As filed with the Securities and Exchange Commission on June 6, 1997
Registration No. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Acceptance Insurance Companies Inc. Delaware 31-074296
AICI Capital Trust Delaware To Be Applied For
(Exact name of Registrants as specified (State or other jurisdiction of (I.R.S. Employer
in their respective charters incorporation or organization) Identification No.)
222 S. 15th Street, Suite 600 North
Omaha, Nebraska 68102
(402) 344-8800
(Address, including zip code, and telephone number, including
area code, of each Registrants principal executive offices)
--------------
William J. Gerber
Vice President
Acceptance Insurance Companies Inc.
222 S. 15th Street, Suite 600 North
Omaha, Nebraska 68102
(402) 344-8800
(Name, address, including zip code, and
telephone number, including area code, of
agent for service for each Registrant)
--------------
Copies to:
Robert S. Rachofsky, Esq. Steven Kaplan, Esq.
Lars Bang-Jensen, Esq. Arnold & Porter
LeBoeuf, Lamb, Greene & MacRae, L.L.P. 555 12th Street, N.W.
125 West 55th Street Washington, D.C. 20004
New York, New York 10019 (202) 942-5998
(212) 424-8000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective. If the only
securities being registered on this Form are being offered pursuant to dividend
or interest reinvestment plans, please check the following box. |_|
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
investment reinvestment plans, check the following box. |_|
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
===================================================================================================================================
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Aggregate Offering Amount of
Securities to be Registered Registered(1) per unit(2)(3) Price(2)(3) Registration Fee(2)
Debt Securities of Acceptance
Insurance Companies Inc.................
- ------------------------------------------- -------------------- ------------------ ----------------------- -----------------------
Preferred Securities of AICI
Capital Trust .........................
- ------------------------------------------- -------------------- ------------------ ----------------------- -----------------------
Guarantee of Preferred Securities of AICI
Capital Trust by Acceptance Insurance
Companies Inc.(4)......................
- ------------------------------------------- -------------------- ------------------ ----------------------- -----------------------
Total...................................... $74,750,000 100% $74,750,000 $22,652
=========================================== ==================== =================== ======================= =======================
(1) Such indeterminate number or amount of Debt Securities of Acceptance
Insurance Companies Inc. and Preferred Securities of AICI Capital Trust as
may from time to time be issued at indeterminate prices. Debt Securities of
Acceptance Insurance Companies Inc. may be issued and sold to AICI Capital
Trust, in which event such Debt Securities may later be distributed to the
holders of Preferred Securities of AICI Capital Trust upon its dissolution
and the distribution of the assets thereof. The amount registered is in
United States dollars or the equivalent thereof in any other currency,
currency unit or units, or composite currency or currencies.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457. The aggregate offering price of the Debt Securities,
and Preferred Securities registered hereby will not exceed $65,000,000.
(3) Exclusive of accrued interest and distributions, if any.
(4) Includes back-up undertakings, consisting of obligations of Acceptance
Insurance Companies Inc. to provide certain indemnities in respect of, and
pay and be responsible for certain expenses and debts of AICI Capital
Trust. No separate consideration will be received for the Guarantee or any
back-up undertakings.
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 or until this Registration Statement shall become effective on
such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
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 sales 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
such State.
SUBJECT TO COMPLETION, DATED JUNE 6, 1997
PROSPECTUS
$65,000,000
AICI Capital Trust
% Preferred Securities
(Liquidation Amount $25 per Preferred Security)
fully and unconditionally guaranteed, as described herein, by
Acceptance Insurance Companies Inc.
The Preferred Securities offered hereby represent preferred undivided
beneficial interests in the assets of AICI Capital Trust, a statutory business
trust created under the laws of the State of Delaware (the "Issuer Trust").
Acceptance Insurance Companies Inc., a Delaware corporation (the "Company"),
will be the holder of all of the beneficial interests represented by common
securities of the Issuer Trust (the "Common Securities" and, together with the
Preferred Securities, the "Trust Securities"). The Issuer Trust exists for the
sole purpose of issuing the Trust Securities and investing the proceeds
thereof in % Junior Subordinated Deferrable Interest Debentures (the "Junior
Subordinated Debentures", and together with the Trust Securities, the
"Securities") to be issued by the Company. The Junior Subordinated Debentures
will mature on , 2027, which date may be shortened (such date, as it may be
shortened, the "Stated Maturity") to a date not earlier than , 2002, if
certain conditions are met (such shortening of the maturity date, the
"Maturity Adjustment"). The Preferred Securities will have a preference under
certain circumstances over the Common Securities with respect to cash
distributions and amounts payable on liquidation, redemption or otherwise. See
"Description of Preferred Securities--Subordination of Common Securities."
(continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 10 HEREOF FOR CERTAIN INFORMATION THAT
SHOULD BE CAREFULLY CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE PREFERRED
SECURITIES.
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.
Price to Underwriting Proceeds to
Public(1) Discount(2) Issuer Trust(3)(4)
Per Preferred Security $25.00 (4) $25.00
Total(5) $65,000,000 (4) $65,000,000
===================================================== ========================= ======================== =======================
(1) Plus accrued Distributions, if any, from , 1997.
(2) The Company and the Issuer Trust have each agreed to indemnify the
Underwriters against certain liabilities under the Securities Act of
1933. See "Underwriting."
(3) Before deduction of expenses payable by the Company estimated at $ .
(4) In view of the fact that the proceeds of the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures,
the Company has agreed to pay to the Underwriters, as compensation for
arranging the investment therein of such proceeds, $ per Preferred
Security (or $ in the aggregate). See "Underwriting."
(5) The Company has granted the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase up to an
additional $9,750,000 aggregate liquidation amount of the Preferred
Securities on the same terms as set forth above, solely to cover
over-allotments, if any. If such over allotment option is exercised in
full, the total Price to Public and Proceeds to Issuer Trust will
be and , respectively. See "Underwriting."
The Preferred Securities are offered by the Underwriters subject to
receipt and acceptance by them, prior sale and the Underwriters' right to
reject any order in whole or in part and to withdraw, cancel or modify the
offer without notice. It is expected that delivery of the Preferred Securities
will be made in book-entry form through the book-entry facilities of The
Depository Trust Company on or about , 1997, against payment therefor in
immediately available funds.
ADVEST, INC.
The date of this Prospectus is June , 1997
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 sales 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 such State.
(cover page continued)
The Preferred Securities will be represented by one or more global
securities registered in the name of a nominee of The Depository Trust Company,
as depositary ("DTC"). Beneficial interests in the global securities will be
shown on, and transfer thereof will be effected only through, records maintained
by DTC and its participants. Except as described under "Description of Preferred
Securities," Preferred Securities in definitive form will not be issued and
owners of beneficial interests in the global securities will not be considered
holders of the Preferred Securities. Application will be made to include the
Preferred Securities on the New York Stock Exchange. Settlement for the
Preferred Securities will be made in immediately available funds. The Preferred
Securities will trade in DTC's Same-Day Funds Settlement System, and secondary
market trading activity for the Preferred Securities will therefore settle in
immediately available funds.
Holders of the Preferred Securities will be entitled to receive
preferential cumulative cash distributions accumulating from____, 1997 and
payable quarterly in arrears on March 31, June 30, September 30 and December 31
of each year commencing ____, 1997, at the annual rate of % of the Liquidation
Amount of $25 per Preferred Security ("Distributions"). The Company has the
right to defer payment of interest on the Junior Subordinated Debentures at any
time or from time to time for a period not exceeding 20 consecutive quarterly
periods with respect to each deferral period (each, an "Extension Period"),
provided that no Extension Period may extend beyond the Stated Maturity of the
Junior Subordinated Debentures. No interest shall be due and payable during any
Extension Period, except at the end thereof. Upon the termination of any such
Extension Period and the payment of all amounts then due, the Company may elect
to begin a new Extension Period subject to the requirements set forth herein. If
interest payments on the Junior Subordinated Debentures are so deferred,
Distributions on the Preferred Securities will also be deferred and the Company
will not be permitted, subject to certain exceptions described herein, to
declare or pay any cash distributions with respect to the Company's capital
stock or with respect to debt securities of the Company that rank pari passu in
all respects with or junior to the Junior Subordinated Debentures. During an
Extension Period, interest on the Junior Subordinated Debentures will continue
to accrue (and the amount of Distributions to which holders of the Preferred
Securities are entitled will accumulate) at the rate of % per annum, compounded
quarterly, and holders of Preferred Securities will be required to accrue
interest income for United States federal income tax purposes. See "Description
of Junior Subordinated Debentures -- Option to Extend Interest Payment Period"
and "Certain Federal Income Tax Consequences -- US Holders -- Interest Income
and Original Issue Discount."
The Company has, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures and the Junior Subordinated Indenture (each as defined
herein), taken together, fully, irrevocably and unconditionally guaranteed all
the Issuer Trust's obligations under the Preferred Securities as described
below. See "Relationship Among the Preferred Securities, the Junior Subordinated
Debentures and the Guarantee--Full and Unconditional Guarantee." The Guarantee
of the Company guarantees the payment of Distributions and payments on
liquidation or redemption of the Preferred Securities, but only in each case to
the extent of funds held by the Issuer Trust, as described herein (the
"Guarantee"). See "Description of Guarantee." If the Company does not make
payments on the Junior Subordinated Debentures held by the Issuer Trust, the
Issuer Trust will have insufficient funds to pay Distributions on the Preferred
Securities. The Guarantee does not cover payment of Distributions when the
Issuer Trust does not have sufficient funds to pay such Distributions. In such
event, a holder of Preferred Securities may institute a legal proceeding
directly against the Company to enforce payment of such Distributions to such
holder. See "Description of Junior Subordinated Debentures -- Enforcement of
Certain Rights by Holders of Preferred Securities." The obligations of the
Company under the Guarantee and the Preferred Securities are subordinate and
junior in right of payment to all Senior Indebtedness (as defined in
"Description of Junior Subordinated Debentures --Subordination") of the Company.
The Preferred Securities are subject to mandatory redemption (i) in whole,
but not in part, upon repayment of the Junior Subordinated Debentures at Stated
Maturity or, at the option of the Company, their earlier redemption in whole
upon the occurrence of a Tax Event (as defined herein) and (ii) in whole or in
part at any time on or after , 2002 contemporaneously with the optional
redemption by the Company of the Junior Subordinated Debentures in whole or in
part. The Junior Subordinated Debentures are redeemable prior to maturity at the
option of the Company (i) on or after , 2002, in whole at any time or in part
from time to time, or (ii) in whole, but not in part, at any time within 90 days
following the occurrence and continuation of a Tax Event, at a redemption price
set forth herein, which includes the accrued and unpaid interest on the Junior
Subordinated Debentures so redeemed to the date fixed for redemption. See
"Description of Junior Subordinated Debentures -- Redemption" and "Description
of Preferred Securities -- Redemption.
The holders of the outstanding Common Securities have the right at any
time to dissolve the Issuer Trust and, after satisfaction of liabilities to
creditors of the Issuer Trust as provided by applicable law, to cause the Junior
Subordinated Debentures to be distributed to the holders of the Preferred
Securities and Common Securities in liquidation of the Issuer Trust. See
"Description of Preferred Securities -- Liquidation Distribution Upon
Dissolution."
In the event of the dissolution of the Issuer Trust, after satisfaction of
liabilities to creditors of the Issuer Trust as provided by applicable law, the
holders of the Preferred Securities will be entitled to receive a Liquidation
Amount of $25 per Preferred Security plus accumulated and unpaid Distributions
thereon to the date of payment, subject to certain exceptions, which may be in
the form of a distribution of such amount in Junior Subordinated Debentures. See
"Description of Preferred Securities-Liquidation Distribution Upon Dissolution."
The Junior Subordinated Debentures are unsecured and subordinated to all
Senior Indebtedness of the Company. See "Description of Junior Subordinated
Debentures--Subordination."
Prospective purchasers must carefully consider the information set forth
under "Certain ERISA Considerations."
----------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE PREFERRED
SECURITIES OFFERED HEREBY, INCLUDING OVER-ALLOTTING SHARES OF THE PREFERRED
SECURITIES AND BIDDING FOR AND PURCHASING SUCH SHARES AT A LEVEL ABOVE THAT
WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING." SUCH STABILIZING TRANSACTIONS, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
FOR NORTH CAROLINA INVESTORS: THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA,
NOR HAS THE COMMISSIONER OF INSURANCE RULED UPON THE ACCURACY OR ADEQUACY OF
THIS DOCUMENT.
FORWARD LOOKING STATEMENTS
This Prospectus contains and incorporates by reference certain forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 with respect to the results of operations and businesses of
the Company. These forward looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially from
those contemplated or projected, forecast, estimated or budgeted in such forward
looking statements include, among others, the following possibilities: (i)
heightened competition, including specifically the intensification of price
competition, the entry of new competitors and the development of new products by
new and existing competitors; (ii) adverse state and federal legislation and
regulation, including limitations on premium levels, increases in minimum
capital and reserves, and other financial viability requirements; (iii) failure
to develop multiple distribution channels in order to obtain new customers or
failure to retain existing customers; (iv) inability to carry out marketing and
sales plans, including, among others, changes to certain products and acceptance
of the revised products in the market; (v) loss of key executives; (vi) changes
in interest rates causing a reduction of investment income; (vii) general
economic and business conditions which are less favorable than expected; and
(viii) unanticipated changes in industry trends. See "Risk Factors."
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements and the notes thereto,
contained elsewhere or incorporated by reference in this Prospectus. Unless
otherwise indicated, information contained in this Prospectus is based on the
assumption that the Underwriters (as defined herein) will not exercise their
over-allotment option.
THE COMPANY
Acceptance Insurance Companies Inc. ("Acceptance" or the "Company") is
engaged in the property and casualty insurance business concentrating on writing
specialty coverages not generally emphasized by standard insurance carriers. The
Company's principal insurance segments are (i) General Agency, which includes
specialty automobile, excess and surplus lines liability and substandard
property, and complex general liability, including products and professional
liability coverages, distributed through general agents; (ii) Crop Insurance,
which includes Multi-Peril Crop Insurance ("MPCI") and crop hail insurance;
(iii) Program, which includes, transportation risks, focused workers'
compensation, standard property and casualty coverages for the rural market,
temporary help agencies, greyhound race tracks, condominiums, fine arts risks,
auto daily rental and other focused insurance programs written primarily through
agents specializing in such coverage; and (iv) Non-Standard Automobile, which
provides coverages for private passenger automobiles and is written principally
in the southwestern United States.
The Company's total revenues and net income were $381.4 million and $30.3
million, respectively, for the year ended December 31, 1996 and were $78.9
million and $3.9 million, respectively, for the three months ended March 31,
1997. As of March 31, 1997, the Company had $848.6 million of total assets and
$211.1 million of total equity.
The Company's strategy is to seek opportunities in the property and
casualty insurance market where it believes it can achieve profitable results.
The Company continually takes advantage of capacity shortages or other
dislocations in the market and develops those opportunities by attracting and
supporting underwriters and other managers with proven expertise in a particular
segment of the insurance industry. Acceptance's strategy has resulted in a
diversified mix of insurance businesses, among which the Company's capital is
allocated based on management's view as to where the best underwriting
opportunities exist at any time. The Company seeks to limit its exposure to
large losses by implementing strict underwriting standards and reinsurance
programs tailored to the needs of its business lines.
During the last five years, the Company has expanded its business both
through internal growth and through acquisitions. The Company's most significant
acquisition during this period was its purchase in July 1993 of The Redland
Group, Inc. ("Redland"), a leading writer of MPCI, crop hail and other named
peril crop insurance. MPCI is a federally-subsidized insurance program which is
designed to provide farmers who suffer an insured crop loss due to the weather
or other natural perils with the funds needed to continue operating and plant
crops for the next growing season. For the year ended December 31, 1996, the
Company wrote approximately $248.3 million in MPCI Premiums (as defined herein).
Based on premium information compiled in 1996 by the Federal Crop Insurance
Corporation ("FCIC") and National Crop Insurance Services, Inc., the Company
believes that it is the fourth largest writer of MPCI business in the United
States with an approximate 15% share of the market.
The Company believes that recent changes in the law have encouraged more
farmers to participate in the MPCI program which has led to an increase in the
number of farm acres insured, which in turn, has led to growth in the national
MPCI market. The Company's MPCI Premiums increased approximately $65.0 million,
or 35.5%, to $248.3 million in 1996 from $183.3 million in 1995. For further
information about the Company's MPCI business, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- General" and "Risk
Factors -- Risk Factors Relating to the Company."
The Company's objective is to write business on both an admitted and a
non-admitted basis in each state in which it operates. The Company believes that
this ability is a competitive advantage since certain lines of speciality
insurance can be written more effectively on a non-admitted, or excess and
surplus lines, basis. The Company's insurance subsidiaries write business in 47
states, the District of Columbia, Puerto Rico and the Virgin Islands, with 66.7%
of direct premiums written during the year ended December 31, 1996 on an
admitted basis and 33.3% written on a non-admitted basis.
Each of the Company's insurance subsidiaries are rated A- (Excellent) by
A.M. Best Company, Inc. ("A.M. Best"), with the exception of American Growers
Insurance Company ("American Growers"), to which A.M. Best rating system does
not apply. A.M. Best bases its ratings upon factors that concern policyholders
and agents and not upon factors concerning investor protection.
The Company's principal executive offices are located at 222 South 15th
Street, Suite 600 North, Omaha, Nebraska 68102, and its telephone number is
(402) 344-8800.
AICI CAPITAL TRUST
The Issuer Trust is a statutory business trust formed under Delaware law
pursuant to (i) a trust agreement, dated as of June 5, 1997 executed by the
Company, as Depositor, and Bankers Trust (Delaware), as Delaware Trustee, and
(ii) the filing of a Certificate of Trust with the Delaware Secretary of State
on June 5, 1997. Such initial trust agreement will be amended and restated in
its entirety (as so amended and restated, the "Trust Agreement"), as of the date
the Preferred Securities are initially issued. Two individuals will be selected
by the holder of the Common Securities to act as administrators with respect to
the Issuer Trust (the "Administrators"). The Company, while holder of the Common
Securities, intends to select two individuals who are employees or officers of
or affiliated with the Company to serve as Administrators. The Issuer Trust's
business and affairs are conducted by its Property Trustee, Delaware Trustee,
and two Administrators. The Issuer Trust exists for the exclusive purposes of
(i) issuing and selling the Preferred Securities and Common Securities, (ii)
using the proceeds from the sale of Preferred Securities and Common Securities
to acquire the Junior Subordinated Debentures issued by the Company and (iii)
engaging in only those other activities necessary, advisable or incidental
thereto (such as registering the transfer of the Preferred Securities).
Accordingly, the Junior Subordinated Debentures will be the sole assets of the
Issuer Trust and payments under the Junior Subordinated Debentures will be the
sole revenue of the Issuer Trust. All of the Common Securities will be owned by
the Company. The Common Securities will rank pari passu, and payments will be
made thereon pro rata, with the Preferred Securities, except that upon the
occurrence and during the continuance of an Event of Default (as defined herein)
under the Trust Agreement resulting from an Event of Default under the
Indenture, the rights of the Company as holder of the Common Securities to
payment in respect of Distributions and payments upon liquidation, redemption or
otherwise will be subordinated to the rights of the holders of the Preferred
Securities. The Company will acquire Common Securities representing an aggregate
liquidation amount equal to 3% of the total capital of the Issuer Trust. The
Issuer Trust has a term of 31 years, but may terminate earlier as provided in
the Trust Agreement. The principal executive office of the Issuer Trust is 222
South 15th Street, Suite 600 North, Omaha, Nebraska 68102, and its telephone
number is (402) 344-8800.
THE OFFERING
Securities Offered..The $65,000,000 aggregate liquidation amount of Preferred
Securities offered hereby represents preferred undivided
beneficial interests in the Issuer Trust's assets, which
will consist solely of the Junior Subordinated Debentures.
The Trust has granted the Underwriters an option,
exercisable within 30 days after the date of this
Prospectus, to purchase up to an additional $9,750,000
aggregate liquidation amount of Preferred Securities at the
offering price, solely to cover over-allotments, if any.
Offering Price......$25 per Preferred Security (Liquidation Amount $25), plus
accumulated Distributions, if any, from , 1997.
Distributions.......Distributions payable on each Preferred Security will be
fixed at a rate per annum of % of the stated liquidation
amount per Preferred Security, will be cumulative, will
accrue from , 1997, the date of issuance of the Preferred
Securities, and will be payable quarterly in arrears on
March 31, June 30, September 30 and December 31 of each
year, commencing , 1997. See "Description of Preferred
Securities -- Distributions."
Junior Subordinated
Debentures..........The Issuer Trust will invest the proceeds from the issuance
of the Preferred Securities and Common Securities in an
equivalent amount of % Junior Subordinated Debentures of
the Company. The Junior Subordinated Debentures will mature
on , 2027, subject to the Maturity Adjustment (as defined
herein). The Junior Subordinated Debentures will rank
subordinate and junior in right of payment to all Senior
Indebtedness (as defined herein) of the Company to the
extent and in the manner set forth in the Junior
Subordinated Indenture. In addition, the Company's
obligations under the Junior Subordinated Debentures will
be structurally subordinated to all existing and future
liabilities and obligations of its subsidiaries.
Guarantee.......... Under the terms of the Guarantee, the Company has guaranteed
the payment of Distributions and payments on liquidation or
redemption of the Preferred Securities, but only in each
case to the extent of funds held by the Issuer Trust
described herein. The Company and the Issuer Trust believe
that the obligations of the Company under the Guarantee, the
Trust Agreement, the Junior Subordinated Debentures and the
Junior Subordinated Indenture taken together, fully,
irrevocably and unconditionally guarantee all of the Issuer
Trust's obligations relating to the Preferred Securities.
The obligations of the Company under the Guarantee and the
Preferred Securities are subordinate and junior in right of
payment to all Senior Indebtedness. See "Description of
Guarantee."
Right to Defer
Interest..........So long as no Debenture Event of Default has occurred and is
continuing, the Company has the right, at any time, to defer
payments of interest on the Junior Subordinated Debentures
for a period not exceeding 20 consecutive quarters; provided
that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. As a
consequence of the Company's extension of the interest
payment period, quarterly Distributions on the Preferred
Securities will be deferred (though such Distribution would
continue to accrue with interest thereon compounded
quarterly, since interest will continue to accrue and
compound on the Junior Subordinated Debentures during any
such Extension Period). During an Extension Period, the
Company will be prohibited, subject to certain exceptions
described herein, from declaring or paying any cash
distributions with respect to its capital stock or debt
securities that rank pari passu with or junior to the Junior
Subordinated Debentures. Upon the termination of any
Extension Period and the payment of all amounts then due,
the Company may commence a new Extension Period, subject to
the foregoing requirements. See "Description of Junior
Subordinated Debentures -- Option to Extend Interest Payment
Period."
Should an Extension Period occur, Preferred Security
holders will continue to include interest income (and de
minimis original issue discount, if any) for United States
federal income tax purposes. See "Certain Federal Income
Tax Consequences -- US Holders -- Interest Income and
Original Issue Discount."
Redemption..........The Preferred Securities are subject to mandatory redemption
(i) in whole, but not in part, at the Stated Maturity upon
repayment of the Junior Subordinated Debentures, (ii) in
whole, but not in part, contemporaneously with the optional
redemption at any time by the Company of the Junior
Subordinated Debentures upon the occurrence and continuation
of a Tax Event and (iii) in whole or in part at any time on
or after , , 2002, contemporaneously with the optional
redemption by the Company of the Junior Subordinated
Debentures in whole or in part, in each case at the
applicable Redemption Price (as defined herein). See
"Description of Preferred Securities -- Redemption."
Liquidation of
the Issuer Trust..The Company, as holder of the Common Securities, has the
right at any time to dissolve the Issuer Trust and cause the
Junior Subordinated Debentures to be distributed to holders
of Preferred Securities in liquidation of the Issuer Trust.
See "Description of Preferred Securities -- Liquidation
Distribution Upon Dissolution."
Voting Rights.......Generally, the holders of the Preferred Securities will have
limited voting rights. See "Description of Preferred
Securities -- Voting Rights; Amendment of Trust Agreement"
and " Risk Factors -- Risk Factors Relating to the Offering
-- Limited Voting Rights."
Use of Proceeds....The proceeds from the sale of the Preferred Securities
offered hereby will be used by the Issuer Trust to purchase
the Junior Subordinated Debentures issued by the Company.
The proceeds received by the Company from the sale of the
Junior Subordinated Debentures will be used primarily to
pay-down the existing bank debt which is currently
approximately $69,000,000 in principal amount. The remaining
proceeds will be used for general corporate purposes. See
"Use of Proceeds."
ERISA Considerations.Prospective purchasers must carefully consider the
information set forth under "Certain ERISA Considerations."
Symbol..............Application will be made to have the Preferred Securities
approved for quotation on the New York Stock Exchange under
the symbol " ."
RISK FACTORS
Prospective investors should carefully consider the matters set forth
under "Risk Factors," beginning on page 10.
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
data and should be read in conjunction with, and is qualified in its entirety
by, the Consolidated Financial Statements and the notes thereto incorporated by
reference in this Prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere herein. This
selected consolidated financial data has been derived from the audited
Consolidated Financial Statements of the Company and its subsidiaries.
At or for the Three
Months Ended
March 31, Years Ended December 31,
-------- -----------------------
1997 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ----
(In thousands, except per share data and ratios)
Income Statement Data:
Insurance Revenues:
Gross premiums written $125,345 $123,729 $651,060 $537,349 $447,483 $256,042 $152,091
======== ======== ======== ======== ======== ======== ========
Net premiums written 71,315 70,834 $366,949 $286,183 $229,176 $137,505 $84,085
======== ======== ======== ======== ======== ======== ========
Net premiums earned 71,062 67,504 $348,653 $271,584 $202,659 $128,082 $79,164
Net investment income 6,347 6,285 25,677 19,851 12,864 10,467 8,220
Net realized capital gains 1,311 1,181 5,206 2,531 554 2,250 1,046
Agency income -- 629 1,035 2,863 3,629 4,119 3,992
-------- -------- -------- -------- -------- -------- --------
Insurance revenues 78,720 75,599 380,571 296,829 219,706 144,918 92,422
Non-insurance revenues 173 179 824 976 412 377 2,610
-------- -------- -------- -------- -------- -------- --------
Total revenues 78,893 75,778 381,395 297,805 220,118 145,295 95,032
Insurance expenses:
Losses and loss adjustment expenses 49,807 45,883 243,257 212,337 142,951 92,805 60,025
Underwriting and other expenses 22,044 21,274 95,803 72,602 52,627 36,905 23,523
Agency expenses -- 531 1,024 2,596 3,180 3,794 3,736
-------- -------- -------- -------- -------- -------- --------
Insurance expenses 71,851 67,688 340,084 287,535 198,758 133,504 87,284
Non-insurance expenses 524 535 2,015 2,165 1,684 1,225 3,107
-------- -------- -------- ------- ------- ------- -------
Total expenses 72,375 68,223 342,099 289,700 200,442 134,729 90,391
-------- -------- -------- ------- ------- ------- -------
Operating profit 6,518 7,555 39,296 8,105 19,676 10,566 4,641
Other income (expense):
Interest expense (1,157) (1,253) (4,896) (2,591) (1,693) (2,235) (4,428)
Other income (expense), net (38) (6) (910) (171) (271) (340) (823)
-------- -------- -------- ------- ------- ------- -------
Income (loss) from continuing
operations before income taxes
and minority interest 5,323 6,296 33,490 5,343 17,712 7,991 (610)
Provision (benefit) for income taxes(4) 1,409 1,818 3,210 1,188 (3,443) 167 --
Minority interests in net income (loss) of
consolidated subsidiaries -- -- -- -- 80 238 216
------- -------- -------- ------- ------- ------- -------
Net income (loss) from continuing 3,914 4,478 $30,280 $4,155 $21,075 $7,586 $(826)
operations
======= ======== ======== ======= ======= ======= =======
Net income (loss) from continuing
operations per share:
-Primary $ .26 $ .30 $2.00 $.28 $1.71 $0.86 $(0.24)
-Fully diluted .25 .29 1.96 .27 1.68 0.85 (0.24)
GAAP Ratios:
Loss ratio 70.1% 68.0% 69.8% 78.2% 70.5% 72.5% 75.8%
Expense ratio 31.0% 31.5% 27.5% 26.7% 26.0% 28.8% 29.7%
-------- ------- ------- ------- ------- ------- --------
Combined loss and expense ratio 101.1% 99.5% 97.3% 104.9% 96.5% 101.3% 105.5%
======== ======= ======= ======== ======= ======= ========
Balance Sheet Data:
Investments $432,253 $385,002 $405,926 $368,001 $264,743 $187,986 $124,311
Total assets 848,617 734,500 884,380 781,034 543,087 409,385 257,734
Loss and loss adjustment
expense reserves 380,529 324,998 432,173 369,244 221,325 211,600 127,666
Unearned premiums 145,700 130,653 140,217 124,122 97,170 60,114 41,709
Borrowings and term debt 69,000 69,000 69,000 69,000 29,000 18,951 33,567
Stockholders' equity 211,062 178,943 207,820 177,787 159,754 95,717 34,523
Other Data:
Statutory Surplus of Insurance
Companies(5) 194,632 172,425 191,455 169,628 126,272 73,910 34,527
Ratio, of Earnings to Fixed Charges 4.48 5.03 6.63 2.52 8.07 4.07 1.07
- ------------------
(1) For a discussion of the accounting treatment of the Company's MPCI
business, the results of which are included beginning July 1, 1993, see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -- General."
(2) Net income was reduced in 1995 by the increase in loss reserves in the
amount of approximately $22.3 million for 1994 and prior year losses
primarily in the commercial auto liability and general liability and
commercial multi-peril lines of insurance. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Results
of Operations -- Year Ended December 31, 1995 Compared to Year Ended
December 31, 1994."
(3) Net Income was reduced in 1992 by the increase in loss reserves for
prior year losses in the amount of approximately $2.1 million on two
lines of insurance and $1.7 million of incurred losses relating to two
hurricanes.
(4) Results for 1994 and 1993 reflect the utilization of tax loss
carryforwards and other temporary differences resulting from prior
non-insurance operations.
(5) Statutory data has been derived from the separate financial statements
of the Insurance Companies prepared in accordance with SAP.
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
Preferred Securities offered by this Prospectus. Certain statements in this
Prospectus and documents incorporated herein by reference are forward-looking
and are identified by the use of forward-looking words or phrases such as
"intended," "will be positioned," "expects," is or are "expected,"
"anticipates," and "anticipated." These forward-looking statements are based on
the Company's current expectations. To the extent any of the information
contained in this Prospectus constitutes a "forward-looking statement" as
defined in Section 27A(i)(1) of the Securities Act, the risk factors set forth
below are cautionary statements identifying important factors that could cause
results to differ materially from those in the forward-looking statement.
RISK FACTORS RELATING TO THE OFFERING
Ranking of Subordinated Obligations Under the Guarantee and the Junior
Subordinated Debentures
The obligations of the Company under the Guarantee issued by the
Company for the benefit of the holders of Preferred Securities and under the
Junior Subordinated Debentures are subordinate and junior in right of payment to
all Senior Indebtedness of the Company (as defined herein). As of March 31,
1997, the Senior Indebtedness of the Company aggregated approximately $69.0
million. None of the Junior Subordinated Indenture, the Guarantee or the Trust
Agreement places any limitation on the amount of secured or unsecured debt,
including Senior Indebtedness, that may be incurred by the Company.
See"Description of Guarantee -- Status of the Guarantee" and "Description of
Junior Subordinated Debentures -- Subordination."
The ability of the Issuer Trust to pay amounts due on the Preferred
Securities is solely dependent upon the Company's making payments on the Junior
Subordinated Debentures as and when required.
