Item 1. BUSINESS - ------ --------
Technology Funding Secured Investors I (hereinafter referred to as the "Partnership" or the "Registrant") was formed as a California limited partnership on August 31, 1984. The business of the Partnership is to provide secured loans and to acquire equity interests in new and developing companies as described in the "Summary of the Offering" and "Business of the Partnership" sections of the Prospectus dated May 5, 1986, that forms a part of Registrant's Form S-1 Registration Statement No. 2-96022, which sections are incorporated herein by reference. Additional characteristics of the Partnership's business are discussed in the "Risk Factors" and "Conflicts of Interest" sections of the Prospectus, which sections are also incorporated herein by reference. The Partnership's Amended and Restated Limited Partnership Agreement ("Partnership Agreement") provides that the Partnership will continue until December 31, 2004, unless dissolved earlier.
Item 2.

Item 2. PROPERTIES - ------ ----------
The Registrant has no material physical properties.
Item 3.

Item 3. LEGAL PROCEEDINGS - ------ -----------------
Except as disclosed in Note 8 to the financial statements, there are no material pending legal proceedings to which the Registrant is party or of which any of its property is the subject, other than ordinary routine litigation incidental to the business of the Partnership.
Item 4.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ ---------------------------------------------------
No matter was submitted to a vote of the holders of units of limited partnership interests ("Units") during 1996.
PART II
Item 5.

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER - ------ ------------------------------------------------------------- MATTERS -------
(a) There is no established public trading market for the Units.
(b) At December 31, 1996, there were 5,924 record holders of Units.
(c) The Registrant, being a partnership, does not pay dividends. Cash distributions, however, may be made to the partners in the Partnership pursuant to the Registrant's Partnership Agreement.
Item 6.

Item 6. SELECTED FINANCIAL DATA - ------ -----------------------
Refer to financial statement notes entitled "Summary of Significant Accounting Policies" and "Allocation of Profits and Losses" for a description of the method of calculation for net realized (loss) income per Unit.
Item 7.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------ ----------------------------------------------------------- AND RESULTS OF OPERATIONS - -------------------------
Liquidity and Capital Resources - -------------------------------
In 1996, net cash used by operating activities totaled $778,116. The Partnership paid management fees of $25,365 to the Managing General Partner, reimbursed related parties for operating expenses of $639,924, and received $3,977 from affiliated partnerships for net loan participations. Other operating expenses of $191,554 were paid and interest income of $28,460 was received. In addition, the Partnership received a collection expense reimbursement of $46,290 from portfolio companies.
During 1996, the partnership issued $50,902 in secured notes receivable primarily to portfolio companies in the computers and computer equipment industry. Repayments of notes receivable provided cash of $162,764 and proceeds from investment sales totaled $31,439. The Partnership also purchased an equity investment for $3,300. As disclosed in Note 8 to the financial statements, the Partnership is an indirect party to litigation, of which the probability and amount of loss, if any, is not presently determinable.
Beginning in 1991, the Partnership entered the liquidation stage and began to distribute its available cash. The Partnership has distributed a major portion of its available cash and is now at the stage in its liquidation process where future distributions are primarily dependent on loan repayments and equity investment sales.
Cash and cash equivalents at December 31, 1996, were $291,452. Operating cash reserves, proceeds from sales of equity investments, repayments of secured notes receivable, and Managing General Partner's support are expected to be sufficient to fund Partnership operations through the next twelve months.
Results of Operations - ---------------------
1996 compared to 1995 - ---------------------
Net losses for 1996 and 1995 were $405,453 and $870,088, respectively. The improvement was primarily attributable to a $2,983,395 decrease in realized losses from investment write- downs and a $648,464 decrease in operating expenses, mostly offset by a $2,292,857 decrease in the change in net unrealized fair value of equity investments, and a $510,160 decrease in net realized gain from sales of equity investments.
Investment write-downs in 1996 and 1995 totaled $5,000 and $2,988,395, respectively. The 1995 write-down related to equity investments in portfolio companies in the medical and retail/consumer product industries.
Total operating expenses were $281,002 and $929,466 in 1996 and 1995, respectively. As discussed in Note 4 to the financial statements, the 1995 operating expenses included additional administrative and investor services expenses of $598,415. The 1996 operating expenses, as discussed in Note 7 to the financial statements, included expense reimbursements of $46,290. Had the 1996 reimbursements not occurred and had the 1995 additional expenses been recorded in prior years, the 1996 and 1995 total operating expenses would have been $327,292 and $369,042, respectively. The decrease was primarily due to lower administrative and investor services, and lending operations and investment management expenses from reduced overall portfolio activities.
During 1996, the Partnership recorded an increase of $96,606 in equity investment fair value primarily due to increases in the medical, microelectronics, and telecommunications industries, partially offset by decreases in the industrial/business automation industry. In 1995, the $2,389,463 increase was mostly due to the reversal of unrealized losses, which were realized as investment write-downs as discussed above.
During 1996, the Partnership realized a gain of $30,189 mainly from the sale of Hybridon, Inc., stock. In 1995, the realized gain of $540,349 primarily related to the sale of equity investments in IKOS Systems, Inc., and 3Com Corporation.
The Partnership recorded secured notes receivable fair value decreases of $185,000 and $20,000 in 1996 and 1995, respectively, based upon the levels of loan loss reserves deemed adequate by the Managing General Partner at the respective year ends.
In 1996, secured notes receivable interest income was $3,850 compared to $142,791 in 1995; the 1995 amount included nonrecurring warrant income of $45,000 from the Integrated Network Corporation warrant redemption. The 1995 secured notes receivable interest income would have been $97,791 without such income. The remaining decrease was primarily due to lower interest-bearing notes receivable balances. At December 31, 1996, the remaining portfolio was on non-accrual status due to uncertainty of the borrowers' financial conditions.
Given the inherent risk associated with the business of the Partnership, the future performance of portfolio company investments may significantly impact future operations.
1995 compared to 1994 - ---------------------
Net losses for 1995 and 1994 were $870,088 and $2,138,497, respectively. The decrease in net loss was primarily attributable to a $4,516,883 increase in the change in net unrealized fair value of equity investments and a $185,333 increase in net realized gain from sales of equity investments. These changes were partially offset by a $2,474,144 increase in realized losses from investment write-downs, a $569,000 decrease in the change in the net unrealized fair value of secured notes receivable, and a $414,043 increase in total operating expenses.
In 1995, the increase in net unrealized fair value of equity investments of $2,389,463 was mostly due to the reversal of unrealized losses, which were realized from investment write- downs for portfolio companies in the medical and retail/consumer product industries. Realized losses from investment write-downs were $2,988,395 and $514,251 in 1995 and 1994, respectively; the 1994 write-downs primarily related to an equity investment in the medical industry. The 1994 decrease in fair value of $2,127,420 was primarily due to the conversion of notes receivable to equity investments at fair values lower than cost for a portfolio company in the medical industry.
During 1995, the Partnership recorded a net realized gain of $540,349 primarily from the sale of IKOS Systems, Inc., and 3Com Corporation. The $355,016 net realized gain recorded in 1994 was mainly from the sale of Micro Decisionware, Inc.
The Partnership recorded a decrease in the fair value of secured notes receivable of $20,000 in 1995, compared to an increase of $549,000 in 1994, based upon the levels of loan loss reserves deemed adequate by the Managing General Partner at the respective year ends. The 1994 increase primarily related to the conversion of notes receivable to equity investments as discussed above.
Total operating expenses were $929,466 and $515,423 in 1995 and 1994, respectively. As discussed in Note 4 to the financial statements, had the additional operating expenses been recorded in prior years, the 1995 and 1994 total operating expenses would have been $369,042 and $556,196, respectively. The decrease was primarily due to lower lending operations and investment management expenses, and administrative and investor services expenses from reduced overall portfolio activities.
Item 8.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ------ -------------------------------------------
The financial statements of the Registrant are set forth in Item 14.
Item 9.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING - ------ ----------------------------------------------------------- AND FINANCIAL DISCLOSURE - ------------------------
Registrant has reported no disagreements with its accountants on matters of accounting principles or practices or financial statement disclosure.
PART III
Item 10.

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------- --------------------------------------------------
As a partnership, the Registrant has no directors or executive officers. Technology Funding Ltd., a California limited partnership ("TFL"), and Technology Funding Inc., a California corporation ("TFI"), and wholly owned subsidiary of TFL, are the General Partners of the Partnership. TFI is the Managing General Partner. Information concerning the ownership of TFL and the business experience of the key officers of TFI and the partners of TFL is incorporated by reference from the sections entitled "Management of the Partnership - The General Partners" and "Management of the Partnership - Key Personnel" in the Prospectus, which are incorporated herein by reference. Changes in this information that have occurred since the date of the Prospectus are included in the Technology Funding Medical Partners I, L.P. Prospectus, as modified by Cumulative Supplement No. 4 dated January 4, 1995, forming a part of the May 3, 1993, Pre-Effective Amendment No. 3 to the Form N-2 Registration Statement No. 33-54002, dated October 30, 1992, which is incorporated herein by reference.
