<PAGE> 1
Registration No. 333-3138
filed per Rule 424(b)(3)
[PICOM LETTERHEAD]
July 2, 1996
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders
(the "Annual Meeting") of PICOM Insurance Company ("PICOM") which will be held
at 10:00 a.m., local time, on Wednesday, July 31, 1996, at University Place
Marriott, 300 M.A.C. Avenue, East Lansing, Michigan 48823.
For some time now, the Board of Directors of PICOM (the "PICOM Board") has
considered reorganizing PICOM and its subsidiaries into an insurance holding
company system headed by a business corporation rather than an insurance
corporation. The PICOM Board believes that such a holding company system is
the corporate structure used by most publicly traded insurance company groups
and that reorganizing PICOM into such a system will provide PICOM with more
financial and operating flexibility than is currently available to PICOM. The
PICOM Board further believes that this flexibility will enhance PICOM's ability
to raise capital and enable PICOM and its subsidiaries to compete more
effectively in the ever-changing insurance industry. Accordingly, at the
Annual Meeting you will be asked to approve the reorganization of PICOM and its
subsidiaries into such an insurance holding company system.
This reorganization will be effected pursuant to a Reorganization
Agreement dated May 13, 1996 (the "Reorganization Agreement"), and an Agreement
and Plan of Merger dated May 13, 1996 (the "Plan of Merger"), by and among
PICOM, Professionals Insurance Company Management Group, a Michigan business
corporation ("Holding Company"), and PICOM Interim Insurance Company, a
Michigan stock insurance company and wholly-owned subsidiary of Holding Company
("INSCO"), which essentially provide for the merger of INSCO with and into
PICOM, and the conversion of each issued and outstanding share of PICOM common
stock, $1.00 par value per share ("PICOM Common Stock"), into one share of
Holding Company common stock. The contemplated reorganization will cause PICOM
shareholders to become shareholders of Holding Company, without any substantive
change in their proportionate ownership of PICOM and its subsidiaries, and will
cause PICOM to become a wholly-owned subsidiary of Holding Company.
The accompanying Notice and Proxy Statement/Prospectus describes in
greater detail the contemplated reorganization and the other matters to be
acted upon at the Annual Meeting, and sets forth the voting rights of holders
of PICOM Common Stock with respect to such matters. You are urged to read
carefully the accompanying Notice and Proxy Statement/Prospectus. THE PICOM
BOARD APPROVED THE REORGANIZATION AGREEMENT AND THE PLAN OF MERGER AND
RECOMMENDS THAT YOU VOTE FOR THE PICOM REORGANIZATION PROPOSAL AT THE ANNUAL
MEETING.
YOUR VOTE IS IMPORTANT. THE REORGANIZATION PROPOSAL REQUIRES THE
AFFIRMATIVE VOTE OF A MAJORITY OF THE OUTSTANDING SHARES OF PICOM COMMON STOCK.
FAILURE TO VOTE OR TO RETURN YOUR PROXY CARD WILL HAVE THE SAME EFFECT AS A
VOTE AGAINST THE REORGANIZATION PROPOSAL. THEREFORE, WHETHER OR NOT YOU PLAN
TO ATTEND THE ANNUAL MEETING IN PERSON AND REGARDLESS OF THE NUMBER OF SHARES
YOU OWN, WE URGE YOU TO COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND
RETURN IT IN THE ENCLOSED PREPAID ENVELOPE AS SOON AS POSSIBLE. (If you wish
to vote in accordance with the recommendations of the PICOM Board, it is not
necessary to specify your choices; you may merely sign, date and return the
enclosed Proxy.) You may, of course, attend the Annual Meeting and vote in
person, even if you have previously returned your proxy card.
Thank you, and we look forward to seeing you at the Annual Meeting.
/s/ W. Peter McCabe, M.D. /s/ Victor T. Adamo
W. Peter McCabe, M.D. Victor T. Adamo
Chairman President and Chief Executive Officer
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[PICOM LETTERHEAD]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 31, 1996
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the
"Annual Meeting") of PICOM Insurance Company ("PICOM") will be held at 10:00
a.m., local time, on Wednesday, July 31, 1996 at University Place Marriott, 300
M.A.C. Avenue, East Lansing, Michigan 48823, for the following purposes, all of
which are more fully described in the accompanying Proxy Statement/Prospectus:
1. To consider and vote upon a proposal (the "PICOM Reorganization
Proposal") to approve and adopt (i) the Reorganization Agreement dated
May 13, 1996 (the "Reorganization Agreement") and executed by and among
PICOM, Professionals Insurance Company Management Group, a Michigan
business corporation ("Holding Company"), and PICOM Interim Insurance
Company, a Michigan stock insurance company and wholly-owned subsidiary of
Holding Company ("INSCO"), (ii) the Agreement and Plan of Merger dated
May 13, 1996 (the "Plan of Merger") and executed by and among PICOM,
Holding Company and INSCO, and (iii) all of the transactions contemplated
by the Reorganization Agreement and the Plan of Merger. The
Reorganization Agreement and the Plan of Merger contemplate, among other
things, (a) that INSCO will be merged with and into PICOM, with the result
that PICOM will become a wholly-owned subsidiary of Holding Company (the
"Merger"), and (b) that upon consummation of the Merger each issued and
outstanding share of PICOM common stock, $1.00 par value per share ("PICOM
Common Stock"), will be converted into one share of Holding Company common
stock, no par value per share.
2. To elect four persons to the Board of Directors of PICOM (the "PICOM
Board") for three year terms expiring at the 1999 Annual Meeting of
Shareholders upon the election and qualification of their successors or
upon their earlier resignation or removal.
3. To transact such other business as may properly come before the Annual
Meeting or any adjournments or postponements thereof.
PICOM Common Stock constitutes the only security of PICOM whose holders
are entitled to vote upon the proposals to be presented at the Annual Meeting.
Holders of record of shares of PICOM Common Stock at the close of business
on June 10, 1996, the record date fixed by the PICOM Board for the Annual
Meeting, are entitled to notice of and to vote at the Annual Meeting or at any
postponements or adjournments thereof. The affirmative vote of the holders of
a majority of the outstanding shares of PICOM Common Stock is required to
approve the PICOM Reorganization Proposal. Assuming the presence of a quorum,
Directors will be elected at the Annual Meeting from among those persons duly
nominated by a plurality of the votes cast by holders of PICOM Common Stock
present in person or by proxy and entitled to vote at the Annual Meeting in the
election of Directors. (Thus, those nominees who receive the first, second,
third and fourth highest numbers of votes for their election as Directors will
be elected, regardless of the number of votes which for any reason, including
abstention, broker non-vote, or withholding of authority to vote, are not cast
for the election of such nominees.)
The PICOM Reorganization Proposal, the terms of the Merger and the Holding
Company Common Stock to be issued in connection therewith, as well as the other
matters to be considered at the Annual Meeting, are described in greater detail
in the accompanying Proxy Statement/Prospectus. To ensure that your vote will
be counted, please complete, date and sign the enclosed proxy card and return
it promptly in the enclosed postage-paid envelope, whether or not you plan to
attend the Annual Meeting. You may revoke your proxy in the manner described
in the accompanying Proxy Statement/Prospectus at any time before it is voted
at the Annual Meeting.
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In the event that there are not sufficient votes to approve the PICOM
Reorganization Proposal, it is expected that the Annual Meeting will be
postponed or adjourned in order to permit further solicitation of proxies by
PICOM.
By Order of the Board of Directors
/s/ Annette E. Flood
Annette E. Flood
Okemos, Michigan Secretary
July 2, 1996
IMPORTANT
Whether or not you plan to attend the Annual Meeting in person, please
complete, sign, date and return the enclosed Proxy as soon as possible. A
return envelope is provided for your convenience.
DO NOT SEND IN ANY STOCK CERTIFICATES WITH YOUR PROXY.
<PAGE> 4
________________________________________
PICOM INSURANCE COMPANY
PROXY STATEMENT
________________________________________
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
PROSPECTUS
3,188,145 SHARES OF COMMON STOCK
________________________________________
This Proxy Statement/Prospectus is being furnished to shareholders of
PICOM Insurance Company, a Michigan stock insurance company (together with its
subsidiaries, "PICOM" or the "PICOM Companies"), in connection with the
solicitation of proxies by the Board of Directors of PICOM (the "PICOM Board")
for use at the Annual Meeting of Shareholders (the "Annual Meeting") of PICOM
to be held at 10:00 a.m., local time, on Wednesday, July 31, 1996 at University
Place Marriott, 300 M.A.C. Avenue, East Lansing, Michigan 48823, and at any
adjournments or postponements thereof (the "Annual Meeting").
This Proxy Statement/Prospectus relates to a proposal (the "PICOM
Reorganization Proposal") to approve and adopt (i) the Reorganization Agreement
dated May 13, 1996 (the "Reorganization Agreement") executed by and among
PICOM, Professionals Insurance Company Management Group, a Michigan business
corporation (together with its subsidiaries, "Holding Company" or the "Holding
Company Entities"), and PICOM Interim Insurance Company, a Michigan stock
insurance company and wholly-owned subsidiary of Holding Company ("INSCO"),
(ii) the Agreement and Plan of Merger dated May 13, 1996 (the "Plan of Merger")
executed by and among PICOM, Holding Company and INSCO, and (iii) all of the
transactions contemplated by the Reorganization Agreement and the Plan of
Merger. The Reorganization Agreement and the Plan of Merger contemplate, among
other things, (a) that INSCO will be merged with and into PICOM, with the
result that PICOM will become a wholly-owned subsidiary of Holding Company (the
"Merger"), and (b) that upon consummation of the Merger each issued and
outstanding share of PICOM common stock, $1.00 par value per share ("PICOM
Common Stock"), will be converted into one share of Holding Company common
stock, no par value per share ("Holding Company Common Stock").
This Proxy Statement/Prospectus also relates to the election of four
persons to the Board of Directors of PICOM (the "PICOM Board") for three year
terms expiring at the 1999 Annual Meeting of Shareholders of PICOM upon the
election and qualification of their successors or upon their earlier
resignation or removal. PICOM shareholders will also consider and vote upon
such other matters as may be properly brought before the Annual Meeting.