Option to Extend Interest Payment Period; Tax Consequences
So long as no Event of Default (as defined in the Junior Subordinated
Indenture) has occurred and is continuing, the Company has the right under the
Junior Subordinated Indenture to defer the payment of interest on the Junior
Subordinated Debentures at any time or from time to time with respect to the
Junior Subordinated Debentures (a "Debenture Event of Default") for a period not
exceeding 20 consecutive quarterly periods with respect to each Extension
Period, provided that no Extension Period may extend beyond the Stated Maturity
of the Junior Subordinated Debentures. See "Description of Junior Subordinated
Debentures -- Option to Extend Interest Payment Period." As a consequence of any
such deferral, quarterly Distributions on the Preferred Securities by the Issuer
Trust will be deferred during any such Extension Period. Distributions to which
holders of the Preferred Securities are entitled will accumulate additional
Distributions thereon during any Extension Period at the rate of % per annum,
compounded quarterly from the relevant payment date for such Distributions,
computed on the basis of a 360-day year of twelve 30-day months and the actual
days elapsed in a partial month in such period. Additional disbursements payable
for each full Distribution period will be computed by dividing the rate per
annum by four. The term "Distribution" as used herein shall include any such
additional Distributions. During any such Extension Period, the Company may not
(i) declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of the Company's
capital stock, or (ii) make any payment of principal of or interest of or
premium, if any, on or repay, repurchase or redeem any debt securities of the
Company that rank pari passu in all respects with or junior in interest to the
Junior Subordinated Debentures (other than (a) repurchases, redemptions or other
acquisition of shares of capital stock of the Company in connection with any
employment contract, benefit plan or other similar arrangement with or for the
benefit of any one or more employees, officers, directors or consultants, in
connection with a dividend reinvestment or stockholder stock purchase plan or in
connection with the issuance of capital stock of the Company (or securities
convertible into or exercisable for such capital stock) as consideration in an
acquisition transaction entered into prior to the applicable Extension Period,
(b) as a result of an exchange or conversion of any class or series of the
Company's capital stock (or any capital stock of a subsidiary of the Company)
for any class or series of the Company's capital stock or of any class or series
of the Company's indebtedness for any class or series of the Company's capital
stock, (c) the purchase of fractional interests in shares of the Company's
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged, (d) any declaration of a
dividend in connection with any stockholder's rights plan, or the issuance of
rights, stock or other property under any stockholder's rights plan, or the
redemption or purchase of rights pursuant thereto, or (e) any dividend in the
form of stock, warrants, options or other rights where the dividend stock or the
stock issuable upon exercise of such warrants options or other rights is the
same stock as that on which the dividend is being paid or ranks pari passu with
or junior to such stock). Prior to the termination of any such Extension Period,
the Company may further defer the payment of interest, provided that no
Extension Period may exceed 20 consecutive quarterly periods or extend beyond
the Stated Maturity of the Junior Subordinated Debentures. Upon the termination
of any Extension Period and the payment of all interest then accrued and unpaid
(together with interest thereon at the annual rate of %, compounded quarterly,
to the extent permitted by applicable law), the Company may elect to begin a new
Extension Period subject to the above conditions. No interest shall be due and
payable during an Extension Period, except at the end thereof. The Company must
give the Issuer Trustees notice of its election to begin an Extension Period at
least one Business Day (as defined herein) prior to the earlier of (i) the date
the Distributions on the Preferred Securities would have been payable but for
the election to begin such Extension Period and (ii) the date the Property
Trustee (as defined herein) is required to give notice to holders of the
Preferred Securities of the record date or the date such Distributions are
payable, but in any event not less than one Business Day prior to such record
date. The Property Trustee will give notice of the Company's election to begin a
new Extension Period to the holders of the Preferred Securities. Subject to the
foregoing, there is no limitation on the number of times that the Company may
elect to begin an Extension Period. See "Description of Preferred Securities --
Distributions" and "Description of Junior Subordinated Debentures -- Option to
Extend Interest Payment Period"
Should an Extension Period occur, a holder of Preferred Securities will
continue to accrue income (in the form of original issue discount ("OID")) for
United States federal income tax purposes in respect of its pro rata share of
the Junior Subordinated Debentures held by the Issuer Trust, which will include
a holder's pro rata share of both the stated interest and de minimus OID, if
any, on the Junior Subordinated Debentures. As a result, a holder of Preferred
Securities will include such OID in gross income for United States federal
income tax purposes in advance of the receipt of cash, and will not receive the
cash related to such income from the Issuer Trust if the holder disposes of the
Preferred Securities prior to the record date for the payment of Distributions.
See "Certain Federal Income Tax Consequences --US Holders -- Interest Income and
Original Issue Discount" and " -- Sales of Preferred Securities."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures. However, should the Company elect to exercise such
right in the future, the market price of the Preferred Securities is likely to
be affected. A holder that disposes of his, her or its Preferred Securities
during an Extension Period, therefore, might not receive the same return on his,
her or its investment as a holder that continues to hold its Preferred
Securities. In addition, as a result of the existence of the Company's right to
defer interest payments, the market price of the Preferred Securities (which
represent preferred undivided beneficial interests in the assets of the Issuer
Trust) may be more volatile than the market prices of other securities on which
original interest discount or interest accrues that are not subject to such
deferrals.
Tax Event Redemption
Upon the occurrence and during the continuation of a Tax Event (as
defined herein) the Company has the right to redeem the Junior Subordinated
Debentures in whole, but not in part, at any time within 90 days following the
occurrence of such Tax Event and thereby cause a mandatory redemption of the
Preferred Securities. Any such redemption shall be at a price equal to the
liquidation amount of the Preferred Securities, together with accumulated
Distributions to but excluding the date fixed for redemption. See "Description
of Junior Subordinated Debentures --Redemption" and "Description of Preferred
Securities -- Liquidation Distribution Upon Dissolution."
A "Tax Event" means the receipt by the Issuer Trust of an opinion of
counsel to the Company experienced in such matters to the effect that, as a
result of any amendment to, or change (including any announced prospective
change) in, the laws (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein, or as a result of
any official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement or decision is announced on or after the date
of issuance of the Preferred Securities, there is more than an insubstantial
risk that (i) the Issuer Trust is, or will be within 90 days of the delivery of
such opinion, subject to United States federal income tax with respect to income
received or accrued on the Junior Subordinated Debentures, (ii) interest payable
by the Company on the Junior Subordinated Debentures is not, or within 90 days
of the delivery of such opinion will not be, deductible by the Company, in whole
or in part, for United States federal income tax purposes, or (iii) the Issuer
Trust is, or will be within 90 days of the delivery of the opinion, subject to
more than a de minimis amount of other taxes, duties or other governmental
charges.
See "-- Possible Tax Law Changes Affecting the Preferred Securities"
and "Certain Federal Income Tax Consequences -- Proposed Tax Law Changes" for a
discussion of certain legislative proposals that, if adopted, could give rise to
a Tax Event, which may permit the Company to cause a redemption of the Preferred
Securities prior to , 2002.
Exchange of Preferred Securities for Junior Subordinated Debentures
The holders of all the outstanding Common Securities have the right at
any time to dissolve the Issuer Trust and, after satisfaction of liabilities to
creditors of the Issuer Trust as provided by applicable law, cause the Junior
Subordinated Debentures to be distributed to the holders of the Preferred
Securities in liquidation of the Issuer Trust. See "Description of Preferred
Securities -- Liquidation Distribution Upon Dissolution."
Under current United States federal income tax law and interpretations
and assuming, as expected, that the Issuer Trust will not be taxable as a
corporation, a distribution of the Junior Subordinated Debentures upon a
liquidation of the Issuer Trust will not be a taxable event to holders of the
Preferred Securities. However, if a Tax Event were to occur that would cause the
Issuer Trust to be subject to United States federal income tax with respect to
income received or accrued on the Junior Subordinated Debentures, a distribution
of the Junior Subordinated Debentures by the Issuer Trust would be a taxable
event to the Issuer Trust and the holders of the Preferred Securities. See
"Certain Federal Income Tax Consequences -- US Holders -- Receipt of Junior
Subordinated Debentures or Cash Upon Liquidation of the Issuer Trust."
Rights Under the Guarantee
Bankers Trust Company will act as the trustee (the "Trustee" or the
"Guarantee Trustee") under the Guarantee and will hold the Guarantee for the
benefit of the holders of the Preferred Securities. Bankers Trust Company will
also act as the debenture trustee (the "Debenture Trustee") for the Junior
Subordinated Debentures and as property trustee (the "Property Trustee") under
the Trust Agreement. Bankers Trust (Delaware) will act as Delaware Trustee under
the Trust Agreement. The Guarantee guarantees to the holders of the Preferred
Securities the following payments, to the extent not paid by or on behalf of the
Issuer Trust: (i) any accumulated and unpaid Distributions required to be paid
on the Preferred Securities, to the extent that the Issuer Trust has funds on
hand available therefor at the payment date, (ii) the Redemption Price (as
defined herein) with respect to any Preferred Securities called for redemption,
to the extent that the Issuer Trust has funds on hand available therefor at such
time, and (iii) upon a voluntary of involuntary dissolution, winding up or
liquidation of the Issuer Trust (unless the Junior Subordinated Debentures are
distributed to holders of the Preferred Securities), the lesser of (a) the
aggregate of the Liquidation Amount (as defined herein) and all accumulated and
unpaid Distributions required to be paid on the Preferred Securities to the
extent that the Issuer Trust has funds on hand available therefor at such time,
and (b) the amount of assets of the Issuer Trust remaining available for
distribution to holders of the Preferred Securities on liquidation of the Issuer
Trust. The Guarantee is subordinated as described under "-- Ranking of
Subordinated Obligations Under the Guarantee and the Junior Subordinated
Debentures" and "Description of Guarantee -- Status of the Guarantee." The
holders of not less than a majority in aggregate Liquidation Amount of the
outstanding Preferred Securities have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Guarantee
Trustee in respect of the Guarantee or to direct the exercise of any trust power
conferred upon the Guarantee Trustee under the Guarantee. Any holder of the
Preferred Securities may institute a legal proceeding directly against the
Company to enforce its rights under the Guarantee without first instituting a
legal proceeding against the Issuer Trust, the Guarantee Trustee or any other
person or entity.
If the Company were to default on its obligation to pay amounts payable
under the Junior Subordinated Debentures, the Issuer Trust may lack funds for
the payment of Distributions or amounts payable on redemption of the Preferred
Securities or otherwise, and, in such event, holders of the Preferred Securities
would not be able to rely upon the Guarantee for payment of such amounts.
Instead, if a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay any amounts payable
in respect of the Junior Subordinated Debentures on the payment date on which
such payment is due and payable, then a holder of Preferred Securities may
institute a legal proceeding directly against the Company for enforcement of
payment to such holder of any amounts payable in respect of such Junior
Subordinated Debentures having a principal amount equal to the aggregate
Liquidation Amount of the Preferred Securities of such holder (a "Direct
Action"). In connection with such Direct Action, the Company will have a right
of set-off under the Junior Subordinated Indenture to the extent of any payment
made by the Company to such holder of Preferred Securities in the Direct Action.
Except as described herein, holders of Preferred Securities will not be able to
exercise directly any other remedy available to the holders of the Junior
Subordinated Debentures or assert directly any other rights in respect of the
Junior Subordinated Debentures. See "Description of Junior Subordinated
Debentures -- Enforcement of Certain Rights by Holders of Preferred Securities"
and "-- Debenture Events of Default," and "Description of Guarantee." The Trust
Agreement provides that each holder of Preferred Securities by acceptance
thereof agrees to the provisions of the Guarantee and the Junior Subordinated
Indenture.
Limited Voting Rights
Holders of Preferred Securities will have limited voting rights
relating generally to the modification of the Preferred Securities and the
Guarantee and the exercise of the Issuer Trust's rights as holder of Junior
Subordinated Debentures. Holders of Preferred Securities will not be entitled to
appoint, remove or replace the Property Trustee or the Delaware Trustee except
upon the occurrence of certain events specified in the Trust Agreement. The
Property Trustee and the holders of all the Common Securities may, subject to
certain conditions, amend the Trust Agreement without the consent of holders of
Preferred Securities to cure any ambiguity or make other provisions not
inconsistent with the Trust Agreement or to ensure that the Issuer Trust will
not be taxable as a corporation for United States federal income tax purposes.
See "Description of Preferred Securities -- Voting Rights; Amendment of Trust
Agreement" and "-- Removal of Issuer Trustees; Appointment of Successors," and
"Description of Guarantee -- Amendments and Assignment."
Absence of Market
The Preferred Securities are a new issue of securities with no
established trading market. Application will be made to list the Preferred
Securities on the New York Stock Exchange. The Company and the Issuer Trust have
been advised by Advest, Inc. that it intends to make a market in the Preferred
Securities. However, Advest, Inc. is not obligated to do so and such market
making may be interrupted or discontinued at any time without notice at the sole
discretion of Advest, Inc. Moreover, there can be no assurance of a second
market maker for the Preferred Securities. Accordingly, no assurance can be
given as to the development or liquidity of any market for the Preferred
Securities.
Market Prices
There can be no assurance as to the market prices for Preferred
Securities, or the market prices for Junior Subordinated Debentures that may be
distributed in exchange for Preferred Securities if a liquidation of the Issuer
Trust occurs. Accordingly, the Preferred Securities or the Junior Subordinated
Debentures that a holder of Preferred Securities may receive on liquidation of
the Issuer Trust may trade at a discount to the price that the investor paid to
purchase the Preferred Securities offered hereby. Because holders of Preferred
Securities may receive Junior Subordinated Debentures on termination of the
Issuer Trust, prospective purchasers of Preferred Securities are also making an
investment decision with regard to the Junior Subordinated Debentures and should
carefully review all the information regarding the Junior Subordinated
Debentures contained herein. See "Description of Junior Subordinated
Debentures."
Proposed Tax Law Changes
On February 6, 1997, President Clinton released his budget proposals
for fiscal year 1998. One of the tax proposals therein (the "Tax Proposal")
would generally deny corporate issuers a deduction for interest related to
certain debt obligations that have a maximum term in excess of 15 years and are
not shown as indebtedness on the separate balance sheet of the issuer or, where
the instrument is issued to a related party (other than a corporation), where
the holder of some other related party issues a related instrument that is not
shown as indebtedness on the issuer's consolidated balance sheet. As currently
drafted, the Tax Proposal would be effective generally for instruments issued on
or after the date of first Congressional committee action which could occur
prior to the issuance of the Junior Subordinated Debentures. It is possible that
the Tax Proposal as enacted into law may contain transition rules for
transactions which are currently underway, such as transactions involving the
offering of securities with respect to which a filing with the Securities and
Exchange Commission has been made. If the Tax Proposal is enacted into law with
such a transition rule, the Tax Proposal would not apply to the Junior
Subordinated Debentures. There can be no assurance, however, that the Tax
Proposal, if enacted, will be enacted as currently drafted or will include such
a transitional rule or that other legislation enacted after the date hereof will
not adversely affect the tax treatment of the Junior Subordinated Debentures or
cause a Tax Event, resulting in the distribution of the Junior Subordinated
Debentures to holders of Preferred Securities. See "Description of Preferred
Securities -- Redemption." Such a change could give rise to a Tax Event, which
may permit the Company to cause a redemption of the Preferred Securities before
, 2002. See "Description of Junior Subordinated Debentures -- Redemption" and
"Description of Preferred Securities --Redemption." See also "Certain Federal
Income Tax Consequences -- Proposed Tax Law Changes." Under current law, the
Company will be able to deduct interest on the Junior Subordinated Debentures.
RISK FACTORS RELATING TO THE COMPANY
Nature of Business; Competition
Insurers compete based on a number of factors, including pricing and
other terms, service provided to agents and policyholders, and ratings. Since
the last half of the 1980's, there has been severe competition in pricing and
terms of coverage in the property and casualty insurance industry, resulting in
underwriting losses for the industry. The Company continues to experience
pricing competition in certain segments of its business as the conditions of a
"soft market cycle" (a period of heightened price competition and impaired
underwriting performance) continue in the industry as a whole. In addition, many
of the Company's competitors have substantially greater financial and other
resources, and some offer a broader variety of coverages than those offered by
the Company. The continuation of soft market conditions for many property and
casualty lines may result in additional competitors seeking to write business in
certain of the Company's specialized lines.
The Company's results also may be influenced by factors affecting the
insurance industry generally and which are largely beyond the Company's control.
Such factors include: (a) weather-related and other catastrophes; (b) taxation
and regulatory reform at both the federal and state levels; (c) changes in
industry standards regarding rating and policy forms; (d) changes in judicial
attitudes toward liability claims; (e) the cyclical nature of pricing in the
industry; and (f) changes in the rate of inflation, interest rates and general
economic conditions.
Property and casualty insurance is a capital intensive business.
The Company must maintain minimum levels of surplus in Acceptance Insurance
Company ("Acceptance Insurance"), Acceptance Indemnity Insurance Company
("Acceptance Indemnity"), Acceptance Casualty Insurance Company ("Acceptance
Casualty"), American Growers, Phoenix Indemnity Insurance Company ("Phoenix
Indemnity"), and Redland Insurance Company ("Redland Insurance," and together
with Acceptance Insurance, Acceptance Indemnity, Acceptance Casualty, American
Growers and Phoenix Indemnity, referred to as the "Insurance Companies"), in
order to continue to write business and at the same time meet the standards
established by state insurance regulatory authorities and insurance rating
bureaus. Without additional capital, the Company could be required to curtail
growth or even to reduce its volume of premium writings in order to satisfy
state regulations or to maintain its current A- (excellent) rating from A.M.
Best.
The Company's history is one of continuing premium growth as a result
both of acquisitions and other equity investments and of internal growth, and it
intends to continue to pursue additional opportunities in the insurance
business. Such growth requires capital, and as a result the Company may seek
additional debt or equity financing in the future, the amounts of which may be
significant. There can be no assurance that the Insurance Companies will have
access to sufficient capital in future periods to continue their growth and also
satisfy the capital requirements of rating agencies and regulators. Such growth
has also involved and may continue to involve entering new lines of insurance in
which the Company has limited prior operating experience. Although the Company
follows the practice of hiring experienced personnel to manage its new lines of
business, there can be no assurance that it will be successful in writing such
new lines.
Crop Program Considerations
As a result of the acquisition of Redland in July 1993, the Company
became significantly involved in crop insurance programs, including the federal
MPCI program and the crop hail business. The Company's operating results from
its crop insurance program can vary substantially from period to period as a
result of various factors, including timing and severity of losses from storms,
droughts, floods, freezes and other natural perils and crop production cycles.
Therefore, the results for any quarter or year are not necessarily indicative of
results for any future period. The underwriting results of the crop insurance
business primarily are recognized in the third and fourth quarter of the year.
The Company expects that for the foreseeable future a material amount
of its crop insurance business will continue to be derived from MPCI business.
MPCI is a federally subsidized farm price support program designed to encourage
farmers to share, through premium payments, in the federal government's price
support programs. MPCI provides farmers with yield coverage for crop damage from
substantially all natural perils. Crop Revenue Coverage ("CRC") is an extension
of the MPCI program which provides farmers with protection from revenue loss
caused by changes in crop prices, low yields, or a combination of the two. As
used herein, the term MPCI includes CRC, unless the context indicates otherwise.
As such, legislative or other changes affecting the MPCI program could impact
the Company's business prospects. The MPCI program has historically been subject
to modification since its establishment in 1980, and some of these modifications
have been significant. No assurance can be given that future changes will not
significantly affect the MPCI program and the Company's crop insurance business.
In October 1994, Congress expanded the MPCI program by enacting the Reform
Act. The Reform Act reduced the expense reimbursement rate payable to the
Company for its costs of servicing MPCI policies that exceed the minimum
available level of MPCI ("CAT Coverage") (such policies, "Buy-up Coverage") for
the 1997, 1998 and 1999 crop years to 29%, 28% and 27.5%, respectively, of the
MPCI Premium services, a decrease from the 31% level established for the 1994,
1995 and 1996 crop years. CRC policies, which generaly have a minimum 20% higher
premium base, will receive a 25% expense reimbursement rate in 1997. Although
the Reform Act directs the FCIC to alter program procedures and administrative
requirements so that the administrative and operating costs of private insurance
companies participating in the MPCI program will be reduced in an amount that
corresponds to the reduction in the expense reimbursement rate, there can be no
assurance that the Company's actual costs will not exceed the reimbursement
rate.
The Company is currently negotiating the 1998 Contract with the FCIC.
The current government proposal is to reduce the MRCI expense reimbursement to
24.5% and reduce the profit sharing arrangement. The negotiations are ongoing
and the ultimate result cannot be determined at this time. There can be no
assurance that the Company negotiates terms for the 1998 Contract which are
favorable to the Company.
The Reform Act also directs the FCIC to establish adequate premiums for
all MPCI coverages at such rates as the FCIC determines are actuarially
sufficient to attain a targeted loss ratio. Since 1980, the average MPCI loss
ratio has exceeded this target ratio. There can be no assurance that the FCIC
will not increase rates to farmers in order to achieve the targeted loss ratio
in a manner that could adversely affect participation by farmers in the MPCI
program above the CAT Coverage level.
The 1996 Reform Act provides that MPCI coverage is not required for
federal farm program benefits if producers sign a written waiver that waives
eligibility for emergency crop loss assistance. The 1996 Reform Act also
provides that, effective for the 1997 crop year, the Secretary of Agriculture
may continue to offer CAT Coverage through USDA offices if the Secretary
determines that the number of approved insurance providers operating in a state
is insufficient to adequately provide catastrophic risk protection coverage to
producers. There can be no assurance as to the ultimate effect which the 1996
Reform Act may have on the business or operations of the Company.
Total MPCI Premium for each farmer depends upon the type of crops
grown, acreage planted and other factors determined by the FCIC. Each year, the
FCIC sets, by crop, the maximum per unit commodity price ("Price Election") to
be used in computing MPCI Premiums. Any reduction of the Price Election by the
FCIC will reduce the MPCI Premium charged per policy, and accordingly will
adversely impact MPCI Premium volume.
The Company's crop insurance business is also affected by market
conditions in the agricultural industry which vary depending on such factors as
federal legislation and administration policies, foreign country policies
relating to agricultural products and producers, demand for agricultural
products, weather, natural disasters, technological advances in agricultural
practices, international agricultural markets and general economic conditions
both in the United States and abroad. For example, the number of MPCI Buy-up
Coverage policies written has historically tended to increase after a year in
which a major natural disaster adversely affecting crops occurs, and to decrease
following a year in which favorable weather conditions prevail.
Loss Reserves
The reserves for losses and loss adjustment expenses ("LAE")
established by the Company are estimates of amounts needed to pay reported and
unreported claims and related LAE based on facts and circumstances then known.
Reserves are based on estimates of trends in claims severity, judicial theories
of liability and other factors.
The Company underwrites both property and casualty coverages in a
number of specialty areas of business which may involve greater risks than
standard property and casualty lines, including the risks associated with the
absence of a long-term, reliable historical claims experience. These risk
components may make more difficult the task of estimating reserves for losses,
and cause the Company's underwriting results to fluctuate.
The establishment of appropriate reserves is an inherently uncertain
process, and it has been necessary, and over time may continue to be necessary,
to revise estimated loss reserve liabilities. Adverse loss experience for 1994
and prior years resulted in a strengthening of loss reserves for the year ended
December 31, 1995, in the amount of $22.3 million. There can be no assurance
that the ultimate liability will not materially exceed the Company's loss and
LAE reserves and have a material adverse effect on the Company's results of
operations and financial condition in the future. Due to the inherent
uncertainty of estimating reserves, it has been necessary, and may over time
continue to be necessary, to revise estimated liabilities as reflected in the
Company's loss and LAE reserves. Conditions and trends that have affected the
development of loss reserves in the past may not necessarily occur in the
future. Accordingly, it is not appropriate to extrapolate redundancies or
deficiencies based on historical information. See "Business -- Loss and Loss
Adjustment Expense Reserves."
Reinsurance
In order to reduce risk and to increase its underwriting capacity, the
Company purchases reinsurance. Reinsurance does not relieve the Company of
liability to its insureds for the risks ceded to reinsurers. As such, the
Company is subject to credit risk with respect to the risks ceded to reinsurers.
Although the Company places its reinsurance with reinsurers it believes to be
financially stable, a significant reinsurer's insolvency or inability to make
payments under the terms of a reinsurance treaty could have a material adverse
effect on the Company.
The amount and cost of reinsurance available to companies writing
property and casualty insurance are subject, in large part, to prevailing market
conditions beyond the control of such companies. The Company's ability to
provide insurance at competitive premium rates and coverage limits on a
continuing basis depends upon its ability to obtain adequate reinsurance in
amounts and at rates that will not adversely affect its competitive position.
Due to continuing market uncertainties regarding reinsurance capacity,
no assurances can be given as to the Company's ability to maintain its current
reinsurance facilities, which generally are subject to annual renewal. If the
Company is unable to renew such facilities upon their expiration and is
unwilling to bear the associated increase in net exposures, the Company may need
to reduce the levels of its underwriting commitments. See "Business
- --Reinsurance."
Investments
The Company's results of operations depend in part on the performance of
its invested assets. The Company's investment portfolio primarily consists of
fixed maturity securities, which principally include U.S. government
obligations, mortgage-backed securities (including collateralized mortgage
obligations ("CMOs")), obligations of states and political subdivisions and
investment grade, publicly traded corporate debt securities. At March 31, 1997,
68% of the Company's investment portfolio was invested in fixed maturity
securities, including mortgage-backed securities which constituted approximately
12% of the Company's investment portfolio at such date. Certain risks are
inherent in connection with fixed maturity securities, including loss upon
default and price volatility in reaction to changes in interest rates and
general market factors. Certain additional risks are inherent with
mortgage-backed securities, including, among others, risks associated with
reinvestment of proceeds due to prepayments of such obligations in a period of
declining interest rates and risks associated with a decline in market value due
to longer durations from slower prepayments of such obligations in a period of
rising interest rates. Certain of the Company's mortgage-backed securities may
be relatively illiquid under current market conditions, which may affect the
accuracy of quoted market prices or other estimates of value for such
securities, although management believes that the Company has sufficient
liquidity in the remainder of its investment portfolio to avoid being required
to sell such securities under current market conditions. See "Business --
Investments."
Regulation
The Company's admitted insurance business is subject to comprehensive,
detailed regulation throughout the United States, under statutes which delegate
regulatory, supervisory and administrative powers to state insurance
commissioners. The primary purpose of such regulations and supervision is the
protection of policyholders and claimants rather than stockholders or other
investors. Depending on whether the insurance company is domiciled in the state
and whether it is an admitted or non-admitted insurer, such authority may extend
to such things as (i) periodic reporting of the insurer's financial condition;
(ii) periodic financial examination; (iii) approval of rates and policy forms;
(iv) loss reserve adequacy; (v) insurer solvency; (vi) the licensing of insurers
and their agents; (vii) restrictions on the payment of dividends and other
distributions; (viii) approval of changes in control; and (ix) the type and
amount of permitted investments.
The Company also is subject to laws governing insurance holding
companies in Nebraska, Iowa, Arizona and Texas, where the Insurance Companies
are domiciled. These laws, among other things, require the Company to file
periodic information with state regulatory authorities including information
concerning its capital structure, ownership, financial condition and general
business operations; regulate certain transactions between the Company, its
affiliates and the Insurance Companies, including the amount of dividends and
other distributions and the terms of surplus notes; and restrict the ability of
any one person to acquire certain levels of the Company's voting securities
(generally 10%) without prior regulatory approval.
Insurance regulatory agencies and the National Association of Insurance
Commissioners ("NAIC") reexamine from time to time existing laws and regulations
and their application to insurance companies. There can be no assurance that
existing insurance-related laws and regulations will not become more restrictive
in the future or that laws and regulations enacted in the future at the state or
federal level will not be more restrictive. For further information as to
regulatory issues affecting the Insurance Companies. See "Business --
Regulation" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
Holding Company Structure; Dividends and Other Restrictions
The Company is an insurance holding company with assets
consisting primarily of the capital stock of its subsidiaries, two surplus
notes issued by Acceptance Insurance and investment assets held at the holding
company level. Following the Offering, the ability of the Company to make
interest payments on the Junior Subordinated Debentures will be dependent upon
the receipt of dividends or other distributions from the subsidiaries of the
Company, interest payments on the surplus notes, tax sharing payments from its
subsidiaries and net investment income from, and proceeds from the sale of,
holding company investments. Dividends from the Insurance Companies are
regulated by the regulatory authorities of the states in which each subsidiary
is domiciled. The laws of such states generally restrict dividends from
insurance companies to parent companies to certain statutorily approved limits.
In 1997, the statutory limitation on dividends from insurance company
subsidiaries to the parent without further insurance departmental approval is
approximately $10.4 million, none of which has been paid. Although the Company
believes that amounts required for it to meet its financial and operating
obligations will be available, there can be no assurance in this regard. For
further information about the Company's sources of cash flow and restrictions
thereon, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
The maximum dividend permitted by law is not necessarily indicative of
an insurer's actual ability to pay dividends or other distributions to a parent
company, which also may be constrained by business and regulatory
considerations, such as the impact of dividends on surplus, which could affect
an insurer's competitive position, the amount of premiums that can be written
and the ability to pay future dividends. Further, state insurance laws and
regulations require that the statutory surplus of an insurance company following
any dividend or distribution by such company be reasonable in relation to its
outstanding liabilities and adequate for its financial needs.
If the Company is unable to generate sufficient funds to service
interest on the Junior Subordinated Debentures from existing sources, the
Company will be compelled to seek additional debt or equity financing in the
future. The Company also expects that, in order to repay the principal amount of
the Junior Subordinated Debentures at maturity or upon acceleration, or to
purchase the Junior Subordinated Debentures upon a change of control, it will be
required to seek additional financing. There can be no assurance that sufficient
funds for any of the foregoing purposes will be available to the Company at such
time.
Dependence on Key Personnel
The future success of the Company depends significantly upon the
efforts of Kenneth C. Coon, Chairman and Chief Executive Officer, and John P.
Nelson, President and Chief Operating Officer. A loss of either of these
officers could adversely affect the Company's business. Each of them is employed
under an employment agreement which is automatically renewed from calendar year
to calendar year, unless terminated by either party with a one year notice.
Messrs. Coon and Nelson each has advised the Company that he has no present
intention to leave employment with the Company.
AICI CAPITAL TRUST
The Issuer Trust is a statutory business trust created under Delaware
law pursuant to the filing of a Certificate of Trust with the Delaware Secretary
of State on June 5, 1997. The Issuer Trust will be governed by the Trust
Agreement among the Company, as Depositor, Bankers Trust (Delaware), as Delaware
Trustee, and Bankers Trust Company, as Property Trustee (together with the
Delaware Trustee, the "Issuer Trustees"). Two individuals will be selected by
the holder of the Common Securities to act as administrators with respect to the
Issuer Trust (the "Administrators"). The Company, while holder of the Common
Securities, intends to select two individuals who are employees or officers of
or affiliated with the Company to serve as the Administrators. See "Description
of Preferred Securities -- Miscellaneous." The Issuer Trust exists for the
exclusive purposes of (i) issuing and selling the Trust Securities, (ii) using
the proceeds from the sale of the Trust Securities to acquire the Junior
Subordinated Debentures and (iii) engaging in only those other activities
necessary, advisable or incidental thereto (such as registering the transfer of
the Trust Securities). Accordingly, the Junior Subordinated Debentures will be
the sole assets of the Issuer Trust, and payments under the Junior Subordinated
Debentures will be the sole source of revenue of the Issuer Trust.
All the Common Securities will be owned by the Company. The Common
Securities will rank pari passu, and payments will be made thereon pro rata,
with the Preferred Securities, except that upon the occurrence and during the
continuation of a Debenture Event of Default arising as a result of any failure
by the Company to pay any amounts in respect of the Junior Subordinated
Debentures when due, the rights of the holder of the Common Securities to
payment in respect of Distributions and Payments upon liquidation, redemption or
otherwise will be subordinated to the rights of the holders of the Preferred
Securities. See "Description of Preferred Securities -- Subordination of Common
Securities." The Company will acquire Common Securities in an aggregate
liquidation amount equal to 3% of the total capital of the Issuer Trust. The
Issuer Trust has a term of 31 years, but may terminate earlier as provided in
the Trust Agreement. The address of the Delaware Trustee is Bankers Trust
(Delaware), 1001 Jefferson Street, Wilmington, Delaware 19801, telephone number
(302)576-3301. The address of the Property Trustee, the Guarantee Trustee and
the Debenture Trustee is Bankers Trust Company, Four Albany Street, 4th Floor,
New York, New York 10006, telephone number (212) 250-2500.
USE OF PROCEEDS
All the proceeds to the Issuer Trust from the sale of the Preferred
Securities will be invested by the Issuer Trust in the Junior Subordinated
Debentures. The Company intends to use the net proceeds it receives from the
sale of the Junior Subordinated Debentures primarily to pay-down existing bank
debt which is currently approximately $69,000,000 in principal amount. The
remaining proceeds will be used for general corporate purposes. Pending
utilization of the net proceeds received by the Company from this offering, the
Company intends to invest them in short-term, income-generating,
investment-grade securities. As of March 31, 1997, the average interest rate of
borrowings under the Company's revolving credit agreement was 6.7%. Borrowings
under such revolving credit agreement must be repaid in 1998.
CAPITALIZATION
The following table sets forth (i) the consolidated capitalization of
the Company at March 31, 1997 and (ii) the consolidated capitalization of the
Company giving effect to the issuance of the Preferred Securities hereby offered
by the Issuer Trust and application by the Company of the net proceeds from the
corresponding sale of the Junior Subordinated Debentures to the Issuer Trust as
if the sale of the Preferred Securities had been consummated on March 31, 1997,
and assuming the Underwriters' over-allotment option was not exercised.