Item 11.

Item 11. EXECUTIVE COMPENSATION - ------- ----------------------
As a partnership, the Registrant has no officers or directors. In 1996, the Partnership incurred $25,365 in management fees. The management fees are designed to compensate the General Partners for General Partner Overhead incurred in performing management duties for the Partnership through December 31, 1996. General Partner Overhead includes the General Partners' share of rent and utilities, and certain salaries and benefits paid by the General Partners in performing their obligations to the Partnership.
Item 12.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------- --------------------------------------------------------------
Not applicable. No Limited Partner beneficially holds more than 5% of the aggregate number of Units held by all Limited Partners, and neither the General Partners nor any of their officers, directors or partners own any Units. The General Partners control the affairs of the Partnership pursuant to the Partnership Agreement.
Item 13.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - ------- ----------------------------------------------
The Registrant, or its investee companies, have engaged in no transactions with the General Partners or their officers and partners other than as described above, in the notes to the financial statements, or in the Prospectus.
PART IV
Item 14.

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON - ------- ------------------------------------------------------- FORM 8-K - --------
(a) List of Documents filed as part of this Annual Report on Form 10-K
(1) Financial Statements - the following financial statements are filed as a part of this Report:
Independent Auditors' Report Balance Sheets as of December 31, 1996 and 1995 Statements of Operations for the years ended December 31, 1996, 1995 and 1994 Statements of Partners' Capital for the years ended December 31, 1996, 1995 and 1994 Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 Notes to Financial Statements
(2) Financial Statement Schedules
All schedules have been omitted because they are not applicable or the required information is included in the financial statements or the notes thereto.
(3) Exhibits
Registrant's Amended and Restated Limited Partnership Agreement (incorporated by reference to Exhibit A to Registrant's Prospectus dated May 5, 1986, included in Registration Statement No. 2-96022 filed pursuant to Rule 424(b) of the General Rules and Regulations under the Securities Act of 1933).
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrant during the year ended December 31, 1996.
(c) Financial Data Schedule for the year ended and as of December 31, 1996 (Exhibit 27).
INDEPENDENT AUDITORS' REPORT ----------------------------
The Partners Technology Funding Secured Investors I:
We have audited the accompanying balance sheets of Technology Funding Secured Investors I (a California limited partnership) as of December 31, 1996 and 1995, and the related statements of operations, partners' capital, and cash flows for each of the years in the three-year period ended December 31, 1996. These financial statements are the responsibility of the Partnership'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. Our procedures included confirmation of certain loans and securities owned, by correspondence with the individual borrowing and investee companies, and a physical examination of securities held by a safeguarding agent as of December 31, 1996 and 1995. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Technology Funding Secured Investors I as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles.
San Francisco, California March 27, 1997 /S/KPMG Peat Marwick LLP
BALANCE SHEETS - --------------
See accompanying notes to financial statements.
STATEMENTS OF OPERATIONS - ------------------------
See accompanying notes to financial statements.
STATEMENTS OF PARTNERS' CAPITAL - -------------------------------
See accompanying notes to financial statements.
STATEMENTS OF CASH FLOWS - ------------------------
See accompanying notes to financial statements.
STATEMENTS OF CASH FLOWS (continued) - -----------------------------------
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS - -----------------------------
1. Summary of Significant Accounting Policies ------------------------------------------
Organization - ------------
Technology Funding Secured Investors I (the "Partnership") is a limited partnership organized under the laws of the State of California on August 31, 1984. The purpose of the Partnership is to provide secured loans to new and developing companies and to acquire, hold, sell, trade, exchange or otherwise dispose of warrants and/or capital stock acquired by the Partnership in conjunction with these loans. The General Partners are Technology Funding Ltd. ("TFL") and Technology Funding Inc. ("TFI"), a wholly-owned subsidiary of TFL. TFI is the Managing General Partner.
The registration statement of the Partnership, filed with the Securities and Exchange Commission, became effective and the Partnership commenced selling units of limited partnership interest ("Units") on May 31, 1985. On September 9, 1985, the minimum number of Units required to form the Partnership (4,800) were sold. On May 31, 1987, the offering terminated with 117,496 Units sold, generating $29,372,475 in cash from Limited Partners and $29,399 from the General Partners. The Partnership Agreement provides that the Partnership will continue until December 31, 2004, unless terminated sooner.
Preparation of Financial Statements and Use of Estimates - --------------------------------------------------------
These financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The financial statements include marketable and non-marketable investments of $748,215 and $951,421 (77% and 68% of partners' capital) as of December 31, 1996 and 1995, respectively. For the non-marketable investments, the Managing General Partner has estimated the fair value of such investments in the absence of readily ascertainable market values. Because of the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have been used had a ready market for investments existed, and the differences could be material. In addition, for certain publicly traded investments that may not be marketable due to selling restrictions, the Managing General Partner has applied an illiquidity discount of up to 33% in determining fair value as discussed below.
Cash and Cash Equivalents - -------------------------
Cash and cash equivalents are principally comprised of cash invested in demand accounts, accounts maintained with brokers, commercial paper, and money market instruments and are stated at cost plus accrued interest. The Partnership considers all money market and short-term investments with an original maturity of three months or less to be cash equivalents.
Provision for Income Taxes - --------------------------
No provision for income taxes has been made by the Partnership, as the Partnership is not directly subject to taxation. The partners are to report their respective shares of Partnership income or loss on their individual tax returns.
The accompanying financial statements are prepared using generally accepted accounting principles which may not equate to tax accounting. The Partnership's total tax basis in investments was higher than the reported total cost basis of $983,721 by $3,108,906 as of December 31, 1996.
Net Realized Income (Loss) Per Unit - -----------------------------------
Net realized income (loss) per Unit is calculated by dividing the weighted average number of Units outstanding for the years ended December 31, 1996, 1995 and 1994, of 110,802, 115,009 and 115,883, respectively, into the total net realized income (loss) allocated to the Limited Partners. The General Partners contributed an amount equal to 0.1% of the total Limited Partner capital contributions and did not receive any Partnership Units.
Investments: - -----------
In accordance with generally accepted accounting principles, the Partnership's method of accounting for investments is the fair value basis used for investment companies. The fair value of Partnership investments is their initial cost basis with changes as noted below:
Secured Notes Receivable, Net -----------------------------
The secured notes receivable portfolio includes accrued interest less the discount related to warrants and the allowance for loan losses. The portfolio approximates fair value through inclusion of an allowance for loan losses. Allowance for loan losses is reviewed quarterly by the Managing General Partner and is adjusted to a level deemed adequate to cover possible losses inherent in notes receivable and unfunded commitments. Notes receivable are placed on nonaccrual status when, in the opinion of the Managing General Partner, the future collectibility of interest or principal is in doubt.
In conjunction with certain secured notes, upon note issuance or restructure, the Partnership has received warrants to purchase certain types of capital stock or capital stock of the borrowing company. The cost basis of such warrants and the resulting discount has been estimated by the Managing General Partner to be 1% of the principal balance of the original notes made to the borrowing company. The cost basis of capital stock and the resulting discount are generally based on the valuation set at the latest round of financing. The discount is amortized to interest income on a straight-line basis over the term of the loan. These warrants and capital stock are included in the equity investment portfolio.
Equity Investments ------------------
The fair value for publicly-traded equity investments (marketable equity securities) is based upon the five-day-average closing sales price or bid/ask price that is available on a national securities exchange or over-the-counter market. Certain publicly-traded equity investments may not be marketable due to selling restrictions. For publicly-traded equity investments with selling restrictions, an illiquidity discount of up to 33% is applied when determining the fair value; the actual discount percentage is based on the type and length of restrictions. Sales of equity investments are recorded on the trade date. The basis on which cost is determined in computing realized gains or losses is generally specific identification.
Other equity investments, which are not publicly traded, are generally valued utilizing pricing obtained from the most recent round of third party financings. Valuation is estimated quarterly by the Managing General Partner. Included in equity investments are convertible and subordinated notes receivable as repayment of these notes generally occur through conversion into equity investments.
Equity investments with temporary changes in fair value result in increases or decreases to the unrealized fair value of equity investments. The cost basis does not change. In the case of an other than temporary decline in value below cost basis, an appropriate reduction in the cost basis is recognized as a realized loss. Adjustments to fair value basis are reflected as "Change in net unrealized fair value of equity investments." Cost basis adjustments are reflected as "Realized losses from investment write-downs" in the Statements of Operations.
