-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BDhtxnW31HpGH93+FX1Dn+k6t9MvVBGDBhbSprs/LAVx4sSae0hWbFSh2ixRCs57 VYSnCfNntQ++lXpD0tcCCQ== 0000950134-96-005058.txt : 19960927 0000950134-96-005058.hdr.sgml : 19960927 ACCESSION NUMBER: 0000950134-96-005058 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19960925 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERISAFE INC CENTRAL INDEX KEY: 0001018979 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 752069407 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-10099 FILM NUMBER: 96634523 BUSINESS ADDRESS: STREET 1: 5550 LBJ FREEWAY STREET 2: STE 901 CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 2144487414 MAIL ADDRESS: STREET 1: 5550 LBJ FREEWAY STREET 2: STE 901 CITY: DALLAS STATE: TX ZIP: 75240 S-1/A 1 PRE-EFFECTIVE AMENDMENT NO.1 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 25, 1996 REGISTRATION NO. 333-10099 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- AMERISAFE, INC. (Exact name of Registrant as specified in its charter) TEXAS 6331 75-2069407 (State of incorporation) (Primary Standard (I.R.S. Employer Industrial Classification Identification No.) Code Number)
--------------------- 2301 HIGHWAY 190 WEST MARK R. ANDERSON DERIDDER, LOUISIANA 70634 PRESIDENT 318-463-9052 2301 HIGHWAY 190 WEST (Address and telephone number of DERIDDER, LOUISIANA 70634 Registrant's principal executive offices) 318-463-9052 (Name, address and telephone number of agent for service)
--------------------- Copies to: JAMES E. O'BANNON FREDERICK W. KANNER JONES, DAY, REAVIS & POGUE DEWEY BALLANTINE 2300 TRAMMELL CROW CENTER 1301 AVENUE OF THE AMERICAS 2001 ROSS AVENUE NEW YORK, NEW YORK 10019 DALLAS, TEXAS 75201 212-259-8000 214-220-3939
--------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as practicable after this Registration Statement becomes effective. 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, 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. / / --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED SEPTEMBER 25, 1996 PROSPECTUS 11,000,000 SHARES LOGO AMERISAFE, INC. CLASS A COMMON STOCK
------------------ All of the shares of Class A Common Stock offered hereby (the "Offering") are being sold by AMERISAFE, Inc. ("AMERISAFE" or the "Company"). Prior to this Offering, there has not been a public market for the Class A Common Stock of the Company. It is currently estimated that the initial public offering price will be between $13.00 and $15.00 per share. See "Underwriting" for information relating to the factors considered in determining the initial public offering price. The Class A Common Stock has been approved for listing on the New York Stock Exchange, upon notice of issuance, under the symbol "ASF." Each share of Class A Common Stock has one vote and each share of the Company's Class B Common Stock has ten votes on all matters that may be submitted to a vote or consent of the shareholders of the Company. Following the Offering, Millard E. Morris, the Company's Chairman of the Board of Directors and Chief Executive Officer, will, through his ownership of Class B Common Stock, control approximately 92.6% of the voting power of the Company's outstanding voting stock (91.8% if the Underwriters' over-allotment option is exercised in full). See "Principal Shareholders" and "Description of Capital Stock." ------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE CLASS A COMMON STOCK OFFERED HEREBY. ------------------ 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------- Per Share......................... $ $ $ - ------------------------------------------------------------------------------------------------- Total(3).......................... $ $ $ - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses of the Offering estimated at $1.1 million payable by the Company. (3) The Company has granted the Underwriters a 30-day option to purchase up to 1,650,000 additional shares of Class A Common Stock on the same terms as set forth above solely to cover over-allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Class A Common Stock are being offered by the several Underwriters named herein, subject to prior sale, when, as and if accepted by them and subject to certain conditions. It is expected that certificates for shares of Class A Common Stock offered hereby will be available for delivery on or about , 1996, at the offices of Smith Barney Inc., 333 West 34th Street, New York, New York 10001. ------------------ SMITH BARNEY INC. PIPER JAFFRAY INC. , 1996. 3 AMERISAFE THE MANAGED RESULTS COMPANY(SM) AMERISAFE seeks hazardous industries -- the toughest workers' compensation challenges. AMERISAFE applies comprehensive on-site safety services to minimize workplace accidents. AMERISAFE utilizes personalized claims management and proactive health care to speed recovery and return to work. MANAGED SAFETY + MANAGED CLAIMS MANAGED CARE - ------------------------------------ = MANAGED RESULTS(SM) [COLLAGE OF PHOTOS] --------------------- NOTICE TO NORTH CAROLINA PURCHASERS: THE COMMISSIONER OF INSURANCE OF THE STATE OF NORTH CAROLINA HAS NOT APPROVED OR DISAPPROVED THIS OFFERING NOR HAS THE COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE MANAGED RESULTS COMPANYSM IS A SERVICE MARK OF THE COMPANY. AN APPLICATION HAS BEEN FILED TO REGISTER THIS MARK WITH THE UNITED STATES PATENT AND TRADEMARK OFFICE; HOWEVER, NO ASSURANCE CAN BE GIVEN THAT SUCH APPLICATION WILL BE ACCEPTED. 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and consolidated financial statements and notes appearing elsewhere in this Prospectus. Unless otherwise indicated, information in this Prospectus (i) assumes no exercise of the Underwriters' option to purchase up to 1,650,000 additional shares of Class A Common Stock to cover over-allotments, if any, and (ii) reflects a reorganization of the Company (the "Reorganization") to be effected prior to the completion of this Offering. See "Recent Reorganization." Unless the context otherwise requires, references in this Prospectus to "AMERISAFE" or the "Company" refer to AMERISAFE, Inc. and its subsidiaries. THE COMPANY AMERISAFE provides managed care workers' compensation products and services primarily to employers in hazardous occupation industries. The Company offers its client-employers a fully integrated program designed to lower the overall costs of workers' compensation claims by: (i) implementing and applying workplace safety programs designed to prevent occupational injuries; (ii) providing immediate, efficient and appropriate managed medical care to injured workers; and (iii) using intensive personal claims management practices to guide and encourage injured workers through the recovery and rehabilitation process with the primary goal of returning the injured worker to work as promptly as practicable. From 1991 through 1995, the Company has increased its revenues from $20.3 million to $69.7 million, or a compound annual growth rate of 36.1%. In this same period, the Company's net income (before cumulative effect of accounting change) increased from $1.8 million to $9.3 million, or a compound annual growth rate of 50.8%. There can be no assurance that these growth rates will continue. As of June 30, 1996, the Company was licensed to provide workers' compensation coverage and services in 25 states and the U.S. Virgin Islands and provided its products and services to approximately 2,900 employers in 18 states, primarily in the southeastern United States. The Company integrates proactive safety services with intensive claims management practices and quality managed care to produce "managed results." The Company's managed results approach focuses on creating and maintaining direct, personal relationships with employers, employees and health care providers in order to design and promote services which are intended to produce lower overall occupational injury costs. The Company designates service teams for each client in order to foster personal relationships, provide continuity of services and implement specific solutions for individual client workers' compensation needs. Since it began operations in 1986, the Company has focused on providing its managed results products and services to employers whose employees are engaged in hazardous occupations, primarily the logging industry. Beginning in 1994, the Company began expanding its client base by targeting employers in other hazardous occupation industries, including general contracting, trucking, and oil and gas exploration. Employers engaged in hazardous occupation industries pay substantially higher than average workers' compensation rates. For example, the Company's logging clients pay generally an amount equal to 20% to 50% of their payroll to obtain workers' compensation coverage for their employees, compared to employers of clerical workers who pay generally less than 1% of their payroll to obtain such coverage. The Company believes that the high severity injuries typically suffered by employees engaged in hazardous occupations and the resulting high cost typically incurred by employers in providing the mandatory workers' compensation coverage for such employees provide the greatest opportunity to lower costs by applying the Company's managed results approach. By focusing on developing and implementing client-specific workplace safety techniques and intensive claims management practices involving the personal presence of the Company's claims representative, the Company believes that substantial cost savings can be achieved when compared to the traditional workers' compensation approach to hazardous occupation industries. By reducing the overall cost of providing workers' compensation coverage to its employer-clients, the Company believes its managed results approach permits it to price its products and services competitively. As of June 30, 1996, more than two-thirds of AMERISAFE's client-employers were involved in hazardous occupation industries. The cost to employers of providing workers' compensation benefits in the United States totaled approximately $58 billion in 1994. From 1984 to 1990, workers' compensation costs increased an average of 13.3% per year and, from 1990 to 1992, workers' compensation costs increased an average of 6.3% per year. 3 5 The substantial growth in the workers' compensation market is primarily attributable to the increased costs of medical treatment and an increase in workers' compensation litigation, which affects both medical benefits and indemnity payments. The Company believes that successful containment of these expenses depends largely upon early intervention in the claims process by assisting the injured employee in receiving appropriate medical treatment and, as a result, enabling an injured employee to return to work as promptly as possible. The Company also believes that traditional insurers have focused on high premium volume and generally maintain minimal staffing. As a result, the Company believes that the workers' compensation industry is generally characterized by limited safety services, inefficient claims adjustment processes and ineffective medical cost management. The Company's strategy is to utilize its managed results approach in an effort to prevent workplace injuries, and, when an injury does occur, to arrange for timely, high quality and cost-effective managed care. The key elements of the Company's strategy are to (i) focus on hazardous occupation employers, (ii) improve workplace safety to reduce workplace accidents, (iii) manage care through personal, direct contact, (iv) direct injured workers to appropriate health care providers, and (v) pursue growth both internally and through acquisitions (although the Company presently has no agreements or understandings with respect to any proposed acquisitions). BENEFITS TO EXISTING SHAREHOLDERS The Company will use a portion of the net proceeds of the Offering to repay indebtedness under the Company's existing credit facility. This credit facility is secured by a pledge of the Company's outstanding Class B Common Stock held by Millard E. Morris, the Company's Chairman of the Board of Directors and Chief Executive Officer, and the stock of certain of the Company's subsidiaries. Upon this repayment, the credit facility will be cancelled and the pledge of such stock will be released. Further, in connection with a reorganization of the Company effected prior to the completion of the Offering, the Company distributed (i) all of the outstanding capital stock of Auto One Acceptance Corporation ("AOAC") to Mr. Morris and Mark R. Anderson, the Company's President, and (ii) shares of two of the Company's former subsidiaries to Mr. Morris. Prior to such distribution, the Company contributed to AOAC additional capital in the form of a note in the amount of $50 million. This note will be repaid with the proceeds of the Offering. See "Recent Reorganization" and "Use of Proceeds." RISK FACTORS Prospective purchasers of the Class A Common Stock should consider certain factors affecting the Company and an investment in the Class A Common Stock. See "Risk Factors." 4 6 THE OFFERING Class A Common Stock Offered by the Company(1)...... 11,000,000 shares Common Stock to be Outstanding after the Offering: Class A Common Stock(1)(2)........................ 11,000,000 shares Class B Common Stock(3)........................... 17,400,000 shares Total..................................... 28,400,000 shares Use of Proceeds by the Company...................... To repay existing indebtedness (including the indebtedness incurred in connection with the Reorganization), to increase capital and surplus and for other general corporate purposes. Proposed NYSE Symbol................................ ASF
- --------------- (1) Does not include an additional 1,650,000 shares of Class A Common Stock that may be sold pursuant to the Underwriters' over-allotment option. See "Underwriting." (2) Excludes (i) 600,000 shares of Class A Common Stock issuable pursuant to outstanding stock options having an exercise price of $12.00 per share granted under the AMERISAFE, Inc. 1996 Stock Incentive Plan (the "Stock Incentive Plan"), and (ii) 6,000 shares of Class A Common Stock to be issued to non-employee directors upon completion of the Offering pursuant to the Stock Incentive Plan. See "Management -- Stock Incentive Plan" and "Management -- Director Compensation." (3) See "Description of Capital Stock -- Class A Common Stock and Class B Common Stock" regarding the conversion rights of the Class B Common Stock. 5 7 SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------------------- ----------------- 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- ------- ------- INCOME STATEMENT DATA: Revenues: Premiums earned.................................... $17,599 $28,640 $35,902 $40,461 $58,167 $23,134 $30,678 Service fee income................................. 578 800 987 2,468 4,110 1,446 3,605 Investment income.................................. 1,745 1,818 2,146 2,484 4,519 1,842 2,743 Fees and other from affiliates..................... 371 1,985 2,154 1,732 2,881 1,004 1,125 ------- ------- ------- ------- ------- ------- ------- Total revenues............................... 20,293 33,243 41,189 47,145 69,677 27,426 38,151 Expenses: Claim and claim settlement expenses................ 12,136 17,622 20,262 25,250 32,924 13,545 18,356 Commission and other underwriting expenses......... 4,577 5,561 7,555 8,507 13,524 6,101 8,377 General and administrative......................... 570 1,910 2,798 4,406 6,810 2,157 4,093 Interest........................................... 442 642 850 726 845 420 632 Depreciation and amortization...................... 4 93 240 703 1,006 364 758 ------- ------- ------- ------- ------- ------- ------- Total expenses............................... 17,729 25,828 31,705 39,592 55,109 22,587 32,216 ------- ------- ------- ------- ------- ------- ------- Income before federal income taxes................... 2,564 7,415 9,484 7,553 14,568 4,839 5,935 Federal income taxes................................. 778 2,375 2,768 2,414 5,234 1,430 1,683 ------- ------- ------- ------- ------- ------- ------- Net income before cumulative effect of change in accounting for income taxes........................ 1,786 5,040 6,716 5,139 9,334 3,409 4,252 Cumulative effect of change in accounting for income taxes.............................................. 334 -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- Net income................................... $ 2,120 $ 5,040 $ 6,716 $ 5,139 $ 9,334 $ 3,409 $ 4,252 ======= ======= ======= ======= ======= ======= ======= Pro forma net income per share............... $ 0.42 $ 0.19 ======= ======= Pro forma weighted average shares outstanding........ 22,061 22,061 Loss Ratio........................................... 69.0% 61.5% 56.4% 62.4% 56.6% 58.6% 59.8%
JUNE 30, 1996 --------------------------- ACTUAL AS ADJUSTED(1) -------- -------------- BALANCE SHEET DATA: Cash and investments.................................................................... $ 90,582 $157,362 Total assets............................................................................ 133,905 200,685 Notes payable........................................................................... 12,425 1,525 Stockholders' equity.................................................................... 36,442 114,591
- --------------- (1) Adjusted to give effect to (i) the Reorganization, (ii) the sale of 11,000,000 shares of Class A Common Stock in the Offering at an assumed public offering price of $14 per share less the estimated underwriting discounts and Offering expenses, and (iii) the application of the net proceeds of the Offering as described herein. See "Use of Proceeds" and "Recent Reorganization." 6 8 THE COMPANY The Company was incorporated as a Texas corporation in 1985 and is principally engaged through its subsidiaries in providing workers' compensation products and services. The Company's principal executive offices are located at 2301 Highway 190 West, DeRidder, Louisiana 70634 (telephone: 318-463-9052) and at 5550 LBJ Freeway, Suite 901, Dallas, Texas 75240 (telephone: 214-448-7414). The Company's principal operating subsidiary is American Interstate Insurance Company, a Louisiana corporation ("American Interstate"). See "Business." RISK FACTORS In addition to other information contained in this Prospectus, prospective investors should consider carefully the following factors in evaluating an investment in the shares of the Class A Common Stock offered hereby. GOVERNMENT REGULATION The Company is subject to substantial regulation by the governmental agencies in the states in which it operates, and will be subject to such regulation in any state in which the Company provides workers' compensation coverage and services in the future. These regulations are primarily intended to protect covered employees and policyholders rather than insurance companies or their shareholders. State regulatory agencies have broad administrative power with respect to all aspects of the Company's business, including premium rates, capital and surplus requirements, reserve requirements, transactions with affiliates, changes in control, investment criteria and policy forms. Under Louisiana law, an insurance company may not, without regulatory approval, pay to its shareholders within a 12-month period dividends or other distributions of cash or property the total fair market value of which exceeds the lesser of (i) ten percent of surplus as to policyholders at the end of the prior calendar year or (ii) the prior calendar year's net income (less any realized capital gains). This requirement would limit American Interstate's ability to make distributions to AMERISAFE in 1996 to approximately $2.7 million. There is no assurance that the Company will seek approval from state regulatory authorities to permit its insurance subsidiaries to pay dividends or make distributions or that, if sought, such approval will be obtained. This approval requirement may limit the amount of distributions which may be made by such subsidiaries and may decrease the amount of capital available to the Company for expansion opportunities and other purposes. Workers' compensation coverage is a creation of state law, is subject to change by the applicable state legislature and is influenced by the political process in each state. Several states have mandated that employers receive coverage only from funds operated by the state. The Company is not aware of any pending or proposed legislation or regulations which could adversely affect the Company. However, there can be no assurance that new workers' compensation-related legislation or regulations will not be adopted in states where the Company presently operates or may operate in the future, which could have a materially adverse effect on the demand for the Company's services and programs in such states, as well as on the Company's business, financial condition or results of operations. From time to time, Congress has also considered federal regulation of the health insurance industry. In 1993, the Clinton administration proposed legislation that would have put into effect substantial changes in the health care industry. Such legislation has not been adopted. Any legislation relating to a comprehensive health care program could adversely affect the Company. See "Business -- Regulation." CONTROL BY A SINGLE SHAREHOLDER The Company's equity currently consists of Class A Common Stock and Class B Common Stock (collectively, the "Common Stock"), which vote together as a single class on all issues, except as otherwise required by law. Following the Offering, Millard E. Morris, the Chairman of the Board of Directors and Chief Executive Officer of the Company, will beneficially own 17,126,521 shares of the Company's Class B Common Stock, each share of which has ten times the voting power of a share of Class A Common Stock. As 7 9 a result, Mr. Morris will control approximately 92.6% of the voting power of the Common Stock (91.8% if the Underwriters' over-allotment option is exercised in full) and will control the outcome of all shareholder votes, including those relating to amending the Company's Amended and Restated Articles of Incorporation (the "Articles") or Restated Bylaws (the "Bylaws"), election of directors and certain mergers and other significant corporate transactions. This could have the effect of delaying, deferring or preventing a change in control of the Company. See "Principal Shareholders" and "Description of Capital Stock -- Class A Common Stock and Class B Common Stock." TRANSACTIONS WITH CONTROLLING SHAREHOLDER After the consummation of the Offering, the Company will have business relationships with certain entities controlled by Millard E. Morris, the principal shareholder, Chairman of the Board of Directors and Chief Executive Officer of the Company. Some of these entities will receive services (e.g., administrative services and aviation services) from the Company for a fee. The Company also shares office space with one of these entities. In addition, the Company has entered into a Tax Matters Agreement in connection with the Reorganization. See "Certain Transactions and Relationships" and "Recent Reorganization." HOLDING COMPANY STRUCTURE The Company is a holding company, the primary assets of which are the capital stock of its subsidiaries. Accordingly, the Company is dependent on the cash flow from its subsidiaries, received through dividends or other intercompany transfers of funds, to meet its obligations. Although the Company does not intend to pay dividends for the foreseeable future, the Company will be dependent on such sources to pay, if and when declared by the Company's Board of Directors, dividends on the Common Stock or any outstanding shares of the Company's preferred stock, $.01 par value per share ("Preferred Stock"). See "Dividend Policy." Dividends and other payments received from the Company's subsidiaries, together with any net proceeds from the Offering retained by the Company for general corporate purposes, are expected, for the foreseeable future, to be the Company's major source of liquidity. None of the Company's subsidiaries will be obligated to declare or pay dividends or make other capital distributions to the Company. In addition, the payment of dividends by the Company's subsidiaries may be restricted under applicable law. See "-- Government Regulation" above. Limitations on the ability of the Company's subsidiaries to make such payments could adversely impact the Company's liquidity. Under Louisiana law applicable to insurance holding companies, the Company's insurance subsidiaries may not enter into certain transactions, including certain reinsurance agreements, management agreements, service contracts and cost sharing arrangements, with members of their insurance holding company system unless they have notified the Commissioner of Insurance of their intention to enter into such a transaction at least 30 days in advance and the Commissioner of Insurance has not disapproved the transaction within such period. Among other things, such transactions are subject to the requirements that their terms be fair and reasonable, that charges or fees for services performed must be reasonable and that the interests of policyholders not be adversely affected. NEED FOR CAPITAL The Company may from time to time need additional capital and surplus to meet certain state regulatory requirements. In particular, the Company anticipates that its insurance subsidiaries will require capital to meet current statutory surplus needs and any additional funding requirements that may periodically arise. From time to time, the Company may be required to increase the capital and surplus of its insurance subsidiaries to remain in compliance with state regulatory requirements. The Company intends to use a portion of the net proceeds from this Offering for this purpose. The Company expects that additional capital will be required by regulatory authorities for the Company to further expand into additional states. If the Company is unable to generate sufficient capital, either internally or from outside sources, it could be required to reduce its growth or to delay or abandon plans to expand into additional states. Although the Company has met its capital needs in the past, there can be no assurance that capital will continue to be available when needed or, if available, will be on terms acceptable to the Company. Additionally, if such capital is not available, there can be no 8 10 assurance that the Company will be able to maintain its current rating of "A" (Excellent) from A.M. Best Company, Inc. A.M. Best's ratings are based on factors of concern to insureds and are not directed towards the protection of investors and should not be relied upon by an investor making a decision with respect to an investment in the Company's Class A Common Stock. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Business -- A.M. Best Rating." The National Association of Insurance Commissioners ("NAIC") has adopted a system of assessing minimum capital adequacy, which system is applicable to the Company's insurance subsidiaries. This system, known as risk-based capital ("RBC"), is used to identify companies that merit further regulatory action by comparing adjusted surplus to the required surplus, which reflects the risk profile of the insurer. Insurers having less statutory surplus than that required by the RBC model formula are subject to regulatory action depending on the level of capital inadequacy. At December 31, 1995, the RBC ratios of the Company's insurance subsidiaries were in excess of statutory minimums. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." MANAGEMENT OF GROWTH; EXPANSION STRATEGY Since it began operations in 1986, the Company has experienced significant growth in its revenues, the number of its employees and the scope of its operations. This growth has and will require the Company to obtain additional capital. See "-- Need for Capital" above. This growth has also resulted in, and is expected to continue to create, new and increased responsibilities for management personnel, as well as additional demands on the Company's operating and financial systems. The Company's business and future growth will depend on the efforts of key management personnel and the Company's ability to attract and retain qualified management personnel. The Company's continued growth also will require it to recruit qualified persons, to enhance managerial systems for its operations, and to successfully integrate new employees and systems into its existing operations. If the Company is unable to continue to manage growth effectively, the Company's business, financial condition or results of operations could be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Strategy -- Pursue Growth Opportunities." The Company intends to pursue growth opportunities through both greater market penetration in existing markets and expansion into new markets, targeting employers in industries and geographic areas in which the Company does not presently conduct business. In addition, the Company intends to pursue acquisitions of other workers' compensation insurers or books of indemnity business. To date, the Company has never acquired another workers' compensation insurer and is unable to predict whether or when any prospective acquisition candidate will become available or the likelihood that any acquisition will be completed. The Company will compete for acquisition and expansion opportunities with many entities that have substantially greater resources. In addition, acquisitions may involve difficulties in the retention of personnel, diversion of management's attention, unexpected legal liabilities and tax and accounting issues. There can be no assurance that the Company will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into its operations or expand into new markets. Once integrated, acquisitions may not achieve levels of revenues, profitability or productivity comparable to the existing business of the Company or otherwise perform as expected. The occurrence of any of these events could have a materially adverse effect on the Company's business, financial condition or results of operations. See "Business -- Strategy." Future growth of the Company's operations depends, in part, on its ability to enter markets in additional states. To achieve this objective, the Company must obtain regulatory approval, win acceptance in the local market, adapt its procedures to each state's regulatory system (which differs materially from state to state) and expand its network of agents. The time required to obtain regulatory approval varies from state to state, and there can be no assurance that the Company will obtain such approval in each state it may seek to enter. See "Business -- Regulation." 9 11 The Company plans to manage its growth in a manner intended to maintain its "A" (Excellent) rating from A.M. Best Company, Inc., although there can be no assurances in this regard. A.M. Best's ratings are based on factors of concern to insureds and are not directed towards the protection of investors and should not be relied upon by an investor making a decision with respect to an investment in the Company's Class A Common Stock. See "Business -- A.M. Best Rating." TAX-FREE REORGANIZATION Immediately prior to the completion of the Offering, the Company distributed the stock of certain subsidiary corporations to existing shareholders of the Company in transactions intended to qualify as tax-free distributions for federal income tax purposes under section 355 of the Internal Revenue Code of 1986, as amended (the "Code"). Prior to such distributions, the Board of Directors of the Company received an opinion of counsel to the effect that such distributions should so qualify for federal income tax purposes. The opinion of counsel received by the Board of Directors of the Company is not binding on the Internal Revenue Service (the "IRS"), and there can be no assurance that the IRS will agree with the opinion. No ruling with respect to such distributions has been requested from the IRS, and there can be no assurance that the IRS will not take the position that such distributions do not qualify as tax-free. If the distributions were not to qualify for tax-free treatment under section 355 of the Code, the Company would recognize taxable gain on the distributions equal to the difference on such date between (i) the fair market value of the distributed stock and (ii) the Company's adjusted basis in such stock. Based on its estimate of the fair market value of the distributed stock, the Company believes that, if the distributions fail to qualify for tax-free treatment, any taxable gain would not exceed approximately $20 million, although there can be no assurance in this regard. The tax resulting from realization of such gain could have a materially adverse effect on the Company's business, financial condition or results of operations. See "Recent Reorganization." FOCUS ON HAZARDOUS OCCUPATION INDUSTRIES Since it began operations in 1986, the Company has focused on providing workers' compensation products and services to employers whose employees are engaged in hazardous occupations and, as a result, are susceptible to serious injuries. Such injuries typically result in substantial costs for both medical treatment and indemnity payments, as well as the costs of managing the delivery of care to injured employees. To limit its exposure, the Company has "excess of loss" reinsurance in effect with a number of reinsurance carriers. The failure of any such reinsurer to meet its obligations to the Company could have a materially adverse effect on the Company's business, financial condition or results of operations. See "-- Reliance on Reinsurance." RELIANCE ON REINSURANCE Due to the Company's exposure to significant claims resulting from injuries suffered by the employees of its clients, the Company has "excess of loss" reinsurance in effect with a number of reinsurance carriers. This reinsurance, in the aggregate, currently provides coverage for each claim occurrence up to $50,000,000 in excess of the Company's retention of $200,000. The Company presently intends to increase its retention level under these policies upon their expiration in July 1997. The Company regularly performs internal reviews of the financial strength of its reinsurers. However, if a reinsurer is unable to meet any of its obligations to the Company under the reinsurance agreements, whether due to the incurrence of multiple large claims by the Company's clients or otherwise, the Company would be responsible for the payment of all claims and claim settlement expenses which the Company has ceded to such reinsurer. Any such failure on the part of the Company's reinsurers could have a materially adverse effect on the Company's business, financial condition or results of operations. See "Business -- Reinsurance." NEED FOR RESERVES The Company establishes reserves to cover its estimated liability for claims and claim settlement expenses with respect to reported claims and claims incurred but not yet reported as of the end of each accounting period. The reserves are estimated using individual case-basis valuations, statistical analyses and estimates based upon experience for unreported claims and claim settlement expenses. The process of 10 12 establishing reserves involves many factors and is inherently uncertain and such estimates may be more or less than the amounts ultimately paid when the claims are settled. Further, the estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in such estimates, management believes that the reserves for claims and claim settlement expenses are adequate. The Company's results of operations may fluctuate on a quarterly basis due in part to the seasonal nature of the businesses conducted by its clients and also as a result of changes in the Company's reserve estimates, as well as other factors. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Reserves for Claims and Claim Settlement Expense." CONCENTRATION IN LOGGING INDUSTRY Since it began operations in 1986, the Company has focused on providing its workers' compensation products and services to employers in the logging industry, primarily in the southeastern United States. See "-- Geographic Concentration" and "Business -- Overview." In 1994, the Company began a program of providing its services to businesses in other hazardous occupation industries. For the year ended December 31, 1995 and the six months ended June 30, 1996, approximately 59.6% and 47.7%, respectively, of the Company's gross premiums earned were derived from its clients in the logging industry. Because premiums are, in general, determined as a percentage of its clients' payroll expense (or, in the case of its logging clients, the clients' production of wood products), premiums fluctuate depending upon the level of business activity of its clients. As a result, the Company's gross premiums earned are dependent upon economic conditions generally and, in particular, the demand for the wood products harvested by its logging clients. Further, due to the concentration of the Company's clients in the logging industry, the Company's gross premiums earned tend to be lower during periods of inclement weather when logging activity is reduced. See "-- Need for Reserves" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." GEOGRAPHIC CONCENTRATION As of June 30, 1996, the Company provided its products and services in 18 states, primarily in the southeastern United States. Although the Company intends to expand its operations into new geographic areas, approximately 83.7% of the gross premiums earned for the six months ended June 30, 1996 were derived from clients in the states of Georgia (19.8%), Louisiana (19.6%), Mississippi (14.9%), Arkansas (13.3%), Alabama (9.8%) and Virginia (6.3%). No other state accounted for more than 5.0% of gross premiums earned for the six months ended June 30, 1996. As a result of this geographic concentration, unfavorable changes in economic conditions affecting the southeastern United States could have a materially adverse effect on the Company's business, financial condition or results of operations. See "Business -- Clients." RELIANCE ON INDEPENDENT AGENTS The Company markets a portion of its workers' compensation products and services through independent agents. For the year ended December 31, 1995 and the six months ended June 30, 1996, independent agents accounted for approximately 39.1% and 49.1%, respectively, of the Company's gross premiums earned. No independent agent accounted for 5.0% or more of the Company's gross premiums earned for either period. These agents are not obligated to promote the Company's products and services and may sell competitors' insurance products. As a result, the Company's business depends in part on the marketing effort of these agents and on the Company's ability to continue to offer workers' compensation products and services that meet the requirements of these agents and their customers. In addition, as the Company expands into additional states and industries, it may elect to establish additional independent agents to market its products. Failure of these independent insurance agents to market successfully the Company's products and services could have a materially adverse effect on the Company's business, financial condition or results of operations. See "Business -- Sales and Marketing." DEPENDENCE ON KEY PERSONNEL The Company's success is largely dependent on the efforts of Millard E. Morris, its Chairman of the Board of Directors and Chief Executive Officer, and Mark R. Anderson, its President. The loss of the services 11 13 of either of these individuals could have a materially adverse effect on the Company. The Company maintains a $1.0 million key-man life insurance policy on Mr. Anderson. The Company presently does not maintain similar insurance with respect to any of its other executive officers. The Company has entered into employment agreements with an initial three-year term with each of its executive officers. The employment agreement between the Company and Mr. Morris does not provide for him to devote full time to the business of the Company. Although Mr. Morris has historically devoted approximately two-thirds of his time to the Company's affairs, his employment agreement provides that he devote such time to the Company's affairs as he and the Company's Board of Directors mutually agree is necessary and appropriate under the circumstances. See "Management -- Employment Agreements." ABSENCE OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offering, there has been no public market for the Class A Common Stock and there can be no assurance that an active trading market for the Class A Common Stock will develop or be sustained after the Offering. The initial public offering price of the Class A Common Stock will be determined through negotiations between the Company and representatives of the Underwriters, and may not be indicative of the market price. Additionally, the market price of the Class A Common Stock could be subject to significant fluctuations in response to period-to-period variations in operating results of the Company, changes in general conditions in the economy or the financial markets, developments in the health care or insurance industries or other developments affecting the Company, its customers or its competitors, some of which may be unrelated to the Company's performance. See "Underwriting." IMPORTANCE OF MAINTAINING A.M. BEST RATING The Company is currently assigned a group letter rating of "A" (Excellent) from A.M. Best Company, Inc. ("A.M. Best"), the leading national insurance rating agency. This rating is assigned to companies that, in the opinion of A.M. Best, have demonstrated an excellent overall performance when compared to the standards established by A.M. Best. A.M. Best considers "A" rated companies to have a strong ability to meet their obligations to policyholders over a long period of time. A.M. Best ratings are based on a comparative analysis of the financial condition and operating performance of insurance companies as determined by their publicly available reports and meetings with such companies' officers. A.M. Best's ratings are based on factors considered to be of concern to insureds and are not directed toward the protection of investors and should not be relied upon by an investor in making a decision to invest in shares of the Company's Class A Common Stock offered hereby. The Company believes that the absence of a rating, or an unfavorable rating, may be a competitive disadvantage because certain potential clients will not purchase coverage from unrated or lower rated companies and certain independent insurance agencies will not place coverage with such companies. When assigning a rating, an area of concern to A.M. Best is rapid growth of written premiums without sufficient capital. Following the Offering, the Company believes that it will be able to maintain adequate capital to permit it to implement its growth strategy in a manner that allows the Company to maintain its rating. However, there can be no assurance that the Company will be able to maintain its "A" rating. See "Business -- A.M. Best Rating." UNALLOCATED OFFERING PROCEEDS The Company intends to retain $66.8 million ($88.3 million if the Underwriters' over-allotment option is exercised in full) of the net proceeds of the Offering to increase its capital and surplus and for other general corporate purposes. These funds have not been allocated for a specific use, and the Board of Directors of the Company will have the sole authority to determine the use of such funds. See "Use of Proceeds." HIGHLY COMPETITIVE BUSINESS The workers' compensation industry is highly competitive. The Company's competitors include, among others, insurance companies, specialized provider groups, in-house benefits administrators, state insurance pools and other significant providers of health care and insurance services. A number of the Company's 12 14 current and potential competitors are significantly larger, with greater financial and operating resources than the Company and can offer their services nationwide. Additionally, the Company does not offer the full line of insurance products which is offered by some of its competitors. There can be no assurance that the Company will be able to compete effectively in the future. See "Business -- Competition." SHARES ELIGIBLE FOR FUTURE SALE After completion of the Offering, the Company will have outstanding 11,000,000 shares of Class A Common Stock (12,650,000 shares if the Underwriters' over-allotment option is exercised in full) and 17,400,000 shares of Class B Common Stock. Of those shares, 11,000,000 shares of Class A Common Stock offered hereby (12,650,000 if the Underwriters' over-allotment option is exercised in full) will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), unless purchased by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act ("Rule 144"). All of the shares of Class B Common Stock were issued by the Company in private transactions prior to the Offering and are "restricted securities" as that term is defined in Rule 144 and are tradable subject to compliance with Rule 144. The Company and its existing shareholders, who upon completion of the Offering will own 17,400,000 shares of Class B Common Stock, have agreed not to dispose of any shares of Class A Common Stock or any securities convertible into or exchangeable for such Class A Common Stock (other than shares and stock options to be granted pursuant to the Stock Incentive Plan) for a period of 180 days from the date of this Prospectus, without the prior written consent of Smith Barney Inc., on behalf of the Underwriters. Neither the Company nor either of its existing shareholders has any present intention to request a waiver of the 180-day period. If any such waiver is requested, Smith Barney Inc. has the sole discretion whether to grant any such waiver. Sales of substantial amounts of Class A Common Stock or Class B Common Stock, or the perception that such sales could occur, could adversely affect market prices for the Class A Common Stock and could impair the Company's future ability to obtain capital through an offering of equity securities. See "Shares Eligible for Future Sale." In addition, Messrs. Morris and Anderson are entitled to certain registration rights with respect to the shares of the Class A Common Stock. See "Description of Capital Stock -- Class A Common Stock and Class B Common Stock -- Registration Rights Agreement." IMMEDIATE AND SUBSTANTIAL DILUTION Purchasers of Class A Common Stock in the Offering will experience immediate and substantial dilution, approximately $9.97 per share, in the net tangible book value per share of Class A Common Stock and may incur additional dilution upon the exercise of outstanding stock options. See "Dilution" and "Management -- Stock Incentive Plan -- Awards." ANTI-TAKEOVER PROVISIONS The Board of Directors of the Company is authorized to issue up to 25,000,000 shares of Preferred Stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the shareholders of the Company. The rights and preferences of any such Preferred Stock may be superior to those of the Class A Common Stock and may adversely affect the rights of the holders of the Class A Common Stock. The Company has no present intention to issue any shares of Preferred Stock. The voting structure of the Common Stock and other provisions of the Articles are intended to encourage a person interested in acquiring the Company to negotiate with, and to obtain the approval of, the Board of Directors of the Company in connection with any such transaction. However, certain of these provisions may discourage a future acquisition of the Company, including an acquisition in which shareholders might otherwise receive a premium for their shares. As a result, shareholders who might desire to participate in such a transaction may not have the opportunity to do so. Moreover, the existence of these provisions may have a depressive effect on the market price of the Class A Common Stock. In addition, the Company is subject to the provisions of Louisiana law applicable to insurance holding companies that prohibit a merger or change in control of the Company without the approval of the Louisiana Department of Insurance. See "Description of Capital Stock -- Anti-Takeover Provisions." 13 15 USE OF PROCEEDS Assuming a public offering price of $14 per share, the net proceeds to the Company from the sale of the 11,000,000 shares of Class A Common Stock offered hereby, after deducting the estimated underwriting discounts and commissions and Offering expenses, are estimated to be approximately $142.1 million ($163.6 million if the Underwriters' over-allotment option is exercised in full). The Company intends to use the net proceeds from the Offering as follows: (i) $50.0 million to repay a note issued as a capital contribution to Auto One Acceptance Corporation in connection with the Reorganization, which note bears interest at 8.0% per annum and matures on the fifth business day following the completion of the Offering (immediately prior to the Reorganization AOAC was a wholly owned subsidiary of the Company; immediately following the Reorganization AOAC will be owned by Messrs. Morris and Anderson); (ii) $13.97 million to repay notes issued to a former shareholder and former subsidiaries in connection with the Reorganization, which notes bear interest at 8.0% per annum and mature on the fifth business day following the completion of the Offering; (iii) $10.0 million to repay in full indebtedness to Banc One Capital Partners II, Ltd., which matures in January 2002 and bears interest at a rate equal to the London Interbank Offered Rate plus 6.0% (11.5% at August 31, 1996); (iv) $900,000 to repay in full indebtedness to certain individuals incurred by the Company in September 1995 in connection with the acquisition of Hammerman & Gainer, Inc., a subsidiary of the Company. Such indebtedness bears interest at 2.667% per annum and is repayable in four equal installments with the last such payment due in September 1999; and (v) to repay all intercompany balances owed to AOAC and the MorTem Corporations (as defined under "Recent Reorganization" below) ($469,000 as of June 30, 1996). The balance of the estimated net proceeds from the Offering (approximately $66.8 million, or $88.3 million if the Underwriters' over-allotment option is exercised in full) will be retained by the Company and used to increase its capital and surplus and for other general corporate purposes. Pending such use, the Company intends to invest such proceeds in investment-grade debt securities. For information relating to the Reorganization, see "Recent Reorganization" below. DIVIDEND POLICY The Company does not currently intend to pay cash dividends to its shareholders. Any determination to pay cash dividends in the future and their amounts, however, will be at the discretion of the Board of Directors and will depend upon the Company's earnings, financial condition, capital requirements, plans for expansion, contractual restrictions, restrictions imposed by applicable law and regulations and other factors deemed relevant by the Board of Directors. The principal source for cash from which to make dividend payments will be dividends and other distributions from the Company's subsidiaries. The Company has not paid any dividends and has made no other distributions to its shareholders in the past two years except for the distributions described below under "Recent Reorganization." See "Risk Factors -- Government Regulation" and "Management's Discussion and Analysis of Results of Operations -- Liquidity and Capital Resources." 14 16 RECENT REORGANIZATION Prior to completion of the Offering, the Company effected certain transactions to separate certain non-workers' compensation related businesses from its workers' compensation businesses and otherwise facilitate the Offering (the "Reorganization"). The Reorganization principally consisted of the following steps: (i) The Company distributed all of the stock of certain corporations conducting insurance agency and other unrelated businesses (the "MorTem Corporations") and 51% of the capital stock of two other subsidiaries -- Southern Underwriters, Inc. ("SU"), and Morris, Temple & Trent Financial Services, Inc. ("MTTFS") -- to a former shareholder of the Company in exchange for all shares of Class B Common Stock then owned by such shareholder. In addition, the Company paid such shareholder $8.0 million and contributed additional capital to the MorTem Corporations in the amount of $5.97 million, in each case, in the form of notes bearing interest at 8.0%. Such notes will be paid with the proceeds of the Offering. (ii) The Company distributed all of the capital stock of Auto One Acceptance Corporation ("AOAC") to Messrs. Morris and Anderson on a pro rata basis and the remaining 49% of the capital stock of SU and MTTFS to Mr. Morris. Prior to such distribution, the Company contributed to AOAC additional capital in the amount of $50 million, in the form of a note bearing interest at 8.0%. Such note will be paid with proceeds of the Offering. The Board of Directors of the Company, in reliance upon the advice of counsel to the Company, believes that the distributions of the stock of the MorTem Corporations, AOAC, SU and MTTFS (the "Distributed Subsidiaries") described in steps (i) and (ii) above (the "Distributions") should qualify as tax-free under section 355 of the Code. In general, if the Distributions so qualify as tax-free under section 355 of the Code, (i) the Company will not be taxed on any unrealized appreciation on the value of the stock of the Distributed Subsidiaries, and (ii) the shareholders receiving such Distributions will not be taxed on the value of the stock received. The Board of Directors of the Company received an opinion of Jones, Day, Reavis & Pogue, counsel to the Company, to the effect that for federal income tax purposes the Distributions should qualify as tax-free under section 355 of the Code. Such opinion of counsel was based upon and subject to certain assumptions, facts and representations provided by the Company and certain of the Company's shareholders. The Company is not aware of any present facts or circumstances which should make such assumptions, facts, representations and advice unobtainable or untrue. However, certain future events not within the control of the Company, including, for example, certain dispositions of stock of the Company or the Distributed Subsidiaries after the Distributions, could provide a basis for the IRS to argue that the assumptions, facts, and representations relied upon by counsel are untrue and that the Distributions do not qualify as tax-free. Pursuant to agreements entered into in connection with the Distributions (the "Distribution Agreements"), the corporations whose stock was distributed in the Distributions and the shareholders receiving the Distributions have agreed not to take those actions which the Company, on the advice of counsel, has determined could provide the basis for an IRS challenge to the tax-free status of the Distributions. The opinion of counsel received by the Board of Directors of the Company has no binding effect on the IRS and there can be no assurance that the IRS will agree with the opinion. A ruling has not been sought from the IRS with respect to the federal income tax consequences of the Reorganization, and it is possible that the IRS may take the position that some or all of the Distributions do not qualify as tax-free, whether or not the assumptions, facts, representations and advice referred to above are received and are true at the time of the Reorganization, and such position may ultimately be upheld. If a Distribution were not to qualify for tax-free treatment under section 355 of the Code, the Company would recognize taxable gain on the Distribution equal to the difference on such date between (i) the fair market value of the distributed stock and (ii) the Company's adjusted basis in such stock. Based on its estimate of the fair market value of the Distributed Subsidiaries, the Company believes that, if the Distributions fail to qualify for tax-free treatment, any taxable gain would not exceed approximately $20 million. The tax resulting from the realization of such gain could have a materially adverse effect on the Company's business, financial condition or results of operations. 15 17 Further, no assurance can be given that the IRS could not successfully contend that the fair market value of the distributed stock, and thus the amount of the recognized gain, exceeded that estimated by the Company. The foregoing summary of the anticipated principal federal income tax consequences of the Reorganization under current law is for general information only and does not purport to cover all federal income tax consequences or any tax consequences that may arise under the tax laws of other jurisdictions. The Company has not requested, and its counsel will not be rendering, any opinion with respect to the tax consequences of the Reorganization under the laws of any state, local or foreign government. 16 18 CAPITALIZATION The following table sets forth the consolidated capitalization of the Company at June 30, 1996, as adjusted to reflect the transactions consummated in connection with the Reorganization (see "Recent Reorganization") and as further adjusted to reflect the sale of the 11,000,000 shares of Class A Common Stock offered hereby and the application of the net proceeds therefrom as described under "Use of Proceeds," assuming a public offering price of $14 per share for the Class A Common Stock and no exercise of the Underwriters' over-allotment option. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and the Notes thereto, included elsewhere in this Prospectus.
JUNE 30, 1996 --------------------------------------------------------- AS ADJUSTED AS FURTHER ADJUSTED ACTUAL FOR THE REORGANIZATION FOR THE OFFERING ------- ---------------------- ------------------- (IN THOUSANDS) Notes payable.................................. $12,425 $ 26,396(2) $ 1,525(7) Notes payable to shareholder and affiliates.... 513 50,513(3) 44(3) ------- -------- -------- Total notes payable.................. 12,938 76,909 1,569 ------- -------- -------- Stockholders' equity (deficit):(1) Preferred Stock, par value $.01 per share, 25,000,000 shares authorized: Series B Convertible Preferred Stock; 510.167 shares issued and outstanding; no shares issued and outstanding, as adjusted and as further adjusted..................... -- -- -- Class A Common Stock, par value $.01 per share, 100,000,000 shares authorized; no shares issued and outstanding and as adjusted; 11,000,000 shares issued and outstanding, as further adjusted.......... -- -- 110(8) Class B Common Stock, par value $.01 per share, 100,000,000 shares authorized; 11,884,647 shares issued and outstanding; 17,400,000 shares issued and outstanding, as adjusted and as further adjusted....... 119 174(4) 174 Additional paid-in capital..................... 1,362 --(5) 142,010(8) Retained earnings (deficit).................... 34,645 (28,019)(6) (28,019) Unrealized gain on available-for-sale securities, net of taxes.................................. 316 316 316 ------- -------- -------- Total stockholders' equity (deficit).... 36,442 (27,529) 114,591 ------- -------- -------- Total capitalization................. $49,380 $ 49,380 $ 116,160 ======= ======== ========
- --------------- (1) Reflects a 3,603.63-for-one common stock split, the reclassification of the Company's then existing common stock to Class B Common Stock, the authorization of the Class A Common Stock, a change in the par value of the Preferred Stock from $1.00 per share to $.01 per share, and an increase in the number of authorized shares of Class A Common Stock, Class B Common Stock and Preferred Stock to 100,000,000 shares, 100,000,000 shares and 25,000,000 shares, respectively, effected by an amendment to the Company's Articles on August 8, 1996. (footnotes continued on following page) 17 19 (2) Notes payable prior to Reorganization................................ $ 12,425 Note payable to former shareholder.................................. 8,000 Note payable to former subsidiary................................... 5,971 -------- Notes payable after Reorganization.................................. $ 26,396 ======== (3) Notes to affiliates prior to Reorganization.......................... $ 513 Note issued to AOAC................................................. 50,000 -------- Notes to affiliates after Reorganization............................ 50,513 Payment of AOAC note................................................ (50,000) Payment of amounts owed to former subsidiary........................ (469) -------- Notes to affiliates after Offering.................................. $ 44 ======== (4) Class B Common Stock prior to conversion of Series B Convertible 8% Preferred Stock.................................................... $ 119 Conversion of Series B Convertible 8% Preferred Stock subsequent to June 30, 1996...................................................... 55 -------- Class B Common Stock prior to Reorganization........................ $ 174 ======== (5) Additional paid-in-capital prior to Reorganization................... $ 1,362 Conversion of Series B Convertible 8% Preferred Stock subsequent to June 30, 1996...................................................... (55) Distributions to former shareholder and affiliates (see note 6)..... (1,307) -------- Additional paid-in capital after Reorganization..................... $ -- ======== (6) Total distributions in connection with Reorganization................ $(63,971) Less amount paid from additional paid-in-capital (see note 5)....... 1,307 -------- Distributions to come from retained earnings........................ (62,664) Retained earnings prior to Reorganization........................... 34,645 -------- Deficit earnings from Reorganization................................ $(28,019) ======== (7) Post-Reorganization notes payable.................................... $ 26,396 Banc One Capital Partners II, Ltd................................... (10,000) Hammerman & Gainer noteholders...................................... (900) Note payable to former shareholder.................................. (8,000) Note payable to former subsidiary................................... (5,971) -------- Notes payable after Offering........................................ $ 1,525 ======== (8) Gross proceeds at $14 per share of Class A Common Stock.............. $154,000 Underwriting discount............................................... (10,780) Estimated offering expenses......................................... (1,100) Net proceeds to Company............................................. 142,120 -------- Par value of Class A Common Stock................................... (110) Additional paid-in-capital after Offering........................... $142,010 ========
18 20 DILUTION At June 30, 1996, the pro forma net tangible book value of the Company was a deficit of $27.5 million, or $(1.25) per share of Common Stock. Pro forma net tangible book value is determined by deducting from net tangible book value amounts to be paid in connection with the Reorganization from the proceeds of the Offering. Pro forma net tangible book value per share is determined by dividing the Company's pro forma net tangible book value (total tangible assets less total liabilities) by the total number of shares of Common Stock outstanding, giving effect to the conversion of all outstanding shares of the Company's Series B Cumulative Preferred Stock and the 3,603.63-for-one stock split both of which occurred subsequent to June 30, 1996. After giving effect to the sale of the 11,000,000 shares of Class A Common Stock offered hereby at an assumed public offering price of $14 per share and after deducting the estimated underwriting discounts and commissions and Offering expenses, the adjusted net tangible book value at June 30, 1996 would have been approximately $114.6 million, or $4.03 per share of the Company's Common Stock. This amount represents an immediate increase in net tangible book value of $5.28 per share to the existing shareholders and an immediate dilution in net tangible book value of $9.97 per share to new investors purchasing shares of Class A Common Stock in the Offering. The following table illustrates this dilution on a per share basis: Assumed public offering price per share of Class A Common Stock.... $14.00 Pro forma net tangible book value per share of Common Stock before the Offering(1)........................................ $(1.25) Increase per share of Common Stock attributable to new investors..................................................... 5.28 ------ Net tangible book value per share of Common Stock after the Offering......................................................... 4.03 ------ Dilution in net tangible book value per share of Class A Common Stock to new investors........................................... $ 9.97 ======
- --------------- (1) Adjusted to give effect to the Reorganization. The following table compares the number of shares of Common Stock acquired from the Company, the total consideration paid and the average consideration per share of Common Stock paid by (i) existing shareholders and (ii) new investors purchasing shares of Class A Common Stock in the Offering, based upon an assumed public offering price of $14 per share.