March 31, 1997
------------------------------------
As
Actual Adjusted
------------- ------------
(in thousands)
Borrowings and term debt $ 69,000 $ 17,000(2)
Company-obligated mandatorily redeemable preferred securities of
AICI Capital Trust, holding solely Junior Subordinated Debentures of
the Company ............................................................... --- 65,000
Stockholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized, none
issued ............................................... --- ----
Common stock, $.40 par value; 20,000,000 shares authorized,
15,329,548 shares issued and outstanding ................ 6,109 6,109
Capital in excess of par value.................................. 196,259 196,259
Unrealized gain (loss) on available for sale securities,
net of tax (2,323) (2,323)
Retained earnings .............................................. 15,346 15,346
------- -------
Less:
Treasury stock, at cost, 38,680 shares (1,629) (1,629)
Contingent stock, 240,000 shares (1) (2,700) (2,700)
-------- --------
Total stockholders' equity ....................................... 211,062 211,062
------- -------
Total capitalization ............................................. $280,062 $293,062
======= =======
- ---------------------
(1) Contingent stock represents shares issued by the Company as part of
the consideration for the Redland acquisition which are currently
held in escrow as a fund against which the Company may assert certain
claims arising out of the acquisition.
(2) Assumes the Company will use approximately $52 million of the net
proceeds from the sale of the Junior Subordinated Debentures to pay
existing bank debt.
For more information regarding the Company's Revolving Credit Facility
and other capital resources, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
ACCOUNTING TREATMENT
For financial reporting purposes, the Issuer Trust will be treated as a
subsidiary of the Company and, accordingly, the accounts of the Issuer Trust
will be included in the consolidated financial statements of the Company. The
Preferred Securities will be included in the consolidated balance sheets of the
Company and appropriate disclosures about the Preferred Securities, the
Guarantee and the Junior Subordinated Debentures will be included in the notes
to the consolidated financial statements of the Company. For financial reporting
purposes, Distributions on the Preferred Securities will be recorded in the
consolidated statements of income of the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
Over the past five years, premiums written in the Company's insurance
operations have consistently increased, both as the result of acquisitions and
through internal growth. In the third quarter of 1995, the Company's decision to
strengthen loss reserves resulted in a loss for that quarter of approximately
$6.0 million. Otherwise, the Company has reported net income in each quarter
beginning with the third quarter of 1992, when the phasing out of its prior
non-insurance operations was substantially completed.
Increased premium volume in recent periods has been the result of the
Company's strategy of acquiring niche businesses and increasing premiums written
in selected lines. The Company's most significant recent acquisition was its
purchase in July 1993 of Redland, which provides MPCI, crop hail and other named
peril crop insurance and certain standard property and casualty coverages to the
rural market. Following its acquisition by the Company, Redland has increased
the volume of its MPCI Premium, and was the fourth largest MPCI writer in the
United States in 1996.
MPCI is a government-sponsored program with accounting treatment which
differs from more traditional property and casualty insurance lines. For income
statement purposes, gross premiums written consist of the aggregate amount of
MPCI premiums paid by farmers, and does not include any related federal premium
subsidies or expense reimbursement. The Company's profit or loss from its MPCI
business is determined after the crop season ends on the basis of a profit
sharing formula established by law and the RMA. For income statement purposes,
any such profit share earned by the Company, net of the cost of third party
reinsurance, is shown as net premiums written, which equals net premiums earned
for MPCI business; whereas, any share of losses payable by the Company is
charged to losses and loss adjustment expenses. Due to various factors,
including timing and severity of losses from storms and other natural perils and
crop production cycles, the profit or loss on MPCI premiums is primarily
recognized in the second half of the calendar year. The Company relies on loss
information from the field to determine (utilizing a formula established by the
RMA) the level of losses that should be considered in estimating the profit or
loss during this period. Based upon available loss information, the Company
records an estimate of the profit or loss during the third quarter and then
re-evaluates the estimate using additional loss information available at
year-end to determine any remaining portion to be recorded in the fourth
quarter. All expense reimbursements received are credited to underwriting
expenses.
Certain characteristics of the Company's crop business may affect
comparisons, including: (i) the seasonal nature of the business whereby profits
or losses are generally recognized predominately in the second half of the year;
(ii) the nature of crop business whereby losses are known within a short time
period; and (iii) the limited amount of investment income associated with crop
business. In addition, cash flows from such business differ from cash flows from
certain more traditional lines. See "Liquidity and Capital Resources" below. The
seasonal and short term nature of the Company's crop business, as well as the
impact on such business of weather and other natural perils, may produce more
volatility in the Company's operating results on a quarter to quarter or year to
year basis than has historically been the case.
Results of Operations
Three Months Ended March 31, 1997
Compared to Three Months Ended March 31, 1996
The Company's operating profit and net income both decreased 12.6%
during the three months ended March 31, 1997 as compared to the same period in
1996. The decrease in operating profit was approximately $1.0 million,
decreasing from $7.5 million in the first quarter of 1996 to $6.5 million in the
first quarter of 1997, while the decrease in net income was approximately $0.6
million, decreasing from $4.5 million during the first quarter of 1996 to $3.9
million during the first quarter of 1997. The principal component of the
decrease in operating profit was a reduction in the income realized by the
Company's Crop Division during the first three months of 1997 as compared to the
first three months of 1996. This negative impact was partially offset by an
improvement in the Company's Property and Casualty Division's operating results
and an increase in both investment income and realized capital gains. In
addition, the Company's net income in the first quarter of 1997 was positively
impacted by lower interest expense and a decrease in the Company's expense for
income taxes, but was adversely affected by a decrease in other income.
During the first quarter of 1996, the Company's operating income
benefitted from a $2.8 million profit in the Company's Crop Division. The
principal component of this $2.8 million profit was the recording of an
additional $3.8 million in profit sharing under the Company's MPCI program. The
Company's estimate of its profit sharing under the MPCI program at December 31,
1995 was affected by a volatile crop growing season during which many of the
rules pertaining to preventive planting payments were changed and a combination
of unusual weather conditions manifested themselves in an unusually late
harvest. As claims were closed during the first quarter of 1996 and the final
preventive planting rules applied to these losses, the Company was able to earn
additional profit sharing. The 1996 growing year did not experience this same
degree of volatility, and the harvest was not delayed by unusual weather
conditions. Consequently, the MPCI profit sharing income recorded at December
31, 1996 more accurately estimated actual results than had the profit sharing
recorded at December 31, 1995. During the first quarter of 1997, the Company
experienced operating income of approximately $0.9 million from its Crop
Division operations. The Company believes that the crop results for the first
quarter of 1997 were more typical of a normal year than those experienced in the
first quarter of 1996.
The negative effect on operating income from the Company's Crop
Division results was partially offset by improved operating results in the
Company's Property and Casualty Division. During the first three months of 1997,
the Company's Property and Casualty Division recorded a combined loss and
expense ratio of 102.4% as compared to a combined ratio of 103.9% during the
same period in 1996. This improvement resulted from a reduction in the Company's
underwriting expense ratio from 33.4% to 32.0% as the Company's loss ratio in
its Property and Casualty Divisions remained approximately constant at 70.4%
during both periods. The Company's property and casualty underwriting results
during the first three months of 1997 were adversely affected by results in its
commercial automobile lines of business. For example, the combined ratio for the
Company's Transportation Department increased from 105.7% during the first
quarter of 1996 to 121.0% during the first quarter of 1997, and the Company's
commercial auto operations in its General Agency Division saw its combined ratio
increase from 118.7% during the first quarter of 1996 to 131.7% during the first
quarter of 1997. These adverse auto results were effected by an increase in both
the severity and frequency of accidents, many of which were related to severe
weather activity during the first quarter of 1997. The Company believes that
this extremely adverse quarter for its commercial automobile business was an
anomaly, and the Company's experience in this line of business should return to
more normal levels during the remainder of 1997. Excluding the commercial
automobile lines, the Company saw improvement in its loss ratios in its other
property and casualty business.
The Company's operating profit was also positively impacted during the
first quarter of 1997 as compared to the first quarter of 1996 by an increase in
the Company's investment income of 0.9% and an increase in net realized capital
gains of 11.0%. The increase in the Company's net investment income resulted
from an increase in the average size of the Company's portfolio from $380.8
million during the three months ended March 31, 1996 to $423.7 million during
the three months ended March 31, 1997. This increase in the size of the
portfolio was largely offset by a decrease in the annualized investment yield of
the portfolio from 6.8% during the first three months of 1996 to 6.2% during the
same period in 1997. This decrease in annualized investment yields was
principally a result of an increase in the amount of tax advantaged securities
within the Company's portfolio during the first quarter of 1997 as compared to
the first quarter of 1996. At March 31, 1997, the percentage of the Company's
portfolio in municipal bonds and preferred stocks was 25.8% and l5.8%,
respectively, while at March 31, 1996 the percentages for these two classes of
securities was 17.4% and 13.3%, respectively. The impact of this shift to more
tax advantaged securities can be seen in the reduction in the Company's
effective income tax rate during the two periods being compared.
The Company's net income during the first three months of 1997 as
compared to the same period a year earlier was positively impacted by a decrease
in interest expense of approximately $0.1 million or 7.7%. This decrease in
interest expense resulted from a decrease in the Company's average interest rate
under its bank credit facility from 7.3% during the three months ended March 31,
1996 to 6.7% during the three months ended March 31, 1997. The Company's
borrowings under the bank credit facility were $69 million during both periods
of time.
A decrease of $130,000 in the Company's other income was primarily a
result of the Company's decision to curtail its agency operations within its
Transportation Division during the second half of 1996.
In addition, net income was also affected by a lower effective income
tax rate during the first quarter of 1997 as compared to the first quarter of
1996 as the Company's tax rate decreased from 28.9% during the first quarter of
1996 to 26.5% during the same period in 1997. This reduction in the Company's
income tax rate reflected additional income from tax advantaged securities in
the Company's investment portfolio such as preferred stocks and municipal bonds
as noted above.
Year Ended December 31, 1996
Compared to Year Ended December 31, 1995
The Company's net income increased approximately 629% from $4.2 million
in the year ended December 31, 1995 to $30.3 million in the year ended December
31, 1996. This increase in net income resulted from improved underwriting
results in the Company's Crop and General Agency divisions, growth in premium
revenues, increased investment income and realized gains, and a decrease in the
effective tax rate of the Company. These positive factors were offset by
deteriorating results in the Company's Program division, increased interest
expense, and a somewhat higher expense ratio for the Company.
The combined underwriting loss and expense ratio improved from 104.9%
for the year ended December 31, 1995 to 97.3% for the 1996 year. This
improvement in the Company's combined ratio was enhanced by growth in net
premiums earned of 28.4%. The greatest contribution to these improved
underwriting results was made by the Company's Crop division. The Company's Crop
division increased its MPCI writings from $183.3 million for the year ended
December 31, 1995 to $248.3 million for the 1996 year. In addition to this
growth in MPCI premium, the Company increased its retained pool from $104.3
million in 1995 to $161.4 million in 1996. This growth in premium was aided by
an increase in commodity prices for the major crops insured by the Company and
the introduction of an enhancement to the MPCI policy, CRC, which generated
significantly higher premiums per policy than the traditional MPCI policy.
Improved weather conditions also contributed significantly to the improved
results in the Crop division as the Company's MPCI profit sharing percentage
realized during 1996 increased to 23.5% from 13.4% realized during 1995. In
addition, the 1996 year benefited from $4.3 million of additional profit sharing
realized in the first quarter of 1996 as final results of the late 1995 harvest
were available.
Underwriting results in the Company's General Agency division also
improved in 1996 as compared to 1995, as the Company's combined ratio in this
division improved from 116.4% in 1995 to 106.9% in 1996. The Company's 1995
results were affected by a $22.3 million strengthening of reserves for prior
year losses (see results of operations for year ended December 31, 1995 compared
to year ended December 31, 1994), and $16.5 million of the $22.3 million
affected the General Agency division, contributing to the 116.4% combined ratio
recorded during 1995. When comparing accident year loss ratios for 1995 and 1996
in the General Agency division, the results are similar. In the year ended
December 31, 1995, the General Agency division 1995 accident year loss ratio was
69.8% as compared to a 1996 accident year loss ratio of 69.9%. The General
Agency division was also able to improve its combined ratio through a reduction
in expenses during 1996 as its expense ratio fell to 31.9% in 1996 as compared
to 34.1% in 1995.
The Company also benefited from a 28.3% increase in investment income
during 1996 as compared to that of 1995, and an increase in the realized
investment gains of the Company of 92.7% when comparing the same periods. The
increase in investment income was principally due to an increase in the average
size of the investment portfolio. The average size of the Company's investment
portfolio increased by 25.3% from $321.3 million for the twelve months ended
December 31, 1995 to $402.4 million for the twelve months ended December 31,
1996, while the pre-tax yield on the portfolio increased from 6.4% in 1995 to
6.6% in 1996. The size of the Company's investment portfolio increased from
retained earnings and positive cash flows from operations.
While the Company's income tax expense increased from $1.2 million for
the twelve months ended December 31, 1995 to $3.2 million for the 1996 year, the
Company's effective tax rate declined from 22.2% in 1995 to 9.6% in 1996. The
Company's 1996 taxes were positively effected by the decrease in the valuation
allowance relating to the unrealized loss from the Company's investment in Major
Realty. In October 1995, Major Realty announced that its Board of Directors had
determined that it was in the best interest of the stockholders to seek a merger
partner or otherwise seek a transaction for the sale of the company. At December
31, 1996, the Company believed that the realization of the capital loss
associated with such a transaction was more likely than not due to sufficient
carryforwards of capital gains as well as the likelihood of future capital
gains.
Positive factors effecting net income were partially offset by
deteriorating underwriting results in the Company's Program division. The
Program division's combined loss and expense ratio increased from 113.6% during
1995 to 117.5% during 1996. A variety of factors combined to cause this
deterioration in underwriting results. In two of the division's departments,
Rural America and Special Products, weather related incidents increased the
frequency of losses. In the Rural America department, storms in areas where the
Company had concentrations of farm business adversely effected the Company's
loss ratio, while in the Company's Special Products department, prolonged
sub-zero temperatures in the greater Chicago area increased the number and
severity of freeze losses experienced in the Company's condominium program. The
Company has taken steps to reduce its geographic concentrations in the Rural
America department, and is making changes in the reinsurance structure of both
of these departments in order to reduce volatility and improve net underwriting
results.
Additionally in the Program division, the Company changed its
strategies within its Workers' Compensation underwriting activities during 1996.
In 1995 and previous years, the Company had followed a strategy of depopulating
assigned risk pools through the application of intensive case management
techniques with risks which had become unacceptable to the standard market due
to frequency rather than severity. With the improvement of workers' compensation
results for the industry as a whole, more companies were willing to write
workers' compensation, and therefore, the number of risks fitting the Company's
profile for removal from assigned risk pools was substantially depleted. During
1996, the Company moved to a strategy of partnership arrangements with select
agencies in which the agent accepts part of the underwriting risk in return for
an enhanced profit sharing from the Company. Due to the competitive market, this
strategy is developing slowly, and, thus, the Company experienced a 65% decrease
in its direct written premiums in this line of business. This transition phase
caused the expense ratio in this line of business to increase more than 100%,
and resulted in an underwriting loss for this line of business. The Company
believes that this line of business can return to profitability as the new
partnership arrangements grow.
Offsetting these deteriorating results in the Program division were
improved results in the Company's Transportation department. Within the
Transportation department, the Company's loss and expense ratio improved from
120.6% during the year ended December 31, 1995 to 103.6% during 1996. While the
department did not produce an underwriting profit, the Company believes that the
improvement in the Company's underwriting ratios indicates that the actions
taken during 1995 and 1996 to reorganize this department are having a positive
effect.
The Company's Non-Standard underwriting activities experienced
unprofitable results for the first time in six years as a result of an increase
in both the severity and frequency of losses, particularly in the area of
physical damage losses. The Company has increased rates beginning in 1996 and
continuing into 1997, reduced commissions in certain areas with poor experience,
and canceled agents with loss ratio problems. This division is also beginning to
see a slow improvement in its expense ratio, and the Company expects this
improvement in the expense ratio to accelerate during 1997.
The Company's interest expense also increased during 1996 as compared
to 1995. This increase in interest expense was due to an increase in the
Company's borrowings under its bank facility which increased from an average of
$34.3 million during the 1995 to $69.0 million during 1996. Offsetting this
increase in the size of borrowings was a decline in the average interest rate
under the bank facility from 7.6% during 1995 to 7.1% during 1996. The
additional borrowings under the bank facility were contributed to the Company's
subsidiaries in order to support underwriting activities and maintain capital
adequacy ratios at a level commensurate with the Company's current A-rating by
A.M. Best & Company.
The Company experienced a somewhat higher expense ratio during 1996
than during 1995. This ratio increased from 26.7% in 1995 to 27.5% in 1996
primarily due to higher net commission expense in the Program division of the
Company. This higher net commission expense was a result of a changing mix of
business with a lesser percentage of premiums produced in lower commission
programs such as Workers' Compensation and Transportation and a higher
percentage of premiums produced in higher commission lines of business. In
addition, the Company decreased the use of quota share reinsurance within the
Program division during 1996. During 1997, the Company expects to again increase
the use of quota share reinsurance within the Program division, and with the
continued growth in new programs offsetting high initial expenses, expects the
expense ratio of this division to fall in 1997.
Year Ended December 31, 1995
Compared to Year Ended December 31, 1994
The Company's net income fell 80.3% from the year ended December 31,
1995 from $21.1 million in 1994 to $4.2 million in 1995. This reduction in net
income resulted as premium growth in the Company's General Agency and Program
divisions, an increase in investment income and an increase in underwriting
profits from the Company's Crop division were offset by higher than expected
losses in the General Agency and Program divisions, an increase in the Company's
expense ratio and a change in the Company's tax status.
The Company experienced strong premium growth in its General Agency
division as direct premiums written increased 26.5% for the year ended December
31, 1995 as compared to the year ended December 31, 1994, and net premiums
earned grew 39.8% from 1994 to 1995. Earned premiums grew more rapidly than
direct premiums as premium growth slowed progressively in each quarter of 1995.
The growth in this division came from the continued growth in new business
produced from the Company's Scottsdale office which was established in late
1993. The rate of premium growth in 1995 slowed due to an increase in the
competitive environment for lines of business written in the General Agency
division.
The Company's Program division also experienced excellent premium
growth during 1995 as direct premiums written increased from $83.9 million in
1994 to $115.4 million in 1995, an increase of 37.5%. Net earned premium
increased at a rate of 50.8% from $42.6 million in 1994 to $64.3 million in
1995. This premium growth was principally from new programs established during
1994 and 1995. The Company continues to seek and establish new lines of business
within the Program division but competitive factors in the marketplace have
resulted in somewhat lower growth rates than expected in many of these new
programs.
The Company's Non-Standard Auto division did not grow during 1995 as
premiums remained relatively stable with $29.3 million in direct written premium
during 1995 as compared to $29.4 million during 1994. This lack of growth during
1995 resulted primarily from the Company's desire to establish new computer
software for its principal programs before seeking additional growth
opportunities.
The Company's Crop division also experienced strong premium growth in
1995 as direct written premiums and net earned premiums increased 21.9% and
30.1% respectively from 1994 to 1995. This premium growth resulted from an
increase in the Federal MPCI program, and increases in premium levels under the
Company's crop hail insurance program resulting from an increase in rates and
the writing of more exposure units in certain states. In late 1994, Congress
expanded the MPCI program by enacting the Reform Act. The Act seeks to encourage
farmers to participate in the MPCI program and thereby reduce dependencies on
traditional disaster relief measures. As a result, the Company's MPCI premium
increased 42.8% from $128.4 million in 1994 to $183.3 million in 1995. In
addition, the Company's MPCI retention also increased from $77.4 million in 1994
to $104.3 million in 1995. The crop industry had experienced several years of
adverse experience in the crop hail business prior to 1995, and as a result,
crop hail rates have increased while capacity has decreased. Therefore, the
Company was able to increase its crop hail writings from $46.5 million in direct
written premiums in 1994 to $62.8 million in direct written premiums for 1995.
The Company's investment income increased 55.6% from $13.3 million in
1994 to $20.7 million in 1995 while the Company's net realized capital gains
increased 388.6% from $0.6 million in 1994 to $2.7 million in 1995. Investment
income increased from both an increase in the average size of the Company's
investment portfolio as well as an increase in the average yield on the
Company's fixed income investments. The average size of the investment portfolio
increased from $220.1 million in 1994 to $321.3 million in 1995 while the
Company's pre-tax yield on its portfolio increased from 6.0% in 1994 to 6.4% in
1995. The Company's investment portfolio increased from additional borrowings
under the Company's credit facility, positive cash flows from operations, funds
from the exercise of warrants in December of 1994 as well as retained earnings.
Investment yields increased as the overall interest rate environment provided
higher yields during 1995 as compared to 1994.
While 1995 was a difficult growing season, the Company's underwriting
income within its Crop division increased from $12.3 million in 1994 to $14.9
million in 1995. This increase was a result of the growth in the MPCI premium
and better results in the Company's hail division, offsetting negative results
in the Company's named peril crop programs principally from an active storm
season in California during 1995. The 1995 growing season in the upper midwest
was afflicted with wet weather during the planting season resulting in delayed
planting of crops, followed by periods of severe heat in July, stressing newly
emerging crops, and an early frost in September of 1995. No such adverse
activity occurred in 1994. In addition, the Reform Act changed the profit
sharing matrix for participants in the MPCI program providing a higher degree of
profit sharing, particularly for companies accepting risks in the commercial
underwriting pool. These two factors combined to change the percentage of the
Company's profit sharing under the MPCI program from 22.0% in 1994 to 13.4% in
1995. This decrease in the profit sharing percentage was more than offset by the
described increase in MPCI Premiums and improved crop hail results. The Reform
Act was not passed until October of 1994, and therefore, the federal agencies
charged with the oversight of the program had a limited time frame in which to
enact guidelines and administrative rules and procedures for changes brought
about by the Reform Act. In addition, the wet planting season created additional
stress on the MPCI program which required further administrative changes by the
federal government. As a result, exact results of the MPCI program were more
difficult to estimate at December 31, 1995 than they had been in previous years.
The aforementioned positive factors were offset by higher than expected
losses in the Company's General Agency and Program division, including losses
resulting from the strengthening of reserves during 1995 for prior year losses.
During the second quarter of 1995, the Company experienced a deterioration in
the loss ratio of its commercial automobile liability business. At that time,
this was principally attributable to a more rapid emergence of losses from the
1994 year than had been expected by the Company. This trend continued in the
third quarter of 1995, and while the noted deterioration was principally in the
automobile liability business, the Company believed that similar deviations were
likely to appear in other lines of business which develop more slowly than
automobile, and therefore, the Company chose in the third quarter to evaluate
all major lines of business. After an extensive study by the Company in
consultation with its independent actuaries, a pre-tax charge of $17.5 million
was made in the third quarter for prior year losses. For the year, the Company
increased its reserves for 1994 and prior year losses by $22.3 million pre-tax.
After the Company completed its review of prior year losses, the new
development pattern assumptions were used to estimate ultimate losses for the
current 1995 accident year. These new assumptions, severe wind and hail storms
in Texas during the second quarter of the year, and adverse results in a few of
the Company's business lines such as nursing home liability, homeowners business
in South Carolina and used car dealer business in California, combined to create
a $5.7 million underwriting loss in the property and casualty divisions of the
Company for the 1995 accident year. For the accident year 1995, the Company's
accident year loss ratio was 70.7% for the property and casualty division. The
Company's underwriting results in the Non-Standard Automobile division were
fairly consistent from 1994 to 1995 with this division experiencing a loss ratio
of 66.8% in 1995 as compared to 68.9% in 1994. Management intends to continue to
closely monitor statistical and other information with respect to loss reserves,
in particular those lines of insurance that are more difficult to predict.
However, the estimates of loss reserves are inherently uncertain and such
estimates may continue to change as more information becomes available.
Underwriting expenses for 1995 increased as a percentage of earned
premium from 26.0% during 1994 to 26.7% during 1995. General and administrative
expenses also increased by $0.5 million from 1994 to 1995, and expenses in the
Company's Crop division net of ceding commissions from reinsurers and expense
reimbursements from the Federal Government under the MPCI program decreased
slightly from $0.8 million in 1994 to $0.7 million in 1995. The increase in the
underwriting expense levels was principally attributable to increases in
Non-Standard Automobile division expenses related to the implementation of new
computer software programs designed to make the Company's product more saleable
in the marketplace and to reduce expenses in future years as the division grows.
In addition, the Company sought to strengthen its information systems and audit
procedures within the Program and General Agency divisions. The cost of
implementation of several new programs in the Program division also added to the
higher expense ratio for 1995 as compared to 1994. The Company expects the
implementation of the new computer program for the Non-Standard Automobile
division as well as the investments in systems for the General Agency and
Program divisions to begin to slowly reduce its expense ratio over the next few
years. Offsetting these internal expense reductions, the Company is experiencing
intense competition in the area of agent's commissions as capacity in the
insurance marketplace continues to exceed demand.
The Company's net income during 1995 was also effected by the impact of
income taxes. The Company received a benefit of $3.4 million from income taxes
in 1994 as opposed to an expense of $1.2 million from income taxes in 1995. As a
result of prior non-insurance operations, the Company generated significant tax
loss carryforwards and other temporary differences, all of which were used by
the end of 1994.
Liquidity and Capital Resources
The Company - Parent Only
As an insurance holding company, the Company's assets consist primarily
of the capital stock of its subsidiaries, two surplus notes issued by one of its
insurance company subsidiaries and investments held at the holding company
level. The Company's primary sources of liquidity are dividends and other
distributions from subsidiaries, interest payments on the surplus notes, tax
sharing payments from its subsidiaries and net investment income from, and
proceeds from the sale of, holding company investments. The Company's liquidity
needs are primarily to service debt, pay operating expenses and taxes, and make
investments in subsidiaries.
Dividends from the insurance subsidiaries of the Company are regulated
by the regulatory authorities of the states in which each subsidiary is
domiciled. The laws of such states generally restrict dividends from insurance
companies to parent companies to certain statutorily approved limits. In 1997,
the statutory limitation on dividends from insurance company subsidiaries to the
parent without further insurance departmental approval is approximately $10.4
million. In addition to dividends from the insurance companies, the Company also
may receive distributions from its non-insurance subsidiaries which are engaged
in agency, premium finance and claim service operations.
The Company currently holds two surplus notes, each in the amount of
$20 million, issued by one of its insurance company subsidiaries, bearing
interest at the rate of 9% per annum, payable quarterly. Although repayment of
all or part of the principal of this surplus note requires prior insurance
department approval, no prior approval of interest payment is currently
required.
The Company is currently a party to a tax sharing agreement with its
subsidiaries, under which such subsidiaries pay the Company amounts in general
equal to the federal income tax that would be payable by such subsidiaries on a
stand-alone basis.
The Company is also a party to a Credit Agreement which provides a
five-year revolving credit facility (the "Revolving Credit Facility") in amounts
not to exceed $100 million. Under the Revolving Credit Facility, interest is
payable quarterly at a rate selected by the Company equal to either the
"Floating Rate" (defined as the higher of the agent bank's corporate base rate
and 1% over the federal funds rate) or LIBOR plus a margin which varies
depending on the Company's ratio of funded debt to total capitalization. At
March 31, 1997, the outstanding balance under the facility was approximately $69
million, with an interest cost of 6.7%. Borrowings under the facility were used
to provide capital for the insurance companies and to repay other debt. The
Committment under the Revolving Credit Facility is required to be permanently
reduced in an amount equal to 40% of the proceeds of most debt and equity
financings, including this offering.
Insurance Companies
The principal liquidity needs of the Insurance Companies are to fund
losses and loss adjustment expense payments and to pay underwriting expenses,
including commissions and other expenses. The available sources to fund these
requirements are net premiums received and, to a lesser extent, cash flows from
the Company's investment activities, which together have been adequate to meet
such requirements on a timely basis. The Company monitors the cash flows of the
Insurance Companies and attempts to maintain sufficient cash to meet current
operating expenses, and to structure its investment portfolio at a duration
which approximates the estimated cash requirements for the payment of loss and
loss adjustment expenses.
Cash flows from the Company's MPCI and crop hail businesses differ in
certain respects from cash flows associated with more traditional property and
casualty lines. MPCI premiums are not received from farmers until the covered
crops are harvested, and when received are promptly remitted by the Company in
full to the government. Covered losses are paid by the Company during the
growing season as incurred, with such expenditures reimbursed by the government
within three business days. Policy acquisition and administration expenses are
paid by the Company as incurred during the year. The Company periodically
throughout the year receives a payment in reimbursement of its policy
acquisition and administration expenses.
The Company's profit or loss from its MPCI business is determined after
the crop season ends on the basis of a profit sharing formula established by law
and the RMA. At such time, the Company receives a profit share in cash, with any
amount in excess of 15% of its MPCI Retention in any year carried forward to
future years, or it must pay its share of losses. The Company recognized $37.9
million, before private reinsurance, in profit sharing earned on the MPCI
business during 1996, and in addition, recognized $4.3 million during 1996 in
profit sharing earned on 1995 MPCI business.
In the crop hail insurance business, premiums are generally not
received until after the harvest, while losses and other expenses are paid
throughout the year.
The NAIC has established a Risk Based Capital ("RBC") formula for
property and casualty insurance companies. The RBC initiative is designed to
enhance the current regulatory framework for the evaluation of the capital
adequacy of a property and casualty insurer. The formula requires an insurer to
compute the amount of capital necessary to support four areas of risk facing
property and casualty insurers: (a) asset risk (default on fixed income assets
and market decline), (b) credit risk (losses from unrecoverable reinsurance and
inability to collect agents' balances and other receivables), (c) underwriting
risk (premium pricing and reserve estimates ), and (d) off balance sheet/growth
risk (excessive premium growth and unreported liabilities). The Insurance
Companies have reviewed and applied the RBC formula for the 1996 year and have
exceeded these requirements.
Consolidated Financial Condition and Cash Flows
The Company's stockholders' equity increased by approximately $3.2
million at March 31, 1997 as compared to December 31, 1996. The principal
components of this increase were net income of $3.9 million in the first quarter
of 1997 and an increase in the unrealized loss on available for sale securities
net of tax, in the Company's investment portfolio of approximately $800,000.
This was comprised of an increase of $1.7 million net of tax in the unrealized
loss on the Company's fixed maturity portfolio as the general interest rate
environment rose and an increase of $0.9 million net of tax in the unrealized
gains on the Company's equity portfolio.
Cash flows from operating activities increased from $19.4 million
during the first three months of 1996 to $25.2 million during the same three
months in 1997. The largest cmponent of net cash provided by operating
activities in both periods was profit sharing payments received from the federal
government's Mulit-Peril Crop insurance program. During the first three months
of 1996 this component of operating cash flows was $15.9 million while in the
first three months of 1997 it was $25.5 million.
Cash flows for the Company's MPCI and crop hail businesses differ in
certain respects from cash flows associated with more traditional property
and casualty lines. MPCI premiums are not received from farmers until the
covered crops are harvested, and when received are promptly remitted by the
Company in full to the government. Covered losses are paid by the Company during
the growing season as incurred, with such expenditures reimbursed by the
government within three business days. Policy acquisition and administration
expenses are paid by the Company as incurred during the year. The Company
periodically througout the year receives a payment in reimbursement of its
policy administration expenses.
In the crop hail business, premiums are generally not received until
after the harvest, while losses and other expenses are paid throughout the year.
Inflation
The Company does not believe that inflation has had a material impact
on its financial condition or results of operations.
BUSINESS
Strategy
Acceptance underwrites and sells specialty property and casualty
insurance coverages that serve niche markets or programs. The Company selects
niche markets or programs for which the Company believes that its expertise
affords it a competitive advantage and which integrate into a diversified-risk
portfolio of coverages. The Company, through diversifying the risks insured,
seeks to avoid concentration in particular risks so that, during years when
particular lines of business are experiencing adverse operating results, overall
operating results will remain within targeted returns to shareholders. The
Company's goal is to achieve underwriting results better than the industry
average, while managing its investment portfolio to maximize after-tax yield and
at the same time emphasize stability and capital preservation and maintaining
adequate liquidity to meet all cash needs.
The Company believes that its success in niche markets and programs
requires that it be opportunistic. The Company believes its position as both an
admitted (licensed) and non-admitted (excess and surplus lines) carrier provides
the versatility to respond when different market conditions and opportunities
are presented. At the same time, the Company manages loss exposure by
diversifying its portfolio of coverages and maintaining reinsurance programs
with the goal of reducing volatility as well as mitigating catastrophic or large
loss exposure.