The Partnership does not consolidate the financial statements of a portfolio company, MARCorp, in which it has an 80% ownership interest. The Managing General Partner believes that the accounting for this majority owned portfolio company on the fair value basis more appropriately represents the economic impact of the effect of MARCorp's operations on the Partnership, and is more consistent with the nature of the Partnership's business.
For the fiscal year ended September 30, 1996, MARCorp's unaudited financial statements reported total revenues of approximately $4.4 million, a net loss of approximately $0.9 million, and a net working capital deficit of approximately $0.1 million. The Partnership and other affiliated partnership have secured notes invested in MARCorp. At September 30, 1996, when the effect of these secured notes are eliminated, MARCorp had net equity of approximately $3.4 million (unaudited), the majority of which was attributable to the affiliated partnerships' security interest. At December 31, 1996, the Partnership reflected its corresponding secured notes receivable from MARCorp at a fair value of $343,000. The Partnership's equity investments in MARCorp were written off in prior years.
Non-cash Exercise of Warrants - -----------------------------
Periodically, the Partnership may acquire stock through the non-cash exercise of warrants. Upon the non-cash exercise of warrants, the Partnership recorded net realized gains of $8,497, $63,330, and $15,378, during 1996, 1995, and 1994, respectively, as a result of the underlying stock prices at the date of exercise. These amounts are included in net realized gain from sale of equity investments in the Statements of Operations.
Distributions - -------------
Distributions made to the Limited Partners are made among such partners in the proportion their respective capital accounts bear to the total of all capital accounts of the group. Future distributions will be dependent upon available cash from loan repayments and equity investment sales. After a reasonable amount of time, unnegotiated distribution checks, if any, are recorded as other liabilities on the Balance Sheets.
Reclassification - ----------------
Certain prior year balances have been reclassified to conform with the 1996 financial statement presentation.
2. Financing Partnership Operations --------------------------------
The Managing General Partner expects that cash received from liquidation of Partnership investments will provide the necessary liquidity to fund Partnership operations. Until such future proceeds are received, the Partnership will be dependent upon the financial support of the Managing General Partner to fund operations. The Managing General Partner has committed to this support in the form of short-term cash advances.
3. Change in Net Unrealized Fair Value of Equity Investments ---------------------------------------------------------
In accordance with the Partnership's accounting policy as stated in Note 1, the Statements of Operations include a line item entitled "Change in net unrealized fair value of equity investments." The table below discloses details of the changes:
4. Related Party Transactions --------------------------
Included in costs and expenses are related party costs as follows:
Management fees, payable quarterly, are equal to one-half of one percent of Partnership assets under management. Management fees compensate the Managing General Partner solely for General Partner Overhead (as defined in the Partnership Agreement) incurred in supervising the operation, management, and progress of Partnership loans to borrowing companies and its portfolio of warrants and capital stock of borrowing companies, as well as for the general administration of the Partnership. Currently, management fees are only paid to the extent that the aggregate amount of all proceeds (including warrants exercised without cash) received by the Partnership from the sale or other disposition of borrowing company equities, plus the aggregate fair market value of any equity securities distributed to the partners, exceeds the total management fee payable.
The Partnership reimburses the Managing General Partner and affiliates for operating expenses incurred in connection with the business of the partnership. Reimbursable operating expenses include expenses (other than Organizational and Offering and General Partner Overhead) such as investment operations, administrative and investor services, and computer services. At December 31, 1996 and 1995, due to related parties for such expenses were $31,990 and $420,507, respectively. During late 1995, operating cost allocations to the Partnership were reevaluated. The Managing General Partner determined that it had not fully recovered allocable overhead as permitted by the Partnership Agreement. As a result, the Partnership was charged additional administrative and investor services costs of $598,415, which were not previously recognized by the Partnership. This charge consisted of $37,991, $40,773 and $519,651 related to 1995, 1994 and prior years, respectively. If this charge had been recorded in prior years, total operating expenses would have been $369,042 and $556,196 for 1995 and 1994, respectively. At December 31, 1995, $178,364 of the $598,415 was recorded as a General Partner capital contribution to eliminate the General Partner tax capital account deficit.
Under the terms of a computer support agreement, the Partnership recognized charges from Technology Administrative Management, a division of TFL, for its share of computer support costs. These amounts are included in computer services expense.
Within the normal course of business, the Partnership participates in secured notes receivable granted to non-affiliated borrowing companies by affiliated partnerships which are also managed by the General Partners. The Partnership may also reparticipate such secured notes receivable amongst affiliated partnerships to meet business needs. At December 31, 1996, no amounts were due to or from affiliated partnerships. At December 31, 1995, $3,977 was due from affiliated partnerships and was included in other assets.
In order to increase the future investment returns to the Partnership, a portfolio company of the Partnership and affiliated partnerships has entered into a joint venture with the General Partners to perform investment recovery efforts. The General Partners have agreed to waive any "post conversion" profit interest in the Partnership attributable to any such recoveries for a share of the joint venture net profits. The post conversion profit is pursuant to, and as defined in, the profit and loss provisions of the Partnership's Partnership Agreement. The joint venture documents are subject to review by legal counsel for the Partnership to ensure conformity with the terms of the Partnership Agreement.
In 1995 and 1994, TFL had a sublease rental agreement with a Partnership portfolio company in the computers and computer equipment industry. The terms of this agreement were similar to those which would apply to an unrelated party. This agreement was terminated in the fourth quarter of 1995.
5. Allocation of Profits and Losses --------------------------------
Net realized loss of the Partnership is allocated 99% to the Limited Partners as a group and 1% to the General Partners as a group.
Net realized profit of the Partnership is allocated based on the beginning of year partners' capital balances as follows:
(A) 99% to the Limited Partners as a group and 1% to the General Partners until conversion, which is defined as such time when:
(i) the amount of cash plus the value of any securities distributed to the Limited Partners equals the aggregate initial capital contributions of all the Limited Partners; and
(ii) an 8% per annum cumulative, compounded return on the adjusted capital contributions (i.e., initial capital contributions less all amounts distributed) of all Limited Partners has been achieved.
(B) Thereafter (post conversion), 80% to the Limited Partners as a group and 20% to the General Partners as a group, except as provided below.
The Partnership Agreement defines adjusted capital contribution, with respect to any Limited Partner, as the capital contribution as reduced, but not below zero, by (i) all prior tax distributions of cash to such Limited Partner and (ii) the aggregate value (determined at the time of distribution) of any securities distributed to such Limited Partner.
Limited Partners that subscribed to the first 60,000 Units accepted by the Partnership will be allocated all of the General Partners' post- conversion profits in excess of a 1% minimum allocation until such time as each such Limited Partner has received total distributions from the Partnership equal to their capital contribution plus a specified annual priority return, ranging between 9% and 18%, on their adjusted capital contribution. Once the lowest priority return is met, the profits will be allocated to those Limited Partners who have not yet received their priority returns. Thereafter, the General Partners will receive their full post-conversion profits.
Given the inherent risk associated with the business of the Partnership, the future performance of portfolio company investments may significantly impact future operations.
6. Equity Investments ------------------
At December 31, 1996 and 1995, equity investments consisted of:
Marketable Equity Securities - ----------------------------
At December 31, 1996 and 1995, marketable equity securities had aggregate costs of $101,591 and $78,845, respectively, and aggregate market values of $257,753 and $145,132, respectively. The unrealized gains at December 31, 1996 and 1995, did not include any gross losses.
Cyclean, Inc./Cyclean of Los Angeles, LLC - -----------------------------------------
During the second quarter of 1996, the Partnership received a stock dividend of 6,297 Series D Preferred shares. Subsequently, the Managing General Partner determined that the fair value of the Partnership's investment had declined and accordingly, the Partnership recorded a $127,607 decrease in fair value at December 31, 1996.
Etec Systems, Inc. - ------------------
In December of 1996, the Partnership cash exercised its warrant for $3,300 and received 676 common shares. The partnership recorded an increase in fair value of $13,447 to reflect the market price of the restricted shares at December 31, 1996.
Hemocleanse, Inc. - -----------------
In 1996, the Partnership recorded a total increase in fair value of $162,492 for its warrant and common stock investments, based on the valuation set at the latest round of financing in which third parties participated.
Hybridon, Inc. - --------------
In January of 1996, Hybridon, Inc., completed its initial public offering. The Partnership exercised its warrant holdings without cash and received 2,532 shares of common stock, which were subsequently sold for total proceeds of $22,549. The total realized gain from these transactions was $21,299.
S-TRON - ------
The company was unsuccessful in its efforts to obtain a major government contract; as a result, the company ceased operations during March of 1996. This investment, which had previously been written off, is no longer held by the Partnership.