SHARES PURCHASED TOTAL CONSIDERATION --------------------- ----------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ------------ ------- ------------- Existing shareholders....... 17,400,000 61.3% $ 1,481,000 1.0% $ 0.09 New investors............... 11,000,000 38.7 154,000,000 99.0 $ 14.00 ---------- ------ ----------- ------ Total............. 28,400,000 100.0% $155,481,000 100.0% ========== ====== =========== ======
The foregoing information assumes (i) no exercise of the Underwriters' over-allotment option and (ii) no exercise of outstanding stock options to purchase 600,000 shares of Class A Common Stock granted pursuant to the Stock Incentive Plan. Such stock options have an exercise price of $12.00 per share. To the extent that these stock options are exercised, there would be further dilution per share to new investors. See "Management -- Stock Incentive Plan." 19 21 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial data of the Company as of and for each of the five fiscal years ended December 31, 1995, and as of and for the six months ended June 30, 1995 and 1996. The statements of income and balance sheet data for each of the three fiscal years ended December 31, 1995 have been derived from the Company's consolidated financial statements, which were audited by Ernst & Young LLP, independent certified public accountants. The statements of income and balance sheet data for the years ended December 31, 1991 and 1992 and for the six months ended June 30, 1995 and 1996 are unaudited, but include, in the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of such data. The results for the six months ended June 30, 1996 are not necessarily indicative of the results expected for the entire year. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company's Consolidated Financial Statements and the Notes thereto and other financial information included elsewhere in this Prospectus.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------- ------------------ 1991 1992 1993 1994 1995 1995 1996 ------- ------- ------- ------- -------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) INCOME STATEMENT DATA: Revenues: Premiums earned............................... $17,599 $28,640 $35,902 $40,461 $ 58,167 $23,134 $30,678 Service fee income............................ 578 800 987 2,468 4,110 1,446 3,605 Investment income............................. 1,745 1,818 2,146 2,484 4,519 1,842 2,743 Fees and other from affiliates................ 371 1,985 2,154 1,732 2,881 1,004 1,125 ------- ------- ------- ------- ------- ------- ------- Total revenues.......................... 20,293 33,243 41,189 47,145 69,677 27,426 38,151 Expenses: Claims and claim settlement expenses.......... 12,136 17,622 20,262 25,250 32,924 13,545 18,356 Commission and other underwriting expenses.... 4,577 5,561 7,555 8,507 13,524 6,101 8,377 General and administrative.................... 570 1,910 2,798 4,406 6,810 2,157 4,093 Interest...................................... 442 642 850 726 845 420 632 Depreciation and amortization................. 4 93 240 703 1,006 364 758 ------- ------- ------- ------- ------- ------- ------- Total expenses.......................... 17,729 25,828 31,705 39,592 55,109 22,587 32,216 ------- ------- ------- ------- ------- ------- ------- Income before federal income taxes.............. 2,564 7,415 9,484 7,553 14,568 4,839 5,935 Federal income taxes............................ 778 2,375 2,768 2,414 5,234 1,430 1,683 ------- ------- ------- ------- ------- ------- ------- Net income before cumulative effect of change in accounting.................................... 1,786 5,040 6,716 5,139 9,334 3,409 4,252 Cumulative effect of change in accounting for income taxes.................................. 334 -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- Net income.............................. $ 2,120 $ 5,040 $ 6,716 $ 5,139 $ 9,334 $ 3,409 $ 4,252 ======= ======= ======= ======= ======= ======= ======= Pro forma net income per share.......... $ 0.42 $ 0.19 ======= ======= Pro forma weighted average shares outstanding... 22,061 22,061 Loss Ratio...................................... 69.0% 61.5% 56.4% 62.4% 56.6% 58.6% 59.8%
DECEMBER 31, ---------------------------------------------------- JUNE 30, 1991 1992 1993 1994 1995 1996 ------- ------- ------- ------- -------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and investments................................... $24,910 $35,249 $45,293 $56,260 $ 81,693 $ 90,582 Total assets........................................... 35,402 53,178 71,972 88,091 120,440 133,905 Reserves for claims and claim settlement expenses...... 19,884 26,038 34,421 40,939 55,427 62,345 Notes payable.......................................... 0 2,787 3,288 7,479 8,232 12,425 Stockholders' equity................................... 4,289 9,260 17,397 22,476 32,138 36,442
20 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company provides managed care workers' compensation products and services designed to lower the overall costs to its employer-clients of providing workers' compensation benefits to their employees. Since it began operations in 1986, the Company has focused on providing its managed results services to employers whose employees are engaged in hazardous occupations, primarily in the logging industry. Beginning in 1994, the Company began expanding its client base by targeting employers in other hazardous occupation industries, including general contracting, trucking, and oil and gas exploration. In the southeastern United States, where the Company's existing logging clients are concentrated, trees are harvested primarily for pulp and paper products, for both domestic use and for export. The Company believes that demand for these paper products produces a more stable market for the timber generally produced in this region of the country as compared to regions that harvest trees to supply lumber for the construction industry. Although supply and demand imbalances have occurred from time to time, the Company believes that the market for these paper products, and as a result the demand for its workers' compensation products and services, has experienced modest growth over the past three years. Because the Company expects continued demand for these paper products, and because reforestation coupled with a relatively short growth cycle for timber in this region make raw materials readily available, the Company believes that the market for its workers' compensation services directed at the logging industry will continue to experience growth over the foreseeable future. The Company's revenues consist primarily of premiums earned from workers' compensation coverage, service fee income and investment income. Premiums earned during a period are the direct premiums earned by the Company on in-force policies, net of premiums ceded to reinsurers. Premiums earned primarily represent workers' compensation products, although the Company has historically provided other insurance products, including general liability and automobile coverage. Service fee income represents fees the Company earns for providing claims management and other services to self-insured businesses, other insurance companies, trade associations and governmental entities. Net investment income represents net earnings on the Company's investment portfolio, less investment expenses. Fees and other from affiliates represent various administrative and management services provided to affiliates for a fee. The Company's expenses consist primarily of claims and claim settlement expenses, commissions and other underwriting expenses and general and administrative expenses. Claims and claim settlement expenses include (i) payments and reserves for current and future medical care and rehabilitation costs, (ii) indemnity payments for lost wages and third-party claim settlement expenses such as independent medical examinations, surveillance costs and legal expenses, and (iii) staff and related expenses incurred to administer and settle claims. Certain claims and claim settlement expenses paid are offset by estimated recoveries from reinsurers under specific excess of loss reinsurance agreements. Commissions and other underwriting expenses consist of agencies' commissions, state premium taxes, fees and other expenses directly related to the production of premiums. General and administrative expenses include the costs of providing executive, administrative and support services. 21 23 The following table identifies the markets in which the Company's premiums were earned and the percentage of the gross premiums earned in those markets to total gross premiums earned for the periods indicated.
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ---------------------------------------------------- --------------------------------- 1993 1994 1995 1995 1996 -------------- -------------- -------------- -------------- -------------- (DOLLARS IN THOUSANDS) Premiums earned: Workers' compensation: Logging related............. $39,026 89% $38,482 80% $39,828 60% $17,791 63% $16,466 48% Other industries............ 297 1 2,332 5 21,381 32 7,270 26 15,942 46 Other insurance products...... 4,672 10 7,448 15 5,623 8 3,264 11 2,126 6 ------- --- ------- --- ------- --- ------- --- ------- --- Gross premiums earned......... 43,995 100% 48,262 100% 66,832 100% 28,325 100% 34,534 100% === === === === === Ceded reinsurance............. (8,093) (7,801) (8,665) (5,191) (3,856) ------- ------- ------- ------- ------- Total premiums earned, net...... $35,902 $40,461 $58,167 $23,134 $30,678 ======= ======= ======= ======= =======
The following table sets forth, on a statutory accounting basis, the loss ratio, expense ratio, dividend ratio and combined ratio for the Company for each of the last three years and the workers' compensation industry for 1993 and 1994.
LOSS RATIO EXPENSE RATIO DIVIDEND RATIO COMBINED RATIO(1) ------------------------ --------------------- ----------------------- --------------------- COMPANY(2) INDUSTRY(3) COMPANY INDUSTRY(3) COMPANY INDUSTRY(3) COMPANY INDUSTRY(3) ---------- ----------- ------- ----------- ------- ----------- ------- ----------- 1993......... 57.8% 84.0% 25.0% 20.4% 0.0%(4) 4.7% 82.9% 109.1% 1994......... 63.7 73.4 25.0 21.7 0.3 6.3 88.9 101.4% 1995......... 57.6 N/A 27.3 N/A 0.2 N/A 85.1 N/A
- --------------- (1) A combined ratio in excess of 100 indicates that the sum of claims and claim settlement expenses, underwriting expenses and policyholder dividends exceeded the net premium earned. (2) The Company's Loss Ratios shown in the tables under the captions "Prospectus Summary -- Summary Consolidated Financial Information" and "Selected Consolidated Financial Data" were derived from the Company's financial statements prepared on the basis of generally accepted accounting principles and, as a result, differ from the Loss Ratios shown in the table above. (3) Source: A.M. Best. Industry data not available for 1995. The industry ratios are computed by A.M. Best from publicly available statutory statements filed by insurance carriers with regulatory authorities. (4) Less than 0.1%. RESULTS OF OPERATIONS The following table sets forth income statement information expressed as a percentage of total revenues for the periods indicated.
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, --------------------------- ---------------- 1993 1994 1995 1995 1996 ----- ----- ----- ----- ----- Revenues: Premiums earned.............................. 87.2% 85.8% 83.5% 84.4% 80.4% Service fee income........................... 2.4 5.2 5.9 5.3 9.4 Investment income............................ 5.2 5.3 6.5 6.7 7.2 Fees and other from affiliates............... 5.2 3.7 4.1 3.6 3.0 ----- ----- ----- ----- ----- Total revenues................................. 100.0 100.0 100.0 100.0 100.0 Expenses: Claims and claim settlement expenses......... 49.2 53.6 47.3 49.4 48.1 Commissions and other underwriting expenses.................................. 18.3 18.0 19.4 22.3 21.9 General and administrative................... 6.8 9.4 9.8 7.9 10.7 Interest..................................... 2.1 1.5 1.2 1.5 1.7 Depreciation and amortization................ 0.6 1.5 1.4 1.3 2.0 ----- ----- ----- ----- ----- Total expenses................................. 77.0 84.0 79.1 82.4 84.4 ----- ----- ----- ----- ----- Income before federal income taxes............. 23.0 16.0 20.9 17.6 15.6 Federal income taxes........................... 6.7 5.1 7.5 5.2 4.4 ----- ----- ----- ----- ----- Net income..................................... 16.3% 10.9% 13.4% 12.4% 11.2% ===== ===== ===== ===== =====
22 24 Six Months Ended June 30, 1996 Compared To Six Months Ended June 30, 1995 Total Revenue. Total revenue increased from $27.4 million for the six months ended June 30, 1995 to $38.2 million for the six months ended June 30, 1996, an increase of approximately 39.4%. Net premiums earned increased from $23.1 million for the six months ended June 30, 1995 to $30.7 million for the six months ended June 30, 1996. This $7.6 million increase was due to an increase of $8.2 million in net workers' compensation premiums earned from other industries, partially offset by a decrease of $769,000 in net premiums earned from other insurance products, primarily automobile coverage. The Company discontinued writing automobile policies effective September 30, 1996. Service fee income increased approximately $2.2 million in the 1996 period compared to the 1995 period. This increase was primarily due to the acquisition of Hammerman & Gainer, Inc. ("H&G") on September 1, 1995, which contributed $2.0 million to service fee income in the six months ended June 30, 1996. Investment income increased by approximately $901,000 in the 1996 period compared to the 1995 period, primarily due to an increase in invested assets from $66.2 million at June 30, 1995 to $90.6 million at June 30, 1996. Fees and other from affiliates remained essentially unchanged. Claims and Claim Settlement Expenses. Claims and claim settlement expenses increased from $13.5 million for the six months ended June 30, 1995 to $18.4 million for the six months ended June 30, 1996, an increase of approximately 36.3%. This increase was commensurate with the increase in premiums earned. The loss ratios for these six month periods were higher than the loss ratio for the year ended December 31, 1995 due to seasonality. Claims are more frequently incurred in the first six months of the year as a result of lower activity in the logging industry during which period workers have historically reported claims more frequently. See "-- Seasonality." Commissions and Other Underwriting Expenses. Commissions and other underwriting expenses increased from $6.1 million for the six months ended June 30, 1995 to $8.4 million for the six months ended June 30, 1996, an increase of approximately 37.7%. This increase is commensurate with the increase in premiums earned. Commissions and other underwriting expenses as a percentage of premiums earned were 26.4% and 27.3% for the 1995 and 1996 periods, respectively. Other Expenses. General and administrative expenses increased from $2.2 million for the six months ended June 30, 1995 to $4.1 million for the six months ended June 30, 1996, an increase of 86.4%. This increase was primarily due to the acquisition of H&G on September 1, 1995 which added approximately $1.8 million in the six months ended June 30, 1996. Depreciation and amortization increased by approximately $394,000 in the 1996 period compared to the 1995 period due to an increase in depreciable assets, primarily furniture, equipment and automobiles. Interest expense increased by approximately $212,000 in the 1996 period compared to the 1995 period due to increases in both total borrowings and the weighted average cost of funds. Federal Income Taxes. Federal income taxes increased from $1.4 million for the six months ended June 30, 1995 to $1.7 million for the six months ended June 30, 1996, an increase of 21.4%. This increase is commensurate with the increase in income before federal income taxes. The effective federal income tax rate was 29.6% and 28.4% for the 1995 and 1996 periods, respectively. Year Ended December 31, 1995 Compared To Year Ended December 31, 1994 Total Revenue. Total revenue increased from $47.1 million for the year ended December 31, 1994 to $69.7 million for the year ended December 31, 1995, an increase of approximately 48.0%. Net premiums earned increased from $40.5 million for the year ended December 31, 1994 to $58.2 million for the year ended December 31, 1995. This increase of $17.7 million was due to an increase of $16.7 million in net workers' compensation premiums earned from other industries and a $2.7 million increase in net logging-related workers' compensation premiums, partially offset by a decrease of $1.7 million in net premiums earned from other insurance products, primarily automobile coverage. Service fee income increased approximately $1.6 million from 1994 to 1995 primarily as a result of the acquisition of H&G on September 1, 1995. Investment income increased approximately $2.0 million, or 81.9%, in 1995 as a result of an increase in invested assets. Invested assets, including cash, increased by approximately $25.4 million in the 1995 period 23 25 compared to the 1994 period. Fees and other from affiliates increased by approximately $1.1 million in the 1995 period compared to the 1994 period, primarily as a result of a $1.0 million dividend which was received from an affiliated entity during 1995. There were no such dividends received in 1994 or 1993. The stock of this affiliate was distributed to shareholders immediately prior to the Offering as part of the Reorganization. See "Recent Reorganization." Claims and Claim Settlement Expenses. Claims and claim settlement expenses increased from $25.3 million for the year ended December 31, 1994 to $32.9 million for the year ended December 31, 1995, an increase of approximately 30.0%. However, the loss ratio (i.e., the ratio of claims and claim settlement expenses to premiums earned) decreased from 62.4% in 1994 to 56.6% in 1995. The improvement in the loss ratio resulted primarily from settling claims related to losses from prior periods for amounts less than originally estimated. Commissions and Other Underwriting Expenses. Commissions and other underwriting expenses increased from $8.5 million for the year ended December 31, 1994 to $13.5 million for the year ended December 31, 1995, an increase of approximately 58.8%, primarily due to increases in premiums earned. Commissions and other underwriting expenses as a percentage of insurance premiums earned increased from 21.0% in 1994 to 23.3% in 1995 as the result of the Company's use of independent agents to produce workers' compensation premiums in industries outside the logging industry. Other Expenses. General and administrative expenses increased from $4.4 million for the year ended December 31, 1994 to $6.8 million for the year ended December 31, 1995, an increase of approximately 54.5%. This increase was primarily due to the acquisition of H&G on September 1, 1995 (which added approximately $1.1 million in 1995) and the build-up of staff and facilities. Depreciation and amortization increased by approximately $303,000 in the 1995 period compared to the 1994 period due to an increase in depreciable assets, primarily furniture, equipment and automobiles. Interest expense increased $119,000, or 16.4%, during 1995 due to increases in both total borrowings and the weighted average cost of funds. Federal Income Taxes. Federal income taxes increased from $2.4 million for the year ended December 31, 1994 to $5.2 million for the year ended December 31, 1995, an increase of approximately 116.7%. This increase is primarily attributable to the increase in income before federal income taxes of 92.9% from the 1994 period to the 1995 period. The remainder of the increase is due to the Company's establishment in the third quarter of 1995 of a $700,000 provision for interest (net of applicable tax benefit) on the payment of taxes which may be required to resolve matters raised in an examination of the Company's 1992 consolidated tax return by the Internal Revenue Service. See Note 4 of the Notes to the Consolidated Financial Statements. This provision increased the effective federal income tax rate to the Company from 31.1% to 35.9% for the year ended December 31, 1995. The effective income tax rate without regard to the provision for interest is comparable to the effective federal income tax rates for 1993 and 1994. Year Ended December 31, 1994 Compared To Year Ended December 31, 1993 Total Revenue. Total revenue increased from $41.2 million for the year ended December 31, 1993 to $47.1 million for the year ended December 31, 1994, an increase of approximately 14.3%. Net premiums earned increased from $35.9 million for the year ended December 31, 1993 to $40.5 million for the year ended December 31, 1994. This increase of $4.6 million was primarily attributable to an increase in net premiums earned on other insurance products, primarily automobile coverage of $2.8 million and an increase in net workers' compensation premiums earned from other industries of $1.5 million. Service fee income increased approximately $1.5 million in the 1994 period compared to the 1993 period, primarily from expansion of the range of services offered to include claim settlement services. Fees and other from affiliates decreased from $2.2 million to $1.7 million or as a percentage of revenue from 5.2% in 1993 to 3.7% in 1994. Claims and Claim Settlement Expenses. Claims and claim settlement expenses increased from $20.3 million for the year ended December 31, 1993 to $25.3 million for the year ended December 31, 1994, an increase of approximately 24.6%. This increase was greater than the 12.7% increase in net premiums earned, primarily due to losses outside the Company's core workers' compensation products. Losses from automobile coverage increased $3.4 million, from $1.2 million to $4.6 million, on increased premiums earned of $1.9 million to $5.0 million for the 1993 and 1994 periods, respectively. 24 26 Commissions and Other Underwriting Expenses. Commissions and other underwriting expenses increased from $7.6 million for the year ended December 31, 1993 to $8.5 million for the year ended December 31, 1994, an increase of approximately 11.8%. The increase in commissions and other underwriting expenses was commensurate with the increase in premiums earned. Commissions and other underwriting expenses as a percentage of premiums earned was 21.0% for each of the years ended December 31, 1993 and 1994. Other Expenses. General and administrative expenses increased from $2.8 million for the year ended December 31, 1993 to $4.4 million for the year ended December 31, 1994, an increase of approximately 57.1%. This was primarily due to the expansion of the range of services offered to include claim settlement services. Depreciation and amortization increased by approximately $463,000 in the 1994 period compared to the 1993 period due to an increase in depreciable assets, primarily furniture, equipment and automobiles. Interest expense decreased $124,000, or 14.6%, during 1994 because the Company refinanced its debt at a lower average interest rate. Federal Income Taxes. Federal income taxes decreased from $2.8 million for the year ended December 31, 1993 to $2.4 million for the year ended December 31, 1994, a decrease of approximately 14.3%. This decrease was commensurate with the decrease in income before federal income taxes. The effective federal income tax rate was 29.2% and 32.0% for the 1993 and 1994 periods, respectively. RESERVES FOR CLAIMS AND CLAIM SETTLEMENT EXPENSE The Company's consolidated financial statements include estimated reserves for unpaid claims and claim settlement expenses. The reserves for these expenses are estimated using individual case-basis valuations and statistical analyses and represent estimates of the ultimate gross and net costs of all unpaid claims and claim settlement expenses incurred through the balance sheet date of each period presented. Those estimates are subject to the effects of trends in claim severity and frequency. The Company's estimates are continually reviewed and, as experience develops and new information becomes known, the reserves are adjusted as necessary. Adjustments, including increases and decreases, are included in current operations net of reinsurance, and in the estimate of reserves for insured events of prior periods. 25 27 The following table shows changes in historical claims and claim settlement expense reserves, net of reinsurance recoverables, for the Company from 1986 through 1995. The top line of the table indicates the estimated reserves for unpaid claims and claim settlement expenses recorded at each year end date. Each amount in the top line represents the estimated amount of claims and claim settlement expenses for the claims incurred in that year as well as future payments on claims occurring in prior years. The upper portion (net reserve re-estimated) shows the year-by-year development of the previously recorded reserves based on experience as of the end of each succeeding year. The estimates change as more information becomes known about the actual claims on which the initial reserves were carried. Any adjustments to the carrying value of unpaid claims for a prior year will also be reflected in the adjustments for each subsequent year. For example, an adjustment in 1995 for 1993 loss reserves will be reflected in the re-estimated net reserve for 1993 and 1994. The net cumulative redundancy (deficiency) line represents the cumulative changes in estimates since the initial reserves were established. It is equal to the difference between the initial reserve and the latest re-estimated net reserve amount. The lower portion of the table (cumulative amount of reserve paid) presents the amounts paid as of the end of subsequent years on those claims for which reserves were carried as of the end of each specific year.
DECEMBER 31, ------------------------------------------------------------------------------------------------ 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 ------ ------- ------- ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS) Reserve for Unpaid Claims and Claim Settlement Expenses, Net of Reinsurance Recoverables... $1,387 $ 4,491 $ 7,262 $10,318 $12,872 $14,741 $19,772 $24,882 $31,242 $43,304 Net Reserve Re-estimated as of: One Year Later................ 1,423 4,738 7,534 10,010 11,273 13,568 17,861 23,495 28,092 Two Years Later............... 1,363 4,915 7,961 9,712 11,844 13,820 16,984 21,805 Three Years Later............. 1,400 5,156 8,035 9,815 12,228 12,606 14,928 Four Years Later.............. 1,392 5,238 8,439 9,648 12,011 12,410 Five Years Later.............. 1,390 5,630 8,307 9,477 11,817 Six Years Later............... 1,389 5,609 8,403 9,453 Seven Years Later............. 1,388 5,616 8,365 Eight Years Later............. 1,387 5,521 Nine Years Later.............. 1,357 Net Cumulative Redundancy (Deficiency).................. $ 30 $(1,030) $(1,103) $ 865 $ 1,055 $ 2,331 $ 4,844 $ 3,077 $ 3,150 Cumulative Amount of Reserve Paid, Net of Reinsurance Recoveries, Through: One Year Later.............. $ 677 $ 2,927 $ 3,879 $ 5,664 $ 5,857 $ 6,961 $ 7,757 $11,095 $10,643 Two Years Later............. 1,142 3,481 6,308 7,760 9,234 9,833 11,290 14,729 Three Years Later........... 1,369 4,665 7,185 8,668 10,256 11,033 12,502 Four Years Later............ 1,390 4,989 7,726 8,889 10,919 11,570 Five Years Later............ 1,390 5,282 7,916 9,119 11,239 Six Years Later............. 1,389 5,395 8,078 9,201 Seven Years Later........... 1,388 5,432 8,147 Eight Years Later........... 1,387 5,455 Nine Years Later............ 1,357 Net Reserve at December 31...... $24,882 $31,242 $43,304 Reinsurance Recoverables........ 9,539 9,697 12,123 ------- ------- ------- Gross Reserve at December 31.... $34,421 $40,939 $55,427 ======= ======= ======= Net Re-estimated Reserve........ $21,805 $28,092 Re-estimated Reinsurance Recoverables.................. 10,614 10,197 ------- ------- Gross Re-estimated Reserve...... $32,419 $38,289 ======= ======= Gross Cumulative Redundancy..... $ 2,002 $ 2,650 ======= =======
The foregoing table indicates that reserves for claims and claim settlement expenses, net of related reinsurance recoverables, at December 31, 1989 through 1994 were decreased from their original amounts. These decreases resulted primarily from settling claims related to losses prior to those dates for amounts less than originally estimated. Most of the favorable development has resulted from the Company's managed results approach and claims management process. 26 28 The following table provides a reconciliation of the beginning and ending reserve balances, net of reinsurance recoverables for 1993, 1994 and 1995:
YEAR ENDED DECEMBER 31, -------------------------------- 1993 1994 1995 -------- -------- -------- (IN THOUSANDS) Reserve for claims and claim settlement expenses, net of related reinsurance recoverables, at beginning of year............................................ $ 19,772 $ 24,882 $ 31,242 Add: Provision for claims and claim settlement expenses for claims occurring in the current year, net of reinsurance.................................. 22,173 26,637 36,074 Decrease in estimated claims and claim settlement expenses for claims occurring in prior years, net of reinsurance.............................. (1,911) (1,387) (3,150) -------- -------- -------- Incurred claims and claim settlement expenses during the current year, net of reinsurance..... 20,262 25,250 32,924 Deduct claims and claim settlement expenses payments for claims, net of reinsurance, occurring during: Current year.................................... (7,395) (7,795) (10,219) Prior years..................................... (7,757) (11,095) (10,643) -------- -------- -------- (15,152) (18,890) (20,862) -------- -------- -------- Reserve for claims and claim settlement expenses, net of related reinsurance recoverables, at end of year............................................... 24,882 31,242 43,304 Recoverable ceded reserves for unpaid claims and claim settlement expenses.......................... 9,539 9,697 12,123 -------- -------- -------- Reserves for claims and claim settlement expenses.... $ 34,421 $ 40,939 $ 55,427 ======== ======== ========
The Company's reserves for claims and claim settlement expenses, net of related reinsurance recoverables, at December 31, 1992, 1993 and 1994, were decreased in 1993, 1994 and 1995, by $1,911,000, $1,387,000 and $3,150,000, respectively, for claims that had occurred on or prior to those balance sheet dates. The decreases were due to settling case-basis liabilities related to claims in those periods for less than originally estimated. Most of the favorable development has resulted from the Company's managed results approach and claims management process. No return premiums are due as a result of prior-year effects. The Company continually attempts to improve its claims estimation process by refining its ability to analyze claims development and settlement patterns, claims payments and other information. However, there are uncertainties inherent in the claims estimation process and claims estimates have become increasingly subject to changes in social and legal trends that may expand the liability of insurers, establish new liabilities and interpret contracts to provide unanticipated coverage long after the related policies were written. In management's judgment, information currently available has been appropriately considered in estimating the Company's claims and claim settlement expense reserves. However, there can be no assurance that future events will not cause incurred claims to exceed estimated reserves. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on the above reserve tables. Loss reserve development without the effects of reinsurance would not be significantly different than that presented above. LIQUIDITY AND CAPITAL RESOURCES The Company's operations historically have provided substantial positive cash flow. Net cash provided by operating activities was $10.2 million, $13.0 million and $29.1 million in 1993, 1994 and 1995, respectively, and $11.1 million and $7.6 million for the six months ended June 30, 1995 and 1996, respectively. Net cash 27 29 provided by operations primarily consists of premiums collected, investment income, service fee income and reinsurance recoverable balances collected, less claims and claim settlement expenses paid, premiums paid for reinsurance protection and operating expenses. Generally, premiums are collected months or years before claims are paid. Premiums are used first to pay current claims and expenses. The balance, if any, is invested in marketable securities to generate investment income. Cash flow from operating activities was $29.1 million for the year ended December 31, 1995. Cash flow from operating activities during this period was principally affected by net income, which increased by approximately $4.2 million, and changes in reserves for claims and claim settlement expenses, which increased by $7.8 million in 1995 compared to 1994. The increase in reserves for claims and claim settlement expenses represents the recognition of expenses for which cash payment has not yet been made. Cash flow from operating activities for the six months ended June 30, 1996 was $7.6 million. The increase in reserves in the 1996 period for claims and claim settlement expenses was approximately $1.2 million greater than the increase in the six months ended June 30, 1995. However, cash flow from operating activities decreased by approximately $4.6 million in the six months ended June 30, 1996 as a result of the payment of expenses accrued in 1995 and the prepayment of certain other expenses. The Company follows an investment strategy which is based on many factors, including underwriting results and the Company's resulting tax position, fluctuations in interest rates and regulatory requirements. The majority of the Company's investment assets are in fixed maturity securities. The following table shows the quality composition of the Company's investment portfolio (percentages determined on the basis of amortized cost) by rating, as assigned by Standard & Poor's, Inc. or Moody's Investor's Services, Inc. at June 30, 1996.
S&P RATING/ PORTFOLIO MOODY'S RATING PERCENTAGE ------------------------------------------------ ---------- AAA/Aaa......................................... 90.7% AA/Aa........................................... 6.5% A/A............................................. 2.5% Less than A/A................................... 0.3%
The Company historically has held its investments in these securities to maturity. Management of the Company believes substantially all of the Company's investment assets are readily marketable. However, because of the Company's strategy of generally holding fixed maturity securities to maturity, the Company has classified the majority of these securities as held-to-maturity for financial accounting purposes. See Note 1 of the Notes to Consolidated Financial Statements. Management currently intends to classify a portion of fixed maturity securities purchased with the proceeds from the Offering as available-for-sale. Cash proceeds from the sales and maturities of fixed income securities in 1995 were $10.2 million compared to $12.1 million in 1994, and $4.4 million in 1993 and $9.2 million for the six months ended June 30, 1996. The Company purchased approximately $14.6 million, $30.3 million and $30.6 million in fixed maturity and equity securities in 1993, 1994 and 1995, respectively, and $7.8 million and $12.6 million in fixed maturity and equity securities in the six months ended June 30, 1995 and 1996, respectively. The purchase of securities, partially offset by the sale or maturity of securities, was the primary factor contributing to net use of cash in investing activities of $9.5 million, $22.2 million and $23.3 million in 1993, 1994 and 1995, respectively, and $6.4 million and $5.9 million in the six months ended June 30, 1995 and 1996, respectively. These net purchases were consistent with the Company's practice of investing the balance of cash provided by operations in marketable securities to generate investment income. Aggregate invested assets, including cash, were $56.3 million and $81.7 million at December 31, 1994 and 1995, respectively, and $90.6 million at June 30, 1996. The increases were primarily due to the investment of cash provided by operating activities. The Company has historically relied on private debt and equity financing to support its growth. In 1993, the Company borrowed approximately $1.1 million from an unaffiliated bank for the purchase of an aircraft. These borrowings, and borrowings from prior years, were reduced by aggregate cash payments of approxi- 28 30 mately $1.2 million resulting in net cash used in financing activities of $26,000. Notes payable to shareholders and affiliates were also reduced in 1993 by the exchange of a $1.5 million note payable to a shareholder for shares of the Company's redeemable cumulative preferred stock. In 1994, the Company borrowed $6.0 million from an unaffiliated bank to repay outstanding notes payable to affiliates and non-affiliates and to repay bank debt of $1.9 million. Additionally, approximately $2.7 million was borrowed from an affiliate to repay outstanding notes payable to other affiliates and to finance the acquisition of equipment and general corporate purposes. These borrowings and repayments resulted in net cash provided by financing activities of $2.9 million in 1994. In 1995, the Company borrowed approximately $1.5 million from an unaffiliated financial institution and approximately $528,000 from affiliates for general corporate purposes, including to purchase automobiles for approximately $855,000. These borrowings were partially offset by principal repayments to affiliates and non-affiliates to result in net cash used in financing activities of $916,000 in 1995. In the first six months of 1996, the Company borrowed approximately $10.0 million from an unaffiliated financial institution to repay outstanding debt of $6.1 million to an unaffiliated bank and outstanding borrowings from affiliates and non-affiliates, to purchase property and equipment and for general corporate purposes. Net cash provided by financing activities was approximately $2.8 million in the six months ended June 30, 1996. The Company's principal need for capital is to fund growth of its core managed results workers' compensation business. The Company is restricted by statute in the amount of net premiums it can write on the basis of certain leverage guidelines established by insurance regulators. Exceeding these factors limits a company's ability to generate premium income. A common measurement of leverage is the ratio of net premiums written to statutory surplus. American Interstate's leverage factors are within the maximum factors specified by the states in which it operates. However, private rating agencies generally have stricter leverage standards, and management believes the Company must stay well within these industry leverage guidelines to maintain its favorable ratings from these agencies. Additionally, beginning in 1994, the Company was required to calculate the Risk-Based Capital (RBC) ratio for each of its insurance subsidiaries, which measures the adequacy of statutory capital and surplus in relation to investment and insurance risks and other business factors. The RBC formula is used by state insurance regulators to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. The RBC ratio of each of the Company's insurance subsidiaries exceeds the minimum required ratio. The National Association of Insurance Commissioners has proposed a new Model Investment Law that, if adopted by the State of Louisiana (American Interstate's state of domicile), may affect the statutory carrying values of certain investments; however, the final outcome of that proposal is not certain, nor is it possible to predict what impact the proposal will have on the Company or whether the proposal will be adopted in the foreseeable future. The Company intends to use a portion of the net proceeds from the Offering to expand its insurance business into additional markets and, if necessary, to increase the capital and surplus of its insurance subsidiaries to remain in compliance with regulatory requirements. The Company is a holding company and, accordingly, the primary source of the Company's liquidity will be from dividends and management fees paid by one of its subsidiaries, American Interstate. The Company provides management services to American Interstate in exchange for these management fees. Additionally, American Interstate and its insurance subsidiary are limited by statute in their ability to pay dividends and fees to the Company. See Note 8 of the Notes to Consolidated Financial Statements and "Risk Factors -- Holding Company Structure." Additionally, management currently expects to invest a portion of the Offering proceeds in marketable securities, using the income to provide liquidity. AMERISAFE has historically received fees from various affiliated entities for the costs of providing certain executive, administrative and support services to those affiliates. Fees received from affiliated entities were $2.2 million, $1.7 million and $2.9 million in 1993, 1994 and 1995, respectively, and $1.1 million for the six months ended June 30, 1996. The Company expects to continue to provide a certain level of these services to certain of these affiliates and will enter into annually renewable agreements with such affiliates. However, management expects the level of fees and other revenues received from affiliates to decline following the Offering. See "Certain Transactions and Relationships -- Services Agreement," and "-- Aircraft Agreement." 29 31 IMPACT OF INFLATION Inflation can have a significant impact on the Company because premium rates are established before the amount of claims and claim settlement expenses is known. The Company attempts to anticipate increases in inflation when establishing rates, subject to limitations imposed by competitive pricing. The Company also considers inflation when estimating liabilities for claims and claim settlement expenses, particularly for claims having a long period between occurrence and settlement. The liabilities for claims and claim settlement expenses are management's estimates of the ultimate net cost of the underlying claims and expenses and are not discounted for the time value of money. In times of high inflation, the normally higher yields on investments may partially offset potentially higher claims and expenses. SEASONALITY The Company's operations are affected by general trends and business cycles affecting the logging industry. Generally, the Company experiences higher premium volume in the late summer and early fall when dryer weather allows the harvesting and processing of trees and higher claims volume in the winter and spring when inclement weather prevents the harvesting of trees and workers in the logging industry have historically reported claims more frequently. During periods of low activity, employees work reduced hours or are laid off. Most states allow a worker one to two years to report a workers' compensation injury. The Company believes that, in slow times, a worker may report an injury that occurred earlier. This allows the worker to receive indemnity payments from his employer's workers' compensation provider when he is not otherwise earning wages, or is earning less than full wages, from his employer. The Company believes that these "late reported" claims generally involve less serious injuries and continues to believe that prompt reporting of injuries affects the ultimate cost of claims by allowing the Company to apply its personal claims management practices. EFFECTS OF OFFERING AND RELATED TRANSACTIONS The Company will receive net proceeds of approximately $142.1 million from the Offering (approximately $163.6 million if the Underwriters' over-allotment option is exercised in full). Approximately $75.3 million will be used for the repayment of indebtedness, including the indebtedness incurred in connection with the Reorganization. See "Use of Proceeds" and "Recent Reorganization." 30 32 BUSINESS OVERVIEW AMERISAFE provides managed care workers' compensation products and services primarily to employers in hazardous occupation industries. The Company offers its client-employers a fully integrated program designed to lower the overall cost of workers' compensation claims by: (i) implementing and applying workplace safety programs designed to prevent occupational injuries, (ii) providing immediate, efficient and appropriate managed medical care to injured workers, and (iii) using intensive personal claims management practices to guide and encourage injured workers through the recovery and rehabilitation process with the primary goal of returning the injured worker to work as promptly as practicable. The Company integrates proactive safety services with intensive claims management practices and quality managed medical care to produce "managed results." The Company's managed results approach focuses on creating and maintaining direct personal relationships with employers, employees and health care providers in order to design and promote services which are intended to produce lower overall occupational injury costs. The Company designates service teams for each client in order to foster personal relationships, provide continuity of service and to implement specific solutions for individual client workers' compensation needs. Since it began operations in 1986, the Company has focused on providing its managed results products and services to employers whose employees are engaged in hazardous occupations, primarily the logging industry. Beginning in 1994, the Company began expanding its client base by targeting employers in other hazardous occupation industries, including general contracting, trucking, and oil and gas exploration. The Company believes that the high severity injuries typically suffered by employees engaged in hazardous occupations and the resulting high cost typically incurred by employers in providing the mandatory workers' compensation coverage for such employees provide the greatest opportunity to lower costs by applying the Company's managed results approach. By focusing on developing and implementing client-specific workplace safety techniques and intensive claims management, the Company believes that substantial cost savings can be achieved when compared to the traditional workers' compensation approach to hazardous occupation industries. By reducing the overall cost of providing workers' compensation coverage to its employer-clients, the Company believes its managed results approach permits it to price its products and services competitively. From 1991 through 1995, the Company has increased its revenues from $20.3 million to $69.7 million, or a compound annual growth rate of 36.1%. In this same period, the Company's net income (before cumulative effect of accounting change) increased from $1.8 million to $9.3 million, or a compound annual growth rate of 50.8%. There can be no assurance that these growth rates will continue. As of June 30, 1996, the Company was licensed to provide workers' compensation coverage and services in 25 states and the U.S. Virgin Islands and provided its products and services to approximately 2,900 employers in 18 states, primarily in the southeastern United States. See "-- Clients." As of that date, more than two-thirds of AMERISAFE's employer-clients were involved in hazardous occupation industries. INDUSTRY Workers' compensation benefits are state-mandated and regulated programs, which generally require employers to provide medical benefits and wage replacement to employees injured at work, regardless of fault. In the event an employee suffers a work-related injury, the employee's workers' compensation coverage will pay the medical benefits associated with such injury, regardless of whether the injured employee participates in any other health or medical benefits program. Each individual state has a regulatory and adjudicatory system which quantifies the level of wage replacement to be paid, determines the level of medical care required to be provided and the cost of permanent impairment, and provides whether the injured employee or the employer has certain options in selecting health care providers. State laws generally require two types of benefits for injured employees: (i) medical benefits that include expenses related to diagnosis and treatment of the injury, as well as rehabilitation, if necessary, and (ii) indemnity payments that consist of temporary wage replacement, permanent disability payments or death benefits to surviving family members. Based on an industry report as well as the Company's claims experience, the Company believes that medical benefits presently account for approximately 40% to 50% of all workers' compensation benefits paid, with the 31 33 remainder paid for lost wages and death benefits. To fulfill this mandated financial obligation, virtually all employers are required either to purchase workers' compensation insurance from a private insurance carrier, a state-sanctioned assigned risk pool or a self-insured fund (an entity that allows employers to pool their liabilities for obtaining workers' compensation coverage, but typically subjects each employer to joint and several liability for the entire fund), or, if permitted by their state, to self-insure. The cost to employers of providing workers' compensation benefits in the United States totaled approximately $58 billion in 1994. From 1984 to 1990, workers' compensation costs increased an average of 13.3% per year and, from 1990 to 1992, workers' compensation costs increased an average of 6.3% per year. The substantial growth in the workers' compensation market is primarily attributable to the increased costs of medical treatment and an increase in workers' compensation litigation, which affects both medical benefits and indemnity payments. The Company believes that successful containment of these expenses depends largely upon early intervention in the claims process and promptly enabling an injured employee to return to work. The Company also believes that, to date, traditional insurers have focused on high premium volume and generally maintain minimal staffing. As a result, the Company believes that the workers' compensation industry is generally characterized by limited safety services, inefficient claims adjustment processes and ineffective medical cost management. While the Company's practices result in higher expenses, the Company believes that its managed results approach results in lower overall costs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview." Employers engaged in hazardous occupation industries pay substantially higher than average workers' compensation rates. While these rates vary significantly across industries and from state to state and are dependent upon the individual employer's loss history, workers' compensation costs are typically a significant component of these hazardous occupation employers' overall operating expenses. For example, the Company's logging clients typically pay an amount equal to 20% to 50% of payroll to obtain workers' compensation benefits for their employees, compared to employers of clerical workers who generally pay an amount less than 1% of their payroll to obtain such benefits. This cost disparity results from the substantial expenses associated with high severity injuries occurring within hazardous occupation industries. The Company believes that the difficulties associated with controlling catastrophic injury costs have historically caused a number of insurance companies to withdraw from the higher-risk market segments. As a result, the Company believes that hazardous occupation industries offer a significant opportunity to workers' compensation providers. STRATEGY The Company's strategy is to utilize its managed results approach in an effort to prevent workplace injury, and, when an injury does occur, to arrange for timely, high quality and cost-effective managed care, thereby lowering the overall costs to its employer-clients of providing workers' compensation benefits to their employees. The Company's strategy includes the following principal elements: - Focus on Hazardous Occupation Employers. The Company targets those employers who, due to the nature of their businesses and the susceptibility of their employees to serious injury, pay substantially higher than average workers' compensation rates. Because the Company focuses its efforts on clients in selected industries, the Company believes that it has developed expertise in assessing not only the risks associated with those industries, but also the operating practices of individual employers. As a result, the Company believes it can more accurately determine the profit opportunity of providing its managed results services. The Company also believes that less competition exists in providing workers' compensation services to hazardous occupation employers because of the potential for severe injuries to their employees and due to the fact that many hazardous occupation employers operate in rural areas, a market not pursued by many traditional insurers. The Company believes that its commitment to working with its client-employers to implement a program designed to benefit both parties results in cost savings for its client-employers and the establishment of long-term relationships with them. - Improve Workplace Safety. The Company believes that implementing comprehensive safety services to reduce workplace accidents is the key element to effect significant reductions in workers' 32 34 compensation costs for employers in hazardous occupation industries. The Company presently employs a staff of 27 safety professionals. Many of these individuals were previously employed in hazardous occupation industries and use their personal experience and expertise in these industries to assist employer-clients in designing safety and injury prevention programs and to assist in the Company's underwriting process. In most cases, before offering the Company's managed results products and services to a potential new client, a Company safety professional will visit the potential client's place of business to assess the existing safety programs and workplace practices. In certain circumstances, the Company will agree to provide workers' compensation products and services only if the employer agrees to implement and maintain specific safety recommendations. Once an employer becomes a client, the Company continues to emphasize safety by periodic workplace visits, assisting the client in designing and implementing enhanced safety management programs, providing current safety-related information and conducting rigorous post-accident management. - Manage Care Through Personal, Direct Contact. The Company believes that its personal, direct contact approach reduces the overall cost of medical care, results in the injured worker returning to work more quickly and lessens the likelihood of litigation and fraudulent claims. The Company encourages its employer-clients to immediately notify the Company of a workplace injury. Following notification, a claims representative contacts the employer, the injured employee and/or the treating physician to determine the nature and severity of the injury. In the case of a serious injury, the employer's pre-designated claims representative will promptly visit the injured employee or the employee's family members to discuss the benefits provided and will visit the treating physician to discuss the proposed treatment plan. Although the Company's claims representative does not recommend or otherwise direct the injured workers' treatment plan, the claims representative acts as a facilitator to assist the injured employee in receiving appropriate medical treatment and to encourage the use of Company-recommended health care providers and facilities. The Company monitors the number of active cases handled by a single claims representative in order to permit the claims representative to better focus on the services best suited for the specific injured employee. - Direct Injured Workers to Appropriate Health Care Providers. The Company believes that directing injured workers to appropriate health care providers is a vital part of its workers' compensation managed care program. The Company believes that it is able to arrange for high quality, cost-effective health care services to injured workers due to its experience with managing claims involving severe injuries of the types most often suffered by its clients' employees and its relationships with health care providers within the regional and local markets it serves. Certain states (Arkansas, Florida, Georgia, Kentucky, Missouri, New Mexico, Oregon and Tennessee) permit the Company or the employer to require injured workers to utilize Company-recommended health care providers and facilities. Even in states in which the injured employee is permitted to choose a health care provider, the Company believes that it is generally successful in encouraging injured workers to use Company-recommended providers and facilities, allowing the Company to more effectively manage health care. - Pursue Growth Opportunities. The Company intends to grow internally and through acquisitions. Internal growth is expected to result from both greater penetration of existing markets and expansion into new markets primarily through targeting employers in geographic areas in markets in which it is licensed but presently conducts little or no business and other hazardous occupation industries such as trucking and oil and gas, which the Company began pursuing in 1994. The Company currently provides products and services in 18 states and expects to target its expansion to additional states in which it is authorized to provide workers' compensation products and services. In addition, due to the fragmented nature of the workers' compensation market, the Company believes that there are a significant number of smaller, traditional workers' compensation insurers or books of indemnity business that the Company could acquire and convert to its managed results approach. The Company's proceeds from this Offering will provide substantial additional capital that will allow the Company to more rapidly expand its business. However, while there can be no assurances, the Company plans to manage its growth in a manner intended to maintain its "A" (Excellent) rating from A.M. Best Company, Inc. See "-- A.M. Best Rating" below. 33 35 OPERATIONS The Company's managed results approach employs an operating process designed to improve workplace safety and thereby reduce work-related injuries, and, when an injury does occur, to provide for prompt medical intervention, integrated claims management and effective medical care management. The Company's managed care approach directs injured workers to appropriate health care providers and facilities. The Company is divided into multidisciplinary geographic service teams which concentrate on providing managed workers' compensation services and products within assigned regions of the Company's market territory. These teams actively enlist employers, employees and health care providers in the common goal of rapid return-to-work in as care-effective and cost-efficient a manner as possible. The components of the Company's managed results approach include: Improve Workplace Safety. Preventing work-related injuries is a key element of the Company's managed results approach. In most cases, before offering the Company's managed results products and services to a potential new client, a Company safety professional will visit the potential client's place of business to assess the existing safety programs and workplace practices. Company representatives also assess the employer's attitude toward workplace safety and toward creating, improving and maintaining a safe work environment. The safety professional will prepare a written report to assist the underwriter in evaluating the risk and pricing it appropriately. In certain circumstances, the Company will agree to provide workers' compensation products and services only if the employer agrees to implement and maintain specific safety recommendations. The Company employs 27 safety professionals throughout its market territory. Many of these individuals were previously employed in logging or other hazardous occupation industries and use their personal experience and expertise in these industries to better assess the safety risks associated with a client's operations. These individuals also use their knowledge of the specific hazards associated with these hazardous occupation industries to assist employers in designing safety and injury prevention programs and to provide information about the industries to assist in the Company's underwriting process. After identifying a client's specific safety risks, the Company's safety professionals work with the client to minimize these risks and reduce accidents through monitoring the client's safety programs. The Company requires each of its safety professionals to pursue professional development programs leading to specific certifications or designations, and to participate in Company-sponsored periodic training in the regulations and guidelines of the Occupational Safety and Health Administration and the Department of Transportation in order to assist the Company in assessing the adequacy of its clients' safety programs. The Company also publishes a periodic logging-specific safety and industry newsletter titled "The Timberleaf" which is distributed to more than 3,000 clients, potential clients, facilitators, mill managers and paper and lumber industry executives. Company safety professionals also participate in state forestry association sponsored logging safety councils, write safety articles published in industry periodicals, and work as members of the American Pulpwood Association's various safety committees. After accepting a client, the Company continues to emphasize workplace safety by making periodic, and sometimes unannounced, visits to the client-employer's workplace. All serious injuries are investigated by a Company representative to determine whether steps can be taken to avoid similar accidents. The Company monitors the activity of its safety professionals in order to assure that appropriate safety services are available to each client-employer. Prompt Medical Intervention. Managing a claim from the earliest possible time is critical in minimizing its ultimate cost. A 1994 industry study indicates that claims reported between 11 and 20 days after the date of injury cost an average of 29% more than claims reported 1 to 10 days after the date of injury, and that the difference escalated to an average of an additional 39% if the claim was reported between 21 and 30 days after the injury occurred. To ensure early intervention in the claims process, the Company encourages immediate notification from the employer of all injuries and provides the employer with 24-hour toll-free assistance or direct contact with the Company's designated service representative. Promptly upon receiving notification of an injury, a claims representative contacts the employer, the injured employee and/or the treating physician to determine the nature and severity of the injury. The claims 34 36 representative acts as a facilitator to assure that the injured employee receives an appropriate medical treatment plan and to encourage the use of Company-recommended health care providers and facilities. The Company believes that this personal, direct contact approach reduces the overall cost of medical care, results in the injured worker returning to work more quickly and lessens the likelihood of litigation and fraudulent claims. In cases involving a serious or complex injury, the Company provides comprehensive field case management to address both the ongoing medical needs of the injured employee as well as the economic and social issues facing the employee and the employee's family. These professionals establish ongoing communication with an injured employee, often at the initial treatment, help coordinate care with the attending physicians and the health care facilities, assist with paperwork and provide ongoing advice to both the injured worker and the employee's family, with the goal of increasing satisfaction through prompt, responsive service and a demonstrated concern for the injured employee's well-being. Because the Company's managed results approach emphasizes direct, personal contact between the designated claims representative and the injured employee and his employer, the Company monitors the number of active cases for which any single claims representative is responsible. The average case load of a claims representative is between 60 and 70 claims, although this number may vary based on the severity of the injury and the type of claim involved. With a lower case load, each claims representative can better focus on the injured employee and access the medical, rehabilitative and social services that are best suited for the specific individual. The Company's claims representatives are located in the geographic area in which their designated employer-clients are based. By locating its claims representatives in the field, the Company derives additional benefits from the fact that its representatives build professional relationships with local health care providers. When expanding into a new geographic market, the Company seeks to hire experienced claims representatives who have established professional contacts with local health care providers and who demonstrate the attitude and ability to enhance the Company's managed results approach. Direct Injured Workers to Appropriate Health Care Providers. The Company believes effective managed care depends largely upon the selection of appropriate health care providers and ongoing review to ensure that medical care is being delivered in a cost-effective manner. The Company seeks to select and develop relationships with health care providers in each of the regional and local markets in which the Company's employer-clients operate. Emphasis is placed on implementing the most expeditious and cost-effective managed care treatment programs for each employer rather than imposing a single standardized system on all employers and their employees. The Company has established relationships with local and regional health care providers and facilities ranging from individual physicians to fully integrated occupational health care networks. In certain circumstances, these relationships are evidenced by formal contracts; in many cases the arrangements are more informal. The Company believes that its personal approach to managed care depends upon selecting a well-qualified, local source of medical care, regardless of any affiliation with existing networks. When entering a market, the Company seeks to enter into strategic relationships with local and regional medical care providers. In selecting its medical care providers, the Company relies, in part, on the recommendations of its claims representatives who have developed professional relationships within their geographic areas. The Company also seeks input from the employers and other contacts in the market in which it intends to provide services. While cost factors are considered in selecting health care providers, the Company considers the ability of the health care provider to achieve a "quality outcome" -- defined as rapid, conclusive recovery and return to sustained, full capacity employment by the injured worker -- as the most important factor in the selection process. Because workers' compensation coverage provides injured workers with statutory health care and indemnity benefits, the coverage provided by the Company does not provide for incentives for the use of its recommended health care providers (i.e., unlike HMO or PPO programs, there are no lower deductibles or similar cost savings to an injured worker for using the services of specific providers). Company representatives may recommend a health care provider based on the Company's prior experience with such provider in treating the needs associated with a specific type of injury. Due to the Company's knowledge of the health care 35 37 providers in a geographic region, the Company believes it often has the ability to recommend qualified providers to injured employees, who often lack knowledge of the qualifications of health care providers in their area who specialize in treating specific types of injuries. The Company's claims representatives maintain primary responsibility for managing the entire claim from occurrence through resolution and are given significant responsibility and authority to ensure the most effective, cost-efficient resolution of claims that will enable the employee to return to work as promptly as practicable. Each claims representative has the authority to retain at the Company's expense independent nurse case managers, independent medical examiners, vocational and rehabilitation specialists or other specialty providers of medical services necessary to achieve the quality outcome desired by the Company. In addition to retaining independent service providers required for a particular injured worker, the claims representative works to reinforce the Company's managed results approach by utilizing existing arrangements that have been established by the Company to meet the needs of employer-clients within a particular geographic market. The Company provides its claims representatives with cars or car allowances, personal computers, cellular phones, facsimile machines, pagers and a full range of additional administrative and technical support to assist them with the prompt, efficient resolution of employee claims. The Company generally requires pre-certification to determine the medical necessity and appropriateness of non-acute medical treatment before it is provided to an injured worker. The Company also conducts fee schedule and medical bill reviews to ensure that it has been billed appropriately for the approved services, to prevent over-utilization of medical services and to detect variances from agreed-upon fee schedules, unbundling of charges and unnecessary or unrelated charges. Because of the variance in regulatory schemes in the states in which the Company provides managed care products and services, the Company also contracts with medical bill review specialists in certain of the markets in which it operates. Dispute and Litigation Management. Through early intervention and its personal claims management approach, the Company seeks to limit the number of disputes with injured workers. The Company's primary goal is rapid, conclusive recovery and return to sustained, full capacity employment by the injured worker. Each claim is evaluated and acted upon by the assigned claims representative. The personal presence of the Company's claims representative throughout this process permits an evaluation of the injured employee's psychological propensity to return to work, to retain counsel and litigate, or, as an alternative, to reasonably settle any disputes with the Company without litigation. The Company believes that the personal presence of the claims representative also enhances the Company's ability to guide the injured employee to the appropriate conclusion in a friendly, dignified, supportive manner and diminishes the injured employee's desire to seek larger settlement amounts than would be the case if the Company was perceived by the injured employee to be adversarial or hostile toward the employee's individual situation. The Company seeks to promptly settle valid claims; however, it aggressively defends against what it considers to be non-meritorious claims. As of June 30, 1996, the Company had closed approximately 98.6% of its pre-1995 reported claims and 88.8% of its 1995 reported claims, thereby substantially reducing the risk of future adverse claims development. Over the last several years, certain states have adopted regulations better enabling workers' compensation providers to actively investigate and pursue allegedly fraudulent claims. The Company believes that its claim representatives' physical presence, and direct face-to-face contact with its employer-clients and injured workers, better enables it to uncover fraudulent claims. PRODUCTS AND SERVICES Workers' Compensation Managed Care Products. The Company's products and rating plans encompass a continuum of options designed to fit the needs of its client-employers. The most basic product, accounting for approximately 97.0% of the Company's premiums in force at June 30, 1996, is a guaranteed cost contract, in which the premium is set in advance and changes only based upon changes in the client's operations or payroll. In return, the Company agrees to assume statutorily imposed obligations of the client-employer to provide workers' compensation benefits to its employees. The premium for these policies varies depending upon the type of work performed by each employee and the general business of the insured. An employer large enough 36 38 to qualify, typically those paying more than $5,000 in annual premium, will have its premium based on its loss experience relative to its peers as determined over a three-year period. This loss experience is adjusted by the type of business and associated risks. A client who desires to assume a certain amount of financial risk may elect a deductible which makes the client responsible for the first portion of any claim. In exchange for the deductible election, the employer receives a premium reduction. The Company also offers several loss sensitive plans (retrospective rating plans and dividend plans) which determine the final premium paid for the current policy period based on the insured's losses during that same period. TPA and Claims Adjustment Services. The Company has historically provided both independent claims adjusting services and third party administration ("TPA") services in Louisiana and Texas. These services include independent adjusting in multiple lines of coverage. Additionally, the Company provides third-party administration services. The Company expanded its TPA services through the acquisition of Hammerman and Gainer, Inc. in September 1995. Current plans involve the expansion of existing services as well as the delivery of workers' compensation and employee benefits, third-party administration, provider networks, medical case management, medical bill review, loss prevention programs, occupational health programs, risk management consulting, alternative dispute resolution and risk financing consulting. The Company presently offers its services on a negotiated fee-for-service basis. These services are typically rendered to self-insured businesses, other insurance companies, trade associations and governmental entities. Other Products. In addition to providing workers' compensation products and services, the Company presently offers certain of its workers' compensation clients general liability coverage. In addition, one of the Company's subsidiaries has traditionally provided automobile liability and property insurance coverage in two states. The Company also utilizes this subsidiary to file alternative workers' compensation rate structures in certain states in order to permit the Company to offer its workers' compensation products and services to a broader range of potential clients. For the six months ended June 30, 1996, general liability and automobile coverage respectively accounted for 3.2% and 2.6% of the Company's gross premiums earned. In 1995, general liability and automobile coverage respectively accounted for 3.7% and 4.7% of the Company's gross premiums earned. CLIENTS Since it began operations in 1986, the Company has marketed its workers' compensation products and services to employers whose employees are engaged in hazardous occupations, and as a result, pay substantially higher than average workers' compensation rates. From 1986 through 1993, substantially all of the Company's clients were employers engaged in the logging industry. Beginning in 1994, the Company began to expand its client base by employers in other hazardous occupation industries, such as general contracting, trucking, and oil and gas. As a result of the Company's expansion efforts, gross premiums earned from these other industries increased from approximately $550,000 in 1994 to approximately $16.9 million in 1995, accounting for approximately 1.1% and 25.3% of the Company's earned premiums in 1994 and 1995, respectively. Gross premiums earned from these other industries for the period ended June 30, 1996 were approximately $13.9 million, accounting for approximately 38.9% of the Company's earned premiums. Because the Company focuses on potential clients in selected industries, it believes it has developed expertise in assessing not only the risks associated with those industries, but also the operating practices of individual employers. A substantial majority of the Company's safety professionals and claims representatives have educational backgrounds and/or prior work experience in safety-related fields or in the businesses in which the Company's clients operate. The Company believes that this knowledge of its clients' businesses provides it with the ability to better evaluate the profit opportunities of providing its managed results services. In addition, the Company's employees evaluate the employer's attitude toward maintaining and improving workplace safety as well as the employer's willingness to partner with the Company in its managed results approach to providing solutions to the employer's workers' compensation needs. The Company provided workers' compensation services and products to approximately 2,900 employers as of June 30, 1996. For the six months ended June 30, 1996, approximately 6.0% of the Company's gross premiums earned were derived from state residual market programs and clients assigned to the Company 37 39 through assigned risk pools. See "-- Regulation -- Participation in State Residual Market Programs" below. The average client, excluding clients in assigned-risk pools, has an average annual premium of approximately $30,000. During the year ended December 31, 1995, the Company's ten largest clients accounted for approximately 5.1% of its premiums in force. Approximately 90.0% of the policies scheduled to expire in 1995 were renewed by the Company's clients, while approximately 84.0% of the policies scheduled to expire in 1994 were renewed by the Company's clients. The following table identifies, for the year ended December 31, 1995 and for the six months ended June 30, 1996, the states in which the percentage of the Company's gross premiums earned exceeded 1.0%, for the periods presented.