The Company has experienced significant revenue growth over the last
five years through growth in existing programs and through acquisition of
insurance operations or books of business. The Company regularly explores new
opportunities where it has or can acquire experienced underwriters and other
managers with a long and successful operating history in a particular line of
business.
Organization
The Company underwrites its insurance products through six wholly-owned
insurance company subsidiaries; Acceptance Insurance, Acceptance Indemnity,
Acceptance Casualty, American Growers, Redland Insurance, and Phoenix Indemnity.
Collectively, the Insurance Companies are admitted in 46 states and the
District of Columbia, and operate on a non-admitted basis in 45 states, the
District of Columbia, Puerto Rico and the Virgin Islands. Two of the Insurance
Companies have received their Certificate of Authority ("T" listing) from the
U.S. Department of Treasury. Each of the Insurance Companies is rated A-
(Excellent) by A.M. Best, with the exception of American Growers to which the
A.M. Best rating system does not apply. A.M. Best bases its ratings upon factors
that concern policyholders and agents, and not upon factors concerning investor
protection.
The Company's insurance agency and insurance service subsidiaries
principally write and service insurance coverages placed with one of the
Insurance Companies.
Business Divisions
The Company has organized its insurance underwriting and marketing
business by product line into four divisions, General Agency, Crop Insurance,
Program Insurance and Non-Standard Automobile.
General Agency
Specialty insurance coverages written by the General Agency Division
include the following principal lines:
Specialty Automobile, including liability and physical damage
coverages for local haulers of specialized freight, and other classes of motor
vehicles not normally underwritten by standard carriers.
Excess and Surplus Lines Liability and Substandard Property
Coverages, including general liability, garage excess liability, liquor
liability, property and commercial multi-peril coverages for small businesses
which normally do not satisfy the underwriting criteria of standard carriers.
Complex General Liability Risks, including products and
professional liability.
Crop Insurance
The principal lines of the Company's Crop insurance division are MPCI
and crop hail insurance. MPCI is a federally subsidized farm price support
program designed to encourage farmers to share, through premium payments, in the
federal government's price support programs. MPCI provides farmers with yield
coverage for crop damage from substantially all natural perils. CRC is an
extension of the MPCI program which provides farmers with protection from
revenue loss caused by changes in crop prices, low yields, or a combination of
the two. As used herein, the term MPCI includes CRC, unless the context
indicates otherwise. For the year ended December 31, 1996, the Company was the
fourth largest writer of MPCI business in the United States with a market share
of approximately 15%.
The Company offers stand alone crop hail insurance, which insures
growing crops against damage resulting from hail storms and which involves no
federal participation. The Company also sells a small volume of insurance
against damage to specific crops from other named perils.
Program Insurance
This division writes a number of diversified coverages, including
coverages for transportation risks, focused workers' compensation, standard
property and casualty coverages for the rural market, temporary help agencies,
greyhound race tracks, condominiums, fine arts risks, auto daily rental and auto
dealers.
Transportation coverages insure long haul truckers and upper Midwest
regional and national trucking companies hauling rural products. The workers'
compensation program is based principally in Minnesota, Illinois, Iowa, and
Maine and focuses principally on medium and larger risks where specialized
underwriting and claims techniques can be effectively implemented to reduce loss
ratios.
Non-Standard Automobile
The Company writes non-standard private passenger automobile coverages
principally in the southwestern United States. The Company has designed this
product for drivers who are unable to obtain coverage from standard carriers due
to prior driving records, other underwriting criteria or market conditions. Such
drivers normally are charged higher premium rates than the rates charged for
preferred or standard risk drivers and usually purchase only basic limits of
liability in order to meet state financial responsibility laws.
The following table reflects the amount of net written premium for
these four insurance divisions for the periods set forth below.
Years Ended December 31,
------------------------
1996 1995 1994
-------- -------- ------
(in thousands)
General Agency................................................$162,157 $135,125 $114,635
Crop Insurance(1)...............................................66,649 46,950 34,592
Program Insurance...............................................95,805 75,279 50,070
Non-Standard Auto...............................................42,338 28,829 29,879
------ ------ ------
Total .....................................................$366,949 $286,183 $229,176
======== ======== ========
- ------------
(1) For a discussion of the accounting treatment of MPCI premiums, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - General."
Marketing
The Company markets its property and casualty insurance products
through a network of independent general agents who, in turn, process and accept
applications for insurance coverages from retail agents who sell insurance to
insurance buyers. The Company also markets a portion of its property and
casualty insurance products and its crop insurance products through a network of
retail agents which specialize in the lines of insurance marketed by them.
Combined Ratios
The statutory combined ratio, which reflects underwriting results
before taking into account investment income, is a traditional measure of the
underwriting performance of a property and casualty insurer. A combined ratio of
less than 100% indicates underwriting profitability whereas a combined ratio in
excess of 100% indicates unprofitable underwriting. The following table reflects
the loss ratios, expense ratios and combined ratios of the Company and the
property and casualty insurance industry, computed in accordance with SAP, for
the periods shown.
Years Ended December 31,
----------------------------------------
1996 1995 1994
----- ------ ------
The Company
Loss Ratio.....................................................69.8% 78.2%(1) 70.8%
Expense Ratio................................................. 26.6 26.1 25.6
---- ---- ----
Combined Ratio.................................................96.4% 104.3% 96.4%
==== ===== ====
Industry Average(2)
Loss Ratio.....................................................78.6% 78.9% 81.0%
Expense Ratio..................................................27.3 27.5 27.3
---- ---- ----
Combined Ratio................................................105.9% 106.4% 108.3%
===== ===== =====
- ------------
(1) The $22.3 million loss reserve strengthening taken by the Company in
1995 with respect to prior years accounts for 8.2% of the loss ratio
for 1995. See "Loss and Loss Adjustment Expense Reserves."
(2) Source: Best's Aggregates & Averages - Property Casualty (1996
Edition). Ratios for 1996 are from A.M. Best.
Underwriting
The Company's goal is to achieve overall underwriting results that are
better than industry averages. To accomplish this, the Company organizes its
underwriting staff by product line, enabling underwriters to focus on the unique
risks associated with the specialty coverages written by the Company. The
Company seeks to ensure that each specialty product or program fits into the
Company's goal through a strategic planning process whereby divisional managers
evaluate the historical and expected levels of underwriting profitability of the
coverages written by such division. The Company then allocates its capital among
product lines where it believes the best underwriting opportunities exist.
Within each division, each underwriter is required to comply with risk
parameters, retention limits and rates and forms prescribed by the Company. All
underwriting operations of the Company are subject to special periodic audit by
the Company's home office personnel and the reinsurers which accept a portion of
these risks.
Generally, the Company grants general agents the authority to sell and
bind insurance coverages in accordance with detailed procedures and limitations
established by the Company. The Company promptly reviews coverages bound by
agents, decides whether the insurance is written in accordance with such
procedures and limitations, and, subject to state law limits and policy terms,
may cancel coverages that are not in compliance.
Within the General Agency Division, Acceptance Risk Managers and
Professional Liability Insurance Managers, which underwrite more difficult
casualty and professional lines business, grant no authority to general agents
but rather each risk must be submitted to the underwriter for individual
consideration.
The Company grants limited binding authority to certain independent
agents in certain lines of business, and provides that all other agents submit
all quotes to the Company's underwriting staff in order for such coverages to be
bound. Business that is outside an agent's binding authority must be submitted
to the Company's underwriting staff to obtain approval to bind such coverages.
Claims
The Company's claims department administers all claims and directs all
legal and adjustment aspects of the claims handling process. To assist in
settling claims the Company regularly uses independent adjusters, attorneys and
investigators. Recently, the Company reorganized its claims department under two
recently appointed senior claims vice presidents. The first, employed in 1993,
supervises litigation claims files and other complex and serious claims; the
second, employed in 1996, administers the other claim files and supervises the
claims handlers. Under the new structure, the Company will emphasize the use of
internal staff rather than independent adjusters, improving claims processing
systems and rapid response mechanisms. The Company believes that the new
structure will help to reduce loss adjustment expense, shorten the life of open
claim files and permit the Company to estimate more rapidly and consistently
future claim liabilities.
Loss and Loss Adjustment Expense Reserves
In the property and casualty insurance industry, it is not unusual for
significant periods of time, ranging up to several years, to elapse between the
occurrence of an insured loss, the report of the loss to the insurer and the
insurer's payment of that loss. The liability for losses and loss adjustment
expenses is determined by management based on historical patterns and
expectations of claims reported and paid, losses which have occurred but which
are not yet reported, trends in claim experience, information available on an
industry-wide basis, changes in the Company's claim handling procedures and
premium rates. The Company's lines of specialty insurance business are
considered less predictable than standard insurance coverages. The effects of
inflation are implicitly reflected in these loss reserves through the industry
data utilized in establishing such reserves. The Company does not discount its
reserves to estimated present value for financial reporting purposes.
In examining reserve adequacy, historical data is reviewed, and, as
additional experience and other data become available and is reviewed, these
estimates and judgments are revised, resulting in increases or decreases to
reserves for insured events of prior years. In 1995, the Company made an
additional provision through a charge to earnings of $22.3 million for its
reestimated liability for losses and loss adjustment expenses for 1994 and prior
accident years.
The liability established represents management's best estimate and is
based on sources of currently available evidence including an analysis prepared
by an independent actuary engaged by the Company. Even with such extensive
analyses, the Company believes that its ultimate liability may from time to time
vary from such estimates.
The Company annually obtains an independent review of its loss
reserving process and reserve estimates by a independent professional actuary as
part of the annual audit of its financial statements.
The following table presents an analysis of the Company's reserves,
reconciling beginning and ending reserve balances for the periods indicated:
Years Ended December 31,
----------------------------------------
1996 1995 1994
------ ------ -----
(in thousands)
Net loss and loss adjustment
expense reserves at beginning
of year.....................................................$201,356 $141,514 $115,714
-------- -------- --------
Provisions for net losses and
loss adjustment expenses for
claims occurring in the current
year ......................................................233,727 190,019 137,881
Increase in net reserves for
claims occurring in prior years................................9,530 22,318 5,070
----- ------ -----
243,257 212,337 142,951
------- ------- -------
Net losses and loss adjustment
expenses paid for claims
occurring during:
The current year...........................................(102,565) (80,281) (60,375)
Prior years.................................................(95,296) (72,214) (56,776)
-------- -------- --------
(197,861) (152,495) (117,151)
--------- --------- ---------
Net loss and loss adjustment
expense reserves at end of year............................. 246,752 201,356 141,514
Reinsurance recoverable on unpaid
losses and loss adjustment
expenses.....................................................185,421 167,888 79,811
------- ------- ------
Gross loss and loss adjustment
expense reserves............................................$432,173 $369,244 $221,325
======== ======== ========
The following table presents the development of balance sheet net loss
reserves from calendar years 1986 through 1996. The top line of the table shows
the loss reserves at the balance sheet date for each of the indicated years.
These amounts are the estimates of losses and loss adjustment expenses for
claims arising in all prior years that are unpaid at the balance sheet date,
including losses that had been incurred but not yet reported to the Company. The
middle section of the table shows the cumulative amount paid, expressed as a
percentage of the initial reserve amount, with respect to previously recorded
reserves as of the end of each succeeding year. The lower section of the table
shows the reestimated amount, expressed as a percentage of the initial reserve
amount, of the previously recorded reserves based on experience as of the end of
each succeeding year. The estimate changes as more information becomes known
about the frequency and severity of claims for individual years. The "Net
cumulative redundancy (deficiency)" caption represents the aggregate percentage
increase (decrease) in the initial reserves estimated. It should be noted that
the table presents the "run off" of balance sheet reserves, rather than accident
or policy year loss development. The Company computes the cumulative redundancy
(deficiency) annually on a calendar year basis.
Years Ended December 31,
------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
--------------- ------ ------ ------ ------ ------ ------ ------ ------ -----
Net reserves for unpaid
losses and loss
adjustment expenses $17,373 $27,730 $34,092 $43,380 $58,439 $66,132 $77,627 $115,714 $141,514 $201,356 $246,752
Cumulative amount of net
liability paid through:
One year later 32.5% 30.6% 30.5% 30.0% 40.6% 45.7% 36.1% 49.1% 51.0% 47.3%
Two years later 63.1% 56.7% 52.1% 59.5% 70.8% 72.3% 73.6% 80.5% 86.1%
Three years later 84.7% 72.9% 68.7% 76.1% 88.5% 96.6% 94.5% 100.9%
Four years later 93.4% 81.8% 77.0% 84.5% 101.2% 108.1% 109.0%
Five years later 100.1% 84.7% 81.5% 89.2% 107.5% 115.1%
Six years later 100.5% 87.1% 85.3% 93.4% 109.7%
Seven years later 100.9% 88.2% 89.8% 94.5%
Eight years later 102.2% 95.0% 90.3%
Nine years later 112.4% 95.2%
Ten years later 112.4%
Net reserves reestimated as of:
One year later 99.3% 96.6% 97.9% 99.1% 100.3% 103.5% 103.3% 104.4% 115.8% 104.7%
Two years later 104.7% 97.6% 92.3% 95.2% 102.3% 109.9% 109.7% 114.5% 115.7%
Three years later 107.3% 91.3% 87.3% 91.4% 107.4% 116.9% 117.9% 113.1%
Four years later 103.0% 89.7% 84.9% 92.5% 110.7% 120.1% 117.7%
Five years later 103.6% 88.1% 85.3% 94.0% 112.7% 119.9%
Six years later 102.5% 88.8% 86.6% 95.9% 112.0%
Seven years later 102.7% 88.9% 91.0% 95.4%
Eight years later 103.0% 95.4% 90.7%
Nine years later 112.7% 95.2%
Ten years later 112.4%
Net cumulative redundancy
(deficiency) -12.4% 4.8% 9.3% 4.6% -12.0% -19.9% -17.7% -13.1% -15.7%(1) -4.7%
Gross reserves for unpaid loss and
loss adjustment expenses $127,666 $211,600 $221,325 $369,244 $432,173
Reinsurance recoverable on unpaid
loss and loss adjustment expenses 50,039 95,886 79,811 167,888 $185,421
------- ------- ------- -------- --------
Net reserves for unpaid loss and
loss adjustment expenses 77,627 115,714 $141,514 $201,356 $246,752
======= ======= ======== ======== ========
Reestimated gross reserves for unpaid
loss and loss adjustment expenses 108.9% 112.4% 116.6% 98.8%
Reestimated reinsurance recoverable on
unpaid loss and loss adjustment
expenses 95.2% 111.6% 118.2% 91.7%
------ ------- ------- ------
Reestimated net reserves for unpaid loss
and loss adjustment expenses 117.7% 113.1% 115.7% 104.7%
======= ======= ======= =======
Gross cumulative redundancy (deficiency) - 8.9% -12.4% -16.6% 1.2%
======= ======= ======= =====
- ---------------
(1) Cumulative deficiencies appearing in the Company's reserve estimates
for 1994 resulted from adverse development of losses occurring in 1994
and prior accident years primarily in its commercial automobile,
general liability and commercial multi-peril lines of business. The
actual loss experience of these lines differed from estimated losses.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Year Ended December 31, 1995 Compared To Year
Ended December 31, 1994".
The establishment of reserves is an inherently uncertain process. The
Company underwrites both property and casualty coverages in a number of
specialty areas of business which may involve greater risks than standard
property and casualty lines. These risk components may make more difficult the
task of estimating reserves for losses, and cause the Company's underwriting
results to fluctuate. Further, conditions and trends that have affected the
development of loss reserves in the past may not necessarily occur in the
future. Accordingly, it may not be appropriate to extrapolate future
redundancies or deficiencies based on this information.
The Company adopted Statement of Financial Accounting Standards No. 113
("SFAS #113"), "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts," effective January 1, 1993. The application of SFAS
#113 resulted in the reclassification of amounts ceded to reinsurers, which
amounts were previously reported as a reduction in unearned premium and unpaid
losses and loss adjustment expenses, to assets on the consolidated balance
sheet. The table below includes a reconciliation of net loss and loss adjustment
expense reserves to amounts presented on the consolidated balance sheet after
reclassifications related to the adoption of SFAS #113. The gross cumulative
deficiency is presented for 1992 through 1995, the only years on the table for
which the Company has restated amounts in accordance with SFAS #113.
Reinsurance
A significant component of the Company's business strategy involves the
structuring of reinsurance to reduce volatility in its business segments as well
as to avoid large or catastrophic loss exposure. Reinsurance involves an
insurance company transferring, or ceding, all or a portion of its exposure on
insurance to a reinsurer. The reinsurer assumes the ceded exposure in return for
a portion of the premium received by the insurance company. Reinsurance does not
discharge the insurer from its obligations to its insured. If the reinsurer
fails to meet its obligations, the ceding insurer remains liable to pay the
insured loss, but the reinsurer is liable to the ceding insurer to the extent of
the reinsured portion of any loss.
The Company limits its exposure under individual policies by purchasing
excess of loss and quota share reinsurance, as well as maintaining catastrophe
reinsurance to protect against catastrophic occurrences where claims can arise
under several policies from a single event, such as a hurricane, earthquake,
wind storm, riot, tornado or other extraordinary event.
The Company generally retains the first $500,000 of risk under its
property and casualty lines, ceding the next $1,500,000 and $2,500,000,
respectively, to reinsurers. On its complex liability and property exposures,
the Company cedes losses in excess of $1,000,000 to its excess reinsurers and
maintains a separate 80% quota share treaty on the first $1,000,000 of risk. To
the extent that individual policies exceed reinsurance treaty limits, the
Company purchases reinsurance on a facultative (specific policy) basis.
The Company maintains catastrophe reinsurance for its casualty lines
which provides coverages of $17 million in excess of $3 million of aggregate
risk per occurrence, and for its property lines, which provides catastrophe
coverage of 95% of $77.5 million in excess of $2.5 million per occurrence. The
Company reviews the concentrations of property values in its property lines of
business continually, and models possible losses from catastrophic events
through computer simulations of different levels of storm activity, adjusting
the required limit of the liability or the concentrations of property coverages
as appropriate.
In its workers' compensation line, the Company buys excess of loss
protection on a statutory basis in excess of a $500,000 per occurrence
retention.
The Company reinsures its MPCI business with various federal
reinsurance pools administered by the RMA. In 1996, the Company ceded to the RMA
an aggregate of 35% of its gross MPCI premium. The Company's net exposure on
MPCI business is further reduced by excess of loss reinsurance purchased from
private carriers. This excess of loss reinsurance generally provides coverage
for 95% of losses in excess of a $3,000,000 deductible after the Company's loss
ratio reaches specified limits for each line of business, specifically 77% on
crop hail and named peril business and 100% on MPCI business. Additionally 50%
of the Company's crop hail business is reinsured through quota share agreements.
At December 31, 1996, 93% of the Company's outstanding reinsurance
recoverables were from domestic reinsurance companies or the federal government,
98% of which was from reinsurance companies rated A- (excellent) or better by
A.M. Best or from the federal government. The balance was primarily placed with
major international reinsurers.
Investments
The Company's investment policy is to maximize the after-tax yield of
the portfolio while emphasizing the stability and preservation of the Company's
capital base. Further, the portfolio is invested in types of securities and in
an aggregate duration which reflect the nature of the Company's liabilities and
expected liquidity needs. The Company manages its portfolio internally. The
Company's fixed maturity securities are classified as available-for-sale and
carried at estimated fair value. The investment portfolio at December 31, 1996
and December 31, 1995, consisted of the following:
December 31, 1996 December 31, 1995
Amortized Estimated Amortized Estimated
Type of Investment Cost Fair Value Cost Fair Value
Fixed maturity securities
U.S. Treasury and government securities................................$86,359 $ 86,253 $ 51,022 $ 51,689
States, municipalities and political
subdivisions..........................................................93,293 94,607 69,433 71,194
Other debt securities ..................................................34,581 34,309 27,484 28,197
Mortgage-backed securities ............................................ 60,138 52,835 72,359 67,220
------- ------- ------- -------
Total fixed maturity securities...................................274,371 268,004 220,298 218,300
Common stocks ..........................................................17,112 20,873 15,211 17,929
Preferred stocks .......................................................62,628 62,964 31,299 30,608
Commercial mortgages ...................................................11,149 11,149 11,290 11,290
Real estate .............................................................3,342 3,342 3,354 3,354
Short-term investments(1) ............................................. 39,594 39,594 86,520 86,520
------- ------- ------- -------
Total ...........................................................$408,196 $405,926 $367,972 $368,001
======== ======== ======== ========
- ---------------
(1) Due to the short-term nature of crop insurance, the Company must
maintain short-term investments to fund amounts due to pay losses.
Historically, these short-term funds are highest in the fall
corresponding to the cash flow in the agricultural industry.
The following table sets forth, as of December 31, 1996, the composition
of the Company's fixed maturity securities portfolio by time to maturity:
Estimated
Maturity Fair Value Percent
-------- ---------- -------
1 year or less ............................................$ 14,300 5.3%
More than 1 year through 5 years........................... 50,689 18.9%
More than 5 years through 10 years......................... 56,133 21.0%
More than 10 years......................................... 94,047 35.1%
Mortgage-backed securities................................. 52,835 19.7%
------- ------
Total ................................................$268,004 100.0%
======= ======
The Company's investment results for the periods indicated are
set forth below:
-------------------------
1996 1995 1994
----- ---- ----
(in thousands, except percentages)
Net investment income..............$ 26,491 $ 20,651 $ 13,276
Average investment
portfolio(1)..................... 402,404 321,251 220,125
Pre-tax return on average
investment portfolio............ 6.6% 6.4% 6.0%
Net realized gains.................$ 5,216 $ 2,707 $ 554
- ---------------
(1) Represents the average of the beginning and ending investment portfolio
(excluding real estate) computed on a quarterly basis.
Regulation
As a general rule, an insurance company must be licensed to transact
insurance business in each jurisdiction in which it operates, and almost all
significant operations of a licensed insurer are subject to regulatory scrutiny.
Licensed insurance companies are generally known as "admitted" insurers. Most
states provide a limited exemption from licensing for insurers issuing insurance
coverages that generally are not available from admitted insurers. Their
coverages are referred to as "surplus lines" insurance and these insurers as
"surplus lines" or "non-admitted" companies.
The Company's admitted insurance business is subject to comprehensive,
detailed regulation throughout the United States, under statutes which delegate
regulatory, supervisory and administrative powers to state insurance
commissioners. The primary purpose of such regulations and supervision is the
protection of policyholders and claimants rather than stockholders or other
investors. Depending on whether the insurance company is domiciled in the state
and whether it is an admitted or non-admitted insurer, such authority may extend
to such things as (i) periodic reporting of the insurer's financial condition;
(ii) periodic financial examination; (iii) approval of rates and policy forms;
(iv) loss reserve adequacy; (v) insurer solvency; (vi) the licensing of insurers
and their agents; (vii) restrictions on the payment of dividends and other
distributions; (viii) approval of changes in control; and (ix) the type and
amount of permitted investments.
The Company also is subject to laws governing insurance holding
companies in Nebraska, Iowa, Arizona and Texas, where the Insurance Companies
are domiciled. These laws, among other things, require the Company to file
periodic information with state regulatory authorities including information
concerning its capital structure, ownership, financial condition and general
business operations; regulate certain transactions between the Company, its
affiliates and the Insurance Companies, including the amount of dividends and
other distributions and the terms of surplus notes; and restrict the ability of
any one person to acquire certain levels of the Company's voting securities
(generally 10%) without prior regulatory approval.
Except for interest on surplus notes issued by the Insurance Companies,
Acceptance is dependent for funds to pay its operating and other expenses upon
dividends and other distributions from its subsidiaries, the payment of which
are subject to review and authorization by state insurance regulatory
authorities. The laws of such states generally restrict dividends from the
Insurance Companies to Acceptance to certain statutorily approved limits. During
1997, the statutory limitation on dividends from the Insurance Companies to
Acceptance without further Insurance Department approval is approximately $10.4
million.
Other regulatory and business considerations may further limit the
ability of the Insurance Companies to pay dividends. For example, the impact of
dividends on surplus could affect an insurers' competitive position, the amount
of premiums that it can write and its ability to pay future dividends. Further,
the insurance laws and regulations of Nebraska, Iowa, Arizona and Texas require
that the statutory surplus of an insurance company domiciled therein, following
any dividend or distribution by such company, be reasonable in relation to its
outstanding liabilities and adequate for its financial needs.
While the non-insurance company subsidiaries are not subject directly to
the dividend and other distribution limitations, insurance holding company
regulations govern the amount which a subsidiary within the holding company
system may charge any of the Insurance Companies for services (e.g., agents'
commissions).
The Company's MPCI program is federally-regulated and supported by the
federal government by means of premium subsidies to farmers and expense
reimbursement and federal reinsurance pools for private insurers. Consequently,
the MPCI program is subject to oversight by the legislative and executive
branches of the federal government, including the RMA. The MPCI program
regulations prescribe premiums which may be charged and generally require
compliance with federal guidelines with respect to underwriting, rating and
claims administration. The Company is required to perform continuous internal
audit procedures and is subject to audit by several federal government agencies.
During the past several years, various regulatory and legislative bodies
have adopted or proposed new laws or regulations to deal with the cyclical
nature of the insurance industry, catastrophic events and insurance capacity and
pricing. These regulations include (i) the creation of "market assistance plans"
under which insurers are induced to provide certain coverages, (ii) restrictions
on the ability of insurers to cancel certain policies in mid-term, (iii) advance
notice requirements or limitations imposed for certain policy non-renewals and
(iv) limitations upon or decreases in rates permitted to be charged.
The NAIC has approved and recommended that states adopt and implement
several regulatory initiatives designed to be used by regulators as an early
warning tool to identify deteriorating or weakly capitalized insurance companies
and to decrease the risk of insolvency of insurance companies. These initiatives
include the implementation of the Risk Based Capital ("RBC") standards for
determining adequate levels of capital and surplus to support four areas of risk
facing property and casualty insurers: (a) asset risk (default on fixed income
assets and market decline), (b) credit risk (losses from unrecoverable
reinsurance and inability to collect agents' balances and other receivables),
(c) underwriting risk (premium pricing and reserve estimates), and (d)
off-balance sheet/growth risk (excessive premium growth and unreported
liabilities). At December 31, 1996 the Insurance Companies meet the RBC
requirements as promulgated by the domiciliary states of the Insurance Companies
and the NAIC.
The eligibility of the Insurance Companies to write insurance on a
surplus lines basis is dependent on their compliance with certain financial
standards, including the maintenance of a requisite level of capital and surplus
and the establishment of certain statutory deposits. State surplus lines laws
typically: (i) require the insurance producer placing the business to show that
he or she was unable to place the coverage with admitted insurers; (ii)
establish minimum financial requirements for surplus lines insurers operating in
the state; and (iii) require the insurance producer to obtain a special surplus
lines license. In recent years, many jurisdictions have increased the minimum
financial standards applicable to surplus lines eligibility.
The Insurance Companies also may be required under the solvency or
guaranty laws of most states in which they are licensed to pay assessments (up
to certain prescribed limits) to fund policyholder losses or liabilities of
insolvent or rehabilitated insurance companies. These assessments may be
deferred or forgiven under most guaranty laws if they would threaten an
insurer's financial strength and, in certain instances, may be offset against
future premium taxes. Some state laws and regulations further require
participation by the Insurance Companies in pools or funds to provide types of
insurance coverages which they would not ordinarily accept.
Competition
The property and casualty insurance business is highly competitive, with
over 3,000 insurance companies in the United States, many of which have
substantially greater financial and other resources, and may offer a broader
variety of coverages than those offered by the Company. Beginning in the latter
half of the 1980s, there has been severe price competition in the insurance
industry which has resulted in a reduction in the volume of premiums written by
the Company in some of its lines of businesses, because of its unwillingness to
reduce prices to meet competition. The specialty property and casualty coverages
underwritten by the Company may involve greater risks than more standard
property and casualty lines. These risks may include a lack of predictability,
and in some instances, the absence of a long-term, reliable historical data base
upon which to estimate future losses.
Employees
At March 24, 1997 the Company and its subsidiaries employed 18 salaried
executives and 1,102 other personnel. Acceptance believes that relations with
its employees are good.
MANAGEMENT
Set forth below is certain information concerning directors and certain
executive officers of the Company. Each director holds office until the next
annual meeting of stockholders and until his or her successor has been elected
and qualified. The information concerning the directors has been furnished by
them to the Company.
Directors and Executive Officers
The Board of Directors of the Company is currently composed of nine
members, each of whom serves for a term of one year. Executive officers are
elected annually by the stockholders of the Company.
The following table sets forth information with respect to the directors and
executive officers of the Company.
Current
Term as
Director/Executive Director Director
Officer Age (1) Position Since Expires
- ------------------ ------- ----------------------------------- ------ -----------
Kenneth C. Coon 46 Chairman, Chief Executive Officer & 1992 1998
Director
John P. Nelson 56 President, Chief Operating Officer & 1993 1998
Director
G. Thomas Bolton 51 Senior Vice President, Claims N/A N/A
Greg D. Ewald 43 Senior Vice President, Underwriting N/A N/A
William J. Gerber 39 Vice President, Investments and N/A N/A
Investor Relations
Richard C. Gibson 61 Vice President, The Redland Group, N/A N/A
President of American Growers and
Chief Executive Officer of American
Agrisurance, Inc.
Robert W. Haney 55 Senior Vice President, Claims N/A N/A
Peter A. Knolla 50 Assistant Secretary N/A N/A
Georgia M. Mace 47 Treasurer & Chief Financial Officer N/A N/A
George P. Mang 66 Senior Vice President and Chief N/A N/A
Operating Officer of Phoenix Indemnity
Mark R. Shapland 38 Vice President & Chief Actuary N/A N/A
Raymond N. Siebert 49 Vice President, Administration N/A N/A
Bruce W. Slaughter 60 Senior Vice President, Redland N/A N/A
Insurance Company
Joseph G. Smith 42 Vice President, Budget, Audit & N/A N/A
Strategic Planning
Thomas D. Stamm 50 Senior Vice President N/A N/A
John R. Svoboda 44 Vice President, Regulatory Affairs N/A N/A
Jay A. Bielfield 51 Director 1992 1998
Edward W. Elliot, Jr. 53 Director 1992 1998
Robert LeBuhn 64 Director 1992 1998
Michael R. McCarthy 45 Director 1986 1998
R.L. Richards 48 Director 1991 1998
David L. Treadwell 42 Director 1992 1998
Doug T. Valassis 44 Director 1992 1998
- -----------------
(1) At April 29, 1997
Biographical Information
Directors and Executive Officers of the Company. The principal
occupation of each director and executive officer of the Company is set forth
below.
Kenneth C. Coon has been Chairman and Chief Executive Officer of the
Company and has been a director of the Company since December 1992. He served as
Interim Chief Executive Officer of the Company beginning in February 1992, and
as Chairman and President from December 1992 until March 1994, whereupon he was
elected Chairman and Chief Executive Officer. Mr. Coon has been President and
Chief Executive Officer, and a director, of Acceptance Insurance Holdings Inc.
since its formation and of each of its subsidiaries since their formation or
acquisition; and, since August 1993 has served as a director of The Redland
Group, Inc., and each of its subsidiaries, all of which are subsidiaries of the
Company. Mr. Coon also serves as a director of Major Realty Corporation.
John P. Nelson has been President and Chief Operating Officer of the
Company since March 1994, and has been a director since August 1993. Mr. Nelson
serves as either Chairman or President and a director of The Redland Group,
Inc., and its insurance subsidiaries, all of which are subsidiaries of the
Company. Since August 1993 he has served as a director of Acceptance Insurance
Holdings Inc. and each of its subsidiaries.
G. Thomas Bolton has been Senior Vice President, Claims since January
1996. Mr. Bolton came to Acceptance from Arthur Andersen LLP, where he was a
Property and Casualty Claims Consultant. Prior to that time he was employed for
16 years by, and was the Eastern Territorial Claim Executive and Assistant Vice
President for, the Home Insurance Group.
Greg D. Ewald has been Senior Vice President of Underwriting of the
Company since October 1993. Mr. Ewald has been Vice President of Underwriting
for Acceptance Insurance Company and Acceptance Indemnity Insurance Company
since April 1990. Prior thereto, Mr. Ewald was Vice President, Treaty
Underwriting, at Underwriters Reinsurance Company.
William J. Gerber has been Vice President, Investments and Investor
Relations of the Company since December 1992, and of Acceptance Insurance
Holdings Inc. since July 1, 1991. Beginning in August 1987, he was Director of
Financial Reporting and Acquisitions for the Company. Prior thereto, he was a
certified public accountant with Coopers & Lybrand.