Other Equity Investments - ------------------------
In May of 1996, the Partnership sold 6,773 Photon Dynamics common shares borrowed from an outside brokerage firm and subsequently closed its open position with purchases on the open market. These transactions resulted in a realized gain of $8,890 and the Partnership maximized its gain based upon an evaluation of the prevailing market conditions.
Other changes reflected above generally relate to market value fluctuations or the elimination of a discount relating to selling restrictions for publicly-traded portfolio companies. Celeritek, Inc., Photon Dynamics and 3Com Corporation are publicly-traded companies.
7. Secured Notes Receivable, Net -----------------------------
At December 31, 1996 and 1995, secured notes receivable consisted of:
The 1996 notes are from two portfolio companies (representing 0% and 100% of the notes receivable fair value at December 31, 1996) in the industrial/business automation, and computers and computer equipment industries. The notes are secured by specific assets of the borrowing companies and interest rates at December 31, 1996, ranged from 12% to 13%.
Changes in the allowance for loan losses were as follows:
The allowance for loan losses is adjusted based upon changes to the portfolio size and risk profile. Although the allowance is established by evaluating individual debtor repayment ability, the allowance represents the Managing General Partner's assessment of the portfolio as a whole and is considered adequate at the respective year ends.
The secured notes receivable portfolio at December 31, 1996 and 1995, was on nonaccrual status due to uncertainty of the borrowers' financial conditions. The Managing General Partner continues to monitor the progress of these companies and intends to manage these investments to maximize the Partnership's net realizable value. The fair value at December 31, 1996, reflects the Managing General Partner's estimate of collectibility of these notes.
During 1996, the Partnership received reimbursements of $46,290 from portfolio companies primarily for legal, consulting, and other costs incurred in prior periods in the defense of the Partnership's secured note rights through bankruptcy court. The reimbursements were recorded as a reduction to lending operations and investment management expense.
The scheduled principal repayments remaining are:
Secured notes receivable which are due on demand are included as principal repayments in 1997. In addition, the Managing General Partner may at times need to restructure notes by either extending maturity dates or converting notes into equity investments to increase the ultimate collectibility of the Partnership's investments.
8. Litigation, Other Investment Expenses and Subsequent Event ----------------------------------------------------------
In March of 1996, an affiliated partnership filed a lawsuit in the United States District Court, Northern District of California, against Cyclean, Inc. ("Cyclean"), Ecopave, L.P. ("Ecopave"), Ecopave Corp. and Stephen M. Vance ("Vance"). The Partnership participated in the secured notes investments to Cyclean with the affiliated partnership.
Ecopave was formed by Cyclean, Ecopave Corp. and Vance. Cyclean, without the consent of the affiliated partnership, transferred certain equipment worth approximately $488,000 to Ecopave that is subject to the affiliated partnership's security interest. Cyclean further gave Ecopave a license to use its patented technology. The equipment and the intellectual property were security interest on a secured loan extended by the affiliated Partnership to Cyclean. The affiliated partnership thus commenced this legal action for patent infringement, seeking to collect approximately $3.5 million of indebtedness owed to the Partnership and affiliated partnerships by Cyclean and the recovery of the equipment from Ecopave. In January of 1997, a counter suit was filed by Ecopave Corp. and Vance against the affiliated partnership which seeks declaration that certain patent rights held by the affiliated partnership as security for the Cyclean debt are invalid as well as asserts a fraud claim. In addition, the counter suit seeks compensatory damages of approximately $5 million and unspecified punitive damages.
As a result of a settlement conference, the above lawsuits have tentatively been resolved for an effective date of April 1, 1997. The affiliated partnership has agreed to indirectly purchase Ecopave Corp. and Vance's ownership interest in Ecopave for $5.5 million; the Partnership may participate in this purchase. It is anticipated that the settlement of this claim will not result in any material negative impact to the Partnership or affiliated partnerships at December 31, 1996, or the date of settlement as the Managing General Partner believes that the fair value of this additional investment is equal to or greater than the purchase price and improves the Partnership's position to recover its secured notes receivable. The Managing General Partner believes a settlement is the most cost effective resolution of the dispute for the Partnership.
In the event that the aforementioned settlement is not consummated, the above lawsuits will continue to trial. Estimates of possible loss, if any, for the ongoing lawsuits cannot be determined at this time. No amounts have been provided in the accompanying financial statements for any possible negative outcome of this matter. The Managing General Partner believes the affiliated partnership has adequate defenses and intends to pursue this matter vigorously.
Other investment expenses in 1996 of $64,341 reflect the participated cost of this legal action.
9. Cash and Cash Equivalents -------------------------
At December 31, 1996 and 1995, cash and cash equivalents consisted of:
10. Repurchase of Limited Partnership Interests -------------------------------------------
Each June, beginning in June of 1987, Limited Partners may tender their Units for repurchase by the Partnership. The price paid for any units tendered is based on the June 30th estimated fair value for the Partnership. Units repurchased and the amounts paid were: 1,197 Units for $12,418; 503 Units for $9,108; and 507 Units for $17,745 in 1996, 1995, and 1994, respectively.
In November of 1995, following the annual June repurchases, the General Partners elected to offer Limited Partners with an initial investment of $2,000 held in an Individual Retirement or Keogh Account the option to tender their Units for repurchase by the Partnership. This was considered beneficial as the annual account maintenance fees for such investors significantly diminished the value of their nominal investment. Repurchases under this option totaled $70,146 for 3,897 Units. The amounts paid for all Unit repurchases were from aggregate principal repayments as well as equity investment sale proceeds.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
TECHNOLOGY FUNDING SECURED INVESTORS I
By: TECHNOLOGY FUNDING INC. Managing General Partner
Date: March 27, 1997 By: /s/Debbie A. Wong -------------------------------------- Debbie A. Wong Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature Capacity Date --------- -------- ----
/s/Charles R. Kokesh President, Chief March 27, 1997 - ------------------------ Executive Officer, Charles R. Kokesh Chief Financial Officer, and Chairman of Technology Funding Inc. and Managing General Partner of Technology Funding Ltd.
/s/Gregory T. George Group Vice President March 27, 1997 - -------------------------- of Technology Funding Gregory T. George Inc. and a General Partner of Technology Funding Ltd.
The above represents the Board of Directors of Technology Funding Inc. and the General Partners of Technology Funding Ltd.


ITEM 1. BUSINESS
THE COMPANY
Meadowbrook Insurance Group, Inc. (the "Company") is a Michigan corporation which was originally incorporated in 1985 under the name Star Holding Company. In November 1995, the Company changed its name and acquired Meadowbrook, Inc. ("Meadowbrook"). Meadowbrook was founded in 1955 as the Meadowbrook Insurance Agency and was subsequently incorporated in 1965.
The Company serves as a holding company for not only Meadowbrook but also for Star Insurance Company ("Star"), Savers Property and Casualty Insurance Company ("Savers") and American Indemnity Insurance Company LTD ("American Indemnity"). Star was formed in 1985 as a subsidiary of Star Holding Company. Star then acquired Savers in 1990, and the Company acquired American Indemnity in 1994.
OVERVIEW
Since 1976, the Company has been developing and managing alternative market risk management programs for defined client groups and their members. The alternative market, which developed as a result of historical volatility in the cost and availability of traditional commercial insurance coverages, includes a wide range of approaches to financing and managing risk exposures, such as captives and rent-a-captives, risk retention and risk purchasing groups, governmental pools and trusts and self-insurance plans. According to the last industry report made in 1994, the alternative market accounts for an estimated $61 billion, or 33%, of the estimated $186 billion of United States property and casualty premium written; and according to industry sources is expected to reach an estimated $85 billion, or 38%, of the estimated $225 billion of United States property and casualty premium written in the year 2000. The Company believes that the alternative market has continued to expand even during the current soft market as a result of the desire of many insureds to exercise greater control over the risk management process and to obtain customized risk management services.
The Company targets selected industry, trade and professional associations, affinity groups and governmental entities, whose specialized risk management goals and objectives are not met by the traditional commercial insurance market. In cooperation with a client group, the Company designs customized packages of services and coverages, or programs, which are then marketed to the group's members. The Company seeks to form long-term risk management "partnerships" with its clients, which the Company believes enable it to achieve cost efficiencies and relatively stable and predictable revenue and to provide clients with enhanced levels of service, cost stability, insurance capacity and coverage availability. Because clients often share in the operating results of the program, they are motivated to prevent and control losses and to participate actively in the overall management of the program. Historically, the Company has maintained a high client retention rate, which has permitted the Company to concentrate on increased market penetration.