% OF GROSS PREMIUMS EARNED ----------------------------------- SIX MONTHS YEAR ENDED ENDED STATE DECEMBER 31, 1995 JUNE 30, 1996 ----- ----------------- ------------- Georgia........................................ 16.9% 19.8% Louisiana...................................... 29.3 19.6 Arkansas....................................... 16.5 14.9 Mississippi.................................... 9.4 13.3 Alabama........................................ 12.0 9.8 Virginia....................................... 1.3 6.3 Tennessee...................................... 1.3 3.5 Texas.......................................... 2.9 3.1 Oklahoma....................................... 3.1 3.0 Kentucky....................................... * 2.9 North Carolina................................. 2.3 2.2 Florida........................................ 1.3 *
- --------------- * Less than 1.0% Additional states in which the Company is licensed to provide workers' compensation products and services, but which do not individually account for more than 1.0% of the Company's gross premiums earned, include Pennsylvania, South Carolina, Missouri, New Mexico, Indiana and Maryland. As of June 30, 1996, the Company was also licensed to provide workers' compensation products and services in the states of Oregon, Wisconsin, Maine, South Dakota, Wyoming, Minnesota, North Dakota and in the U.S. Virgin Islands. SALES AND MARKETING As of June 30, 1996, the Company's workers' compensation products and services were sold both through 20 direct agents employed by the Company and 285 independent agents. Most of the Company's direct agents either have degrees in forestry or have worked extensively in the forestry industry. Similar to the Company's safety professionals and claims representatives, direct agents live in their assigned territories throughout the United States. The Company's direct agents receive competitive salaries, commissions and a bonus based on the profitability to the Company of their assigned client-employers. Although most of the Company's products and services are sold through direct agents, independent agents are also utilized in some areas, and are selected based upon their proven expertise in industries targeted by the Company. For the year ended December 31, 1995 and for the six months ended June 30, 1996, independent agents accounted for approximately 39.1% and 47.1%, respectively, of the Company's gross premiums earned. No independent agent accounted for more than 5.0% of the Company's gross premiums earned in either period. In Mississippi, the Company has a contract with an independent general agent who, in turn, has contractual arrangements with approximately 105 additional independent agents in that state. For the six months ended June 30, 1996, approximately 3.0% of the Company's gross earned premiums were generated by independent agents retained by this general agent. Although the Company expects this contract to continue for the foreseeable future, the loss of this general agent contract would require the Company to enter into an arrangement with another general agent or enter into arrangements with individual independent agents in Mississippi. 38 40 A.M. BEST RATING The Company is currently assigned a group letter rating of "A" (Excellent) from A.M. Best Company, Inc. ("A.M. Best"), the leading national insurance rating agency. This rating is assigned to companies that, in the opinion of A.M. Best, have demonstrated an excellent overall performance when compared to the standards established by A.M. Best. The Company was awarded an "A-" rating in 1991, its first year of eligibility. The rating was raised to "A" in 1993. A.M. Best ratings are based on a comparative analysis of the financial condition and operating performance of insurance companies as determined by their publicly available reports and meetings with the entities' officers. A.M. Best's ratings are based on factors considered to be of concern to insureds and are not directed toward the protection of investors and should not be relied upon by an investor in making a decision to invest in the Company's Class A Common Stock. Furthermore, A.M. Best ratings are not ratings of any of the Company's securities nor are such ratings a warranty of the Company's current or future ability to meet its contractual obligations. A.M. Best ratings include Secure Ratings, which consist of Superior (A++, A+), Excellent (A, A-) and Very Good (B++, B+). A.M. Best also provides Vulnerable Ratings, which range from Adequate (B, B-) to In Liquidation (F). The Company believes that its current A.M. Best rating provides it with a competitive advantage over certain competitors because certain potential clients will not purchase coverage from unrated or lower rated companies and certain independent insurance agencies will not place coverage with such companies. The Company presently intends to expand its business through internal growth and acquisitions. However, while there can be no assurances, the Company plans to manage its growth in a manner intended to maintain its "A" (Excellent) rating. See "-- Strategy -- Pursue Growth Opportunities" above. REINSURANCE Through reinsurance, the Company is able to transfer certain of the financial risks of severe and catastrophic injury suffered by a client's employee. The Company's reinsurance program includes a number of reinsurance carriers, all of which have A.M. Best ratings of "A-" or better. The Company has in effect specific "excess of loss" reinsurance agreements under which it pays its reinsurers a percentage of gross premiums earned and whereby the reinsurers agree to assume their allocated portion of the risks relating to claims over $200,000 on a per occurrence basis up to their limit of liability. The Company carries multiple reinsurance agreements, each with a specific limit of liability that, in the aggregate, provide protection for each claims occurrence up to $50,000,000 in excess of the Company's retention of $200,000. As a result of the Company's increased capitalization following the Offering, the Company intends to increase its retention under these agreements upon their renewal in July 1997. The Company historically has not encountered difficulties collecting from its reinsurers. The Company monitors ratings of its reinsurers and periodically consults with its reinsurer broker who also monitors the solvency of its reinsurers. The following table sets forth as of June 30, 1996 the names of the Company's primary reinsurance carriers (those which provide coverage in excess of $200,000 up to $5,000,000 per occurrence), their A.M. Best ratings, and the amount of reinsurance premiums ceded to each for the six months ended June 30, 1996. The A.M. Best ratings of the reinsurance carriers listed represent the two highest of nine ratings provided by A.M. Best.
REINSURANCE PREMIUMS REINSURANCE CARRIER RATING CEDED ------------------- ------ ----------- Reliance Insurance Company.............................. A- $ 2,344,000 Skandia America Reinsurance Corporation................. A- 1,938,000 TIG Reinsurance Corporation............................. A 1,175,000 St. Paul Fire & Marine Insurance Company................ A+ 801,000 TransAmerica Occidental Life Insurance Co............... A+ 381,000
Exclusions relative to the Company's managed workers' compensation products and services are generally limited to occupational disease exposures such as asbestosis, silicosis, brown lung and black lung. The 39 41 Company reviews each prospective client-employer to assess the potential exposure to these types of excluded diseases before the Company's products and services are offered. INFORMATION TECHNOLOGY AND COMMUNICATIONS SYSTEMS The Company uses its proprietary and other management information systems as an integral part of its operations and makes a substantial ongoing investment in improving its systems. The Company believes that the services it provides to its clients and their employees are enhanced by integrating its information systems to utilize more effectively the information it obtains in its underwriting processes in conjunction with information regarding claims, billing and claims management. The Company's direct agents, safety professionals and claims representatives are provided with laptop computers and other communication equipment in order to more timely and efficiently complete the underwriting process, to facilitate communication and to report and monitor claims. For example, the Company's safety professionals have the ability to prepare survey reports on-site and immediately assist potential clients with the design of workplace safety programs by providing examples of safety plans implemented by other employers in similar businesses. COMPETITION The market to provide managed care workers' compensation insurance and services is highly competitive. The Company's competitors include, among others, insurance companies, specialized provider groups, in-house benefits administrators, state insurance pools and other significant providers of health care and insurance services. A number of the Company's current and potential competitors are significantly larger, with greater financial and operating resources than those of the Company, and can offer their services nationwide. After a period of absence from the market, traditional national insurance companies have recently re-entered the workers' compensation insurance market, thereby increasing competition. Competitive factors in the workers' compensation insurance field include premium rates (in some states), levels of service, A.M. Best ratings, levels of capitalization, quality of managed care services, the ability to reduce loss ratios and the ability to reduce claims expense. The Company believes that its products and services are competitively priced. In addition, the Company believes its premium rates are typically lower than those for clients assigned to the state-sponsored risk pools, allowing the Company to provide a viable alternative for employers in such pools. The Company also believes that its level of service, its "A" (Excellent) A.M. Best rating and its ability to reduce claims are strong competitive factors that have enabled it to retain existing clients and attract new clients. Competitive factors relating to the Company's TPA products are primarily based upon pricing, service and reputation. REGULATION General. Managed health care programs are subject to various laws and regulations. Both the nature and degree of applicable government regulation vary greatly depending upon the specific activities involved. Generally parties that actually provide or arrange for the provision of managed care workers' compensation programs, assume financial risk related to the provision of those programs or undertake direct responsibility for making payment or payment decisions for those services are subject to a number of complex regulatory schemes that govern many aspects of their conduct and operations. The managed health care field is a rapidly expanding and changing industry; it is possible that the applicable regulatory frameworks will expand to have an even greater impact upon the conduct and operation of the Company's business. The Company's business is subject to state-by-state regulation of workers' compensation insurance and workers' compensation insurance management services. Under the workers' compensation system, employer insurance or self-funded coverage is governed by individual laws in each of the fifty states and by certain federal laws. Changes in individual state regulation of workers' compensation or managed health care may create a greater or lesser demand for some or all of the Company's services or may require the Company to develop new or modified services in order to meet the needs of the marketplace and compete effectively in that marketplace. Under Louisiana law, an insurance company may not, without regulatory approval, pay to its shareholders within a 12-month period dividends or other distributions of cash or property the total fair market 40 42 value of which exceeds the lesser of (i) ten percent of surplus as to policyholders at the end of the prior calendar year or (ii) the prior calendar year's net income (less any realized capital gains). This requirement would limit American Interstate's ability to make distributions to AMERISAFE in 1996 to approximately $2.7 million. Premium Rate Restrictions. State regulations governing the workers' compensation system and insurance business in general impose restrictions and limitations on the Company's business operations that are not imposed on unregulated businesses. Among other matters, state laws regulate not only what workers' compensation benefits must be paid to injured workers, but also the premium rates that may be charged by the Company to insure employers for those liabilities. As a consequence, the Company's ability to pay insured workers' compensation claims out of the premium revenue generated from the Company's sale of such insurance is dependent on the level of premium rates permitted by state laws. In this regard it is significant that the state regulatory agency that regulates workers' compensation benefits may not be the same agency that regulates workers' compensation insurance premium rates. Financial and Investment Restrictions. Insurance company operations also are subject to financial restrictions that are not imposed on other businesses. State laws require insurance companies to maintain minimum surplus balances and place limits on the amount of insurance a company may write based on the amount of the company's surplus. These limitations restrict the rate at which the Company's insurance operations can grow. The Company currently meets applicable state capital and surplus requirements. State laws also require insurance companies to establish reserves for payment of policyholder liabilities and impose restrictions on the kinds of assets in which insurance companies may invest. These restrictions may require the Company to invest its assets more conservatively than it would if it were not subject to the state law restrictions and may prevent the Company from obtaining as high a return on its assets as it might otherwise be able to realize. Insurance Regulatory Information System. The National Association of Insurance Commissioners ("NAIC") has developed a set of financial relationships or "tests" called the Insurance Regulatory Information System ("IRIS") that were designed for early identification of companies that may require special attention by insurance regulatory authorities. These tests were developed primarily to assist state insurance departments in executing their statutory mandate to oversee the financial condition of insurance companies. Insurance companies submit data on an annual basis to the NAIC, which in turn analyzes the date using ratios covering twelve categories of financial data with defined "usual ranges" for each category. Falling outside the usual range of IRIS ratios is not considered a failing result; rather, unusual values are viewed as part of the regulatory early monitoring system. Furthermore, in some years, it may not be unusual for financially sound companies to have several ratios with results outside the usual ranges. An insurance company may fall out of the usual range for one or more ratios because of specific transactions that are in themselves immaterial or eliminated at the consolidated level. Generally, an insurance company will become subject to regulatory scrutiny if it falls outside the usual ranges of four or more of the ratios. In normal years, 15% of the companies included in the IRIS system are expected by the NAIC to be outside the usual range on four or more ratios. In the three-year period ended December 31, 1995, American Interstate had IRIS ratios outside the usual ranges for the change in writings ratio in 1995 and the change in surplus ratio in 1993. The change in writings ratio was outside the usual range in 1995 due to the increase in premiums written. The change in surplus ratio was outside the usual range in 1993 due to the Company's increase in earnings and the acquisition of Silver Oak Casualty, Inc., which resulted in an increase in surplus. Participation in State Guaranty Funds. Every state has established one or more insurance guaranty funds or associations which are charged by state law to pay claims of policyholders insured by a company that becomes insolvent. All insurance companies must participate in the guaranty associations in the states where they do business and are assessable for the associations' operating costs, including the cost of paying policyholder claims against an insolvent insurer. The Company's financial performance could be adversely affected by guaranty association assessments as a consequence of the insolvency of other insurers over which the Company has no control. 41 43 Participation in State Residual Market Programs. Many of the states in which the Company is licensed, or intends to become licensed, to provide its managed workers' compensation products and services require that all licensed insurers participate in a program to provide workers' compensation insurance to those employers who have not or cannot procure coverage from a carrier on a negotiated basis. The level of required participation in such programs is generally determined by calculating the volume of the Company's voluntarily written business in that state as a percentage of all voluntarily written business in that state by all insurers. The resulting factor is the proportion of premium the Company must accept as a percentage of all of the premiums in policies residing in that state's residual market program. Companies generally have two methods of fulfilling their residual market obligations: (i) they may join a reinsurance pool in which the results of all policies provided through the pool are shared by the participating companies, or (ii) they may accept directly assigned policies for which they are obligated to provide all services and assume the underwriting results. Currently, the Company utilizes both methods, depending on management's evaluation of the most efficient method to adopt in each state. Generally, the Company believes that the direct-assignment method produces better results as the Company applies its managed results approach to these involuntary client-employers. In 1995 and for the three months ended June 30, 1996, approximately 6.7% and 7.7% of the Company's gross premiums earned, respectively, were from direct assignment residual market obligations. Statutory Accounting and Solvency Regulation. State regulation of insurance company financial transactions and financial condition is based on statutory accounting principles ("SAP"). SAP differs in a number of ways from generally accepted accounting principles ("GAAP") which govern the financial reporting of most other businesses. In general, SAP financial reports are more conservative than GAAP financial reports. State insurance regulators closely monitor the financial condition of insurance companies reflected in SAP financial statements and can impose significant financial and operating restrictions on an insurance company that becomes financially impaired. Regulators generally have the power to impose restrictions or conditions on the following kinds of activities of a financially impaired insurance company: the transfer or disposition of assets; the withdrawal of funds from bank accounts; the extension of credit or making of loans; and the investment of funds. State Subsequent Injury Funds. A number of states operate trust funds that reimburse employers and carriers for excess workers' compensation benefits paid to employees when an employee is injured on the job and the injury to the physically disabled worker merges with, aggravates or accelerates a preexisting work-related impairment. The state-managed trust funds are funded through assessments against insurers and self-insurers providing workers' compensation coverage in a specific state. At June 30, 1996, the Company carried receivables on its books from state subsequent injury funds of less than $500,000. State Insurance Department Examinations. The Company's insurance subsidiaries are subject to periodic examinations by state insurance departments in the states in which they operate. American Interstate was examined jointly by the Georgia and Louisiana Insurance Commissioners on December 31, 1992. Silver Oak Casualty, Inc., another subsidiary of the Company, was examined by the Louisiana Insurance Commissioner in 1993. Neither of these examinations produced any material adverse findings. The Company has not been notified that any future examinations have been scheduled. Possible Future Regulation. State legislatures and the federal government have considered and are considering a number of cost containment and health care reform proposals. The Company believes it may benefit from some proposals that favor the growth of managed care. However, no assurance can be given that the state or federal government will not adopt future health care reforms that would adversely affect the Company. In recent years the state insurance regulatory framework has come under increased federal scrutiny, and certain state legislatures have considered or enacted laws that altered and, in many cases, increased state authority to regulate insurance companies and insurance holding companies. Further, the NAIC and state insurance regulators are re-examining existing laws and regulations, specifically focusing on investment laws for insurers, modifications to holding company regulations, codification of statutory accounting practices, risk- 42 44 based capital guidelines, interpretations of existing laws and the development of new laws. In addition, Congress and certain federal agencies are investigating the current condition of the insurance industry in the United States to determine whether to impose federal regulation. The Company cannot predict with certainty the effect any proposed or future legislation or NAIC initiatives may have on the conduct of the Company's business or the financial condition or results of operations of the Company. PROPERTIES The Company owns its 43,000 square foot executive offices in DeRidder, Louisiana and leases its executive offices in Dallas, Texas. The Company also leases space at other locations for its service offices and claims representative offices. See "Certain Transactions and Relationships -- Office Sharing Agreement." EMPLOYEES The Company had 315 full-time employees at August 31, 1996. Of the Company's employees, approximately 50 perform administrative and financial functions and 265 serve on service and marketing teams providing its managed results services to its employer-clients. None of the Company's employees is subject to collective bargaining agreements. The Company believes that its employee relations are good. LEGAL PROCEEDINGS In the ordinary course of administering its workers' compensation managed results program, the Company is routinely involved in the adjudication of claims resulting from workplace injuries. Except as described below, the Company is not involved in any legal or administrative claims that it believes are likely to have a materially adverse effect on the Company's business, financial condition or results of operations. The Company's federal income tax return with respect to its 1992 tax year is currently subject to an audit by the IRS. The principal issues with respect to which the IRS has proposed adjustments relate to (i) whether the Company should have included in income at the time of receipt certain deposits it received from its clients to secure the payment of premiums, (ii) the timing of inclusion in income of certain unearned premiums and (iii) whether the Company's reserves for future claims were excessive. The aggregate amount of additional tax which would be owed by the Company if the proposed adjustments were sustained is approximately $3.3 million, plus accrued interest. Because the proposed adjustments relate to the timing of the receipt of income, they would not, if sustained, be expected to have an impact on the Company's results of operations, but would impact the Company's cash flow. The Company believes that it has meritorious defenses to the proposed adjustments and intends to contest them vigorously. The federal income tax returns filed by a subsidiary of the Company with respect to its 1990 and 1991 tax years are also presently subject to an audit by the IRS. During the years in question the corporation was not a subsidiary of the Company. The principal issue in this audit relates to the reasonableness of compensation paid by such corporation to Mr. Morris and another former officer-shareholder of the Company during such years. The IRS has proposed that a portion of the compensation paid to these individuals during such years is not deductible for federal income tax purposes, and that as a result the corporation owes additional tax in the amount of approximately $2.1 million, plus accrued interest. No penalties have been asserted by the IRS. The corporation believes that it has meritorious defenses to the proposed adjustments and is contesting them vigorously. In connection with the Reorganization, the MorTem Corporations have agreed to indemnify the Company and its affiliates for any liability they may have with respect to this tax audit. 43 45 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The names of the directors and executive officers of the Company and their ages and positions are as follows:
NAME AGE POSITION - ---------------------------------------- --- ------------------------------------- Millard E. Morris....................... 51 Chairman of the Board of Directors and Chief Executive Officer Mark R. Anderson........................ 44 President, Chief Operating Officer and Director John R. Buck............................ 35 Vice President, Chief Financial Officer, Treasurer and Director Arthur L. Hunt.......................... 51 Vice President -- Risk Group and Director C. Allen Bradley, Jr. .................. 45 Vice President -- Risk Services Group and General Counsel Andre Comeaux........................... 35 Vice President -- Product Development Zonie A. Harris......................... 61 Vice President -- Claims Services Craig P. Leach.......................... 46 Vice President -- Business Development Daniel J. Jessee........................ 43 Director N. David Spence......................... 60 Director
Millard E. Morris has been Chairman of the Board, Chief Executive Officer, and principal shareholder of the Company since its inception in 1985. Mr. Morris began his insurance career in 1972, and has owned and managed many diverse financial services operations. He is currently the Chairman of the Board and principal shareholder of Auto One Acceptance Corporation, a Dallas based financial services company. Mr. Morris has a Bachelor of Business Administration in Accounting and a Master of Science in Economics, both from Baylor University, and is a Certified Public Accountant. Mr. Morris serves in the class of Directors whose terms expire at the Company's 1999 annual meeting of shareholders. Mark R. Anderson began his insurance career in 1979 and joined the Company in 1986 as Vice President, Chief Operating Officer and Director. He was elected President in 1996, and has served as President of American Interstate since 1987. Mr. Anderson has served on various legislative insurance advisory committees in Louisiana, and has served as a workers' compensation rate and reform consultant to several southern Insurance Commissioners. He holds a Bachelor of Science degree from Louisiana State University and a Master of Science degree in Business Administration from Boston University. Mr. Anderson serves in the class of directors whose terms expire at the Company's 1998 annual meeting of shareholders. John R. Buck has been Vice President and Chief Financial Officer of the Company since 1989 and a Director since 1994. He served in various accounting positions with Zale Corporation's Insurance Group from 1983 to 1988 and joined American Interstate as Controller in 1988. Mr. Buck has Bachelor of Science degrees in Accounting and Business Administration from Illinois State University, and became a Certified Public Accountant in 1985. Mr. Buck serves in the class of directors whose terms expire at the Company's 1997 annual meeting of shareholders. Arthur L. Hunt has served as Secretary of the Company since 1991, was elected Vice President -- Risk Group in August 1996, and has been a Director since 1994. Prior to joining the Company, Mr. Hunt served twenty years in the United States Army. He served as a Judge Advocate General officer and retired after attaining the rank of Colonel. Mr. Hunt has a Bachelor of Science degree in Psychology from Loyola University and a law degree from the Loyola University School of Law, Chicago. Mr. Hunt serves in the class of directors whose terms expire at the Company's 1997 annual meeting of shareholders. 44 46 C. Allen Bradley, Jr. was elected Vice President -- Risk Services Group and General Counsel in August 1996. He joined a subsidiary of the Company in 1994 as an executive officer, and prior to that time was engaged in the private practice of law. Mr. Bradley also served as a Louisiana State Representative from 1984 to 1992. He holds a Bachelor of Arts degree from Southeastern Louisiana University and a law degree from Louisiana State University. Andre Comeaux has been Vice President -- Product Development since August 1996 and has been Industries Manager of American Interstate since April 1995. Mr. Comeaux began his career in the insurance industry in 1987 with AEtna Casualty & Surety Co., serving as an Engineering Consultant and Commercial Account Representative. In 1993, he joined American International Group as an Account Executive, Loss Control Services, and served in that capacity until he joined American Interstate. Mr. Comeaux holds a Bachelor of Science degree in Mechanical Engineering from the University of Southwestern Louisiana and is a Chartered Property Casualty Underwriter, a Certified Safety Professional and is licensed as a Professional Engineer by the state of California. He is recognized as a Qualified Field Safety Representative by the states of Texas and Arkansas and is recognized as an Associate in Loss Control Management by the Insurance Institute of America. Zonie A. Harris was elected Vice President -- Claims Services in August 1996. Since 1986 he has also served as Vice President, Claims for American Interstate. Mr. Harris has served with various affiliates of the Company and other insurance firms in claims management since 1972. Prior to his insurance career, Mr. Harris spent twenty years in the U.S. Air Force as a communications specialist. Craig P. Leach was elected Vice President -- Business Development in August 1996. He has served since 1994 as Senior Vice President of American Interstate, and has served in similar roles with affiliated firms since beginning his insurance career in 1980. Prior to 1980 Mr. Leach held various management positions with companies engaged in the paper and lumber industries. He holds both a Bachelor of Science degree and a Master of Science degree in Forestry from Louisiana State University. Mr. Leach currently serves on the board of directors of the Louisiana Forestry Association, and has served in an advisory capacity for the Southern Forest Insurance Coalition and various wood product companies throughout the country. Daniel J. Jessee has been a Director of the Company since August 1996. Since January 1995, Mr. Jessee has been Vice Chairman of Banc One Capital Corporation ("BOCC"), an investment banking firm and a subsidiary of Banc One Corporation. Prior to becoming Vice Chairman, he was a Managing Director of BOCC since August 1990. Mr. Jessee serves in the class of directors whose terms expire at the Company's 1999 annual meeting of shareholders. Mr. Jessee is also a director of RAC Financial Group, Inc. N. David Spence has been a Director of the Company since August 1996. Mr. Spence is a Senior Vice President and General Manager -- Paper Division of Boise Cascade Corporation ("BCC"). Mr. Spence joined BCC in 1969 and has served in various management positions since that time. Mr. Spence serves in the class of directors whose terms expire at the Company's 1998 annual meeting of shareholders. Mr. Spence is also a director of the American Forest & Paper Association and the Pacific Coast Association of Pulp & Paper Manufacturers. COMMITTEES The Bylaws provide that the Board of Directors may elect such directorate committees as it may from time to time determine. Two committees of the Board of Directors have been established: the Audit Committee and the Compensation Committee. The Audit Committee of the Board of Directors (the "Audit Committee") will review the professional services provided by the Company's independent accountants and the independence of such accountants from management of the Company. The Audit Committee will also review the scope of the audit coverage and annual financial statements of the Company and such other matters with respect to accounting, auditing practices and procedures of the Company as it may find appropriate or as may have been brought to its attention. The members of the Audit Committee are Messrs. Jessee and Spence. 45 47 The Compensation Committee of the Board of Directors (the "Compensation Committee") will review and approve executive salaries and administer bonus, stock option and incentive compensation plans of the Company. It will advise and consult with management regarding significant employee benefit policies and practices and significant compensation policies and practices of the Company. The members of the Compensation Committee are Messrs. Jessee and Spence. LIMITATION OF LIABILITY AND INDEMNIFICATION As authorized by the Texas Miscellaneous Corporation Laws (the "TMCL"), the Company's Articles provide that, to the full extent permitted by the TMCL or any other applicable laws as presently or hereafter in effect, no director of the Company shall be personally liable to the Company for an act or omission in his capacity as a director of the Company. The TMCL does not permit limitation of liability of any director (i) for a breach of the director's duty of loyalty to the Company or its shareholders, (ii) for acts or omissions not in good faith that constitute a breach of duty of the director or an act or omission that involves intentional misconduct or a knowing violation of the law, (iii) a transaction from which the director received an improper personal benefit, or (iv) an act or omission for which liability of a director is expressly provided by an applicable statute. The principal effect of the limitation of liability provision is that a shareholder is unable to prosecute an action for monetary damages against a director of the Company unless the shareholder can demonstrate one of the specified bases of liability. Additionally, the Company's Articles and Bylaws provide that the Company shall indemnify all directors, officers, agents or employees of the Company to the fullest extent permitted by the Texas Business Corporation Act ("TBCA"). The TBCA establishes the standard which permits a corporation to provide indemnification, except when shareholder approval for the indemnification has been obtained. The TBCA provides that a director may be indemnified for liabilities and expenses in respect to actions brought against him by reason of his serving as a director if he conducted himself in good faith and reasonably believed that (i) in the case of conduct in his official capacity as a director, his conduct was in the Company's best interests, and (ii) in all other cases, that his conduct was at least not opposed to the best interests of the Company. Indemnification for criminal actions also requires the director to have no reason to believe his conduct was unlawful. In addition, if the director is found liable to the Company or on the basis that a personal benefit was improperly received by him, indemnification will be limited to expenses actually incurred and will not be available if the director is found liable for willful or intentional misconduct in the performance of his duty to the Company. The Company has entered into certain agreements ("Indemnification Agreements") with each of its directors and executive officers designed to give effect to the foregoing provisions of the Articles and Bylaws and to provide certain additional assurances against the possibility of uninsured liability. The effect of these provisions and the Indemnification Agreements will be to eliminate the right of the Company and its shareholders (through shareholders' derivative suits on behalf of the Company) to recover monetary damages against a director for breach of fiduciary duty as a director except as described therein. The provisions of the Articles and Bylaws and the Indemnification Agreements will not alter the liability of directors of the Company under federal securities laws. 46 48 EXECUTIVE COMPENSATION The following table provides information concerning the annual and long-term compensation for services paid or accrued by the Company for the fiscal year ended December 31, 1995 to (i) the Company's chief executive officer and (ii) each other executive officer of the Company whose total annual salary and bonus exceeded $100,000, based on salary and bonuses earned during 1995 (collectively, the "Named Officers"). SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION --------------------------------------- OTHER ANNUAL ALL OTHER NAME AND PRINCIPAL POSITION SALARY BONUS(1) COMPENSATION(2) COMPENSATION - ------------------------------------------- -------- -------- --------------- ------------ Millard E. Morris.......................... $268,750 $750,000 -- $1,185(3) Chairman of the Board of Directors and Chief Executive Officer Mark R. Anderson........................... 150,000 265,000 -- 16,845(4) President and Chief Operating Officer Craig P. Leach............................. 122,248 92,139 -- 27,285(5) Vice President -- Business Development C. Allen Bradley, Jr....................... 120,010 50,000 -- 600(6) Vice President -- Risk Services Group and General Counsel John R. Buck............................... 85,000 35,000 -- 6,100(7) Vice President, Chief Financial Officer and Treasurer
- --------------- (1) Reflects bonus earned during the 1995 fiscal year. In all cases, the bonus has been or will be paid during the 1996 fiscal year and was accrued in the Company's balance sheet as of December 31, 1995. (2) None of the Named Officers received personal benefits, securities or property in excess of the lesser of $50,000 or 10% of such individual's reported salary and bonus. (3) Consists of Company contributions to the Company's 401(k) Plan (the "401(k) Plan"). (4) Consists of $1,185 of Company contributions to the 401(k) Plan and $15,660 in premiums on a life insurance policy for Mr. Anderson's benefit. (5) Consists of $1,185 of Company contributions to the 401(k) Plan and $26,100 in premiums on a life insurance policy for Mr. Leach's benefit. (6) Consists of Company contributions to the 401(k) Plan. (7) Consists of $880 of Company contributions to the 401(k) Plan and $5,220 in premiums on a life insurance policy for Mr. Buck's benefit. EMPLOYMENT AGREEMENTS In connection with the Offering, the Company entered into an employment agreement (the "Employment Agreement") with each of Messrs. Morris, Anderson, Buck, Leach and Bradley (each, an "Executive Officer") that expires on the third anniversary of the Offering. Pursuant to the Employment Agreements, Mr. Morris serves as Chairman of the Board of Directors and Chief Executive Officer of the Company and is paid an annual base salary of $450,000, Mr. Anderson serves as President and Chief Operating Officer of the Company and is paid an annual base salary of $275,000, Mr. Buck serves as Vice President, Chief Financial Officer and Treasurer of the Company and is paid an annual base salary of $120,000, Mr. Leach serves as Vice President -- Business Development of the Company and is paid an annual base salary of $125,000, and Mr. Bradley serves as Vice President -- Risk Services Group and General Counsel of the Company and is 47 49 paid an annual base salary of $120,000. In addition to their annual base salaries, each of the Executive Officers is entitled to receive an annual bonus at the discretion of the Board of Directors. The Employment Agreements provide for salary adjustments at the discretion of the Board of Directors and further provide that the Executive Officers will be entitled to participate in Company-sponsored employee benefit plans or arrangements and other benefits generally available to employees of the Company. Each Employment Agreement provides that if the Executive Officer's employment is involuntarily terminated by the Company other than for "cause" (as defined in the Employment Agreement), the Executive Officer, subject to certain conditions, shall receive termination payments calculated in accordance with the Employment Agreement and the continuation of all welfare benefits for a period of one year after the date of termination. Subject to certain exceptions, each Executive Officer's Employment Agreement prohibits him from competing with or working for a competitor of the Company or any of its subsidiaries for a period of one year after the termination of his employment with the Company, if his employment is involuntarily terminated by the Company other than for "cause". Upon the expiration of the initial three-year term and on each subsequent anniversary thereof, each Employment Agreement automatically renews for an additional one-year period unless earlier terminated by either party upon 90 day's notice given prior to the end of the initial term or any extension. Mr. Morris' Employment Agreement does not provide for him to devote his full time to the business and affairs of the Company. STOCK INCENTIVE PLAN General. The Board of Directors of the Company adopted the AMERISAFE, Inc. 1996 Stock Incentive Plan (the "Stock Incentive Plan") on August 5, 1996, subject to approval by the shareholders of the Company. A majority of the holders of the Common Stock of the Company approved the Stock Incentive Plan on August 5, 1996. The purpose of the Stock Incentive Plan is to enable the Company to attract and retain directors, officers and other key employees and to provide them with appropriate incentives and rewards for superior performance. The Stock Incentive Plan is to be administered by the Board of Directors of the Company (the "Board") or a duly authorized committee thereof. The Board has delegated administrative authority with respect to the Plan to the Compensation Committee. The Stock Incentive Plan affords the Compensation Committee the flexibility to respond to changes in the competitive and legal environments, thereby protecting and enhancing the Company's current and future ability to attract and retain officers and other key employees and consultants. The Stock Incentive Plan authorizes the granting of options to purchase shares of Class A Common Stock ("Option Rights"), stock appreciation rights ("Appreciation Rights") and restricted shares ("Restricted Shares"). The terms applicable to these various types of awards, including those terms that may be established by the Compensation Committee when making or administering particular awards, are set forth in detail in the Stock Incentive Plan. Summary of Stock Incentive Plan. Shares Available Under the Stock Incentive Plan. Subject to adjustment as provided in the Stock Incentive Plan, the number of shares of Class A Common Stock that may be issued or transferred, plus the number of shares of Class A Common Stock covered by outstanding awards granted under the Stock Incentive Plan, shall not in the aggregate exceed 3,000,000. Eligibility. Directors, officers and other salaried employees of the Company or its subsidiaries may be selected by the Compensation Committee to receive benefits under the Stock Incentive Plan. The Stock Incentive Plan provides that, in the event the Board of Directors of the Company authorizes a committee thereof to administer the Stock Incentive Plan, grants awarded to members of such committee will require the approval of the Board of Directors of the Company. Option Rights. The Compensation Committee may grant Option Rights that entitle the optionee to purchase shares of Class A Common Stock. The option price is payable at the time of exercise (i) in cash or cash equivalents, (ii) by the transfer to the Company of shares of Class A Common Stock that are already 48 50 owned by the optionee and have a value at the time of exercise equal to the option price, (iii) with any other legal consideration the Compensation Committee may deem appropriate, or (iv) by any combination of the foregoing methods of payment. Any grant may provide for deferred payment of the option price from the proceeds of sale through a broker of some or all of the shares of Class A Common Stock to which the exercise relates. Option Rights granted under the Stock Incentive Plan may be Option Rights that are intended to qualify as "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or Option Rights that are not intended to so qualify. At or after the date of grant of any nonqualified Option Rights, the Compensation Committee may provide for the payment of dividend equivalents to the optionee on a current, deferred or contingent basis or may provide that dividend equivalents be credited against the option price. The Compensation Committee has the authority to specify at the time Option Rights are granted that shares of Class A Common Stock will not be accepted in payment of the option price until they have been owned by the optionee for a specified period; however, the Stock Incentive Plan does not require any such holding period and would permit immediate sequential exchanges of shares of Class A Common Stock at the time of exercise of Option Rights. No Option Right may be exercised more than 10 years from the date of grant. Each grant must specify the conditions, including as and to the extent determined by the Compensation Committee, the period of continuous employment or continuous engagement of consulting services by the Company that are necessary before the Option Rights will become exercisable, and may provide for the earlier exercise of the Option Rights, including, without limitation, in the event of a change in control of the Company or other similar transaction or event. Successive grants may be made to the same optionee regardless of whether Option Rights previously granted to him or her remain unexercised. Appreciation Rights. Appreciation Rights granted under the Stock Incentive Plan may be either free-standing or granted in tandem with Option Rights. An Appreciation Right represents the right to receive from the Company the difference (the "Spread"), or a percentage thereof not in excess of 100 percent, between the base price per share of Class A Common Stock in the case of a free-standing Appreciation Right, or the option price of the related Option Right in the case of a tandem Appreciation Right, and the market value of the Class A Common Stock on the date of exercise of the Appreciation Right. Tandem Appreciation Rights may only be exercised at a time when the related Option Right is exercisable and the Spread is positive, and the exercise of a tandem Appreciation Right requires the surrender of the related Option Right for cancellation. A free-standing Appreciation Right must have a base price that is at least equal to the fair market value of a share of Class A Common Stock on the date of grant, must specify the conditions, including as and to the extent determined by the Compensation Committee, the period of continuous employment or continuous engagement of consulting services and may not be exercised more than 10 years from the date of grant. Any grant of Appreciation Rights may specify that the amount payable by the Company upon exercise may be paid in cash, shares of Class A Common Stock or combination thereof and the Compensation Committee may either reserve or grant to the recipient the right to elect among those alternatives. The Compensation Committee may provide with respect to any grant of Appreciation Rights for the payment of dividend equivalents thereon in cash or Class A Common Stock on a current, deferred or contingent basis and for the exercise of the Appreciation Rights upon a change in control. Restricted Shares. An award of Restricted Shares involves the immediate transfer by the Company to a participant of ownership of a specific number of shares of Class A Common Stock in consideration of the performance of services. The participant is entitled immediately to voting, dividend and other ownership rights in the shares of Class A Common Stock. The transfer may be made without additional consideration or for consideration in an amount that is less than the market value of the shares on the date of grant, as the Compensation Committee may determine. Restricted Shares may be subject to a "substantial risk of forfeiture" within the meaning of Section 83 of the Code for a period to be determined by the Compensation Committee. An example would be a provision that the Restricted Shares would be forfeited if the participant ceased to serve the Company as a director, officer or other salaried employee during a specified period of years. In order to enforce these forfeiture 49 51 provisions, the transferability of Restricted Shares will be prohibited or restricted in a manner and to the extent prescribed by the Compensation Committee for the period during which the forfeiture provisions are to continue. The Compensation Committee may provide for a shorter period during which the forfeiture provisions are to apply, including, without limitation, in the event of a change in control of the Company any or other similar transaction or event. Transferability. Unless the agreement evidencing such grant provides otherwise, no Option Right, or other "derivative security" within the meaning of Rule 16b-3 under the Exchange Act will be transferable by a participant except by will or the laws of descent and distribution. Option Rights may not be exercised during a participant's lifetime except by the participant or, in the event of his or her incapacity, by his or her guardian or legal representative acting in a fiduciary capacity on behalf of the participant under the state law and court supervision. Adjustments. The maximum number of shares of Class A Common Stock that may be issued or transferred under the Stock Incentive Plan, the number of shares covered by outstanding awards and the option prices per share applicable thereto, are subject to adjustment in the event of stock dividends, stock splits, combinations of shares, recapitalizations, mergers, consolidations, spin-offs, reorganizations, liquidations, issuances of rights or warranties, and similar transactions or events. In the event of any such transaction or event, the Compensation Committee may in its discretion provide in substitution for any or all outstanding awards under the Stock Incentive Plan such alternative consideration as it may in good faith determine to be equitable in the circumstances and may require the surrender of all awards so replaced. Administration. The Stock Incentive Plan is administered by the Compensation Committee. In connection with its administration of the Stock Incentive Plan, the Compensation Committee is authorized to interpret the Stock Incentive Plan and related agreements and other documents. The Compensation Committee may make grants to participants under any or a combination of all of the various categories of awards that are authorized under the Stock Incentive Plan and may provide for special terms for awards to participants who are foreign nationals, as the Compensation Committee may consider necessary or appropriate to accommodate differences in local law, tax policy or custom. Amendments. The Stock Incentive Plan may be amended from time to time by the Compensation Committee, but without further approval by the shareholders of the Company no such amendment (unless expressly allowed pursuant to the adjustment provisions described above) may cause Rule 16b-3 under the Exchange Act to cease to be applicable to the Stock Incentive Plan. Federal Income Tax Consequences. The following is a brief summary of certain of the federal income tax consequences of certain transactions under the Stock Incentive Plan based on federal income tax laws in effect on the date of this Prospectus. This summary is not intended to be exhaustive and does not describe state or local tax consequences. Nonqualified Option Rights. In general: (i) no income will be recognized by an optionee at the time a nonqualified Option Right is granted; (ii) at the time of exercise of a nonqualified Option Right, ordinary income will be recognized by the optionee in an amount equal to the difference between the option price paid for the shares of Class A Common Stock and the fair market value of such shares if they are nonrestricted on the date of exercise; and (iii) at the time of sale of shares acquired pursuant to the exercise of a nonqualified Option Right, any appreciation (or depreciation) in the value of such shares after the date of exercise will be treated as either short-term capital gain (or loss) depending on how long the shares of Class A Common Stock have been held. Incentive Stock Options. No income generally will be recognized by an optionee upon the grant or exercise of an incentive stock option. If shares of Class A Common Stock are issued to an optionee pursuant to the exercise of an incentive stock option and no disqualifying disposition of the shares is made by the optionee within two years after the date of grant or within one year after the transfer of the shares to the optionee, then upon the sale of the shares any amount realized in excess of the option price will be taxed to the optionee as long-term capital gain and any loss sustained will be long-term capital loss. 50 52 If shares of Class A Common Stock acquired upon the exercise of an incentive stock option are disposed of prior to the expiration of either holding period described above, the optionee generally will recognize ordinary income in the year of disposition in an amount equal to any excess of the fair market value of the shares of Class A Common Stock at the time of exercise (or, if less, the amount realized on the disposition of the shares in a sale or exchange) over the option price paid for the shares. Any further gain (or loss) realized by the optionee generally will be taxed as short-term or long-term capital gain (or loss) depending on the holding period. Restricted Shares. A recipient of Restricted Shares generally will be subject to tax at ordinary income rates on the fair market value of the Restricted Shares reduced by any amount paid by the recipient at such time as the shares are no longer subject to a risk of forfeiture or restrictions on transfer for purposes of Section 83 of the Code. However, a recipient who so elects under Section 83(b) of the Code within 30 days of the date of transfer of the shares will have taxable ordinary income on the date of transfer of the shares equal to the excess of the fair market value of the shares (determined without regard to the risk of forfeiture or restrictions on transfer) over any purchase price paid for the shares. If a Section 83(b) election has not been made, any non-restricted dividends received with respect to Restricted Shares that are subject at that time to a risk of forfeiture or restrictions on transfer generally will be treated as compensation that is taxable as ordinary income to the recipient. Special Rules Applicable to Officers and Directors. In limited circumstances where the sale of shares of Class A Common Stock that are received as the result of a grant of an award could subject an officer or director to suit under Section 16(b) of the Exchange Act, the tax consequences to the officer or director may differ from the tax consequences described above. In these circumstances, unless a special election has been made, the principal difference usually will be to postpone valuation and taxation of the shares of Class A Common Stock received so long as the sale of shares of Class A Common Stock received could subject the officer or director to suit under Section 16(b) of the Exchange Act, but no longer than six months. Tax Consequences to the Company. To the extent that a participant recognized ordinary income in the circumstance described above, the Company or subsidiary for which the participant performs services will be entitled to a corresponding deduction provided that, among other things, the income meets the test of reasonableness, is an ordinary and necessary business expense, is not subject to the annual compensation limitation set forth in Section 162(m) of the Code and is not an "excess parachute payment" within the meaning of Section 280G of the Code. Awards. Option Rights with respect to a total of 600,000 shares of Class A Common Stock have been granted under the Stock Incentive Plan, including Option Rights granted to executive officers of the Company as set forth in the table below. The Option Rights are exercisable at a price equal to $12.00 per share and vest in equal increments on each of the first five anniversaries of the date of grant.
OPTION RIGHTS GRANTEE GRANTED ------- ------------- Mark R. Anderson...................................... 120,000 Craig P. Leach........................................ 160,000 John R. Buck.......................................... 80,000 Zonie A. Harris....................................... 60,000 Arthur L. Hunt........................................ 60,000 C. Allen Bradley, Jr.................................. 40,000 Andre Comeaux......................................... 20,000
In addition, an aggregate of 60,000 Option Rights have been granted to certain non-executive employees of the Company on the same terms as the grants to executive officers. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Prior to August 1996, the Company did not have a Compensation Committee or other committee of the Board of Directors performing similar functions. Decisions concerning compensation of executive officers of 51 53 the Company were made by the Company's Board of Directors. After the Offering, compensation decisions will be made by the Compensation Committee, currently consisting of Messrs. Jessee and Spence. DIRECTOR COMPENSATION Directors who are employees of the Company will not be paid any fees or additional compensation for service as members of the Board of Directors or any committee thereof. Each non-employee director will receive $3,500 for each meeting of the Board of Directors attended. Upon completion of the Offering, non-employee directors will also receive a grant of 3,000 Restricted Shares under the Stock Incentive Plan. Such grant will vest ratably over a three-year period with 1,000 shares vesting on the first anniversary of the date of grant and 1,000 shares vesting on each of the next two succeeding anniversaries. If a non-employee director's membership on the Board of Directors of the Company is terminated for any reason (other than death or disability), the shares of restricted Class A Common Stock that have not yet vested as of the date of such termination will be forfeited. See "-- Stock Incentive Plan" above. All directors will be reimbursed for travel and other related expenses incurred in attending meetings of the Board of Directors or any committee thereof. PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock as of August 31, 1996 by: (i) each of the Company's directors and Named Officers; (ii) all executive officers and directors of the Company as a group; and (iii) each person known by the Company to be the beneficial owner of more than five percent of the outstanding Common Stock. Except as otherwise noted, each of the holders listed below has sole voting power and investment power over the shares beneficially owned.