This Proxy Statement/Prospectus also constitutes a prospectus of Holding
Company with respect to up to 3,188,145 shares of Holding Company Common Stock
to be issued pursuant to the Reorganization Agreement and the Plan of Merger
upon consummation of the Merger. Conditions to the consummation of the Merger
include, among other things, requisite and satisfactory shareholder and
regulatory approvals and the receipt of certain opinions and certificates.
Holding Company was incorporated under the Michigan Business Corporation
Act, as amended (the "MBCA"), on January 31, 1996 and on behalf of PICOM solely
for the purpose of serving as the holding company for PICOM and its
subsidiaries. INSCO was incorporated under the Michigan Insurance Code of
1956, as amended (the "Michigan Insurance Code"), solely for the purpose of
merging with and into PICOM and establishing PICOM as a wholly-owned subsidiary
of Holding Company. The shares of Holding Company Common Stock to be issued in
the Merger have been admitted for quotation on the Nasdaq National Market
subject to official notice of issuance. The issued and outstanding shares of
PICOM Common Stock are currently listed on the Nasdaq National Market under the
trading symbol "PICM," and Holding Company has applied for the same trading
symbol. On June 28, 1996, the last practicable trading day preceding the
mailing of this Proxy Statement/Prospectus, the high and low bid prices of
PICOM Common Stock were $24.25 and $24.25, respectively, per share.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
SEE "RISK FACTORS" ON PAGE 13 OF THIS PROXY STATEMENT/PROSPECTUS FOR CERTAIN
CONSIDERATIONS RELEVANT TO AN INVESTMENT IN HOLDING COMPANY COMMON STOCK.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS July 2, 1996.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to shareholders of PICOM on or about July 2, 1996.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
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TABLE OF CONTENTS
<TABLE>
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AVAILABLE INFORMATION................................................................ 2
INTRODUCTION......................................................................... 3
SUMMARY.............................................................................. 4
The Companies................................................................... 4
Risk Factors.................................................................... 6
The PICOM Annual Meeting........................................................ 6
The Reorganization.............................................................. 7
Management and Operations After the Reorganization.............................. 10
Certain Regulatory Considerations............................................... 11
Pro Forma Consolidated Financial Information.................................... 11
Summary Consolidated Historical Financial Data of PICOM......................... 12
RISK FACTORS......................................................................... 14
Industry Factors................................................................ 14
Competition..................................................................... 14
Health Care Industry Consolidation.............................................. 15
Underwriting Losses and Reserves................................................ 15
Reinsurance..................................................................... 16
Reliance on Independent Insurance Agencies...................................... 16
Holding Company Structure....................................................... 17
Regulatory Considerations....................................................... 17
Tort Reform..................................................................... 17
Absence of Public Trading Market; Possible Price Fluctuation.................... 18
Anti-Takeover Provisions........................................................ 18
Potential Adverse Consequences of Acquisitions and Business Combinations........ 18
Shares Eligible for Future Sale................................................. 19
Authorization of Additional Securities.......................................... 19
CAPITALIZATION....................................................................... 20
PICOM COMPARATIVE PER SHARE DATA..................................................... 21
COMPARATIVE STOCK PRICES............................................................. 22
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP..................................... 23
THE PICOM ANNUAL MEETING............................................................. 24
Meeting of Shareholders......................................................... 24
Matters to be Considered........................................................ 24
Votes Required.................................................................. 24
Voting of Proxies............................................................... 25
Revocability of Proxies......................................................... 25
</TABLE>
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<TABLE>
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PAGE
Record Date; Shares Entitled to Vote; Quorum................................... 25
No Dissenters' Rights.......................................................... 25
Solicitation of Proxies........................................................ 25
THE REORGANIZATION.................................................................. 26
Method of Reorganization....................................................... 26
Reorganization Consideration; Exchange Ratio................................... 26
Reasons for Reorganization..................................................... 26
Recommendation of PICOM Board.................................................. 27
Closing; Effective Time........................................................ 27
Conditions to Consummation..................................................... 28
Regulatory Approvals Required.................................................. 28
Conversion of Shares; Procedures for Exchange of Certificates; Fractional Shares 29
Conduct of Business............................................................ 30
Holding Company 1996 Long Term Stock Incentive Plan............................ 30
Holding Company 1996 Non-Employee Directors Stock Option Plan.................. 35
Holding Company Stock Purchase Plan............................................ 37
Interests of Certain Persons................................................... 37
Anticipated Accounting Treatment............................................... 38
Resale of Holding Company Common Stock; Restrictions on Transfer............... 38
Stock Listing.................................................................. 38
No Dissenters' Rights.......................................................... 38
CERTAIN FEDERAL INCOME TAX CONSEQUENCES............................................. 38
MANAGEMENT AND OPERATIONS AFTER THE REORGANIZATION.................................. 40
Directors...................................................................... 40
Board Committees............................................................... 42
Executive Officers............................................................. 42
Dividend Policy................................................................ 43
BENEFICIAL OWNERSHIP OF HOLDING COMPANY COMMON STOCK................................ 43
CERTAIN REGULATORY CONSIDERATIONS................................................... 44
General........................................................................ 44
Change or Acquisition of Control............................................... 45
Insolvency Funds; Mandatory Pools.............................................. 46
Restrictions on Dividends...................................................... 46
Risk Based Capital............................................................. 46
NAIC-IRIS Ratios............................................................... 47
Effect of Federal Legislation.................................................. 47
SELECTED CONSOLIDATED FINANCIAL DATA OF PICOM....................................... 48
</TABLE>
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<TABLE>
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PAGE
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF PICOM...................................................... 51
Overview....................................................................... 51
Financial Position............................................................. 51
Results of Operations -- Three month period ended March 31, 1996
versus Three month period ended March 31, 1995.............................. 53
Results of Operations -- Year ended December 31, 1995 versus
Year ended December 31, 1994................................................ 54
Results of Operations -- Year ended December 31, 1994 versus
Year ended December 31, 1993................................................ 55
Liquidity and Capital Resources................................................ 56
Impact of Inflation and Changing Prices........................................ 56
Effects of New Accounting Pronouncements....................................... 57
BUSINESS AND PROPERTIES OF PICOM.................................................... 57
Overview....................................................................... 57
Products and Services.......................................................... 58
Marketing...................................................................... 58
Underwriting................................................................... 59
Claims Management.............................................................. 59
Reserves and Losses............................................................ 60
Investments.................................................................... 63
Ceded Reinsurance.............................................................. 64
Competition.................................................................... 65
Regulation..................................................................... 65
Subsidiaries................................................................... 65
Employees...................................................................... 66
Properties..................................................................... 66
Legal Proceedings.............................................................. 66
MANAGEMENT OF PICOM................................................................. 66
Directors...................................................................... 66
Executive Officers............................................................. 66
Director Remuneration.......................................................... 66
PICOM Stock Purchase Plan...................................................... 67
Management Remuneration........................................................ 67
Employment Severance Compensation Plans........................................ 68
Compensation Committee Report.................................................. 69
Stock Performance Graph........................................................ 70
Compensation Committee Interlocks and Insider Participation.................... 71
BENEFICIAL OWNERSHIP OF PICOM COMMON STOCK.......................................... 72
RELATED PARTY TRANSACTIONS OF PICOM................................................. 73
</TABLE>
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<TABLE>
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PAGE
DESCRIPTION OF HOLDING COMPANY CAPITAL STOCK........................................ 73
General....................................................................... 73
Preferred Stock............................................................... 74
Common Stock.................................................................. 74
Transfer Agent................................................................ 74
Authorized But Unissued Shares................................................ 74
COMPARISON OF SHAREHOLDER RIGHTS.................................................... 75
General....................................................................... 75
Board of Directors; Voting for Directors; Removal of Directors................ 75
Director Nominations.......................................................... 76
Shareholder Voting Requirements............................................... 77
Anti-Takeover Laws............................................................ 79
Meetings of Shareholders...................................................... 80
Director Liability and Indemnification........................................ 81
Payment of Dividends.......................................................... 82
Charter Amendments............................................................ 82
Dissenters' Rights............................................................ 83
Other Matters................................................................. 83
THE REORGANIZATION AGREEMENT........................................................ 84
Representations and Warranties................................................ 84
Conduct of Business; Certain Covenants........................................ 84
Capitalization of INSCO....................................................... 84
Stock Listing................................................................. 85
Indemnification............................................................... 85
Conditions to Consummation.................................................... 86
Termination................................................................... 88
Expenses...................................................................... 89
Amendment; Waiver............................................................. 89
ELECTION OF PICOM DIRECTORS......................................................... 89
General....................................................................... 89
Information About Nominees and Incumbent Directors............................ 90
Committees and Meetings of PICOM Board........................................ 91
LEGAL MATTERS....................................................................... 92
EXPERTS............................................................................. 92
SHAREHOLDER PROPOSALS............................................................... 93
GLOSSARY OF SELECTED INSURANCE TERMS................................................ 93
</TABLE>
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<TABLE>
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PAGE
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION...................................... 94
INDEX TO FINANCIAL STATEMENTS..................................................... FS-1
ANNEXES
Annex A - Reorganization Agreement dated May 13, 1996....................... A-1
Annex B - Agreement and Plan of Merger dated May 13, 1996................... B-1
</TABLE>
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NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE SOLICITATIONS OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY HOLDING COMPANY OR PICOM. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF HOLDING COMPANY OR PICOM SINCE THE DATE HEREOF OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO SUCH DATE. ALL
INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS RELATING TO HOLDING
COMPANY AND ITS SUBSIDIARIES HAS BEEN SUPPLIED BY OR ON BEHALF OF HOLDING
COMPANY AND ALL INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS
RELATING TO PICOM AND ITS SUBSIDIARIES HAS BEEN SUPPLIED BY OR ON BEHALF OF
PICOM.
AVAILABLE INFORMATION
Holding Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 (registration no. 333-3138)
(together with any amendments thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Holding Company Common Stock to be issued pursuant to the Reorganization
Agreement and the Plan of Merger upon consummation of the Merger. This Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits thereto. Such additional information
may be inspected and copied as set forth above. Statements contained in this
Proxy Statement/Prospectus or in any document referred to herein or therein are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement or such other document, each such statement being qualified in all
respects by such reference. The Registration Statement, including exhibits and
schedules filed therewith can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices at 7 World
Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material also can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
Holding Company is not currently subject to the informational and periodic
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). However, in connection with the Merger and the admission for
quotation on the Nasdaq National Market of the shares of Holding Company Common
Stock to be issued in the Merger, Holding Company will become subject to the
informational and periodic reporting requirements of the Exchange Act. Holding
Company will fulfill its obligations with respect to such requirements of the
Exchange Act by filing periodic reports and other information with the
Commission.