Based upon the particular risk management goals of its clients and the Company's assessment of the opportunity for operating profit, the Company offers its programs on a managed basis, a risk-sharing basis or, in certain circumstances in response to a specific market opportunity, a fully-insured basis. In a "managed program," the Company provides program management services for a fee but usually assumes no insurance risk and does not participate directly in the operating results of the program. In a "risk-sharing program," the Company receives management fees and commissions and participates with its clients or agents in the operating results of the program through a captive, retrospectively-rated program, or a contingent commission. In a "fully-insured program," the Company provides traditional insurance coverage
without a risk-sharing mechanism and derives revenue exclusively from earned premiums and investment income. The Company writes programs on a fully-insured basis generally when the Company believes there is potential to develop a long-term risk-sharing relationship.
The Company's principal sources of income result from fees and commissions earned on risk management programs managed by Meadowbrook, and from the Company's participation in the operating results of many of the programs it manages through its insurance subsidiaries, Star and Savers. In addition to its alternative risk management business, the Company also issues surety bonds and operates a retail insurance agency.
Many of the Company's programs involve the participation of a risk-bearing entity owned by all or some of the insureds, which serves as a vehicle for the retention and pooling of risks by the insureds. Through the client's risk-bearing entity, the insured participates in the program's underwriting results on the retained risk exposures, earns investment income and often reduces the costs of risk management. The objective of the client's risk-bearing entity is generally to retain risks related to loss events that occur frequently, are low in severity and are relatively predictable, and to cede excess risk to reinsurers. Consistent with the needs of its clients and its assessment of the relative opportunities presented by the program, the Company often chooses to share in the underwriting results related to risk exposures retained by the client's risk-bearing entity.
The Company's capabilities in the provision of both services and insurance coverages provide flexibility for the consideration and implementation of a variety of alternative market solutions. Services provided and insurance lines of business include:
DESCRIPTION OF SERVICES AND CAPABILITIES
Program Design. Prior to implementing a new program, the Company reviews a significant amount of data, including: financial projections for the contemplated program; historical loss experience; actuarial studies of the underlying risks; the creditworthiness of the potential client; and the availability of reinsurance. A senior management team and employees representing each of the risk-management disciplines within the Company work together to design, market and implement new programs. While the Company does not generate substantial fees for
program design services, these services are an integral part of the Company's program management services.
Formation and Management of Risk-Bearing Entities. The Company generates fees by forming and managing risk-bearing entities for clients and agents. The Company currently manages over thirty captives and holds a minority interest in eight of these captives. The offshore captives are managed by the Company's subsidiaries in Bermuda and Barbados.
Risk Selection. The Company performs underwriting services for its clients, its clients' captives and certain individual accounts. Compensation for underwriting services generally is included in the Company's management fees. The Company's underwriting personnel help develop the proper criteria for selecting risks, while actuarial and reinsurance personnel evaluate and recommend the appropriate levels of risk retention. The program is then tailored according to the requirements of each client.
Reinsurance Brokerage. The Company earns fees by placing excess reinsurance for its programs. The Company's two reinsurance brokerage subsidiaries, Meadowbrook Intermediaries, Inc. and Meadowbrook International, Ltd., place reinsurance (as well as insurance coverage with high deductibles) for insurance companies, captives and self-insured programs managed by the Company. Reinsurance is also placed for clients that do not have other business relationships with the Company.
Loss Control and Prevention. The Company earns fees for loss control services which are designed to help clients prevent or limit certain loss events. Through an evaluation of the client's workplace environment, the Company's loss control specialists assist the client in planning and implementing a loss prevention program and, in certain cases, provide educational and training programs for the client.
Claims Handling and Administration. The Company is experienced in handling and managing claims for workers' compensation and most other casualty lines, property and surety bonds. It handles all claims functions for most of the programs managed by the Company. The Company's involvement in claims handling and administration provides feedback to program managers in assessing the client's risk environment and the overall structure of the program.
Sales and Marketing. The Company markets its programs and services to associations, groups, local, regional and national insurance agents and insurance consultants. Once a program has been developed for a particular association or group, the Company generally then markets the program to members of the association or group. Sales and marketing efforts include personal contact, direct mail, telemarketing, advertising, and attendance at seminars and trade and industry conventions.
MANAGED PROGRAMS
In a managed program, the Company, through Meadowbrook, earns commission and fee revenue by providing management and other services to a client's risk-bearing entity, but generally does not share in the operating results of such programs. The Company believes that its managed programs provide a stable source of revenue as well as opportunities for revenue growth without a proportionate increase in expenses. Revenue growth may occur through the sale of an existing managed program to additional members of the sponsoring client group, the expansion of coverages and services provided to existing programs and the creation of programs for new client groups (such as additional municipal associations) with needs that are similar to existing client groups.
Meadowbrook specializes in providing managed programs to public entity associations, and currently manages public entity pools and other captive insurance entities, which provide insurance coverage for over 2500 participants, including city, county, township and village
governments in five states. Over the years, Meadowbrook has been able to expand the services offered under existing programs as well as to increase the number of participants in these managed programs.
Managed program services for which Meadowbrook receives commissions and fees include: program design and development; underwriting; reinsurance brokerage; policy administration; loss prevention and control services (including the provision of specialized law enforcement training); claims and litigation management; information processing and accounting functions; and general management oversight of the program on behalf of the sponsoring client group. Fees and commissions received by the Company under its managed programs are generally either in a fixed amount or based on a percentage of premium serviced.
In addition to municipal associations, Meadowbrook also manages mutual insurance companies, offshore captives and other insurance entities including the Company's insurance subsidiaries Star and Savers.
In total, Meadowbrook employs 464 associates.
RISK-SHARING PROGRAMS
Client Risk-Sharing. In a client risk-sharing program, the Company participates in the operating results of the program, and the client group also shares in such results through a captive, a rent-a-captive or a retrospectively-rated program. In many instances, a captive owned by a client reinsures a portion of the risk on a quota-share basis. In addition to premium revenue and investment income from its participation in the operating results of the program, the Company may also be compensated through the receipt of ceding commissions and other fees for policy issuance services and acquisition costs, captive management services, reinsurance brokerage, loss prevention services and claims handling and administration services. For financial reporting purposes, ceding commissions are treated as a reduction in underwriting expenses.
The Company's experience has been that the number of claims and the cost of losses tend to be lower in risk-sharing programs than with traditional forms of insurance. The Company believes that client risk-sharing motivates insureds to focus on loss prevention and control measures and to establish and adhere to stricter underwriting guidelines. As a result of its experience with risk-sharing programs, the Company actively seeks out such opportunities in appropriate circumstances and has significantly increased the capital of Star since its formation in 1985 to accommodate new and expanded risk-sharing programs.
The Company assists the sponsoring group in forming a captive, which is capitalized by contributions from members of the sponsoring group in exchange for shares of the captive. The captive is generally managed for a fee by an offshore subsidiary of the Company. The Company works with the client to determine the amount of risk exposure that will be assumed by the captive, which varies depending on the captive's capitalization, the line of business, the amount to be retained by the Company and the amount to be reinsured by excess reinsurers. The Company then issues an insurance policy and receives premium from the insured. Pursuant to the quota-share reinsurance agreement with the captive, the Company generally transfers (cedes) a portion of the retained risk to the captive and pays to the captive its share of the net premium (after deducting ceding commissions, policy issuance fees, the cost of excess reinsurance, taxes and other fees and expenses). The Company generally seeks to cede approximately 50% of its loss exposures, but in some cases cedes as little as 30% or as much as 80% of its loss exposures. The Company secures obligations due from captives through the use of funds withheld trusts and letters of credit. Through its reinsurance intermediary subsidiaries, the Company obtains excess-of-loss reinsurance, subject to agreed upon limits and retention levels. The Company generally administers all claims handling functions, and the captive
provides funds to the Company for the payment of the captive's proportionate share of paid claims and claims expenses. The captive realizes investment income from its capital, unearned premium and loss reserves, and shares in the underwriting results.
The Company also offers its clients "rent-a-captive" risk-sharing programs. These programs allow a client to retain a significant portion of its own loss exposure without the administrative costs and capital commitment required to establish and operate its own captive. In order to enhance its "rent-a-captive" capabilities, the Company acquired American Indemnity, a Bermuda company, in June 1994.
In another variation on client risk-sharing, the Company establishes retrospectively rated programs for individual accounts. In such a program, the Company works with the client to develop the appropriate self-insured retention and loss fund amount and then helps arrange for excess of loss reinsurance. The client reimburses the Company for all claims payments within the client's retention. The Company generally earns a management fee (which includes claims and loss control fees). In most of these programs, the Company also participates in the operating results of the reinsurance coverage and earns a ceding commission.
Agent Risk-Sharing. The Company also writes program business on a risk-sharing basis with agents or brokers. The Company believes that agent risk-sharing has grown as a result of market volatility and lack of coverage availability in the traditional market. Risk-sharing is achieved either through an agent-owned captive, rent-a-captive or through a contingent commission structure tied to operating results. The Company believes that certain agents and brokers view risk-sharing as a means to recapture lost profit margins on commissions that have been reduced due to premium reductions in the soft market and to establish a long-term relationship with an insurer.