SHARES OF COMMON SHARES OF COMMON STOCK BENEFICIALLY STOCK BENEFICIALLY OWNED PRIOR TO THE OWNED AFTER THE OFFERING(1) OFFERING(1) NAME OF --------------------- --------------------- BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT ---------------- ---------- ------- ---------- ------- Millard E. Morris(2)....................... 17,126,521 98.4% 17,126,521 60.3% Mark R. Anderson........................... 273,479 1.6 273,479 1.0 John R. Buck............................... -- 0 -- 0 Arthur L. Hunt............................. -- 0 -- 0 Daniel J. Jessee........................... -- 0 -- 0 N. David Spence............................ -- 0 -- 0 Craig P. Leach............................. -- 0 -- 0 C. Allen Bradley, Jr. ..................... -- 0 -- 0 All Directors and Executive Officers as a Group (10 Persons)....................... 17,400,000 100.0% 17,400,000 61.3%
- --------------- (1) All shares of Common Stock beneficially owned by Messrs. Morris and Anderson are shares of Class B Common Stock, representing respectively 98.4% and 1.6% of the outstanding Class B Common Stock both before and after the Offering. Excludes 6,000 shares of Class A Common Stock to be issued to non-employee directors of the Company upon completion of the Offering pursuant to the Stock Incentive Plan. (2) Mr. Morris' business address is 5550 LBJ Freeway, Suite 901, Dallas, Texas 75240. 52 54 CERTAIN TRANSACTIONS AND RELATIONSHIPS REGISTRATION RIGHTS AGREEMENT In connection with the Offering, the Company granted certain registration rights to Messrs. Morris and Anderson. See "Description of Capital Stock -- Registration Rights." TAX MATTERS AGREEMENT The Company has entered into a Tax Matters Agreement with the Distributed Subsidiaries to provide for (i) the allocation of payments of taxes for periods during which the Company (or any of its affiliates other than the Distributed Subsidiaries and the direct and indirect subsidiaries thereof) and any of the Distributed Subsidiaries or the direct or indirect subsidiaries thereof are included in the same consolidated group for federal income tax purposes, (ii) the allocation of responsibility for the filing of tax returns, the conducting of tax audits and the handling of tax controversies, and (iii) various related matters. SERVICES AGREEMENT In connection with the Reorganization, the Company and Auto One Acceptance Corporation ("AOAC"), which will be owned by Messrs. Morris and Anderson following the Reorganization, entered into a services agreement (the "Services Agreement"), pursuant to which the Company will continue to provide various services to AOAC, including payroll, human resources, legal, internal audit, benefits administration and similar administrative and management services that the Company has historically provided to AOAC. For such services, AOAC will pay the Company a fee of $40,000 per month, which the Company believes will cover its costs to provide these services. The Services Agreement is terminable by either the Company or AOAC on 90 days prior notice, provided however, that neither party may terminate the Services Agreement prior to the first anniversary date of the Offering. As a result of the Company's affiliation with AOAC, the terms of the Services Agreement were not, and the terms of any future amendments to the Services Agreement may not be, the result of arm's-length negotiation. OFFICE SHARING AGREEMENT The Company has entered into an office sharing agreement with AOAC for its 2,500 square foot executive offices in Dallas, Texas. Under the terms of this agreement, the Company will pay to AOAC $3,700 per month, which approximates the Company's pro rata share of the cost to AOAC to lease the facilities. This agreement may be terminated by either party upon 90 days' written notice. AIRCRAFT AGREEMENT The Company and AOAC have entered into an aircraft agreement (the "Aircraft Agreement") pursuant to which AOAC may use the aircraft owned by the Company for travel by AOAC's senior management in the course of AOAC's businesses. AOAC will be charged a fee for the use of such aircraft at a rate of $5,000 per month plus an additional amount based on the number of nautical miles traveled. The Company believes that the amounts payable by AOAC under the Aircraft Agreement approximate AOAC's pro rata share of the expenses related to the Company's ownership and operation of the aircraft. The Aircraft Agreement has an initial term of one year and may be terminated thereafter by either party on 90 days' written notice. TRANSACTIONS WITH BANC ONE CORPORATION Daniel J. Jessee, a director of the Company, is a member of the investment committee of Banc One Capital Partners II, Ltd., the lender under the Company's existing credit agreement. Banc One Capital Corporation, a subsidiary of Banc One Corporation and of which Mr. Jessee is Vice Chairman, received a fee of $125,000 from the Company for its services in the arrangement and placement of this credit agreement. Borrowings under this credit agreement will be repaid in full with a portion of the proceeds of this Offering. See "Use of Proceeds." 53 55 DESCRIPTION OF CAPITAL STOCK GENERAL The authorized capital stock of the Company consists of 100,000,000 shares of Class A Common Stock, par value $.01 per share, 100,000,000 shares of Class B Common Stock, par value $.01 per share, and 25,000,000 shares of Preferred Stock, par value $.01 per share. As of the date of this Prospectus and without giving effect to the shares of Class A Common Stock to be sold in the Offering, there were no shares of Class A Common Stock, 17,400,000 shares of Class B Common Stock and no shares of Preferred Stock issued and outstanding. All outstanding shares of Class B Common Stock are, and the shares of Class A Common Stock offered hereby will be, upon payment thereof, fully paid and nonassessable. The Class A Common Stock and the Class B Common Stock are referred to in this Prospectus collectively as the "Common Stock." CLASS A COMMON STOCK AND CLASS B COMMON STOCK Voting Rights. Each share of Class A Common Stock is entitled to one vote and each share of Class B Common Stock is entitled to ten votes on all matters submitted to a vote of the shareholders. Except as otherwise required by law, the holders of the Class A Common Stock and the Class B Common Stock vote together as a single class on all matters that may be submitted to a vote or consent of the shareholders, including the election of directors. The Common Stock does not have any cumulative voting rights. Accordingly, immediately after the Offering, Mr. Morris will retain effective control of the Company through holding approximately 92.6% of the combined voting power of the outstanding Common Stock (91.8% if the Underwriters' over-allotment option is exercised in full). Conversion. Class A Common Stock has no conversion rights. Each share of Class B Common Stock will be convertible at any time, at the option of and without cost to the shareholder, into one share of Class A Common Stock upon surrender to the Company's transfer agent of the certificate or certificates evidencing the Class B Common Stock to be converted, together with a written notice of the election of such shareholder to convert such shares into Class A Common Stock. Shares of Class B Common Stock will also be automatically converted into shares of Class A Common Stock upon the transfer of such shares of Class B Common Stock, except as a result of (i) a transfer to a record holder's spouse, (ii) a transfer to any lineal descendant of any grandparent of a record holder, including adopted children and any such descendant's spouse, (iii) a transfer by will or by the laws of descent and distribution, or (iv) a transfer to a voting trust or other trust (including a distribution from such trust to the trust beneficiaries), to a corporation, partnership or other entity controlled by the beneficial owner of such shares, or to the individual beneficial owner of such shares or to any such entity that will become controlled by the beneficial owner of such shares immediately after the transfer or series of transfers within any ten (10) day period. Once shares of Class B Common Stock are converted into shares of Class A Common Stock, such shares may not be converted back into Class B Common Stock. Dividends and Liquidation Rights. The holders of Class A Common Stock and Class B Common Stock are entitled to receive dividends out of assets legally available therefor at such times and in such amounts as the Board of Directors may from time to time determine, subject to any preferential dividend rights of outstanding Preferred Stock, if any. Upon liquidation and dissolution of the Company, the holders of Class A Common Stock and Class B Common Stock are entitled to receive all assets available for distribution to shareholders, subject to any preferential amounts payable to holders of Preferred Stock, if any. Other Rights. The holders of Class A Common Stock and Class B Common Stock are not entitled to preemptive or subscription rights, and there are no redemption or sinking fund provisions applicable to such Common Stock. PREFERRED STOCK Under the Articles, the Company has authority to issue 25,000,000 shares of Preferred Stock. As of the date of this Prospectus, no shares of Preferred Stock are outstanding and the Company has no present intention to issue any shares of Preferred Stock. 54 56 Preferred Stock may be issued, from time to time in one or more series, and the Board of Directors, without further approval of the shareholders, is authorized to fix the dividend rights and terms, redemption rights and terms, liquidation preferences, conversion rights, voting rights and sinking fund provisions applicable to each such series of Preferred Stock. If the Company issues a series of Preferred Stock in the future that has voting rights or preference over the Common Stock with respect to the payment of dividends and upon the Company's liquidation, dissolution or winding up, the rights of the holders of the Common Stock offered hereby may be adversely affected. The issuance of shares of Preferred Stock could be utilized, under certain circumstances, in an attempt to prevent an acquisition of the Company. REGISTRATION RIGHTS The Company and Millard E. Morris, the Company's Chairman of the Board and Chief Executive Officer and Mark R. Anderson, the Company's President, have entered into a Registration Rights Agreement which expires on June 30, 2007. Under this Registration Rights Agreement, beginning after June 30, 1997, Mr. Morris has the right to request the Company to effect four registrations of Class A Common Stock, subject to the right of the other shareholders to be included in such registrations and other conditions and limitations, provided that the number of shares of Class A Common Stock to be included in each such registration is not less than 1,000,000. The Registration Rights Agreement also grants secondary offering rights ("piggy back" rights) to Messrs. Morris and Anderson and, in certain cases, their transferees, subject to certain conditions and limitations, in connection with any registration of Class A Common Stock by the Company, which rights may be exercised beginning after June 30, 1997. As of the date of this Prospectus, an aggregate of 17,400,000 shares of Class A Common Stock are subject to the registration rights described above, assuming full conversion by Messrs. Morris and Anderson of their Class B Common Stock into Class A Common Stock. In all such registrations, the Company is required under the Registration Rights Agreement to bear the expenses of registration. While Messrs. Morris and Anderson have certain priority rights in such registrations, the Company has retained the right to grant registration rights to other persons, including its officers and directors. ANTI-TAKEOVER PROVISIONS The Articles contain provisions which provide for a classified board of directors consisting of three classes with directors serving staggered three-year terms. Therefore, only one-third of the directors are subject to election by the shareholders each year. The Articles also include provisions eliminating the personal liability of the Company's directors for monetary damages resulting from breaches of their fiduciary duty to the extent permitted by the TBCA. The Articles and Bylaws include provisions indemnifying the Company's directors and officers to the full extent permitted by the TBCA, including under certain circumstances in which indemnification is otherwise discretionary. See "Management -- Limitation of Liability and Indemnification." The Articles and Bylaws contain a number of provisions relating to corporate governance and to the rights of shareholders. These provisions include (i) a requirement that special meetings of shareholders may be called only by the Chairman, the President, the Board of Directors or upon the request of shareholders owning 50% or more of the shares entitled to vote at the meeting, (ii) the authority of the Board of Directors to issue series of Preferred Stock with such voting rights and other powers as the Board of Directors may determine, and (iii) notice requirements in the Bylaws relating to nominations to the Board of Directors and to the raising of business matters at shareholder meetings. The provisions of the TBCA and the Articles and Bylaws discussed above would make more difficult or discourage a proxy contest or the acquisition of control by a holder of a substantial block of the Company's stock or the removal of the incumbent Board of Directors. Such provisions could also have the effect of discouraging a third party from making a tender offer or otherwise attempting to obtain control of the Company, even though such an attempt might be beneficial to the Company and its shareholders. In addition, since these provisions are designed to discourage accumulations of large blocks of the Company's stock by purchasers whose objective is to have such stock repurchased by the Company at a premium, such provisions could tend to reduce the temporary fluctuations in the market price of the Class A Common Stock which are 55 57 caused by such accumulations. Accordingly, shareholders could be deprived of certain opportunities to sell their stock at a temporarily higher market price. The Company is also subject to certain provisions of Louisiana law applicable to insurance holding companies. Those laws prohibit the merger or acquisition of control of a domestic insurer or any person controlling a domestic insurer without the prior approval of the proposed transaction by the Louisiana Department of Insurance. TRANSFER AGENT AND REGISTRAR American Stock Transfer & Trust Company is the transfer agent and registrar for the Class A Common Stock. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have outstanding 11,000,000 shares of Class A Common Stock (assuming the Underwriters' over-allotment option is not exercised) and 17,400,000 shares of Class B Common Stock. The Class B Common Stock is convertible on a share-for-share basis into Class A Common Stock and must be converted to effect any public sale of such stock. Of these outstanding shares, the 11,000,000 shares of Class A Common Stock sold in the Offering will be freely tradeable without restriction under the Securities Act, except for any shares purchased by an "affiliate" of the Company (as that term is defined in the Securities Act), which will be subject to the resale limitations of Rule 144 adopted under the Securities Act. The 17,400,000 outstanding shares of Class B Common Stock are "restricted" securities within the meaning of Rule 144 and may not be resold in a public distribution (before or upon conversion into Class A Common Stock) except in compliance with the registration requirements of the Securities Act or pursuant to Rule 144. In general, under Rule 144 as currently in effect, an affiliate of the Company, or person (or persons whose shares are aggregated) who has beneficially owned restricted shares for at least two years from the later of the date such restricted shares were acquired from the Company and (if applicable) the date they were acquired from an affiliate, but less than three years, will be entitled to sell in any three-month period a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of Class A Common Stock (approximately 110,000 shares immediately after the Offering) or (ii) the average weekly trading volume in the public market during the four calendar weeks immediately preceding the date on which notice of the sale is filed with the Commission. Sales pursuant to Rule 144 are subject to certain requirements relating to manner of sale, notice and availability of current public information about the Company. Affiliates may sell shares not constituting restricted shares in accordance with the foregoing volume limitations and other restrictions, but without regard to the two-year holding period. A person (or persons whose shares are aggregated) who is not deemed to have been an affiliate of the Company at any time during the 90 days immediately preceding the sale and who has beneficially owned his or her shares for at least three years from the later of the date such restricted shares were acquired from the Company and (if applicable) the date they were acquired from an affiliate is entitled to sell such shares pursuant to Rule 144(k) without regard to the limitations described above. As defined in Rule 144, an "affiliate" of an issuer is a person who directly, or indirectly through the use of one or more intermediaries, controls, or is controlled by, or is under common control with, such issuer. Rule 144A under the Securities Act as currently in effect permits the immediate sale by current holders of restricted shares of all or a portion of their shares to certain qualified institutional buyers described in Rule 144A, subject to certain conditions. The Company and Messrs. Morris and Anderson, the Company's current shareholders, who in the aggregate hold beneficially 17,400,000 shares of Class B Common Stock, have agreed that they will not offer, sell, contract to sell, grant any option to purchase, or otherwise dispose of any shares of Class A Common Stock of the Company or any securities convertible into or exchangeable for such Class A Common Stock (other than shares and stock options to be granted pursuant to the Stock Incentive Plan), for a period of 56 58 180 days from the date of this Prospectus without the prior written consent of Smith Barney Inc. Neither the Company nor either of its existing shareholders has any present intention to request a waiver of the 180-day period. If any such waiver is requested, Smith Barney Inc. has the sole discretion whether to grant any such waiver. Under the Stock Incentive Plan, 3,000,000 shares of Class A Common Stock are reserved for issuance thereunder, including 6,000 shares of Class A Common Stock to be granted to non-employee directors. Options to purchase 600,000 shares of Class A Common Stock at an exercise price of $12.00 per share have been granted. See "Management -- Stock Incentive Plan" and "Management -- Director Compensation." Prior to this Offering, there has been no public market for the Class A Common Stock, and no predictions can be made as to the effect, if any, that sales of shares or the availability of shares for sale will have on the prevailing market price of the Class A Common Stock. Sales of substantial amounts of Class A Common Stock in the public market could have an adverse effect on prevailing market prices. 57 59 UNDERWRITING Upon the terms and conditions stated in the Underwriting Agreement, each Underwriter named below has severally agreed to purchase, and the Company has agreed to sell to such Underwriter, the shares of Class A Common Stock which equal the number of shares set forth opposite the name of such Underwriter:
NUMBER NAME OF UNDERWRITER OF SHARES ------------------- ---------- Smith Barney Inc. ....................................................... Piper Jaffray Inc. ...................................................... ---------- Total.......................................................... 11,000,000 ==========
The Underwriters, for whom Smith Barney Inc. and Piper Jaffray Inc. are acting as the Representatives, have advised the Company that they propose to offer part of the shares directly to the public at the public offering price set forth on the cover page of this Prospectus and part of the shares to certain dealers at a price that represents a concession not in excess of $ per share under the public offering price. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the initial public offering, the offering price and other selling terms may be changed by the Representatives. The Underwriters do not intend to confirm sales of the Class A Common Stock offered hereby to accounts over which they exercise discretionary authority. The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares are subject to approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are obligated to take and pay for all shares of Class A Common Stock offered hereby (other than those covered by the over-allotment option described below) if any such shares are purchased. The Company has granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to an aggregate of 1,650,000 additional shares of Class A Common Stock at the price to the public set forth on the cover page of this Prospectus minus the underwriting discounts and commissions. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, in connection with the Offering of the shares hereby. To the extent such option is exercised, each Underwriter will be obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number of shares set forth next to such Underwriter's name in the preceding table bears to the total number of shares listed in such table. The Class A Common Stock has been approved for listing on the New York Stock Exchange, upon notice of issuance, under the symbol "ASF." In order to meet one of the requirements for listing of the Class A Common Stock on the New York Stock Exchange, the Underwriters will undertake to sell lots of 100 or more shares to a minimum of 2,000 beneficial owners. The Company and the Underwriters have agreed to indemnify each other against certain liabilities, including certain liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. The Company and its existing shareholders have agreed not to offer, sell, contract to sell, grant any option to purchase, or otherwise dispose of any shares of Class A Common Stock of the Company or any securities convertible into or exercisable or exchangeable for such Class A Common Stock (other than shares and stock options to be granted pursuant to the Stock Incentive Plan), except to the Underwriters pursuant to the 58 60 Underwriting Agreement, for a period of 180 days after the date of this Prospectus, without the prior written consent of Smith Barney Inc. Prior to the Offering, there has been no public market for the Class A Common Stock. Consequently, the public offering price for the shares offered hereby was determined by negotiations between the Company and the Representatives. Among the factors considered in determining the public offering price were the history of, and the prospects for, the Company's business and the industry in which it competes, an assessment of the Company's management, its past and present operations, its past and present revenues and earnings, and the trend of such revenues and earnings, the prospects for growth of the Company's revenues and earnings, the present state of the Company's development, the general condition of the securities market at the time of the Offering and the market prices and earnings of similar securities of comparable companies at the time of the Offering, the current state of the economy in the United States and the current level of economic activity in the industry in which the Company competes and in related or comparable industries. LEGAL MATTERS The validity of the shares of Class A Common Stock offered hereby will be passed upon for the Company by Jones, Day, Reavis & Pogue, Dallas, Texas. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Dewey Ballantine, New York, New York. As to matters of Texas law, Dewey Ballantine will rely on the opinion of Jones, Day, Reavis & Pogue. EXPERTS The consolidated financial statements of AMERISAFE, Inc. and subsidiaries at December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 under the Securities Act with respect to the shares of Class A Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which have been omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the shares of Class A Common Stock offered hereby, reference is made to the Registration Statement, including the exhibits filed as a part thereof. Statements made in this Prospectus as to the contents of any contract or any other document are not necessarily complete; with respect to each such contract, agreement or other document filed as an exhibit to the Registration Statement, reference is made to such exhibit for a more complete description of the matter involved, and each such statement herein shall be deemed qualified in its entirety by such reference. Copies of such materials may be examined without charge at, or obtained upon payment of prescribed fees from, the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at 7 World Trade Center, New York, New York 10048. The Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission and that is located at http://www.sec.gov. 59 61 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Auditors........................................................ F-2 Consolidated Balance Sheets at December 31, 1994 and 1995 and at June 30, 1996 (unaudited)......................................................................... F-3 Consolidated Statements of Income for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 and 1996 (unaudited)......................... F-4 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1996 (unaudited)......................................................................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the six months ended June 30, 1995 and 1996 (unaudited).................... F-6 Notes to Consolidated Financial Statements............................................ F-7
F-1 62 REPORT OF INDEPENDENT AUDITORS The Board of Directors AMERISAFE, Inc. We have audited the accompanying consolidated balance sheets of AMERISAFE, Inc. and subsidiaries as of December 31, 1994 and 1995, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of AMERISAFE, Inc. and subsidiaries at December 31, 1994 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company effected a reorganization on , 1996, resulting in a change in the reporting entity. Dallas, Texas , 1996 The foregoing report is in the form that will be signed upon completion of transactions described in the first paragraph of Note 1 to the consolidated financial statements. ERNST & YOUNG LLP Dallas, Texas September 19, 1996 F-2 63 AMERISAFE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
PRO FORMA STOCKHOLDERS' EQUITY DECEMBER 31, (NOTE 1) ------------------- JUNE 30, JUNE 30, 1994 1995 1996 1996 ------- -------- -------- ------------- (UNAUDITED) ASSETS Investments: Investments held-to-maturity -- fixed maturities at amortized cost (fair value: 1994 -- $48,324; 1995 -- $66,840; 1996 -- $68,434)... $49,618 $ 65,052 $ 68,795 Investments available-for-sale, at fair value: Equity securities (cost: 1994 -- $1,317; 1995 -- $2,748; 1996 -- $3,641)................................................. 1,253 3,076 4,083 Fixed maturities (cost: 1994 -- $125; 1995 -- $3,291; 1996 -- $3,000)................................................. 125 3,363 3,016 ------- -------- -------- Total investments............................................. 50,996 71,491 75,894 Cash and cash equivalents............................................. 5,264 10,202 14,688 Receivable for securities sold or matured............................. 312 868 -- Recoverable from reinsurers........................................... 10,941 13,360 14,330 Recoverable from state funds.......................................... 405 401 470 Agents balances in course of collection............................... 8,815 9,654 10,043 Accrued interest receivable........................................... 811 1,105 1,303 Notes receivable from affiliates...................................... 2,176 2,387 2,993 Real estate, furniture and equipment, net............................. 4,269 5,906 7,150 Deferred federal income taxes......................................... 2,303 1,891 2,323 Other assets.......................................................... 1,799 3,175 4,711 ------- -------- -------- Total assets.................................................. $88,091 $120,440 $133,905 ======= ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Reserves for claims and claim settlement expenses................... $40,939 $ 55,427 $ 62,345 Unearned premiums................................................... 4,229 3,581 4,460 Funds held under reinsurance treaties............................... 164 166 428 Reinsurance premiums payable........................................ 113 1,426 1,589 Amounts held for others............................................. 5,923 10,299 11,014 Accounts payable and accrued liabilities............................ 3,391 7,290 4,689 Notes payable....................................................... 7,479 8,232 12,425 Notes payable to shareholder and affiliates......................... 3,377 1,881 513 ------- -------- -------- Total liabilities............................................. 65,615 88,302 97,463 Commitments and contingencies Stockholders' equity (deficit): Preferred stock, $0.01 par value, 25,000,000 shares authorized: Series B -- cumulative convertible 8% preferred stock, issued and outstanding shares -- 510.167................................... -- -- -- $ -- Class A common stock, $0.01 par value, Authorized shares -- 100,000,000 Issued and outstanding shares -- None............................. -- -- -- -- Class B common stock, $0.01 par value: Authorized shares -- 100,000,000 Issued and outstanding shares -- 11,884,647....................... 119 119 119 174 Additional paid-in capital.......................................... 1,362 1,362 1,362 -- Retained earnings (deficit)......................................... 21,059 30,393 34,645 (28,019) Unrealized gain (loss) on securities available-for-sale, net of taxes............................................................. (64) 264 316 316 ------- -------- -------- -------- Total stockholders' equity (deficit).......................... 22,476 32,138 36,442 $(27,529) ======== ------- -------- -------- Total liabilities and stockholders' equity.................... $88,091 $120,440 $133,905 ======= ======== ========
See notes to consolidated financial statements. F-3 64 AMERISAFE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------- ------------------ 1993 1994 1995 1995 1996 ------- ------- ------- ------- ------- (UNAUDITED) Revenues: Premiums earned............................ $35,902 $40,461 $58,167 $23,134 $30,678 Service fee income......................... 987 2,468 4,110 1,446 3,605 Investment income.......................... 2,146 2,484 4,519 1,842 2,743 Fees and other from affiliates............. 2,154 1,732 2,881 1,004 1,125 ------- ------- -------- ------- ------- Total revenues..................... 41,189 47,145 69,677 27,426 38,151 Expenses: Claims and claim settlement expenses....... 20,262 25,250 32,924 13,545 18,356 Commissions and other underwriting expenses................................ 7,555 8,507 13,524 6,101 8,377 General and administrative................. 2,798 4,406 6,810 2,157 4,093 Interest................................... 850 726 845 420 632 Depreciation and amortization.............. 240 703 1,006 364 758 ------- ------- -------- ------- ------- Total expenses..................... 31,705 39,592 55,109 22,587 32,216 ------- ------- -------- ------- ------- Income before federal income taxes........... 9,484 7,553 14,568 4,839 5,935 Federal income taxes......................... 2,768 2,414 5,234 1,430 1,683 ------- ------- -------- ------- ------- Net income................................... $ 6,716 $ 5,139 $ 9,334 $ 3,409 $ 4,252 ======= ======= ======== ======= ======= Pro forma net income per share............... $ 0.42 $ 0.19 ======== ======= Pro forma weighted average shares outstanding................................ 22,061 22,061 ======== =======
See notes to consolidated financial statements. F-4 65 AMERISAFE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS)
UNREALIZED GAIN (LOSS) ON ADDITIONAL SECURITIES PREFERRED COMMON PAID-IN RETAINED AVAILABLE- STOCK STOCK CAPITAL EARNINGS FOR-SALE TOTAL --------- ------ ---------- -------- ---------- ------- Balance at January 1, 1993........... $ -- $119 $ (118) $ 9,204 $ 55 $ 9,260 Net income......................... -- -- -- 6,716 -- 6,716 Change in unrealized gain/loss on securities available-for-sale... -- -- -- -- (59) (59) Issuance of redeemable cumulative preferred stock................. -- -- 1,480 -- -- 1,480 ----- ---- ------ ------- ---- ------- Balance at December 31, 1993......... -- 119 1,362 15,920 (4) 17,397 Net income......................... -- -- -- 5,139 -- 5,139 Change in unrealized gain/loss on securities available-for-sale... -- -- -- -- (60) (60) ----- ---- ------ ------- ---- ------- Balance at December 31, 1994......... -- 119 1,362 21,059 (64) 22,476 Net income......................... -- -- -- 9,334 -- 9,334 Change in unrealized gain/loss on securities available-for-sale, net of deferred income taxes.... -- -- -- -- 328 328 ----- ---- ------ ------- ---- ------- Balance at December 31, 1995......... -- 119 1,362 30,393 264 32,138 Net income (unaudited)............. -- -- -- 4,252 -- 4,252 Change in unrealized gain/loss on securities available-for-sale, net of deferred income taxes (unaudited)..................... -- -- -- -- 52 52 ----- ---- ------ ------- ---- ------- Balance at June 30, 1996 (unaudited)........................ $ -- $119 $1,362 $34,645 $316 $36,442 ===== ==== ====== ======= ==== =======
See notes to consolidated financial statements. F-5 66 AMERISAFE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, -------------------------------- ------------------- 1993 1994 1995 1995 1996 -------- -------- -------- ------- -------- (UNAUDITED) OPERATING ACTIVITIES: Net income.................................................... $ 6,716 $ 5,139 $ 9,334 $ 3,409 $ 4,252 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................. 240 703 1,006 364 758 Deferred income tax (benefit) expense..................... (772) (121) 203 (200) (432) Investment (gains) losses, net............................ (176) 18 (133) (5) (7) Changes in operating assets and liabilities: Accounts receivable and recoverables.................... (3,278) (565) (200) 1,030 (389) Reserves for unpaid claims and claim settlement expenses.............................................. 8,383 6,518 14,489 5,729 6,918 Unearned premiums....................................... 1,580 2,638 (648) (1,775) 879 Reinsurance balances.................................... (2,607) (2,491) (1,103) (1,015) (545) Amounts held for others................................. 512 1,565 4,376 2,769 715 Accounts payable and accrued liabilities................ (468) 111 3,846 (734) (2,601) Other, net.............................................. 100 (560) (2,021) 1,513 (1,990) -------- -------- -------- ------- -------- Net cash provided by operating activities....................... 10,230 12,955 29,149 11,085 7,558 INVESTING ACTIVITIES: Purchases of investments held-to-maturity..................... (13,937) (29,770) (28,820) (7,317) (11,685) Proceeds from maturity of investments held-to-maturity........ 2,158 11,713 8,386 1,494 8,608 Purchases of investments available-for-sale................... (645) (561) (1,777) (500) (891) Sales and maturities of investments available-for-sale........ 2,284 384 1,805 847 555 Net decrease in other invested assets......................... 897 -- -- -- -- Purchase of subsidiary, net of cash acquired.................. -- -- (218) -- -- Purchases of real estate, furniture and equipment............. (1,702) (1,347) (2,460) (876) (1,878) Decrease (increase) in loans to stockholders and affiliates... 1,470 (2,871) (211) -- (606) Decrease in interest-bearing deposits in banks................ -- 265 -- -- -- -------- -------- -------- ------- -------- Net cash used in investing activities........................... (9,475) (22,187) (23,295) (6,352) (5,897) FINANCING ACTIVITIES: Proceeds from revolving and short-term notes payable.......... -- 6,000 -- -- 10,000 Proceeds from notes payable................................... 1,140 265 1,475 355 395 Principal payments on notes payable and capital lease obligations................................................. (638) (2,075) (1,922) (891) (6,202) Proceeds from loans from shareholder and affiliates........... -- 2,773 528 369 -- Principal payments on notes payable to shareholder and affiliates.................................................. (528) (4,101) (997) -- (1,368) -------- -------- -------- ------- -------- Net cash (used in) provided by financing activities............. (26) 2,862 (916) (167) 2,825 -------- -------- -------- ------- -------- Increase (decrease) in cash and cash equivalents................ 729 (6,370) 4,938 4,566 4,486 Cash and cash equivalents at beginning of period................ 10,905 11,634 5,264 5,264 10,202 -------- -------- -------- ------- -------- Cash and cash equivalents at end of period...................... $ 11,634 $ 5,264 $ 10,202 $ 9,830 $ 14,688 ======== ======== ======== ======= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid............................................... $ 833 $ 743 $ 845 $ 420 $ 536 Income taxes paid........................................... $ 1,926 $ 2,570 $ 4,644 $ 1,800 $ 3,000 SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Other assets acquired with the issuance of notes payable.... $ -- $ -- $ 1,200 $ -- $ -- Dividend from affiliate for note payable.................... $ -- $ -- $ 1,027 $ -- $ -- Debt converted to redeemable cumulative preferred stock..... $ 1,480 $ -- $ -- $ -- $ --
See notes to consolidated financial statements. F-6 67 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Reorganization AMERISAFE, Inc. (formerly Gulf Universal Holdings, Inc.) (AMERISAFE) was reorganized on , 1996, resulting in a change in the reporting entity. Prior to this reorganization the subsidiaries were American Interstate Insurance Company and subsidiaries (American Interstate), Auto One Acceptance Corporation and subsidiaries (Auto One), Gulf Universal Insurance, Ltd. (LTD), Mor-Tem Systems, Inc. and subsidiaries (Mor-Tem), Systems Operations, Inc. (d.b.a. Engineered Mechanical Services) (EMS) and Gulf Air, Inc. In connection with this reorganization, the common stock of certain insurance agency subsidiaries of Mor-Tem and EMS, and an $8.0 million note payable bearing interest at 8.0% per annum were exchanged for the Class B Common Stock of AMERISAFE held by a minority shareholder. Prior to the exchange, the Company made a capital contribution of approximately $6.0 million to a subsidiary of MorTem in the form of a note payable which bears interest at 8.0% per annum. The Company realized a gain from discontinued operations of approximately $ on , 1996, in connection with the split-off of these subsidiaries. The net assets and operations of these subsidiaries are not separately disclosed in the accompanying financial statements as they are not material. Following the split-off of the insurance agency subsidiaries of Mor-Tem and EMS the Company distributed the common stock of Auto One and LTD to the remaining shareholders on a pro rata basis. The distribution of Auto One and LTD was accounted for as a reorganization of commonly controlled entities and was accounted for in a manner similar to a "pooling of interests" (see Note 4). Prior to these distributions, the Company made a capital contribution of $50.0 million to Auto One in the form of a note payable which bears interest at 8.0% per annum. Accordingly, the historical consolidated financial statements of AMERISAFE have been recast to include, at historical cost, only the individual companies which were not spun off to the shareholders for all periods presented. Management currently expects to repay the aforementioned notes payable issued in connection with the reorganization with a portion of the proceeds of a planned initial public offering of the Company's Class A Common Stock. Accordingly, historical net income per share has been deleted and pro forma net income per share, giving effect to the number of shares whose proceeds will be necessary to repay the notes payable, has been calculated for the most recent annual and interim periods. The effect of this change in the reporting entity was a decrease in net income of $5,465,000 in 1993, $2,930,000 in 1994, $1,160,000 in 1995 and $837,000 and $601,000 in the six months ended June 30, 1995 and 1996, respectively. The effect of the change in the reporting entity on pro forma net income per share was a decrease of $0.05 in 1995 and $0.03 in the six months ended June 30, 1996. On August 8, 1996, AMERISAFE's Board of Directors approved a change in the Company's capital structure for a 3,603.63-for-one stock split, the reclassification of the Company's common stock to Class B Common Stock, the authorization of the Class A Common Stock, a change in the par value of the Preferred Stock from $1.00 per share to $.01 per share, and an increase in the number of authorized shares of Class A Common Stock, Class B Common Stock and Preferred Stock to 100,000,000 shares, 100,000,000 shares and 25,000,000 shares, respectively, effected by amendment to the Company's articles of incorporation. The accompanying consolidated financial statements reflect the above changes to the Company's capital structure for all periods presented. The characteristics of the Class B Common Stock are identical to those of Class A Common Stock, except that each holder of the Class B Common Stock is entitled to ten votes for each share held. Basis of Presentation The consolidated financial statements include the accounts of AMERISAFE and its wholly-owned subsidiaries: American Interstate, Mor-Tem Risk Management, Inc., Hammerman & Gainer, Inc. (H&G) and Gulf Air, Inc., collectively referred to as the "Company." F-7 68 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) American Interstate is a property/casualty insurance company domiciled in the state of Louisiana and conducts business primarily in the southeastern United States. American Interstate writes primarily workers' compensation and general liability coverage for the logging industry. It expanded its workers' compensation business beyond the logging industry beginning in 1994, but that industry group still accounts for approximately 60% of the Company's 1995 premiums earned. Assets and revenues of American Interstate represent approximately 93% and 90%, respectively, of the 1995 consolidated amounts. Mor-Tem Risk Management, Inc. is domiciled in the state of Louisiana and provides safety engineering and claims settlement services. On September 1, 1995, the Company acquired H&G, a claims settlement company, for $1,500,000 (including notes payable of $1,200,000). The assets and liabilities of H&G at September 1, 1995, have been recorded at their estimated fair values which, except for certain intangible assets, were not significantly different from their net carrying values. The unamortized balance of $1,035,000 of intangible assets arising from this acquisition is included in other assets at December 31, 1995 and is being amortized on a straight-line basis generally over a 15 year life. Risk management and claims settlement related assets and revenues represent approximately 2% and 5%, respectively, of the 1995 consolidated amounts. Interim Financial Statements The interim financial statements for the six months ended June 30, 1995 and 1996 are unaudited. In the opinion of management, such statements reflect all adjustments (consisting only of normal recurring adjustments) necessary for fair presentations of financial position, results of operations and cash flows. Principles of Consolidation All significant intercompany balances and transactions have been eliminated in consolidation. Cash and Cash Equivalents The Company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents. Investments The Company adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (Statement No. 115), for its investments effective January 1, 1994. Pursuant to Statement No. 115, the Company determines the appropriate classification of investments in debt and equity securities at the time of purchase. If the Company has the intent and ability at the time of purchase to hold debt securities until maturity, they are classified as investments held-to-maturity and carried at amortized cost (unless a permanent impairment in value exists). At the date of adoption of the new accounting standard, and at the end of 1994, the Company had classified substantially all of its debt securities as held-to-maturity. Debt securities for which management does not have the ability or intent to hold until maturity are classified as available-for-sale and carried at market value; temporary changes in market value are recognized in stockholders' equity as unrealized gains or losses, net of deferred income tax. The Company has no securities acquired for trading purposes. Equity and certain other securities are considered available-for-sale and are carried at market value. Temporary changes in the market value are reported in stockholders' equity as unrealized gains or losses on securities available-for-sale, net of deferred income tax. This method of reporting is consistent with the manner in which investments in equity securities were reported prior to adoption of Statement No. 115. No future income tax benefit was recorded for the unrealized loss applicable to equity securities at December 31, 1993 and 1994, as the amounts were not material. F-8 69 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The discount or premium on debt securities is amortized using the interest method. Anticipated prepayments are not considered when determining the amortization of premiums or discounts as the unamortized amounts are not material. Real Estate, Furniture and Equipment The Company's office building, furniture, and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated primarily by the straight-line method over the estimated useful lives of the respective assets, generally 39 years for the building, and three to seven years for furniture and equipment. Premium Revenue Insurance premiums on workers' compensation and general liability coverages are based on actual payroll costs or production during the policy term and are generally billed monthly in arrears; accordingly, there are no significant unearned premiums on these lines of business except assigned risk workers' compensation policies. However, the Company requires a deposit of 5% to 25% of the estimated annual premium at the inception of the policy; such deposits are included in amounts held for others. All other insurance premiums are reflected in earnings over periods covered by the policies. Unearned premiums on these policies are computed on a daily pro rata basis. Reserves for Claims and Claim Settlement Expenses Reserves for claims and claim settlement expenses represent the estimated ultimate net cost of all reported and unreported claims incurred through the respective balance sheet dates. The Company does not discount claims and claim settlement expense reserves. The reserves for unpaid claims and claim settlement expenses are estimated using individual case-basis valuations, statistical analyses, and estimates based upon experience for unreported claims and claim settlement expenses. Such estimates may be more or less than the amounts ultimately paid when the claims are settled. The estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in such estimates, management believes that the reserves for claims and claim settlement expenses are adequate. The estimates are continually reviewed and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations. Salvage and subrogation recoverables are estimated using the "case-basis" method for large recoverables and historical statistics for smaller recoverables. Such amounts deducted from the liability for claims and claim settlement expenses were $237,000 and $250,000 at December 31, 1994 and 1995, respectively, and $285,000 at June 30, 1996 (unaudited). Federal Income Taxes AMERISAFE, its subsidiaries and the former subsidiaries of AMERISAFE have historically filed a consolidated federal income tax return. The consolidated tax liability is allocated among the participants in accordance with the ratio of each participant's taxable income to the consolidated taxable income of the group. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company has not established a valuation allowance for the F-9 70 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) deferred income tax asset at December 31, 1994 and 1995 or at June 30, 1996 as management has concluded the entire deferred income tax asset will be realized. Pro Forma Net Income per Share Pro forma net income per share was computed based on the weighted average number of common and common equivalent shares outstanding. The weighted average shares outstanding for each period include common equivalent shares attributable to convertible preferred stock (5,515,353 shares), outstanding stock options (85,714 shares) using the treasury stock method, incremental shares from the expected issuance of Class A Common Stock (6,000 shares) and pro forma shares for the number of shares whose proceeds would be necessary to pay certain debts originated in connection with the reorganization of AMERISAFE to be paid from the proceeds of the Company's initial public offering of its Class A Common Stock (4,569,357 shares) (See Note 8). Incremental shares resulting from the issuance of convertible preferred stock and stock options issued prior to the Company's initial public offering have been included in the weighted average shares outstanding for all periods for which net income per share is presented. All Class A common share and per share data have been restated to adjust for the 3,603.63-for-one stock split of the Company's Common Stock. Reinsurance Reinsurance premiums, claims, and claim settlement expenses are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Stock-Based Compensation The Company grants stock options for a fixed number of shares to employees and non-employee directors with an exercise price equal to the fair value at grant date. The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and accordingly, recognizes no compensation expense for the stock option grants. Pro forma information regarding net income and earnings per share is required by Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (Statement No. 123), as if the Company had accounted for its stock options under the fair value method of Statement No. 123. The Company will make the pro forma disclosures required by Statement No. 123 when stock options are granted. Use of Estimates The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known which could impact the amounts reported and disclosed herein. F-10 71 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2. INVESTMENTS The Company believes its investments do not pose unusual credit risk and are widely diversified. In excess of 95% of the Company's investments in debt securities at December 31, 1995 have investment agency ratings of AA or higher. The remaining debt securities are investment grade or better. A summary of net investment income is as follows (in thousands):
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, -------------------------- ---------------- 1993 1994 1995 1995 1996 ------ ------ ------ ------ ------ (UNAUDITED) Fixed maturities.......................... $1,510 $2,171 $3,199 $1,456 $2,136 Equity securities......................... 279 74 193 5 36 Other..................................... 373 255 1,150 389 598 ------ ------ ------ ---- ------ Total investment income................... 2,162 2,500 4,542 1,850 2,770 Less investment expenses.................. 16 16 23 8 27 ------ ------ ------ ---- ------ Net investment income..................... $2,146 $2,484 $4,519 $1,842 $2,743 ====== ====== ====== ==== ======
The cost or amortized cost and fair values of investments in debt securities held-to-maturity at December 31, 1994 and 1995 and June 30, 1996, are summarized as follows (in thousands):
COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ------- DECEMBER 31, 1994 U.S. Treasury securities and obligations of U.S. Government agencies.................. $17,760 $ 7 $ 359 $17,408 Corporate securities........................ 2,119 10 48 2,081 Obligations of states and political subdivisions.............................. 29,739 127 1,031 28,835 ------- ------ ------ ------- Totals...................................... $49,618 $ 144 $1,438 $48,324 ======= ====== ====== =======
DECEMBER 31, 1995 U.S. Treasury securities and obligations of U.S. Government agencies.................. $28,530 $ 721 $ 4 $29,247 Corporate securities........................ 2,768 44 -- 2,812 Obligations of states and political subdivisions.............................. 33,754 1,037 10 34,781 ------- ------ ------ ------- Totals...................................... $65,052 $1,802 $ 14 $66,840 ======= ====== ====== ======= JUNE 30, 1996 (UNAUDITED) U.S. Treasury securities and obligations of U.S. Government agencies.................. $34,170 $ 116 $ 786 $33,500 Corporate securities........................ 3,283 6 134 3,155 Obligations of states and political subdivisions.............................. 31,342 543 106 31,779 ------- ------ ------ ------- Totals...................................... $68,795 $ 665 $1,026 $68,434 ======= ====== ====== =======
F-11 72 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Unrealized gains and losses on investments in securities available-for-sale are reported directly in stockholders' equity (net of deferred income taxes) and do not affect operations. The gross unrealized gains and losses on, and the cost and fair value of, those investments at December 31, 1994 and 1995 and June 30, 1996 are summarized as follows (in thousands):
COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE --------- ---------- ---------- ------ DECEMBER 31, 1994 Common stocks................................ $1,317 $ -- $64 $1,253 Debt securities.............................. 125 -- -- 125 ------ ---- --- ------ Totals....................................... $1,442 $ -- $64 $1,378 ====== ==== === ======
DECEMBER 31, 1995 U.S. Treasury securities and obligations of U.S. Government agencies................... $3,191 $ 72 $ 3 $3,260 Other debt securities........................ 100 3 -- 103 ------ ---- --- ------ Total debt securities...................... 3,291 75 3 3,363 Common stocks (primarily mutual funds)....... 2,748 342 14 3,076 ------ ---- --- ------ Totals....................................... $6,039 $417 $17 $6,439 ====== ==== === ====== JUNE 30, 1996 (UNAUDITED) U.S. Treasury securities and obligations of U.S. Government agencies................... $2,900 $ 19 $ 5 $2,914 Other debt securities........................ 100 2 -- 102 ------ ---- --- ------ Total debt securities...................... 3,000 21 5 3,016 Common stocks (primarily mutual funds)....... 3,641 491 49 4,083 ------ ---- --- ------ Totals....................................... $6,641 $512 54 $7,099 ====== ==== === ======
A summary of the cost or amortized cost and fair value of investments in debt securities by contractual maturity at December 31, 1995 is as follows (in thousands):
HELD-TO-MATURITY AVAILABLE-FOR-SALE ----------------------- -------------------- COST OR COST OR AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE --------- ---------- ---------- ------ Maturity In 1996.................................... $ 8,912 $ 8,948 $1,196 $1,210 In 1997 through 2001....................... 29,244 30,017 2,095 2,153 In 2002 through 2006....................... 24,022 24,866 -- -- After 2006................................. 2,874 3,009 -- -- ------- ------- ------ ------ $65,052 $66,840 $3,291 $3,363 ======= ======= ====== ======
The actual maturities of the debt securities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 1995, there were $365,000 of short-term investments (included in cash and cash equivalents) and $3,316,000 of held-to-maturity investments on deposit, as required, with regulatory agencies of states in which the Company does business. F-12 73 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Proceeds from sales or maturities of available-for-sale securities during 1993, 1994 and 1995 were approximately $2,284,000, $384,000 and $1,805,000, respectively, and $847,000 and $1,774,000 for the six months ended June 30, 1995 and 1996, respectively. Gross gains of $147,000, $26,000, $174,000, $6,000 and $7,000 and gross losses of $38,000, $4,000, $1,000 and $0 were realized on these securities during 1993, 1994, 1995 and the six months ended June 30, 1995 and 1996 (unaudited), respectively. Realized gains and losses are determined on the basis of the cost of the specific security sold. During 1995, Silver Oak Casualty, Inc. (Silver Oak), a subsidiary of American Interstate, disposed of two held-to-maturity debt securities prior to their stated maturities to satisfy its liquidity needs. As a result, on the basis of the likelihood that other sales may occur in the future, all of Silver Oak's debt securities, with an aggregate amortized cost of approximately $3,300,000 and an unrealized loss of approximately $25,000, were transferred to the available-for-sale portfolio. American Interstate sold a held-to-maturity debt security during 1995 prior to its stated maturity. The security, which had a carrying value of $300,000, was sold at a loss of $8,000. The sale was the result of a downgrade in the investment rating of the security by Standard and Poor's rating agency and is considered an isolated event. The Company's management intends to hold the remaining held-to-maturity portfolio until maturity. 3. REINSURANCE The Company cedes reinsurance to various unaffiliated reinsurers under excess-of-loss policies. Those reinsurance arrangements allow management to control exposure to potential losses arising from larger risks and provide additional capacity for growth. Generally, the Company retains $200,000 per occurrence. The effect of reinsurance on premiums written and earned in 1993, 1994 and 1995 was as follows (in thousands):
NET DIRECT CEDED PREMIUMS ------- ------- -------- 1993 Premiums Written............................................. $45,660 $(8,189) $37,471 Earned.............................................. 43,995 (8,093) 35,902 1994 Premiums Written............................................. $50,900 $(8,033) $42,867 Earned.............................................. 48,262 (7,801) 40,461 1995 Premiums Written............................................. $66,184 $(8,336) $57,848 Earned.............................................. 66,832 (8,665) 58,167
Claims and claim settlement expenses were reduced by reinsurance recoveries of $5,462,000, $3,906,000 and $5,398,000 in 1993, 1994 and 1995, respectively, and $2,437,000 and $2,162,000 for the six months ended June 30, 1995 and 1996 (unaudited), respectively. F-13 74 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Amounts recoverable from reinsurers consist of the following (in thousands):
DECEMBER 31, ------------------ JUNE 30, 1994 1995 1996 ------- ------- ----------- (UNAUDITED) Recoverable ceded reserves for unpaid claims and claims settlement expenses: Case basis........................................ $ 8,321 $ 9,780 $10,261 Incurred but not reported......................... 1,376 2,343 3,073 ------- ------- ------- 9,697 12,123 13,334 Paid claims recoverable................................ 915 1,237 996 Ceded unearned premiums................................ 329 -- -- ------- ------- ------- Total.................................................. $10,941 $13,360 $14,330 ======= ======= =======
The five largest unsecured reinsurance recoverables associated with unaffiliated reinsurers at December 31, 1995, are shown below (in thousands). The A.M. Best rating for the reinsurer is shown parenthetically. General Reinsurance Corporation (A++)....................................... $2,710 Insurance Corporation of Hannover (A-)...................................... 1,256 Reliance Insurance Company (A-)............................................. 2,897 Skandia America Reinsurance Corporation (A-)................................ 2,655 TIG Reinsurance Corporation (A)............................................. 1,045
Ceded reinsurance contracts do not relieve the Company from its obligations to policyholders. The Company remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreements. To minimize its exposure to significant losses from reinsurer insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers. F-14 75 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. FEDERAL INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for federal income tax purposes. The Company's deferred income tax assets and liabilities are as follows (in thousands):
DECEMBER 31, ---------------- JUNE 30, 1994 1995 1996 ------ ------ ----------- (UNAUDITED) Deferred income tax assets: Discounting of unpaid claims.......................... $2,291 $2,350 $ 2,978 20% reduction of unearned premiums.................... 269 245 305 Other................................................. 149 202 -- ------ ------ ------ 2,709 2,797 3,283 Deferred income tax liabilities: Commissions on deposit premiums....................... (82) (155) (155) Deferred policy acquisition costs..................... (153) (108) (208) Unrealized gain on securities available-for-sale...... -- (161) (148) Conversion of acquired subsidiary from cash to accrual basis of accounting................................ -- (193) (193) Other................................................. (171) (289) (256) ------ ------ ------ (406) (906) (960) ------ ------ ------ Net deferred federal income tax asset................... $2,303 $1,891 $ 2,323 ====== ====== ======
The components of consolidated federal income tax expense are as follows (in thousands):
SIX MONTHS YEAR ENDED DECEMBER 31, ENDED JUNE 30, -------------------------- ---------------- 1993 1994 1995 1995 1996 ------ ------ ------ ------ ------ (UNAUDITED) Current................................... $3,540 $2,535 $4,822 $1,630 $2,113 Deferred.................................. (772) (121) 412 (200) (430) ------ ------ ------ ---- ------ Total..................................... $2,768 $2,414 $5,234 $1,430 $1,683 ====== ====== ====== ==== ======
Federal income tax expense is different from the amount computed by applying the U.S. federal income tax statutory rate of 34% to income before federal income taxes as follows (in thousands):
YEAR ENDED DECEMBER 31, SIX MONTHS -------------------------- ENDED 1993 1994 1995 JUNE 30, ------ ------ ------ 1996 ------------ (UNAUDITED) Income tax computed at federal statutory tax rate........................................ $3,225 $2,568 $4,953 $2,018 Tax exempt interest, net...................... (297) (404) (478) (236) Dividends received deduction.................. (17) (22) (399) (9) Change in accrual for prior taxes............. -- -- 700 -- Other......................................... (143) 272 458 (90) ------ ------ ------ ------ $2,768 $2,414 $5,234 $1,683 ====== ====== ====== ======
In connection with the reorganization (see Note 1), the Company distributed the stock of certain subsidiaries to shareholders of the Company in a transaction intended to qualify as tax-free distributions for F-15 76 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) federal income tax purposes under section 355 of the Internal Revenue Code of 1986, as amended (the "Code"). Prior to such distributions, the Board of Directors of the Company received an opinion from its legal counsel to the effect that such distributions should so qualify for federal income tax purposes. No ruling with respect to such distributions was obtained from the IRS; however, and there can be no assurance that the IRS will not take a position that such distributions do not qualify as tax-free. If the distributions were not to qualify for tax-free treatment under section 355 of the Code, the Company would recognize taxable gains on the distributions of the subsidiaries stock equal to the difference on such date between (i) the fair market value of the distributed stock and (ii) the Company's adjusted basis in such stock, at the transaction date. The Company is in the process of resolving various issues with respect to examinations by the Internal Revenue Service (IRS) of AMERISAFE's 1992 consolidated income tax return and of the 1990 and 1991 tax returns of a subsidiary that was merged into AMERISAFE. The IRS has issued to the Company notices of proposed adjustment for alleged tax deficiencies of approximately $5.4 million as a result of these examinations, approximately $3.3 million of which relate to temporary differences. The Company has filed a written protest of the alleged deficiencies related to the examination of its 1992 consolidated tax return. Management believes the alleged deficiencies are without merit and intends to vigorously defend its position on these matters and litigate them if necessary. In addition, the Company has entered into an agreement with certain of its former subsidiaries that were split-off in connection with the reorganization (see Note 1) whereby it will be indemnified for any liability that might result from the 1990 and 1991 examinations. Management does not believe the resolution of these matters will have a material effect on the financial position or results of operations of the Company. Therefore, no liability has been accrued in the accompanying financial statements for additional taxes that may result from these alleged deficiencies. However, the resolution of the temporary differences related to the 1992 examination may result in an increase in deferred tax benefit and a significant cash payment of income taxes by the Company if it does not prevail in its protest. Accordingly, the Company included a $700,000 adjustment in the 1995 tax provision for interest (net of tax benefit) on this cash payment of taxes. The Company entered into a tax allocation agreement with the subsidiaries distributed in connection with the reorganization (Distributed Subsidiaries) to provide for (i) the allocation of payments of taxes for periods during which the Company (or any of its affiliates other than the Distributed Subsidiaries and the direct and indirect subsidiaries thereof) and any of the Distributed Subsidiaries or any direct or indirect subsidiaries thereof are included in the same consolidated group for federal income tax purposes, (ii) the allocation of responsibility for the filing of tax returns, the conducting of tax audits and the handling of tax controversies, and (iii) various related matters. F-16 77 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. NOTES PAYABLE Notes payable consist of the following (in thousands):