THIS PROXY STATEMENT/PROSPECTUS REFERENCES DOCUMENTS WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN EXHIBITS TO
SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY REFERENCED IN THIS PROXY
STATEMENT/PROSPECTUS) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING
ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, ON
WRITTEN OR ORAL REQUEST, IN THE CASE OF DOCUMENTS RELATING TO HOLDING COMPANY
TO ANNETTE E. FLOOD, SECRETARY, 4295 OKEMOS ROAD, BOX 2510, OKEMOS, MICHIGAN
48805-9510, TELEPHONE (517) 349-6500, AND, IN THE CASE OF DOCUMENTS RELATING TO
PICOM TO ANNETTE E. FLOOD, SECRETARY, 4295 OKEMOS ROAD, BOX 2510, OKEMOS,
MICHIGAN 48805-9510, TELEPHONE (517) 349-6500. IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, REQUESTS SHOULD BE RECEIVED BY JULY 24, 1996.
<PAGE> 11
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INTRODUCTION
PICOM Insurance Company is a stock insurer that was incorporated under the
Michigan Insurance Code in 1980. PICOM, which is licensed as a property and
casualty insurer in Michigan, Illinois, Indiana and Ohio, principally offers
professional liability insurance for health care providers. PICOM has five
subsidiaries, one of which, PICOM Insurance Company of Illinois
("PICOM-Illinois"), is itself licensed as a property and casualty insurer in
Illinois, and three of which are inactive. In addition, in a transaction valued
at approximately $1.2 million, PICOM acquired all of the issued and outstanding
shares of American Insurance Management Corporation, a privately held Indiana
corporation that serves as the attorney-in-fact for American Medical Insurance
Exchange, an Indiana interinsurance reciprocal exchange.
To facilitate the growth of PICOM, through acquisitions or otherwise, the
PICOM Board intends to reorganize PICOM and its subsidiaries into an insurance
holding company system headed by a business corporation rather than an
insurance corporation. This reorganization will be effected pursuant to the
Reorganization Agreement and the Plan of Merger, which essentially provide for
the merger of PICOM Interim Insurance Company with and into PICOM, and the
conversion of each issued and outstanding share of PICOM Common Stock into one
share of common stock of Professionals Insurance Company Management Group. As
a result of the transactions contemplated by the Reorganization Agreement and
the Plan of Merger (including, without limitation, the Merger), PICOM
shareholders will become shareholders of Holding Company, without any
substantive change in their proportionate ownership of PICOM and its
subsidiaries, and PICOM will become a wholly-owned subsidiary of Holding
Company. Following consummation of the Merger, all direct and indirect
insurance subsidiaries of Holding Company (e.g., PICOM and PICOM-Illinois) will
continue to operate under their existing insurance licenses and none of such
subsidiaries will be required to reapply for any of such licenses. See
"SUMMARY," "PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP," "THE
REORGANIZATION," "MANAGEMENT AND OPERATIONS AFTER THE REORGANIZATION,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF PICOM," "BUSINESS AND PROPERTIES OF PICOM," and "THE
REORGANIZATION AGREEMENT."
The following charts reflect the organizational relationships of PICOM,
PICOM's active wholly-owned subsidiaries and PICOM's shareholders before and
after giving effect to the Merger.
Before the Merger: After the Merger:
Public Shareholders Public Shareholders
| |
PICOM Insurance Company Professionals Insurance Company
(Michigan stock insurance Management Group
corporation) (Michigan business corporation)
| |
| 100%
| |
| PICOM Insurance Company
| (Michigan stock insurance corporation)
| |
-- 100% - PICOM Insurance -- 100% - PICOM Insurance
| Company of Illinois | Company of Illinois
| |
-- 100% - PICOM Claims Services -- 100% - PICOM Claims Services
Corporation Corporation
<PAGE> 12
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SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus. As this summary is necessarily incomplete,
reference is made to, and this summary is qualified in its entirety by, the more
detailed information contained or incorporated by reference in this Proxy
Statement/Prospectus and the Annexes hereto. Shareholders are urged to read
this Proxy Statement/Prospectus and the Annexes hereto in their entirety.
Certain capitalized terms which are used but not defined in this summary are
defined elsewhere in this Proxy Statement/Prospectus.
THE COMPANIES
INTRODUCTION
To facilitate the growth of PICOM, the PICOM Board intends to reorganize
PICOM and its subsidiaries into an insurance holding company system headed by a
business corporation rather than an insurance corporation. Accordingly, and as
more thoroughly explained elsewhere in this Proxy Statement/Prospectus, the
transactions contemplated by the Reorganization Agreement and the Plan of Merger
(including, without limitation, the Merger) will result in (i) PICOM
shareholders becoming shareholders of Professionals Insurance Company Management
Group, without any substantive change in their proportionate ownership of PICOM
and its subsidiaries, and (ii) PICOM becoming a wholly-owned subsidiary of
Professionals Insurance Company Management Group.
<PAGE> 13
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PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
Professionals Insurance Company Management Group is a Michigan business
corporation incorporated under the laws of the State of Michigan on January 31,
1996 for the purpose of serving as the holding company for PICOM and its
subsidiaries. Holding Company has one subsidiary, PICOM Interim Insurance
Company, a Michigan stock insurance company incorporated under the laws of the
State of Michigan solely for the purpose of merging with and into PICOM and
establishing PICOM as a wholly-owned subsidiary of Holding Company. At the
present time neither Holding Company nor INSCO has any business operations.
Following consummation of the merger of INSCO with and into PICOM, Holding
Company will be the parent of PICOM and INSCO will cease to exist. It is
anticipated that Holding Company will conduct its activities through
subsidiaries. Because INSCO was formed solely for the purpose of merging with
and into PICOM and thereby establishing PICOM as a wholly-owned subsidiary of
Holding Company, INSCO will not write or underwrite any lines of insurance.
Following consummation of the Merger all direct and indirect subsidiaries of
Holding Company (e.g., PICOM and PICOM-Illinois) will continue to operate under
their existing insurance licenses and none of such subsidiaries will be required
to reapply for any of such licenses. The principal executive offices for each
of Holding Company and INSCO are located at 4295 Okemos Road, Box 2510, Okemos,
Michigan 48805-9510 and the telephone number for each of them is (517) 349-6500.
PICOM INSURANCE COMPANY
PICOM Insurance Company is a stock insurance company incorporated under the
laws of the State of Michigan in 1980. PICOM, which is licensed as a property
and casualty insurer in Michigan, Illinois, Indiana and Ohio, began business on
June 27, 1980 by assuming the assets, liabilities and business of the
Brown-McNeely Insurance Fund. (The Brown-McNeely Fund was created by the State
of Michigan in 1975 to provide doctors with an effective and reliable source of
medical malpractice insurance.) Beginning July 1, 1980, PICOM offered its own
policies to doctors and physician clinics throughout Michigan. PICOM began
insuring dentists in 1983 and hospitals and other health care institutions in
1993, and began offering professional liability insurance to lawyers and law
firms in 1994. Since January 1, 1995, PICOM, through PICOM-Illinois, has
insured doctors and physician clinics in Illinois. The principal product
currently offered by PICOM is professional liability insurance for providers of
health care services in Michigan and Illinois. PICOM had consolidated assets of
approximately $330 million at March 31, 1996 and approximately $331 million at
December 31, 1995. The principal executive offices of PICOM are located at 4295
Okemos Road, Box 2510, Okemos, Michigan 48805-9510, and its telephone number is
(517) 349-6500.
<PAGE> 14
-6-
For additional information regarding Holding Company, INSCO and PICOM, see
"PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP," "MANAGEMENT AND OPERATIONS
AFTER THE REORGANIZATION," "BENEFICIAL OWNERSHIP OF HOLDING COMPANY COMMON
STOCK," "SELECTED CONSOLIDATED FINANCIAL DATA OF PICOM," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
PICOM," "BUSINESS AND PROPERTIES OF PICOM," "MANAGEMENT OF PICOM," "BENEFICIAL
OWNERSHIP OF PICOM COMMON STOCK" and "RELATED PARTY TRANSACTIONS OF PICOM."
RISK FACTORS
The securities offered pursuant to this Proxy Statement/Prospectus may
involve a high degree of risk. The several risk factors discussed in this Proxy
Statement/Prospectus, along with the other matters discussed in this Proxy
Statement/Prospectus, as well as general investment risks, should be considered
in evaluating such securities and the Merger. See "RISK FACTORS."
THE PICOM ANNUAL MEETING
MEETING OF SHAREHOLDERS
The 1996 Annual Meeting of Shareholders of PICOM will be held at 10:00
a.m., local time, on Wednesday, July 31, 1996 at University Place Marriott, 300
M.A.C. Avenue, East Lansing, Michigan 48823. See "THE PICOM ANNUAL MEETING."
MATTERS TO BE CONSIDERED
At the Annual Meeting, holders of PICOM Common Stock will consider and vote
upon a proposal to approve and adopt (i)the Reorganization Agreement dated
May 13, 1996 executed by and among PICOM, Holding Company and INSCO, (ii) the
Agreement and Plan of Merger dated May 13, 1996 executed by and among PICOM,
Holding Company and INSCO, and (iii) all of the transactions contemplated by the
Reorganization Agreement and the Plan of Merger (including, without limitation,
the Merger). The Reorganization Agreement and the Plan of Merger contemplate,
among other things, (a) that INSCO will be merged with and into PICOM, with the
result that PICOM will become a wholly-owned subsidiary of Holding Company, and
(b) that upon consummation of the Merger each issued and outstanding share of
PICOM Common Stock will be converted into one share of Holding Company Common
Stock. See "THE PICOM ANNUAL MEETING -- Matters to be Considered" and "THE
REORGANIZATION."