Richard C. Gibson has been Executive Vice President of The Redland
Group, Inc., since August 1993, and effective January 1996, President of
American Growers and Chairman and Chief Executive Officer of American
Agrisurance, Inc., a wholly-owned marketing subsidiary of the Company. Mr.
Gibson served as President of American Agrisurance, Inc., from its formation in
November 1976 until January 1996. From 1973 through 1976, Mr. Gibson was Vice
President and Marketing Manager of Blakley Crop Hail and prior to that time,
from 1964 through 1973 Branch Manager of the Crop Division of the Insurance
Company of North America.
Robert W. Haney has been Senior Vice President of Claims of the Company
since July 1993. For the prior 11 years, Mr. Haney was Assistant Vice President
of Claims for Empire Fire & Marine Insurance Company.
Peter A. Knolla has been Assistant Secretary of the Company since
December of 1992. He has been Secretary of the majority of the Acceptance
subsidiaries since July of 1991. Prior to that time he was associated with the
Central National Insurance Group and Empire Fire and Marine Insurance Company
for 15 years.
Georgia M. Mace has been Treasurer and Chief Financial Officer of the
Company since May 1992. Ms. Mace has been Treasurer and Chief Financial Officer
of Acceptance Insurance Company since its formation and of each of the
Acceptance subsidiaries since their formation or acquisition. She also has
served as a director of Acceptance Insurance Company and Phoenix Indemnity
Insurance Company since their formation. Ms. Mace formerly was Treasurer of
Cornhusker Casualty, a division of Berkshire Hathaway.
George P. Mang has been Senior Vice President and Chief Operating
Officer of Phoenix Indemnity since April 1994. Mr. Mang served as Secretary of
Phoenix Indemnity from its organization in 1988 until 1994. Prior to that
time, Mr. Mang was Executive Vice President of Statewide Insurance for 25 years.
Mark R. Shapland has been Vice President and Chief Actuary since August
1996. During the preceding six years, Mr. Shapland was an actuary with Zurich
Insurance Company, and Vice President and Chief Actuary with Empire Fire &Marine
Insurance Company.
Raymond N. Siebert has been Vice President of Administration for the
Company since May 1995. Prior to that, Mr. Siebert was an Assistant Vice
President for Systems and Operations for the Home Insurance Company. Mr. Siebert
held various administrative and operations support positions at Home Insurance
for 13 years. He also has held positions in a similar capacity for the IL. FAIR
Plan, Chubb and Son, and Allstate Insurance co., dating back to 1975.
Bruce W. Slaughter has been Senior Vice President of Redland Insurance
Company since October of 1995. Prior to coming with Acceptance Insurance
Companies in October of 1994, Mr. Slaughter was Executive Vice President of Home
Insurance Company. Prior to that time he was Vice President with Chubb Insurance
Group, having been with them for a period of 24 years.
Joseph G. Smith has been Vice President of Budget, Audit and Strategic
Planning since August 1993. Mr. Smith served as Vice President and Treasurer of
Redland Insurance Company from September 1982 to October 1994. Prior to joining
Redland, Mr. Smith worked as a certified public accountant with Ernst & Whinney
for six years.
Thomas D. Stamm has been Senior Vice President of Acceptance Insurance
Company since October 1993. Prior to that time, Mr. Stamm was a founding
officer and Senior Vice President of Underwriting for the Scottsdale Insurance
Company. Prior to that time, Mr. Stamm was a Vice President of Underwriting for
Great Southwest Fire Insurance Company for 10 years.
John R. Svoboda has been Vice President of regulatory Affairs for the
Company since July 1991. He has been with the Company since 1987. For the prior
13 years Mr. Svoboda was a Senior Examiner with the Nebraska Department of
Insurance.
Jay A. Bielfield has been a director of the Company since December 1992.
Mr. Bielfield is an employee of Little Ceasar International, Inc. Mr. Bielfield
is a director of Major realty Corporation.
Edward W. Elliot, Jr. has been a director of the Company since December
1992. Mr. Elliot is Vice-Chairman and Chief Financial Officer of Franklin
Enterprises, Inc., a private investment management firm located in Deerfield,
Illinois. Mr. Elliot also serves as a director of Warehouse Club, Inc.
Robert LeBuhn has been a director of the Company since December 1992.
Mr. LeBuhn is a private investor. He was Chairman of Investor International
(U.S.), Inc., an investment firm in New York, New York, until September `994.
Mr. LeBuhn serves as a director of USAir Group, Inc., Cambrex Corp., New Jersey
Steel, and Enzon, Inc.
Michael R. McCarthy has been a director of the Company since December
1992. Mr. McCarthy has been Chairman and a director of McCarthy & Co., a firm
engaged in the investment banking business in Omaha, Nebraska, since it was
organized in 1986. He is also a director and Chairman of McCarthy Group, Inc.,
which is an investment and merchant banking firm and the parent of McCarthy &
Co. Mr. McCarthy also serves as a director of Major Realty Corporation.
R.L. Richards has been a director of the Company since January 1991. Mr.
Richards serves as Managing Director of RDT Limited, a private investment
company located in Dublin, Ohio. Prior to the organization of RDT Limited in
December 1994, he served as President and director of its predecessor and has
held various positions with that company since 1978.
David L. Treadwell has been a director of the Company since December
1992. Mr. Treadwell has been director, Chairman and Chief Executive Officer of
Major Realty since March 1992. Mr. Treadwell also is President of Heritage
Network, Incorporated, which is responsible for a portfolio of investments,
including operating businesses in automotive supply, newspaper publishing, real
estate development and residential construction. Mr. Treadwell has also been
Community Bank Director of Old Kent Bank, SE, since April 1992.
Doug T. Valassis has been a director of the Company since December 1992.
Mr. Valassis is President and Chief Operating Officer and a director of Franklin
Enterprises, Inc., an investment management firm in Deerfield, Illinois. Mr.
Valassis also serves as a director of Warehouse Club, Inc., and serves as a
director and officer of Lindner Investments, Massachusetts Trust, a complex of
six investment funds; Mr. Valassis serves as director for each of the six funds.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Doug T. Valassis, a director of the Company, is the son of George F.
Valassis, a principal shareholder of the Company, and is President and Chief
Operating Officer and a director of Franklin Enterprises, Inc. ("Franklin").
Franklin is a general partner of Valassis Enterprises, L.P., another principal
shareholder of the Company. Edward W. Elliott, Jr., a director of the Company,
is Vice Chairman and Chief Financial Officer and a director of Franklin. Messrs.
Doug T. Valassis and Edward W. Elliott, Jr., are co-trustees of an irrevocable
family trust ("Valassis Children's Trust") established by George F. Valassis.
Under the terms of the governing trust instrument, at any time while Mr. Elliott
is co-trustee, he may acquire any and all assets held in the trust by
substituting other assets of equivalent value. Doug T. Valassis also is
one-third beneficiaries of the Valassis Children's Trust, and beneficiary of
another family trust established by George F. Valassis.
During the fiscal year ended December 31, 1996, the Company employed
McCarthy & Co., d/b/a/ Long View Capital Management, a wholly-owned subsidiary
of McCarthy Group, Inc., to furnish investment advisory services to the Company
and paid McCarthy & Co., approximately $298,000 for such services. Michael R.
McCarthy, a director of the Company, is Chairman and the controlling shareholder
of McCarthy Group, Inc. Effective March 15, 1996, McCarthy Group, Inc., acquired
an aggregate of 726,301 shares of the Company's Common Stock from a group of
unrelated shareholders in an exchange offer for shares of common stock of
McCarthy Group, Inc.
The Company beneficially owns 33.1% of the common stock of Major Realty
Corporation ("Major Realty"). Messrs. Bielfiled, Coon, McCarthy & Treadwell are
directors of both the Company and Major Realty. George F. Valassis, beneficial
owner of approximately 13% of the Company's common stock, owns beneficially
approximately 9.8% of the Major realty common stock. Mr. Valassis is the father
of Doug T. Valassis, a director of the Company. In October 1995, the Company
loaned $5,100,000 to Major Realty, collateralized by real estate, and bearing
interest at prime plus 1.5%. In April 1997, the Company and Major Realty agreed
to restate the loan into a new note, bearing interest at prime plus 2.5%; added
to principal in the new note was accrued and unpaid interest of $386,584,
bringing the new note amount to $5,450,728.
The Company contracts with Redland & Associates, Inc. and its affiliates
to administer health insurance benefits for its employees and to place property
and casualty coverage on behalf of the Company whereby Redland & Associates
receives commissions from the insurance providers, which totaled $237,000 in
1996. In addition, the Company pays commissions and fees to Redland & Associates
in connection with insurance written and loss control activities, which totaled
$186,000 in 1996. Redland & Associates reimburses the Company for an allocable
share of certain office occupancy expenses, in the sum of $174,000 in 1996. John
P. Nelson, President and Chief Operating Officer, and a Director of the Company,
is Chairman of the Board and a principal shareholder of Redland & Associates.
By virtue of the foregoing positions, relationships and interests, the
persons named above may have an indirect material interest in transactions and
business relationships between the Company and its subsidiaries and such persons
or their affiliates.
DESCRIPTION OF PREFERRED SECURITIES
Pursuant to the terms of the Trust Agreement for the Issuer Trust, the
Issuer Trustees on behalf of the Issuer Trust will issue the Preferred
Securities and the Common Securities. The Preferred Securities will represent
preferred undivided beneficial interests in the assets of the Issuer Trust and
the holders thereof will be entitled to a preference in certain circumstances
with respect to Distributions and amounts payable on redemption or liquidation
over the Common Securities, as well as other benefits as described in the Trust
Agreement. This summary of certain provisions of the Preferred Securities and
the Trust Agreement does not purport to be complete and is subject to, and
qualified in its entirety by reference to, all the provisions of the Trust
Agreement, including the definitions therein of certain terms. Wherever
particular defined terms of the Trust Agreement are referred to herein, such
defined terms are incorporated herein by reference. A copy of the form of the
Trust Agreement is available upon request from the Issuer Trustees.
General
The Preferred Securities will be limited to $65,000,000 aggregate
Liquidation Amount outstanding (which amount may be increased by up to
$9,750,000 aggregate liquidation amount of Preferred Securities for exercise of
the Underwriters' over-allotment option). See "Underwriting." The Preferred
Securities will rank pari passu, and payments will be made thereon pro rata,
with the Common Securities except as described under "-- Subordination of Common
Securities." The Junior Subordinated Debentures will be registered in the name
of the Issuer Trust and held by the Property Trustee in trust for the benefit of
the holders of the Preferred Securities and Common Securities. The Guarantee
will be a guarantee on a subordinated basis with respect to the Preferred
Securities but will not guarantee payment of Distributions or amounts payable on
redemption or liquidation of such Preferred Securities when the Issuer Trust
does not have funds on hand available to make such payments. See "Description of
Guarantee."
Distributions
The Preferred Securities represent preferred undivided beneficial
interests in the assets of the Issuer Trust, and Distributions on each Preferred
Security will be payable at the annual rate of % of the stated Liquidation
Amount of $25, payable quarterly in arrears on March 31, June 30, September 30
and December 31 of each year (each a "Distribution Date"), to the holders of the
Preferred Securities at the close of business on the 15th day of March, June,
September and December (whether or not a Business Day (as defined below)) next
preceding the relevant Distribution Date. Distributions on the Preferred
Securities will be cumulative. Distributions will accumulate from , 1997. The
first Distribution Date for the Preferred Securities will be , 1997. The amount
of Distributions payable for any period less than a full Distribution period
will be computed on the basis of a 360-day year of twelve 30-day months and the
actual days elapsed in a partial month in such period. Distributions payable for
each full Distribution period will be computed by dividing the rate per annum by
four. If any date on which Distributions are payable on the Preferred Securities
is not a Business Day, then payment of the Distributions payable on such date
will be made on the next succeeding day that is a Business Day (without any
additional Distributions or other payment in respect of any such delay), with
the same force and effect as if made on the date such payment was originally
payable.
So long as no Debenture Event of Default has occurred and is continuing,
the Company has the right under the Junior Subordinated Indenture to defer the
payment of interest on the Junior Subordinated Debentures at any time or from
time to time for a period not exceeding 20 consecutive quarterly periods with
respect to each Extension Period, provided that no Extension Period may extend
beyond the Stated Maturity of the Junior Subordinated Debentures. As a
consequence of any such deferral, quarterly Distributions on the Preferred
Securities by the Issuer Trust will be deferred during any such Extension
Period. Distributions to which holders of the Preferred Securities are entitled
will accumulate additional Distributions thereon at the rate of % per annum,
compounded quarterly from the relevant payment date for such Distributions,
computed on the basis of a 360-day year of twelve 30-day months and the actual
days elapsed in a partial month in such period. Additional Distributions payable
for each full Distribution period will be computed by dividing the rate per
annum by four. The term "Distributions" as used herein shall include any such
additional Distributions. During any such Extension Period, the Company may not
(i) declare or pay any dividends or distributions on, or redeem, purchase,
acquire or make a liquidation payment with respect to, any of the Company's
capital stock or (ii) make any payment of principal of or interest or premium,
if any, on or repay, repurchase or redeem any debt securities of the Company
that rank pari passu in all respects with or junior in interest to the Junior
Subordinated Debentures (other than (a) repurchases, redemptions or other
acquisitions of shares of capital stock of the Company in connection with any
employment contract, benefit plan or other similar arrangement with or for the
benefit of any one or more employees, officers, directors or consultants, in
connection with a dividend reinvestment or stockholder stock purchase plan or in
connection with the issuance of capital stock of the Company (or securities
convertible into or exercisable or exchangeable for such capital stock) as
consideration in an acquisition transaction entered into prior to the applicable
Extension Period, (b) as a result of an exchange or conversion of any class or
series of the Company's capital stock (or any capital stock of a subsidiary of
the Company) for any class or series of the Company's capital stock or of any
class or series of the Company's indebtedness for any class or series of the
Company's capital stock, (c) the purchase of fractional interests in shares of
the Company's capital stock pursuant to the conversion or exchange provisions of
such capital stock or the security being converted or exchanged, (d) any
declaration of a dividend in connection with any stockholder's rights plan, or
the issuance of rights, stock or other property under any stockholder's rights
plan, or the redemption or repurchase of rights pursuant thereto, or (e) any
dividend in the form of stock, warrants, options or other rights where the
dividend stock or the stock issuable upon exercise of such warrants, options or
other rights is the same stock as that on which the dividend is being paid or
ranks pari passu with or junior to such stock). Prior to the termination of any
such Extension Period, the Company may further defer the payment of interest,
provided that no Extension Period may exceed 20 consecutive quarterly periods or
extend beyond the Stated Maturity of the Junior Subordinated Debentures. Upon
the termination of any such Extension Period and the payment of all amounts then
due, the Company may elect to begin a new Extension Period. No interest shall be
due and payable during an Extension Period, except at the end thereof. The
Company must give the Issuer Trustees notice of its election of such Extension
Period at least one Business Day prior to the earlier of (i) the date the
Distributions on the Preferred Securities would have been payable but for the
election to begin such Extension Period and (ii) the date the Property Trustee
is required to give notice to holders of the Preferred Securities of the record
date or the date such Distributions are payable, but in any event not less than
one Business Day prior to such record date. The Property Trustee will give
notice of the Company's election to begin a new Extension Period to the holders
of the Preferred Securities. Subject to the foregoing, there is no limitation on
the number of times that the Company may elect to begin an Extension Period. See
"Description of Junior Subordinated Debentures -- Option To Extend Interest
Payment Period" and "Certain Federal Income Tax Consequences -- Interest Income
and Original Issue Discount."
The Company has no current intention of exercising its right to defer
payments of interest by extending the interest payment period on the Junior
Subordinated Debentures.
The revenue of the Issuer Trust available for distribution to holders of
the Preferred Securities will be limited to payments under the Junior
Subordinated Debentures in which the Issuer Trust will invest the proceeds from
the issuance and sale of the Preferred Securities. See "Description of Junior
Subordinated Debentures." If the Company does not make payments on the Junior
Subordinated Debentures, the Issuer Trust may not have funds available to pay
Distributions or other amounts payable on the Preferred Securities. The payment
of Distributions and other amounts payable on the Preferred Securities (if and
to the extent the Issuer Trust has funds legally available for and cash
sufficient to make such payments) is guaranteed by the Company on a limited
basis as set forth herein under "Description of Guarantee."
Redemption
Upon the repayment or redemption, in whole or in part, of the Junior
Subordinated Debentures, whether at maturity or upon earlier redemption as
provided in the Junior Subordinated Indenture, the proceeds from such repayment
or redemption shall be applied by the Property Trustee to redeem a Like Amount
(as defined below) of the Preferred Securities, upon not less than 30 nor more
than 60 days' notice, at a redemption price (the "Redemption Price") equal to
the aggregate Liquidation Amount of such Preferred Securities plus accumulated
but unpaid Distributions thereon to the date of redemption (the "Redemption
Date") and the related amount of the premium, if any, paid by the Company upon
the concurrent redemption of such Junior Subordinated Debentures. See
"Description of Junior Subordinated Debentures -- Redemption." If less than all
the Junior Subordinated Debentures are to be repaid or redeemed on a Redemption
Date, then the proceeds from such repayment or redemption shall be allocated to
the redemption pro rata of the Preferred Securities and the Common Securities.
The amount of premium, if any, paid by the Company upon the redemption of all or
any part of the Junior Subordinated Debentures to be repaid or redeemed on a
Redemption Date shall be allocated to the redemption pro rata of the Preferred
Securities and the Common Securities.
The Company has the right to redeem the Junior Subordinated Debentures
(i) on or after , 2002, in whole at any time or in part from time to time, or
(ii) in whole, but not in part, at any time within 90 days following the
occurrence and during the continuation of a Tax Event (as defined below). See
"-- Liquidation Distribution Upon Dissolution." A redemption of the Junior
Subordinated Debentures would cause a mandatory redemption of a Like Amount of
the Preferred Securities and Common Securities at the Redemption Price.
"Business Day" means a day other than (a) a Saturday or Sunday, (b) a
day on which banking institutions in the City of New York are authorized or
required by law or executive order to remain closed, or (c) a day on which the
Property Trustee's Corporate Trust Office or the Corporate Trust Office of the
Debenture Trustee is closed for business.
"Like Amount" means (i) with respect to a redemption of Trust
Securities, Trust Securities having a Liquidation Amount (as defined below)
equal to that portion of the principal amount of Junior Subordinated Debentures
to be contemporaneously redeemed in accordance with the Junior Subordinated
Indenture, allocated to the Common Securities and to the Preferred Securities
based upon the relative Liquidation Amounts of such classes and (ii) with
respect to a distribution of Junior Subordinated Debentures to holders of Trust
Securities in connection with a dissolution or liquidation of the Issuer Trust,
Junior Subordinated Debentures having a principal amount equal to the
Liquidation Amount of the Trust Securities of the holder to whom such Junior
Subordinated Debentures are distributed.
"Liquidation Amount" means the stated amount of $25 per Trust Security.
"Tax Event" means the receipt by the Issuer Trust of an opinion of
counsel to the Company experienced in such matters to the effect that, as a
result of any amendment to, or change (including any announced prospective
change) in, the laws (or any regulations thereunder) of the United States or any
political subdivision or taxing authority thereof or therein, or as a result of
any official or administrative pronouncement or action or judicial decision
interpreting or applying such laws or regulations, which amendment or change is
effective or which pronouncement or decision is announced on or after the date
of issuance of the Preferred Securities, there is more than an insubstantial
risk that (i) the Issuer Trust is, or will be within 90 days of the delivery of
such opinion, subject to United States federal income tax with respect to income
received or accrued on the Junior Subordinated Debentures, (ii) interest payable
by the Company on the Junior Subordinated Debentures is not, or within 90 days
of the delivery of such opinion, will not be, deductible by the Company, in
whole or in part, for United States federal income tax purposes or (iii) the
Issuer Trust is, or will be within 90 days of the delivery of such opinion,
subject to more than a de minimis amount of other taxes, duties or other
governmental charges.
If a Tax Event described in clause (i) or (iii) of the definition of Tax
Event above has occurred and is continuing and the Issuer Trust is the holder of
all the Junior Subordinated Debentures, the Company will pay Additional Sums (as
defined below), if any, on the Junior Subordinated Debentures.
"Additional Sums" means the additional amounts as may be necessary in
order that the amount of Distributions then due and payable by the Issuer Trust
on the outstanding Preferred Securities and Common Securities of the Issuer
Trust will not be reduced as a result of any additional taxes, duties and other
governmental charges to which the Issuer Trust has become subject as a result of
a Tax Event.
Redemption Procedures
Preferred Securities redeemed on each Redemption Date shall be redeemed
at the Redemption Price with the applicable proceeds from the contemporaneous
redemption of the Junior Subordinated Debentures. Redemptions of the Preferred
Securities shall be made and the Redemption Price shall be payable on each
Redemption Date only to the extent that the Issuer Trust has funds on hand
available for the payment of such Redemption Price. See also "-- Subordination
of Common Securities."
If the Issuer Trust gives a notice of redemption in respect of the
Preferred Securities, then, by 12:00 noon, New York City time, on the Redemption
Date, to the extent funds are available, in the case of Preferred Securities
held in book-entry form, the Property Trustee will deposit irrevocably with DTC
funds sufficient to pay the applicable Redemption Price and will give DTC
irrevocable instructions and authority to pay the Redemption Price to the
holders of the Preferred Securities. With respect to Preferred Securities not
held in book-entry form, the Property Trustee, to the extent funds are
available, will irrevocably deposit with the paying agent for the Preferred
Securities funds sufficient to pay the applicable Redemption Price and will give
such paying agent irrevocable instructions and authority to pay the Redemption
Price to the holders thereof upon surrender of their certificates evidencing the
Preferred Securities. Notwithstanding the foregoing, Distributions payable on or
prior to the Redemption Date for any Preferred Securities called for redemption
shall be payable to the holders of the Preferred Securities on the relevant
record dates for the related Distribution Dates. If notice of redemption shall
have been given and funds deposited as required, then upon the date of such
deposit, all rights of the holders of such Preferred Securities so called for
redemption will cease, except the right of the holders of such Preferred
Securities to receive the Redemption Price, but without interest on such
Redemption Price, and such Preferred Securities will cease to be outstanding. If
any date fixed for redemption of Preferred Securities is not a Business Day,
then payment of the Redemption Price payable on such date will be made on the
next succeeding day which is a Business Day (without any interest or other
payment in respect of any such delay), except that, if such Business Day falls
in the next calendar year, such payment will be made on the immediately
preceding Business Day. In the event that payment of the Redemption Price in
respect of Preferred Securities called for redemption is improperly withheld or
refused and not paid either by the Issuer Trust or by the Company pursuant to
the Guarantee as described under "Description of Guarantee," Distributions on
such Preferred Securities will continue to accumulate at the then applicable
rate, from the Redemption Date originally established by the Issuer Trust for
such Preferred Securities to the date such Redemption Price is actually paid, in
which case the actual payment date will be the date fixed for redemption for
purposes of calculating the Redemption Price.
Subject to applicable law (including, without limitation, United States
federal securities laws), the Company or its affiliates may at any time and from
time to time purchase outstanding Preferred Securities by tender, in the open
market or by private agreement, and may resell such securities.
If less than all the Preferred Securities and Common Securities are to
be redeemed on a Redemption Date, then the aggregate Liquidation Amount of such
Preferred Securities and Common Securities to be redeemed shall be allocated pro
rata to the Preferred Securities and the Common Securities based upon the
relative Liquidation Amounts of such classes. The particular Preferred
Securities to be redeemed shall be selected on a pro rata basis not more than 60
days prior to the Redemption Date by the Property Trustee from the outstanding
Preferred Securities not previously called for redemption, or if the Preferred
Securities are then held in the form of a Global Preferred Security [(as defined
below)], in accordance with DTC's customary procedures. The Property Trustee
shall promptly notify the securities registrar for the Trust Securities in
writing of the Preferred Securities selected for redemption and, in the case of
any Preferred Securities selected for partial redemption, the Liquidation Amount
thereof to be redeemed. For all purposes of the Trust Agreement, unless the
context otherwise requires, all provisions relating to the redemption of
Preferred Securities shall relate, in the case of any Preferred Securities
redeemed or to be redeemed only in part, to the portion of the aggregate
Liquidation Amount of Preferred Securities which has been or is to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more
than 60 days before the Redemption Date to each registered holder of Preferred
Securities to be redeemed at its address appearing on the securities register
for the Trust Securities. Unless the Company defaults in payment of the
Redemption Price on the Junior Subordinated Debentures, on and after the
Redemption Date interest will cease to accrue on the Junior Subordinated
Debentures or portions thereof (and, unless payment of the Redemption Price in
respect of the Preferred Securities is withheld or refused and not paid either
by the Issuer Trust or the Company pursuant to the Guarantee, Distributions will
cease to accumulate on the Preferred Securities or portions thereof) called for
redemption.
Subordination of Common Securities
Payment of Distributions on, and the Redemption Price of, and the
Liquidation Distribution in respect of, the Preferred Securities and Common
Securities, as applicable, shall be made pro rata based on the Liquidation
Amount of such Preferred Securities and Common Securities. However, if on any
Distribution Date or Redemption Date a Debenture Event of Default has occurred
and is continuing as a result of any failure by the Company to pay any amounts
in respect of the Junior Subordinated Debentures when due, no payment of any
Distribution on, or Redemption Price of, or Liquidation Distribution in respect
of, any of the Common Securities, and no other payment on account of the
redemption, liquidation or other acquisition of such Common Securities, shall be
made unless payment in full in cash of all accumulated and unpaid Distributions
on all the outstanding Preferred Securities for all Distribution periods
terminating on or prior thereto, or in the case of payment of the Redemption
Price the full amount of such Redemption Price on all the outstanding Preferred
Securities then called for redemption, shall have been made or provided for, and
all funds available to the Property Trustee shall first be applied to the
payment in full in cash of all Distributions on, or Redemption Price of, the
Preferred Securities then due and payable.
In the case of any Event of Default (as defined below) resulting from a
Debenture Event of Default, the holders of the Common Securities will be deemed
to have waived any right to act with respect to any such Event of Default under
the Trust Agreement until the effects of all such Events of Default with respect
to such Preferred Securities have been cured, waived or otherwise eliminated.
See "--Events of Default; Notice" and "Description of Junior Subordinated
Debentures -- Debenture Events of Default." Until all such Events of Default
under the Trust Agreement with respect to the Preferred Securities have been so
cured, waived or otherwise eliminated, the Property Trustee will act solely on
behalf of the holders of the Preferred Securities and not on behalf of the
holders of the Common Securities, and only the holders of the Preferred
Securities will have the right to direct the Property Trustee to act on their
behalf.
Liquidation Distribution Upon Dissolution
The amount payable on the Preferred Securities in the event of any
liquidation of the Issuer Trust is $25 per Preferred Security plus accumulated
and unpaid Distributions, subject to certain exceptions, which may be in the
form of a distribution of such amount in Junior Subordinated Debentures.
The holders of all the outstanding Common Securities have the right at
any time to dissolve the Issuer Trust and, after satisfaction of liabilities to
creditors of the Issuer Trust as provided by applicable law, cause the Junior
Subordinated Debentures to be distributed to the holders of the Preferred
Securities and Common Securities in liquidation of the Issuer Trust.
Pursuant to the Trust Agreement, the Issuer Trust will automatically
dissolve upon expiration of its term or, if earlier, will dissolve on the first
to occur of: (i) certain events of bankruptcy, dissolution or liquidation of the
Company or the holder of the Common Securities, (ii) the distribution of a Like
Amount of the Junior Subordinated Debentures to the holders of the Trust
Securities, if the holders of Common Securities have given written direction to
the Property Trustee to dissolve the Issuer Trust (which direction, subject to
the foregoing restrictions, is optional and wholly within the discretion of the
holders of Common Securities), (iii) the repayment of all the Preferred
Securities in connection with the redemption of all the Trust Securities as
described under "-- Redemption" and (iv) the entry of an order for the
dissolution of the Issuer Trust by a court of competent jurisdiction.
If dissolution of the Issuer Trust occurs as described in clause (i),
(ii) or (iv) above, the Issuer Trust will be liquidated by the Property Trustee
as expeditiously as the Property Trustee determines to be possible by
distributing, after satisfaction of liabilities to creditors of the Issuer Trust
as provided by applicable law, to the holders of such Trust Securities a Like
Amount of the Junior Subordinated Debentures, unless such distribution is not
practical, in which event such holders will be entitled to receive out of the
assets of the Issuer Trust available for distribution to holders, after
satisfaction of liabilities to creditors of the Issuer Trust as provided by
applicable law, an amount equal to, in the case of holders of Preferred
Securities, the aggregate of the Liquidation Amount plus accumulated and unpaid
Distributions thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because the Issuer Trust has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by the
Issuer Trust on its Preferred Securities shall be paid on a pro rata basis. The
holders of the Common Securities will be entitled to receive distributions upon
any such liquidation pro rata with the holders of the Preferred Securities,
except that if a Debenture Event of Default has occurred and is continuing as a
result of any failure by the Company to pay any amounts in respect of the Junior
Subordinated Debentures when due, the Preferred Securities shall have a priority
over the Common Securities. See "-- Subordination of Common Securities."
After the liquidation date fixed for any distribution of Junior
Subordinated Debentures (i) the Preferred Securities will no longer be deemed to
be outstanding, (ii) DTC or its nominee, as the registered holder of Preferred
Securities, will receive a registered global certificate or certificates
representing the Junior Subordinated Debentures to be delivered upon such
distribution with respect to Preferred Securities held by DTC or its nominee and
(iii) any certificates representing the Preferred Securities not held by DTC or
its nominee will be deemed to represent the Junior Subordinated Debentures
having a principal amount equal to the stated Liquidation Amount of the
Preferred Securities and bearing accrued and unpaid interest in an amount equal
to the accumulated and unpaid Distributions on the Preferred Securities until
such certificates are presented to the security registrar for the Trust
Securities for transfer or reissuance.
If the Company does not redeem the Junior Subordinated Debentures prior
to maturity and the Issuer Trust is not liquidated and the Junior Subordinated
Debentures are not distributed to holders of the Preferred Securities, the
Preferred Securities will remain outstanding until the repayment of the Junior
Subordinated Debentures and the distribution of the Liquidation Distribution to
the holders of the Preferred Securities.
There can be no assurance as to the market prices for the Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for Preferred Securities if a dissolution and liquidation of the Issuer
Trust were to occur. Accordingly, the Preferred Securities that an investor may
purchase, or the Junior Subordinated Debentures that the investor may receive on
dissolution and liquidation of the Issuer Trust, may trade at a discount to the
price that the investor paid to purchase the Preferred Securities offered
hereby.
Events of Default; Notice
Any one of the following events constitutes an "Event of Default" under
the Trust Agreement (an "Event of Default") with respect to the Preferred
Securities (whatever the reason for such Event of Default and whether it is
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(i) the occurrence of a Debenture Event of Default (see "Description of
Junior Subordinated Debentures -- Debenture Events of Default"); or
(ii) default by the Issuer Trust in the payment of any Distribution when
it becomes due and payable, and continuation of such default for a
period of 30 days; or
(iii) default by the Issuer Trust in the payment of any Redemption
Price of any Trust Security when it becomes due and payable; or
(iv) default in the performance, or breach, in any material respect, of
any covenant or warranty of the Issuer Trustees in the Trust
Agreement (other than a covenant or warranty a default in the
performance of which or the breach of which is dealt with in clause
(ii) or (iii) above), and continuation of such default or breach
for a period of 60 days after there has been given, by registered
or certified mail, to the Issuer Trustees and the Company by the
holders of at least 25% in aggregate Liquidation Amount of the
outstanding Preferred Securities, a written notice specifying such
default or breach and requiring it to be remedied and stating that
such notice is a "Notice of Default" under the Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee if a successor Property Trustee has
not been appointed within 90 days thereof.
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee will transmit
notice of such Event of Default to the holders of Trust Securities and the
Administrators, unless such Event of Default has been cured or waived. The
Company, as Depositor, and the Administrators are required to file annually with
the Property Trustee a certificate as to whether or not they are in compliance
with all the conditions and covenants applicable to them under the Trust
Agreement.
If a Debenture Event of Default has occurred and is continuing as a
result of any failure by the Company to pay any amounts in respect of the Junior
Subordinated Debentures when due, the Preferred Securities will have a
preference over the Common Securities with respect to payments of any amounts in
respect of the Preferred Securities as described above. See "-- Subordination of
Common Securities," "-- Liquidation Distribution Upon Dissolution" and
"Description of Junior Subordinated Debentures -- Debenture Events of Default."