The agent may own a captive or purchase an interest in a rent-a-captive which acts as a reinsurer on business produced. In some cases, the captive's shareholders may include key producers, subproducers and insureds. In other circumstances, the agent accepts a lower up-front commission in exchange for a multi-year contingent commission based on operating results. The Company believes that multi-year commission structures motivate the agent to produce business with better risk characteristics and higher profit potential because unfavorable results reduce commissions.
FULLY-INSURED PROGRAMS
In a fully-insured program, the Company earns premium revenue by providing insurance coverage without a risk-sharing mechanism. The Company may provide fully-insured programs when it perceives opportunities for the development of risk-sharing programs in the future. For example, a fully-insured program marketed to an association comprised of licensed landscape and irrigation contractors developed into one of the Company's largest client risk-sharing programs. This program was initially established as a fully-insured program in 1990 to fill a void in insurance coverage for the members of the association. Thereafter, the Company assisted the association in forming a Bermuda-based captive reinsurance company and began ceding business to the captive in July 1993.
The Company's largest fully-insured program was developed for a residential care association in Michigan. The Company's relationship with this association dates from the early 1970's when the Company began placing insurance and providing program management services for members of the association. In 1986, the Company began writing property and workers' compensation insurance for these members and this program now accounts for approximately 10% of the Company's 1996 revenue.
AGENCY
The Company earns commissions through the operation of a retail property and casualty insurance agency. Formed in 1955 as Meadowbrook's original business, the insurance agency places principally commercial insurance, as well as personal property, casualty, life and accident and health insurance, with more than 25 insurance carriers. The agency has grown to be one of the largest agencies in Michigan, generating commissions in excess of $4.6 million, $4.3 million and $3.7 million for the years ended December 31, 1996, 1995 and 1994, respectively. In addition to its independent retail agency activities, the Company's insurance agency also earns revenue by serving as agent for several of the Company's programs, including two of its ten largest programs.
SURETY BONDS
The Company formed a surety bond business unit in late 1993 and began issuing surety bonds for contractors and licensees in May 1994. The Company earned premium revenue on surety bonds issued through general agents throughout the United States, including a wholly-owned subsidiary of the Company. General agents were paid commissions and, in some cases, profit sharing bonuses based upon loss ratios. The general agents had limited underwriting authority. In marketing payment and performance surety bonds to clients, the Company generally considered the net worth and working capital ratios and the client's experience, expertise, financial statements and historical track record. In certain instances, the Company required collateral before issuing a surety bond. The form of collateral varied depending upon an assessment of the risk factors associated with the surety bond. Generally, collateral consisted of escrowed cash, letters of credit or investment securities, all of which was held through the term of the bond.
In December 1996, the Company entered into a five-year joint underwriting agreement with Connecticut Surety Corporation. The agreement provides for the transfer of the underwriting risk on the majority of the Company's existing surety bond business. In addition, Star will continue to write new surety business, utilizing its capital and licenses, and Connecticut Surety will manage the operations and assume the risk. This arrangement substantially reduces the Company's underwriting risk exposure while creating a five-year fee arrangement. This enables the Company to refocus its efforts on its core business, alternative risk management.
INSURANCE OPERATIONS
INSURANCE SUBSIDIARIES
The Company's principal insurance subsidiaries, Star and Savers, operate primarily as program insurance companies, providing coverage to defined classes of insureds. These subsidiaries may be used in certain of the Company's managed programs as a policy issuance vehicle to fulfill a client's legal requirement or business need for a policy from a licensed insurer, or may be used to assume a significant portion of the premium and risk exposures under the Company's risk-sharing and fully-insured programs. The Company's insurance subsidiaries are involved in most of the Company's programs. Star and Savers are managed by Meadowbrook and have no employees.
Star is licensed in 45 states and the District of Columbia. Star was formed in Michigan in 1985 and was originally intended to serve primarily as a policy-issuing carrier and as a risk-sharing entity for certain of the Company's clients. In 1990, Star acquired Savers, a surplus lines company, to supplement its alternative market programs. Savers is domiciled in Missouri, licensed in five states and authorized as a surplus lines carrier in all other states except Vermont. Collectively, Star and Savers are authorized to write business, on either an admitted or surplus lines basis, in all fifty states.
The following table summarizes the growth in the Company's gross written premium and net earned premium for the most recent five years:
GROSS WRITTEN PREMIUM
NET EARNED PREMIUM
During 1996, A.M. Best affirmed an "A-" (Excellent) rating for both Star and Savers. Such ratings are now considered a group rating under the name Meadowbrook Insurance Group. A.M. Best ratings are based upon factors of concern to policyholders and are not directed toward the protection of investors. No assurances can be given that in the future A.M. Best will not reduce or withdraw the ratings of the Company's insurance subsidiaries.
RESERVES
The Company establishes reserves for the payment of loss and loss adjustment expenses. Loss reserves are estimates at a given point in time of what the insurer expects to pay claimants for claims occurring on or prior to such time, including claims that have not yet been reported to the insurer. The establishment of appropriate reserves is an uncertain process and, as such, it can be expected that the ultimate liability on claims will be greater or less than the estimated amounts. In particular, surety bond losses are not predictable, by nature; and therefore, by necessity, are based upon management's best estimates at a given point in time. While management believes that the amount accrued is adequate, actual results could differ from those estimates.
When a claim involving a probable loss is reported, the Company establishes a case reserve for the estimated amount of the Company's ultimate loss and loss adjustment expense payments on that claim. The estimate reflects the Company's judgment based on established reserving practices and the experience and knowledge of the Company's claims examiners regarding the nature and value of the claim as well as the estimated expense of settling the claim, including legal and other fees, and the general expenses of administering the claims adjustment process. These case reserves are reviewed on a regular basis, and as new data becomes available, appropriate adjustments are made to reserves.
Management also establishes reserves on an aggregate basis to provide for losses "incurred but not reported" ("IBNR"), as well as for future developments on losses reported to the Company. Thus, IBNR reserves represent the difference between the estimated value of total loss reserves and the reported case reserves. A variety of methods have been developed in the insurance industry for determining estimates of loss reserves. The Company relies on three methods when setting reserves which consider prior experience, expected losses, expected payout, reporting patterns and known activity. The Company uses a combination of Company historical experience and industry data when projecting IBNR loss reserves.
The following is a summary of the Company's loss and loss adjustment expense (LAE) reserves as of December 31, 1996 and 1995:
Reserves are computed by the Company based on actuarial principles and procedures applicable to the lines of business written by the Company. These reserve calculations are reviewed regularly by management and the Company engages independent actuaries on an annual basis to express an opinion as to the adequacy of statutory reserves established by management. These opinions are filed with the various jurisdictions in which the Company is licensed. Provisions for inflation are implicitly considered in the reserving process. For GAAP and statutory purposes, the Company's reserves are carried at the total estimate for ultimate expected loss without any discount to reflect the time value of money. The following table provides a reconciliation of beginning and ending liability balances on a GAAP basis for the year indicated:
The following table shows the development of reserves for unpaid losses and loss adjustment expense from 1987 through 1996 for the Company's current insurance subsidiaries. The top line of the table shows the reserves net of reinsurance at the balance sheet date for each of the indicated years. This reflects the estimated amounts of losses and loss adjustment expense for claims arising in that year and all prior years that are unpaid at the balance sheet date, including losses incurred but not yet reported to the Company. The upper portion of the table shows the cumulative amounts subsequently paid as of successive years with respect to the reserves. The middle portion of the table shows the re-estimated amount 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 frequency and severity of claims for individual years. A redundancy (deficiency) exists when the re-estimated liability at each December 31 year-end is less (greater) than the prior liability estimate. The "cumulative redundancy (deficiency)" depicted in the table, for any particular calendar year, represents the aggregate change in the initial estimates over all subsequent calendar years. It should be emphasized that the table presents a
run-off of balance sheet reserves rather than accident or policy year loss development. Therefore, each amount in the table includes the effects of changes in reserves for all prior years.
Due to the Company's adoption of SFAS 113, the bottom portion of the table shows the impact of reinsurance for the years 1992 through 1996, reconciling the net reserves shown in the upper portion of the table to gross reserves.