A conformed copy of the Reorganization Agreement (without exhibits) is
attached as Annex A to this Proxy Statement/Prospectus. A conformed copy of the
Plan of Merger (without exhibits) is attached as Annex B to this Proxy
Statement/Prospectus.
This Proxy Statement/Prospectus also relates to the election of four
persons to the PICOM Board for three year terms expiring at the 1999 Annual
Meeting of Shareholders of PICOM upon the election and qualification of their
successors or upon their earlier resignation or removal. PICOM shareholders
will also consider and vote upon such other matters as may be properly brought
before the Annual Meeting. See "THE PICOM ANNUAL MEETING -- Matters to be
Considered," "ELECTION OF PICOM DIRECTORS" and "SHAREHOLDER PROPOSALS."
<PAGE> 15
-7-
VOTES REQUIRED
Each share of PICOM Common Stock is entitled to one vote on each matter
that is properly presented to shareholders for a vote at the Annual Meeting.
Approval of the PICOM Reorganization Proposal requires the affirmative vote of a
majority of the outstanding shares of PICOM Common Stock. Assuming the presence
of a quorum, PICOM directors will be elected at the Annual Meeting from among
those persons duly nominated by a plurality of the votes cast by holders of
PICOM Common stock present in person or by proxy and entitled to vote at the
Annual Meeting in the election of directors. See "THE PICOM ANNUAL MEETING
- -- Votes Required."
As of May 31, 1996, directors and executive officers of PICOM and their
affiliates were beneficial owners of approximately 5.3% of the 3,188,145 issued
and outstanding shares of PICOM Common Stock, and the one (1) outstanding share
of Holding Company Common Stock. The directors and executive officers of PICOM
have indicated that they intend to vote all shares of PICOM Common Stock owned
by them FOR approval and adoption of the PICOM Reorganization Proposal, and FOR
the election to the PICOM Board of each of the persons nominated for election by
the PICOM Board.
As of May 31, 1996, Victor T. Adamo, a director and the President and
Chief Executive Officer of PICOM, was the beneficial owner of the one issued and
outstanding share of Holding Company Common Stock (which share represents 100%
of Holding Company's outstanding shares of capital stock). This share was
issued to Mr. Adamo for $25.00 and for the purpose of organizing the Holding
Company and enabling it to form INSCO and enter into the Reorganization
Agreement and the Plan of Merger.
RECORD DATE; SHARES ENTITLED TO VOTE
The record date for the Annual Meeting is June 10, 1996. Only holders of
record of PICOM Common Stock at the close of business on such date are entitled
to notice of, and to vote at, the Annual Meeting. See "THE PICOM ANNUAL MEETING
- -- Record Date; Shares Entitled to Vote; Quorum."
THE REORGANIZATION
METHOD OF REORGANIZATION
Pursuant to the Reorganization Agreement and the Plan of Merger, INSCO will
merge with and into PICOM, with PICOM being the surviving corporation in the
Merger, with the result that PICOM will become a wholly-owned subsidiary of
Holding Company and each issued and outstanding share of PICOM Common Stock will
be converted into one share of Holding Company Common Stock. The name of the
surviving insurance corporation following consummation of the Merger will be
"PICOM Insurance Company." See "THE REORGANIZATION -- Method of
Reorganization."
REORGANIZATION CONSIDERATION; EXCHANGE RATIO
Upon consummation of the Merger, but subject to the provisions of the
Reorganization Agreement and the Plan of Merger regarding fractional shares and
other matters, each outstanding share of PICOM Common Stock will be
automatically converted into one (1) share of Holding Company Common Stock. See
"THE REORGANIZATION -- Reorganization Consideration; Exchange Ratio."
<PAGE> 16
-8-
REASONS FOR THE REORGANIZATION; RECOMMENDATION OF PICOM BOARD
For some time now, the PICOM Board has considered reorganizing PICOM and
its subsidiaries into an insurance holding company system headed by a business
corporation rather than an insurance corporation. The PICOM Board believes that
such a holding company system is the corporate structure used by most
publicly-traded insurance groups and that reorganizing PICOM into such a system
will provide PICOM with more financial and operating flexibility than is
currently available to PICOM. The PICOM Board further believes that this
flexibility will enhance PICOM's ability to raise capital and enable PICOM and
its subsidiaries to compete more effectively in the ever-changing insurance
industry. The PICOM Board also believes that reorganizing PICOM into such a
holding company system will facilitate potential acquisitions of, or
combinations with, other insurance companies and related service providers
(e.g., claims and risk management organizations). PICOM evaluates acquisition
opportunities, to the extent suitable opportunities maybe identified. However,
PICOM is not currently engaged in any acquisition negotiations and, except for
the transactions and agreements that are the subject of this Proxy
Statement/Prospectus or are described in the next sentence, PICOM is not
presently a party to any agreements concerning acquisitions or combinations. In
a transaction valued at approximately $1.2 million, PICOM acquired all of the
issued and outstanding shares of American Insurance Management Corporation, a
privately held Indiana corporation that serves as the attorney-in-fact for
American Medical Insurance Exchange, an Indiana interinsurance reciprocal
exchange. There can be no assurance that any further acquisitions will be made
or, if made, will be successful. The PICOM Board approved the Reorganization
Agreement and the Plan of Merger and recommends that PICOM shareholders vote FOR
the PICOM Reorganization Proposal (which vote shall constitute, among other
things, approval of the Reorganization Agreement, the Plan of Merger and the
Merger). The PICOM Board also recommends that PICOM shareholders vote FOR the
election to the PICOM Board of each of the persons nominated for election by the
PICOM Board. See "THE REORGANIZATION --Reasons for Reorganization" and "--
Recommendations of PICOM Board."
CLOSING; EFFECTIVE TIME
Closing and Closing Date. Subject to the terms and conditions of the
Reorganization Agreement, the closing of the Merger (the "Closing") will take
place at 10:00 a.m. on the third business day following the satisfaction or
waiver (subject to applicable law) of the latest to occur of certain conditions
set forth in the Reorganization Agreement (the "Closing Date") unless another
time, date or place is provided for in the Michigan Insurance Code or in any
Order of Acquisition Exemption and Preliminary Approval of Merger (a
"Preliminary Order") or any Order of Acquisition Exemption and Final Approval of
Merger (a "Final Order," and together with the Preliminary Order, the "Orders")
issued by the Commissioner of Insurance of the State of Michigan (the "Michigan
Insurance Commissioner") pursuant to the Michigan Insurance Code, or is agreed
to in writing by Holding Company, INSCO and PICOM. See "THE REORGANIZATION --
Closing; Effective Time."
Effective Time. Subject to the provisions of the MBCA, the Michigan
Insurance Code, any Orders, the Reorganization Agreement and the Plan of Merger,
the Merger will become effective (the "Effective Time") not later than
11:59 p.m. Eastern Time on the third business day following the Closing Date.
See "THE REORGANIZATION -- Closing; Effective Time."
<PAGE> 17
-9-
CONDITIONS; TERMINATION
Consummation of the Merger is subject to various conditions, including,
among other things, obtaining satisfactory and requisite shareholder and
regulatory approvals, and receipt of certain opinions in respect of certain
federal income tax consequences of the Merger and certain certificates. None of
Holding Company, INSCO and PICOM presently has any intention to waive or modify
the terms of the PICOM Reorganization Proposal, the Reorganization Agreement or
the Plan of Merger. See "THE REORGANIZATION AGREEMENT -- Conditions to
Consummation."
Under certain circumstances, the Reorganization Agreement may be terminated
by Holding Company, INSCO and/or PICOM at any time prior to the consummation of
the Merger, whether before or after approval of the Merger by the shareholders
of Holding Company, INSCO or PICOM. See "THE REORGANIZATION AGREEMENT --
Termination."
On May 6, 1996, the Michigan Insurance Commissioner issued and entered an
Order of Acquisition Exemption and Preliminary Approval of Merger granting
preliminary approval of the Merger in accordance with the Reorganization
Agreement and the Plan of Merger. The Michigan Insurance Commissioner cannot
issue an Order of Acquisition Exemption and Final Approval of Merger granting
final approval of the Merger prior to the effectiveness of the Registration
Statement and the approval of the PICOM Reorganization Proposal by PICOM's
shareholders. In light of the Preliminary Order and the proceedings before the
Michigan Insurance Commissioner, Holding Company and PICOM anticipate that the
Michigan Insurance Commissioner will grant final approval of the Merger if the
PICOM Reorganization Proposal is approved by PICOM's shareholders. However,
there can be no assurance that PICOM's shareholders will approve the PICOM
Reorganization Proposal or that the Michigan Insurance Commissioner will in fact
issue and enter a Final Order granting final approval of the Merger. In the
event that PICOM's shareholders do not approve the PICOM Reorganization Proposal
or the Michigan Insurance Commissioner does not issue and enter such a Final
Order, or all requisite regulatory approvals are not obtained, then the Merger
will not be consummated and the Reorganization Agreement and the Plan of Merger
will be terminated. In addition, the shares of Holding Company Common Stock
covered by the Registration Statement will be deregistered.
REGULATORY APPROVALS REQUIRED
The Reorganization Agreement, the Plan of Merger and the Merger are subject
to certain regulatory reviews and approvals, including review and approval by
the Michigan Insurance Commissioner. There can be no assurances that all
requisite regulatory approvals will be obtained, or if obtained, when obtained.
There can also be no assurances that any such approvals will not contain a
condition or requirement which causes such approvals to fail to satisfy the
conditions to the consummation of the Merger. See "THE REORGANIZATION
- -- Conditions to Consummation" and "-- Regulatory Approvals Required."
ANTICIPATED ACCOUNTING TREATMENT
For financial reporting purposes, it is anticipated that the Merger will be
accounted for as if a pooling of interests because the merging entities are
under common control. Accordingly, Holding Company will carry forward to its
accounts the assets and liabilities of PICOM at their respective amounts as
reported by PICOM. See "THE REORGANIZATION -- Anticipated Accounting
Treatment."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Consummation of the Merger is conditioned upon there being delivered the
opinion of Miller, Canfield, Paddock and Stone, P.L.C. to the effect that the
Merger will be treated as a reorganization within the meaning of
Section 368(a)(1)(A) and Section 368(a)(2)(E) of the Internal Revenue Code of
1986, as amended (the "Code"), and Holding Company, INSCO and PICOM will each be
treated as a party to the reorganization under Section 368(b) of the Code.