Removal of Issuer Trustees; Appointment of Successors
The holders of at least a majority in aggregate Liquidation Amount of
the outstanding Preferred Securities may remove an Issuer Trustee for cause or,
if a Debenture Event of Default has occurred and is continuing, with or without
cause. If an Issuer Trustee is removed by the holders of the outstanding
Preferred Securities, the successor may be appointed by the holders of at least
25 % in Liquidation Amount of the outstanding Preferred Securities. If an Issuer
Trustee resigns, such Trustee will appoint its successor. If an Issuer Trustee
fails to appoint a successor, the holders of at least 25 % in Liquidation Amount
of the outstanding Preferred Securities may appoint a successor. If a successor
has not been appointed by the holders, any holder of Preferred Securities or
Common Securities or the other Issuer Trustee may petition a court in the State
of Delaware to appoint a successor. Any Delaware Trustee must meet the
applicable requirements of Delaware law. Any Property Trustee must be a national
or state-chartered bank, and at the time of appointment have securities rated in
one of the three highest rating categories by a nationally recognized
statistical rating organization and have capital and surplus of at least
$50,000,000. No resignation or removal of an Issuer Trustee and no appointment
of a successor trustee shall be effective until the acceptance of appointment by
the successor trustee in accordance with the provisions of the Trust Agreement.
Merger or Consolidation of Issuer Trustees
Any entity into which the Property Trustee or the Delaware Trustee may
be merged or converted or with which it may be consolidated, or any entity
resulting from any merger, conversion or consolidation to which such Issuer
Trustee is a party, or any entity succeeding to all or substantially all the
corporate trust business of such Issuer Trustee, will be the successor of such
Issuer Trustee under the Trust Agreement, provided such entity is otherwise
qualified and eligible.
Mergers, Consolidations, Amalgamations or Replacements of the Issuer Trust
The Issuer Trust may not merge with or into, consolidate, amalgamate, or
be replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to, any entity, except as described below or as
otherwise set forth in the Trust Agreement. The Issuer Trust may, at the request
of the holders of the Common Securities and with the consent of the holders of
at least a majority in aggregate Liquidation Amount of the outstanding Preferred
Securities, merge with or into, consolidate, amalgamate, or be replaced by or
convey, transfer or lease its properties and assets substantially as an entirety
to a trust organized as such under the laws of any State, so long as (i) such
successor entity either (a) expressly assumes all the obligations of the Issuer
Trust with respect to the Preferred Securities or (b) substitutes for the
Preferred Securities other securities having substantially the same terms as the
Preferred Securities (the "Successor Securities") so long as the Successor
Securities have the same priority as the Preferred Securities with respect to
distributions and payments upon liquidation, redemption and otherwise, (ii) a
trustee of such successor entity, possessing the same powers and duties as the
Property Trustee, is appointed to hold the Junior Subordinated Debentures, (iii)
such merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease does not cause the Preferred Securities (including any Successor
Securities) to be downgraded by any nationally recognized statistical rating
organization, if then rated, (iv) such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease does not adversely affect the rights,
preferences and privileges of the holders of the Preferred Securities (including
any Successor Securities) in any material respect, (v) such successor entity has
a purpose substantially identical to that of the Issuer Trust, (vi) prior to
such merger, consolidation, amalgamation, replacement, conveyance, transfer or
lease, the Issuer Trust has received an opinion from independent counsel
experienced in such matters to the effect that (a) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the Preferred
Securities (including any Successor Securities) in any material respect and (b)
following such merger, consolidation, amalgamation, replacement, conveyance,
transfer or lease, neither the Issuer Trust nor such successor entity will be
required to register as an investment company under the investment Company Act,
and (vii) the Company or any permitted successor or assignee owns all the common
securities of such successor entity and guarantees the obligations of such
successor entity under the Successor Securities at least to the extent provided
by the Guarantee. Notwithstanding the foregoing, the Issuer Trust may not,
except with the consent of holders of 100% in aggregate Liquidation Amount of
the Preferred Securities, consolidate, amalgamate, merge with or into, or be
replaced by or convey, transfer or lease its properties and assets substantially
as an entirety to, any other entity or permit any other entity to consolidate,
amalgamate, merge with or into, or replace it if such consolidation,
amalgamation, merger, replacement, conveyance, transfer or lease would cause the
Issuer Trust or the successor entity to be taxable as a corporation for United
States federal income tax purposes.
Voting Rights; Amendment of Trust Agreement
Except as provided above and under "-- Removal of Issuer Trustees;
Appointment of Successors" and "Description of Guarantee --Amendments and
Assignment" and as otherwise required by law and the Trust Agreement, the
holders of the Preferred Securities will have no voting rights.
The Trust Agreement may be amended from time to time by the holders of a
majority of the Common Securities and the Property Trustee, without the consent
of the holders of the Preferred Securities, (i) to cure any ambiguity, correct
or supplement any provisions in the Trust Agreement that may be inconsistent
with any other provision, or to make any other provisions with respect to
matters or questions arising under the Trust Agreement, provided that any such
amendment does not adversely affect in any material respect the interests of any
holder of Trust Securities, or (ii) to modify, eliminate or add to any
provisions of the Trust Agreement to such extent as may be necessary to ensure
that the Issuer Trust will not be taxable as a corporation for United States
federal income tax purposes at any time that any Trust Securities are
outstanding or to ensure that the Issuer Trust will not be required to register
as an "investment company" under the Investment Company Act, and any amendments
of the Trust Agreement will become effective when notice of such amendment is
given to the holders of Trust Securities. The Trust Agreement may be amended by
the holders of a majority of the Common Securities and the Property Trustee with
(i) the consent of holders representing not less than a majority in aggregate
Liquidation Amount of the outstanding Preferred Securities and (ii) receipt by
the Issuer Trustees of an opinion of counsel to the effect that such amendment
or the exercise of any power granted to the Issuer Trustees in accordance with
such amendment will not affect the issuer Trust's not being taxable as a
corporation for United States federal income tax purposes or the Issuer Trust's
exemption from status as an "investment company" under the Investment Company
Act, except that, without the consent of each holder of Trust Securities
affected thereby, the Trust Agreement may not be amended to (i) change the
amount or timing of any Distribution on the Trust Securities or otherwise
adversely affect the amount of any Distribution required to be made in respect
of the Trust Securities as of a specified date or (ii) restrict the right of a
holder of Trust Securities to institute suit for the enforcement of any such
payment on or after such date.
So long as any Junior Subordinated Debentures are held by the Issuer
Trust, the Property Trustee will not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Debenture Trustee, or
execute any trust or power conferred on the Property Trustee with respect to the
Junior Subordinated Debentures, (ii) waive any past default that is waivable
under Section 5.13 of the Junior Subordinated Indenture, (iii) exercise any
right to rescind or annul a declaration that the Junior Subordinated Debentures
shall be due and payable or (iv) consent to any amendment, modification or
termination of the Junior Subordinated Indenture or the Junior Subordinated
Debentures, where such consent shall be required, without, in each case,
obtaining the prior approval of the holders of at least a majority in aggregate
Liquidation Amount of the outstanding Preferred Securities, except that, if a
consent under the Junior Subordinated Indenture would require the consent of
each holder of Junior Subordinated Debentures affected thereby, no such consent
will be given by the Property Trustee without the prior consent of each holder
of the Preferred Securities. The Property Trustee may not revoke any action
previously authorized or approved by a vote of the holders of the Preferred
Securities except by subsequent vote of the holders of the Preferred Securities.
The Property Trustee will notify each holder of Preferred Securities of any
notice of default with respect to the Junior Subordinated Debentures. In
addition to obtaining the foregoing approvals of the holders of the Preferred
Securities, before taking any of the foregoing actions, the Property Trustee
will obtain an opinion of counsel experienced in such matters to the effect that
the Issuer Trust will not be taxable as a corporation for United States federal
income tax purposes on account of such action.
Any required approval of holders of Preferred Securities may be given at
a meeting of holders of Preferred Securities convened for such purpose or
pursuant to written consent. The Property Trustee will cause a notice of any
meeting at which holders of Preferred Securities are entitled to vote, or of any
matter upon which action by written consent of such holders is to be taken, to
be given to each registered holder of Preferred Securities in the manner set
forth in the Trust Agreement.
No vote or consent of the holders of Preferred Securities will be
required to redeem and cancel Preferred Securities in accordance with the Trust
Agreement.
Notwithstanding that holders of Preferred Securities are entitled to
vote or consent under any of the circumstances described above, any of the
Preferred Securities that are owned by the Company, the Issuer Trustees or any
affiliate of the Company or any Issuer Trustees, will, for purposes of such vote
or consent, be treated as if they were not outstanding.
Expenses and Taxes
In the Indenture, the Company, as borrower, has agreed to pay all debts
and other obligations (other than with respect to the Preferred Securities) and
all costs and expenses of the Issuer Trust (including costs and expenses
relating to the organization of the Issuer Trust, the fees and expenses of the
Issuer Trustees and the costs and expenses relating to the operation of the
Issuer Trust) and to pay any and all taxes and all costs and expenses with
respect thereto (other than United States withholding taxes) to which the issuer
Trust might become subject. The foregoing obligations of the Company under the
Junior Subordinated Indenture are for the benefit of, and shall be enforceable
by, any person to whom any such debts, obligations, costs, expenses and taxes
are owed (a "Creditor") whether or not such Creditor has received notice
thereof. Any such Creditor may enforce such obligations of the Company directly
against the Company, and the Company has irrevocably waived any right or remedy
to require that any such Creditor take any action against the Issuer Trust or
any other person before proceeding against the Company. The Company has also
agreed in the Junior Subordinated Indenture to execute such additional
agreements as may be necessary or desirable to give full effect to the
foregoing.
Book Entry, Delivery and Form
The Preferred Securities will be issued in the form of one or more fully
registered global securities which will be deposited with, or on behalf of, DTC
and registered in the name of DTC's nominee. Unless and until it is exchangeable
in whole or in part for the Preferred Securities in definitive form, a global
security may not be transferred except as a whole by DTC to a nominee of DTC or
by a nominee of DTC to DTC or another nominee of DTC or by DTC or any such
nominee to a successor of such Depository or a nominee of such successor.
Ownership of beneficial interests in a global security will be limited
to persons that have accounts with DTC or its nominee ("Participants") or
persons that may hold interests through Participants. The Company expects that,
upon the issuance of a global security, DTC will credit, on its book-entry
registration and transfer system, the Participants' accounts with their
respective principal amounts of the Preferred Securities represented by such
global security. Ownership of beneficial interests in such global security will
be shown on, and the transfer of such ownership interests will be effected only
through, records maintained by DTC (with respect to interests of Participants)
and on the records of Participants (with respect to interests of Persons held
through Participants). Beneficial owners will not receive written confirmation
from DTC of their purchase, but are expected to receive written confirmations
from the Participants through which the beneficial owner entered into the
transaction. Transfers of ownership interests will be accomplished by entries on
the books of Participants acting on behalf of the beneficial owners.
So long as DTC, or its nominee, is the registered owner of a global
security, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Preferred Securities represented by such global security
for all purposes under the Junior Subordinated Indenture. Except as provided
below, owners of beneficial interests in a global security will not be entitled
to receive physical delivery of the Preferred Securities in definitive form and
will not be considered the owners or holders thereof under the Junior
Subordinated Indenture. Accordingly, each person owning a beneficial interest in
such a global security must rely on the procedures of DTC and, if such person is
not a Participant, on the procedures of the Participant through which such
person owns its interest, to exercise any rights of a holder of Preferred
Securities under the Junior Subordinated Indenture. The Company understands
that, under DTC's existing practices, in the event that the Company requests any
action of holders, or an owner of a beneficial interest in such a global
security desires to take any action which a holder is entitled to take under the
Junior Subordinated Indenture, DTC would authorize the Participants holding the
relevant beneficial interests to take such action, and such Participants would
authorize beneficial owners owning through such Participants to take such action
or would otherwise act upon the instructions of beneficial owners owning through
them. Redemption notices will also be sent to DTC. If less than all of the
Preferred Securities are being redeemed, the Company understands that it is
DTC's existing practice to determine by lot the amount of the interest of each
Participant to be redeemed.
Distributions on the Preferred Securities registered in the name of DTC
or its nominee will be made to DTC or its nominee, as the case may be, as the
registered owner of the global security representing such Preferred Securities.
None of the Company, the Issuer Trustees, the Administrators, any Paying Agent
or any other agent of the Company or the Issuer Trustees will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the global
security for such Preferred Securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
Disbursements of Distributions to Participants shall be the responsibility of
DTC. DTC's practice is to credit Participants' accounts on a payable date in
accordance with their respective holdings shown on DTC's records unless DTC has
reason to believe that it will not receive payment on the payable date. Payments
by Participants to beneficial owners will be governed by standing instructions
and customary practices, as is the case with securities held for the accounts of
customers in bearer form or registered in "street name," and will be the
responsibility of such Participant and not of DTC, the Company, the Issuer
Trustees, the Paying Agent or any other agent of the Company, subject to any
statutory or regulatory requirements as may be in effect from time to time.
DTC may discontinue providing its services as securities depository with
respect to the Preferred Securities at any time by giving reasonable notice to
the Company or the Issuer Trustees. If DTC notifies the Company that it is
unwilling to continue as such, or if it is unable to continue or ceases to be a
clearing agency registered under the Exchange Act and a successor depository is
not appointed by the Company within ninety days after receiving such notice or
becoming aware that DTC is no longer so registered, the Company will issue the
Preferred Securities in definitive form upon registration of transfer of, or in
exchange for, such global security. In addition, the Company may at any time and
in its sole discretion determine not to have the Preferred Securities
represented by one or more global securities and, in such event, will issue
Preferred Securities in definitive form in exchange for all of the global
securities representing such Preferred Securities.
DTC has advised the Company and the Issuer Trust as follows: DTC is a
limited purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its Participants and to facilitate the clearance and
settlement of securities transactions between Participants through electronic
book entry changes to accounts of its Participants, thereby eliminating the need
for physical movement of certificates. Participants include securities brokers
and dealers (such as the Underwriter), banks, trust companies and clearing
corporations and may include certain other organizations. Certain of such
Participants (or their representatives), together with other entities, own DTC.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through, or maintain a custodial
relationship with a Participant, either directly or indirectly.
Same-Day Settlement and Payment
Settlement for the Preferred Securities will be made by the Underwriters
in immediately available funds.
Secondary trading in Preferred Securities of corporate issuers is
generally settled in clearinghouse or next-day funds. In contrast, the Preferred
Securities will trade in DTC's Same-Day Funds Settlement System, and secondary
market trading activity in the Preferred Securities will therefore be required
by DTC to settle in immediately available funds. No assurance can be given as to
the effect, if any, of settlement in immediately available funds on trading
activity in the Preferred Securities.
Payment and Paying Agency
Payments in respect of the Preferred Securities will be made to DTC,
which will credit the relevant accounts at DTC on the applicable Distribution
Dates or, if the Preferred Securities are not held by DTC, such payments will be
made by check mailed to the address of the holder entitled thereto as such
address appears on the securities register for the Trust Securities. The paying
agent (the "Paying Agent") will initially be the Property Trustee and any
co-paying agent chosen by the Property Trustee and acceptable to the
Administrators. The Paying Agent will be permitted to resign as Paying Agent
upon 30 days' written notice to the Property Trustee and the Administrators. If
the Property Trustee is no longer the Paying Agent, the Property Trustee will
appoint a successor (which must be a bank or trust company reasonably acceptable
to the Administrators) to act as Paying Agent.
Registrar and Transfer Agent
The Property Trustee will act as registrar and transfer agent for the
Preferred Securities.
Registration of transfers of Preferred Securities will be effected
without charge by or on behalf of the Issuer Trust, but upon payment of any tax
or other governmental charges that may be imposed in connection with any
transfer or exchange. The Issuer Trust will not be required to register or cause
to be registered the transfer of the Preferred Securities after the Preferred
Securities have been called for redemption.
Information Concerning the Property Trustee
The Property Trustee, other than during the occurrence and continuance
of an Event of Default, undertakes to perform only such duties as are
specifically set forth in the Trust Agreement and, after such Event of Default,
must exercise the same degree of care and skill as a prudent person would
exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Trust Agreement at the request of any holder of
Preferred Securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby.
For information concerning the relationships between Bankers Trust
Company, the Property Trustee, and the Company, see "Description of Junior
Subordinated Debentures -- Information Concerning the Debenture Trustee."
Miscellaneous
The Administrators and the Property Trustee are authorized and directed
to conduct the affairs of and to operate the Issuer Trust in such a way that the
Issuer Trust will not be deemed to be an "investment company" required to be
registered under the Investment Company Act or taxable as a corporation for
United States federal income tax purposes and so that the Junior Subordinated
Debentures will be treated as indebtedness of the Company for United States
federal income tax purposes. In this connection, the Property Trustee and the
holders of Common Securities are authorized to take any action, not inconsistent
with applicable law, the certificate of trust of the Issuer Trust or the Trust
Agreement, that the Property Trustee and the holders of Common Securities
determine in their discretion to be necessary or desirable for such purposes, as
long as such action does not materially adversely affect the interests of the
holders of the Preferred Securities.
Holders of the Preferred Securities have no preemptive or similar
rights.
The Issuer Trust may not borrow money, issue debt or mortgage or pledge
any of its assets.
Governing Law
The Trust Agreement will be governed by and construed in accordance with
the laws of the State of Delaware.
DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures are to be issued under the Junior
Subordinated Indenture, under which Bankers Trust Company is acting as Debenture
Trustee. This summary of certain terms and provisions of the Junior Subordinated
Debentures and the Junior Subordinated Indenture does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, all the
provisions of the Junior Subordinated Indenture, including the definitions
therein of certain terms. Whenever particular defined terms of the Junior
Subordinated Indenture (as amended or supplemented from time to time) are
referred to herein, such defined terms are incorporated herein by reference. A
copy of the form of Junior Subordinated Indenture is available from the
Debenture Trustee upon request.
General
Concurrently with the issuance of the Preferred Securities, the Issuer
Trust will invest the proceeds thereof, together with the consideration paid by
the Company for the Common Securities, in the Junior Subordinated Debentures
issued by the Company. The Junior Subordinated Debentures will bear interest,
accruing from , 1997, at the annual rate of % of the principal amount thereof,
payable quarterly in arrears on March 31, June 30, September 30 and December 31
of each year (each, an "Interest Payment Date"), commencing , 1997, to the
person in whose name each Junior Subordinated Debenture is registered at the
close of business on the 15th day of March, June, September or December (whether
or not a Business Day) next preceding such Interest Payment Date. It is
anticipated that, until the liquidation, if any, of the Issuer Trust, each
Junior Subordinated Debenture will be registered in the name of the Issuer Trust
and held by the Property Trustee in trust for the benefit of the holders of the
Trust Securities. The amount of interest payable for any period less than a full
interest period will be computed on the basis of a 360-day year of twelve 30-day
months and the actual days elapsed in a partial month in such period. The amount
of interest payable for any full interest period will be computed by dividing
the rate per annum by four. If any date on which interest is payable on the
Junior Subordinated Debentures is not a Business Day, then payment of the
interest payable on such date will be made on the next succeeding day that is a
Business Day (without any interest or other payment in respect of any such
delay), with the same force and effect as if made on the date such payment was
originally payable. Accrued interest that is not paid on the applicable Interest
Payment Date will bear additional interest on the amount thereof (to the extent
permitted by law) at the rate per annum of %, compounded quarterly and computed
on the basis of a 360-day year of twelve 30-day months and the actual days
elapsed in a partial month in such period. The amount of additional interest
payable for any full interest period will be computed by dividing the rate per
annum by four. The term "interest" as used herein includes quarterly interest
payments, interest on quarterly interest payments not paid on the applicable
Interest Payment Date and Additional Sums (as defined below), as applicable.
The Junior Subordinated Debentures will mature on , 2027, subject to the
Maturity Adjustment (such date, as it may be shortened by the Maturity
Adjustment is referred to herein as the Stated Maturity). The Maturity
Adjustment represents the right of the Company to shorten the maturity date once
at any time to any date not earlier than , 2002. In the event the Company elects
to shorten the Stated Maturity of the Junior Subordinated Debentures, it will
give notice to the registered holders of the Junior Subordinated Debentures, the
Debenture Trustee and the Issuer Trust of such shortening no less than 90 days
prior to the effectiveness thereof. The Property Trustee must give notice to the
holders of the Trust Securities of the shortening of the Stated Maturity at
least 30 but not more than 60 days before such date.
The Junior Subordinated Debentures will be unsecured and will rank
junior and be subordinate in right of payment to all Senior Indebtedness of the
Company. The Junior Subordinated Debentures will not be subject to a sinking
fund. The Junior Subordinated Indenture does not limit the incurrence or
issuance of other secured or unsecured debt by the Company, including Senior
Indebtedness, whether under the Junior Subordinated Indenture or any existing or
other indenture that the Company may enter into in the future or otherwise. See
"-- Subordination."
Option to Extend Interest Payment Period
So long as no Debenture Event of Default has occurred and is continuing,
the Company has the right at any time during the term of the Junior Subordinated
Debentures to defer the payment of interest at any time or from time to time for
a period not exceeding 20 consecutive quarterly periods with respect to each
Extension Period, provided that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. During any such Extension Period
the Company shall have the right to make partial payments of interest on any
interest payment date. At the end of such Extension Period, the Company must pay
all interest then accrued and unpaid (together with interest thereon at the
annual rate of %, compounded quarterly and computed on the basis of a 360-day
year of twelve 30-day months and the actual days elapsed in a partial month in
such period, to the extent permitted by applicable law). The amount of
additional interest payable for any full interest period will be computed by
dividing the rate per annum by four. During an Extension Period, interest will
continue to accrue and holders of Junior Subordinated Debentures (or holders of
Preferred Securities while outstanding) will be required to accrue interest
income for United States federal income tax purposes. See "Certain Federal
Income Tax Consequences -- Interest Income and Original Issue Discount."
During any such Extension Period, the Company may not (i) declare or pay
any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of the Company's capital stock or (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu in
all respects with or junior in interest to the Junior Subordinated Debentures
(other than (a) repurchases, redemptions or other acquisitions of shares of
capital stock of the Company in connection with any employment contract, benefit
plan or other similar arrangement with or for the benefit of any one or more
employees, officers, directors or consultants, in connection with a dividend
reinvestment or stockholder stock purchase plan or in connection with the
issuance of capital stock of the Company (or securities convertible into or
exercisable or exchangeable for such capital stock) as consideration in an
acquisition transaction entered into prior to the applicable Extension Period,
(b) as a result of an exchange or conversion of any class or series of the
Company's capital stock (or any capital stock of a subsidiary of the Company)
for any class or series of the Company's capital stock or of any class or series
of the Company's indebtedness for any class or series of the Company's capital
stock, (c) the purchase of fractional interests in shares of the Company's
capital stock pursuant to the conversion or exchange provisions of such capital
stock or the security being converted or exchanged, (d) any declaration of a
dividend in connection with any stockholder's rights plan, or the issuance of
rights, stock or other property under any stockholders rights plan, or the
redemption or repurchase of rights pursuant thereto, or (e) any dividend in the
form of stock, warrants, options or other rights where the dividend stock or the
stock issuable upon exercise of such warrants, options or other rights is the
same stock as that on which the dividend is being paid or ranks pari passu with
or junior to such stock). Prior to the termination of any such Extension Period,
the Company may further defer the payment of interest, provided that no
Extension Period may exceed 20 consecutive quarterly periods or extend beyond
the Stated Maturity of the Junior Subordinated Debentures. Upon the termination
of any such Extension Period and the payment of all amounts then due, the
Company may elect to begin a new Extension Period subject to the above
conditions. No interest shall be due and payable during an Extension Period,
except at the end thereof. The Company must give the Issuer Trustees notice of
its election of such Extension Period at least one Business Day prior to the
earlier of (i) the date the Distributions on the Preferred Securities would have
been payable but for the election to begin such Extension Period and (ii) the
date the Property Trustee is required to give notice to holders of the Preferred
Securities of the record date or the date such Distributions are payable, but in
any event not less than one Business Day prior to such record date. The Property
Trustee will give notice of the Company's election to begin a new Extension
Period to the holders of the Preferred Securities. There is no limitation on the
number of times that the Company may elect to begin an Extension Period.
Redemption
The Junior Subordinated Debentures are redeemable prior to maturity at
the option of the Company (i) on or after ___________, 2002, in whole at any
time or in part from time to time, or (ii) in whole, but not in
part, at any time within 90 days following the occurrence and during the
continuation of a Tax Event (defined under "Description of Preferred Securities
- --Redemption"), at the redemption price described below. The proceeds of any
such redemption will be used by the Issuer Trust to redeem the Preferred
Securities.
The redemption price for Junior Subordinated Debentures is the
outstanding principal amount of the Junior Subordinated Debentures plus accrued
interest (including any Additional Interest or any Additional Sums) thereon to
but excluding the date fixed for redemption.
Additional Sums
The Company has covenanted in the Junior Subordinated Indenture that, if
and for so long as (i) the Issuer Trust is the holder of all Junior Subordinated
Debentures and (ii) the Issuer Trust is required to pay any additional taxes,
duties or other governmental charges as a result of a Tax Event, the Company
will pay as additional sums ("Additional Sums") on the Junior Subordinated
Debentures such amounts as may be required so that the Distributions payable by
the Issuer Trust will not be reduced as a result of any such additional taxes,
duties or other governmental charges. See "Description of Preferred Securities
- -- Redemption."
Registration, Denomination and Transfer
The Junior Subordinated Debentures will initially be registered in the
name of the Issuer Trust. If the Junior Subordinated Debentures are distributed
to holders of Preferred Securities, it is anticipated that the depositary
arrangements for the Junior Subordinated Debentures will be substantially
identical to those in effect for the Preferred Securities. See "Description of
Preferred Securities -- Book Entry, Delivery and Form."
Although DTC has agreed to the procedures described above, it is under
no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. If DTC is at any time unwilling or
unable to continue as depositary and a successor depositary is not appointed by
the Company within 90 days of receipt of notice from DTC to such effect, the
Company will cause the Junior Subordinated Debentures to be issued in definitive
form.
Payments on Junior Subordinated Debentures represented by a global
security will be made to Cede & Co., the nominee for DTC, as the registered
holder of the Junior Subordinated Debentures, as described under "Description of
Preferred Securities -- Book Entry, Delivery and Form." If Junior Subordinated
Debentures are issued in certificated form, principal and interest will be
payable, the transfer of the Junior Subordinated Debentures will be registrable,
and Junior Subordinated Debentures will be exchangeable for Junior Subordinated
Debentures of other authorized denominations of a like aggregate principal
amount, at the corporate trust office of the Debenture Trustee in New York, New
York or at the offices of any paying agent or transfer agent appointed by the
Company, provided that payment of interest may be made at the option of the
Company by check mailed to the address of the persons entitled thereto. However,
a holder of $1 million or more in aggregate principal amount of Junior
Subordinated Debentures may receive payments of interest (other than interest
payable at the Stated Maturity) by wire transfer of immediately available funds
upon written request to the Debenture Trustee not later than 15 calendar days
prior to the date on which the interest is payable.
Junior Subordinated Debentures will be exchangeable for other Junior
Subordinated Debentures of like tenor, of any authorized denominations, and of a
like aggregate principal amount.
Junior Subordinated Debentures may be presented for exchange as provided
above, and may be presented for registration of transfer (with the form of
transfer endorsed thereon, or a satisfactory written instrument of transfer,
duly executed), at the office of the securities registrar appointed under the
Junior Subordinated Debenture or at the office of any transfer agent designated
by the Company for such purpose without service charge and upon payment of any
taxes and other governmental charges as described in the Junior Subordinated
Indenture. The Company will appoint the Debenture Trustee as securities
registrar under the Junior Subordinated Indenture. The Company may at any time
designate additional transfer agents with respect to the Junior Subordinated
Debentures.
In the event of any redemption, neither the Company nor the Debenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Junior Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of the Junior
Subordinated Debentures to be redeemed and ending at the close of business on
the day of mailing of the relevant notice of redemption or (ii) transfer or
exchange any Junior Subordinated Debentures so selected for redemption, except,
in the case of any Junior Subordinated Debentures being redeemed in part, any
portion thereof not to be redeemed.
Any monies deposited with the Debenture Trustee or any paying agent, or
then held by the Company in trust, for the payment of the principal of (and
premium, if any) or interest on any Junior Subordinated Debenture and remaining
unclaimed for two years after such principal (and premium, if any) or interest
has become due and payable shall, at the request of the Company, be repaid to
the Company and the holder of such Junior Subordinated Debenture shall
thereafter look, as a general unsecured creditor, only to the Company for
payment thereof.
Restrictions on Certain Payments; Certain Covenants of the Company
The Company has covenanted that it will not (i) declare or pay any
dividends or distributions on, or redeem, purchase, acquire, or make a
liquidation payment with respect to, any of the Company's capital stock or (ii)
make any payment of principal of or interest or premium, if any, on or repay,
repurchase or redeem any debt securities of the Company that rank pari passu in
all respects with or junior in interest to the Junior Subordinated Debentures
(other than (a) repurchases, redemptions or other acquisitions of shares of
capital stock of the Company in connection with any employment contract, benefit
plan or other similar arrangement with or for the benefit of any one or more
employees, officers, directors or consultants, in connection with a dividend
reinvestment or stockholder stock purchase plan or in connection with the
issuance of capital stock of the Company (or securities convertible into or
exercisable or exchangeable for such capital stock) as consideration in an
acquisition transaction entered into prior to the applicable Extension Period or
other event referred to below, (b) as a result of an exchange or conversion of
any class or series of the Company's capital stock (or any capital stock of a
subsidiary of the Company) for any class or series of the Company's capital
stock or of any class or series of the Company's indebtedness for any class or
series of the Company's capital stock, (c) the purchase of fractional interests
in shares of the Company's capital stock pursuant to the conversion or exchange
provisions of such capital stock or the security being converted or exchanged,
(d) any declaration of a dividend in connection with any stockholder's rights
plan, or the issuance of rights, stock or other property under any stockholder's
rights plan, or the redemption or repurchase of rights pursuant thereto, or (e)
any dividend in the form of stock, warrants, options or other rights where the
dividend stock or the stock issuable upon exercise of such warrants, options or
other rights is the same stock as that on which the dividend is being paid or
ranks pari passu with or junior to such stock), if at such time (i) there has
occurred any event (a) of which the Company has actual knowledge that with the
giving of notice or the lapse of time, or both, would constitute a Debenture
Event of Default and (b) that the Company has not taken reasonable steps to
cure, (ii) if the Junior Subordinated Debentures are held by the Issuer Trust,
the Company is in default with respect to its payment of any obligations under
the Guarantee or (iii) the Company has given notice of its election of an
Extension Period as provided in the Junior Subordinated Indenture and has not
rescinded such notice, or such Extension Period, or any extension thereof, is
continuing.
The Company has covenanted in the Junior Subordinated Indenture (i) to
continue to hold, directly or indirectly, 100% of the Common Securities,
provided that certain successors that are permitted pursuant to the Junior
Subordinated Indenture may succeed to the Company's ownership of the Common
Securities, (ii) as holder of the Common Securities, not to voluntarily
terminate, windup or liquidate the Issuer Trust, other than (a) in connection
with a distribution of Junior Subordinated Debentures to the holders of the
Preferred Securities in liquidation of the Issuer Trust or (b) in connection
with certain mergers, consolidations or amalgamations permitted by the Trust
Agreement and (iii) to use its reasonable efforts, consistent with the terms and
provisions of the Trust Agreement, to cause the Issuer Trust to continue not to
be taxable as a corporation for United States federal income tax purposes.