Loss reserves have historically developed redundancies on a net basis. In the most recent two years, gross reserves have been inadequate, due to adverse development from large surety bond claims and increased IBNR estimates for ceded excess of loss reinsurance. For 1995, the Company had gross adverse development of $3.7 million on surety bonds, with the balance attributed to increases in ceded excess IBNR. For 1994, surety bonds had gross favorable development, therefore the entire deficiency was caused by increased IBNR estimates for ceded excess of loss reinsurance. Payments, on both a gross and net basis, are typically about one third of respective prior year-end reserves. However, in 1996, net payments were 39.7% of 1995 reserves, due to increased surety bond payments. Surety has a quicker payment pattern than the balance of the Company's book of business. This, coupled with the recent growth in surety, caused the increase in the percentage of reserves paid in 1996. In addition, gross payments in 1993 were 46.1% of 1992 year-end gross reserves, due to the settlement of the large claim on an agent risk-sharing program covering a type of risk that is no longer insured by the Company.
Net payments in 1993 were only 23.0% of 1992 year-end net reserves, due to the commutation of a reinsurance treaty with a captive in which the recapture of $4.5 million in loss and loss adjustment reserves was recorded as a reduction in net paid losses. Excluding the effects of these two items, 1993 payments would have represented 33.8% and 37.1% of 1992 year-end reserves on a gross and net basis, respectively.
INVESTMENTS
The Company's investment portfolio consists primarily of tax-exempt fixed income securities. As of December 31, 1996, the Company's cash and invested assets totaled $156.5 million, of which $118.2 million consisted of obligations of state and local governmental authorities. The Company's investment strategy emphasizes the preservation of capital and after-tax yield. The Company seeks to manage its investment portfolio to match the cash flows and maturities of its fixed-income securities to its anticipated cash flow requirements. The Company generally holds fixed-income securities until maturity and currently has 76.8% of its portfolio classified as "held to maturity" at December 31, 1996. The Company's investment policies and strategies are subject to change depending upon regulatory, economic and market conditions and the existing or anticipated financial condition and operating requirements, including the tax position of the Company.
Based on its investment experience, the Company believes that investments in municipal bonds currently generate a greater after-tax return than investments in taxable fixed income securities of comparable risk, duration and other investment characteristics. All of the income derived from the tax-exempt municipal bonds is included in the expanded base on which the alternative minimum tax ("AMT") is calculated. Currently, the Company is not in an AMT position, but the Company constantly monitors the AMT effect of its investments in municipal bonds and may adjust its portfolio to include taxable securities to avoid incurring an AMT liability.
At December 31, 1996, the carrying value of the Company's investment portfolio, including cash and cash equivalents, was approximately $156.5 million. The diversification of the Company's portfolio at December 31, 1996 is shown below:
At December 31, 1996, based on carrying value, 88.3% of the Company's investments were in fixed income securities (including fixed income cash equivalents), of which over 98.6% were invested in securities with a S&P rating range from AAA to A-.
The following table sets forth certain information regarding the maturities of the Company's fixed income securities at December 31, 1996:
COMPETITION
The Company competes both with other providers of alternative risk management programs and services and with traditional providers of commercial insurance coverages. Both the alternative risk management and the traditional property and casualty insurance markets are highly competitive. The Company's alternative risk management programs and services compete with products and services offered by insurance companies, other providers of alternative risk management services (including certain domestic and foreign insurers and reinsurers and insurance brokers) as well as with self-insurance plans, captives managed by others, and a variety of other risk-financing vehicles and mechanisms. These competitive products are offered by other companies that may have greater financial resources than the Company.
The market for alternative risk management products and services is significantly influenced by market conditions affecting the traditional property and casualty insurance industry. Insurance market conditions historically have been subject to significant variability due to premium rate competition, natural disasters and other catastrophic events, judicial trends, changes in the investment and interest rate environment, regulation and general economic conditions. Pricing is a primary means of competition in the commercial insurance market. Competition is also based on the availability and quality of products, quality and speed of service (including claims service), financial strength, ratings, distribution systems and technical expertise. The primary basis for competition among alternative risk management providers varies with the financial and insurance needs and resources of each potential insured. Principal factors that are considered by insureds include: an analysis of the net present-value (after tax) of the cost of financing the insured's expected level of losses, the amount of excess coverage provided in the event losses exceed expected levels, cash flow and tax planning considerations and the expected quality and consistency of the services to be provided. The Company believes that it is able to compete based on its experience, the quality of its products and services and its program-oriented approach. However, its ability to successfully compete is dependent upon a number of factors,
many of which, including market and competitive conditions, are outside of the Company's control.
REGULATION
REGULATION IN GENERAL
The Company's insurance subsidiaries are subject to regulation by government agencies in the states in which they do business. The nature and extent of such regulation vary from jurisdiction to jurisdiction, but typically involve prior approval of the acquisition of control of an insurance company or of any company controlling an insurance company, regulation of certain transactions entered into by an insurance company with any of its affiliates, approval of premium rates, forms and policies used for many lines of insurance, standards of solvency and minimum amounts of capital and surplus which must be maintained, establishment of reserves required to be maintained for unearned premium, losses and loss expense or for other purposes, limitations on types and amounts of investments, restrictions on the size of risks which may be insured by a single company, licensing of insurers and agents, deposits of securities for the benefit of policyholders, and the filing of periodic reports with respect to financial condition and other matters. In addition, state regulatory examiners perform periodic examinations of insurance companies. Such regulation is generally intended for the protection of policyholders rather than security holders.
In addition to the regulatory oversight of the Company's insurance subsidiaries, the Company is also subject to regulation under the Michigan and Missouri Insurance Holding Company System Regulatory Acts (the "Holding Company Acts"). The Holding Company Acts contain certain reporting requirements including those requiring the Company, as the ultimate parent company, to file information relating to its capital structure, ownership, and financial condition and general business operations of its insurance subsidiaries. The Holding Company Acts contain special reporting and prior approval requirements with respect to transactions among affiliates.
Insurance companies are also affected by a variety of state and federal legislative and regulatory measures and judicial decisions that define and extend the risks and benefits for which insurance is sought and provided. These include redefinitions of risk exposure in areas such as product liability, environmental damage and workers' compensation. In addition, individual state insurance departments may prevent premium rates for some classes of insureds from reflecting the level of risk assumed by the insurer for those classes. Such developments may adversely affect the profitability of various lines of insurance. In some cases, these adverse effects on profitability can be minimized through re-pricing, if permitted by applicable regulations, of coverages or limitations or cessation of the affected business.
The Company's insurance intermediaries are subject to regulation as insurance intermediaries. Under applicable regulations, the intermediary is responsible as a fiduciary for funds received for the account of the parties to the reinsurance transaction and is required to hold such funds in appropriate bank accounts subject to restrictions on withdrawals and prohibitions on commingling.
INSURANCE REGULATION CONCERNING CHANGE OR ACQUISITION OF CONTROL
Star and Savers are domestic property and casualty insurance companies organized, respectively, under the insurance laws of Michigan and Missouri (the "Insurance Codes"). The Insurance Codes provide that the acquisition or change of "control" of a domestic insurer or of any person that controls a domestic insurer cannot be consummated without the prior approval of the relevant insurance regulatory authority. A person seeking to acquire control, directly or indirectly, of a domestic insurance company or of any person controlling a domestic insurance company must generally file with the relevant insurance regulatory authority an application for
change of control containing certain information required by statute and published regulations and provide a copy of such to the domestic insurer. In both Michigan and Missouri, control is generally presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote or holds proxies representing 10% or more of the voting securities of any other person.
In addition, many state insurance regulatory laws contain provisions that require pre-notification to state agencies of a change in control of a non-domestic admitted insurance company in that state. While such pre-notification statutes do not authorize the state agency to disapprove the change of control, such statutes do authorize issuance of a cease and desist order with respect to the non-domestic admitted insurer if certain conditions exist such as undue market concentration.
Any future transactions that would constitute a change in control of the Company would also generally require prior approval by the Insurance Departments of Michigan and Missouri and would require pre-acquisition notification in those states which have adopted pre-acquisition notification provisions and in which the insurers are admitted. Such requirements may deter, delay or prevent certain transactions that could be advantageous to the stockholders of the Company.
RESTRICTIONS ON DIVIDENDS
A significant portion of the Company's consolidated assets represents assets of the Company's insurance subsidiaries that may not be transferable to the holding company in the form of dividends, loans or advances. The Company's insurance subsidiaries are subject to various state statutory and regulatory restrictions, generally applicable to each insurance company in its state of incorporation, which limit the amount of dividends or distributions by an insurance company to its stockholders. The restrictions are generally based on certain levels of surplus, operating income and investment income, as determined under statutory accounting practices.