Receipt of such opinion is a condition to the Merger that will not be waived.
See "THE REORGANIZATION -- Conditions to Consummation" and "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES."
<PAGE> 18
-10-
STOCK LISTING
The shares of Holding Company Common Stock to be issued in the Merger have
been admitted for quotation on the Nasdaq National Market subject to official
notice of issuance. PICOM Common Stock is traded through the Nasdaq National
Market under the symbol "PICM", and Holding Company has applied for the same
trading symbol. See "THE REORGANIZATION AGREEMENT -- Stock Listing."
NO DISSENTERS' RIGHTS
Holders of shares of PICOM Common Stock will not have dissenters' rights
under the Michigan Insurance Code in connection with, or as a result of, the
matters to be acted upon at the Annual Meeting. See "THE REORGANIZATION -- No
Dissenters' Rights."
MANAGEMENT AND OPERATIONS AFTER THE REORGANIZATION
DIRECTORS
The Board of Directors of Holding Company (the "Holding Company Board")
currently has one member - Victor T. Adamo, a director and the President and
Chief Executive Officer of PICOM. Upon consummation of the Merger, the Holding
Company Board will consist of ten directors; Victor T. Adamo, Esq., CPCU,
Mr. Jerry D. Campbell, John F. Dodge, Jr., Esq., H. Harvey Gass, M.D., W. Peter
McCabe, M.D., Mr. John F. McCaffrey, Isaac J. Powell, M.D., Ann F. Putallaz,
Ph.D, William H. Woodhams, M.D., and Donald S. Young, Esq. The Holding Company
Board will be divided into three classes and directors for each class will be
elected at the annual meeting of shareholders held in the year in which the
terms of such class expires and will serve thereafter for three years. Upon
consummation of the Merger, INSCO will be merged with and into PICOM, with PICOM
being the surviving insurance corporation. The PICOM Board will consist of ten
directors, all of whom will be the current members of the PICOM Board. See
"MANAGEMENT AND OPERATIONS AFTER THE REORGANIZATION -- Directors" and
"MANAGEMENT OF PICOM."
EXECUTIVE OFFICERS
The officers of Holding Company are currently Victor T. Adamo, Esq., CPCU,
President and Chief Executive Officer, R. Kevin Clinton, FCAS, MAAA, Vice
President, Treasurer and Chief Financial Officer, and Annette E. Flood, Esq.,
R.N., Secretary. Upon consummation of the Merger, the officers of Holding
Company will be the officers identified in the preceding sentence and W. Peter
McCabe, M.D., Chairman. Upon consummation of the Merger, INSCO will be merged
with and into PICOM. It is anticipated that PICOM, as the surviving insurance
corporation, will operate with PICOM's current executive officers. See
"MANAGEMENT AND OPERATIONS AFTER THE REORGANIZATION -- Executive Officers" and
"MANAGEMENT OF PICOM."
<PAGE> 19
-11-
DIVIDEND POLICY
The holders of Holding Company Common Stock are entitled to receive such
dividends as may be declared from time to time by the Holding Company Board out
of funds legally available therefor. Holding Company is not expected to declare
dividends on Holding Company Common Stock for the foreseeable future following
the Merger, as it is expected that earnings of Holding Company and its
subsidiaries will be retained and used for operations. Any future dividends
will depend upon, among other things, future financial results and requirements
and contractual restrictions applicable to Holding Company and its subsidiaries.
The ability of Holding Company to fund its operations and to pay dividends on
Holding Company Common Stock following consummation of the Merger will be
dependent upon its receipt of dividends from PICOM. The ability of PICOM to pay
dividends is subject to regulatory restrictions. There can be no assurance as
to any future dividends by Holding Company or PICOM. See "MANAGEMENT AND
OPERATIONS AFTER THE REORGANIZATION -- Dividend Policy" and "CERTAIN REGULATORY
CONSIDERATIONS."
CERTAIN REGULATORY CONSIDERATIONS
As insurance holding companies or insurance companies, Holding Company,
PICOM, and their respective subsidiaries are subject to certain regulatory
restrictions, and examination and reporting requirements, of certain regulatory
authorities. See "CERTAIN REGULATORY CONSIDERATIONS.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
It is anticipated that the Merger will be accounted for in a manner similar
to a pooling of interests, and Holding Company will carry forward to its
accounts the assets and liabilities of PICOM at their respective amounts as
reported by PICOM. Moreover, because Holding Company did not exist for the
periods that would normally be presented and its assets are insignificant in
comparison to the assets of PICOM, the transactions contemplated by the
Reorganization Agreement and the Plan of Merger will not result in a material
change to either the consolidated balance sheets or the consolidated statements
of income of PICOM appearing elsewhere in this Proxy Statement/Prospectus.
Accordingly, and in reliance on Rule 11-02(b)(1) of Regulation S-X, no pro forma
consolidated financial information for Holding Company and PICOM has been
included in this Proxy Statement/Prospectus. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PICOM," "PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION," and "FINANCIAL STATEMENTS.
<PAGE> 20
-12-
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL DATA OF PICOM
(IN THOUSANDS, EXCEPT PER SHARE DOLLAR AMOUNTS)
The following table summarizes certain consolidated historical financial
data of PICOM for each of the years in the five year period ended December 31,
1995. The consolidated historical financial data for the three-month periods
ended March 31, 1996 and 1995, and as of March 31, 1996, have been derived from
the unaudited condensed consolidated financial statements of PICOM which appear
elsewhere in this Proxy Statement/Prospectus and in the opinion of PICOM
management reflect all adjustments (consisting only of normally recurring
accruals) necessary for a fair presentation of the financial position and the
operating results for such periods. The operating results for any interim
period are not necessarily indicative of the operating results for a full year.
All information is presented in accordance with generally accepted accounting
principles ("GAAP"), except for selected statutory data, which are presented in
accordance with statutory accounting principles ("SAP"). The summary
consolidated financial data should be read in conjunction with "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF
PICOM" and the historical consolidated financial statements of PICOM, including
the notes thereto, which appear elsewhere in this Proxy Statement/Prospectus.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF PICOM" and "FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEARS ENDED DECEMBER 31,
------------------- ---------------------------------------------------------
STATEMENT OF INCOME DATA(1): 1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Premiums written $ 20,711 $19,559 $67,727 $ 51,110 $ 50,514 $ 49,549 $ 47,327
Net premiums written 16,448 14,578 55,151 48,778 48,177 47,476 45,424
Premiums earned 14,337 13,935 55,684 48,490 48,192 48,778 47,899
Net investment income 3,869 2,971 14,729 13,379 12,363 14,338 15,758
Total revenues and other income 18,275 17,020 70,572 59,867 67,476 70,604 70,857
Losses and loss adjustment expenses(2) 12,416 13,493 35,558 44,853 44,585 53,511 45,168
Total expenses 15,109 15,765 46,230 52,669 52,775 64,787 56,306
Income before cumulative effect of change in
accounting method $ 2,327 $830 $16,066 $ 5,154 $ 9,866 $ 3,779 $ 9,724
Cumulative effect of change in accounting
method(2) -- (8,125) (8,125) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income $ 2,327 $(7,295) $ 7,941 $ 5,154 $ 9,866 $ 3,779 $ 9,724
======== ======== ======== ======== ======== ======== ========
Weighted average shares outstanding(3) 3,126 3,239 3,115 3,239 3,239 3,238 3,231
EARNINGS PER SHARE(3):
Income before cumulative effect of change in
accounting method $ 0.74 $ 0.26 $ 5.16 $ 1.59 $ 3.05 $ 1.17 $ 3.01
Cumulative effect of change in accounting
method(2) -- (2.51) (2.61) -- -- -- --
-------- ------- ------- -------- -------- -------- --------
Net income per common share $ 0.74 $ (2.25) $ 2.55 $ 1.59 $ 3.05 $ 1.17 $ 3.01
======== ======= ======= ======== ======== ======== ========
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31,
------------------- --------------------------------------------------------
BALANCE SHEET DATA: 1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total investments $273,736 $259,260 $280,607 $249,979 $253,133 $235,091 $226,515
Total assets 329,683 323,035 330,712 297,926 301,106 284,245 274,914
Loss and loss adjustment expense reserves(2) 200,904 208,593 199,605 188,544 191,221 184,758 178,132
Reserve for extended reporting period claims 14,182 13,069 14,082 12,738 12,238 11,486 7,755
Unearned premiums 27,008 26,880 23,122 24,557 24,347 24,305 25,391
Shareholders' equity 78,532 58,850 78,411 63,142 64,839 54,974 55,640
Book value per common share(3) $ 24.98 $ 18.17 $ 25.17 $ 19.49 $ 20.02 $ 16.97 $ 17.22
</TABLE>
<PAGE> 21
-13-
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31,
------------------- --------------------------------------------------------
SELECTED STATUTORY DATA: 1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Loss ratio(4)(5) 87.3% 101.5% 71.5% 93.5% 94.0% 117.3% 110.5%
Expense ratio 16.2% 19.0% 17.1% 15.5% 15.8% 15.6% 14.2%
-------- -------- -------- -------- -------- -------- --------
Combined ratio 103.5% 120.5% 88.6% 109.0% 109.8% 132.9% 124.7%
======== ======== ======== ======== ======== ======== ========
Statutory surplus $ 70,286 $ 47,691 $ 67,006 $ 47,149 $ 40,431 $ 27,169 $ 20,902
Net premiums written to statutory surplus(6) .81x 1.15x .82x 1.03x 1.19x 1.75x 2.17x
</TABLE>
- ----------------------
(1) Effective January 1, 1995, PICOM began writing a book of business
previously written by an Illinois insurance company.
(2) PICOM discounted loss and loss adjustment expense reserves through 1994.
In 1993, 1992, and 1991 PICOM changed its loss and loss adjustment expense
reserve discount rate from 3.75% to 3%, 5.625% to 3.75%, and 7% to 5.625%,
respectively. These reductions in reserve discount rate were treated as
changes in accounting estimates and resulted in decreases in net income of
$2,006,000 for 1993, $5,312,000 for 1992 and $3,594,000 for 1991. The
effects of such changes in the reserve discount rate, which were
previously presented as changes in accounting principles; have
been reclassified and presented as changes in accounting estimates.