Modification of Junior Subordinated Indenture
From time to time, the Company and the Debenture Trustee may, without
the consent of any of the holders of the outstanding Junior Subordinated
Debentures, amend, waive or supplement the provisions of the Junior Subordinated
Indenture to: (1) evidence succession of another corporation or association to
the Company and the assumption by such person of the obligations of the Company
under the Junior Subordinated Debentures, (2) add further covenants,
restrictions or conditions for the protection of holders of the Junior
Subordinated Debentures, (3) cure ambiguities or correct the Junior Subordinated
Debentures in the case of defects or inconsistencies in the provisions thereof,
so long as any such cure or correction does not adversely affect the interest of
the holders of the Junior Subordinated Debentures in any material respect, (4)
change the terms of the Junior Subordinated Debentures to facilitate the
issuance of the Junior Subordinated Debentures in certificated or other
definitive form, (5) evidence or provide for the appointment of a successor
Debenture Trustee, or (6) qualify, or maintain the qualification of, the Junior
Subordinated Indentures under the Trust Indenture Act. The Junior Subordinated
Indenture contains provisions permitting the Company and the Debenture Trustee,
with the consent of the holders of not less than a majority in principal amount
of the Junior Subordinated Debentures, to modify the Junior Subordinated
Indenture in a manner affecting the rights of the holders of the Junior
Subordinated Debentures, except that no such modification may, without the
consent of the holder of each outstanding Junior Subordinated Debenture so
affected, (i) change the Stated Maturity of the Junior Subordinated Debentures,
or reduce the principal amount thereof, the rate of interest thereon or any
premium payable upon the redemption thereof, or change the place of payment
where, or the currency in which, any such amount is payable or impair the right
to institute suit for the enforcement of any Junior Subordinated Debenture or
(ii) reduce the percentage of principal amount of Junior Subordinated
Debentures, the holders of which are required to consent to any such
modification of the Junior Subordinated Indenture. Furthermore, so long as any
of the Preferred Securities remain outstanding, no such modification may be made
that adversely affects the holders of such Preferred Securities in any material
respect, and no termination of the Junior Subordinated Indenture may occur, and
no waiver of any Debenture Event of Default or compliance with any covenant
under the Junior Subordinated Indenture may be effective, without the prior
consent of the holders of at least a majority of the aggregate Liquidation
Amount of the outstanding Preferred Securities unless and until the principal of
(and premium, if any, on) the Junior Subordinated Debentures and all accrued and
unpaid interest thereon have been paid in full and certain other conditions are
satisfied.
Debenture Events of Default
The Junior Subordinated Indenture provides that any one or more of the
following described events with respect to the Junior Subordinated Debentures
that has occurred and is continuing constitutes an "Event of Default" with
respect to the Junior Subordinated Debentures:
(i) failure to pay any interest on the Junior Subordinated
Debentures when due and continuance of such default for a period
of 30 days (subject to the deferral of any due date in the case
of an Extension Period); or
(ii) failure to pay any principal of or premium, if any, on the
Junior Subordinated Debentures when due whether at the
Stated Maturity; or
(iii) failure to observe or perform in any material respect certain
other covenants contained in the Junior Subordinated Indenture
for 90 days after written notice to the Company from the
Debenture Trustee or the holders of at least 25% in aggregate
outstanding principal amount of the outstanding Junior
Subordinated Debentures; or
(iv) the Company consents to the appointment of a receiver or other
similar official in any liquidation, insolvency or similar
proceeding with respect to the Company or all or substantially
all its property.
For purposes of the Trust Agreement and this Prospectus, each such Event
of Default under the Junior Subordinated Debenture is referred to as a
"Debenture Event of Default." As described in "Description of Preferred
Securities -- Events of Default; Notice," the occurrence of a Debenture Event of
Default will also constitute an Event of Default in respect of the Trust
Securities.
The holders of at least a majority in aggregate principal amount of
outstanding Junior Subordinated Debentures have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Debenture Trustee. The Debenture Trustee or the holders of not less than 25 % in
aggregate principal amount of outstanding Junior Subordinated Debentures may
declare the principal due and payable immediately upon a Debenture Event of
Default, and, should the Debenture Trustee or such holders of Junior
Subordinated Debentures fail to make such declaration, the holders of at least
25 % in aggregate Liquidation Amount of the outstanding Preferred Securities
shall have such right. The holders of a majority in aggregate principal amount
of outstanding Junior Subordinated Debentures may annul such declaration and
waive the default if all defaults (other than the non-payment of the principal
of Junior Subordinated Debentures which has become due solely by such
acceleration) have been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Debenture Trustee. Should the holders of Junior
Subordinated Debentures fail to annul such declaration and waive such default,
the holders of a majority in aggregate Liquidation Amount of the outstanding
Preferred Securities shall have such right.
The holders of at least a majority in aggregate principal amount of the
outstanding Junior Subordinated Debentures affected thereby may, on behalf of
the holders of all the Junior Subordinated Debentures, waive any past default,
except a default in the payment of principal (or premium, if any) or interest
(unless such default has been cured and a sum sufficient to pay all matured
installments of interest and principal due otherwise than by acceleration has
been deposited with the Debenture Trustee) or a default in respect of a covenant
or provision which under the Junior Subordinated Indenture cannot be modified or
amended without the consent of the holder of each outstanding Junior
Subordinated Debenture affected thereby. See "-- Modification of Junior
Subordinated Indenture." The Company is required to file annually with the
Debenture Trustee a certificate as to whether or not the Company is in
compliance with all the conditions and covenants applicable to it under the
Junior Subordinated Indenture.
If a Debenture Event of Default occurs and is continuing, the Property
Trustee will have the right to declare the principal of and the interest on the
Junior Subordinated Debentures, and any other amounts payable under the Junior
Subordinated Indenture, to be forthwith due and payable and to enforce its other
rights as a creditor with respect to the Junior Subordinated Debentures.
Enforcement of Certain Rights by Holders of Preferred Securities
If a Debenture Event of Default has occurred and is continuing and such
event is attributable to the failure of the Company to pay any amounts payable
in respect of the Junior Subordinated Debentures on the date such amounts are
otherwise payable, a registered holder of Preferred Securities may institute a
Direct Action against the Company for enforcement of payment to such holder of
an amount equal to the amount payable in respect of Junior Subordinated
Debentures having a principal amount equal to the aggregate Liquidation Amount
of the Preferred Securities held by such holder. The Company may not amend the
Junior Subordinated Indenture to remove the foregoing right to bring a Direct
Action without the prior written consent of the holders of all the Preferred
Securities. The Company will have the right under the Junior Subordinated
Indenture to set-off any payment made to such holder of Preferred Securities by
the Company in connection with a Direct Action.
The holders of the Preferred Securities are not able to exercise
directly any remedies available to the holders of the Junior Subordinated
Debentures except under the circumstances described in the preceding paragraph.
See "Description of Preferred Securities --Events of Default; Notice."
Consolidation, Merger, Sale of Assets and Other Transactions
The Junior Subordinated Indenture provides that the Company may not
consolidate with or merge into any other Person or convey, transfer or lease its
properties and assets substantially as an entirety to any Person, and no Person
may consolidate with or merge into the Company or convey, transfer or lease its
properties and assets substantially as an entirety to the Company, unless (i) if
the Company consolidates with or merges into another Person or conveys or
transfers its properties and assets substantially as an entirety to any Person,
the successor Person is organized under the laws of the United States or any
state or the District of Columbia, and such successor Person expressly assumes
the Company's obligations in respect of the Junior Subordinated Debentures; (ii)
immediately after giving effect thereto, no Debenture Event of Default, and no
event which, after notice or lapse of time or both, would constitute a Debenture
Event of Default, has occurred and is continuing; and (iii) certain other
conditions as prescribed in the Junior Subordinated Indenture are satisfied.
The provisions of the Junior Subordinated Indenture do not afford
holders of the Junior Subordinated Debentures protection in the event of a
highly leveraged or other transaction involving the Company that may adversely
affect holders of the Junior Subordinated Debentures.
Satisfaction and Discharge
The Junior Subordinated Indenture provides that when, among other
things, all Junior Subordinated Debentures not previously delivered to the
Debenture Trustee for cancellation (i) have become due and payable, (ii) will
become due and payable at the Stated Maturity within one year, and the Company
deposits or causes to be deposited with the Debenture Trustee funds, in trust,
for the purpose and in an amount sufficient to pay and discharge the entire
indebtedness on the Junior Subordinated Debentures not previously delivered to
the Debenture Trustee for cancellation, for the principal (and premium, if any)
and interest to the date of the deposit or to the Stated Maturity, as the case
may be, then the Junior Subordinated Indenture will cease to be of further
effect (except as to the Company's obligations to pay all other sums due
pursuant to the Junior Subordinated Indenture and to provide the officers'
certificates and opinions of counsel described therein), and the Company will be
deemed to have satisfied and discharged the Junior Subordinated Indenture.
Subordination
The Junior Subordinated Debentures will be subordinate and junior in
right of payment, to the extent set forth in the Junior Subordinated Indenture,
to all Senior Indebtedness (as defined below) of the Company. If the Company
defaults in the payment of any principal, premium, if any, or interest, if any,
or any other amount payable on any Senior Indebtedness when the same becomes due
and payable, whether at maturity or at a date fixed for redemption or by
declaration of acceleration or otherwise, then, unless and until such default
has been cured or waived or has ceased to exist or all Senior Indebtedness has
been paid, no direct or indirect payment (in cash, property, securities, by
setoff or otherwise) may be made or agreed to be made on the Junior Subordinated
Debentures, or in respect of any redemption, repayment, retirement, purchase or
other acquisition of any of the Junior Subordinated Debentures.
As used herein, "Senior Indebtedness" means, whether recourse is to all
or a portion of the assets of the Company and whether or not contingent, (i)
every obligation of the Company for money borrowed; (ii) every obligation of the
Company evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of the Company with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of the Company; (iv) every obligation of the Company issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of the Company; (vi) every
obligation of the Company for claims (as defined in Section 101(4) of the United
States Bankruptcy Code of 1978, as amended) in respect of derivative products
such as interest and foreign exchange rate contracts, commodity contracts and
similar arrangements; and (vii) every obligation of the type referred to in
clauses (i) through (vi) of another person and all dividends of another person
the payment of which, in either case, the Company has guaranteed or is
responsible or liable, directly or indirectly, as obligor or otherwise; provided
that Senior Indebtedness shall not include (i) any obligations which, by their
terms, are expressly stated to rank pari passu in right of payment with, or to
not be superior in right of payment to, the Junior Subordinated Debentures, (ii)
any Senior Indebtedness of the Company which when incurred and without respect
to any election under Section 1111(b) of the United States Bankruptcy Code of
1978, as amended, was without recourse to the Company, (iii) any indebtedness of
the Company to any of its subsidiaries, (iv) indebtedness to any executive
officer or director of the Company, or (v) any indebtedness in respect of debt
securities issued to any trust, or a trustee of such trust, partnership or other
entity affiliated with the Company that is a financing entity of the Company in
connection with the issuance of such financing entity of securities that are
similar to the Preferred Securities.
In the event of (i) certain events of bankruptcy, dissolution or
liquidation of the Company or the holder of the Common Securities, (ii) any
proceeding for the liquidation, dissolution or other winding up of the Company,
voluntary or involuntary, whether or not involving insolvency or bankruptcy
proceedings, (iii) any assignment by the Company for the benefit of creditors or
(iv) any other marshalling of the assets of the Company, all Senior Indebtedness
(including any interest thereon accruing after the commencement of any such
proceedings) shall first be paid in full before any payment or distribution,
whether in cash, securities or other property, shall be made on account of the
Junior Subordinated Debentures. In such event, any payment or distribution on
account of the Junior Subordinated Debentures, whether in cash, securities or
other property, that would otherwise (but for the subordination provisions) be
payable or deliverable in respect of the Junior Subordinated Debentures will be
paid or delivered directly to the holders of Senior Indebtedness in accordance
with the priorities then existing among such holders until all Senior
Indebtedness (including any interest thereon accruing after the commencement of
any such proceedings) has been paid in full.
In the event of any such proceeding, after payment in full of all sums
owing with respect to Senior Indebtedness, the holders of Junior Subordinated
Debentures, together with the holders of any obligations of the Company ranking
on a parity with the Junior Subordinated Debentures, will be entitled to be paid
from the remaining assets of the Company the amounts at the time due and owing
on the Junior Subordinated Debentures and such other obligations before any
payment or other distribution, whether in cash, property or otherwise, will be
made on account of any capital stock or obligations of the Company ranking
junior to the Junior Subordinated Debentures and such other obligations. If any
payment or distribution on account of the Junior Subordinated Debentures of any
character or any security, whether in cash, securities or other property is
received by any holder of any Junior Subordinated Debentures in contravention of
any of the terms hereof and before all the Senior Indebtedness has been paid in
full, such payment or distribution or security will be received in trust for the
benefit of, and must be paid over or delivered and transferred to, the holders
of the Senior Indebtedness at the time outstanding in accordance with the
priorities then existing among such holders for application to the payment of
all Senior Indebtedness remaining unpaid to the extent necessary to pay all such
Senior Indebtedness in full. By reason of such subordination, in the event of
the insolvency of the Company, holders of Senior Indebtedness may receive more,
ratably, and holders of the Junior Subordinated Debentures may receive less,
ratably, than the other creditors of the Company. Such subordination will not
prevent the occurrence of any Event of Default in respect of the Junior
Subordinated Debentures.
The Junior Subordinated Indenture places no limitation on the amount of
additional Senior Indebtedness that may be incurred by the Company. The Company
expects from time to time to incur additional indebtedness constituting Senior
Indebtedness.
Information Concerning the Debenture Trustee
The Debenture Trustee, other than during the occurrence and continuance
of a default by the Company in performance of its obligations under the Junior
Subordinated Debenture, is under no obligation to exercise any of the powers
vested in it by the Junior Subordinated Indenture at the request of any holder
of Junior Subordinated Debentures, unless offered reasonable indemnity by such
holder against the costs, expenses and liabilities that might be incurred
thereby. The Debenture Trustee is not required to expend or risk its own funds
or otherwise incur personal financial liability in the performance of its duties
if the Debenture Trustee reasonably believes that repayment or adequate
indemnity is not reasonably assured to it.
Bankers Trust Company, the Debenture Trustee, may serve from time to
time as trustee under other indentures or trust agreements with the Company or
its subsidiaries relating to other issues of their securities. In addition, the
Company and certain of its affiliates may have other banking relationships with
Bankers Trust Company and its affiliates.
Governing Law
The Junior Subordinated Indenture and the Junior Subordinated Debentures
will be governed by and construed in accordance with the laws of the State of
New York.
DESCRIPTION OF GUARANTEE
The Guarantee will be executed and delivered by the Company concurrently
with the issuance of Preferred Securities by the Issuer Trust for the benefit of
the holders from time to time of the Preferred Securities. Bankers Trust Company
will act as Guarantee Trustee under the Guarantee. This summary of certain
provisions of the Guarantee does not purport to be complete and is subject to,
and qualified in its entirety by reference to, all the provisions of the
Guarantee, including the definitions therein of certain terms. A copy of the
form of Guarantee is available upon request from the Guarantee Trustee. The
Guarantee Trustee will hold the Guarantee for the benefit of the holders of the
Preferred Securities.
General
The Company will irrevocably agree to pay in full on a subordinated
basis, to the extent set forth in the Guarantee and described herein, the
Guarantee Payments (as defined below) to the holders of the Preferred
Securities, as and when due, regardless of any defense, right of set-off or
counterclaim that the Issuer Trust may have or assert other than the defense of
payment. The following payments with respect to the Preferred Securities, to the
extent not paid by or on behalf of the Issuer Trust (the "Guarantee Payments"),
will be subject to the Guarantee: (i) any accrued and unpaid Distributions
required to be paid on such Preferred Securities, to the extent that the Issuer
Trust has funds on hand available therefor at such time, (ii) the Redemption
Price with respect to any Preferred Securities called for redemption, to the
extent that the Issuer Trust has funds on hand available therefor at such time,
and (iii) upon a voluntary or involuntary dissolution, termination, winding up
or liquidation of the Issuer Trust (unless the Junior Subordinated Debentures
are distributed to holders of the Preferred Securities), the lesser of (a) the
aggregate of the Liquidation Amount and all accumulated and unpaid Distributions
to the date of payment, to the extent that the Issuer Trust has funds on hand
available therefor at such time, and (b) the amount of assets of the Issuer
Trust remaining available for distribution to holders of the Preferred
Securities on liquidation of the Issuer Trust. The Company's obligation to make
a Guarantee Payment may be satisfied by direct payment of the required amounts
by the Company to the holders of the Preferred Securities or by causing the
Issuer Trust to pay such amounts to such holders.
The Guarantee will be an irrevocable guarantee of payment on a
subordinated basis of the Issuer Trust's obligations under the Preferred
Securities, but will apply only to the extent that the Issuer Trust has funds
sufficient to make such payments, and is not a guarantee of collection.
If the Company does not make payments on the Junior Subordinated
Debentures held by the Issuer Trust, the Issuer Trust will not be able to pay
any amounts payable in respect of the Preferred Securities and will not have
funds legally available therefor. The Guarantee will rank subordinate and junior
in right of payment to all Senior Indebtedness of the Company. See "-- Status of
the Guarantee." The Guarantee does not limit the incurrence or issuance of other
secured or unsecured debt of the Company, including Senior Indebtedness, whether
under the Junior Subordinated Indenture, any other indenture that the Company
may enter into in the future or otherwise.
The Company has, through the Guarantee, the Trust Agreement, the Junior
Subordinated Debentures and the Junior Subordinated Indenture, taken together,
fully, irrevocably and unconditionally guaranteed all the Issuer Trust's
obligations under the Preferred Securities on a subordinated basis. No single
document standing alone or operating in conjunction with fewer than all the
other documents constitutes such guarantee. It is only the combined operation of
these documents that has the effect of providing a full, irrevocable and
unconditional guarantee of the Issuer Trust's obligations in respect of the
Preferred Securities. See "Relationship Among the Preferred Securities, the
Junior Subordinated Debentures and the Guarantee."
Status of the Guarantee
The Guarantee will constitute an unsecured obligation of the Company and
will rank subordinate and junior in right of payment to all Senior Indebtedness
of the Company in the same manner as the Junior Subordinated Debentures.
The Guarantee will constitute a guarantee of payment and not of
collection (i.e., the guaranteed party may institute a legal proceeding directly
against the Guarantor to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity). The
Guarantee will be held by the Guarantee Trustee for the benefit of the holders
of the Preferred Securities. The Guarantee will not be discharged except by
payment of the Guarantee Payments in full to the extent not paid by the Issuer
Trust or distribution to the holders of the Preferred Securities of the Junior
Subordinated Debentures.
Amendments and Assignment
Except with respect to any changes which do not materially adversely
affect the rights of holders of the Preferred Securities (in which case no
consent will be required), the Guarantee may not be amended without the prior
approval of the holders of not less than a majority of the aggregate Liquidation
Amount of the outstanding Preferred Securities. The manner of obtaining any such
approval will be as set forth under "Description of Preferred Securities --
Voting Rights; Amendment of Trust Agreement." All guarantees and agreements
contained in the Guarantee shall bind the successors, assigns, receivers,
trustees and representatives of the Company and shall inure to the benefit of
the holders of the Preferred Securities then outstanding.
Events of Default
An event of default under the Guarantee will occur upon the failure of
the Company to perform any of its payment or other obligations thereunder, or to
perform any non-payment obligation if such non-payment default remains
unremedied for 30 days. The holders of not less than a majority in aggregate
Liquidation Amount of the outstanding Preferred Securities have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Guarantee Trustee in respect of the Guarantee or to direct the
exercise of any trust or power conferred upon the Guarantee Trustee under the
Guarantee.
Any registered holder of Preferred Securities may institute a legal
proceeding directly against the Company to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Issuer Trust,
the Guarantee Trustee or any other person or entity.
The Company, as guarantor, is required to file annually with the
Guarantee Trustee a certificate as to whether or not the Company is in
compliance with all the conditions and covenants applicable to it under the
Guarantee.
Information Concerning the Guarantee Trustee
The Guarantee Trustee, other than during the occurrence and continuance
of a default by the Company in performance of the Guarantee, undertakes to
perform only such duties as are specifically set forth in the Guarantee and,
after the occurrence of an event of default with respect to the Guarantee, must
exercise the same degree of care and skill as a prudent person would exercise or
use in the conduct of his or her own affairs. Subject to this provision, the
Guarantee Trustee is under no obligation to exercise any of the powers vested in
it by the Guarantee at the request of any holder of the Preferred Securities
unless it is offered reasonable indemnity against the costs, expenses and
liabilities that might be incurred thereby.
For information concerning the relationship between Bankers Trust
Company, as Guarantee Trustee, and the Company, see "Description of Junior
Subordinated Debentures -- Information Concerning the Debenture Trustee."
Termination of the Guarantee
The Guarantee will terminate and be of no further force and effect upon
full payment of the Redemption Price of the Preferred Securities, upon full
payment of the amounts payable with respect to the Preferred Securities upon
liquidation of the Issuer Trust or upon distribution of Junior Subordinated
Debentures to the holders of the Preferred Securities in exchange for all of the
Preferred Securities. The Guarantee will continue to be effective or will be
reinstated, as the case may be, if at any time any holder of the Preferred
Securities must restore payment of any sums paid under the Preferred Securities
or the Guarantee.
Governing Law
The Guarantee will be governed by and construed in accordance with the
laws of the State of New York.
RELATIONSHIP AMONG THE PREFERRED SECURITIES, THE JUNIOR
SUBORDINATED DEBENTURES AND THE GUARANTEE
Full and Unconditional Guarantee
Payments of Distributions and other amounts due on the Preferred
Securities (to the extent the Issuer Trust has funds available for such payment)
are irrevocably guaranteed, on a subordinated basis, by the Company as and to
the extent set forth under "Description of Guarantee." Taken together, the
Company's obligations under the Junior Subordinated Debentures, the Junior
Subordinated Indenture, the Trust Agreement and the Guarantee provide, in the
aggregate, a full, irrevocable and unconditional guarantee of payments of
Distributions and other amounts due on the Preferred Securities. No single
document standing alone or operating in conjunction with fewer than all the
other documents constitutes such guarantee. It is only the combined operation of
these documents that has the effect of providing full, irrevocable and
unconditional guarantee of the Issuer Trust's obligations in respect of the
Preferred Securities. If and to the extent that the Company does not make
payments on the Junior Subordinated Debentures, the Issuer Trust will not have
sufficient funds to pay Distributions or other amounts due on the Preferred
Securities. The Guarantee does not cover payment of amounts payable with respect
to the Preferred Securities when the Issuer Trust does not have sufficient funds
to pay such amounts. In such event, the remedy of a holder of the Preferred
Securities is to institute a legal proceeding directly against the Company for
enforcement of payment of the Company's obligations under Junior Subordinated
Debentures having a principal amount equal to the Liquidation Amount of the
Preferred Securities held by such holder.
The obligations of the Company under the Junior Subordinated Debentures
and the Guarantee are subordinate and junior in right of payment to all Senior
Indebtedness.
Sufficiency of Payments
As long as payments are made when due on the Junior Subordinated
Debentures, such payments will be sufficient to cover Distributions and other
payments distributable on the Preferred Securities, primarily because (i) the
aggregate principal amount of the Junior Subordinated Debentures will be equal
to the sum of the aggregate stated Liquidation Amount of the Preferred
Securities and Common Securities; (ii) the interest rate and interest and other
payment dates on the Junior Subordinated Debentures will match the Distribution
rate, Distribution Dates and other payment dates for the Preferred Securities;
(iii) the Company will pay for any and all costs, expenses and liabilities of
the Issuer Trust except the Issuer Trust's obligations to holders of the Trust
Securities; and (iv) the Trust Agreement further provides that the Issuer Trust
will not engage in any activity that is not consistent with the limited purposes
of the Issuer Trust.
Notwithstanding anything to the contrary in the Junior Subordinated
Indenture, the Company has the right to set-off any payment it is otherwise
required to make thereunder against and to the extent the Company has
theretofore made, or is concurrently on the date of such payment making, a
payment under the Guarantee.
Enforcement Rights of Holders of Preferred Securities
A holder of any Preferred Security may institute a legal proceeding
directly against the Company to enforce its rights under the Guarantee without
first instituting a legal proceeding against the Guarantee Trustee, the Issuer
Trust or any other person or entity. See "Description of Guarantee."
A default or event of default under any Senior Indebtedness of the
Company would not constitute a default or Event of Default in respect of the
Preferred Securities. However, in the event of payment defaults under, or
acceleration of, Senior Indebtedness of the Company, the subordination
provisions of the Junior Subordinated Indenture provide that no payments may be
made in respect of the Junior Subordinated Debentures until such Senior
Indebtedness has been paid in full or any payment default thereunder has been
cured or waived. See "Description of Junior Subordinated Debentures --
Subordination."
Limited Purpose of Issuer Trust
The Preferred Securities represent preferred undivided beneficial
interests in the assets of the Issuer Trust, and the Issuer Trust exists for the
sole purpose of issuing its Preferred Securities and Common Securities and
investing the proceeds thereof in Junior Subordinated Debentures. A principal
difference between the rights of a holder of a Preferred Security and a holder
of a Junior Subordinated Debenture is that a holder of a Junior Subordinated
Debenture is entitled to receive from the Company payments on Junior
Subordinated Debentures held, while a holder of Preferred Securities is entitled
to receive Distributions or other amounts distributable with respect to the
Preferred Securities from the Issuer Trust (or from the Company under the
Guarantee) only if and to the extent the Issuer Trust has funds available for
the payment of such Distributions.
Rights Upon Dissolution
Upon any voluntary or involuntary dissolution of the Issuer Trust, other
than any such dissolution involving the distribution of the Junior Subordinated
Debentures, after satisfaction of liabilities to creditors of the Issuer Trust
as required by applicable law, the holders of the Preferred Securities will be
entitled to receive, out of assets held by the Issuer Trust, the Liquidation
Distribution in cash. See "Description of Preferred Securities -- Liquidation
Distribution Upon Dissolution." Upon any voluntary or involuntary liquidation or
bankruptcy of the Company, the Issuer Trust, as registered holder of the Junior
Subordinated Debentures, would be a subordinated creditor of the Company,
subordinated and junior in right of payment to all Senior Indebtedness as set
forth in the Junior Subordinated Indenture, but entitled to receive payment in
full of all amounts payable with respect to the Junior Subordinated Debentures
before any stockholders of the Company receive payments or distributions. Since
the Company is the guarantor under the Guarantee and has agreed under the Junior
Subordinated Indenture to pay for all costs, expenses and liabilities of the
Issuer Trust (other than the Issuer Trust's obligations to the holders of the
Trust Securities), the positions of a holder of the Preferred Securities and a
holder of such Junior Subordinated Debentures relative to other creditors and to
stockholders of the Company in the event of liquidation or bankruptcy of the
Company are expected to be substantially the same.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
This summary is based on the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury regulations thereunder, and administrative and judicial
interpretations thereof, each as of the date hereof, all of which are subject to
change, possibly on a retroactive basis. The authorities on which this summary
is based are subject to various interpretations, and the opinions of Tax Counsel
are not binding on the Internal Revenue Service (the "IRS") or the courts,
either of which could take a contrary position. Moreover, no rulings have been
or will be sought from the IRS with respect to the transactions described
herein. Accordingly, there can be no assurance that the IRS will not challenge
the opinions expressed herein or that a court would not sustain such a
challenge.
Except as otherwise stated, this summary deals only with the Preferred
Securities held as a capital asset by a holder who or which (i) purchased the
Preferred Securities upon original issuance (an "Initial Holder") at their
original offering price and (ii) is a US Holder (as defined below). This summary
does not address all the tax consequences that may be relevant to a US Holder,
nor does it address the tax consequences, except as stated below, to holders
that are not US Holders ("Non-US Holders") or to holders that may be subject to
special tax treatment (such as banks, thrift institutions, real estate
investment trusts, regulated investment companies, insurance companies, brokers
and dealers in securities or currencies, other financial institutions,
tax-exempt organizations, persons holding the Preferred Securities as a position
in a "straddle," or as part of a "synthetic security," "hedging," as part of a
"conversion" or other integrated investment, persons having a functional
currency other than the U.S. Dollar and certain United States expatriates).
Further, this summary does not address (a) the income tax consequences to
shareholders in, or partners or beneficiaries of, a holder of the Preferred
Securities, (b) the United States federal alternative minimum tax consequences
of the purchase, ownership or disposition of the Preferred Securities, or (c)
any state, local or foreign tax consequences of the purchase, ownership and
disposition of Preferred Securities.
A "US Holder" is a holder of the Preferred Securities who or which is
(i) a citizen or individual resident (or is treated as a citizen or individual
resident) of the United States for income tax purposes, (ii) a corporation or
partnership created or organized (or treated as created or organized for income
tax purposes) in or under the laws of the United States or any political
subdivision thereof, (iii) an estate the income of which is includible in its
gross income for United States federal income tax purposes without regard to its
source, or (iv) a trust if (a) a court within the United States is able to
exercise primary supervision over the administration of the trust and (b) one or
more United States trustees have the authority to control all substantial
decisions of the trust.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE PREFERRED
SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES FEDERAL OR OTHER
TAX LAWS.
US Holders
Characterization of the Issuer Trust. In connection with the issuance of
the Preferred Securities, Tax Counsel will render its opinion generally to
effect that, under then current law and based on the representations, facts and
assumptions set forth in this Prospectus, and assuming full compliance with the
terms of the Trust Agreement (and other relevant documents), and based on
certain assumptions and qualifications referenced in the opinion, the Issuer
Trust will be characterized for United States federal income tax purposes as a
grantor trust and will not be characterized as an association taxable as a
corporation. Accordingly, for United States federal income tax purposes, each
holder of the Preferred Securities generally will be considered the owner of an
undivided interest in the Junior Subordinated Debentures and each US Holder will
be required to include in gross income all interest on (OID accrued) or gain
recognized for United States federal income tax purposes with respect to its
allocable share of the Junior Subordinated Debentures.
Characterization of the Junior Subordinated Debentures. The Company and
the Issuer Trust will agree to treat the Junior Subordinated Debentures as
indebtedness for all United States federal income tax purposes. In connection
with the issuance of the Junior Subordinated Debentures, Tax Counsel will render
its opinion generally to the effect that, under then current law and based on
the representations, facts and assumptions set forth in this Prospectus, and
assuming full compliance with the terms of the Junior Subordinated Indenture
(and other relevant documents) and based on certain assumptions and
qualifications referenced in the opinion, the Junior Subordinated Debentures
will be characterized for United States federal income tax purposes as debt of
the Company.
Interest Income and Original Issue Discount. Under recently issued
Treasury regulations (the "Regulations") applicable to all debt instruments
that, like the Junior Subordinated Debentures, are issued on or after August 13,
1996, remote contingencies that stated interest will not be timely paid are
ignored in determining whether a debt instrument is issued with OID, which
determination depends in part on whether interest is "unconditionally payable"
on the debt instrument. OID must be included in income by all holders as it
accrues economically on a daily basis, without regard to when it is paid in cash
or whether a particular holder generally uses the cash method of accounting. The
Company has concluded that the likelihood of its exercising its option to defer
payments of interest is remote. This conclusion is based on the Company's
analysis, as of the date of issue of the Junior Subordinated Debentures, of
various facts and circumstances deemed relevant to exercising such deferral
option, including, among other things, the inability of the Company to declare
dividends on its stock while interest on the Junior Subordinated Debentures is
being deferred, and the likely impact of the non-payment of dividends upon the
ratings of the Company's securities if the deferral option is exercised. Based
upon this conclusion and in the absence of any specific definition of "remote"
in the applicable income tax regulations, the Company intends to take the
position that the Junior Subordinated Debentures do not include OID. As a
consequence, holders of the Preferred Securities should report interest under
their own methods of accounting (e.g., cash or accrual) instead of under the
daily economic accrual rules for OID instruments.
Under the regulations, if the Company exercises its option to defer
payments of interest, the Junior Subordinated Debentures would be treated as
redeemed and reissued for OID purposes and the sum of the remaining interest
payments (and any de minimis OID) on the Junior Subordinated Debentures would
thereafter be treated as OID, which would accrue, and be includible in a US
Holder's taxable income, on an economic accrual basis (regardless of the US
Holder's method of accounting for income tax purposes) over the remaining term
of the Junior Subordinated Debentures (including any period of interest
deferral), without regard to the timing of payments under the Junior
Subordinated Debentures. A holder who disposes of the Preferred Securities
during such a Deferral Period may suffer a loss because the market value of the
Preferred Securities will likely fall if the Company exercises its option to
defer payments of interest on the Junior Subordinated Debentures. Furthermore,
the market value of the Preferred Securities may not reflect the accumulated
distribution that will be paid at the end of the Deferral Period, and a holder
who sells the Preferred Securities during the Deferral Period will not receive
from the Company any cash related to the interest (OID) income the holder
accrued and included in its taxable income under the OID rules (because that
cash will be paid to the holder of record at the end of the Deferral Period).
If the possibility of the Company's exercise of its option to defer
payments of interest is not remote, the Junior Subordinated Debentures would be
treated as initially issued with OID in an amount equal to the aggregate stated
interest (plus any de minimis OID) over the term of the Junior Subordinated
Debentures. That OID would generally be includible in a US Holder's taxable
income, over the term of the Junior Subordinated Debentures, on an economic
accrual basis.
The Regulations have not been addressed in any rulings or other
interpretations by the Internal Revenue Service other than the preamble to the
Treasury Decision that issued the new regulations, which added the concept of
"remote contingencies" to existing definitions used to determine whether
interest payable under a debt instrument is "unconditionally payable." The new
regulations could be viewed as a favorable reversal of the Internal Revenue
Service's previous position, as expressed in a 1995 Revenue Ruling that has not
been withdrawn. It is possible that the IRS could take a position contrary to
the interpretation herein.