DECEMBER 31, ------------------ JUNE 30, 1994 1995 1996 ------- ------- ----------- (UNAUDITED) Notes payable: Revolving credit loan payable to bank; originally due June 1995 extended through January 31, 1996, interest payable at prime (generally 8.09% and 8.89% in 1994 and 1995, respectively); secured by stock of Auto One and Mor-Tem.................................................. $ 6,000 $ 5,200 $ -- Capital equipment leases, bearing interest at approximately 8.6%..................................................... 207 141 106 Note payable to bank; principal and interest payments in monthly installments through November 2, 1998; interest at prime rate; secured by aircraft....................... 1,007 893 -- Note payable to bank; principal and interest in monthly installments through March 1, 2001; interest at 8.125%; secured by furniture and fixtures........................ -- -- 368 Note payable to bank; interest only until January 31, 1999, after which principal and interest will be paid in monthly installments through January 2, 2002; interest at LIBOR plus 6%; secured by stock of AMERISAFE, Auto One, and Mor-Tem.............................................. -- -- 10,000 Notes payable to financial institutions; principal and interest in monthly installments through 1998; various interest rates; secured by Company automobiles........... 265 798 751 Notes payable to former owners of acquired subsidiary, due in annual installments through August 1, 1999, interest payable at 2.667%........................................ -- 1,200 1,200 ------- ------- ------- Total notes payable................................. 7,479 8,232 12,425 Notes payable to shareholders and affiliates: Note payable to Auto One, interest payable at 8.0%.......... 2,200 1,203 -- Notes payable to LTD, interest payable at 6.5% and 8.0%..... 1,027 -- -- Notes payable to shareholder; due on demand; interest payable at 9.0%.......................................... 150 150 -- Other borrowings from affiliates............................ -- 528 513 ------- ------- ------- Total notes payable to shareholder and affiliates... 3,377 1,881 513 ------- ------- ------- Total notes payable and notes payable to shareholder and affiliates.................................................. $10,856 $10,113 $12,938 ======= ======= =======
The future maturities of the Company's outstanding notes payable at December 31, 1995, without regards to the matter discussed in the following paragraph, are summarized as follows (in thousands): 1996............................................. $ 8,266 1997............................................. 515 1998............................................. 1,032 1999............................................. 300 ------- $10,113 =======
Subsequent to December 31, 1995, the Company replaced its existing revolving credit facility due January 31, 1996 with a new credit facility. The new facility bears an interest rate of LIBOR plus 6%, expires F-17 78 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) no earlier than January 1999, and contains covenants restricting the payment of dividends and requiring the Company, Auto One and American Interstate to maintain certain financial ratios. The Company retired the $893,000 debt secured by aircraft with the proceeds from this new credit facility. Management currently expects to use a portion of the proceeds from a planned initial public offering of the Company's Class A Common Stock (see Note 13) to repay the $10,000,000 note payable to bank and other indebtedness. The repayment of debt is expected to result in prepayment penalties and other fees of approximately $300,000 in the fourth quarter of 1996. Supplemental pro forma net income per share reflecting (i) the issuance of a sufficient number of shares of Class A Common Stock to repay debt outstanding at June 30, 1996 and (ii) the elimination of interest expense related to those borrowings was $0.42 and $0.19 for the year ended December 31, 1995 and the six months ended June 30, 1996, respectively. 6. CLAIMS AND CLAIM SETTLEMENT EXPENSES The following table provides a reconciliation of the beginning and ending reserve balances, net of reinsurance recoverables, for 1993, 1994 and 1995 and the six months ended June 30, 1996 (in thousands):
YEAR ENDED DECEMBER 31, SIX MONTHS -------------------------------- ENDED 1993 1994 1995 JUNE 30, -------- -------- -------- 1996 ------------ (UNAUDITED) Reserves for claims and claim settlement expenses, net of related reinsurance recoverables, at beginning of period........... $ 19,772 $ 24,882 $ 31,242 $ 43,304 Add: Provision for claims and claim settlement expenses for claims occurring in the current period, net of reinsurance.................. 22,173 26,637 36,074 18,973 Decrease in estimated claims and claim settlement expenses for claims occurring in prior periods, net of reinsurance........... (1,911) (1,387) (3,150) (617) -------- -------- -------- ------- Incurred claims and claim settlement expenses, net of reinsurance............................. 20,262 25,250 32,924 18,356 Deduct claims and claim settlement expense payments for claims, net of reinsurance, occurring during: Current period................................. (7,395) (7,795) (10,219) (3,296) Prior periods.................................. (7,757) (11,095) (10,643) (9,353) -------- -------- -------- ------- (15,152) (18,890) (20,862) (12,649) -------- -------- -------- ------- Reserve for claims and claim settlement expenses, net of related reinsurance recoverables, at end of period...................................... 24,882 31,242 43,304 49,011 Recoverable ceded reserves for unpaid claims and claims settlement expenses..................... 9,539 9,697 12,123 13,334 -------- -------- -------- ------- Reserves for claims and claim settlement expenses at end of period............................... $ 34,421 $ 40,939 $ 55,427 $ 62,345 ======== ======== ======== =======
The Company's reserves for claims and claim settlement expenses, net of related reinsurance recoverables, at December 31, 1992, 1993, 1994, and 1995, were decreased in 1993, 1994, 1995, and the six months ended June 30, 1996 (unaudited) by $1,911,000, $1,387,000, $3,150,000, and $617,000, respectively, for claims that had occurred prior to those balance sheet dates. The decreases were due to settling case-basis liabilities related to claims in those periods for less than originally estimated. Most of the favorable F-18 79 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) development has resulted from the Company's managed results approach and claims management process. No return premiums are due as a result of prior-year effects. The anticipated effect of inflation is considered when estimating liabilities for claims and claim settlement expenses. While anticipated price increases due to inflation are considered in estimating the ultimate claim costs, the increase in average severities of claims is caused by a number of factors that vary with the individual type of policy written. Future average severities are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions, and general economic trends. Those anticipated trends are monitored based on actual development and are modified if necessary. 7. REAL ESTATE, FURNITURE AND EQUIPMENT Real estate, furniture and equipment consists of the following (in thousands):
DECEMBER 31, ----------------- JUNE 30, 1994 1995 1996 ------ ------ ----------- (UNAUDITED) Land and office building.............................. $1,202 $1,772 $ 2,810 Furniture and equipment............................... 1,730 2,745 3,500 Automobiles........................................... 321 1,176 1,329 Aircraft.............................................. 1,824 1,824 1,824 ------ ------ ------ 5,077 7,517 9,463 Accumulated depreciation.............................. 808 1,611 2,313 ------ ------ ------ Real estate, furniture and equipment, net............. $4,269 $5,906 $ 7,150 ====== ====== ======
8. STOCKHOLDERS' EQUITY, REGULATORY REQUIREMENTS AND RESTRICTIONS American Interstate and its insurance subsidiary are required to periodically submit financial statements prepared in accordance with statutory accounting practices to insurance regulatory authorities. Accounting practices used to prepare these statutory-basis financial statements differ from generally accepted accounting principles. American Interstate's statutory capital and surplus, determined using statutory accounting practices, as of December 31, 1994 and 1995, was approximately $20,006,000 and $26,715,000, respectively; its insurance subsidiary's statutory capital and surplus was approximately $3,108,000 and $3,270,000 at December 31, 1994 and 1995, respectively. American Interstate's statutory net income was approximately $5,177,000, $4,676,000, and $7,888,000 for the years ended December 31, 1993, 1994, and 1995, respectively; its insurance subsidiary reported net losses of approximately $156,000 and $563,000 for the years ended December 31, 1993 and 1994, respectively, and net income of approximately $88,000 for the year ended December 31, 1995. Under Louisiana insurance regulations, American Interstate and its insurance subsidiary are each required to maintain minimum capital and surplus of $3 million at December 31, 1995. Pursuant to routine regulatory requirements, American Interstate cannot pay dividends in excess of the lesser of 10% of statutory surplus, or statutory net income, less realized capital gains, for the preceding 12-month period without prior approval of the Louisiana Commissioner of Insurance. American Interstate cannot pay dividends in 1996 in excess of approximately $2.7 million without prior regulatory approval. The redeemable cumulative preferred stock pays dividends at a rate of 8% per annum (applied to the stated value of $1,480,000), is nonvoting, and is redeemable at any time at the option of the Company. The preferred stock was issued in satisfaction of notes payable (bearing interest at 9% to 11%) to a shareholder. Each share of preferred stock is convertible into three shares of Class B common stock (10,810.88 shares after giving effect to the stock split) at the option of the preferred shareholder. The liquidation preference is equal F-19 80 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) to stated value plus all dividends in arrears and totaled $1,598,400 at December 31, 1994, $1,716,800 at December 31, 1995, and $1,776,000 at June 30, 1996. At December 31, 1995 and June 30, 1996 (unaudited), cumulative dividends of $236,800 and $296,000, respectively, were in arrears. Subsequent to June 30, 1996 (unaudited), the preferred stockholder exercised the option to convert the preferred stock into common stock. The Board of Directors adopted a stock incentive plan on August 5, 1996, subject to approval by the shareholders of the Company (the Stock Incentive Plan). The Stock Incentive Plan provides for the grant of restricted Class A Common Stock and options on Class A Common Stock to officers, non-employee directors and other individuals providing critical services to the Company. The term of each stock option issued under the Stock Incentive Plan is ten years and options generally vest evenly over a period of five years. Restricted stock issued under the Stock Incentive Plan generally vests evenly over a period of three years. Stock options for 600,000 shares at an exercise price of $12 per share were granted under the Stock Incentive Plan; none of these options have been exercised. Six thousand shares of restricted stock have been approved for issuance subject to completion of a planned initial public offering of the Company's Class A common stock. The aggregate number of shares reserved for issuance under the Stock Incentive Plan is 3,000,000. Property/casualty insurance companies are subject to certain Risk-Based Capital (RBC) requirements specified by the National Association of Insurance Commissioners (NAIC). Under those requirements, the amount of capital and surplus maintained by a property/casualty insurance company is to be determined based on the various risk factors related to it. At December 31, 1994 and 1995 and June 30, 1996, American Interstate and its insurance subsidiary exceed the minimum RBC requirements. Unaudited pro forma stockholders' equity at June 30, 1996 as set forth in the accompanying balance sheet reflects the assumed conversion of preferred stock and the payment of debts originated in connection with the reorganization of AMERISAFE which are expected to be paid from the proceeds of a planned initial public offering of the Company's Class A common stock. See Note 1. 9. RELATED PARTY TRANSACTIONS Fees and other from affiliates includes fees from various affiliated entities for the costs of providing certain executive, administrative and support services to those affiliates. Fees and other from affiliates in 1995 includes a dividend received by AMERISAFE from a former subsidiary consisting of a $1,027,000 note owed by the Company to the former subsidiary. During 1993, substantially all of the Company's gross premiums earned were produced by MT & Co. and Southern Underwriters, Inc., two agencies under common control by a former subsidiary of AMERISAFE. In January 1994, AMERISAFE transferred to American Interstate a portion of the agency operations of these affiliated agencies. The transfer had no effect on stockholders' equity but established American Interstate as a direct writer of its core logging industry related business. MT & Co. and Southern Underwriters, Inc. produced approximately 8.0% and 5.0% of the Company's gross premiums earned in 1994 and 1995, respectively. At December 31, 1994 and 1995, approximately $607,000 and $795,000, respectively, were included in agents balances in course of collection related to business produced by these agencies. Management currently expects to continue its business relationship with these agencies following the reorganization. In connection with the reorganization, the Company and Auto One entered into a services agreement (Services Agreement), pursuant to which the Company will continue to provide various services to Auto One, including payroll, human resources, legal, internal audit, benefits administration and similar administrative and management services that the Company has historically provided to Auto One. For such services, Auto One will pay the Company a fee of $40,000 per month. The Services Agreement is terminable by either the Company or Auto One on 90 days' prior notice; provided however, that neither party may terminate the Services Agreement prior to the first anniversary date of the planned initial public offering of the Company's Class A Common Stock. F-20 81 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company has entered into an office sharing agreement with AOAC with respect to its 2,500 square foot executive offices in Dallas, Texas. Under the terms of the agreement, the Company will pay to AOAC $3,700 per month. The agreement may be terminated by either party upon 90 days' written notice. The Company and Auto One have entered into an aircraft agreement (Aircraft Agreement) pursuant to which Auto One may use the aircraft owned by the Company for travel by Auto One's senior management in the course of Auto One's business. Auto One will be charged a fee for the use of such aircraft at a rate of $5,000 per month plus an additional amount based on the number of nautical miles traveled. The Aircraft Agreement has an initial term of one year and may be terminated thereafter by either party on 90 days' written notice. 10. EMPLOYEE BENEFIT PLAN The Company sponsors a 401(k) benefit program which is available to all employees. The Company matches up to 1% of employee contributions limited to 4% of employee compensation for participating employees. Employees vest immediately in their contributions and become 100% vested in employer contributions to the plan after five years. Contributions during 1993, 1994 and 1995 and the six months ended June 30, 1996 were not material. 11. COMMITMENTS AND CONTINGENCIES The Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. The Company manages interest rate risk on pension-type claims by settling these claims through the purchase of annuities from unaffiliated carriers. In the event these carriers are unable to meet their obligations under these contracts, the Company remains primarily liable to the claimants. Significant carriers and the face amounts of the annuities at December 31, 1995, are as follows (in thousands): Confederation Life........................................... $ 936 Transamerica Occidental...................................... 323 Others....................................................... 1,098 ------ $2,357 ======
The Company continuously monitors the financial condition of all carriers. On August 11, 1994, Confederation Life's Canadian parent was placed into receivership by Canadian insurance regulators. Management has monitored the rehabilitation of Confederation Life since that date and, on the basis of published reports, believes no loss will be incurred by the Company as a result of the receivership of Confederation Life's Canadian parent. Accordingly, no loss accrual is recorded in the accompanying consolidated financial statements. Confederation Life is current in its annuity obligations at December 31, 1995 and June 30, 1996. The increase in the number of insurance companies that are under regulatory supervision has resulted, and is expected to continue to result, in increased assessments by state guaranty funds to cover losses to policyholders of insolvent or rehabilitated insurance companies. Those mandatory assessments may be partially recovered through a reduction in future premium taxes in certain states. The Company recognizes those assessments when notified by the State. Assessments paid by the Company were approximately $353,000, $442,000 and $477,000 in 1993, 1994 and 1995, respectively, and $427,000 for the six months ended June 30, 1996 (unaudited). F-21 82 AMERISAFE, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company has entered into employment agreements with certain executives in connection with a planned initial public offering of the Company's Class A Common Stock (see Note 13). These agreements have initial terms of three years and require aggregate annual salary payments of approximately $1,285,000. 12. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating "fair value" disclosures for financial instruments in the accompanying 1995 and 1996 consolidated financial statements and notes thereto: Cash and Cash Equivalents The carrying amounts reported in the accompanying 1995 and 1996 consolidated balance sheet for these financial instruments approximate their fair values. Investment Securities The fair values disclosed in Note 2 for fixed maturity securities and equity securities are based on market values prescribed by the Securities Valuation Office of the NAIC (which approximates quoted market prices) or quoted market prices, where available. Notes Payable The carrying value of notes payable (excluding capital lease obligations) disclosed in Note 5 approximates the estimated fair value of the obligations as the interest rates on substantially all the debt are comparable to rates which the Company believes it presently would be charged on comparable borrowings. Other Assets and Liabilities The carrying amounts of recoverables from state funds and from reinsurers, funds on deposit with reinsurers, notes receivable from shareholders and affiliates, funds held under reinsurance treaties and amounts held for others approximate those assets' and liabilities' carrying values because of the actual or expected short-term maturity of those instruments. 13. SUBSEQUENT EVENT On August 5, 1996, the Board of Directors authorized the registration of up to 16,000,000 shares of the Company's Class A Common Stock to be offered in a planned initial public offering of such stock. 14. UNAUDITED SELECTED QUARTERLY FINANCIAL DATA (IN THOUSANDS)
1995 ---------------------------------------- FIRST SECOND THIRD FOURTH ------- ------- ------- ------- Revenue................................................ $12,820 $14,606 $21,303 $20,948 ======= ======= ======= ======= Claims and claims settlement expenses.................. $ 6,725 $ 6,820 $10,926 $ 8,453 ======= ======= ======= ======= Net income............................................. $ 1,642 $ 1,767 $ 2,602 $ 3,323 ======= ======= ======= =======
1994 ---------------------------------------- FIRST SECOND THIRD FOURTH ------- ------- ------- ------- Revenue................................................ $10,226 $10,580 $13,751 $12,588 ======= ======= ======= ======= Claims and claims settlement expenses.................. $ 6,032 $ 5,566 $ 8,654 $ 4,998 ======= ======= ======= ======= Net income............................................. $ 703 $ 1,178 $ 436 $ 2,822 ======= ======= ======= =======
F-22 83 MANAGING YOUR WORKERS' COMPENSATION NEEDS Oil derricks, log skidders, cherry pickers, cranes, road graders, bulldozers, dredges, "18 wheelers", chainsaws, shovels, pick axes, and sledge hammers -- all tools, all heavy equipment. Skilled workers performing back-breaking, muscle-wrenching work in every town, forest, oil patch, and roadbed in America. Drilling, mining, and harvesting natural resources. Laying power and transmission lines. Building bridges, stadiums, overpasses, office buildings, homes, and hospitals. America's builders of infrastructure -- hundreds of thousands of skilled workers exposed to life-threatening work hazards. One slip from a ledge, one wayward falling tree, one out-of-control bulldozer -- these can mean death, quadriplegia, or amputation. They can mean pain, permanent disability, and millions of dollars in lost wages and medical payments. They can mean a family's dreams are crushed. They mean a good worker has to be replaced. [A COLLAGE OF PHOTOS] At AMERISAFE, the Managed Results Company(SM), we believe that prevention is the best managed care. Prevention produces the best outcome: no injury, no lost work, no medical bills, no pain, and no rehabilitation. We work on prevention through training, safety programs, and behavior modification. Our safety professionals live and work near our clients. They spend their days, and sometimes nights, on job sites -- exploring new ways to prevent accidents. They're appreciated because they're effective. When accidents do occur, managed medical care is just the beginning. Our case managers work with the injured employee, with the employee's family, his boss, and his rehab team. They work together to get that employee back on the job. That's good management. That's a second beginning. MANAGED SAFETY MANAGED CLAIMS MANAGED CARE [AMERISAFE LOGO] 84 - ------------------------------------------------------ - ------------------------------------------------------ NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR ANY OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH AN OFFER IN ANY STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CURRENT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary..................... 3 The Company............................ 7 Risk Factors........................... 7 Use of Proceeds........................ 14 Dividend Policy........................ 14 Recent Reorganization.................. 15 Capitalization......................... 17 Dilution............................... 19 Selected Consolidated Financial Data... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 21 Business............................... 31 Management............................. 44 Principal Shareholders................. 52 Certain Transactions and Relationships........................ 53 Description of Capital Stock........... 54 Shares Eligible for Future Sale........ 56 Underwriting........................... 58 Legal Matters.......................... 59 Experts................................ 59 Additional Information................. 59 Index to Financial Statements.......... F-1 UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL DEALERS EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, 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. - -------------------------------------------- - --------------------------------------------
- ------------------------------------------------------ - ------------------------------------------------------ 11,000,000 SHARES AMERISAFE, INC. CLASS A COMMON STOCK LOGO ------------ PROSPECTUS , 1996 ------------ SMITH BARNEY INC. PIPER JAFFRAY INC. - ------------------------------------------------------ - ------------------------------------------------------ 85 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth an estimate of those expenses to be incurred by the Company in connection with the issuance and distribution of the securities being registered. Securities and Exchange Commission Fee................................... $ 65,432 NASD Fee................................................................. 19,475 New York Stock Exchange Listing Fee...................................... 190,000 Printing Expenses........................................................ 150,000 Legal Fees and Expenses.................................................. 400,000 Accounting Fees and Expenses............................................. 235,000 Transfer Agent Fees...................................................... 5,000 Blue Sky Fees and Expenses............................................... 15,000 Miscellaneous............................................................ 20,093 ---------- Total.......................................................... $1,100,000 =========
All these expenses, except the Securities and Exchange Commission registration fee, the New York Stock Exchange listing fee and the NASD registration fee, represent estimates only. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Articles 2.02A(16) and 2.02-1 of the Texas Business Corporation Act (the "TBCA") permit a corporation to indemnify a person who was or is a director, officer, employee or agent of a corporation or who serves at the corporation's request as a director, officer, venturer, partner, proprietor, trustee, employee or agent of another corporation, partnership, sole proprietorship, employee benefit plan, trust, joint venture, or other enterprise (an "outside enterprise"), who was, is or is threatened to be named a defendant in a legal proceeding by virtue of such person's position in the corporation or in an outside enterprise, but only if the person conducted himself in good faith and reasonably believed, in the case of conduct in the person's official capacity, that the conduct was in the corporation's best interest or, in the case of all other conduct, that the conduct was not opposed to the corporation's best interest, and, in the case of a criminal proceeding, the person had no reasonable cause to believe the conduct was unlawful. A person may be indemnified within the above limitations against judgments, penalties, fines, settlements and reasonable expenses actually incurred. Generally, an officer, director, agent or employee of a corporation or a person who serves at the corporation's request as an officer, director, agent or employee of an outside enterprise may not be indemnified against judgments, fines and settlements incurred in a proceeding in which the person is found liable to the corporation or is found to have improperly received a personal benefit and may not be indemnified for expenses unless, and only to the extent that, in view of all the circumstances, the person is fairly and reasonably entitled to indemnification for such expenses. A corporation must indemnify a director, officer, employee or agent against reasonable expenses incurred in connection with a proceeding in which the person is a party because of the person's corporate position, if the person was successful, on the merits or otherwise, in the defense of the proceeding. Under certain circumstances, a corporation may also advance expenses to such person. Article 2.02-1 of the TBCA permits a corporation to purchase and maintain insurance or to make other arrangements on behalf of any of the foregoing persons against any liability asserted against and incurred by the person in such capacity, or arising out of the person's status as such a person, whether or not the corporation would have the powers to indemnify the person against the liability under applicable law. The Company's Articles of Incorporation, as amended (the "Articles"), provide that the Company's directors will have no personal liability to the Company or its shareholders for monetary damages for an act or omission in their capacities as directors. This provision has no effect on director liability for (i) a breach of the II-1 86 director's duty of loyalty to the Company or its shareholders, (ii) acts or omissions not in good faith that constitute a breach of duty of a director or involving intentional misconduct or knowing violations of law, (iii) approval of any transaction from which a director derives an improper personal benefit, or (iv) an act or omission for which the liability of a director is expressly provided by an applicable statute. In addition, the Company's Articles provide that any additional liability permitted to be eliminated by subsequent legislation will automatically be eliminated without further shareholder vote, unless additional shareholder approval is required by such legislation. Article VI of the Company's Bylaws (the "Bylaws") also provides that the Company will indemnify its directors, officers, employees and agents to the fullest extent permitted by the TBCA. As described above, this means that the Company is generally required to indemnify its directors, officers, employees, and agents against all judgments, fines, settlements, legal fees, and other expenses incurred in connection with pending or threatened legal proceedings because of the person's position with the Company or another entity that the person serves at the Company's request, subject to certain conditions, generally described above, and to advance funds to enable them to defend against such proceedings. The Company has entered into certain agreements (the "Indemnification Agreements") with each of its directors and executive officers (each, an "Indemnitee") designed to give effect to the foregoing provisions of the Articles and Bylaws. The Indemnification Agreements are intended to provide certain additional assurances against the possibility of uninsured liability primarily because the Indemnification Agreements (i) specify the extent to which the Indemnitees shall be entitled to receive benefits not expressly set forth in the TBCA and (ii) include a number of procedural provisions designed to provide certainty in administration of the rights to indemnity. Pursuant to the Indemnification Agreements, among other things, an Indemnitee will be entitled to indemnification as provided by the TBCA. The right to receive indemnification is not available under the Indemnification Agreements in connection with any claim against the Indemnitee (i) for which payment is actually made to the Indemnitee under a valid and collectible insurance policy or (ii) as to which the Indemnitee shall have been adjudged to be liable for willful or intentional misconduct in the performance of his duty to the Company, unless ordered by the court in which the claim was brought in accordance with applicable law. The Underwriting Agreement entered into by the Company and the Underwriters in connection with this Offering provides that the Underwriters will indemnify the directors and officers of the Company against certain liabilities relating to information furnished by the Underwriters. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. On December 31, 1993, the Company issued 3,229.34 shares of the Company's common stock in exchange for all of the issued and outstanding common stock of Mor-Tem Systems, Inc. ("Mor-Tem") owned by Messrs. Morris, Anderson and another Mor-Tem shareholder. On the same date, the Company issued 510.167 shares of the Company's Series B Cumulative Preferred Stock (the "Series B Stock") to Mr. Morris in exchange for the cancellation of the Company's promissory notes payable to Mr. Morris with outstanding principal balances totalling $1,480,000. On July 29, 1996, Mr. Morris converted the Series B Stock into 1530.50 shares of the Company's common stock. The above transactions were exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"), pursuant to Section 4(2) thereof. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. a. Exhibits: 1.1 -- Form of Underwriting Agreement 2.1 -- Distribution Agreement between the Company and existing and former shareholders 2.2 -- Form of First Amendment to Distribution Agreement among the Company, existing and former shareholders and former subsidiaries
II-2 87 2.3 -- Form of Distribution Agreement among the Company, AOAC, Millard E. Morris and Mark R. Anderson 3.1* -- Amended and Restated Articles of Incorporation of the Company 3.2* -- Amended and Restated Bylaws of the Company 4.1 -- Form of Class A Common Stock Certificate (temporary) 5.1 -- Opinion of Jones, Day, Reavis & Pogue 10.1* -- Form of Registration Rights Agreement among the Company, Millard E. Morris and Mark R. Anderson 10.2 -- Stock Incentive Plan 10.3 -- Form of Indemnification Agreement 10.4 -- Form of Employment Agreement with certain executive officers of the Company 10.5 -- Form of Tax Matters Agreement 10.6 -- Form of Services Agreement between the Company and Auto One Acceptance Corporation 10.7+ -- First Casualty Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.8+ -- Second Casualty Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.9+ -- Third Casualty Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.10+ -- First Workers' Compensation Per Occurrence Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.11+ -- Second Workers' Compensation Per Occurrence Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.12+ -- First Per Claimant Workers' Compensation Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.13+ -- Second Per Claimant Workers' Compensation Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 11.1 -- Statement of Computation of Earnings Per Share 21.1* -- Subsidiaries of the Company 23.1 -- Consent of Ernst & Young LLP 23.2 -- Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5.1) 24.1* -- Powers of Attorney 27.1 -- Financial Data Schedule
- --------------- * Previously filed. + Previously filed with confidential portions omitted and filed separately. b. Financial Statement Schedules: Report of Ernst & Young LLP on Financial Statement Schedules I. Summary of Investments -- Other Than Investments In Related Parties* II. Condensed Financial Information of Registrant* III. Supplementary Insurance Information* IV. Reinsurance* VI. Supplemental Information Concerning Property-Casualty Insurance Operations* - --------------- * Previously filed. II-3 88 All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule, or because the information required is included in the financial statements and notes thereto. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in 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, 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. II-4 89 SIGNATURES Pursuant to the requirement of the Securities Act, the Registrant has duly caused this Amendment No. 1 to Registration Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas, on September 23, 1996. AMERISAFE, INC. By: /s/ MARK R. ANDERSON ------------------------------------ Mark R. Anderson President and Chief Operating Officer Pursuant to the requirements of the Securities Act, this Amendment No. 1 to Registration Statement on Form S-1 has been signed by the following persons in the capacities indicated on September 23, 1996.
SIGNATURES TITLE - --------------------------------------------- ---------------------------------------------- MILLARD E. MORRIS* Chairman of the Board of Directors and Chief - --------------------------------------------- Executive Officer (principal executive Millard E. Morris officer) /s/ MARK R. ANDERSON President, Chief Operating Officer and - --------------------------------------------- Director Mark R. Anderson ARTHUR L. HUNT* Vice President and Director - --------------------------------------------- Arthur L. Hunt JOHN R. BUCK* Vice President, Chief Financial Officer, - --------------------------------------------- Treasurer and Director (Principal Financial John R. Buck and Accounting Officer) DANIEL J. JESSEE* Director - --------------------------------------------- Daniel J. Jessee N. DAVID SPENCE* Director - --------------------------------------------- N. David Spence
* The undersigned, by signing his name hereto, does sign and execute this Amendment No. 1 to Registration Statement as of this 23rd day of September, 1996, pursuant to the Powers of Attorney executed on behalf of the above-named officers and directors and previously filed with the Securities and Exchange Commission. By: /s/ MARK R. ANDERSON ------------------------------------ Mark R. Anderson Attorney-in-Fact II-5 90 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGE - ---------- ----------------------------------------------------------------------------------- 1.1 -- Form of Underwriting Agreement 2.1 -- Distribution Agreement between the Company and existing and former shareholders 2.2 -- Form of First Amendment to Distribution Agreement among the Company, existing and former shareholders and former subsidiaries 2.3 -- Form of Distribution Agreement among the Company, AOAC, Millard E. Morris and Mark R. Anderson 3.1* -- Amended and Restated Articles of Incorporation of the Company 3.2* -- Amended and Restated Bylaws of the Company 4.1 -- Form of Class A Common Stock Certificate (temporary) 5.1 -- Opinion of Jones, Day, Reavis & Pogue 10.1* -- Form of Registration Rights Agreement among the Company, Millard E. Morris and Mark R. Anderson 10.2 -- Stock Incentive Plan 10.3 -- Form of Indemnification Agreement 10.4 -- Form of Employment Agreement with certain executive officers of the Company 10.5 -- Form of Tax Matters Agreement 10.6 -- Form of Services Agreement between the Company and Auto One Acceptance Corporation 10.7+ -- First Casualty Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.8+ -- Second Casualty Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.9+ -- Third Casualty Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.10+ -- First Workers' Compensation Per Occurrence Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.11+ -- Second Workers' Compensation Per Occurrence Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.12+ -- First Per Claimant Workers' Compensation Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 10.13+ -- Second Per Claimant Workers' Compensation Excess Reinsurance Agreement between the Company, Silver Oak Casualty, Inc. and the Reinsurers identified therein 11.1 -- Statement of Computation of Earnings Per Share 21.1* -- Subsidiaries of the Company 23.1 -- Consent of Ernst & Young LLP 23.2 -- Consent of Jones, Day, Reavis & Pogue (included in Exhibit 5.1) 24.1* -- Powers of Attorney 27.1 -- Financial Data Schedule
- --------------- * Previously filed. + Previously filed with confidential portions omitted and filed separately. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 11,000,000 SHARES AMERISAFE, INC. CLASS A COMMON STOCK UNDERWRITING AGREEMENT , 1996 SMITH BARNEY INC. PIPER JAFFRAY INC. As Representatives of the Several Underwriters c/o SMITH BARNEY INC. 388 Greenwich Street New York, New York 10013 Dear Sirs: AMERISAFE, Inc., a Texas corporation (the "Company"), proposes to issue and sell an aggregate of 11,000,000 shares (the "Firm Shares") of its Class A common stock, par value $.01 per share (the "Class A Common Stock"), to the several Underwriters named in Schedule I hereto (the "Underwriters"). In addition, solely for the purpose of covering over-allotments, the Company proposes to sell to the Underwriters, upon the terms and conditions set forth in Section 2 hereof, up to an additional 1,650,000 shares (the "Additional Shares") of Class A Common Stock. The Firm Shares and the Additional Shares are hereinafter collectively referred to as the "Shares." The Company wishes to confirm as follows its agreement with you (the "Representatives") and the other several Underwriters on whose behalf you are acting, in connection with the several purchases of the Shares by the Underwriters. 1. REGISTRATION STATEMENT AND PROSPECTUS. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") in accordance with the provisions of the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder (collectively, the "Act"), a registration statement on Form S-1 under the Act (the "registration statement"), including a prospectus subject to completion, relating to the Shares. The term "Registration Statement" as used in this Agreement means the registration statement (including all financial schedules and exhibits) as amended at the time it becomes effective or, if the registration statement became effective prior to the execution of this Agreement, as supplemented or amended prior to the execution of this Agreement. If it is contemplated, at the time this Agreement is executed, that a post-effective amendment to the registration statement will be filed and must be declared effective before the offering of the Shares may commence, the term "Registration Statement" as used in this Agreement means the registration statement as amended by said post-effective amendment. If an abbreviated registration statement is 2 prepared and filed with the Commission in accordance with Rule 462(b) under the Act (an "Abbreviated Registration Statement"), the term "Registration Statement" as used in this Agreement includes the Abbreviated Registration Statement. The term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement, or, if the prospectus included in the Registration Statement omits information in reliance on Rule 430A under the Act and such information is included in a prospectus filed with the Commission pursuant to Rule 424(b) under the Act, the term "Prospectus" as used in this Agreement means the prospectus in the form included in the Registration Statement as supplemented by the addition of the Rule 430A information contained in the prospectus filed with the Commission pursuant to Rule 424(b). The term "Prepricing Prospectus" as used in this Agreement means the prospectus subject to completion in the form included in the registration statement at the time of the initial filing of the registration statement with the Commission, and as such prospectus shall have been amended from time to time prior to the date of the Prospectus. 2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees, subject to all the terms and conditions set forth herein, to issue and sell to each Underwriter and, upon the basis of the representations, warranties and agreements of the Company herein contained and subject to all the terms and conditions set forth herein, each Underwriter agrees, severally and not jointly, to purchase from the Company, at a purchase price of $ per share (the "purchase price per share"), the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number of Firm Shares increased as set forth in Section 10 hereof). The Company also agrees, subject to all the terms and conditions set forth herein, to sell to the Underwriters, and, upon the basis of the representations, warranties and agreements of the Company herein contained and subject to all the terms and conditions set forth herein, the Underwriters shall have the right to purchase from the Company, at the purchase price per share, pursuant to an option (the "over-allotment option") which may be exercised at any time and from time to time prior to 9:00 p.m., New York City time, on the 30th day after the date of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a holiday, on the next business day thereafter when the New York Stock Exchange is open for trading), up to an aggregate of 1,650,000 Additional Shares from the Company. Upon any exercise of the over-allotment option, each Underwriter, severally and not jointly, agrees to purchase from the Company the number of Additional Shares (subject to such adjustments as you may determine in order to avoid fractional shares) which bears the same proportion to the number of Additional Shares to be purchased by the Underwriters as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number of Firm Shares increased as set forth in Section 10 hereof) bears to the aggregate number of Firm Shares. 3. TERMS OF PUBLIC OFFERING. The Company has been advised by you that the Underwriters propose to make a public offering of their respective portions of the Shares as soon after the Registration Statement and this Agreement have become effective as in your judgment is advisable and initially to offer the Shares upon the terms set forth in the Prospectus. 4. DELIVERY OF THE SHARES AND PAYMENT THEREFOR. Delivery to the Underwriters of and payment for the Firm Shares shall be made at the office of Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, at 10:00 A.M., New York City time, on , 1996 (the "Closing Date"). The place of closing for the Firm Shares and the Closing Date may be varied by agreement between you and the Company. Delivery to the Underwriters of and payment for any Additional Shares to be purchased by the Underwriters shall be made at the aforementioned office of Smith Barney Inc. at such time on such date (the "Option Closing Date"), which may be the same as the Closing Date but shall in no event be -2- 3 earlier than the Closing Date nor earlier than two nor later than ten business days after the giving of the notice hereinafter referred to, as shall be specified in a written notice from you on behalf of the Underwriters to the Company of the Underwriters' determination to purchase a number, specified in such notice, of Additional Shares. The place of closing for any Additional Shares and the Option Closing Date for such Shares may be varied by agreement between you and the Company. Certificates for the Firm Shares and for any Additional Shares to be purchased hereunder shall be registered in such names and in such denominations as you shall request by written notice, it being understood that a facsimile transmission shall be deemed written notice, prior to 9:30 A.M., New York City time, on the second business day preceding the Closing Date or any Option Closing Date, as the case may be. Such certificates shall be made available to you in New York City for inspection and packaging not later than 9:30 A.M., New York City time, on the business day next preceding the Closing Date or the Option Closing Date, as the case may be. The certificates evidencing the Firm Shares and any Additional Shares to be purchased hereunder shall be delivered to you on the Closing Date or the Option Closing Date, as the case may be, against payment of the purchase price therefor in immediately available funds. 5. AGREEMENTS OF THE COMPANY. The Company agrees with the several Underwriters as follows: (a) If, at the time this Agreement is executed and delivered, it is necessary for the Registration Statement or a post-effective amendment thereto or any Abbreviated Registration Statement to be declared or, in the case of an Abbreviated Registration Statement, to become effective before the offering of the Shares may commence, the Company will endeavor to cause the Registration Statement or such post-effective amendment or Abbreviated Registration Statement to become effective as soon as possible and will advise you promptly and, if requested by you, will confirm such advice in writing, when the Registration Statement or such post-effective amendment or Abbreviated Registration Statement has become effective. (b) The Company will advise you promptly and, if requested by you, will confirm such advice in writing: (i) of any request by the Commission for amendment of or a supplement to the Registration Statement, any Prepricing Prospectus or the Prospectus or for additional information; (ii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of the suspension of qualification of the Shares for offering or sale in any jurisdiction or the initiation of any proceeding for such purpose; and (iii) within the period of time referred to in paragraph (f) below, of any change in the Company's condition (financial or other), business, prospects, properties, net worth or results of operations, or of the happening of any event, which makes any statement of a material fact made in the Registration Statement or the Prospectus (as then amended or supplemented) untrue or which requires the making of any additions to or changes in the Registration Statement or the Prospectus (as then amended or supplemented) in order to state a material fact required by the Act or the regulations thereunder to be stated therein or necessary in order to make the statements therein not misleading, or of the necessity to amend or supplement the Prospectus (as then amended or supplemented) to comply with the Act or any other law. If at any time the Commission shall issue any stop order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal of such order at the earliest possible time. (c) The Company will furnish to you, without charge, three signed copies of the registration statement as originally filed with the Commission and of each amendment thereto, including financial statements and all exhibits to the registration statement and will also furnish to you, without -3- 4 charge, such number of conformed copies of the registration statement as originally filed and of each amendment thereto, but without exhibits, as you may reasonably request. (d) The Company will not (i) file any amendment to the Registration Statement or make any amendment or supplement to the Prospectus of which you shall not previously have been advised or to which you shall object after being so advised or (ii) so long as, in the opinion of counsel for the Underwriters, a prospectus is required to be delivered in connection with sales by any Underwriter or dealer, file any information, documents or reports pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), without delivering a copy of such information, documents or reports to you, as Representatives of the Underwriters, prior to or concurrently with such filing. (e) Prior to the execution and delivery of this Agreement, the Company has delivered or will deliver to you, without charge, in such quantities as you have requested or may hereafter reasonably request, copies of each form of the Prepricing Prospectus. The Company consents to the use, in accordance with the provisions of the Act and with the securities or Blue Sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by dealers, prior to the date of the Prospectus, of each Prepricing Prospectus so furnished by the Company. (f) As soon after the execution and delivery of this Agreement as possible and thereafter from time to time for such period as in the opinion of counsel for the Underwriters a prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer, the Company will expeditiously deliver to each Underwriter and each dealer, without charge, as many copies of the Prospectus (and of any amendment or supplement thereto) as you may reasonably request. The Company consents to the use of the Prospectus (and of any amendment or supplement thereto) in accordance with the provisions of the Act and with the securities or Blue Sky laws of the jurisdictions in which the Shares are offered by the several Underwriters and by all dealers to whom Shares may be sold, both in connection with the offering and sale of the Shares and for such period of time thereafter as the Prospectus is required by the Act to be delivered in connection with sales by any Underwriter or dealer. If during such period of time any event shall occur that in the judgment of the Company or in the opinion of counsel for the Underwriters is required to be set forth in the Prospectus (as then amended or supplemented) or should be set forth therein in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary to supplement or amend the Prospectus to comply with the Act or any other applicable law, the Company will forthwith prepare and, subject to the provisions of paragraph (d) above, file with the Commission an appropriate supplement or amendment thereto and will expeditiously furnish copies thereof to the Underwriters and dealers in such quantities as you shall reasonably request. In the event that the Company and you, as Representatives of the several Underwriters, agree that the Prospectus should be amended or supplemented, the Company, if requested by you, will promptly issue a press release announcing or disclosing the matters to be covered by the proposed amendment or supplement. (g) The Company will cooperate with you and with counsel for the Underwriters in connection with the registration or qualification of the Shares for offering and sale by the several Underwriters and by dealers under the securities or Blue Sky laws of such jurisdictions as you may designate and will file such consents to service of process or other documents necessary or appropriate in order to effect such registration or qualification; provided that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action that would subject it to service of process in suits, other than those arising out of the offering or sale of the Shares, in any jurisdiction where it is not now so subject. -4- 5 (h) The Company will make generally available to its security holders a consolidated earnings statement, which need not be audited, covering a twelve-month period commencing after the effective date of the Registration Statement and ending not later than 15 months thereafter, as soon as practicable after the end of such period, which consolidated earnings statement shall satisfy the provisions of Section 11(a) of the Act. (i) During the period of five years hereafter, the Company will furnish to you, as soon as available, a copy of each report of the Company mailed to shareholders or filed with the Commission. (j) If this Agreement shall terminate or shall be terminated after execution pursuant to any provisions hereof (otherwise than pursuant to the second paragraph of Section 10 hereof or by notice given by you terminating this Agreement pursuant to Section 10 or Section 11 hereof) or if this Agreement shall be terminated by the Underwriters because of any failure or refusal on the part of the Company to comply in all material respects with the terms or fulfill any of the conditions of this Agreement, the Company agrees to reimburse the Representatives for all out-of-pocket expenses (including fees and expenses of counsel for the Underwriters) reasonably incurred by you in connection herewith. (k) The Company will apply the net proceeds from the sale of the Shares substantially in accordance with the description set forth in the Prospectus, including such repayment of indebtedness as is necessary to cause all of the outstanding shares of capital stock of each of the Subsidiaries owned by the Company directly, or indirectly through one of the other Subsidiaries, to be free and clear of any security interest, lien, adverse claim, equity or other encumbrance simultaneously with the closing for the Firm Shares. (l) If Rule 430A of the Act is employed, the Company will timely file the Prospectus pursuant to Rule 424(b) under the Act and will advise you of the time and manner of such filing. (m) Except as provided in this Agreement, the Company will not sell, offer to sell, contract to sell or otherwise transfer or dispose of any Class A Common Stock (or any securities convertible into or exercisable or exchangeable for Class A Common Stock), or grant any options or warrants to purchase Class A Common Stock (except pursuant to employee benefit plans of the Company), for a period of 180 days after the date of the Prospectus, without the prior written consent of Smith Barney Inc. (n) The Company has furnished or will furnish to you "lock-up" letters from each of Millard E. Morris and Mark R. Anderson to the effect that such shareholders will agree not to sell, offer to sell, contract to sell, pledge, grant any option for the sale of or otherwise transfer or dispose or cause the disposition of any Class A Common Stock (or any securities convertible into or exchangeable or exercisable for Class A Common Stock) for a period of 180 days after the date of the Prospectus, without the prior written consent of Smith Barney Inc. (o) Except as stated in this Agreement and in the Prepricing Prospectus and Prospectus, the Company has not taken, nor will it take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Class A Common Stock to facilitate the sale or resale of the Shares. -5- 6 (p) The Company will use its reasonable best efforts to have the Class A Common Stock listed, subject to notice of issuance, on the New York Stock Exchange prior to or concurrently with the effectiveness of the registration statement. (q) Prior to the Closing Date, the Company will have filed . . . . [SPECIFY LOUISIANA INSURANCE LAW COMPLIANCE.] 6. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to each Underwriter that: (a) Each Prepricing Prospectus included as part of the registration statement as originally filed or as part of any amendment or supplement thereto, or filed pursuant to Rule 424 under the Act, complied when so filed in all material respects with the provisions of the Act. The Commission has not issued any order preventing or suspending the use of any Prepricing Prospectus. (b) The registration statement in the form in which it became or becomes effective and also in such form as it may be when any post-effective amendment thereto or any Abbreviated Registration Statement shall become effective, and the Prospectus and any supplement or amendment thereto when filed with the Commission under Rule 424(b) under the Act, complied or will comply in all material respects with the provisions of the Act and did not or will not at any such times contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, except that this representation and warranty does not apply to statements in or omissions from the registration statement or the Prospectus made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by or on behalf of any Underwriter through you expressly for use therein. (c) All the outstanding shares of capital stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable, are free of any preemptive or similar rights (other than such rights as shall terminate upon completion of the offering contemplated hereby, as set forth in the Registration Statement and the Prospectus) and have been issued and sold in compliance with all Federal and state securities laws; the Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free of any preemptive or similar rights; and the capital stock of the Company conforms to the description thereof in the Registration Statement and the Prospectus. (d) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus, and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a material adverse effect on the condition (financial or other), business, prospects, properties, net worth or results of operations of the Company and the Subsidiaries (as hereinafter defined) taken as a whole (a "Material Adverse Effect"). (e) All the Company's subsidiaries (as defined in the Act) are listed in an exhibit to the Registration Statement and are referred to herein individually as a "Subsidiary" and collectively as the "Subsidiaries." Each Subsidiary is a corporation duly organized, validly existing and in good standing in the jurisdiction of its incorporation, with full corporate power and authority to own, lease and operate -6- 7 its properties and to conduct its business as described in the Registration Statement and the Prospectus, and is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a Material Adverse Effect. All the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable, and, except for a nominal number of shares owned by directors to comply with requirements of state law, are wholly owned by the Company directly or indirectly through one of the other Subsidiaries, free and clear of any lien, adverse claim, security interest, equity or other encumbrance, except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement thereto) and which exception includes the disclosed pledge of the stock of certain of the Subsidiaries as security for indebtedness under the Company's existing credit facility with Banc One Capital Partners II, Ltd. (f) There are no legal or governmental proceedings pending or, to the knowledge of the Company, threatened, against the Company or any of the Subsidiaries, or to which the Company or any of the Subsidiaries or any of their respective properties are subject, that are required to be described in the Registration Statement or the Prospectus but are not described as required. There are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus or to be filed as an exhibit to the Registration Statement that are not described or filed as required by the Act. Neither the Company nor any Subsidiary is involved in any strike or organized labor dispute, and to the Company's best knowledge no such action or dispute is threatened. (g) Neither the Company nor any of the Subsidiaries is (i) in violation of its articles of incorporation or bylaws, or of any law, ordinance, administrative or governmental rule or regulation applicable to the Company or any of the Subsidiaries, including, without limitation, laws prohibiting the corporate practice of medicine, fee-splitting or fees for the referral of patients, or of any decree of any court or governmental agency or body having jurisdiction over the Company or any of the Subsidiaries, or (ii) in default in any respect in the performance of any obligation, agreement or condition contained in any bond, debenture, note or any other evidence of indebtedness or in any agreement, indenture, lease or other instrument to which the Company or any of the Subsidiaries is a party or by which it or any of them or any of their respective properties may be bound, except, in either case, for such violations or omissions that would not have a Material Adverse Effect. (h) Neither the issuance and sale of the Shares, the execution, delivery or performance of this Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby (i) requires any consent, approval, authorization or other order of, or registration or filing with, any court, regulatory body, administrative agency or other governmental body, agency or official (except such as may be required for the registration of the Shares under the Act and the Exchange Act and . . . [COMPLIANCE WITH LOUISIANA INSURANCE LAW - - SPECIFY], all of which have been or will be effected in accordance with this Agreement, and compliance with the securities or Blue Sky laws of various jurisdictions) or conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, the certificate of incorporation or bylaws, or other organizational documents, of the Company or any of the Subsidiaries or (ii) conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, any agreement, indenture, lease or other instrument to which the Company or any of the Subsidiaries is a party or by which it or any of them or any of their respective properties may be bound, or violates or will violate any statute, law, regulation or filing or judgment, injunction, order or decree applicable to the Company or any of the Subsidiaries or any of their respective properties, or will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Subsidiaries pursuant to the terms of any agreement or -7- 8 instrument to which it or any of them is a party or by which it or any of them may be bound or to which any of the property or assets of it or any of them is subject. (i) The accountants, Ernst & Young LLP, who have certified or shall certify the financial statements filed or to be filed as part of the Registration Statement or the Prospectus (or any amendment or supplement thereto), are independent public accountants as required by the Act. (j) The financial statements, together with related schedules and notes of the Company forming part of the Registration Statement and the Prospectus (and any amendment or supplement thereto), comply with the requirements of the Act and present fairly the financial position, results of operations and changes in stockholders' equity and cash flows of the Company and the Subsidiaries on the basis stated in the Registration Statement at the respective dates or for the respective periods to which they apply; such statements and related schedules and notes have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved, except as disclosed therein; and the other financial and statistical information and data set forth in the Registration Statement and the Prospectus (and any amendment or supplement thereto) are accurately presented and prepared on a basis consistent with such financial statements and the books and records of the Company and the Subsidiaries. (k) The Company has all requisite power and authority to execute, deliver and perform its obligations under this Agreement; the execution and delivery of, and the performance by the Company of its obligations under, this Agreement have been duly and validly authorized by the Company, and this Agreement has been duly executed and delivered by the Company and constitutes the valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms, except as rights to indemnity and contribution hereunder may be limited by federal or state securities laws or principles of public policy and subject to the qualification that the enforceability of the Company's obligations hereunder may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium and other laws relating to or affecting creditors' rights generally and by general equitable principles. (l) Except as disclosed in or contemplated by the Registration Statement and the Prospectus (or any amendment or supplement thereto), subsequent to the respective dates as of which such information is given in the Registration Statement and the Prospectus (or any amendment or supplement thereto), neither the Company nor any of the Subsidiaries has incurred any liability or obligation, direct or contingent, or entered into any transaction that is material to the Company and the Subsidiaries taken as a whole, and there has not been any change in the capital stock, or material increase in the short-term or long-term debt, of the Company or any of the Subsidiaries, or any material adverse change, or any development involving or which may reasonably be expected to involve a prospective material adverse change, in the condition (financial or other), business, properties, net worth or results of operations of the Company and the Subsidiaries taken as a whole. (m) Each of the Company and the Subsidiaries has good and marketable title to all property (real and personal) described in the Prospectus as being owned by it, free and clear of all liens, claims, security interests or other encumbrances except such as (i) are described in the Registration Statement and the Prospectus or in a document filed as an exhibit to the Registration Statement or (ii) are neither material in amount nor materially significant in relation to the business of the Company and the Subsidiaries taken as a whole, and all the property described in the Prospectus as being held under lease by the Company or any of the Subsidiaries is held by it or them under valid, subsisting and enforceable leases. -8- 9 (n) The Company has not distributed and, prior to the later to occur of (i) the Closing Date and (ii) completion of the distribution of the Shares, will not distribute any offering material in connection with the offering and sale of the Shares other than the Registration Statement, the Prepricing Prospectus, the Prospectus or other materials, if any, permitted by the Act. (o) Each of the Company and the Subsidiaries has such permits, licenses, franchises, authorizations and clearances ("Permits") of governmental or regulatory authorities as are necessary to own, lease and operate their respective properties and to conduct their respective businesses in the manner described in the Prospectus, subject to such qualifications as may be set forth in the Prospectus and except where the failure to have such Permits would not have a Material Adverse Effect; subject to such qualifications as may be set forth in the Prospectus, the Company and each of the Subsidiaries have fulfilled and performed all of their respective material obligations with respect to the Permits, and no event has occurred which allows, or after notice or lapse of time would allow, revocation or termination thereof or results in any other material impairment of the rights of the holder of any Permit, subject in each case to such qualification as may be set forth in the Prospectus except where such revocation or termination would not have a Material Adverse Effect. Except as described in the Prospectus, none of the Permits contain any restriction that is materially burdensome to either of the Company or any of the Subsidiaries. (p) The property, assets and operations of each of the Company and the Subsidiaries comply in all material respects with all applicable federal, state and local laws, rules, orders, decrees, judgments, injunctions, licenses, permits or regulations relating to environmental matters (the "Environmental Laws"). To the Company's knowledge after due inquiry, none of the Company's nor any of the Subsidiaries' property, assets or operations is the subject of any federal, state or local investigation evaluating whether any remedial action is needed to respond to a release of any substance regulated by or forming the basis of liability under any Environmental Laws (a "Hazardous Material") into the environment or is in contravention of any federal, state, local or foreign law, order or regulation. Neither the Company nor any of the Subsidiaries has received any notice or claim, nor are there any pending or, to the Company's knowledge after due inquiry, threatened or reasonably anticipated lawsuits against it with respect to violations of an Environmental Law or in connection with the release of any Hazardous Material into the environment. Neither the Company nor any of the Subsidiaries has any material contingent liability in connection with any release of Hazardous Material into the environment. (q) The Company and the Subsidiaries maintain insurance of the types and in amounts generally deemed adequate for their respective businesses and consistent with insurance coverage maintained by similar companies and businesses, all of which insurance is in full force and effect. (r) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (s) Neither the Company nor any of the Subsidiaries, nor, to the Company's knowledge after due inquiry, any employee or agent of the Company or any of the Subsidiaries has made any payment of funds of the Company or received or retained any funds in violation of any law, rule or regulation, which payment, receipt or retention of funds is of a character required to be disclosed in the Prospectus. -9- 10 (t) Each of the Company and the Subsidiaries has filed all tax returns required to be filed, which returns are complete and correct in all material respects, and neither the Company nor any Subsidiary is in default in the payment of any taxes which were payable pursuant to said returns or any assessments with respect thereto, except as disclosed in the Prospectus. (u) Except as disclosed in the Prospectus and except for rights which have been waived, no holder of any security of the Company has any right to require registration of shares of Class A Common Stock or any other security of the Company because of the filing of the registration statement or the consummation of the transactions contemplated by this Agreement and, except as disclosed in the Prospectus, no person has the right to require registration under the Act of any shares of Class A Common Stock or other securities of the Company. No person has the right, contractual or otherwise, to cause the Company to permit such person to underwrite the sale of any of the Shares. Except as described in or contemplated by the Prospectus, there are no outstanding options, warrants or other rights calling for the issuance of, and there are no commitments, plans or arrangements to issue, any shares of capital stock of the Company or any security convertible into or exchangeable or exercisable for capital stock of the Company. (v) The Company and the Subsidiaries own or possess or have applied for all patents, trademarks, trademark registrations, service marks, service mark registrations, trade names, copyrights, licenses, inventions, trade secrets and rights described in the Prospectus as being owned by them or any of them or necessary for the conduct of their respective businesses, and the Company is not aware of any claim to the contrary or any challenge by any other person to the rights of the Company and the Subsidiaries with respect to the foregoing except where such claim or challenge would not have a Material Adverse Effect. (w) Neither the Company nor any of the Subsidiaries is, nor will the Company or any of the Subsidiaries become, upon the sale of the Shares to be issued and sold in accordance herewith and application of the net proceeds from such sale as described in the Prospectus under the caption "Use of Proceeds," an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (x) The Company is in compliance with all provisions of Florida Statutes Section 517.075 and the regulations thereunder, relating to issuers doing business with Cuba. (y) The Company is not required to be licensed as an insurance company in any state. American Interstate Insurance Company ("AIIC") and Silver Oak Casualty, Inc. ("SOC") (each an Insurance Subsidiary and, together, the "Insurance Subsidiaries") are the only Subsidiaries of the Company which are insurance companies. Each of the Insurance Subsidiaries holds all licenses, certificates and permits from insurance departments and other governmental authorities (collectively, the "Insurance Licenses") necessary or desirable to conduct its business as presently conducted or as presently contemplated to be conducted in the future, except where the failure to hold any such Insurance Licenses would not have a Material Adverse Effect. Each of the Insurance Subsidiaries has fulfilled and performed all material obligations necessary to maintain its Insurance Licenses, and no event or events have occurred which would result in the impairment, modification, termination or revocation of such Insurance Licenses, except where such impairment, modification, termination or revocation would not have a Material Adverse Effect. -10- 11 (z) No loss experience has occurred since December 31, 1995 which would require or make it necessary or appropriate for the Company to change, alter, modify or amend the Company's methodology or assumptions relating to losses. (aa) The Company has made available to the Underwriters copies of the statutory Annual and Quarterly Statements (the "Statutory Statements") of AIIC and SOC filed with the department of insurance in each state where the Insurance Subsidiaries are licensed for the years 1990 through 1995. The statutory financial statements contained in each Statutory Statement fairly present the statutory financial condition of the respective corporations at the date of each such statement, and the statutory results of operations and other data contained therein for each of the five years then ended have been prepared in accordance with the prescribed or permitted statutory insurance accounting requirements and practices, and in accordance with accounting practices prescribed or permitted by the National Association of Insurance Commissioners, and have been applied on a consistent basis except as expressly set forth or disclosed in the notes, exhibits or schedules thereto. The exhibits and schedules included in each Statutory Statement fairly present the data purported to be shown thereby. (ab) All reinsurance treaties, contracts, agreements and arrangements to which the Company or any of the Insurance Subsidiaries is a party and as to which any of them reported recoverables, premiums due or other amounts in its 1995 Statutory Statements are in full force and effect and none of the Company or any of the Insurance Subsidiaries is in violation of, or in default in the performance, observance or fulfillment of, any material obligation, agreement, covenant or condition contained therein, which violation or default would, singly or in the aggregate, have a Material Adverse Effect. None of the Company or any of its Subsidiaries has any reason to believe that any other party to such treaties, contracts, agreements or arrangements will not or cannot perform in any material respect its duties or obligations under such treaty, contract, agreement or arrangement, except where the failure to perform would not have a Material Adverse Effect. (ac) A.M. Best Company, Inc. has not taken any action to, or to the Company's knowledge, threatened to: (i) downgrade the ratings of any of the Insurance Subsidiaries or (ii) publicly announce or otherwise indicate to the Company that its ratings of any of the Insurance Subsidiaries are under review with negative implications. 7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each of you and each other Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act from and against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Prepricing Prospectus or in the Registration Statement or the Prospectus or in any amendment or supplement thereto, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any untrue statement or omission or alleged untrue statement or omission which has been made therein or omitted therefrom in reliance upon and in conformity with the information relating to such Underwriter furnished in writing to the Company by or on behalf of any Underwriter through you expressly for use in connection therewith; provided, however, that the indemnification contained in this paragraph (a) with respect to any Prepricing Prospectus shall not inure to the benefit of any Underwriter (or to the benefit of any person controlling such Underwriter) on account of any such loss, claim, damage, liability or expense arising from the sale of Shares by such Underwriter to any person if (i) a copy of the Prospectus shall not have been delivered or sent to such person within the time required by the Act and the untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such -11- 12 Prepricing Prospectus was corrected in the Prospectus and (ii) the Company has delivered the Prospectus to the several Underwriters in requisite quantity on a timely basis to permit such delivery or sending. The foregoing indemnity agreement shall be in addition to any liability which the Company may otherwise have. (b) If any action, suit or proceeding shall be brought against any Underwriter or any person controlling any Underwriter in respect of which indemnity may be sought against the Company in accordance with Section 7(a), such Underwriter or such controlling person shall promptly notify the Company, and the Company shall assume the defense thereof, including the employment of counsel and payment of all fees and expenses. Such Underwriter or any such controlling person shall have the right to employ separate counsel in any such action, suit or proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Underwriter or such controlling person unless (i) the Company has agreed in writing to pay such fees and expenses, (ii) the Company has failed to assume the defense and employ counsel or (iii) the named parties to any such action, suit or proceeding (including any impleaded parties) include both such Underwriter or such controlling person and the Company and such Underwriter or such controlling person shall have been advised by its counsel that representation of such indemnified party and the Company by the same counsel would be inappropriate under applicable standards of professional conduct (whether or not such representation by the same counsel has been proposed) due to actual or potential differing interests between them (in which case the Company shall not have the right to assume the defense of such action, suit or proceeding on behalf of such Underwriter or such controlling person). It is understood, however, that the Company shall, in connection with any one such action, suit or proceeding or separate but substantially similar or related actions, suits or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of only one separate firm of attorneys (in addition to any local counsel) at any time for all such Underwriters and controlling persons not having actual or potential differing interests with you or among themselves, which firm shall be designated in writing by Smith Barney Inc., and that all such fees and expenses shall be reimbursed as they are incurred. The Company shall not be liable for any settlement of any such action, suit or proceeding effected without its written consent, but if settled with such written consent, or if there be a final judgment for the plaintiff in any such action, suit or proceeding, the Company agrees to indemnify and hold harmless any Underwriter and any such controlling person, to the extent provided in Section 7(a), from and against any loss, claim, damage, liability or expense by reason of such settlement or judgment. (c) Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, its directors, its officers who sign the Registration Statement, and any person who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, to the same extent as the foregoing indemnity from the Company to each Underwriter, but only with respect to information relating to such Underwriter furnished in writing to the Company by or on behalf of such Underwriter through you expressly for use in the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto. If any action, suit or proceeding shall be brought against the Company, any of its directors, any such officer or any such controlling person based on the Registration Statement, the Prospectus or any Prepricing Prospectus, or any amendment or supplement thereto, and in respect of which indemnity may be sought against any Underwriter pursuant to this paragraph (c), such Underwriter shall have the rights and duties given to the Company by Section 7(b) (except that if the Company shall have assumed the defense thereof such Underwriter shall not be required to do so, but may employ separate counsel therein and participate in the defense thereof, but the fees and expenses of such counsel shall be at such Underwriter's sole expense), and the Company, its directors, any such officer, and any such controlling person shall have the rights and duties given to the Underwriters by Section 7(b). The foregoing indemnity agreement shall be in addition to any liability which the Underwriters may otherwise have. -12- 13 (d) If the indemnification provided for in this Section 7 is unavailable to an indemnified party under Sections 7(a) or 7(c) hereof in respect of any losses, claims, damages, liabilities or expenses referred to therein, then an indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Shares, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Underwriters on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other hand shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus; provided that, in the event that the Underwriters shall have purchased any Additional Shares hereunder, any determination of the relative benefits received by the Company and the Underwriters from the offering of the Shares shall include the net proceeds (before deducting expenses) received by the Company, and the underwriting discounts and commissions received by the Underwriters, from the sale of such Additional Shares, in each case computed on the basis of the respective amounts set forth in the notes to the table on the cover page of the Prospectus. The relative fault of the Company on the one hand and the Underwriters on the other hand shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or by the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. (e) The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by a pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in Section 7(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities and expenses referred to in Section 7(d) shall be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by such indemnified party in connection with investigating any claim or defending any such action, suit or proceeding. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price of the Shares underwritten by it and distributed to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 7 are several in proportion to the respective numbers of Firm Shares set forth opposite their names in Schedule I hereto (or such numbers of Firm Shares increased as set forth in Section 10 hereof) and not joint. (f) No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding. -13- 14 (g) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 7 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred. The indemnity and contribution agreements contained in this Section 7 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any person controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter or any person controlling any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 7. 8. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of the Underwriters to purchase the Firm Shares hereunder are subject to the following conditions: (a) If, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post-effective amendment thereto or an Abbreviated Registration Statement to be declared effective before the offering of the Shares may commence, the registration statement or such post-effective amendment or Abbreviated Registration Statement shall have become effective not later than 5:30 P.M., New York City time, on the date hereof, or at such later date and time as shall be consented to in writing by you, and all filings, if any, required by Rules 424 and 430A under the Act shall have been timely made. (b) Subsequent to the effective date of this Agreement, there shall not have occurred (i) any change, or any development involving a prospective change, in or affecting the condition (financial or other), business, prospects, properties, net worth or results of operations of the Company or the Subsidiaries not contemplated by the Prospectus, which in your reasonable opinion, as Representatives of the several Underwriters, would materially, adversely affect the market for the Shares, or (ii) any event or development relating to or involving the Company or any of the Subsidiaries, or any officer or director of the Company or any of the Subsidiaries, which makes any statement made in the Prospectus untrue or which, in the opinion of the Company and its counsel or the Underwriters and their counsel, requires the making of any addition to or change in the Prospectus in order to state a material fact required by the Act or any other law to be stated therein or necessary in order to make the statements therein not misleading, if amending or supplementing the Prospectus to reflect such event or development would, in your reasonable opinion, as Representatives of the several Underwriters, materially, adversely affect the market for the Shares. (c) You shall have received on the Closing Date an opinion of Jones, Day, Reavis & Pogue, counsel for the Company, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, that: (i) The Company is a corporation validly existing and in good standing under the laws of the State of Texas with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement thereto); (ii) Each Subsidiary is a corporation validly existing and in good standing under the laws of the jurisdiction of its incorporation with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus (and any amendment or supplement thereto); -14- 15 (iii) The authorized and outstanding capital stock of the Company is as set forth under the caption "Capitalization" in the Prospectus, and the authorized capital stock of the Company conforms as to legal matters in all material respects to the description contained in the Prospectus under the caption "Description of Capital Stock"; (iv) The Shares have been duly authorized and, when issued and delivered to the Underwriters against payment therefor in accordance with the terms hereof, will be validly issued, fully paid and nonassessable and free of any preemptive rights arising under the Company's articles of incorporation or the Texas Business Corporation Act ("TBCA"); (v) The form of certificate for the Shares conforms to the requirements of the TBCA; (vi) To the actual knowledge of such counsel, (i) the Registration Statement and all post-effective amendments, if any, have become effective under the Act, (ii) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose are pending before or contemplated by the Commission and (iii) any required filing of the Prospectus pursuant to Rule 424(b) has been made in accordance with Rule 424(b); (vii) The Company has the corporate power and authority to enter into this Agreement and to issue, sell and deliver the Shares to the Underwriters as provided herein, and this Agreement has been duly authorized, executed and delivered by the Company and is a valid and binding agreement of the Company; (viii) To the actual knowledge of such counsel, neither the Company nor any of the Subsidiaries is in default in the performance of any agreement filed as an exhibit to the Registration Statement (collectively, the "Material Agreements") except as may be disclosed in the Registration Statement; (ix) Neither the offer, sale or delivery of the Shares, the execution, delivery or performance of this Agreement, compliance by the Company with the provisions hereof nor consummation by the Company of the transactions contemplated hereby conflicts or will conflict with or constitutes or will constitute a breach of, or a default under, the articles of incorporation or bylaws of the Company or any of the Subsidiaries or any Material Agreement; (x) No consent, approval, authorization or other order of, or registration or filing with, any court, regulatory body, administrative agency or other governmental body, agency, or official is required on the part of the Company (except as have been obtained under the Act and the Exchange Act or such as may be required under state securities or Blue Sky laws governing the purchase and distribution of the Shares) for the valid issuance and sale of the Shares to the Underwriters as contemplated by this Agreement; (xi) The Registration Statement and the Prospectus and any supplements or amendments thereto (except for the operating statistics, financial statements and the notes thereto and the schedules and other financial and statistical data included therein, as to which such counsel need not express any opinion) comply as to form in all material respects with the requirements of the Act; (xii) To the actual knowledge of such counsel, (A) other than as described or contemplated in the Prospectus (or any supplement thereto), there are no legal or governmental -15- 16 proceedings pending or threatened against the Company or any of the Subsidiaries, or to which the Company or any of the Subsidiaries or any of their respective properties is subject, which are required to be described in the Registration Statement or Prospectus (or any amendment or supplement thereto) that are not described as required and (B) there are no agreements, contracts, indentures, leases or other instruments that are required to be described in the Registration Statement or the Prospectus (or any amendment or supplement thereto) or to be filed as an exhibit to the Registration Statement that are not described or filed as required, as the case may be; and (xiii) Neither the Company nor any of the Subsidiaries is, nor will the Company or any of the Subsidiaries become upon the sale of the Shares and the application of the proceeds therefrom as described in the Prospectus under the caption "Use of Proceeds," an "investment company" or a person "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. In addition, such counsel shall state that although such counsel has not independently verified and is not passing upon, and does not assume any responsibility for, the accuracy, completeness or fairness of the statements in the Registration Statement and the Prospectus, such counsel has participated in the preparation of the Registration Statement and the Prospectus, including review and discussion of the contents thereof, and no facts have come to the attention of such counsel that have caused it to believe that the Registration Statement, at the time the Registration Statement became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus, as of its date and as of the Closing Date or the Option Closing Date, as the case may be, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, or that any amendment or supplement to the Prospectus, as of its date, and as of the Closing Date or the Option Closing Date, as the case may be, contained or contains an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no opinion with respect to the operating statistics, financial statements and the notes thereto and the schedules and other financial and statistical data included in the Registration Statement or the Prospectus). (d) You shall have received on the Closing Date an opinion of C. Allen Bradley, Jr., General Counsel for the Company, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, that: (i) The Company is duly registered and qualified to conduct its business and is in good standing in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify does not have a Material Adverse Effect; (ii) Each Subsidiary is duly registered and qualified to conduct its business and is in good standing as a foreign corporation in each jurisdiction or place where the nature of its properties or the conduct of its business requires such registration or qualification, except where the failure so to register or qualify or to be in good standing would not have a Material Adverse Effect; (iii) Each Insurance Subsidiary holds all insurance licenses, certificates and permits from insurance departments and other governmental authorities (collectively, the -16- 17 "Insurance Licenses") necessary or desirable to conduct its business as presently conducted or as contemplated to be conducted in the future, except where the failure to hold any such Insurance Licenses would not have a Material Adverse Effect. (iv) The Company and each Subsidiary has full corporate power and authority and all necessary Permits (except where the failure to so have any such Permits, individually or in the aggregate, would not have a Material Adverse Effect) to own their respective properties and to conduct their respective businesses as now being conducted as described in the Prospectus; (v) All the shares of capital stock of the Company outstanding prior to the issuance of the Shares have been duly authorized and validly issued and are fully paid and nonassessable; (vi) All the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and nonassessable, and, except for a nominal number of shares owned by directors to comply with requirements of state law, are wholly owned by the Company directly or indirectly through one of the other Subsidiaries, free and clear of any security interest, lien, adverse claim, equity or other encumbrance, except as disclosed in the Registration Statement and the Prospectus (or any amendment or supplement thereto) and which exception includes the disclosed pledge of the stock of certain of the Subsidiaries as security for indebtedness under the Company's existing credit facility with Banc One Capital Partners II, Ltd; (vii) Neither the Company nor any of the Subsidiaries is in violation of its articles of incorporation or bylaws; (viii) Neither the offer, sale or delivery of the Shares, the execution, delivery or performance of this Agreement, compliance by the Company with the provisions hereof nor consummation by the Company of the transactions contemplated hereby will result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of the Subsidiaries, nor will any such action result in any violation of any existing law, regulation, ruling (assuming compliance with all applicable state securities and Blue Sky laws), judgment, injunction, order or decree known to such counsel and applicable to the Company or any of the Subsidiaries or any of their respective properties; (ix) [The Company has filed . . . [COMPLIANCE WITH LOUISIANA INSURANCE LAW - - SPECIFY], and no further filings or other actions are necessary under the Louisiana insurance laws in connection with the issuance and sale of the Shares, the execution, delivery or performance of this Agreement by the Company or the consummation by the Company of the transactions contemplated hereby]; (x) To the actual knowledge of such counsel, neither the Company nor any of the Subsidiaries is in violation of any law, ordinance, administrative or governmental rule or regulation applicable to it or any of them, the violation of which would have a Material Adverse Effect, or of any decree of any court or governmental agency or body having jurisdiction over it or any of them; and (xi) Except as described in the Prospectus, there is no outstanding option, warrant or other right calling for the issuance of, commitment, plan or arrangement to issue, any shares of capital stock of the Company or any securities convertible into or exchangeable or -17- 18 exercisable for capital stock of the Company; and except as described in the Prospectus, there is no holder of any security of the Company or any other person who has the right, contractual or otherwise, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, any of the Shares or the right to have any Class A Common Stock or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the Registration Statement or otherwise, to require the Company to register under the Act any shares of Class A Common Stock or other securities of the Company, and any registration rights in connection with the offering contemplated hereby have been waived. (e) You shall have received on the Closing Date an opinion of Dewey Ballantine, counsel for the Underwriters, dated the Closing Date and addressed to you, as Representatives of the several Underwriters, with respect to the matters referred to in clauses (iv), (vi), (vii), (xi) and the last paragraph of Section 8(c) hereof and such other related matters as you may request. [In rendering their opinion, Dewey Ballantine may rely as to matters of Texas law upon the opinion of Jones, Day, Reavis & Pogue.] (f) You shall have received letters addressed to you and dated the date hereof and the Closing Date from Ernst & Young LLP, independent certified public accountants, substantially in the forms heretofore approved by you. (g)(i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or, to the knowledge of the Company, contemplated by the Commission at or prior to the Closing Date and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with; (ii) there shall not have been any change in the capital stock of the Company nor any material increase in the short-term or long-term debt of the Company from that set forth or contemplated in the Registration Statement or the Prospectus (or any amendment or supplement thereto); (iii) there shall not have been, since the respective dates as of which information is given in the Registration Statement and the Prospectus (or any amendment or supplement thereto), except as may otherwise be stated in the Registration Statement and Prospectus (or any amendment or supplement thereto), any material adverse change in the condition (financial or other), business, prospects, properties, net worth or results of operations of the Company; (iv) the Company shall not have any liabilities or obligations, direct or contingent (whether or not in the ordinary course of business), that are material to the Company and its Subsidiaries taken as a whole, other than those reflected in or contemplated by the Registration Statement or the Prospectus (or any amendment or supplement thereto); and (v) all the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects on and as of the date hereof and on and as of the Closing Date as if made on and as of the Closing Date, and you shall have received a certificate, dated the Closing Date and signed by the chief executive officer and the chief financial officer of the Company (or such other officers as are acceptable to you) acting on behalf of the Company and without personal liability, as to the matters set forth in this Section 8(g) and in Section 8(i) hereof. (h) The Company shall have obtained any and all consents, approvals, authorizations or releases (under any agreement, indenture, lease or other instrument to which the Company or any of the Subsidiaries is a party) necessary in order to consummate the transactions contemplated by this Agreement. (i) The Company shall not have failed at or prior to the Closing Date to have performed or complied with any of its agreements herein contained and required to be performed or complied with by it hereunder at or prior to the Closing Date. -18- 19 (j) The Shares shall have been listed or approved for listing subject to notice of issuance on the New York Stock Exchange. (k) [The Company shall have filed . . . [COMPLIANCE WITH LOUISIANA INSURANCE LAW - - SPECIFY].] (l) The Company shall have furnished or caused to be furnished to you such further certificates and documents as you shall have reasonably requested. All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are reasonably satisfactory in form and substance to you, as Representatives of the Underwriters, and counsel for the Underwriters. Any certificate or document signed by any officer of the Company and delivered to you, as Representatives of the several Underwriters, or to counsel for the Underwriters, shall be deemed a representation or warranty by the Company to each Underwriter as to the statements made therein. The several obligations of the Underwriters to purchase Additional Shares hereunder are subject to the satisfaction on and as of any Option Closing Date of the conditions set forth in this Section 8, except that, if any Option Closing Date is other than the Closing Date, the certificates, opinions and letters referred to in paragraphs (c) through (h) and paragraph (l) shall be dated the Option Closing Date in question and the opinions called for by paragraphs (c) and (d) shall be revised to reflect the sale of Additional Shares. 9. EXPENSES. The Company agrees to pay the following costs and expenses and all other costs and expenses incident to the performance by it of its obligations hereunder: (i) the preparation, printing or reproduction, and filing with the Commission of the registration statement (including financial statements and exhibits thereto), each Prepricing Prospectus, the Prospectus, and each amendment or supplement to any of them; (ii) the printing (or reproduction) and delivery (including postage, air freight charges and charges for counting and packaging) of such copies of the registration statement, each Prepricing Prospectus, the Prospectus, and all amendments or supplements to any of them as may be reasonably requested for use in connection with the offering and sale of the Shares; (iii) the preparation, printing, authentication, issuance and delivery of certificates for the Shares, including any stamp taxes in connection with the offering of the Shares; (iv) the reproduction and delivery of this Agreement, the preliminary and supplemental Blue Sky Memoranda and all other agreements or documents reproduced and delivered in connection with the offering of the Shares; (v) the registration of the Class A Common Stock under the Exchange Act and the listing of the Shares on the New York Stock Exchange; (vi) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of the several states as provided in Section 5(g) hereof (including the reasonable fees, expenses and disbursements of counsel for the Underwriters (not to exceed $20,000) relating to the preparation, reproduction and delivery of the preliminary and supplemental Blue Sky Memoranda and such registration and qualification); (vii) the filing fees and the reasonable fees and expenses of counsel for the Underwriters in connection with any filings required to be made with the National Association of Securities Dealers, Inc. in connection with the offering; (viii) the transportation and other expenses incurred by or on behalf of representatives of the Company in connection with presentations to prospective purchasers of the Shares; (ix) the fees and expenses of the Company's accountants and the fees and expenses of counsel (including local and special counsel) for the Company; and (x) the performance by the Company of its other obligations under this Agreement. -19- 20 10. EFFECTIVE DATE OF AGREEMENT. This Agreement shall become effective: (i) upon the execution and delivery hereof by the parties hereto; or (ii) if, at the time this Agreement is executed and delivered, it is necessary for the registration statement or a post-effective amendment thereto or an Abbreviated Registration Statement to be declared effective before the offering of the Shares may commence, when notification of the effectiveness of the registration statement or such post-effective amendment or Abbreviated Registration Statement has been released by the Commission. Until such time as this Agreement shall have become effective, it may be terminated by the Company, by notifying you, or by you, as Representatives of the several Underwriters, by notifying the Company. If any one or more of the Underwriters shall fail or refuse to purchase Shares which it or they have agreed to purchase hereunder, and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of Shares which the Underwriters are obligated to purchase on the Closing Date or the Option Closing Date, as the case may be, each non-defaulting Underwriter shall be obligated, severally, in the proportion which the number of Firm Shares set forth opposite its name in Schedule I hereto bears to the aggregate number of Firm Shares set forth opposite the names of all non-defaulting Underwriters or in such other proportion as you may specify in accordance with Section 20 of the Master Agreement Among Underwriters of Smith Barney, Harris Upham & Co. Incorporated (predecessor of Smith Barney Inc.), to purchase the Shares which such defaulting Underwriter or Underwriters agreed, but failed or refused, to purchase. If any Underwriter or Underwriters shall fail or refuse to purchase Shares which it or they are obligated to purchase on the Closing Date or the Option Closing Date, as the case may be, and the aggregate number of Shares with respect to which such default occurs is more than one-tenth of the aggregate number of Shares which the Underwriters are obligated to purchase on the Closing Date or the Option Closing Date, as the case may be, and arrangements satisfactory to you and the Company for the purchase of such Shares by one or more non-defaulting Underwriters or other party or parties approved by you and the Company are not made within 36 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company. In any such case which does not result in termination of this Agreement, either you or the Company shall have the right to postpone the Closing Date or the Option Closing Date, as the case may be, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Underwriter from liability in respect of any such default of any such Underwriter under this Agreement. The term "Underwriter" as used in this Agreement includes, for all purposes of this Agreement, any party not listed in Schedule I hereto who, with your approval and the approval of the Company, purchases Shares which a defaulting Underwriter agreed, but failed or refused, to purchase. Any notice under this Section 10 may be given by telegram, telecopy or telephone but shall be subsequently confirmed by letter. 11. TERMINATION OF AGREEMENT. This Agreement shall be subject to termination in your absolute discretion, without liability on the part of any Underwriter to the Company, by notice to the Company, if prior to the Closing Date or any Option Closing Date (if different from the Closing Date and then only as to the Additional Shares), as the case may be, (i) trading in securities generally on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market shall have been suspended or materially limited, (ii) a general moratorium on commercial banking activities in New York shall have been declared by either federal or state authorities, or (iii) there shall have occurred any outbreak or escalation of hostilities or other international or domestic calamity, crisis or change in political, financial or economic conditions, the effect of which on the financial markets of the United States is such as to make it, in your reasonable judgment, impracticable or inadvisable to commence or -20- 21 continue the offering of the Shares at the offering price to the public set forth on the cover page of the Prospectus or to enforce contracts for the resale of the Shares by the Underwriters. Notice of such termination may be given by telegram, telecopy or telephone and shall be subsequently confirmed by letter. 12. INFORMATION FURNISHED BY THE UNDERWRITERS. The statements set forth in the last paragraph on the cover page, the stabilization legend on the inside front cover page and the statements in the first and second paragraphs under the caption "Underwriting" in any Prepricing Prospectus and in the Prospectus constitute the only information furnished by or on behalf of the Underwriters through you as such information is referred to in Sections 6(b) and 7 hereof. 13. MISCELLANEOUS. Except as otherwise provided in Sections 5, 10 and 11 hereof, notice given pursuant to any provision of this Agreement shall be in writing and shall be delivered (i) if to the Company, at the office of the Company at 2301 Highway 190 West, DeRidder, Louisiana 70634, Attention: Mark R. Anderson, President, with a copy to Jones, Day, Reavis & Pogue, 2300 Trammell Crow Center, 2001 Ross Avenue, Dallas, Texas 75201, Attention: James E. O'Bannon, Esq.; or (ii) if to you, as Representatives of the several Underwriters, care of Smith Barney Inc., 388 Greenwich Street, New York, New York 10013, Attention: Manager, Investment Banking Division, with a copy to Dewey Ballantine, 1301 Avenue of the Americas, New York, New York 10019, Attention: Frederick W. Kanner, Esq. This Agreement has been and is made solely for the benefit of the several Underwriters, the Company, its directors, its officers who sign the Registration Statement and the controlling persons referred to in Section 7 hereof and, to the extent provided herein, their respective successors and assigns and no other person shall acquire or have any right under or by virtue of this Agreement. Neither the term "successor" nor the term "successors and assigns" as used in this Agreement shall include a purchaser from any Underwriter of any of the Shares in his status as such purchaser. 14. APPLICABLE LAW; COUNTERPARTS. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed within the State of New York. This Agreement may be signed in various counterparts which together constitute one and the same instrument. If signed in counterparts, this Agreement shall not become effective unless at least one counterpart hereof shall have been executed and delivered on behalf of each party hereto. -21- 22 Please confirm that the foregoing correctly sets forth the agreement between the Company and the several Underwriters. Very truly yours, AMERISAFE, INC. By ------------------------------------ Millard E. Morris Chairman of the Board of Directors and Chief Executive Officer Confirmed as of the date first above mentioned on behalf of themselves and the other several Underwriters named in Schedule I hereto. SMITH BARNEY INC. PIPER JAFFRAY INC. As Representatives of the Several Underwriters By SMITH BARNEY INC. By ------------------------------------------- Managing Director -22- 23 SCHEDULE I AMERISAFE, INC.
Number of Underwriter Firm Shares - ----------- ----------- Smith Barney Inc. . . . . . . . . . . . . . . . . . . . . . . . . Piper Jaffray Inc. . . . . . . . . . . . . . . . . . . . . . . . ---------- Total . . . . . . . . . . . . . . . . . 11,000,000 ==========
-23- EX-2.1 3 FORM OF DISTRIBUTION AGREEMENT 1 EXHIBIT 2.1 DISTRIBUTION AGREEMENT This Distribution Agreement (this "Agreement") is made and entered into on July 20, 1996, by and among Gulf Universal Holdings, Inc., a Texas corporation (the "Company"), Millard E. Morris ("Morris") and Aubrey T. Temple ("Temple"). RECITALS A. The Company is the owner, directly or indirectly, of all issued and outstanding shares of capital stock of Southern Underwriters, Inc., a Louisiana corporation ("SUI"), Morris, Temple and Trent Financial Services, a Louisiana corporation ("MTTFS"), and the entities identified on Schedule 1 hereto (the "MorTem Corporations"). B. Morris and Temple are the record and beneficial owners of shares of Common Stock, no par value, of the Company (the "Company Common Stock"). C. The Company desires to distribute cash, all of the capital stock of the MorTem Corporations and 50% of the capital stock of SUI and MTTFS to Temple in exchange for all shares of Company Common Stock held by Temple, and Temple desires to accept such distribution, subject to the terms and conditions of this Agreement. D. The Company desires to distribute 50% of the capital stock of SUI and MTTFS to Morris, and Morris desires to accept such distribution, subject to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and intending to be legally bound hereby, the parties agree as follows: 1. Distribution. (a) Distribution to Temple. The Company hereby agrees to distribute to Temple on or prior to the Distribution Date (as defined below in Section 3) (i) all of the capital stock of the MorTem Corporations; provided that the Company may distribute all of the capital stock of less than all of the MorTem Corporations if such distribution would cause Temple to have direct or indirect ownership of all of the MorTem Corporations (the "MorTem Shares"), (ii) 500 shares of Common Stock, par value $1.00 per share, of SUI (the "Temple SUI Shares"), (iii) 50 shares of Common Stock, no par value, of MTTFS (the "Temple MTTFS Shares"), and (iv) cash in the amount of $8,000,000.00. The Company also hereby agrees to make, prior to such distribution, a capital contribution (the "Capital Contribution") to such of the MorTem 2 Corporations as are designated by Temple in the aggregate amount of $4,068,148.23. Temple hereby agrees to accept the MorTem Shares, the Temple SUI Shares, the Temple MTTFS Shares and the cash distribution (the "Temple Distribution"). (b) Distribution to Morris. The Company hereby agrees to distribute to Morris on or prior to the Distribution Date (i) 500 shares of Common Stock, par value $1.00 per share, of SUI (the "Morris SUI Shares"), and (ii) 50 shares of Common Stock, no par value, of MTTFS (the "Morris MTTFS Shares"). Morris hereby agrees to accept the Morris SUI Shares and the Morris MTTFS Shares. (c) Delivery of Certificates. On or prior to the Distribution Date, the Company will deliver to each of Temple and Morris properly endorsed stock powers, with all applicable stock certificates attached, to evidence the transfer of the shares contemplated in Sections 1(a) and 1(b). 2. Consideration. In consideration of the Temple Distribution, Temple hereby agrees to transfer to the Company 931.37 shares of Company Common Stock, representing all of Temple's ownership interest in the Company. On or prior to the Distribution Date, Temple will deliver to the Company properly endorsed stock powers, with all applicable stock certificates attached, to evidence the transfer of such shares to the Company. 3. Distribution Date. For purposes of this Agreement "Distribution Date" shall mean the date of execution of an underwriting agreement with respect to the Company's registered public offering of the Company's Class A Common Stock (the "Offering") or such earlier date as may be agreed upon by the parties; provided that if the Distribution Date has not occurred prior to October 31, 1996, the obligations of each of the parties hereto will terminate. 4. Representations of Morris and Temple. (a) Each of Morris and Temple hereby represents and warrants that: (i) He has all requisite power and authority to execute and deliver this Agreement and to perform all of the transactions contemplated by this Agreement to be performed by him; and (ii) Subject to Section 3, this Agreement will, when executed and delivered by the parties, constitute his valid and binding obligation, enforceable against him in accordance with its terms. (b) Temple further represents and warrants that upon transfer of the shares of Company Common Stock to the Company, the Company will have beneficial ownership (and, upon appropriate -2- 3 recording in the books and records of the Company, record ownership) of such shares, free and clear of any and all liens and encumbrances other than the pledge of such shares to Banc One Capital Partners II, Ltd. ("Banc One") as security for the loan agreement between the Company and Banc One. 5. Representations of the Company. The Company hereby represents and warrants to each of Morris and Temple that: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Louisiana and has all requisite corporate authority to execute and deliver this Agreement and to perform all of the transactions contemplated by this Agreement to be performed by it; (b) The execution and delivery by the Company of this Agreement, and the consummation of the transactions contemplated by this Agreement to be performed by the Company, have been duly authorized by all necessary corporate action on the part of the Company, and this Agreement will, when executed and delivered by the parties and subject to Section 3, constitute a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. (c) Upon the distribution by the Company to each of Morris and Temple of the shares set forth in Section 1, each of Morris and Temple will have beneficial and record ownership of such shares, free and clear of any and all liens and encumbrances. 6. Purchase of EMS Shares. For a period of 90 days after the Distribution Date, Temple or any MorTem Corporation owning all of the capital stock of Systems Operations, Inc., a Louisiana corporation (d/b/a Engineered Mechanical Services)("EMS"), shall have the right to require Morris to purchase from Temple 50% of the outstanding capital stock of EMS for an amount equal to $750,000 in cash. Payment for and delivery of the shares of EMS capital stock shall be due within 10 days of the receipt by Morris of Temple's written notice of his election to exercise such right. 7. Tax Characterization. It is the express intention of the parties that the transactions contemplated by this Agreement qualify for tax-free treatment under section 355 of the Internal Revenue Code of 1986, as amended. In this regard, each of Morris and Temple represents that he has no presently existing plan or intention, nor has he engaged in any negotiations or entered into any arrangement, to sell or otherwise dispose of any of the shares to be distributed to him pursuant to this Agreement, and any decision made by him to sell or otherwise dispose of his stock subsequent to the distributions will be based solely upon the circumstances existing at such later time. -3- 4 8. Services Agreement. Following the Distribution Date, the Company agrees to provide certain management services to the MorTem Corporations on such terms as the parties shall mutually agree. Temple agrees to pay the sum of $600,000.00 over a 15 month period commencing with the Distribution Date. Said sum may be paid to the Company in a lump sum or installments. 9. Further Assurances. Each of the parties agrees that he or it will, at any time, upon the request of any other party hereto, take, or cause to be taken, all actions and do, or cause to be done, all things (including without limitation executing, acknowledging and delivering additional agreements, instruments and documents) as may be necessary, appropriate or advisable in order to consummate or make effective the transactions contemplated by this Agreement in a manner consistent with the intentions and purposes of the parties including, without limitation, the delivery of such certificates or undertakings as may reasonably be required by counsel to the Company in connection with the rendering by such counsel of opinions with respect to the federal income tax treatment of the distributions contemplated herein. 10. Miscellaneous. (a) Successors and Assigns. This Agreement will be binding upon the parties hereto and their respective heirs, legal representatives, successors and assigns and will inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns. (b) Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof. (c) Amendment. This Agreement may not be amended except by an instrument signed by the parties hereto. (d) Headings. Section headings in this Agreement are included herein for convenience of reference only and will not constitute a part of this Agreement for any other purpose. (e) Governing Law. This Agreement will be governed by, and construed in accordance with, the law of the State of Texas, without giving effect to the principles of conflict of laws of such State. (f) Counterparts. This Agreement may be executed in counterparts, each of which shall be an original, but all of which together shall constitute but one and the same agreement. -4- 5 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed on July __, 1996. GULF UNIVERSAL HOLDINGS, INC. By: /s/ MARK R. ANDERSON ------------------------------------ Mark R. Anderson, President /s/ MILLARD E. MORRIS ---------------------------------------- MILLARD E. MORRIS /s/ AUBREY T. TEMPLE ---------------------------------------- AUBREY T. TEMPLE -5- 6 Schedule 1 MORTEM CORPORATIONS Gulf Audit Services, Inc. M&T Aviation, Inc. Morris, Temple & Trent of Arkansas, Inc. Gulf Premium Acceptance Corp. Morris, Temple & Company, Inc. Systems Operations, Inc. -6- EX-2.2 4 FORM OF 1ST AMENDMENT TO DISTRIBUTION AGREEMENT 1 EXHIBIT 2.2 Draft of September 22, 1996 FIRST AMENDMENT TO DISTRIBUTION AGREEMENT This First Amendment to Distribution Agreement (this "Amendment") is made and entered into on October __, 1996, by and among AMERISAFE, Inc., a Texas corporation (formerly Gulf Universal Holdings, Inc.) (the "Company"), Millard E. Morris ("Morris"), Aubrey T. Temple ("Temple"), M.T. & Co., Inc., a Louisiana corporation ("MTInc."), Southern Underwriters, Inc., a Louisiana corporation ("SUI"), and Morris, Temple and Trent Financial Services, a Louisiana corporation ("MTTFS"). RECITALS A. The Company, Morris and Temple are parties to a Distribution Agreement dated July 20, 1996 (the "Original Agreement"). B. The parties to the Original Agreement desire to (i) amend the Original Agreement as set forth in this Amendment to, among other things, adjust the distribution of the SUI and MTTFS capital stock and (ii) add MTInc., SUI and MTTFS as parties thereto. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and intending to be legally bound hereby, the parties agree as follows: 1. Sections 1(a) and 1(b) of the Original Agreement are hereby amended in their entirety to read as follows: (a) Distribution to Temple. The Company hereby agrees to distribute to Temple on or prior to the Distribution Date (as defined below in Section 3) (i) 1,000 shares of Common Stock, no par value, of MTInc. (the "MTInc. Shares"), representing all of the outstanding capital stock of MTInc., (ii) 510 shares of Common Stock, par value $1.00 per share, of SUI (the "Temple SUI Shares"), (iii) 51 shares of Common Stock, no par value, of MTTFS (the "Temple MTTFS Shares"), and (iv) a promissory note in the amount of $8,000,000 (the "Temple Note"). The Company also hereby agrees to make, prior to such distribution, a capital contribution to MTInc. by delivering a promissory note in the amount of $5,971,872 (the "MTInc. Note"). Temple hereby agrees to accept the MTInc. Shares, the Temple SUI Shares, the Temple MTTFS Shares and the Temple Note. MTInc. hereby agrees to accept the MTInc. Note. (b) Distribution to Morris. The Company hereby agrees to distribute to Morris on or prior to the Distribution Date (i) 490 shares of Common Stock, par value $1.00 per share, of SUI (the "Morris SUI Shares") and (ii) 49 shares of Common Stock, no par value, of MTTFS (the "Morris MTTFS Shares"). Morris hereby agrees to accept the Morris SUI Shares and the Morris MTTFS Shares. 2 2. A new Section 1(d) is added as follows: (d) Reorganization of MorTem Corporations. Temple acknowledges that prior to the Distribution Date, the MorTem Corporations will be reorganized pursuant to the Plan of Reorganization adopted by the Board of Directors of the Company on October __, 1996 (the "Plan of Reorganization") as follows: (i) M&T Aviation, Inc., Morris, Temple & Trent of Arkansas and Gulf Audit Services, Inc. will be merged with and into MTInc., with MTInc. as the surviving corporation, (ii) Morris, Temple & Company, Morris, Temple & Trent of Shreveport and Systems Operations, Inc. (d/b/a Engineered Mechanical Systems) will become wholly owned subsidiaries of MTInc., (iii) the assets and liabilities of CHM, Inc. ("CHM"), other than any shares of Class B Common Stock of the Company held by CHM, will be transferred to MTInc., (iv) the assets of Mor-Tem Systems, Inc. ("MOR-TEM"), other than the (a) MTInc. Shares, (b) the shares of capital stock of SUI, MTTFS, Hammerman & Gainer, Inc. and Morris Temple Risk Management, Inc. and (c) the shares of Series A Preferred Stock of the Company held by MOR-TEM will be transferred to MTInc. and (v) MTInc. will indemnify MOR-TEM and assume the liabilities of MOR-TEM. 3. Section 3 of the Original Agreement is hereby amended in its entirety to read as follows: 3. Distribution Date. For purposes of this Agreement, "Distribution Date" means the date which is two business days prior to the date requested by the Company for the acceleration of the effectiveness of its Registration Statement on Form S-1 (File No. 333-10099) with respect to the Company's registered public offering of the Company's Class A Common Stock (the "Offering") or such earlier date as may be agreed upon by the parties; provided that if the Distribution Date has not occurred prior to October 31, 1996, the obligations of the parties hereto will terminate. 4. New paragraphs (iii) and (iv) are added to subsection (a) of Section 4 as follows: (iii) As of the Distribution Date, he has not transferred, agreed to transfer, or negotiated with any person regarding a transfer of, any of his shares of the Company held as of July 1, 1996. (iv) Except as provided in this Agreement, he currently has no plans or intentions to transfer any of his stock in the Company, MTInc., SUI, or MTTFS on or after the Distribution Date. -2- 3 5. A new subsection (c) is added to Section 4 as follows: (c) Each of MTInc., SUI and MTTFS hereby represents and warrants that: (i) It is a corporation duly organized, validly existing and in good standing under the laws of the State of Louisiana and has all requisite corporate authority to execute and deliver this Agreement and to perform all of the transactions contemplated by this Agreement to be performed by it; and (ii) The execution and delivery by it of this Agreement, and the consummation of the transactions contemplated by this Agreement to be performed by it, have been duly authorized by all necessary corporate action on the part of such corporation, and this Agreement will, when executed and delivered by the parties and subject to Section 3, constitute its valid and binding obligation, enforceable against it in accordance with its terms. 6. Section 5 is hereby amended to extend the representations and warranties of the Company contained in such section to MTInc., SUI and MTTFS as well as Morris and Temple. 7. Section 7 is hereby amended in its entirety, to read as follows: 7. Tax Characterization. It is the express intention of the parties that the distributions of stock contemplated by this Agreement qualify for tax-free treatment under section 355 of the Internal Revenue Code of 1986, as amended (the "Code"). In this regard, the parties hereto covenant as follows: (a) Each of Morris and Temple hereby covenants that: (i) For the period commencing on the Distribution Date and ending at the end of the second taxable year ending after the Distribution Date (the "Post-Distribution Period"), he will not transfer any of his Company, MTInc., SUI or MTTFS stock to any other person, other than a transfer by Morris of Company stock solely in exchange for stock, pursuant to a transaction qualifying as a tax-free reorganization described in section 368(a)(1) of the Code (a "Qualifying Transaction"). For all purposes of this Agreement, a transaction shall be deemed to be a Qualifying Transaction only if: (i) the IRS issues a ruling letter so holding, or (ii) tax counsel to the Company renders an opinion reasonably satisfactory in form and substance to the Company and to both Morris and Temple that the transaction is a Qualifying Transaction. Any stock received in such a transfer pursuant to a Qualifying Transaction shall become subject to this covenant. -3- 4 (ii) Following the Post-Distribution Period he will not transfer stock of the Company, MTInc., SUI, or MTTFS to any person pursuant to any agreements, arrangements or negotiations entered into before the Distribution Date. (iii) During the Post-Distribution Period Morris will cause the Company, through its operating subsidiary, Temple will cause MTInc., and Morris and Temple will cause SUI and MTTFS, to continue the active conduct of their respective businesses which they conduct on the Distribution Date, and not to liquidate or to sell or otherwise dispose of any material part of their assets (including stock of subsidiaries) other than in the ordinary course of business or pursuant to a Qualifying Transaction, if such sale or disposition would cause the respective corporation not to continue to employ a substantial portion of the assets held by it on the Distribution Date in the conduct of businesses conducted by it on such date. (iv) Temple will cause MTInc. to use the MTInc. Note, or the proceeds thereof, solely in the ordinary conduct of its existing business and/or to retire existing indebtedness. In no event will he cause MTInc. to use such funds to invest in assets of any business or activity other than MTInc.'s existing lines of business. (b) The Company, MTInc., SUI and MTTFS each covenants that during the Post-Distribution Period it will not discontinue the active conduct of the active business which it conducts on the Distribution Date, liquidate, or sell or otherwise dispose of any material part of its assets (including stock of subsidiaries) other than in the ordinary course of business or pursuant to a Qualifying Transaction, if such sale or disposition would cause the respective corporation not to continue to employ a substantial portion of the assets held by it on the Distribution Date in the conduct of businesses conducted by it on such date. (c) MTInc. covenants that it will use the MTInc. Note, and proceeds thereof, solely in the ordinary conduct of its existing business and/or to retire existing indebtedness. In no event will it use such funds to invest in assets of any business or activity other than its existing lines of business. 8. A new Section 11 is added as follows: 11. Pledge to Banc One. (a) Morris Pledge. Morris hereby agrees to pledge the Morris SUI Shares and the Morris MTTFS Shares to Banc One as security for the loan agreement between Banc One and the Company (the "Loan Agreement"), and further agrees to execute and deliver all such agreements, instruments and documents, and to take any further action, as may be requested by Banc One to evidence such pledge. -4- 5 (b) Temple Pledge. Temple hereby acknowledges that the Temple Note will be payable only out of the net proceeds of the Offering and will be subject to the prior repayment of all amounts owed to Banc One in connection with the Loan Agreement. Temple hereby agrees to pledge the Temple Note and the proceeds therefrom, the MorTem Shares, the Temple SUI Shares and the Temple MTTFS Shares to Banc One as security for the Loan Agreement, and further agrees to execute and deliver all such agreements, instruments and documents, and to take any further action, as may be requested by Banc One to evidence such pledge. (c) MTInc. Pledge. MTInc. acknowledges that the MTInc. Note will be payable only out of the net proceeds of the Offering and shall be subject to the prior repayment of all amounts owed to Banc One in connection with the Loan Agreement. MTInc. hereby agrees to pledge the MTInc. Note and the proceeds therefrom to Banc One as security for the Loan Agreement, and further agrees to execute and deliver all such agreements, instruments or documents, and to take any further action, as may be requested by Banc One to evidence such pledge. 