Effective January 1, 1995, PICOM eliminated discounting of loss and loss
adjustment expense reserves, for GAAP reporting purposes. The elimination
of reserve discounting was treated as a change in accounting method.
(3) Weighted average shares in thousands. Prior period amounts have been
restated for the effects of 10% stock dividends on December 1, 1994 and
1993, respectively.
(4) In 1995, PICOM reduced its estimated liability for loss and loss adjustment
expense reserves by $12,300,000 for redundancies.
(5) The statutory loss ratio is calculated based upon incurred losses plus the
change in reserve for extended reporting period claims.
(6) Net written premiums for the prior twelve-month period divided by ending
statutory surplus.
<PAGE> 22
-14-
RISK FACTORS
An investment in the securities offered pursuant to this Proxy
Statement/Prospectus may involve a high degree of risk. The several risk
factors discussed below, along with general investment risks and the other
matters discussed in this Proxy Statement/Prospectus, should be considered in
making an investment decision and in evaluating the Merger.
INDUSTRY FACTORS
Virtually all of PICOM's insurance premium revenue is derived from medical
malpractice risks. Many factors influence the financial results of the medical
malpractice insurance business, several of which are beyond the control of
Holding Company and PICOM. The supply of medical malpractice insurance, or the
industry's underwriting capacity, is determined principally by the industry's
level of capitalization, historical underwriting results, returns on investment
and perceived premium rate adequacy. Historically, the financial performance of
the medical malpractice insurance industry has tended to fluctuate in cyclical
patterns characterized by periods of greater competition in pricing and
underwriting terms and conditions (a "soft insurance market") followed by
periods of capital shortage and lesser competition (a "hard insurance market").
For several years, the medical malpractice insurance industry and PICOM have
faced a soft insurance market that has generally resulted in lower premiums and
reduced profitability. In the present soft insurance market PICOM has offered
discounts to its published premium rates in order to retain market share.
Although PICOM is endeavoring to offset lower premiums charged through more
selective underwriting practices, there can be no assurance that these practices
will be successful. Moreover, there can be no assurances regarding whether or
when market conditions will improve, or the manner in which, or the extent to
which, changes in market conditions may impact the results and operations of
Holding Company or PICOM.
Insurance companies, such as PICOM, rely on the positive performance of
their investment portfolios to offset insurance losses and to enhance profitable
results. Consequently, prevailing economic conditions, particularly changes in
market interest rates, may significantly affect the operations of an insurance
company, such as PICOM, that depends on its net investment income. In addition,
changes in interest rates also can affect the value of an insurance company's
interest-earning assets, which are comprised of fixed and adjustable-rate
investment securities. Generally, the value of fixed-rate investment securities
fluctuates inversely with changes in interest rates. Changes in interest rates
also can affect the average life of investment securities. An insurance company
is subject to reinvestment risk to the extent that it is not able to reinvest
prepayments at rates which are comparable to the rates on the maturing
investments. Changes in market interest rates have resulted in significant
changes in the market value of PICOM's portfolio of fixed maturity investments.
As of March 31, 1996, such portfolio had a modified duration of four years and a
market value that was $1.5 million less than the $260.2 million amortized cost
of such portfolio. As of December 31, 1995, such portfolio had a modified
duration of approximately four years and a market value that was $2.9 million
more than the $257.1 million amortized cost of such portfolio. A one hundred
basis point increase in market interest rates would decrease the value of this
portfolio by four percent, whereas a one hundred basis point decrease in market
interest rates would increase the value of this portfolio by four percent.
The success of each of Holding Company and PICOM may also be influenced by
general economic and legal conditions in the geographic markets served by them
and their respective subsidiaries. No assurance can be given that favorable
economic and legal conditions will exist in such markets.
COMPETITION
Holding Company and PICOM compete with numerous insurance companies as
well as various self-insurance mechanisms. Principal competitors consist of
three customer-owned local insurance companies (Michigan Physicians Mutual
Liability Company, Illinois State Medical Inter-Insurance Exchange and Michigan
<PAGE> 23
-15-
Hospital Association Insurance Company) and several national companies
(including The St. Paul Companies, The Medical Protective Company, American
International Group, MMI Companies, Cincinnati Insurance Company, and CNA
Insurance Companies). The majority of these competitors have substantially
greater financial resources than do Holding Company and PICOM.
Competition in the medical malpractice insurance industry may take several
forms, including pricing, service quality, breadth and flexibility of
coverages, method of sale, and insurance carrier financial stability and
ratings. PICOM competes through name recognition and reputation, especially in
its Michigan market, by emphasizing a high level of customer service to
insureds, and by using local insurance agencies to sell and distribute its
insurance products. PICOM has attempted to balance its need for upward rate
adjustments with the goal of maintaining market share in a very competitive
insurance market. As a result, PICOM has offered discounts to its published
premium rates to retain market share and has experienced margin or price
reductions as a result of such competitive market conditions. Although PICOM
has maintained profitability and is endeavoring to offset lower premiums
charged through more selective underwriting practices, there can be no
assurance that these practices will be successful in the long term.
HEALTH CARE INDUSTRY CONSOLIDATION
PICOM derives substantially all of its premium income from physicians and
other individual health care providers, physician groups, and smaller health
care facilities. The health care industry is undergoing rapid market driven
change and consolidation which may negatively impact the medical practice and
economic independence of physicians who are PICOM's primary customer base. For
example, the emergence of "managed care" has made it more difficult for
physicians to conduct a traditional fee-for-service practice and has caused some
physicians to leave private practice for employment with medical systems or to
join or contractually affiliate with managed care organizations or practice
management organizations. Such change and consolidation may result in the
elimination of, or a significant decrease in, the role of the physician in the
medical malpractice insurance purchasing decision. It could also result in
greater emphasis on the role of professional managers, who may seek to purchase
insurance on a price competitive basis, and who may favor insurance companies
that are larger and more highly rated than PICOM. In addition, such change and
consolidation could reduce medical malpractice premiums available to PICOM as
groups of insurance purchasers generally retain more risk by accepting higher
deductibles and self insured retentions or by forming their own captive
insurance mechanisms.
The movement from traditional fee-for-service practice to the managed care
environment may also result in an increase in the liability profile of PICOM's
insureds. The majority of PICOM's insured physicians practice in primary care
specialties such as internal medicine, family practice, general practice and
pediatrics. In the managed care environment, these primary care physicians are
being required to take on the role of "gatekeeper" and restrain the use of
specialty care by controlling access to specialists and by performing certain
procedures that would customarily be performed by specialists in a
fee-for-service setting. These practice changes may result in an increase in
the claims frequency and severity experienced by primary care physicians and by
PICOM as their insurance carrier.
UNDERWRITING LOSSES AND RESERVES
PICOM collects premiums for the insurance coverage it provides. Such
premiums are based upon certain actuarial and other assumptions. Although
PICOM employs actuarial assumptions that it believes are reasonable, such
assumptions are, by their nature, estimates. To the extent that the actuarial
and other assumptions used by PICOM prove to be incorrect, PICOM may incur
unanticipated underwriting losses on the risks that it insures. Medical
malpractice claims and expenses may be paid over a period of ten years or more,
which is longer than most property and casualty insurance. Trends in losses
may therefore be slow to appear and accordingly, PICOM's
<PAGE> 24
-16-
reaction in terms of modifying underwriting practices and changing premium rates
may lag underlying loss trends. In addition, inflation may increase PICOM's
ultimate loss costs.
The loss and loss adjustment expense reserves established by PICOM are
estimates of amounts needed to pay reported and unreported claims and related
loss adjustment expenses. The estimates are based on assumptions related to
the ultimate cost of settling such claims. If PICOM's reserves are inadequate,
PICOM will be required to increase its reserves and thus reduce its net income
or shareholders' equity in the period in which the deficiency is identified.
Unanticipated underwriting losses or materially underestimated reserves could
have a material adverse effect on Holding Company and PICOM.
REINSURANCE
In order to reduce risk and to increase its underwriting capacity, PICOM
obtains reinsurance from unaffiliated reinsurers (including domestic and foreign
companies and Lloyd's of London), although it retains a portion of each risk
reinsured. PICOM is subject to credit risk with respect to its reinsurers
because reinsurance does not relieve PICOM of its original liability to its
insureds for the risks ceded to reinsurers. Although PICOM believes that its
reinsurance is maintained with financially stable reinsurers and that any
reinsurance security maintained is adequate to protect its interests, the
inability of PICOM to collect on its aggregate reinsurance recoverable, or the
inability of PICOM's reinsurers to make payments under the terms of reinsurance
treaties (due to insolvency or otherwise), could have a material adverse effect
on PICOM's future results of operations and financial position.
The amount and cost of reinsurance available to companies specializing in
medical professional liability insurance are subject, in large part, to
prevailing market conditions beyond the control of Holding Company and PICOM.
PICOM's ability to provide professional liability insurance at competitive
premium rates and coverage limits on a continuing basis will depend in part
upon its ability to obtain adequate reinsurance in amounts and at rates that
will not adversely affect its competitive position. Although Holding Company
and PICOM anticipate that PICOM will continue to be able to obtain such
reinsurance, there can be no assurance that this will be the case.
RELIANCE ON INDEPENDENT INSURANCE AGENCIES
PICOM markets its professional liability products primarily through
independent insurance agencies. PICOM has contractual relationships with all
of its agents. In the Michigan market, PICOM and agencies representing over
95% of Michigan premiums written through agencies have entered into written
agreements that prohibit the agencies from transferring existing PICOM medical
malpractice insureds to another insurance company without PICOM's written
consent, although the agencies may place newly sourced business with another
insurance company. In the Illinois market the agencies retain full ownership
of expirations and, accordingly, may transfer an existing PICOM insured to
another insurance company without PICOM's consent. PICOM anticipates that as
it enters new states and offers non-medical malpractice insurance products in
Michigan and other states, the agencies representing PICOM will retain full
ownership of expirations.