Characterization of Income. Because the income underlying the Preferred
Securities will not be characterized as dividends for income tax purposes,
corporate holders of the Preferred Securities will not be entitled to a
dividends-received deduction for any income recognized with respect to the
Preferred Securities.
Market Discount and Bond Premium. Holders of the Preferred Securities
other than Initial Holders may be considered to have acquired their undivided
interests in the Junior Subordinated Debentures with market discount or
acquisition premium (as each phrase is defined for United States federal income
tax purposes).
Receipt of Junior Subordinated Debentures or Cash Upon Liquidation of
the Issuer Trust. Under certain circumstances described herein (See "Description
of the Preferred Securities -- Liquidation Distribution Upon Dissolution"), the
Issuer Trust may distribute the Junior Subordinated Debentures to holders in
exchange for the Preferred Securities and in liquidation of the Issuer Trust.
Except as discussed below, such a distribution would not be a taxable event for
United States federal income tax purposes, and each US Holder would have an
aggregate adjusted basis in its Junior Subordinated Debentures for United States
federal income tax purposes equal to such holder's aggregate adjusted basis in
its Preferred Securities. For United States federal income tax purposes, a US
Holder's holding period in the Junior Subordinated Debentures received in such a
liquidation of the Issuer Trust would include the period during which the
Preferred Securities were held by the holder. If, however, the relevant event is
a Tax Event which results in the Issuer Trust being treated as an association
taxable as a corporation, the distribution would constitute a taxable event to
both the Issuer Trust and US Holders of the Preferred Securities for United
States federal income tax purposes.
Under certain circumstances described herein (see "Description of the
Preferred Securities"), the Junior Subordinated Debentures may be redeemed for
cash and the proceeds of such redemption distributed to holders in redemption of
their Preferred Securities. Such a redemption would be taxable for United States
federal income tax purposes, and a US Holder would recognize gain or loss as if
it had sold the Preferred Securities for cash. See "--Sales of Preferred
Securities" below.
Sales of Preferred Securities. A holder that sells Preferred Securities
will recognize gain or loss equal to the difference between its adjusted tax
basis in the Preferred Securities and the amount realized on the sale of such
Preferred Securities. To the extent of any accrued but unpaid interest the
amount realized on the sale of such Preferred Securities will be treated as
ordinary income. Assuming the Company does not defer interest on the Junior
Subordinated Debentures by extending the interest payment period, a holder's
adjusted tax basis in the Preferred Securities generally will equal its initial
purchase price. Subject to the market discount rules described above and the
discussion below regarding accrued and unpaid interest, such gain or loss
generally will be a capital gain or loss and generally will be a long-term
capital gain or loss if the Preferred Securities have been held for more than
one year.
The Preferred Securities may trade at a price that does not fully
reflect the value of accrued but unpaid interest with respect to the underlying
Junior Subordinated Debentures. If the Company exercises its right to defer
payments of interest, the Junior Subordinated Debentures will become OID
instruments and a holder who disposes of Preferred Securities between record
dates for payments of distributions thereon will be required to include in
income as ordinary income, accrued and unpaid interest on the Junior
Subordinated Debentures through the date of disposition, and to add such amount
to such holder's adjusted tax basis in its pro rata share of the underlying
Junior Subordinated Debentures deemed disposed of. To the extent the selling
price is less than the holder's adjusted tax basis (which will include all
accrued but unpaid interest) a holder will recognize a capital loss. Subject to
certain limited exceptions, capital losses cannot be applied to offset ordinary
income for United States federal income tax purposes. Accrual basis taxpayers
would be subjected to similar treatment without regard to the Company's election
to defer.
Proposed Tax Law Changes
On February 6, 1997, President Clinton released his budget proposals for
fiscal year 1998. One Tax Proposal therein would generally deny corporate
issuers a deduction for interest related to certain debt obligations that have a
maximum term in excess of 15 years and are not shown as indebtedness on the
separate balance sheet of the issuer or, where the instrument is issued to a
related party (other than a corporation), where the holder of some other related
party issues a related instrument that is not shown as indebtedness on the
issuer's consolidated balance sheet. As currently drafted, the Tax Proposal
would be effective generally for instruments issued on or after the date of
first Congressional committee action which could occur prior to the issuance of
the Junior Subordinated Debentures. It is possible that the Tax Proposal as
enacted into law may contain transition rules for transactions which are
currently underway, such as transactions involving the offering of securities
with respect to which a filing with the Securities and Exchange Commission has
been made. If the Tax Proposal is enacted into law with such a transition rule,
the Tax Proposal would not apply to the Junior Subordinated Debentures. There
can be no assurance, however, that the Tax Proposal, if enacted, will be enacted
as currently drafted or will include such a transitional rule or that other
legislation enacted after the date hereof will not adversely affect the tax
treatment of the Junior Subordinated Debentures or cause a Tax Event, resulting
in the distribution of the Junior Subordinated Debentures to holders of
Preferred Securities. See "Description of Preferred Securities -- Redemption."
Non-US Holders
The following discussion applies to a Non-US Holder.
Payments to a holder of a Preferred Security which is a Non-US Holder
will generally not be subject to withholding of income tax, provided that (a)
the beneficial owner of the Preferred Security does not (directly or indirectly,
actually or constructively) own 10% or more of the total combined voting power
of all classes of stock of the Company entitled to vote, (b) the beneficial
owner of the Preferred Security is not a controlled foreign corporation that is
related to the Company through stock ownership, and (c) either (i) the
beneficial owner of the Preferred Securities certifies to the Issuer Trust or
its agent, under penalties of perjury, that it is a Non-US Holder and provides
its name and address, or (ii) a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business (a "Financial Institution"), and holds the Preferred
Security in such capacity, certifies to the Issuer Trust or its agent, under
penalties of perjury, that such a statement has been received from the
beneficial owner by it or by another Financial Institution between it and the
beneficial owner in the chain of ownership, and furnishes the Issuer Trust or
its agent with a copy thereof.
As discussed above (see "--Proposed Tax Law Changes"), changes in
legislation affecting the income tax consequences of the Junior Subordinated
Debentures are possible, and could adversely affect the ability of the Company
to deduct the interest payable on the Junior Subordinated Debentures. Moreover,
any such legislation could adversely affect Non-US Holders by characterizing
income derived from the Junior Subordinated Debentures as dividends, generally
subject to a 30 % income tax (on a withholding basis) when paid to a Non-US
Holder, rather than as interest which, as discussed above, is generally exempt
from income tax in the hands of a Non-US Holder.
A Non-US Holder of a Preferred Security will generally not be subject to
withholding of income tax on any gain realized upon the sale or other
disposition of a Preferred Security.
A Non-US Holder which holds the Preferred Securities in connection with
the active conduct of a United States trade or business will be subject to
income tax on all income and gains recognized with respect to its proportionate
share of the Junior Subordinated Debentures.
Information Reporting
In general, information reporting requirements will apply to payments
made on, and proceeds from the sale of, the Preferred Securities held by a
noncorporate US Holder within the United States. In addition, payments made on,
and payments of the proceeds from the sale of, the Preferred Securities to or
through the United States office of a broker are subject to information
reporting unless the holder thereof certifies as to its Non-United States status
or otherwise establishes an exemption from information reporting and backup
withholding. See "-- Backup Withholding." Taxable income on the Preferred
Securities for a calendar year should be reported to US Holders on the
appropriate forms (Forms 1099) by the following January 31st.
Backup Withholding
Payments made on, and proceeds from the sale of, the Preferred
Securities may be subject to a "backup" withholding tax of 31% unless the holder
complies with certain identification or exemption requirements. Any amounts so
withheld will be allowed as a credit against the holder's income tax liability,
or refunded, provided the required information is provided to the IRS.
The preceding discussion is only a summary and does not address the
consequences to a particular holder of the purchase, ownership and disposition
of the Preferred Securities. Potential holders of the Preferred Securities are
urged to contact their own tax advisors to determine their particular tax
consequences.
CERTAIN ERISA CONSIDERATIONS
The Company and certain affiliates of the Company may each be considered
a "party in interest" within the meaning of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") or a "disqualified person" within the
meaning of Section 4975 of the Code with respect to certain employee benefit
plans ("Plans") that are subject to ERISA. The purchase of the Preferred
Securities by a Plan that is subject to the fiduciary responsibility provisions
of ERISA or the prohibited transaction provisions of Section 4975(e)(I) of the
Code and with respect to which the Company, or any affiliate of the Company is a
service provider (or otherwise is a party in interest or a disqualified person)
may constitute or result in a prohibited transaction under ERISA or Section 4975
of the Code, unless the Preferred Securities are acquired pursuant to and in
accordance with an applicable exemption. Any pension or other employee benefit
plan proposing to acquire any Preferred Securities should consult with its
counsel.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement
(the "Underwriting Agreement") dated , 1997, among the Company, the Issuer Trust
and the underwriters named therein (the "Underwriters"), the Issuer Trust has
agreed to sell to the Underwriters, and the Underwriters have severally agreed
to purchase from the Issuer Trust, the following respective aggregate
Liquidation Amount of Preferred Securities at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus:
Underwriter: Liquidation Amount of
------------ ---------------------
Preferred Securities:
---------------------
Advest, Inc. $
-----------
Total .......................... $65,000,000
===========
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the Preferred Securities offered hereby if any
of such Preferred Securities are purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the Preferred Securities to the public at the public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession not in excess of $ per Preferred Security. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per Preferred Security to certain other dealers. After the public offering,
the offering price and other selling terms may be changed by the Underwriters.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to an
additional $9,750,000 aggregate Liquidation Amount of the Preferred Securities
at the public offering price. To the extent that the Underwriters exercise such
option, the Company will be obligated, pursuant to the option, to sell such
Preferred Securities to the Underwriters. The Underwriters may exercise such
option only to cover over-allotments made in connection with the sale of the
Preferred Securities offered hereby. If purchased, the Underwriters will offer
such additional Preferred Securities on the same terms as those on which the
$65,000,000 aggregate Liquidation Amount of the Preferred Securities are being
offered.
In connection with the offering of the Preferred Securities, the
Underwriters and any selling group members and their respective affiliates may
engage in transactions effected in accordance with Rule 104 of the Securities
and Exchange Commission's Regulation M that are intended to stabilize, maintain
or otherwise affect the market price of the Preferred Securities. Such
transactions may include over-allotment transactions in which the Underwriters
create a short position for their own account by selling more Preferred
Securities than they are committed to purchase from the Issuer Trust. In such a
case, to cover all or part of the short position, the Underwriters may exercise
the over-allotment option described above or may purchase Preferred Securities
in the open market following completion of the initial offering of the Preferred
Securities. The Underwriters also may engage in stabilizing transactions in
which they bid for, and purchase, shares of the Preferred Securities at a level
above that which might otherwise prevail in the open market for the purpose of
preventing or retarding a decline in the market price of the Preferred
Securities. The Underwriters also may reclaim any selling concessions allowed to
an Underwriter or dealer if the Underwriters repurchase shares distributed by
that Underwriter or dealer. Any of the foregoing transactions may result in the
maintenance of a price for the Preferred Securities at a level above that which
might otherwise prevail in the open market. Neither the Company nor any of the
Underwriters makes any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Preferred Securities. The Underwriters are not required to engage
in any of the foregoing transactions and, if commenced, such transactions may be
discontinued at any time without notice.
In view of the fact that the proceeds from the sale of the Preferred
Securities will be used to purchase the Junior Subordinated Debentures issued by
the Company, the Underwriting Agreement provides that the Company will pay as
compensation for the Underwriter's arranging the investment therein of such
proceeds an amount of $ per Preferred Security (or $ ($ if the over-allotment
option is exercised in full) in the aggregate).
Because the National Association of Securities Dealers, Inc. ("NASD") is
expected to view the Preferred Securities as interests in a direct participation
program, the offering of the Preferred Securities is being made in compliance
with the applicable provisions of Rule 2810 of the NASD's Conduct Rules.
The Preferred Securities are a new issue of securities with no
established trading market. The Company and the Issuer Trust have been advised
by the Underwriters that they intend to make a market in the Preferred
Securities. However, the Underwriters are not obligated to do so and such market
making may be interrupted or discontinued at any time without notice at the sole
discretion of each of the Underwriters. Application will be made by the Company
to list the Preferred Securities on the New York Stock Exchange. Accordingly, no
assurance can be given as to the development or liquidity of any market for the
Preferred Securities.
The Company and the Issuer Trust have each agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
The Underwriters may in the future perform various services to the
Company, including investment banking services, for which it has or may receive
customary fees for such services.
VALIDITY OF SECURITIES
The validity of the Guarantee and the Junior Subordinated Debentures and
certain tax matters will be passed upon for the Company by LeBoeuf, Lamb, Greene
& MacRae, L.L.P., a limited liability partnership including professional
corporations, New York, New York, and certain legal matters will be passed upon
for the Underwriters by Arnold & Porter, Washington, D.C. and New York, New
York. Certain matters of Delaware law relating to the validity of the Preferred
Securities, the enforceability of the Trust Agreement and the creation of the
Issuer Trust will be passed upon by Richards, Layton & Finger, special Delaware
counsel to the Company and the Issuer Trust. LeBoeuf, Lamb, Greene & MacRae,
L.L.P. and Arnold & Porter will rely as to certain matters of Nebraska law on
the opinion of Crosby, Guenzel, Davis, Kessner & Kuester, Lincoln, Nebraska, and
will rely as to certain matters of Delaware law on the opinion of Richards,
Layton & Finger.
EXPERTS
The consolidated financial statements and the related financial
statement schedules of the Company incorporated by reference in its Annual
Report on Form 10-K for year ended December 31, 1996, have been audited by
Deloitte & Touche LLP, independent auditors, as set forth in their reports
thereon incorporated by reference or set forth therein and incorporated herein
by reference such consoldiated financial statements are incorporated herein by
reference in reliance upon such reports given upon the authority fo such firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities of the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, Suite
1300, New York, New York 10048 and Suite 1400, Citicorp Center, 14th Floor, 500
West Madison Street, Chicago, Illinois 60661. Copies of such material can also
be obtained at prescribed rates by writing to the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Such material
also may be accessed electronically by means of the Commission's home page on
the Internet at http://www.sec.gov. This Prospectus does not contain all the
information set forth in the Registration Statement and exhibits thereto, which
the Company has filed with the Commission under the Securities Act and to which
reference is hereby made.
The Company has filed a Registration Statement on Form S-3 (the
"Registration Statement") with the Commission pursuant to the Securities Act of
1933, as amended (the "Securities Act") with respect to the Preferred Securities
offered hereby. This Prospectus does not contain all the information set forth
in the Registration Statement and the exhibits and schedules filed as a part
thereof, as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the Common Stock, reference
is hereby made to the Registration Statement, including the exhibits and
schedules filed as a part thereof. Statements contained in this Prospectus as to
the contents of any contract or other document referred to herein are not
necessarily complete and where such contract or other document is an exhibit to
the Registration Statement, each such statement is qualified in all respects by
the provisions of such exhibit, to which reference is hereby made for a full
statement of the provisions thereof. The Registration Statement, including the
exhibit and schedules filed as a part thereof, may be inspected without charge
at the public reference facilities maintained by the Commission as set forth in
the preceding paragraph. Copies of these documents may be obtained at prescribed
rates from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
No separate financial statements of the Issuer Trust have been included
or incorporated by reference herein. The Company and the Issuer Trust do not
consider that such financial statements would be material to holders of the
Preferred Securities because the Issuer Trust is a newly formed special purpose
entity, has no operating history or independent operations and is not engaged in
and does not propose to engage in any activity other than holding as trust
assets the Junior Subordinated Debentures and issuing the Trust Securities. See
"AICI Capital Trust," "Description of Preferred Securities," "Description of
Junior Subordinated Debentures" and "Description of Guarantee." In addition, the
Company does not expect that the Issuer Trust will be filing reports under the
Exchange Act with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by the Company (File No. 1 -
7461) with the Commission pursuant to the Exchange Act, and are incorporated
herein by reference:
1. The Company's Annual Report on Form 10-K for the year ended
December 31, 1996;
2. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997; and
3. The Company's Current Reports on Form 8-K dated May 15, 1997.
In addition, all documents filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior to
the termination of the offering hereunder shall be deemed to be incorporated by
reference in this Prospectus and to be part hereof from the date of filing of
such documents. Any statement contained in a document incorporated by reference
herein shall be deemed to be modified or superseded for all purposes to the
extent that a statement contained herein or in any other subsequently filed
document which is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as modified or superseded, to constitute a part of this
Prospectus.
The Company will provide, without charge, to each person to whom a copy
of this Prospectus is delivered, upon the written or oral request of such
person, a copy of any and all of the documents incorporated by reference (not
including the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents). Requests for such copies should be
directed to William J. Gerber, Vice President, Acceptance Insurance Companies,
Inc., 222 S. 15th Street, Suite 600 North, Omaha, Nebraska 68102, or by
telephone at (402) 344-8800 or facsimile at (402) 345-9190.
GLOSSARY OF SELECTED INSURANCE TERMS
Admitted Insurer.............. An insurance company licensed by a state regulatory authority to
transact insurance business in that state. An admitted insurer is
subject to the rules and regulations of each state in which it is
licensed governing virtually all aspects of its insurance operations
and financial condition. A non-admitted insurer, also known as an
excess and surplus lines insurer, is not licensed to transact
insurance business in a given state but may be permitted to write
certain business in that state in accordance with the provisions of
excess and surplus lines insurance laws which generally involve less
rate, form and operational regulation.
Buy-up Coverage............... Multi-Peril Crop Insurance policy providing coverage in excess of
that provided by CAT Coverage. Buy-up Coverage is offered only
through private insurers.
CAT Coverage (CAT)............ The minimum available level of Multi-Peril Crop Insurance, providing
coverage for 50% of a farmer's historical yield for eligible crops at
60% of the price per unit for such crop set by the FCIC. This
coverage is offered through private insurers and USDA field offices.
Case Reserve.................. The estimated liability for loss established by a claims examiner for
a reported claim.
Combined Ratio................ The sum of the expense ratio and the loss ratio determined in
accordance with GAAP or SAP.
Crop Revenue Coverage (CRC)... An extension of the MPCI program that insures a producer of crops
with varying levels of protection against loss of revenues caused by
changes in crop prices, low yields, or a combination of the two.
Crop Year..................... For MPCI, a crop year commences on July 1 and ends on June 30. For
crop hail insurance, the crop year is the calendar year.
Direct Written Premiums....... Total premiums collected in respect of policies issued by an insurer
during a given period without any reduction for premiums ceded to reinsurers.
Excess and Surplus
Lines Insurance............. The business of insuring risks for which insurance is generally
unavailable from admitted insurers in whole or in part. Such
business is placed by the broker or agent with nonadmitted insurers
in accordance with the excess and surplus lines provisions of state insurance laws.
Excess of Loss Reinsurance........ A form of reinsurance in which the reinsurer, subject to a specified
limit, agrees to indemnify the ceding company for the amount of each
loss, on a defined class of business, that exceeds a specified retention.
Expense Ratio..................... Under statutory accounting, the ratio of underwriting expenses to net
premiums written. Under GAAP accounting, the ratio of underwriting
expenses to net premiums earned.
Federal Crop Insurance Corporation
(FCIC).......................... A wholly-owned federal government corporation within the
Farm Services Agency.
Generally Accepted Accounting
Principles (GAAP)............... Accounting practices as set forth in opinions and pronouncements of
the Accounting Principles Board of American
Institute of Certified Public Accountants
and statements and pronouncements of the
Financial Accounting Standards Board and
which are applicable in the circumstances
as of the date in question.
Gross Written Premiums............. Direct written premiums plus premiums collected in respect of
policies assumed, in whole or in part, from other insurance carriers.
Incurred But Not Reported (IBNR)
Reserves......................... The liability for future payments on losses which have already
occurred but have not yet been reported to the insurer. IBNR
reserves include LAE (as hereinafter defined) related to such losses
and may also provide for future adverse loss development on reported
claims.
Insurance Regulatory Information
System (IRIS).................... A system of ratio analysis developed by the NAIC primarily intended
to assist state insurance departments in executing their statutory
mandates to oversee the financial condition of insurance companies.
Loss Adjustment Expenses (LAE)...... Expenses
incurred in the settlement of claims,
including outside adjustment expenses,
legal fees and internal administrative
costs associated with the claims adjustment
process, but not including general overhead
expenses.
Loss Ratio.......................... The ratio of losses and LAE incurred to premiums earned.
Loss Reserves....................... Liabilities established by insurers to reflect the estimated ultimate
cost of claim payments as of a given date.
MPCI Imputed Premium................ For purposes of the profit/loss sharing arrangement with the federal
government, the amount of premiums credited to the Company for all
CAT Coverages it sells, as such amount is determined by formula.
MPCI Premium........................ For purposes of the profit/loss sharing arrangement with the federal
government, the amount of premiums credited to the Company for all
Buy-up Coverages paid by farmers, plus the amount of any related
federal premium subsidies.
MPCI Retention...................... The aggregate amount of MPCI Premium and MPCI Imputed Premium on
which the Company retains risk after allocating farms to the three
federal reinsurance pools.
Multi-Peril Crop Insurance (MPCI)... A
federally-regulated subsidized crop
insurance program that insures a producer
of crops with varying levels of protection
against loss of yield from substantially
all natural perils to growing crops.
NAIC................................ The National Association of Insurance Commissioners.
Net Earned Premiums................. The portion of net written premiums applicable to the expired period
of policies and, accordingly, recognized as income during a given
period.
Net Written Premiums................ Total premiums for insurance written (less any return premiums)
during a given period, reduced by premiums ceded in respect to
liability reinsured by other carriers.
Policyholders' or Statutory Surplus. As determined under
SAP (hereinafter defined), the excess of
total admitted assets over total
liabilities.
Price Election...................... The maximum per unit commodity price by crop to be used in computing
MPCI Premiums, which is set each year by the FCIC.
Quota Share Reinsurance............. A form of reinsurance whereby the reinsurer agrees to indemnify the
cedent for a stated percentage of each loss, subject to a specified
limit the cedent pays, on a defined class of business.
Reinsurance..........................The practice whereby a company called the
"reinsurer" assumes, for a share of the
premium, all or part of a risk originally
undertaken by another insurer called the
"ceding" company or "cedent." Reinsurance
may be affected by "treaty" reinsurance,
where a standing agreement between the
ceding and reinsuring companies
automatically covers all risks of a defined
category, amount and type, or by
"facultative" reinsurance where reinsurance
is negotiated and accepted on a
risk-by-risk basis.
Retention............................The amount of liability, premiums or losses which an insurance
company keeps for its own account after application of reinsurance.
Risk-based Capital (RBC)
Requirements......................Capital requirements for property and casualty insurance companies
adopted by the NAIC to assess minimum capital requirements and to
raise the level of protection that statutory surplus provides for
policyholder obligations.
Risk Management Agency (RMA).........A division
of the United State Department of
Agriculture ("USDA") which, along with the
Federal Crop Insurance Corporation ("FCIC")
administers and provides reinsurance for
the federally-regulated MPCI and CRC
programs.
Stop Loss Reinsurance................A form of reinsurance, similar to
Excess of Loss Reinsurance, whereby the
primary insurer caps its loss on a
particular risk by purchasing reinsurance
in excess of such cap.
Statutory Accounting Accounting practices which consist of
Principles (SAP)...................recording transactions and preparing
financial statements in accordance with the
rules and procedures prescribed or
permitted by state regulatory authorities.
Statutory accounting emphasizes solvency
rather than matching revenues and expenses
during an accounting period.
================================================================================
No person has been authorized in connection with the offering made hereby to
give any information or to make any representation not contained in this
Prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by the Company or any underwriter. This
prospectus does not constitute an offer to sell or a solicitation of any offer
to buy any of the securities offered hereby to any person or by anyone in any
jurisdiction in which 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 the infor mation contained herein is
correct as of any date subsequent to the date hereof.
----------------
TABLE OF CONTENTS
Page
Forward Looking Statements 2
Prospectus Summary 3
Selected Consolidated Financial Data 8
Risk Factors 10
AICI Capital Trust 18
Use of Proceeds 19
Capitalization 20
Accounting Treatment 20
Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Business 29
Management 39
Certain Relationships and Related Transactions 42
Description of Preferred Securities 43
Description of Junior Subordinated Debentures 52
Description of Guarantee 59
Relationship Among the Preferred Securities, the
Junior Subordinated Debentures and the Guarantee 61
Certain Federal Income Tax Consequences 63
Certain ERISA Considerations 66
Underwriting 67
Validity of Securities 69
Experts 69
Available Information 69
Incorporation of Certain Documents by Reference 70
Glossary of Selected Insurance terms 71
----------------
Until , 1997 (25 days after the commencement of the offering), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This 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.
$65,000,000
AICI CAPITAL TRUST
% Preferred Securities
(Liquidation Amount $25 per
Preferred Security)
guaranteed, as described
herein, by
ACCEPTANCE INSURANCE
COMPANIES INC.
------------------
PROSPECTUS
------------------
ADVEST, INC.
, 1997
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The expenses in connection with the distribution of the Preferred
Securities are set forth in the following table. All amounts except the
Securities and Exchange Commission registration fee are estimated. The expenses
set forth below will be borne by the Company. The Selling Stockholder will pay
all discounts, concessions or commissions to underwriters, agents, brokers or
dealers and all transfer or other taxes on the sale of the Shares.
Securities and Exchange Commission registration fee $ 22,652
Listing fee *
Trustee's fees and expenses *
Legal fees and expenses *
Accountants' fees and expenses *
Printing and engraving expenses *
Rating agencies' fees *
Blue Sky fees and expenses *
Miscellaneous *
Total *
- --------------
*To be filed by amendment.
Item 15. Indemnification of Directors and Officers.
The Registrant's Certificate of Incorporation and Bylaws provide for
indemnification of directors and officers of the Registrant to the full extent
permitted by Delaware law.
Section 145 of the General Corporation Law of the State of Delaware
provides generally that a corporation may indemnify any person who was or is a
part or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is or was a director,
officer, employee or agent of the corporation, or is or was serving at its
request in such capacity in another corporation or business association, against
expenses (including attorneys fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he or she acted in good faith and in a manner he
or she reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
In addition, pursuant to the authority of Delaware law, the Certificate of
Incorporation of the Registrant also eliminates the monetary liability of
directors to the fullest extent permitted by Delaware law.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers or persons
controlling the Registrant pursuant to the foregoing provisions, the Registrant
has been informed that in the opinion of the Securities and Exchange Commission
(the "Commission") such indemnification is against public policy as expressed in
the Act and is therefore unenforceable.
Item 16. Exhibits
Exhibit
No. Description
1.1 Underwriting Agreement*
4.1 Restated and Amended Certificate of Incorporation of Acceptance
Insurance Companies Inc. (Exhibit 3.1 to Acceptance Insurance
Companies Inc.'s March 31, 1997 10-Q)
4.2 Restated By-laws of Acceptance Insurance Companies Inc. (Exhibit
3.2 to Acceptance Insurance Companies Inc.'s March 31, 1997 10-Q)
4.3 Form of Preferred Security*
4.4 Form of Guarantee Agreement Between Acceptance Insurance
Companies Inc. and Bankers Trust Company
4.5 Form of Junior Subordinated Indenture Between Acceptance
Insurance Companies Inc. and Bankers Trust Company
4.6 Certificate of Trust of AICI Capital Trust
4.7 Declaration of Trust of AICI Capital Trust*
4.8 Form of Amended and Restated Trust Agreement among Acceptance
Insurance Companies Inc., Bankers Trust Company and Bankers Trust
(Delaware)
5.l Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.*
5.2 Opinion of Richards, Layton & Finger*
8.1 Tax Opinion of LeBoeuf, Lamb, Greene & MacRae, L.L.P.*
10.1 Intercompany Federal Income Tax Allocation Agreement between
Acceptance Insurance Holdings Inc. and its subsidiaries and
Registrant dated April 12, 1990, and related agreements (Exhibit
10.2 to Acceptance Insurance Companies Inc.'s December 31, 1996
10-K)
10.2 Employment Agreement dated February 19, 1990 between Acceptance
Insurance Holdings Inc., Registrant and Kenneth C. Coon (Exhibit
10.3 to Acceptance Insurance Companies Inc.'s December 31, 1996
10-K)
10.3 Employment Agreement dated July 2, 1993, between Redland
Insurance Group, Inc., and John P. Nelson (Exhibit 10.4 to
Acceptance Insurance Companies Inc.'s December 31, 1996 10-K)
10.4 Employment Agreement dated July 2, 1993 between Redland Insurance
Group, Inc., and Richard C. Gibson (Exhibit 10.5 to Acceptance
Insurance Companies Inc.'s December 31, 1996 10-K)
10.5 $90,000,000 Credit Agreement By and Among the Registrant, NBD Bank,
N.A., First National Bank of Omaha, FirsTier Bank, N.A., Comerica
Bank, First Interstate Bank of Arizona and NBD Bank, N.A., As Agent,
dated as of July 26, 1995 (Exhibit 10.6 to Acceptance Insurance
Companies Inc.'s December 31, 1996 10-K)
10.6 Employment Agreement dated July 2, 1993 between Registrant and
Richard C. Gibson (Exhibit 10.7 to Acceptance Insurance Companies
Inc.'s December 31, 1996 10-K)
10.7 Warrants to purchase a total of 389,507 shares of common stock ($.10
par value) of the Registrant dated April 10, 1992, issued by the
Registrant to the various purchasers of the Floating Rate Secured
Subordinated Notes, due 1993, Series A and B (Exhibit 10.8 to
Acceptance Insurance Companies Inc.'s December 31, 1996 10-K)
12.1 Computation of Ratio of Earnings to Fixed Charges and Ratio of
Earnings to Fixed Charges and Preferred Stock Dividends*
23.1 Independent Auditors' Consent -- Deloitte & Touche LLP
23.2 Consent of LeBoeuf, Lamb, Greene & MacRae, L.L.P (included in
Exhibit 5.1)*
23.3 Consent of Richards, Layton & Finger*
24.1 Powers of Attorney (included on signature pages of this filing)
25.1 Statement of Eligibility on Form T-1 under the Trust Indenture Act of
1939, as amended, of Bankers Trust Company as Trustee under the
Junior Subordinated Indenture
25.2 Statement of Eligibility on Form T-1 under the Trust Indenture Act of
1939, as amended, of Bankers Trust Company as Trustee of the
Preferred Securities of AICI Capital Trust (included in Exhibit 25.1)
25.3 Statement of Eligibility on Form T-1 under the Trust Indenture Act of
1939, as amended, of Bankers Trust Company as Trustee of the
Preferred Securities Guarantee of Acceptance Insurance Companies Inc.
for the benefit of holders of Preferred Securities of AICI Capital
Trust (included in Exhibit 25.1)
- --------------
*To be filed by amendment.
Item 17. Undertakings
A. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall be deemed to be 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.
B. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 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 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 Act and will be governed by the final adjudication of
such issue.
C. The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a 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 of 1933, 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.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, AICI Capital
Trust certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form S-3 and that it has duly caused this
Registration Statement or amendment thereto to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Omaha and State of
Nebraska on June 6, 1997.
AICI CAPITAL TRUST
By: /s/ William J. Gerber
William J. Gerber, Administrator
By: /s/ Kenneth C.Coon
Kenneth C.Coon, Administrator
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Omaha, State of Nebraska, on June __, 1997.
ACCEPTANCE INSURANCE COMPANIES INC.
By: /s/ Kenneth C. Coon
Kenneth C. Coon
Chairman and Chief Executive Officer
By: /s/ Georgia M. Mace
Georgia M. Mace
Chief Financial Officer and Treasurer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Kenneth C. Coon and Georgia M. Mace, and each of
them, his or her true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, to sign any
registration statement to be filed pursuant to Rule 462(b) under the Securities
Act of 1933 for the same offering covered by this Registration Statement, and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated as of June 6, 1997.
Signature Title
/s/ Kenneth C.Coon
Kenneth C. Coon Chairman, Chief Executive Officer and Director
/s/ John P. Nelson
John P. Nelson President, Chief Operating Officer and Director
/s/ Georgia M. Mace
Georgia M. Mace Treasurer and Chief Financial Officer
/s/ Jay A. Bielfield
Jay A. Bielfield Director
/s/ Edward W. Elliott, Jr.
Edward W. Elliott, Jr. Director
/s/ Robert LeBuhn
Robert LeBuhn Director
/s/ Michael R. McCarthy
Michael R. McCarthy Director
/s/ R. L. Richards
R. L. Richards Director
/s/ David L. Treadwell
David L. Treadwell Director
/s/ Doug T. Valassis Director
Doug T. Valassis