The insurance holding company laws of Michigan and Missouri regulate the distribution of dividends and other payments to the Company by its subsidiaries. Under the applicable Michigan statute, the maximum discretionary dividend that may be declared (or cash/property distribution that may be made) by Star is the greater of (i) the insurance company's net income (excluding realized capital gains) for the preceding calendar year plus net income (excluding realized capital gains) from the second and third preceding calendar years (that was not paid in dividends or other distributions) or (ii) ten percent of the insurance company's policyholders' surplus for the preceding calendar year, excluding unrealized gains. These dividends are further limited by a clause in the Michigan law which prohibits an insurer from declaring dividends except out of earned surplus earnings of the company, as allowed under the Insurance Code. Since Star is the parent insurance company, its maximum dividend calculation represents that of the combined insurance companies.
Under the applicable Missouri statute, the maximum discretionary dividend that may be declared (or cash/property distribution that may be made) by Savers to Star is the lesser of (i) 10% of the insurer's policyholders surplus for the preceding calendar year or (ii) the net investment income for the preceding calendar year. Such restrictions, or any additional subsequently imposed restrictions, may in the future affect the Company's ability to pay expenses, cash dividends to its stockholders and principal and interest on any future debt outstanding.
RISK-BASED CAPITAL
The NAIC has adopted a methodology for assessing the adequacy of statutory surplus of property and casualty insurers which includes a risk-based capital requirement that requires insurance companies to calculate and report information under a risk-based formula which
attempts to measure statutory capital and surplus needs based on the risks in a company's mix of products and investment portfolio. The formula is designed to allow state insurance regulators to identify potential weakly capitalized companies. Under the formula, a company determines its "risk-based capital" ("RBC") by taking into account certain risks related to the insurer's assets (including risks related to its investment portfolio and ceded reinsurance) and the insurer's liabilities (including underwriting risks related to the nature and experience of its insurance business). The risk-based capital rules provide for different levels of regulatory attention depending on the ratio of a company's total adjusted capital to its "authorized control level" ("ACL") of RBC. Based on calculations made by the Company, the risk-based capital levels for each of the Company's insurance subsidiaries exceed levels that would trigger regulatory attention. At December 31, 1996 the parent insurance company's (Star) RBC ratio exceeded applicable risk-based capital requirements. At December 31, 1996, Star's statutory surplus was $64.6 million; the threshold requiring regulatory involvement was $11.7 million. Therefore, the Company's capital exceeds all requirements of the Risk-Based Capital Model Act.
EFFECT OF FEDERAL LEGISLATION
Although the federal government does not directly regulate the business of insurance, federal initiatives often affect the insurance business in a variety of ways. Current and proposed federal measures which may significantly affect the insurance business include federal government participation in asbestos and other product liability claims, pension regulation (ERISA), examination of the taxation of insurers and reinsurers minimum levels of liability insurance and automobile safety regulations.
NAIC-IRIS RATIOS
The NAIC's Insurance Regulatory Information System ("IRIS") was developed by a committee of state insurance regulators and is primarily intended to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies operating in their respective states. IRIS identifies 11 industry ratios and specifies "usual values" for each ratio. Departure from the usual values on four or more ratios generally leads to inquiries from individual state insurance commissioners.
In 1996, Star had one ratio which varied from the "usual value" range as follows:
For Star:
Star's "investment yield" ratio was affected by its commitment of a large portion of its invested assets to the ownership of Savers, which does not pay Star a dividend and therefore does not produce an investment yield. Eliminating the effect of the Savers investment, the investment yield would have been 5.0%, which puts Star within the usual range.
ITEM 2.

ITEM 2. PROPERTIES
The Company currently leases its corporate offices in Southfield, Michigan from 26600 Development Associates Limited Partnership. In 1996, the Company paid rent in the amount of approximately $660,000. The term of the lease for the offices in Southfield expires on September 30, 2004. The Company, through its subsidiaries, is also a party to various leases for locations in which such subsidiaries have offices. The Company does not consider any of these leases to be material.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Company is subject to litigation in the ordinary course of business. Among the legal actions currently pending is a lawsuit filed by two of the former shareholders of the agent which previously produced substantially all of the Company's surety bond business against, among others: Star; Meadowbrook; certain of the Company's officers, including Warren D. Gardner, Robert S. Cubbin, Joseph C. Henry and Merton J. Segal; as well as certain employees of the Company. This lawsuit was filed on June 26, 1995 in the Second Judicial District Court of the State of Nevada in the County of Washoe and alleges, among other claims, breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment, bad faith, negligence, slander and wrongful termination by the Company. The plaintiffs requested injunctive relief, compensatory damages, punitive and exemplary damages and attorney fees in an unspecified amount. The Nevada Insurance Department revoked the license of the first plaintiff and denied further licensing of the second plaintiff. The Company continues to vigorously defend itself and has filed counterclaims against the plaintiffs. While the Company believes that it has meritorious defenses and counterclaims in this lawsuit, there can be no assurance that the Company's results of operations and financial condition will not be materially adversely affected by this lawsuit. The ultimate outcome of the lawsuit cannot be determined at this time, and the Company is unable to estimate the range of possible loss, if any.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference to page 49 of the Company's 1996 Annual Report to Shareholders.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to page 26 of the Company's 1996 Annual Report to Shareholders.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this item is incorporated by reference to pages 17 to 25 of the Company's 1996 Annual Report to Shareholders.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated by reference to pages 27 to 47 of the Company's 1996 Annual Report to Shareholders.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report in that the Registrant has filed a definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this report and certain information included therein is incorporated herein by reference. Only those sections of the Proxy Statement that specifically address the items set forth herein are incorporated by reference.
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is included under the caption "Directors and Executive Officers" of the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 19, 1997, which is hereby incorporated by reference.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is included under the caption "Executive Compensation" of the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 19, 1997, which is hereby incorporated by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included under the caption "Security Ownership of Certain Beneficial Owners and Management" of the Company's Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 19, 1997, which is hereby incorporated by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) The following documents are filed as part of this Report:
1. Financial Statements: The following Consolidated Financial Statements of Meadowbrook Insurance Group, Inc., the accompanying Notes to Consolidated Financial Statements and Report of Coopers & Lybrand L.L.P., Independent Accountants, have been incorporated herein by reference in their entirety, from pages 27-47 of the 1996 Annual Report to Shareholders:
Report of Coopers & Lybrand L.L.P., Independent Accountants
Consolidated Balance Sheet - December 31, 1996 and 1995
Consolidated Statement of Income - Fiscal Years Ended December 31, 1996, 1995 and 1994
Consolidated Statement of Shareholders' Equity - Fiscal Years Ended December 31, 1996, 1995 and 1994
Consolidated Statement of Cash Flows - Fiscal Years Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. Report of Independent Accountants on Financial Statement Schedules Listed Under 14(A)3 of this Form 10-K (enclosed on pg. 22)
3. Financial Statement Schedule
Schedule II Condensed Financial Information of Registrant (enclosed on pg. 23-25)
Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements and Notes thereto.
4. Exhibits The Exhibits listed on the accompanying Index to Exhibits immediately following the financial statement schedule are filed as part of, or incorporated by reference into, this Form 10-K.
(*) Incorporated by reference to Form S-1 Registration Statement (No. 33-2626206) of Meadowbrook Insurance Group, Inc. declared effective November 20, 1995.
(**) Submitted in paper format under separate cover; see Form S-E filing.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the year ended December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, in Southfield, Michigan, on March 24, 1997.
MEADOWBROOK INSURANCE GROUP, INC.
By: ** -------------------------------------------- Merton J. Segal Chairman and Chief Executive Officer (Principal Executive Officer)
By:/s/ Daniel G. Gibson -------------------------------------------- Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
Dated: March 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity and on the dates indicated.
EXHIBIT INDEX
(*) Incorporated by reference to Form S-1 Registration Statement (No. 33-2626206) of Meadowbrook Insurance Group, Inc. declared effective November 20, 1995.
(**) Submitted in paper format under separate cover; see Form S-E filing.
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders Meadowbrook Insurance Group, Inc.
We have audited the consolidated financial statements of Meadowbrook Insurance Group, Inc. (formerly "Star Holding Company") and Subsidiaries as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, which financial statements are included on pages 27 through 47 of the 1996 Annual Report to Shareholders of Meadowbrook Insurance Group, Inc. and incorporated by reference herein. We have also audited the financial statement schedule listed under Item 14(A)3 of this Form 10-K. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Meadowbrook Insurance Group, Inc. and Subsidiaries as of December 31, 1996 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, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
Coopers & Lybrand LLP
Detroit, Michigan March 10, 1997
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MEADOWBROOK INSURANCE GROUP, INC. PARENT COMPANY ONLY
INCOME STATEMENT
For the years ended December 31,
_______
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MEADOWBROOK INSURANCE GROUP, INC. PARENT COMPANY ONLY
BALANCE SHEET
As of December 31, 1996 and 1995
_______
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
MEADOWBROOK INSURANCE GROUP, INC. PARENT COMPANY ONLY
STATEMENT OF CASH FLOWS
For the years ended December 31,
_______