As of December 31, 1995, PICOM's top ten agencies accounted for
approximately 55% of PICOM's direct in-force premiums, with the top agency,
Willis Corroon Corporation of Michigan, located in suburban Detroit, accounting
for approximately 10% of PICOM's direct in-force premiums. PICOM's business
depends, in part, on the effort of these agencies and on PICOM's ability to
continue to offer insurance products that meet the needs of these agencies and
their policyholders. In addition, PICOM's ability to expand into additional
markets will depend, in part, on its ability to successfully establish a
network of independent insurance agencies and to compete with other insurance
companies that are represented by these agencies. For a general description of
PICOM's existing contractual relationships with independent insurance agencies,
see "BUSINESS AND PROPERTIES OF PICOM -- Marketing."
<PAGE> 25
-17-
HOLDING COMPANY STRUCTURE
Holding Company is a legal entity separate and distinct from its various
subsidiaries. As a holding company with no significant operations of its own,
the principal sources of its funds are dividends and other distributions from
its subsidiaries, borrowings and sales of equity. The rights of Holding
Company, and consequently its shareholders, to participate in any distribution
of assets of any of its subsidiaries is subject to prior claims of policy
holders, creditors and preferred shareholders, if any, of such subsidiary
(except to the extent claims of Holding Company in its capacity as a creditor
are recognized), and to certain regulatory restrictions. Consequently, Holding
Company's ability to fund its operations, pay debt, expenses and cash
dividends to its shareholders may be limited.
Holding Company may engage in activities in addition to providing
insurance through PICOM and its subsidiaries. Such activities could include
activities related to providing insurance, such as claims and risk management
services, and activities unrelated to insurance, such as medical practice
management services. However, Holding Company has not presently specifically
identified any such additional activities. To the extent that Holding Company
engages in activities that are unrelated to medical malpractice insurance, it
may have no or limited experience or senior management expertise related to
such new activities.
REGULATORY CONSIDERATIONS
Because insurance holding companies and insurance companies are heavily
regulated, the success of Holding Company and PICOM is impacted not only by
competitive factors but also by regulations affecting insurance holding
companies and insurance companies. These regulations are primarily intended to
protect policyholders, not shareholders. Regulation of the insurance industry
is continuously changing and the ultimate effect of such changes cannot be
predicted. Regulations now affecting Holding Company and PICOM may be modified
at any time and new regulations affecting Holding Company and PICOM may be
enacted. There is no assurance that such modifications or new regulations will
not adversely affect the business of Holding Company and PICOM. In addition,
under the insolvency or guaranty fund laws of most of the states in which
Holding Company and PICOM operate, insurers doing business in those states are
regularly assessed for policyholder losses of insolvent insurance companies.
In addition, from time to time, states may make special assessments in response
to extraordinary circumstances. No assurance can be given that there will not
be such assessments in the future.
In addition to state-imposed insurance laws and regulations, Holding
Company and PICOM are subject to statutory accounting principles and the
reporting format of the National Association of Insurance Commissioners (the
"NAIC"). The NAIC recently adopted a risk-based capital formula to establish
minimum capital and surplus requirements for property and casualty insurance
companies. The risk-based capital formula is based principally on underwriting
risk (loss and LAE reserve risk and premium risk), asset risk and reinsurance
credit risk. PICOM's statutory surplus at December 31, 1995, exceeds the
minimum capital and surplus requirements established under NAIC's current
property and casualty risk-based capital formula.
TORT REFORM
On a state level, several states, including Michigan and Illinois, have
adopted tort reforms designed to moderate the risk of practice to health care
providers. Although such legislation generally has a positive impact by
reducing malpractice losses, it also causes the particular state to be more
attractive to other insurance companies seeking to expand their markets. PICOM
has seen an increase in competition in its markets due, in part, to the passage
of tort reform.
On the federal level, attempts to reform the delivery of medical care have
contained provisions that could, if adopted, have a material impact on PICOM
and its insurance products. An example of such a change is the
<PAGE> 26
-18-
concept of "enterprise liability" that was contained in President Clinton's
health care proposal. Under the enterprise liability concept, doctors
would not bear individual liability for malpractice events with such liability
being borne by the hospital or other enterprise in which the doctor practices.
If enterprise liability or a similar concept were adopted, PICOM could
be at a competitive disadvantage since its business is concentrated in
individual physician risks and larger, more established, companies already
provide malpractice insurance for the enterprise risks.
ABSENCE OF PUBLIC TRADING MARKET; POSSIBLE PRICE FLUCTUATION
Although PICOM Common Stock has been publicly traded for several years,
there has been no public trading market for the Holding Company Common Stock
prior to the Merger and there can be no assurance that an active trading market
for the Holding Company Common Stock will develop following consummation of the
Merger. Factors such as quarterly variations in financial results,
announcements by Holding Company, and other developments affecting Holding
Company or PICOM or the insurance or health care industries generally could
cause the market price of the Holding Company Common Stock to fluctuate
substantially. In addition, the stock market has experienced price and volume
fluctuations in recent years. These fluctuations have had a substantial effect
on the market prices for many securities unrelated to the operating performance
of the companies that issued such securities.
ANTI-TAKEOVER PROVISIONS
The Michigan Insurance Code and the MBCA contain provisions that could
discourage attempts to acquire Holding Company. See "CERTAIN REGULATORY
CONSIDERATIONS" and "COMPARISON OF SHAREHOLDERS RIGHTS."
In addition, Holding Company's Articles of Incorporation and Bylaws
contain provisions that could discourage attempts to acquire Holding Company or
to remove incumbent directors even if some or a majority of Holding Company's
stockholders deem such an attempt to be in Holding Company's and their best
interest and even if the potential acquiror is willing to pay a premium over
the prevailing market price of the Holding Company Common Stock. Holding
Company's Articles of Incorporation authorizes the Holding Company Board to
issue, from time to time, shares of Preferred Stock with such designations and
preferences as the Holding Company Board shall determine. These shares could
be used to discourage attempts to acquire Holding Company or remove incumbent
directors. See "DESCRIPTION OF HOLDING COMPANY CAPITAL STOCK" and "COMPARISON
OF SHAREHOLDER RIGHTS."
POTENTIAL ADVERSE CONSEQUENCES OF ACQUISITIONS OR BUSINESS COMBINATIONS
PICOM has experienced significant growth in premium volume as a result
of an acquisition. Holding Company and PICOM intend to continue to pursue
acquisitions and other business combinations to the extent suitable candidates
and acceptable terms may be identified. PICOM is unable to predict whether or
when any prospective acquisition candidate will become available or the
likelihood that any acquisition will be completed. PICOM competes for
acquisition and expansion opportunities with many entities that have
substantially greater resources. In addition, acquisitions may involve
difficulties in the retention of personnel, diversion of management's
attention, unexpected legal liabilities, and tax and accounting issues. There
can be no assurance that PICOM will be able to successfully identify suitable
acquisition candidates, complete acquisitions, integrate acquired businesses
into its operations, or expand into new markets. Once integrated, acquisitions
may not achieve comparable levels of revenues, profitability, or productivity
as the existing business of PICOM or otherwise perform as expected.
<PAGE> 27
-19-
SHARES ELIGIBLE FOR FUTURE SALE
After consummation of the Merger, Holding Company will have 3,188,146
shares of Holding Company Common Stock issued and outstanding. Of these
shares, approximately 3,018,448 shares of Holding Company Common Stock will be
freely tradeable without restriction under the Securities Act by persons who
are believed by Holding Company to not be "affiliates" of either Holding
Company or PICOM. All the remaining shares of Holding Company Common Stock,
which will be held by persons believed by Holding Company to be "affiliates" of
either Holding Company or PICOM, will be "restricted securities" and may not be
sold unless they are sold pursuant to an exemption from registration, including
an exemption contained in Rule 145 under the Securities Act, or are registered
under the Securities Act. Consummation of the Merger is conditioned upon,
among other things, the receipt by Holding Company, from each director,
executive officer and other person who is reasonably believed to be an
affiliate of either Holding Company or PICOM (for purposes of Rule 145) of a
written agreement intended to ensure compliance with these requirements.
In general, under Rule 145 as currently in effect, the holder of such
restricted securities, including persons who may be deemed "affiliates" of
either Holding Company or PICOM, would be entitled to sell, within any
three-month period, up to a number of restricted securities that does not
exceed the greater of (i) 1% of the then outstanding shares of Holding Company
Common Stock and (ii) the average weekly trading volume for Holding Company
Common Stock during the four calendar weeks preceding the date on which notice
of the sale is filed with the Securities and Exchange Commission provided that
certain restrictions relating to manner of sale, notice and the availability of
current public information about Holding Company are satisfied. In addition,
when a period of two years has elapsed from the date the restricted securities
were acquired from Holding Company, and provided the holder is not then, or has
not been within the past three months, an affiliate of Holding Company, the
holder of the restricted securities will be able to dispose of them without
compliance with such restrictions other than the availability of current public
information about Holding Company and when a period of three years has elapsed,
and provided the holder is not then, or has not been within the past three
months, an affiliate of Holding Company, without restriction.
Following the consummation of the Merger, sales of substantial amounts of
Holding Company Common Stock in the public market pursuant to registration
under the Securities Act, Rule 145 or otherwise, or even the potential for
such sales, could adversely affect the prevailing market prices for Holding
Company Common Stock and impair Holding Company's ability to raise capital
through the sale of its equity securities.
AUTHORIZATION OF ADDITIONAL SECURITIES
Holding Company is authorized to issue 25,000,000 shares of Holding
Company Common Stock. After consummation of the Merger, Holding Company will
have 3,188,146 shares of Holding Company Common Stock issued and outstanding.
Uncommitted authorized but unissued shares of Holding Company Common Stock may
be issued from time to time to such persons and for such consideration as may
be determined by the Holding Company Board; and, holders of the then
outstanding Holding Company Common Stock may or may not be given the
opportunity to vote thereon, depending on the nature of such transactions,
applicable law, the rules and policies of any stock exchange upon which such
securities may be listed, and the judgment of the Holding Company Board
regarding the submission of such issuance to Holding Company shareholders.
The availability of authorized but unissued shares of Holding Company
Common Stock is intended to provide Holding Company with the flexibility to
take advantage of opportunities to issue such stock to obtain capital, as
consideration for possible acquisitions or for other purposes (including,
without limitation, the issuance of additional shares of Holding Company Common
Stock through stock splits and stock dividends in appropriate circumstances).