9. A new Section 12 is added as follows: 12. Indemnity. (a) MTInc., SUI and MTTFS. If, as a result of any event within the control of MTInc., SUI or MTTFS occurring in the 24-month period commencing on the Distribution Date and involving either the stock or assets (or any combination thereof) of MTInc., SUI or MTTFS (including, but not limited to, a merger, consolidation, liquidation, stock issuance, or sale or other disposition of assets by or involving MTInc., SUI or MTTFS) any taxes are imposed on the Company or any of its subsidiaries with respect to any action taken pursuant to the Plan of Reorganization (or any amendment thereof), then the respective corporation shall pay those taxes (and related interest and penalties, if any) and shall indemnify and hold harmless the Company and its subsidiaries from and against all such taxes, interest, and penalties, including but not limited to any such taxes paid at any time by Company or any subsidiary. The respective corporation shall make such payment and indemnification no later than 15 days after written notice from the Company or one of its subsidiaries of a final determination with respect to such taxes, which notice shall be accompanied by a computation of the amounts due. (b) Morris. Morris agrees to indemnify the Company and its subsidiaries and hold them harmless against and with respect to any damages, claims, losses, taxes (including interest, penalties and additions thereto), and costs and expenses arising from, in connection with or with respect to (i) any misrepresentation or breach of warranty by Morris under this Agreement, or (ii) any failure by Morris to fulfill any agreement or covenant under this Agreement. (c) Temple. Temple agrees to indemnify the Company and its subsidiaries and hold them harmless against and with respect to any damages, claims, -5- 6 losses, taxes (including interest, penalties and additions thereto), and costs and expenses arising from, in connection with or with respect to (i) any misrepresentation or breach of warranty by Temple under this Agreement, or (ii) any failure by Anderson to fulfill any agreement or covenant under this Agreement. (d) Morris and Temple. Morris and Temple jointly and severally agree to indemnify and hold harmless the Company against any liability for tax, penalties, interest or other amounts which may be asserted against the Company or any of its subsidiaries as a result of alleged federal or state income tax deficiencies of MTInc. or any corporation (other than Hammerman & Gainer, Inc.) which was at any time a subsidiary of MTInc. with respect to any year in which such corporation was not a member of the affiliated group (within the meaning of section 1504 of the Internal Revenue Code of 1986) of which the Company was the common parent, including without limitation deficiencies attributable to the disallowance of compensation deductions for amounts paid to Morris and/or Temple. 10. Schedule 1 to the Original Agreement is amended to delete Morris Temple & Co. of Texas from the list of MorTem Corporations. IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of the date first above written. AMERISAFE, INC. By: ------------------------------------- Mark R. Anderson, President ------------------------------------------- MILLARD E. MORRIS ------------------------------------------- AUBREY T. TEMPLE M.T. & CO., INC. By: ------------------------------------- Aubrey T. Temple, President -6- 7 SOUTHERN UNDERWRITERS, INC. By: ------------------------------------- Aubrey T. Temple, President MORRIS, TEMPLE & TRENT FINANCIAL SERVICES, INC. By: ------------------------------------- Craig P. Leach, Vice President -7- EX-2.3 5 FORM OF DISTRIBUTION AGREEMENT (MORRIS & ANDERSON) 1 EXHIBIT 2.3 Draft of September 22, 1996 DISTRIBUTION AGREEMENT This Distribution Agreement (this "Agreement") is made and entered into on October __, 1996, by and among AMERISAFE, Inc., a Texas corporation (the "Company"), Auto One Acceptance Corp., a Texas corporation ("AOAC"), Millard E. Morris ("Morris") and Mark R. Anderson ("Anderson"). RECITALS A. The Company is the owner of all issued and outstanding shares of common stock (the "AOAC Stock") of AOAC. B. Pursuant to the Plan of Reorganization adopted by the Board of Directors of the Company on October __, 1996 (the "Plan of Reorganization"), the Company desires to distribute 98.4% of the AOAC Stock to Morris and 1.6% of the AOAC Stock to Anderson, and Morris and Anderson desire to accept such distributions, subject to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein contained, and intending to be legally bound hereby, the parties agree as follows: 1. Distribution. (a) Distribution of Shares. The Company hereby agrees to distribute on or prior to the Distribution Date (as defined below in Section 2) (i) 984 shares of AOAC Stock to Morris and (ii) 16 shares of AOAC Stock to Anderson. The Company also hereby agrees to make, prior to such distribution, a capital contribution to AOAC by delivering to AOAC a promissory note in the amount of $50 million (the "Note"). Morris and Anderson hereby agree to accept their respective distributions of AOAC Stock. (b) Delivery of Certificates. On or prior to the Distribution Date, the Company will deliver to each of Morris and Anderson properly endorsed stock powers, with all applicable stock certificates attached, to evidence the transfer of the shares contemplated in Section 1(a). 2. Distribution Date. For purposes of this Agreement, "Distribution Date" means the date which is two business days prior to the date requested by the Company for the acceleration of the effectiveness of its Registration Statement on Form S-1 (File No. 333-10099) with respect to the Company's registered public offering of the Company's Class A Common Stock (the "Offering") or such earlier date as may be agreed upon by the parties; provided that if the Distribution Date has not occurred prior to October 31, 1996, the obligations of each of the parties hereto will terminate. 2 3. Representations of Morris, Anderson and AOAC. (a) Each of Morris and Anderson hereby represents and warrants that: (i) He has all requisite power and authority to execute and deliver this Agreement and to perform all of the transactions contemplated by this Agreement to be performed by him. (ii) Subject to Section 2, this Agreement will, when executed and delivered by the parties, constitute his valid and binding obligation, enforceable against him in accordance with its terms. (iii) As of the Distribution Date, he has not transferred, agreed to transfer, or negotiated with any person regarding a transfer of, any of his shares of the Company held as of July 1, 1996. (iv) He currently has no plans or intentions to transfer any of his stock of the Company or AOAC on or after the Distribution Date. (b) AOAC hereby represents and warrants that: (i) AOAC is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas and has all requisite corporate authority to execute and deliver this Agreement and to perform all of the transactions contemplated by this Agreement to be performed by it; and (ii) The execution and delivery by the AOAC of this Agreement, and the consummation of the transactions contemplated by this Agreement to be performed by AOAC, have been duly authorized by all necessary corporate action on the part of AOAC, and this Agreement will, when executed and delivered by the parties and subject to Section 2, constitute a valid and binding obligation of AOAC, enforceable against AOAC in accordance with its terms. 4. Representations of the Company. The Company hereby represents and warrants to each of Morris, Temple and AOAC that: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Texas and has all requisite corporate authority to execute and deliver this Agreement and to perform all of the transactions contemplated by this Agreement to be performed by it; (b) The execution and delivery by the Company of this Agreement, and the consummation of the transactions contemplated by this Agreement to be performed by the Company, have been duly authorized by all necessary corporate action on the part of the Company, and this Agreement will, when executed and delivered by the parties 2 3 and subject to Section 2, constitute a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms; and (c) Upon the distribution by the Company to each of Morris and Anderson of the shares of AOAC Stock, each of Morris and Anderson will have beneficial and record ownership of such shares, free and clear of any and all liens and encumbrances, other than the pledge of such shares to Banc One Capital Partners II, Ltd. ("Banc One") as security for the loan agreement between the Company and Banc One (the "Loan Agreement"). 5. Tax Characterization. It is the express intention of the parties that the transactions contemplated by this Agreement qualify for tax-free treatment under section 355 of the Internal Revenue Code of 1986, as amended (the "Code.") In this regard, the parties hereto covenant as follows: (a) Each of Morris and Anderson hereby covenants that: (i) For the period commencing on the Distribution Date and ending at the end of the second taxable year ending after the Distribution Date (the "Post-Distribution Period"), he will not transfer any of his Company or AOAC stock to any other person, other than a transfer of Company stock solely in exchange for stock, pursuant to a transaction qualifying as a tax-free reorganization described in section 368(a)(1) of the Code (a "Qualifying Transaction"). For all purposes of this Agreement, a transaction shall be deemed to be a Qualifying Transaction only if: (i) the IRS issues a ruling letter so holding, or (ii) tax counsel to the Company renders an opinion reasonably satisfactory in form and substance to the Company and to both Morris and Anderson that the transaction is a Qualifying Transaction. Any stock received in such a transfer pursuant to a Qualifying Transaction shall become subject to this covenant. (ii) Following the Post-Distribution Period he will not transfer stock of the Company or AOAC to any person pursuant to any agreements, arrangements or negotiations entered into before the Distribution Date. (iii) During the Post-Distribution Period he will cause the Company, through its operating subsidiary, and AOAC to continue the active conduct of their respective businesses which they conduct on the Distribution Date, and not to liquidate or to sell or otherwise dispose of any material part of their assets (including stock of subsidiaries) other than in the ordinary course of business or pursuant to a Qualifying Transaction, if such sale or disposition would cause the respective corporation not to continue to employ a substantial portion of the assets held by it on the Distribution Date in the conduct of businesses conducted by it on such date. 3 4 (iv) He will cause AOAC to use the Note, and the proceeds from the repayment thereof, solely in the ordinary conduct of its existing finance business and/or to retire existing indebtedness. In no event will he cause AOAC to use such funds to invest in assets of any business or activity other than AOAC's financing business. (b) The Company and AOAC each covenants that during the Post-Distribution Period it will not discontinue the active conduct of the active business which it conducts on the Distribution Date, liquidate, or sell or otherwise dispose of any material part of its assets (including stock of subsidiaries) other than in the ordinary course of business or pursuant to a Qualifying Transaction, if such sale or disposition would cause the respective corporation not to continue to employ a substantial portion of the assets held by it on the Distribution Date in the conduct of businesses conducted by it on such date. (c) AOAC covenants that it will use the Note, and proceeds from the repayment thereof, solely in the ordinary conduct of its existing finance business and/or to retire existing indebtedness. In no event will it use such funds to invest in assets of any business or activity other than its existing finance business. 6. Pledge. AOAC hereby acknowledges that the Note received pursuant to Section 1 will be payable only out of the net proceeds of the Offering and will be subject to the prior repayment of all amounts owed to Banc One in connection with the Loan Agreement. AOAC hereby agrees to pledge the Note and the proceeds therefrom to Banc One as security for the Loan Agreement, and further agrees to execute and deliver all such agreements, instruments and documents, and to take any further action, as may be requested by Banc One to evidence such pledge. Each of Morris and Anderson acknowledges that the shares of AOAC Stock to be received by him will remain pledged to Banc One as security for the Loan Agreement and agrees to execute and deliver all such agreements, instruments and documents, and to take any further action, as may be requested by Banc One to evidence such pledge. 7. Further Assurances. Each of the parties agrees that he or it will, at any time, upon the request of any other party hereto, take, or cause to be taken, all actions and do, or cause to be done, all things (including without limitation executing, acknowledging and delivering additional agreements, instruments and documents) as may be necessary, appropriate or advisable in order to consummate or make effective the transactions contemplated by this Agreement in a manner consistent with the intentions and purposes of the parties including, without limitation, the delivery of such certificates or undertakings as may reasonably be required by counsel to the Company in connection with the rendering by such counsel of opinions with respect to the federal income tax treatment of the distributions contemplated herein. 4 5 8. Indemnification. (a) AOAC. If, as a result of any event within the control of AOAC occurring in the 24-month period commencing on the Distribution Date and involving either the stock or assets (or any combination thereof) of AOAC (including, but not limited to, a merger, consolidation, liquidation, stock issuance, or sale or other disposition of assets by or involving AOAC) any taxes are imposed on the Company or any of its subsidiaries with respect to any action taken pursuant to the Plan of Reorganization (or any amendment thereof), then AOAC shall pay those taxes (and related interest and penalties, if any) and shall indemnify and hold harmless the Company and its subsidiaries from and against all such taxes, interest and penalties, including but not limited to any such taxes paid at any time by Company or any subsidiary. AOAC shall make such payment and indemnification no later than 15 days after written notice from the Company or one of its subsidiaries of a final determination with respect to such taxes, which notice shall be accompanied by a computation of the amounts due. (b) Morris. Morris agrees to indemnify the Company and its subsidiaries and hold them harmless against and with respect to any damages, claims, losses, taxes (including interest, penalties and additions thereto), and costs and expenses arising from, in connection with or with respect to (i) any misrepresentation or breach of warranty by Morris under this Agreement, or (ii) any failure by Morris to fulfill any agreement or covenant under this Agreement. (c) Anderson. Anderson agrees to indemnify the Company and its subsidiaries and hold them harmless against and with respect to any damages, claims, losses, taxes (including interest, penalties and additions thereto), and costs and expenses arising from, in connection with or with respect to (i) any misrepresentation or breach of warranty by Anderson under this Agreement, or (ii) any failure by Anderson to fulfill any agreement or covenant under this Agreement. 9. Miscellaneous. (a) Successors and Assigns. This Agreement will be binding upon, and will inure to the benefit of, the parties hereto and their respective heirs, legal representatives, successors and assigns. (b) Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof. (c) Amendment. This Agreement may not be amended except by an instrument signed by the parties hereto. (d) Headings. Section headings in this Agreement are included herein for convenience of reference only and will not constitute a part of this Agreement for any other purpose. 5 6 (e) Governing Law. This Agreement will be governed by, and construed in accordance with, the substantive laws of the State of Texas, without giving effect to the principles of conflict of laws of such State. (f) Counterparts. This Agreement may be executed in counterparts, each of which shall be an original, but all of which together shall constitute but one and the same agreement. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. AMERISAFE, INC. By: ------------------------------------ Mark R. Anderson, President AUTO ONE ACCEPTANCE CORPORATION By: ------------------------------------ Millard E. Morris, Chief Executive Officer ------------------------------------------ MILLARD E. MORRIS ------------------------------------------ MARK R. ANDERSON 6 EX-4.1 6 FORM OF CLASS A COMMON STOCK CERTIFICATE 1 EXHIBIT 4.1 TEMPORARY CERTIFICATE EXCHANGEABLE FOR DEFINITIVE ENGRAVED CERTIFICATE WHEN READY FOR DELIVERY. NUMBER SHARES CA [LOGO] CLASS A COMMON STOCK AMERISAFE, INC. PAR VALUE $.01 THE MANAGED RESULTS COMPANY(SM) INCORPORATED UNDER THE LAWS OF THE STATE OF TEXAS CUSIP 03071H 10 0 SEE REVERSE FOR CERTAIN DEFINITIONS *************************************************************************** * * * THIS CERTIFIES THAT * * * * * * * * * * * * * * * * * * is the OWNER of * * * *************************************************************************** FULLY PAID AND NON-ASSESSABLE SHARES OF CLASS A COMMON STOCK OF AMERISAFE, INC. (hereinafter referred to as the "Corporation"), transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are issued and shall be held subject to all of the provisions of the Articles of Incorporation, as amended from time to time, of the Corporation (a copy of which Articles is on file with the Transfer Agent), to all of which the holder, by acceptance hereof, assents. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. DATED /s/ [ILLEGIBLE] [SEAL] /s/ [ILLEGIBLE] SECRETARY PRESIDENT COUNTERSIGNED AND REGISTERED: AMERICAN STOCK TRANSFER & TRUST COMPANY (NEW YORK, NY) TRANSFER AGENT AND REGISTRAR. AUTHORIZED SIGNATURE 2 AMERISAFE, INC. The Articles of Incorporation of the Corporation set forth (a) the authorized amounts, designations, preferences, limitations and relative rights of each class of capital stock authorized to be issued and (b) a denial to shareholders of preemptive rights to acquire unissued or treasury shares of the Corporation. The Corporation will furnish to any shareholder without charge upon written request to the Corporation at its principal place of business or registered office, and there is on file in the office of the Secretary of State of Texas, (i) a full statement of all of the designations, preferences, limitations and relative rights of the shares of each class or series of stock to the extent they have been fixed and determined and the authority of the Board of Directors to fix and determine the designations, preferences, limitations and relative rights of any subsequent series and (ii) a full statement of the denial of preemptive rights contained in the Articles of Incorporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian ------ -------- TEN ENT - as tenants by the (Cust) (Minor) entireties JT TEN - as joint tenants with under Uniform Gifts to right of survivorship Minors Act and not as tenants -------------- in common (State) Additional abbreviations may also be used though not in the above list. For Value Received, hereby sell, assign and transfer unto -------- PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE [ ] ---------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE) ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Shares ---------------------------------------------------------------------- of the capital stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ----------------------------------------- Attorney -------------------------------------------------------------------- to transfer the said stock on the books of the within-named Corporation with full power of substitution in the premises. Dated --------------------------------- NOTICE: X ------------------------------------- THE SIGNATURE(S) TO THIS ASSIGNMENT (SIGNATURE) MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE --- > CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT X OR ANY CHANGE WHATEVER. -------------------------------------- -------------------------------------- THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS. SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. --------------------------------------- SIGNATURE(S) GUARANTEED BY: -------------------------------------- EX-5.1 7 OPINION OF JONES DAY REAVIS & POGUE 1 EXHIBIT 5.1 September 23, 1996 AMERISAFE, Inc. 5550 LBJ Freeway, Suite 901 Dallas, Texas 75240 Re: Registration on Form S-1 of 12,650,000 shares of Class A Common Stock, par value $0.01 per share, of AMERISAFE, Inc. Gentlemen: We are acting as special counsel to AMERISAFE, Inc., a Texas corporation (the "Company"), in connection with the registration and sale in an initial public offering of up to 12,650,000 shares of Class A Common Stock, par value $0.01 per share, of the Company (the "Shares"), pursuant to the Underwriting Agreement (the "Underwriting Agreement") to be entered into among the Company and Smith Barney Inc. and Piper Jaffray Inc., as the representatives of the several underwriters to be named in Schedule I to the Underwriting Agreement (the "Underwriters"). We have examined such documents, records and matters of law as we have deemed necessary for purposes of this opinion. Based on such examination and on the assumptions set forth below, we are of the opinion that the Shares are duly authorized and, when issued and delivered to the Underwriters pursuant to the Underwriting Agreement against payment of the consideration therefor as provided therein in an amount in excess of the par value thereof, will be validly issued, fully paid and nonassessable. In rendering the foregoing opinion, we have relied as to certain factual matters upon certificates of officers of the Company and public officials, and we have not independently checked or verified the accuracy of the statements contained therein. We hereby consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement on Form S- 1 (Commission 2 AMERISAFE, Inc. September 23, 1996 Page 2 File No. 333-10099) filed by the Company to effect registration of the Shares and to the reference to our firm under the caption "Legal Matters" in the Prospectus constituting a part of such Registration Statement. Very truly yours, /s/ Jones, Day, Reavis & Pogue EX-10.2 8 STOCK INCENTIVE PLAN 1 EXHIBIT 10.2 AMERISAFE, INC. 1996 STOCK INCENTIVE PLAN 2 AMERISAFE, INC. 1996 STOCK INCENTIVE PLAN TABLE OF CONTENTS
PAGE ---- 1. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 3. Shares Available under the Plan . . . . . . . . . . . . . . . . . . . . . . . 2 4. Option Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5. Appreciation Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 6. Restricted Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 7. Transferability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 8. Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 9. Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 10. Withholding Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 11. Certain Terminations of Employment, Hardship and Approved Leaves of Absence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 12. Administration of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . 6 13. Amendments and Other Matters . . . . . . . . . . . . . . . . . . . . . . . . 7 14. Termination of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
-i- 3 AMERISAFE, INC. 1996 STOCK INCENTIVE PLAN 1. Purpose. The purpose of this AMERISAFE, Inc. 1996 Stock Incentive Plan is to attract and retain directors, officers and other salaried employees of AMERISAFE, Inc., and its Subsidiaries (as defined) and to provide such persons with incentives and rewards for superior performance. 2. Definitions. As used in this Plan: "Appreciation Rights" means a right granted pursuant to Section 5 of this Plan, including a Free-Standing Appreciation Right and a Tandem Appreciation Right. "Base Price" means the price to be used as the basis for determining the Spread upon the exercise of a Free-Standing Appreciation Right. "Board" means the Board of Directors of the Corporation. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Common Shares" means (i) shares of the Class A Common Stock, $.01 par value per share, of the Corporation and (ii) any security into which Common Shares may be converted by reason of any transaction or event of the type referred to in Section 8 of this Plan. "Corporation" means AMERISAFE, Inc., a Texas corporation. "Date of Grant" means the date specified by the Board on which a grant of Option Rights, Appreciation Rights or a grant or sale of Restricted Shares shall become effective, which shall not be earlier than the date on which the Board takes action with respect thereto. "Free-Standing Appreciation Right" means an Appreciation Right granted pursuant to Section 5 of this Plan that is not granted in tandem with an Option Right or similar right. "Incentive Stock Option" means an Option Right that is intended to qualify as an "incentive stock option" under Section 422 of the Code or any successor provision thereto. "Management Objectives" means the achievement of performance objectives established pursuant to this Plan. "Market Value per Share" means the fair market value of the Common Shares as determined by the Board from time to time. "Nonqualified Option" means an Option Right that is not intended to qualify as a Tax-Qualified Option. "Optionee" means the person so designated in an agreement evidencing an outstanding Option Right. "Option Price" means the purchase price payable upon the exercise of an Option Right. "Option Right" means the right to purchase Common Shares from the Corporation upon the exercise of a Nonqualified Option or a Tax-Qualified Option granted pursuant to Section 4 of this Plan. 4 "Participant" means a person who is selected by the Board to receive benefits under this Plan and (i) is at that time a director, officer or other salaried employee of the Corporation or any Subsidiary, or (ii) has agreed to commence serving in any such capacity. "Plan" means this AMERISAFE, Inc. 1996 Stock Incentive Plan. "Restricted Shares" means Common Shares as to which neither the substantial risk of forfeiture nor the restrictions on transfer referred to in Section 6 hereof has expired. "Rule 16b-3" means Rule 16b-3, as promulgated and amended from time to time by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, or any successor rule. "Spread" means, in the case of a Free-Standing Appreciation Right, the amount by which the Market Value per Share on the date when the Appreciation Right is exercised exceeds the Base Price specified therein or, in the case of a Tandem Appreciation Right, the amount by which the Market Value per Share on the date when the Appreciation Right is exercised exceeds the Option Price specified in the related Option Right. "Subsidiary" means a corporation, partnership, joint venture, unincorporated association or other entity in which the Corporation has a direct or indirect ownership or other equity interest; provided, however, for purposes of determining whether any person may be a Participant for purposes of any grant of Incentive Stock Options, "Subsidiary" means any corporation in which the Corporation owns or controls directly or indirectly at least 50 percent of the total combined voting power represented by all classes of stock issued by such corporation at the time of the grant. "Tandem Appreciation Right" means an Appreciation Right granted pursuant to Section 5 of this Plan that is granted in tandem with an Option Right or any similar right granted under any other plan of the Corporation. "Tax-Qualified Option" means an Option Right that is intended to qualify under particular provisions of the Code, including without limitation an Incentive Stock Option. 3. Shares Available under the Plan. (a) Subject to adjustment as provided in Section 8 of this Plan, the number of Common Shares issued or transferred and covered by outstanding awards granted under this Plan shall not in the aggregate exceed 3,000,000 Common Shares, which may be Common Shares of original issuance or Common Shares held in treasury or a combination thereof. For the purposes of this Section 3(a): (i) Upon payment in cash of the benefit provided by any award granted under this Plan, any Common Shares that were covered by that award shall again be available for issuance or transfer hereunder. (ii) Common Shares covered by any award granted under this Plan shall be deemed to have been issued or transferred, and shall cease to be available for future issuance or transfer in respect of any other award granted hereunder, at the earlier of the time when they are actually issued or transferred or the time when dividends or dividend equivalents are paid thereon; provided, however, that Restricted Shares shall be deemed to have been issued or transferred at the earlier of the time when they cease to be subject to a substantial risk of forfeiture or the time when dividends are paid thereon. (b) Notwithstanding anything to the contrary contained in this Plan, including without limitation Section 3(a) hereof, the aggregate number of Common Shares actually issued or transferred by the Corporation upon the exercise of the Incentive Stock Options shall not exceed 3,000,000 Common Shares. -2- 5 (c) Notwithstanding anything to the contrary contained in this Plan, no Participant shall be granted, in the aggregate, Option Rights and Appreciation Rights for more than 1,500,000 Common Shares during any period of five consecutive calendar years, subject to adjustment as provided in Section 8 of this Plan. 4. Option Rights. The Board may from time to time authorize grants to Participants of options to purchase Common Shares upon such terms and conditions as the Board may determine in accordance with the following provisions: (a) each grant shall specify the number of Common Shares to which it pertains; and (b) each grant shall specify the form of consideration to be paid in satisfaction of the Option Price and the manner of payment of such consideration, which may include (i) cash in the form of currency or check or other cash equivalent acceptable to the Corporation, (ii) nonforfeitable, unrestricted Common Shares, which are already owned by the Optionee and have a value at the time of exercise that is equal to the Option Price, (iii) any other legal consideration that the Board may deem appropriate and (iv) any combination of the foregoing. (c) Any grant may provide for deferred payment of the Option Price from the proceeds of sale through a broker of some or all of the Common Shares to which the exercise relates. (d) Successive grants may be made to the same Participant regardless of whether any Option Rights previously granted to the Participant remain unexercised. (e) Each grant shall specify the period or periods of continuous employment of the Optionee by the Corporation or any Subsidiary, or the achievement of Management Objectives, or both, that are necessary before the Option Rights or installments thereof shall become exercisable, and any grant may provide for the earlier exercise of the Option Rights in the event of a change in control of the Corporation or other similar transaction or event. (f) Option Rights granted pursuant to this Section 4 may be Nonqualified Options or Tax-Qualified Options or combinations thereof. (g) On or after the Date of Grant of any Nonqualified Option, the Board may provide for the payment to the Optionee of dividend equivalents thereon in cash or Common Shares on a current, deferred or contingent basis, or the Board may provide that any dividend equivalents shall be credited against the Option Price. (h) No Option Right granted pursuant to this Section 4 may be exercised more than 10 years from the Date of Grant. (i) Each grant shall be evidenced by an agreement, which shall be executed on behalf of the Corporation by any officer thereof and delivered to and accepted by the Optionee and shall contain such terms and provisions as the Board may determine consistent with this Plan. 5. Appreciation Rights. The Board may also authorize grants to Participants of Appreciation Rights. An Appreciation Right shall be a right of the Participant to receive from the Corporation an amount, which shall be determined by the Board and shall be expressed as a percentage (not exceeding 100 percent) of the Spread at the time of the exercise of an Appreciation Right. Any grant of Appreciation Rights under this Plan shall be upon such terms and conditions as the Board may determine in accordance with the following provisions: (a) Any grant may specify that the amount payable upon the exercise of an Appreciation Right may be paid by the Corporation in cash, Common Shares or any combination -3- 6 thereof and may (i) either grant to the Participant or reserve to the Board the right to elect among those alternatives or (ii) preclude the right of the Participant to receive and the Corporation to issue Common Shares or other equity securities in lieu of cash; provided, however, that no form of consideration or manner of payment that would cause Rule 16b-3 to cease to apply to this Plan shall be permitted. (b) Any grant may specify that the amount payable upon the exercise of an Appreciation Right shall not exceed a maximum specified by the Board on the Date of Grant. (c) Any grant may specify (i) a waiting period or periods before Appreciation Rights shall become exercisable and (ii) permissible dates or periods on or during which Appreciation Rights shall be exercisable. (d) Any grant may specify that an Appreciation Right may be exercised only in the event of a change in control of the Corporation or other similar transaction or event. (e) Any grant may provide for the payment to the Participant of dividend equivalents thereon in cash or Common Shares on a current, deferred or contingent basis. (f) Regarding Tandem Appreciation Rights only: Each grant shall provide that a Tandem Appreciation Right may be exercised only (i) at a time when the related Option Right (or any similar right granted under any other plan of the Corporation) is also exercisable and the Spread is positive and (ii) by surrender of the related Option Right (or such other right) for cancellation. (g) Regarding Free-Standing Appreciation Rights only: (i) Each grant shall specify in respect of each Free-Standing Appreciation Right a Base Price per Common Share; (ii) Successive grants may be made to the same Participant regardless of whether any Free-Standing Appreciation Rights previously granted to the Participant remain unexercised; (iii) Each grant shall specify the period or periods of continuous employment of the Participant by the Corporation or any Subsidiary, or the achievement of Management Objectives or both, that are necessary before the Free-Standing Appreciation Rights or installments thereof shall become exercisable, and any grant may provide for the earlier exercise of the Free-Standing Appreciation Rights in the event of a change in control of the Corporation or other similar transaction or event; and (iv) No Free-Standing Appreciation Right granted under this Plan may be exercised more than 10 years from the Date of Grant. (h) Each grant shall be evidenced by an agreement, which shall be executed on behalf of the Corporation by any officer thereof and delivered to and accepted by the Participant and shall describe the subject Appreciation Rights, identify any related Option Rights, state that the Appreciation Rights are subject to all of the terms and conditions of this Plan and contain such other terms and provisions as the Board may determine consistent with this Plan. 6. Restricted Shares. The Board may also authorize grants or sales to Participants of Restricted Shares upon such terms and conditions as the Board may determine in accordance with the following provisions: -4- 7 (a) Each grant or sale shall constitute an immediate transfer of the ownership of Common Shares to the Participant in consideration of the performance of services, entitling such Participant to dividend, voting and other ownership rights, subject to the substantial risk of forfeiture and restrictions on transfer hereinafter referred to. (b) Each grant or sale may be made without additional consideration from the Participant or in consideration of a payment by the Participant. (c) Each grant or sale may provide that the Restricted Shares covered thereby shall be subject to a "substantial risk of forfeiture" within the meaning of Section 83 of the Code for a period to be determined by the Board on the Date of Grant, and any grant or sale may provide for the earlier termination of such period in the event of a change in control of the Corporation or other similar transaction or event. (d) Each grant or sale shall provide that, during the period for which such substantial risk of forfeiture is to continue, the transferability of the Restricted Shares shall be prohibited or restricted in the manner and to the extent prescribed by the Board on the Date of Grant. Such restrictions may include without limitation rights of repurchase or first refusal in the Corporation or provisions subjecting the Restricted Shares to a continuing substantial risk of forfeiture in the hands of any transferee. (e) Any grant or sale may require that any or all dividends or other distributions paid on the Restricted Shares during the period of such restrictions be automatically sequestered and reinvested on an immediate or deferred basis in additional Common Shares, which may be subject to the same restrictions as the underlying award or such other restrictions as the Board may determine. (f) Each grant or sale shall be evidenced by an agreement, which shall be executed on behalf of the Corporation by any officer thereof and delivered to and accepted by the Participant and shall contain such terms and provisions as the Board may determine consistent with this Plan. Unless otherwise directed by the Board, all certificates representing Restricted Shares, together with a stock power that shall be endorsed in blank by the Participant with respect to the Restricted Shares, shall be held in custody by the Corporation until all restrictions thereon lapse. 7. Transferability. (a) Except as otherwise expressly provided in the agreement evidencing such grant, no Option Right or other derivative security (as that term is used in Rule 16b-3) granted under this Plan may be transferred by a Participant except by will or the laws of descent and distribution. (b) Any grant made under this Plan may provide that all or any part of the Common Shares that are to be issued or transferred by the Corporation upon the exercise of Option Rights or upon the termination of the period during which Restricted Shares are subject to the substantial risk of forfeiture and restrictions on transfer referred to in Section 6 of this Plan, shall be subject to further restrictions upon transfer. 8. Adjustments. The Board may make or provide for such adjustments in the number of Common Shares covered by outstanding Option Rights, Appreciation Rights and Restricted Shares granted hereunder, the Option Prices per Common Share or Base Price per Common Share applicable to any such Option Rights and the kind of shares (including shares of another issuer) covered thereby, as the Board may in good faith determine to be equitably required in order to prevent dilution or expansion of the rights of Participants that otherwise would result from (i) any stock dividend, stock split, combination of shares, recapitalization or other change in the capital structure of the Corporation, or (ii) any merger, consolidation, spin-off, spin-out, split-off, split-up, reorganization, partial or complete liquidation or other distribution of assets, issuance of warrants or other rights to purchase securities or any other corporate transaction or event having an effect similar to any of the foregoing. In the event of any such transaction or event, the Board may provide in substitution for any or all outstanding awards under this Plan such alternative consideration -5- 8 as it may in good faith determine to be equitable under the circumstances and may require in connection therewith the surrender of all awards so replaced. Moreover, the Board may on or after the Date of Grant provide in the agreement evidencing any award under this Plan that the holder of the award may elect to receive an equivalent award in respect of securities of the surviving entity of any merger, consolidation or other transaction or event having a similar effect, or the Board may provide that the holder will automatically be entitled to receive such an equivalent award. The Board may also make or provide for such adjustments in the maximum number of Common Shares specified in Section 3(a) of this Plan as the Board may in good faith determine to be appropriate in order to reflect any transaction or event described in this Section 8. 9. Fractional Shares. The Corporation shall not be required to issue any fractional Common Shares pursuant to this Plan. The Board may provide for the elimination of fractions or for the settlement thereof in cash. 10. Withholding Taxes. To the extent that the Corporation is required to withhold federal, state, local or foreign taxes in connection with any payment made or benefit realized by a Participant or other person under this Plan, and the amounts available to the Corporation for the withholding are insufficient, it shall be a condition to the receipt of any such payment or the realization of any such benefit that the Participant or such other person make arrangements satisfactory to the Corporation for payment of the balance of any taxes required to be withheld. At the discretion of the Board, any such arrangements may include relinquishment of a portion of any such payment or benefit. The Corporation and any Participant or such other person may also make similar arrangements with respect to the payment of any taxes with respect to which withholding is not required. 11. Certain Terminations of Employment, Hardship and Approved Leaves of Absence. Notwithstanding any other provision of this Plan to the contrary, in the event of termination of employment by reason of death, disability, normal retirement, early retirement with the consent of the Corporation, termination of employment to enter public service with the consent of the Corporation or leave of absence approved by the Corporation, or in the event of hardship or other special circumstances, of a Participant who holds an Option Right or Appreciation Right that is not immediately and fully exercisable, or any Restricted Shares as to which the substantial risk of forfeiture or the prohibition or restriction on transfer has not lapsed, the Board may take any action that it deems to be equitable under the circumstances or in the best interests of the Corporation, including without limitation waiving or modifying any limitation or requirement with respect to any award under this Plan. 12. Administration of the Plan. (a) This Plan shall be administered by the Board, which may from time to time delegate all or any part of its authority under this Plan to a committee of not less than two directors appointed by the Board. The members of the committee shall be "non-employee directors" within the meaning of that term in Rule 16b-3 of the Securities and Exchange Commission (or any successor rule to the same effect). To the extent of such delegation, references in this Plan to the Board shall also refer to the committee. The majority of the committee shall constitute a quorum, and the action of a majority of the members of the committee present at any meeting at which a quorum is present, or acts unanimously approved in writing, shall be the acts of the committee. In the event that the Board authorizes a committee thereof to administer the Plan, grants of Option Rights, Appreciation Rights or Restricted Shares pursuant to this Plan to any member of such committee shall be approved by the Board of Directors of the Corporation. (b) The interpretation and construction by the Board of any provision of this Plan or any agreement, notification or document evidencing the grant of Option Rights, Appreciation Rights or Restricted Shares, and any determination by the Board pursuant to any provision of this Plan or any such agreement, notification or document, shall be final and conclusive. No member of the Board shall be liable for any such action taken or determination made in good faith. 13. Amendments and Other Matters. (a) This Plan may be amended from time to time by the Board; provided, however, except as expressly authorized by this Plan, no such amendment shall cause this -6- 9 Plan to cease to satisfy any applicable condition of Rule 16b-3, without the further approval of the shareholders of the Corporation. (b) The Board may condition the grant of any award or combination of awards authorized under this Plan on the surrender or deferral by the Participant of his or her right to receive a cash bonus or other compensation otherwise payable by the Corporation or a Subsidiary to the Participant. (c) This Plan shall not confer upon any Participant any right with respect to continuance of employment or other service with the Corporation or any Subsidiary and shall not interfere in any way with any right that the Corporation or any Subsidiary would otherwise have to terminate any Participant's employment or other service at any time. (d) To the extent that any provision of this Plan would prevent any Option Right that was intended to qualify as a Tax-Qualified Option from so qualifying, any such provision shall be null and void with respect to any such Option Right; provided, however, that any such provision shall remain in effect with respect to other Option Rights, and there shall be no further effect on any provision of this Plan. 14. Termination of the Plan. No further awards shall be granted under this Plan after the passage of 10 years from the date on which this Plan is first approved by the shareholders of the Corporation. -7- EX-10.3 9 FORM OF INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.3 AMERISAFE, INC. INDEMNIFICATION AGREEMENT This Indemnification Agreement (this "Agreement") is made and entered into as of the ______ day of ________________ 1996, by and between AMERISAFE, Inc., a Texas corporation (the "Corporation"), and ________________ ("Indemnitee"). RECITALS A. Indemnitee is presently serving as an officer and/or director of the Corporation, and the Corporation desires Indemnitee to continue in such capacity. B. Indemnitee is willing, subject to certain conditions, including, without limitation, the execution and performance of this Agreement by the Corporation, to continue in that capacity. C. In addition to the indemnification to which Indemnitee is entitled under the Restated Articles of Incorporation of the Corporation (the "Articles") and the Restated Bylaws of the Corporation (the "Bylaws"), the Corporation intends to obtain, at its sole expense, insurance protecting its officers and directors, including Indemnitee, against certain losses arising out of actual or threatened actions, suits or proceedings to which such persons may be made or threatened to be made parties. D. As a result of circumstances having no relation to, and beyond the control of, the Corporation and Indemnitee, there can be no assurance that the Corporation will be able to obtain such insurance or if obtained, the continuation or renewal of such insurance. NOW, THEREFORE, in order to induce Indemnitee to continue to serve in his present capacity, the Corporation and Indemnitee hereby agree as follows: ARTICLE I CERTAIN DEFINITIONS As used herein, the following words and terms shall have the following respective meanings (whether singular or plural): "Claim" means an actual or threatened claim or request for relief. "Corporate Status" means the status of a person who is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent or similar functionary of another foreign or domestic corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. "Expenses" means all attorneys' fees, retainers, court costs, transcript costs, fees of experts, witness fees, travel expenses, duplicating costs, printing costs, telephone charges, postage, delivery service fees and all other disbursements or expenses of the types customarily incurred in connection with prosecuting, defending, preparing to prosecute or defend, investigating or being or preparing to be a witness in a Proceeding. "Official Capacity" means (a) when used with respect to a director, the office of director in the Corporation and (b) when used with respect to a person other than a director, the elective or appointive 2 office in the Corporation held by the officer or the employment or agency relationship undertaken by the employee or agent on behalf of the Corporation, but neither clause (a) or (b) includes service for any other foreign or domestic corporation or any partnership, joint venture, sole proprietorship, trust, employee benefit plan or other enterprise. "Proceeding" means any threatened, pending or completed action, suit, arbitration, investigation, administrative hearing or any other proceeding whether civil, criminal, administrative or investigative (except one initiated by Indemnitee pursuant to Article V of this Agreement to enforce his rights under this Agreement), and any appeal in or related to any such action, suit, arbitration, investigation, hearing or proceeding and any inquiry or investigation that could lead to such an action, suit, proceeding or arbitration. "TBCA" means the Texas Business Corporation Act and any successor statute thereto as either of them may from time to time be amended. ARTICLE II INDEMNIFICATION Section 2.1. General. The Corporation shall indemnify, and advance Expenses, to Indemnitee to the full extent permitted by applicable law in effect on the date hereof and to such greater extent as applicable law may thereafter from time to time permit. The rights of Indemnitee provided under the preceding sentence shall include, but shall not be limited to, the right to be indemnified and to have Expenses advanced in all Proceedings to the full extent permitted by Article 2.02-1 of the TBCA (or any successor provision). The provisions set forth in this Agreement are provided in addition to and as a means of furtherance and implementation of, and no in limitation of, the obligations expressed in this Article II. Section 2.2. Additional Indemnity of the Corporation. Indemnitee shall be entitled to indemnification pursuant to this Section 2.2 if, by reason of his Corporate Status, he is, or is threatened to be made, a party to any Proceeding (except to the extent limited by Section 2.3). Pursuant to this Section 2.2, Indemnitee shall be indemnified against Expenses, judgments, penalties (including excise or similar taxes), fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any Claim therein, if (a) he conducted himself in good faith; (b) he reasonably believed: (i) in the case of conduct in his Official Capacity, that his conduct was in the Corporation's best interests; and (ii) in all other cases, that his conduct was at least not opposed to the Corporation's best interests, and (c) in the case of any criminal Proceeding, had no reasonable cause to believe his conduct was unlawful. Nothing in this Section 2.2 shall limit the benefits of Section 2.1 or any other Section hereunder. Section 2.3. Limitation on Indemnity. The indemnification otherwise available to Indemnitee under Section 2.2 shall be limited to the extent set forth in this Section 2.3. In the event that Indemnitee is found liable to the Corporation or is found liable on the basis that personal benefit was improperly received by Indemnitee whether or not the benefit resulted from an action taken in Indemnitee's Official Capacity Indemnitee shall, with respect to the Claim in the Proceeding in which such finding is made, be indemnified only against reasonable Expenses actually incurred by him in connection with that Claim. Notwithstanding the foregoing, no indemnification against such Expenses shall be made in respect of any Claim in such Proceeding as to which Indemnitee shall have been adjudged to be liable for willful or intentional misconduct in the performance of his duty to the Corporation; provided, however, that, if applicable law so permits, indemnification against such Expenses shall nevertheless be made by the Corporation in such event if and only to the extent that the court in which such Proceeding shall have been brought or is pending, shall determine. -2- 3 ARTICLE III EXPENSES Section 3.1. Expenses of a Party Who Is Wholly or Partly Successful. Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by him in connection with any Proceeding to which Indemnitee is a party by reason of his Corporate Status and in which Indemnitee is successful, on the merits or otherwise. In the event that Indemnitee is not wholly successful, on the merits or otherwise, in a Proceeding but is successful, on the merits or otherwise, as to any Claim in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf relating to each such Claim. For purposes of this Section 3.1 and without limitation, the termination of a Claim in a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such Claim. Section 3.2. Expenses of a Witness. To the extent that Indemnitee is, by reason of his Corporate Status, a witness or otherwise participates in any Proceeding at a time when he is not named a defendant or respondent in the Proceeding, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. Section 3.3. Advancement of Expenses. The Corporation shall pay all reasonable Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding or Claim, whether brought by the Corporation or otherwise, in advance of any determination respecting entitlement to indemnification pursuant to Article IV hereof within 10 business days after the receipt by the Corporation of a written request from Indemnitee setting forth a written affirmation of his good faith belief that he has met the standard of conduct necessary for indemnification under applicable law, confirming his obligation under the last sentence of this Section 3.3 and requesting such payment or payments from time to time, whether prior to or after final disposition of such Proceeding or Claim. Such statement or statements shall reasonably evidence the Expenses incurred by Indemnitee. Indemnitee hereby undertakes and agrees that he will repay the Corporation for any Expenses so advanced to the extent that it shall ultimately be determined by a court in a final adjudication from which there is no further right of appeal, that Indemnitee is not entitled to be indemnified against such Expenses. ARTICLE IV PROCEDURE FOR DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION Section 4.1. Request for Indemnitee. To obtain indemnification under this Agreement, Indemnitee shall submit to the Corporation a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification. The Secretary or an Assistant Secretary of the Corporation shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that Indemnitee has requested indemnification. Section 4.2. Determination of Request. Upon written request by Indemnitee for indemnification pursuant to Section 4.1 hereof, a determination, if required by applicable law, with respect to Indemnitee's entitlement thereto shall be made in the specific case in accordance with Article 2.02-1 of the TBCA (or any successor provision). If it is so determined that Indemnitee is entitled to indemnification hereunder, payment to Indemnitee shall be made within five business days after such determination. Indemnitee shall cooperate with the Board of Directors of the Corporation, any committee thereof or special legal counsel appointed by the Board of Directors of the Corporation or any committee thereof making such determination with respect to Indemnitee's entitlement to indemnification, including providing to such person or persons upon reasonable advance request any documentation or information that is not privileged or otherwise protected from disclosure and that is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys' fees and disbursements) incurred by Indemnitee -3- 4 in so cooperating with the person or persons making such determination shall be borne by the Corporation (irrespective of the determination as to Corporation's entitlement to indemnification) and the Corporation hereby agrees to indemnify and hold harmless Indemnitee therefrom. Section 4.3. Presumptions and Effect of Certain Proceedings. (a) If the person or persons empowered or selected under Article IV of this Agreement to determine whether Indemnitee is entitled to indemnification shall not have made a determination within 45 calendar days after receipt by the Corporation of the request by Indemnitee therefor, the requisite determination of entitlement to indemnification shall be deemed to have been made and Indemnitee shall be entitled to such indemnification, absent (i) a knowing misstatement by Indemnitee of a material fact, or knowing omission of a material fact necessary to make Indemnitee's statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided, however, that such 45-day period may be extended for a reasonable time, not to exceed an additional 30 calendar days, if the person making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating of documentation and/or information relating to such determination; and provided, further, that the 45-day limitation set forth in this Section 4.3(a) shall not apply and such period shall be extended as necessary if within 30 days after receipt by the Corporation of the request for indemnification under Section 4.1 the Board has resolved to submit such determination to the shareholders pursuant to Section 4.2(b) of this Agreement for their consideration at an annual meeting thereof to be held within 90 calendar days after such receipt and such determination is made thereat, or a special meeting of shareholders is called within 30 calendar days after such receipt for the purpose of making such determination, such meeting is held for such purpose within 60 calendar days after having been so called and such determination is made thereat. (b) The termination of any Proceeding or of any Claim by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) by itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did meet the requirements for indemnification under Section 2.2. Indemnitee shall be deemed to have been found liable in respect of any Claim only after he shall have been so adjudged by a court in competent jurisdiction after exhaustion of all appeals therefrom. ARTICLE V CERTAIN REMEDIES OF INDEMNITEE Section 5.1. Indemnitee Entitled to Adjudication in an Appropriate Court. In the event (a) a determination is made pursuant to Article IV that Indemnitee is not entitled to indemnification under this Agreement or (b) there has been any failure by the Corporation to make timely payment or advancement of any amounts due hereunder, Indemnitee shall be entitled to commence an action seeking an adjudication in an appropriate court of the State of Texas, or in any other court of competent jurisdiction, of his entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association. Indemnitee shall commence such action seeking an adjudication or an award in arbitration within 180 days following the date on which Indemnitee first has the right to commence such action pursuant to this Section 5.1, or such right shall expire. The Corporation agrees not to oppose Indemnitee's right to seek any such adjudication or award in arbitration. Section 5.2. Adverse Determination Not to Affect any Judicial Proceeding. In the event that a determination shall have been made pursuant to Article IV that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Article V shall be conducted in all respects as a de novo trial or arbitration on the merits, and Indemnitee shall not be prejudiced by reason of such initial adverse determination. In any judicial proceeding or arbitration commenced pursuant to this -4- 5 Article V, the Corporation shall have the burden of proving, by clear and convincing evidence, that Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be. Section 5.3. Company Bound by Determination Favorable to Indemnitee in any Judicial Proceeding or Arbitration. If a determination shall have been made or deemed to have been made pursuant to Article IV that Indemnitee is entitled to indemnification, the Corporation shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Article V, absent a knowing misstatement by Indemnitee of a material fact, or a knowing omission of a material fact necessary to make a statement by Indemnitee not materially misleading, in connection with the request for indemnification. Section 5.4. Corporation Bound by the Agreement. The Corporation shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Article V that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Corporation is bound by all the provisions of this Agreement. Section 5.5. Indemnitee Entitled to Expenses of Judicial Proceeding. In the event that Indemnitee seeks a judicial adjudication of or an award in arbitration to enforce his rights under, or to recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the Corporation, and shall be indemnified by the Corporation against, any and all expenses (of the types described in the definition of Expenses in Article I) actually and reasonably incurred by him in such judicial adjudication or arbitration but only if he prevails therein. If it shall be determined in said judicial adjudication or arbitration that Indemnitee is entitled to receive part but not all of the indemnification or advancement of expenses or other benefit sought, the expenses incurred by Indemnitee in connection with such judicial adjudication or arbitration shall be reasonably prorated in good faith by counsel for Indemnitee. Section 5.6. No Diminishment of Rights. The Corporation shall not adopt any amendment to the Articles or Bylaws the effect of which would be to deny, diminish or encumber Indemnitee's rights to indemnity pursuant to the Articles, Bylaws, the TBCA or any other applicable law as applied to any act or failure to act occurring in whole or in part prior to the date (the "Effective Date") upon which the amendment was approved by the Board or the shareholders of the Corporation, as the case may be. In the event that the Corporation shall adopt any amendment to the Articles or Bylaws the effect of which is to so deny, diminish or encumber Indemnitee's rights to indemnity, such amendment shall apply only to acts or failures to act occurring entirely after the Effective Date thereof. ARTICLE VI MISCELLANEOUS Section 6.1. Non-Exclusivity. The rights of Indemnitee to receive indemnification and advancement of Expenses under this Agreement shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Articles or Bylaws, any other agreement, vote of shareholders or a resolution of directors of the Corporation, or otherwise. No amendment or alteration of the Articles or Bylaws of the Corporation or any provision thereof shall adversely affect Indemnitee's rights hereunder and such rights shall be in addition to any rights Indemnitee may have under the Articles, Bylaws, the TBCA or otherwise. To the extent that there is a change in the TBCA (whether by statute or judicial decision) which allows greater indemnification by agreement than would be afforded currently under the Articles or Bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by virtue of this Agreement the greater benefit so afforded by such change. Section 6.2. Insurance and Subrogation. (a) To the extent that the Corporation maintains an insurance policy or policies providing liability insurance for directors, officers, employees, agents or fiduciaries of the Corporation or of -5- 6 any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise that such person serves at the request of the Corporation, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee, agent or fiduciary under such policy or policies. (b) In the event of any payment by the Corporation under this Agreement, the Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all agreements or other documents required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Corporation to bring suit to enforce such rights. (c) The Corporation shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise. Section 6.3. Certain Settlement Provisions. The Corporation shall have no obligation to indemnify Indemnitee under this Agreement for amounts paid in settlement of a Proceeding or Claim without the Corporation's prior written consent. The Corporation shall not settle any Proceeding or Claim in any manner that would impose any fine or other obligation on Indemnitee without Indemnitee's consent. Neither the Corporation nor Indemnitee shall unreasonably withhold their consent to any proposed settlement. Section 6.4. Exculpation of Directors. If Indemnitee is or was a director of the Corporation, he shall not in that capacity be liable to the Corporation or its shareholders for monetary damages for an act or omission in Indemnitee's capacity as a director, except that Indemnitee's liability shall not be eliminated or limited for: (a) a breach of Indemnitee's duty of loyalty to the Corporation or its shareholders; (b) an act or omission not in good faith that constitutes a breach of duty of Indemnitee to the Corporation or an act or omission that involves intentional misconduct or a knowing violation of the law; (c) a transaction from which Indemnitee received an improper benefit, whether or not the benefit resulted from an action taken within the scope of Indemnitee's office; or (d) an act or omission for which the liability of Indemnitee is expressly provided for by statute. Section 6.5. Duration of Agreement. This Agreement shall continue for so long as Indemnitee serves in his Corporate Status, and thereafter shall survive until and terminate upon the later to occur of (a) the final termination of all pending Proceedings in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any proceeding commenced by Indemnitee pursuant to Article V relating thereto or (b) the expiration of all statutes of limitation applicable to possible Claims arising out of Indemnitee's Corporate Status. This Agreement shall be binding upon the Corporation and its successors and assigns and shall inure to the benefit of Indemnitee and his heirs, executors, legal representatives and administrators. Section 6.6. Notice by Each Party. Indemnitee agrees to promptly notify the Corporation in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document or communication relating to any Proceeding or Claim for which Indemnitee may be entitled to indemnification or advancement of Expenses hereunder. The Corporation agrees to promptly notify Indemnitee in writing, as to the pendency of any Proceeding or Claim which may involve a claim against Indemnitee for which Indemnitee may be entitled to indemnification or advancement of Expenses hereunder. Section 6.7. Amendment. This Agreement may not be modified or amended except by a written instrument executed by or on behalf of each of the parties hereto. Section 6.8. Waivers. The observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) by the party entitled to enforce such term only by a writing signed by the party against which such waiver is to be asserted. Unless otherwise expressly provided herein, no delay on the part of any party hereto in exercising any right, power or privilege -6- 7 hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party hereto of any right, power or privilege hereunder operate as a waiver of any other right, power or privilege hereunder nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder. Section 6.9. Entire Agreement. This Agreement and the documents expressly referred to herein constitute the entire agreement between the parties hereto with respect to matters covered hereby, and any other prior or contemporaneous oral or written understandings or agreements with respect to the matters covered hereby are expressly superseded by this Agreement. Section 6.10. Severability. If any provision of this Agreement or the application of such provision to any person or circumstance, shall be judicially declared to be invalid, unenforceable or void, such decision will not have the effect of invalidating or voiding the remainder of this Agreement or affect the application of such provision to other persons or circumstances, and the parties hereto agree that the part or parts of this Agreement so held to be invalid, unenforceable or void will be deemed to have been stricken herefrom and the remainder of this Agreement will have the same force and effectiveness as if such part or parts had never been included herein; provided, however, that the parties shall negotiate in good faith with respect to an equitable modification of the provision or application thereof declared to be invalid, unenforceable or void. Any such finding of invalidity or unenforceability shall not prevent the enforcement of such provision in any other jurisdiction to the maximum extent permitted by applicable law. Section 6.11. Merger or Consolidation. If the Corporation shall be a constituent corporation in a consolidation, merger or other reorganization, the Corporation, if it shall not be the surviving, resulting or other corporation therein, shall require as a condition thereto the surviving, resulting or acquiring corporation to agree to indemnify Indemnitee to the full extent provided in this Agreement. Whether or not the Corporation is the resulting, surviving or acquiring corporation in any such transaction, Indemnitee shall also stand in the same position under this Agreement with respect to the resulting, surviving or acquiring corporation as he would have with respect to the Corporation if its separate existence had continued. Section 6.12. Notices. Unless otherwise expressly provided herein, all notices, requests, demands, consents, waivers, instructions, approvals and other communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered to or mailed, certified mail return receipt requested, first-class postage paid, addressed as follows: (i) if to the Corporation, AMERISAFE, Inc., 2301 Highway 190 West, DeRidder, Louisiana 70634, Attn: Secretary and (ii) if to Indemnitee, at the address specified on the signature page of this Agreement, or to such other address or to such other individuals as any party shall have last designated by notice to the other parties. All notices and other communications given to any party in accordance with the provisions of this Agreement shall be deemed to have been given when delivered or sent to the intended recipient thereof in accordance with the provisions of this Section 6.12. Section 6.13. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of Texas without regard to the principles of conflict of laws. Section 6.14. Headings. The Article and Section headings in this Agreement are for convenience of reference only, and shall not be deemed to alter or affect the meaning or interpretation of any provisions hereof. Section 6.15. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. IN WITNESS WHEREOF, this Agreement has been duly executed and delivered to be effective as of the date first above written. -7- 8 AMERISAFE, INC. By: ------------------------------------- Name: Title: INDEMNITEE ---------------------------------------- [Name] Notice Address: ---------------------------------------- ---------------------------------------- ---------------------------------------- -8- EX-10.4 10 FORM OF EMPLOYMENT AGREEMENT 1 EXHIBIT 10.4 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "Agreement") dated as of _____________, 1996, by and between AMERISAFE, Inc., a Texas corporation (the "Company"), and _________________________ (the "Executive"). WITNESSETH: WHEREAS, the Company has agreed to continue to employ the Executive and the Executive has agreed to continue to be employed by the Company, subject to and on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, it is agreed as follows: 1. Employment. The Company hereby agrees to employ the Executive as the _____________________ of the Company and the Executive hereby agrees to be employed by the Company in such position, subject to and on the terms and conditions set forth in this Agreement. 2. Term. The term of this Agreement (the "Term") shall commence on the closing date of the initial public offering (the "Offering") of the Company's Class A Common Stock (the "Commencement Date") and, subject to termination pursuant to Section 6, shall expire on the third anniversary of the Commencement Date. Notwithstanding the previous sentence, on the third anniversary of the Commencement Date and on each subsequent anniversary thereof, the Term shall be automatically extended (subject to Section 6) for an additional one-year period on the terms and conditions set forth in this Agreement, unless either party to this Agreement gives the other party written notice (in accordance with Section 15) of such party's intention to terminate this Agreement and the employment of the Executive at least 90 days prior to the expiration of the Term. For the purposes of this Agreement, any reference to the "Term" of this Agreement shall include the initial term and any extension thereof. 3. Duties of the Executive. The Executive shall devote substantially all of his time during normal business hours to the business and affairs of the Company. Notwithstanding the foregoing, the Executive may devote reasonable periods of time during normal business hours to (i) serving as a director, trustee or member of or participant in any organization or business so long as such activity would not constitute Competitive Activity (as that term is defined in Section 9) if conducted by the Executive after the effective date of the termination of the Executive's employment with the Company (the "Termination Date"), (ii) engaging in charitable and community activities, or (iii) managing his personal investments. 4. Compensation. (a) Base Salary. During the Term, the Company shall pay to the Executive a base salary of $__________ per annum, which base salary may be adjusted from time to time by the Board of Directors of the Company in its sole discretion, payable at the times and in the manner consistent with the Company's policy for payment of base salary to other senior executives of the Company. (b) Incentive Compensation. The Executive shall be eligible to participate in any bonus plan or program or other incentive compensation arrangement (including any stock option or similar plan) adopted by the Board of Directors of the Company from time to time for senior executives of the Company on such terms as the Board of Directors of the Company may prescribe from time to time. The Executive acknowledges that the foregoing provisions of this Section 4(b) do not entitle the Executive to any payment 2 or award under such plans, programs or arrangements, it being understood that any such payments or awards will be determined in the discretion of the Board of Directors of the Company or a duly authorized committee thereof or pursuant to the terms of any such plan, program or arrangement. (c) Employee Benefits. In addition to the compensation described in this Section 4, the Executive and his eligible dependents shall be entitled to participate in Company-sponsored employee benefit plans, programs or arrangements and such other usual and customary benefits and prerequisites made available generally to other senior executives of the Company. (d) Expenses. The Company shall pay or reimburse the Executive for reasonable and necessary expenses incurred by the Executive in connection with his duties on behalf of the Company in accordance with the policies of the Company applicable to other senior executives of the Company. 5. Place of Performance. In connection with his employment by the Company, unless otherwise agreed by the Executive, the Executive shall be based at offices located in [the Dallas, Texas metropolitan area] [DeRidder, Louisiana], except for travel reasonably required for Company business. 6. Termination. (a) Involuntary Termination. The Executive's employment hereunder may be terminated by the Company for any reason or without reason by written notice as provided in Section 15. For purposes of this Agreement, the Executive's employment with the Company will be deemed to have been terminated by the Company without Cause (as that term is defined in Section 7(e)) if the Executive terminates his employment with the Company under the following circumstances: (i) at any time after the Company has notified the Executive pursuant to Section 2 that the Company intends to terminate this Agreement and the Executive's employment (rather than allow the Agreement to be extended); (ii) within 60 calendar days of a reduction in the Executive's then-current base salary, unless such reduction in base salary is part of a reduction applicable generally to senior executives of the Company; (iii) unless otherwise agreed by the Executive, if the Company requires the Executive to change his principal location of work to any location more than 25 miles from the then-current location thereof; or (iv) any other material breach of this Agreement by the Company that is not remedied by the Company within 30 calendar days after receipt of notice from the Executive of an alleged breach of this Agreement, which notice shall specify in reasonable detail the alleged breach by the Company. (b) Voluntary Termination. The Executive may terminate this Agreement and his employment with the Company at any time by written notice to the Company as provided in Section 15. (c) Effect of Termination. Subject to Section 9 and any requirements of applicable laws, in the event the Executive's employment hereunder is terminated for any reason whatsoever, the compensation and benefits obligations of the Company under Section 4 shall cease as of the Termination Date, except for any compensation and benefits earned or accrued but unpaid through such date. 7. Termination Payments and Benefits. If the Executive's employment hereunder is terminated by the Company other than for Cause during the Term, the Company shall be obligated to pay to the Executive the amounts and make available the benefits as provided in this Section 7. (a) Payment Period. Payments shall be made for a period of one year from the Executive's Termination Date (the "Payment Period"). (b) Calculation of Termination Payments. Subject to Section 7(f), during the Payment Period, the Executive shall be entitled to receive his base salary in an amount equal to the Executive's highest annual base salary from the Company or any subsidiary during the three-year period immediately prior to the Executive's Termination Date. -2- 3 (c) Method of Payment. Termination payments shall be paid to the Executive in accordance with the Company's policy for the payment of base salary to other senior executives of the Company, but not less than monthly. If the Executive should die while any amounts are still payable pursuant to this Section 7, such amounts shall be paid to the Executive's designated beneficiary or, if none, to the Executive's estate. (d) Benefits. Subject to Section 7(g), during the Payment Period, the Company shall arrange to provide the Executive (and his eligible dependents) with all employee welfare benefits which the Executive was entitled to receive immediately prior to the Executive's Termination Date or shall arrange to make available to the Executive benefits substantially similar to those which the Executive would otherwise have been entitled to receive if his employment had not been terminated. Such welfare benefits shall be provided to the Executive on the same terms and conditions (including employee contributions toward the premium payments) under which the Executive was entitled such benefits immediately prior to his Termination Date. (e) Termination for Cause. For purposes of this Agreement, the term "Cause" means either: (i) that the Executive shall have committed: (A) an intentional act of fraud, embezzlement or theft in connection with his duties or in the course of his employment with the Company; (B) intentional wrongful damage to property of the Company; (C) intentional misconduct that is materially injurious to the Company, monetarily or otherwise; or (D) an intentional breach of the Executive's obligations set forth in Section 8, and any such act shall have been materially harmful to the Company; or (ii) the failure by the Executive to consistently meet the Company's performance standards as applied to the Executive; provided, however, that the Executive shall not be terminated for Cause pursuant to this Section 7(e) (ii) unless he shall have received a written report setting forth in reasonable detail the manner in which he has failed to meet such standards and within 30 calendar days after receiving such report, the Board of Directors of the Company shall have determined in good faith that the Executive shall have failed to make substantial progress in meeting the Company's performance standards. For purposes of this Agreement, no act or failure to act on the part of the Executive shall be deemed "intentional" if it was due primarily to an error in judgment or negligence, but shall be deemed "intentional" only if done or omitted to be done by the Executive not in good faith and without reasonable belief that his action or omission was in the best interest of the Company. (f) Disability. If the Executive's employment is terminated by the Company during the Term as a result of a disability and the Executive becomes entitled to receive benefits under an insured long-term disability insurance plan ("LTD Plan") now or hereafter paid for by the Company, then the benefits provided under Section 7(d) shall be reduced by the amount of the benefits received by the Executive under such LTD Plan. No such reduction shall be made for amounts paid to the Executive under a personal disability income plan or such other disability income plan paid for by the Executive, whether or not the plan was obtained through a group-sponsored or Company-related program. -3- 4 (g) No Mitigation Obligation. The Executive is under no obligation to mitigate damages or the amount of any payment provided for hereunder by seeking other employment or otherwise; provided, however, that the benefits provided under Section 7(d) will terminate when the Executive becomes covered under any benefit plan made available by another employer providing substantially similar benefits. The Executive shall notify the Company within 10 calendar days after the commencement of any such benefits. (h) Forfeiture. Notwithstanding anything contained in this Agreement to the contrary, any right of the Executive to continue to receive the payments and benefits provided under this Section 7 shall terminate in the event that the Executive breaches his obligations under Sections 8, 9 or 10 following the Executive's Termination Date. 8. Confidentiality and Nonsolicitation Agreement. (a) The Executive acknowledges that in the course of his employment with the Company, he will or may have access to and become informed of confidential and proprietary information which is a competitive asset of the Company, including, without limitation (i) the terms of any agreement between the Company and any employee, clients or third-parties (including reinsurance treaties), (ii) underwriting and pricing strategies, (iii) marketing methods, (iv) product and service development ideas and strategies, (v) personnel training and development programs, (vi) financial results, (vii) strategic plans and demographic analyses, (viii) proprietary computer and systems software, and (ix) other non-public information concerning the Company and its business and operations (collectively, "Confidential Information"). The Executive acknowledges that the Confidential Information is the property of the Company. The Executive agrees that he will keep all Confidential Information in strict confidence during the course of his employment by the Company and thereafter, and will not directly or indirectly make known, divulge, reveal, furnish, make available or use any Confidential Information (except in the course of his employment with the Company). The Executive agrees that the obligations under this Section 8 shall survive termination of his employment by the Company regardless of any actual or alleged breach by the Company of this Agreement, until and unless any such Confidential Information shall have become, through no fault of the Executive, generally known to the public or the Executive is required by law to make disclosure (after giving the Company notice and an opportunity to contest such requirement). The Executive's obligations under this Section 8 are in addition to, and not in limitation of or preemption of, all other obligations of confidentiality which the Executive may have to the Company under general legal or equitable principles. (b) Upon termination of the Executive's employment with the Company, the Executive shall promptly return to the Company any documents or other property of the Company which are in the possession, custody or control of the Executive. (c) For a period of one year following the Executive's Termination Date, the Executive agrees that he will not in any capacity, on his own behalf or on behalf of any other firm, person or entity, undertake or assist in the solicitation of any employee of the Company to terminate his or her employment with the Company. (d) The Executive acknowledges and agrees that a breach of his obligations under this Section 8 would cause irreparable harm to the Company, and that the Company's remedy at law for any such breach would be inadequate. In recognition of the foregoing, the Executive agrees that, in addition to any other relief afforded by law or this Agreement, including damages sustained by a breach of this Agreement and any forfeitures under Section 7(h), the Company shall be entitled to enforce this Agreement by specific performance, including temporary and permanent injunctions, it being understood by the parties hereto that damages, the forfeiture provided in Section 7(h) and injunctions shall all be appropriate remedies and are not to be considered as alternative remedies. 9. Competitive Activity. During the Payment Period, if the Executive shall have received or shall be receiving benefits under Section 7, the Executive shall not, without the prior written consent of the -4- 5 Company, engage in any Competitive Activity. For purposes of this Agreement, the term "Competitive Activity" shall mean the Executive's participation, without the written consent of the Board of Directors of the Company, in the management of any business enterprise if such enterprise engages in substantial and direct competition with the Company and such enterprise's revenues from any product or service competitive with any product or service of the Company amounted to 25% of such enterprise's net revenues for its most recently completed fiscal year and if the Company's net revenues from said product or service amounted to 25% of the Company's net revenues for its most recently completed fiscal year. "Competitive Activity" shall not include (i) the mere ownership of less than 10% of the outstanding voting securities in any such enterprise and the exercise of rights appurtenant thereto or (ii) participation in the management of any such enterprise other than in connection with the competitive operations of such enterprise. 10. Post-Termination Assistance. Provided that the Executive shall be receiving the benefits provided under Section 7, during the Payment Period, the Executive agrees that he will provide, upon reasonable notice, such information and assistance to the Company as may reasonably be requested by the Company in connection with any litigation in which it or any of its affiliates is or may become a party; provided, however, that the Company agrees to reimburse the Executive for any reasonable expenses, including travel expenses, incurred by the Executive in performing his obligations under this Section 10. 11. Arbitration. (a) Any dispute between the parties under this Agreement shall be resolved (except as provided in Section 11(b)) through arbitration by an arbitrator selected under the rules of the American Arbitration Association (the "AAA"), and the arbitration shall be conducted under the rules of the AAA in the location of the Executive's place of employment as provided in Section 5. Each party shall be entitled to present evidence and argument to the arbitrator. The arbitrator shall permit reasonable pre-hearing discovery, to the extent necessary to establish a claim or a defense to a claim, subject to supervision by the arbitrator. The determination of the arbitrator shall be conclusive and binding upon the parties and judgment upon the same may be entered in any court having jurisdiction thereof. The arbitrator shall give written notice to the parties stating his or their determination, and shall furnish to each party a signed copy of such determination. The expenses of arbitration shall be borne equally by the Executive and the Company or as the arbitrator shall otherwise equitably determine. (b) Notwithstanding the foregoing, the Company shall not be required to seek or participate in arbitration regarding any alleged breach of the Executive's obligations under Section 8 or Section 9, but may pursue its equitable remedies for such breach in a court of competent jurisdiction; provided, however, that any claim for monetary damages shall be resolved in accordance with Section 11(a). (c) Any arbitration or action pursuant to this Section 11 will be governed by and construed in accordance with the substantive laws of the State of Texas, without giving effect to the principles of conflict of laws of such State. 12. Agreement. This Agreement supersedes any and all other agreements, whether in writing or otherwise, between the parties hereto (and any such agreement between any subsidiary or affiliate of the Company and the Executive in effect as of the date hereof) with respect to the employment of the Executive by the Company or any of its subsidiaries or affiliates and contains all of the covenants and agreements between the parties with respect to such subject matter. 13. Withholding of Taxes. The Company may withhold from any amounts payable under this Agreement all federal, state, city or other taxes as the Company is required to withhold pursuant to any law or government regulation or ruling. -5- 6 14. Successors and Binding Agreement. (a) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business or assets of the Company, by agreement in form and substance satisfactory to the Executive, expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Company would be required to perform if no such succession had taken place. This Agreement will be binding upon and inure to the benefit of the Company and any successor to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business or assets of the Company whether by purchase, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the "Company" for the purposes of this Agreement), but will not otherwise be assignable, transferable or delegable by the Company. (b) This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees and legatees. (c) This Agreement is personal in nature and neither of the parties hereto will, without the consent of the other, assign, transfer or delegate this Agreement or any rights or obligations hereunder except as expressly provided in this Section 14. Without limiting the generality or effect of the foregoing, the Executive's right to receive payments hereunder will not be assignable, transferable or delegable, whether by pledge, creation of a security interest or otherwise, other than by a transfer by the Executive's will or by the laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 14(c), the Company shall have no liability to pay any amount so attempted to be assigned, transferred or delegated. 15. Notices. For all purposes of this Agreement, all communications, including without limitation notices, consents, requests or approvals, required or permitted to be given hereunder shall be in writing and will be deemed to have been duly given when hand delivered or dispatched by electronic facsimile transmission (with receipt thereof confirmed), or five business days after having been mailed by United States registered or certified mail, return receipt requested, postage prepaid, or three business days after having been sent by a nationally recognized overnight courier service such as Federal Express or UPS, addressed to the Company (to the attention of the Secretary of the Company) at its principal executive offices and to the Executive at his principal residence, or to such other address as either party may have furnished to the other in writing and in accordance herewith, except that notices of changes of address shall be effective only upon receipt. 16. Governing Law. The validity, interpretation, construction and performance of this Agreement will be governed by and construed in accordance with the substantive laws of the State of Texas, without giving effect to the principles of conflict of laws of such State. 17. Validity. If any provision of this Agreement or the application of any provision hereof to any person or circumstances is held invalid, unenforceable or otherwise illegal, the remainder of this Agreement and the application of such provision to any other person or circumstances will not be affected, and the provision so held to be invalid, unenforceable or otherwise illegal will be reformed to the extent (and only to the extent) necessary to make it enforceable, valid or legal. 18. Survival of Provisions. Notwithstanding any other provision of this Agreement, the parties' respective rights and obligations under Sections 7, 8, 9, 10, 11 and 13 shall survive any termination or expiration of this Agreement or the termination of the Executive's employment for any reason whatsoever. 19. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with any condition or provision of this Agreement to be performed by such other party will be -6- 7 deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. Unless otherwise noted, references to "Sections" are to sections of this Agreement. The captions used in this Agreement are designed for convenient reference only and are not to be used for the purpose of interpreting any provision of this Agreement. 20. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereof have executed this Agreement as of the day and year first above written. AMERISAFE, Inc. By ----------------------------------- Millard E. Morris, Chairman of the Board of Directors and Chief Executive Officer --------------------------------------- [Executive's Name] -7- EX-10.5 11 FORM OF TAX MATTERS AGREEMENT 1 EXHIBIT 10.5 DRAFT 9/20/96 TAX MATTERS AGREEMENT THIS TAX MATTERS AGREEMENT ("Agreement") is made this __ day of ______________, 1996, by and among AMERISAFE, Inc., a Texas corporation ("AMERISAFE"), on its own behalf and on behalf of its direct and indirect subsidiaries (other than Auto One, the Auto One Companies, MTInc., the MTInc. Companies, MTTFS and SUI (the "AMERISAFE" Subsidiaries"), Auto One Acceptance Corporation, a Texas corporation ("Auto One"), on its own behalf and on behalf of its subsidiaries (the "Auto One Companies"), M.T. & Co., Inc., a Louisiana corporation ("MTInc."), on its own behalf and on behalf of its predecessors and subsidiaries (the "MTInc. Companies," which, for purposes of this agreement, shall include MOR-TEM Systems, Inc., the former parent corporation of MTInc.), Southern Underwriters, Inc., a Louisiana corporation ("SUI"), and Morris, Temple and Trent Financial Services, a Louisiana corporation ("MTTFS") (Auto One, the Auto One Companies, MTInc., the MTInc. Companies, SUI, and MTTFS collectively referred to herein as "the Distributed Companies"). RECITALS WHEREAS, Auto One, MTInc. SUI and MTTFS are wholly-owned subsidiaries of AMERISAFE; WHEREAS, AMERISAFE intends to distribute all of the common stock of Auto One, MTInc., SUI and MTTFS to shareholders of AMERISAFE (the "Distribution"); WHEREAS, The Distributed Companies have been or will be included in Consolidated Tax Returns filed or to be filed by AMERISAFE on behalf of Parent's Group; 2 AND WHEREAS, the parties hereto desire to allocate responsibility for the payment of federal, state, local, and foreign Taxes attributable, allocable, or apportionable to AMERISAFE and/or the AMERISAFE Subsidiaries, and to the Distributed Companies for the Period in which the Distribution occurs and for Periods prior and subsequent to such Period, provide for the consequences of Distribution date adjustments of such Taxes, and agree as to related matters; NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: ARTICLE I DEFINITIONS As used herein the following terms, when capitalized, shall have the following meanings: 1.1 "Affiliated Group" shall mean an "affiliated group" as defined in section 1504(a) of the Code. 1.2 "Code" shall mean the Internal Revenue Code of 1986, as amended and as in effect from time to time, and any predecessor or successor thereto. A reference to any section of the Code means such section as in effect from time to time and any comparable provision of any predecessor or successor law. 1.3 "Consolidated Income Tax Returns" shall mean all federal Tax Returns for Income Taxes which have been or will be filed by AMERISAFE on behalf of Parent's Group, and "Consolidated 2 3 Income Taxes" shall mean the Taxes shown or required to be shown on such Tax Returns. 1.4 "Final Determination" shall mean, in the context of federal Income Taxes, with respect to any issue or item for any Period, (i) a final, unappealable decision by a court of competent jurisdiction, (ii) the expiration of the time for assessment of Taxes or filing a claim for refund or, if a refund claim has been timely filed, the expiration of the time for instituting suit in respect of such refund claim, if no further adjustment to the items of income, gain, deduction, loss, or credit for such Period may thereafter be made, (iii) the execution of a closing agreement under section 7121 of the Code, (iv) the acceptance by the IRS or its counsel of a tender pursuant to an offer in compromise pursuant to section 7122 of the Code, (v) the execution of a Form 870A, or (vi) any other final and irrevocable determination of Taxes for any Period. In the context of other Taxes, "Final Determination" shall mean, with respect to any issue or item for any Period, any final, unappealable, and irrevocable determination of Taxes for such Period. 1.5 "IRS" shall mean the United States Internal Revenue Service or any successor thereto. 1.6 "Parent's Group" shall mean any Affiliated Group including AMERISAFE or any predecessor or successor thereof. 1.7 When used in the context of federal income taxes, "Period" shall mean any taxable year or other period which is treated as a taxable year (including any Short Period) for 3 4 purposes of the Code. When used in the context of any other Taxes, "Period" shall mean any taxable year or other period with respect to which any such Taxes may be imposed under any applicable statute, rule, or regulation. 1.8 "Regulations" shall mean the Treasury regulations in effect from time to time under the Code. 1.9 "Short Period" shall mean, with respect to the Distributed Companies, any Period beginning on January 1 of any year and ending at the end of the Distribution date in the same year. 1.10 "State Income Taxes" shall mean all Taxes measured on or by income imposed by any State of the United States of America or political subdivision thereof and shall include State Taxes denominated or in the nature of franchise Taxes. 1.11 "Tax" and "Taxes" shall mean all income taxes (including federal income taxes, State income taxes, and foreign income taxes imposed under Subtitle A of the Code or similar laws of any taxing authority having effect prior to or on the Closing Date) (referred to herein as "Income Taxes"), payroll and employee withholding taxes (imposed under Chapters 21 through 24 of the Code or any similar or comparable payroll and employee withholding taxes (including disability withholding taxes imposed by the laws of any taxing authority) having effect prior to or on the Distribution date), other domestic and foreign withholding taxes, sales and use taxes, excise taxes, real and personal property taxes, and any other governmental imposition generally referred to as or in the nature of a tax, whether arising before, 4 5 on, or after the Distribution date. Except as may be otherwise provided in Section 3.1(b) below, any reference in this Agreement to a particular type of Tax (or refund thereof) enumerated in this Section 1.11 shall also be deemed to refer to any interest, additions to Tax, or penalties that may be payable in respect thereof. 1.12 "Tax Returns" shall mean all reports, estimates, information statements, and returns relating to, or required to be filed in connection with, any Taxes pursuant to the statutes, rules and regulations of any federal, state, local, or foreign taxing authority. ARTICLE II PREPARATION OF RETURNS, CONTROVERSIES 2.1 Returns and Controversies--Consolidated Income Tax Returns and Estimates. (a) Tax Returns and Payment. AMERISAFE shall have exclusive authority to report for Consolidated Income Tax purposes the operations of Parent's Group, including the operations of the Distributed Companies, for any Period ending at the end of or before the Closing Date. Subject to the terms of this Agreement, AMERISAFE shall be responsible for the timely filing of, and shall be liable and shall indemnify the Distributed Companies for the full and timely payment of all amounts shown to be due on, Consolidated Income Tax Returns and estimates of Parent's Group for such Periods; provided, however, that Auto One shall be responsible for providing AMERISAFE with 5 6 all information reasonably required by AMERISAFE with respect to the operations and assets of Auto One and the Auto One Companies, MTInc. shall be responsible for providing AMERISAFE with all information reasonably required by AMERISAFE with respect to the operations and assets of MTInc. and the MTInc. Companies, and SUI and MTTFS shall each be responsible for providing AMERISAFE with all information reasonably required by AMERISAFE with respect to their own operations and assets, so as to permit AMERISAFE to prepare and file such Consolidated Income Tax Returns and estimates and to pay such Consolidated Income Taxes and estimates on a timely basis. In calculating amounts to be shown as due on the Consolidated Income Tax Return which includes any Short Period, all items of each of the Distributed Companies (including items of each corporation triggered by reason of the Distribution) shall be taken into account in accordance with Regulations Section 1.1502-76(b) and no election shall be made under Regulations Section 1.1502-76(b)(2)(ii) or Regulations Section 1.1502-76(b)(2)(iii). (b) Controversies. AMERISAFE shall have exclusive authority to represent the Distributed Companies before the IRS or any other governmental agency or authority or any court regarding Consolidated Income Taxes and estimates for Periods covered by Consolidated Income Tax Returns and estimates referred to in section 2.1(a) above, including, but not limited to, (i) the exclusive control of any response to any examination by the IRS or any other taxing authority and (ii) the exclusive control over any contest of any issue through a Final 6 7 Determination, including, but not limited to (A) whether and in what forum to conduct such contest and (B) whether and on what basis to settle such contest. AMERISAFE shall timely notify Auto One, MTInc., SUI and/or MTTFS, as appropriate, of any correspondence and Tax controversies with any taxing authority relating to items of Auto One, any Auto One Company, MTInc., any MTInc. Company, SUI, and/or MTTFS, and will promptly provide such company with copies of all such correspondence. Subject to AMERISAFE's exclusive authority as provided for herein, Auto One, MTInc., SUI and MTTFS have the right to consult with AMERISAFE with respect to the handling of any such correspondence or controversies. Auto One, MTInc., SUI and MTTFS shall exercise such right, if at all, on a timely basis. AMERISAFE shall permit Auto One, MTInc., SUI, and/or MTTFS, as the cases may be, to attend any hearing or other proceedings relating to any such controversies. 2.2 Returns and Controversies--All other Taxes. (a) Tax and Information Returns. Except as otherwise provided herein or as the parties may otherwise agree, Auto One shall have exclusive authority with regard to all Taxes of Auto One and the Auto One Companies, MTInc. shall have exclusive authority with respect to all Taxes of MTInc. and the MTInc. Companies, SUI and MTTFS shall each have exclusive authority with regard to all of its own Taxes, and Auto One, MTInc., SUI and MTTFS shall be responsible for the correct and timely filing of, and shall be liable for the full and timely payment of, all such Taxes. 7 8 (b) Controversies. Except as otherwise provided herein or as the parties may otherwise agree, Auto One, at its own expense, shall have exclusive authority to represent itself and the Auto One Companies before the IRS or any other taxing authority or any court regarding the Tax consequences of the operations and assets of Auto One and the Auto One Companies with respect to all Taxes covered by Section 2.2(a) above, MTInc., at its own expense, shall have exclusive authority to represent itself and the MTInc. Companies before the IRS or any other taxing authority or any court regarding the Tax consequences of such companies with respect to all Taxes covered by Section 2.2(a) above, and each of SUI and MTTFS, at its own expense, shall have exclusive authority to represent itself before the IRS or any other taxing authority or any court regarding the Tax consequences of its operations and assets with respect to all Taxes covered by Section 2.2(a) above. ARTICLE III COMPUTATIONS AND PAYMENTS OF TAXES; INDEMNIFICATIONS 3.1 Consolidated Income Taxes. (a) Initial Computation. For each Period, including any Short Period, for which any Distributed Company is included in a Consolidated Income Tax Return of Parent's Group, the Tax liability of each such corporation shall be calculated in accordance with Regulations Section 1.1552-1(a)(2) and, using a percentage of 100%, Regulations 1.1502-33(d)(3). See Example (2) 8 9 of Regulations Section 1.1502-33(d)(6). Any resulting positive amount (i.e., an amount owed by a Distributed Company) is hereinafter referred to as a "AMERISAFE Receivable." Any resulting negative amount (i.e., an amount owed to a Distributed Company) is hereinafter referred to as a "AMERISAFE Payable." The AMERISAFE Receivables and the AMERISAFE Payables for Auto One and each Auto One Company for each such Period shall be aggregated, and the resulting number, positive (i.e., AMERISAFE Receivables exceed AMERISAFE Payables) or negative (i.e., AMERISAFE Payables exceed AMERISAFE Receivables), is hereinafter referred to as the "Aggregate." If the Aggregate is a positive number, Auto One shall pay the Aggregate to AMERISAFE to the extent not previously paid by Auto One or an Auto One Company. If the Aggregate is a negative number, AMERISAFE shall pay the Aggregate to Auto One to the extent not previously paid to Auto One or an Auto One Company. The same procedures shall be followed with respect to MTInc. and the MTInc. Companies, and, separately, with respect to each of SUI and MTTFS. (b) Subsequent Adjustments; Indemnifications. AMERISAFE shall be responsible and liable and shall indemnify the Distributed Companies for any and all increases in Consolidated Income Taxes and shall be entitled to any refund of any and all decreases in Consolidated Income Taxes which may be determined pursuant to a Final Determination and which are allocable to AMERISAFE or any AMERISAFE Subsidiary for all Periods ending before the Closing Date and for any Period which includes the Short Period. Auto One, MTInc., SUI and MTTFS shall be 9 10 responsible and liable, and shall indemnify AMERISAFE and the AMERISAFE Subsidiaries, for any and all increases (including any increase arising from a loss of foreign Tax credits due to any reduction in foreign Taxes of Distributed Companies), and shall be entitled to any refunds, of Consolidated Income Taxes for all Periods ending before the Closing Date and for any Period which includes the Short Period which are allocable to the Distributed Companies. For purposes of determining the amount of any Consolidated Income Tax increases or refunds that are allocable to Distributed Companies, on the one hand, or to AMERISAFE or any AMERISAFE Subsidiary, on the other hand, the amounts computed under Section 3.1(a) above shall be recomputed to take into account all adjustments made in accordance with the Final Determination. Auto One, MTInc., SUI, and MTTFS shall also be responsible and liable and shall indemnify AMERISAFE and the AMERISAFE Subsidiaries for any and all interest, additions to Tax, and penalties with respect to any and all increases which are allocable to the Distributed Companies, respectively. 3.2 All Other Taxes. Auto One, MTInc., SUI and MTTFS shall be responsible and liable for, and shall indemnify and hold AMERISAFE and the AMERISAFE Subsidiaries harmless from, any increases in, and shall be entitled to any refund resulting from any decreases in, any and all Taxes of Auto One or any Auto One Company, of MTInc. or any MTInc. Company, or of SUI or MTTFS, respectively, described in Section 2.2(a) above. 3.3 Time of Payment. Any amounts to be paid pursuant to Section 3.1(a) above shall be paid and made current not less 10 11 than 5 days before the applicable Tax Return is due. Amounts owed by either party hereto in respect of Tax refunds received by such party to which the other party is entitled hereunder shall be paid by the party receiving the refund to the other party within 5 days after the receipt or credit of such refund, and amounts owed by either party hereto in respect of Tax increases (including any Tax increases under Section 3.1(b) or 3.2 above, or Section 5.2) shall be paid by such party to the other party within 30 days after the Final Determination with respect thereto. ARTICLE IV COOPERATION BY THE PARTIES 4.1 Record Retention. AMERISAFE, Auto One, MTInc., SUI and MTTFS agree that all Tax records within the possession of either shall be retained for as long as they may be material. 4.2 Cooperation re Tax Return Filings and Controversies. (a) In General. Each party hereto agrees that it will cooperate with the other, and its representatives, in a prompt and timely manner, in connection with (i) the preparation and filing of, and (ii) any administrative or judicial proceeding involving, any Tax Return filed or required to be filed hereunder by AMERISAFE or its delegee which includes any Distributed Company. Such cooperation shall include, but not be limited to, (i) the execution and delivery to AMERISAFE or its delegee by any of the Distributed Companies, as applicable, of any power of 11 12 attorney required to allow AMERISAFE and its counsel to represent such Distributed Company in any controversy which AMERISAFE shall have the right to control pursuant to Section 2.1(b) above and (ii) making available to the other party, during normal business hours, all books, records (including, but not limited to, work papers and schedules), information, officers, and employees (without substantial interruption of employment) reasonably requested and necessary or useful in connection with any Tax inquiry, audit, investigation, dispute, litigation, or other matter. Notwithstanding the foregoing, neither party shall be required to furnish to the other federal Income Tax Returns or drafts thereof (except as otherwise expressly provided herein or as is reasonably necessary to implement the provisions of Section 5.2 below), for any Period, except that AMERISAFE or its delegee shall furnish to Auto One, MTInc., SUI and MTTFS the portions of such Tax Returns reporting the operations of Auto One and/or any Auto One Company, of MTInc. and/or any MTInc. Company, of SUI, and/or of MTTFS, as applicable, and the related portions of all reports relating to the examination by the IRS or any other governmental agency or taxing authority of such Tax Returns. (b) Draft Consolidated Income Tax Return. In furtherance of Section 2.1(a) above, AMERISAFE shall prepare and, not less than 15 days before filing, furnish to Auto One, MTInc., SUI and to MTTFS draft federal (and, to the extent applicable, state) income Tax Returns reporting the operations and assets of the Distributed Companies for any Short Period in 1996. Such draft Tax Returns shall be prepared without regard to the items 12 13 of income, gain, deduction, loss, or credit of AMERISAFE or any AMERISAFE Subsidiary. Except as AMERISAFE may otherwise determine after consulting with Auto One, MTInc., SUI and MTTFS, all items of income, gain, deduction, loss, and credit of each Distributed Company shall be reported on a basis consistent with the reporting of such items (or substantially similar items) of such Distributed Company for prior Periods unless applicable law or a change in factual circumstances requires otherwise. ARTICLE V MISCELLANEOUS 5.1 Prior Tax Sharing Agreements. This Agreement terminates and supersedes any and all other Tax sharing or Tax allocation agreements or practices in effect between AMERISAFE and/or any AMERISAFE Subsidiary, on the one hand, and any Distributed Company, on the other hand, regardless of the Period for which such Taxes are imposed. 5.2 Carrybacks. Deductions, losses, or credits of any Distributed Company arising in a Period in which the entity generating them is not included in a Consolidated Income Tax Return pursuant to Section 2.1(a) above may, under applicable law, be available for carryback to a Period in which the entity generating them was so included. To the extent applicable law allows such a carryback to be waived, Auto One, MTInc., SUI and/or MTTFS, as applicable, shall have the exclusive authority to determine whether or not to waive such carryback. To the 13 14 extent the carryback is not waivable or not waived, AMERISAFE shall be entitled to the benefits of such carryback but shall pay to the applicable Distributed Company an amount equal to the reduction in Taxes of AMERISAFE or any AMERISAFE Subsidiary attributable to such carryback. To the extent any such carryback causes AMERISAFE or any AMERISAFE Subsidiary to incur any additional Tax, Auto One, MTInc., SUI and/or MTTFS, as appropriate, shall pay to AMERISAFE an amount equal to such additional Tax. AMERISAFE shall cooperate, as is reasonably necessary, in the implementation of this Section 5.2. 5.3 Effectiveness of this Agreement; Survival of Obligations. This Agreement shall be effective only from and after the Distribution date. With respect to any particular item of Tax liability, the covenants and obligations contained in this Agreement shall not terminate until a Final Determination as to such item and any payment required hereunder have been made. 5.4 Complete Agreement. This Agreement and other agreements and documents referred to herein shall constitute the entire agreement between the parties with respect to the subject matter hereof and shall supersede all previous negotiations, commitments, and writings with respect to such subject matter. 5.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. 5.6 Notices. All notices and other communications hereunder shall be in writing and shall be delivered by hand, mailed by registered or certified mail (return receipt 14 15 requested), or sent by courier or other express delivery that provides for independent delivery verification to the parties at the following addresses (or at such other addresses for a party as shall be specified by like notice) and shall be deemed given on the date on which such notice or communication is delivered to the addressees at the address specified below: (a) If to AMERISAFE: if by hand: if by mail: (b) If to Auto One: if by hand: if by mail: (c) If to MTInc.: if by hand: if by mail: (d) If to SUI: if by hand: if by mail: 15 16 (e) If to MTTFS: if by hand: if by mail: 5.7 Amendments. This Agreement may not be modified or amended except by an agreement in writing signed by the parties hereto. 5.8 Successors and Assigns. This Agreement and all the provisions hereof shall be binding upon and inure to the benefit of the parties and their respective successors and assigns; provided, however, that, except as specifically provided herein, no party may assign or delegate any of its rights or obligations under this Agreement without the consent of the other party, which consent shall not be unreasonably withheld. 5.9 No Third-Party Beneficiaries. This Agreement is solely for the benefit of the parties hereto and their Subsidiaries and shall not be deemed to confer upon any third party any remedy, claim, liability, reimbursement, claim of action, or other right in excess of those existing without reference to this Agreement. 5.10 Titles and Headings. Titles and headings to sections herein are inserted for the convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 5.11 Execution in Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an 16 17 original, but which together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. Amerisafe, Inc. By: ----------------------------------- Title: -------------------------------- Auto One Acceptance Corporation By: ----------------------------------- Title: -------------------------------- M.T. & Co., Inc. By: ----------------------------------- Title: -------------------------------- Southern Underwriters, Inc. By: ----------------------------------- Title: -------------------------------- 17 18 Morris, Temple & Trent Financial Services By: ----------------------------------- Title: -------------------------------- 18 EX-10.6 12 FORM OF SERVICES AGREEMENT 1 EXHIBIT 10.6 SERVICES AGREEMENT This Services Agreement (this "Agreement") is made and entered into as of _______________, 1996 by and between AMERISAFE, Inc., a Texas corporation ("AMERISAFE"), and Auto One Acceptance Corporation, a Texas corporation ("Auto One"). RECITALS A. Auto One is a former subsidiary of AMERISAFE. B. AMERISAFE has historically provided to its subsidiaries, including Auto One and its subsidiaries, certain administrative and management services. C. Auto One desires that AMERISAFE continue to provide certain administrative and management services to Auto One and AMERISAFE agrees to provide such services on the terms and subject to the conditions set forth herein. NOW, THEREFORE, for and in consideration of the agreements set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Administrative Services. AMERISAFE shall provide or cause to be provided to Auto One and its subsidiaries, if, when and to the extent requested by Auto One, the administrative and management services described on Exhibit A hereto (the "Services"). 2. Charges for Services. (a) In consideration for AMERISAFE providing the Services to Auto One, Auto One will pay AMERISAFE a monthly fee of $40,000 (the "Fee"). Auto One shall remit the Fee, in full, on or before the last calendar day of the month commencing with the month in which the Effective Date (as defined in Section 5) occurs and continuing until the termination of this Agreement in accordance with its terms. The Fee shall be pro rated for any partial calendar month based upon the actual number of days during such month in which this Agreement was in effect. (b) In addition to the Fee, Auto One shall reimburse AMERISAFE for all third-party out-of-pocket expenses ("Expenses") incurred by AMERISAFE in connection with providing the Services. Following the end of each month during the term of this Agreement, AMERISAFE shall submit to Auto One a statement (each a "Reimbursement Statement") setting forth the aggregate Expenses, including reasonable supporting documentation, incurred in such month. Promptly (and, in any event, within 10 business days) following receipt of the Reimbursement Statement, Auto One shall pay to AMERISAFE the amount of the Expenses set forth therein. 3. Performance of Services. (a) Degree of Care. AMERISAFE shall perform the Services with the same degree of care, skill and prudence customarily exercised by it in respect of its own business, operations and affairs. It is understood and agreed that the Services shall be substantially identical in nature and quality to the Services performed by AMERISAFE for Auto One immediately prior to the Effective Date. (b) Certain Limitations. Each party acknowledges that the Services shall be provided only with respect to the businesses of Auto One and its subsidiaries as such businesses exist as of the Effective Date or as otherwise mutually agreed by the parties. AMERISAFE will not be obligated to 2 provide Services for the benefit of entities other than Auto One and its subsidiaries. Auto One shall use the Services only in accordance with all applicable federal, state and local laws and regulations. (c) Certain Information. Auto One shall provide, and shall cause each of its subsidiaries to provide, in a manner consistent with the practices employed by the parties prior to the Effective Date, any information needed by AMERISAFE from Auto One or such subsidiary, as the case may be, to perform the Services pursuant hereto. If the failure to provide such information renders the performance of any requested Service impossible or unreasonably difficult, AMERISAFE may, upon reasonable notice to Auto One, refuse to provide such Service. 4. Limitations on Liability and Indemnification. (a) Limitations on Liability. Neither party will have any liability under this Agreement (including any liability for its own negligence) for damages, losses or expenses suffered by the other party or its subsidiaries as a result of the performance or non-performance of such party's obligations hereunder, unless such damages, losses or expenses are caused by or arise out of the willful misconduct or gross negligence of such party or a breach by such party of any of the express provisions hereof. In no event will either party have any liability to the other party for indirect, incidental or consequential damages that such other party or its subsidiaries or any third party may incur or experience on account of the performance or non-performance of such party's obligations hereunder. (b) Indemnification. Subject to the limitations on liability set forth in the last sentence of Section 4(a) hereof, each party shall indemnify, defend and hold harmless the other party and its directors, officers, employees, agents and representatives from and against all claims, liabilities, damages, losses and expenses (including without limitation reasonable attorneys' fees and expenses) caused by or arising out of the willful misconduct or gross negligence of such indemnifying party in the performance or non-performance of its obligations hereunder or the breach by such indemnifying party of any of the express provisions hereof. (c) The provisions of this Section 4 shall survive any termination of this Agreement. 5. Term of Agreement. This Agreement shall become effective on the closing date of AMERISAFE's initial public offering its Class A Common Stock (the "Effective Date") and shall continue until terminated by either party in accordance with this Section 5. Neither party hereto may terminate the Agreement prior to the first anniversary date of the Effective Date. Thereafter, this Agreement shall be terminable by either party upon not less than 90 days' prior written notice to the other party. Termination under this Section 5 or otherwise shall have no effect on the respective obligations of the parties prior to the date of such termination or their respective obligations to make any payment required to be made pursuant to the terms hereof. 6. Confidentiality. Each party shall hold in trust and maintain confidential and, except as required by law, not disclose to others without the prior written approval of the other party, any information received by it from the other party or developed or otherwise obtained by it in connection with the performance of its obligations hereunder (the "Information"). Within 30 days after the date of termination of this Agreement, each party shall return to the other party, or, with the written consent of the other party, destroy all documents, data and other materials of whatever nature relating to the businesses of the other party and its subsidiaries that it obtained in connection with the performance of its obligations hereunder, provided that the parties may retain any Information to the extent reasonably needed to comply with applicable tax, accounting or financial reporting requirements or to resolve any legal issues identified at the time of termination. The provisions of this Section 6 shall survive any termination of this Agreement. 7. Miscellaneous. (a) Successors and Assigns. This Agreement shall be binding upon the parties hereto and their respective successors and permitted assigns and shall inure to the benefit of the parties hereto and 3 their respective successors and permitted assigns. This Agreement may not be assigned by either party hereto to any other person except with the express written consent of the other party. (b) No Third-Party Beneficiaries. Except for the persons entitled to indemnification pursuant to Section 4(b) hereof, each of whom is an intended third-party beneficiary hereunder, nothing expressed or implied in this Agreement shall be construed to give any person or entity other than the parties hereto any legal or equitable rights hereunder. (c) Entire Agreement. This Agreement constitutes the entire agreement among the parties relating to the subject matter hereof. (d) Amendment. This Agreement may be amended or supplemented at any time provided that any such amendment or supplement must be made in writing and signed by each of the parties hereto. (e) Assignment. This Agreement and the rights, duties, obligations and privileges hereunder may not be assigned by either party without the prior written consent of the other party. (f) Waivers. Either party hereto may (i) extend the time for the performance of any of the obligations or other acts of the other party or (ii) waive compliance with any of the agreements contained herein. No waiver of any term shall be construed as a waiver of the same term, or a waiver of any other term, of this Agreement. The failure of any party to assert any of its rights hereunder will not constitute a waiver of any such rights. (g) Severability. If any provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, such provision shall be deemed severable and all other provisions of this Agreement shall nevertheless remain in full force and effect. (h) Headings. Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. (i) Notices. All notices given in connection with this Agreement shall be in writing. Service of such notices shall be deemed complete (i) if hand delivered, on the date of delivery, (ii) if by mail, on the fourth business day following the day of deposit in the United States mail, by certified or registered mail, first-class postage prepaid, or (iii) if sent by Federal Express or equivalent courier service, on the next business day. Such notices shall be addressed to the parties at the following addresses or at such other address for a party as shall be specified by like notice (except that notices of change of address shall be effective upon receipt): If to AMERISAFE: AMERISAFE, Inc. 2301 Highway 190 West DeRidder, Louisiana 70634 Attention: President Telephone: (318) 463-9052 Telecopy: (318) 463-7298 If to Auto One: Auto One Acceptance Corporation 5550 LBJ Freeway, Suite 901 Dallas, Texas 75240 Attention: President Telephone: (214) 661-1234 Telecopy: (214) 239-6380 -3- 4 (j) Governing Law. This Agreement shall be governed by, and construed in accordance with, the substantive laws of the State of Louisiana, without giving effect to the principles of conflict of laws of such State. (k) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all of which together shall constitute but one agreement. IN WITNESS WHEREOF, AMERISAFE and Auto One have caused this Agreement to be executed on the date first above written. AMERISAFE, INC. By: ------------------------------- Mark R. Anderson, President AUTO ONE ACCEPTANCE CORPORATION By: ----------------------------- James Bass, President -4- 5 EXHIBIT A Administrative and Management Services 1. General Accounting (a) Journal entry coding and input (b) Maintenance of ledger system (c) Reconciliation of bank accounts (d) Other general accounting functions 2. Financial Reporting and Accounting Research (a) Preparation of financial statements (b) Research regarding the impact of accounting standards 3. Internal and External Auditing (a) Internal audit (b) Review of internal accounting and administrative controls (c) Review of operational and financial management 4. Employee Matters (a) Payroll (b) Benefits administration 5. Risk Management Administration of risk management matters 6. Tax (a) Preparation and filing of all tax returns (b) Assistance with state and local property tax compliance (c) Assistance with financial accounting and taxes (d) Supervision of all federal, state and local tax audits, protests, administrative proceedings and litigation (e) Qualification and design of all employee benefit plans (f) Preparation and submission of all tax ruling requests (g) Rendering and obtaining all tax opinions (h) Qualification and reporting of stock options 7. Legal Advice and assistance with respect to legal matters -5- 6 8. Governmental Reports Preparation of reports required to be filed with governmental agencies 9. Human Resources Advice and assistance with respect to compensation, employee benefits and other employee matters -6- EX-11.1 13 STATEMENT RE: COMPUTATION OF EARNINGS 1 EXHIBIT 11.1 COMPUTATION OF EARNINGS PER SHARE
Year Six Months Ended Ended December 31, June 30, 1995 1996 --------------------------- PRIMARY: Net income ............................................ $ 9,334,000 $ 4,252,000 ============ ============ Shares as adjusted: Weighted average common shares outstanding ......... 11,884,647 11,884,647 Assumed conversion of Series B cumulative convertible preferred stock ...................... 5,515,353 5,515,353 Incremental shares from outstanding stock options as determined under the treasury stock method ..................................... 85,714 85,714 Incremental shares from issuance of Class A Common Stock ..................................... 6,000 6,000 Pro forma shares whose proceeds would be necessary to pay certain debts originated in connection with the reorganization of AMERISAFE, Inc. ............ 4,569,357 4,569,357 ------------ ------------ Shares as adjusted .................................... 22,061,071 22,061,071 ============ ============ Pro forma net income per share ........................ $ 0.42 $ 0.19 ============ ============ FULLY DILUTED: Net income ............................................ $ 9,334,000 $ 4,252,000 ============ ============ Shares as adjusted: Weighted average common shares outstanding ......... 11,884,647 11,884,647 Assumed conversion of Series B cumulative convertible preferred stock ...................... 5,515,353 5,515,353 Incremental shares from outstanding stock options as determined under the treasury stock method ..................................... 85,714 85,714 Incremental shares from issuance of Class A Common Stock ..................................... 6,000 6,000 Pro forma shares whose proceeds would be necessary to pay certain debts originated in connection with the reorganization of AMERISAFE, Inc. ............ 4,569,357 4,569,357 ------------ ------------ Shares as adjusted .................................... 22,061,071 22,061,071 ============ ============ Pro forma net income per share ........................ $ 0.42 $ 0.19 ============ ============
EX-23.1 14 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the captions "Experts" and "Selected Consolidated Financial Data," and to the use of our reports dated ______________________, 1996, in the Registration Statement (Form S-1, No. 333-10099) and related Prospectus of AMERISAFE, Inc. for the registration of 12,650,000 shares of its common stock. Dallas, Texas _______________, 1996 The foregoing consent is in the form that will be signed upon the completion of the reorganization described in Note 1 to the financial statements. /s/ ERNST & YOUNG LLP Dallas, Texas September 25, 1996 EX-27.1 15 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF INCOME FOUND ON PAGES F-3 THROUGH F-5 OF THE COMPANY'S S-1 FILED ON SEPTEMBER 24, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR 6-MOS DEC-31-1995 DEC-31-1996 JAN-01-1995 JAN-01-1996 DEC-31-1995 JUN-30-1996 3,363 3,016 65,052 68,795 66,840 68,434 3,076 4,083 0 0 0 0 71,491 75,894 10,202 14,688 13,360 14,330 316 607 120,440 133,905 55,427 62,345 3,581 4,460 0 0 10,299 11,014 10,113 12,938 119 119 0 0 0 0 32,019 36,323 120,440 133,905 58,167 30,678 4,519 2,743 174 (7) 6,991 4,730 32,924 18,356 245 250 13,279 8,127 14,568 5,935 5,234 1,683 0 0 0 0 0 0 0 0 9,334 4,252 0.42 0.19 0.42 0.19 31,242 43,304 36,074 18,973 (3,150) (617) 10,219 3,296 10,643 9,353 43,304 49,011 (3,150) (617)
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