There are, at present, no plans, understandings, agreements or arrangements
concerning the issuance of additional shares of Holding Company Common Stock,
except for shares to be issued pursuant to the
<PAGE> 28
-20-
Merger (and shares to be reserved for issuance upon exercise of
options). However, it is possible that, depending on factors then considered
relevant by the Holding Company Board, that Holding Company may, at any time in
the future, issue additional shares of Holding Company Common Stock in a public
offering or private transaction. Holding Company shareholders will not have
preemptive rights to subscribe for newly issued shares.
CAPITALIZATION
(UNAUDITED)
The following table sets forth the capitalization of Holding Company and PICOM
(i) on a historical basis and (ii) on a pro forma basis as adjusted to give
effect to the Merger as if it had occurred at March 31, 1996. The information
set forth below should be read in conjunction with the historical consolidated
financial statements of each of Holding Company and PICOM, including the notes
thereto, which appear elsewhere in this Proxy Statement/Prospectus. See
"DESCRIPTION OF HOLDING COMPANY CAPITAL STOCK," "PRO FORMA FINANCIAL
INFORMATION" and "FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
Holding
PICOM Company
----- Pro Forma
--------
(in thousands)
<S> <C> <C>
Borrowings:
Short-term debt........................................................ $ -- $ --
Shareholders' equity:
Preferred stock, no par value; 5,000,000 shares authorized; no shares
issued and outstanding................................................. $ -- $ --
Common stock, $1 par value; 10,000,000 shares authorized; 3,238,959
shares issued and outstanding, including treasury shares............... 3,239 --
Common Stock, no par value; 25,000,000 shares authorized; 1 share
issued and outstanding at March 31, 1996 and 3,238,960 shares
(including treasury shares) issued and outstanding as adjusted......... -- 11,863
Additional paid-in capital............................................. 8,624 --
Retained earnings...................................................... 69,321 69,321
Net unrealized depreciation on investments, net of taxes............... (1,021) (1,021)
------- -------
80,163 80,163
Less cost of treasury shares; 94,814 shares at March 31, 1996.......... (1,631) (1,631)
------- -------
Total shareholders' equity.............................................. 78,532 78,532
------- -------
Total capitalization.................................................... $78,532 $78,532
======= =======
</TABLE>
<PAGE> 29
-21-
PICOM COMPARATIVE PER SHARE DATA
(Unaudited)
The following table sets forth for PICOM Common Stock certain historical per
share financial information. The information presented herein should be
read in conjunction with the historical financial statements of PICOM,
including the notes thereto, which appear elsewhere in this Proxy
Statement/Prospectus. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF PICOM" and "FINANCIAL STATEMENTS."
<TABLE>
<S> <C>
COMMON SHAREHOLDERS' EQUITY:
March 31,1996..........................................................................................................$24.98
March 31, 1995..........................................................................................................18.17
December 31,1995........................................................................................................25.17
December 31,1994........................................................................................................19.49
December 31,1993........................................................................................................20.02
NET INCOME:
Three months ended March 31, 1996:
Net Income............................................................................................................$0.74
=====
Three months ended March 31, 1995:
Income before cumulative effect of change in accounting method........................................................$0.26
Cumulative effect of change in accounting method(1) ..................................................................(2.51)
-----
Net Loss.............................................................................................................$(2.25)
=====
Year ended December 31, 1995:
Income before cumulative effect of change in accounting method..........................................................$5.16
Cumulative effect of change in accounting method(1).....................................................................(2.61)
-----
Net Income..............................................................................................................$2.55
Year ended December 31, 1994: =====
Net Income..............................................................................................................$1.59
Year ended December 31, 1993:(2) =====
Net Income..............................................................................................................$3.05
=====
</TABLE>
- --------------------
(1) Effective January 1, 1995, PICOM eliminated discounting of loss and loss
adjustment expense reserves for GAAP reporting purposes. The elimination
of reserve discounting was treated as a change in accounting method.
(2) Per share amounts have been restated to account for the effect of a
ten percent stock dividend paid on December 31, 1994. In 1993, PICOM
changed its loss and loss adjustment reserve discount rate from 3.75% to
3%. The reduction in the reserve discount rate was treated as a change in
accounting estimate, which reduced net income by $0.62 per share for 1993.
The effect of such change in the reserve discount rate, which was
previously presented as a change in accounting principle, has been
reclassified and presented as a change in accounting estimate.
<PAGE> 30
-22-
COMPARATIVE STOCK PRICES
HOLDING COMPANY
Holding Company and INSCO were only recently incorporated and have been
privately held corporations since their formation. As of the date of this
Proxy Statement/Prospectus, there was one shareholder of record of the one (1)
issued and outstanding Holding Company Common Stock. Holding Company is the
sole shareholder of INSCO. The shares of Holding Company Common Stock to be
issued in the Merger have been admitted for quotation on the Nasdaq National
Market subject to official notice of issuance. PICOM Common Stock is traded
through the Nasdaq National Market under the symbol "PICM," and Holding Company
has applied for the same trading symbol. See "THE REORGANIZATION AGREEMENT --
Stock Listing."
PICOM
PICOM Common Stock is traded in the over-the-counter market and, since
October, 1994, has been listed for quotation on the Nasdaq National Market
under the symbol "PICM." From June, 1993 to October, 1994, PICOM Common
Stock was traded on the Nasdaq Small Cap Market under the symbol "PICM."
Although transactions in PICOM Common Stock have been, and are expected to
continue to be, facilitated by market-makers, there can be no assurance that an
established or liquid trading market in PICOM Common Stock will continue.
The table below sets forth (i)for the periods since October, 1994, the high
and low bid prices for PICOM Common Stock on the Nasdaq National Market, and
(ii)for the periods prior to October, 1994, the high and low bid prices for
PICOM Common Stock on the Nasdaq Small Cap Market. In each case the quotations
have been adjusted as if the ten percent stock dividend paid on December 31,
1994 had occurred prior to such quarters.
<TABLE>
<CAPTION>
PICOM
Common Stock
<S> <C> <C>
1994
- ---- High Low
First Quarter................................................................................ $14.89 $11.36
Second Quarter............................................................................... 14.77 13.07
Third Quarter................................................................................ 13.30 10.80
Fourth Quarter............................................................................... 12.50 11.00
1995
- ----
First Quarter................................................................................ 11.00 10.00
Second Quarter............................................................................... 15.25 11.00
Third Quarter................................................................................ 18.00 14.00
Fourth Quarter............................................................................... 20.75 17.75
1996
----
First Quarter................................................................................ 25.00 20.75
Second Quarter (through June 28, 1996)...................................................... 24.25 21.50
</TABLE>
On May 10, 1996, the last trading day before the execution of the
Reorganization Agreement, the high and low bid prices of PICOM Common Stock as
reported on the Nasdaq National Market were $22.00 and $21.75, respectively,
per share. On June 28, 1996 (the last practicable date prior to the mailing of
this Proxy Statement/Prospectus), the high and low bid prices of PICOM Common
Stock as reported on the Nasdaq National Market were $ 24.25 and $ 24.25,
respectively, per share. PICOM SHAREHOLDERS ARE ADVISED TO OBTAIN CURRENT
MARKET QUOTATIONS FOR THE PICOM COMMON STOCK.
On June 10, 1996, there were approximately 2542 holders of record of
PICOM Common Stock. PICOM has neither declared nor paid any cash dividends on
PICOM Common Stock in the last ten years.
<PAGE> 31
-23-
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
Professionals Insurance Company Management Group is a Michigan business
corporation incorporated under the laws of the State of Michigan on
January 31, 1996 for the purpose of serving as the holding company for PICOM
and its subsidiaries. Holding Company has one subsidiary, PICOM Interim
Insurance Company, a Michigan stock insurance company incorporated under the
laws of the State of Michigan solely for the purpose of merging with and into
PICOM and establishing PICOM as a wholly-owned subsidiary of Holding Company.
At the present time neither Holding Company nor INSCO has any business
operations. It is anticipated that Holding Company will conduct its activities
through subsidiaries. See "RISK FACTORS -- Holding Company Structure."
Because INSCO was formed solely for the purpose of merging with and into PICOM
and thereby establishing PICOM as a wholly-owned subsidiary of Holding Company,
INSCO will not write or underwrite any lines of insurance. The principal
executive offices for each of Holding Company and INSCO are located at 4295
Okemos Road, Box 2510, Okemos, Michigan 48805-9510 and the telephone number for
each of them is (517)349-6500.
Following consummation of the merger of INSCO with and into PICOM, INSCO
will cease to exist, PICOM will be the surviving corporation in the Merger and
a wholly-owned subsidiary of Holding Company, and each issued and outstanding
share of PICOM Common Stock will be converted into one share of Holding Company
Common Stock. The name of the surviving insurance corporation following
consummation of the Merger will be "PICOM Insurance Company." Following
consummation of the Merger all direct and indirect insurance subsidiaries of
Holding Company (e.g., PICOM and PICOM-Illinois) will continue to operate under
their existing insurance licenses and none of such subsidiaries will be
required to reapply for any of such licenses. See "THE REORGANIZATION
- --Method of Reorganization."
In connection with the transactions contemplated by the Reorganization
Agreement and the Plan of Merger, PICOM loaned $1,500,000 to Holding Company for
the purpose of enabling Holding Company to form and capitalize INSCO in
accordance with the Michigan Insurance Code. Holding Company invested all of
that sum in INSCO in exchange for all of the issued and outstanding shares of
capital stock of INSCO. INSCO invested the $1,500,000 in United States
government obligations with maturities of less than one year (the "INSCO
Investment"). The loan from PICOM to Holding Company is evidenced by a
short-term, non-renewable, interest bearing promissory note having a stated
principal amount of $1,500,000 and a stated maturity date that is the earlier of
the Effective Time or December 31, 1996 (the "Note"). The Note is secured by a
pledge of all of the issued and outstanding shares of INSCO. Interest on the
Note accrues at a rate equivalent to the rate of interest paid on the INSCO
Investment. Upon consummation of the Merger, the INSCO Investment, and all
interest accrued thereon, will become and be the property of PICOM. Following
consummation of the Merger, PICOM will declare and pay to Holding Company
certain cash dividends. One of these dividends will be in the amount of
$2,000,000 and will be used primarily to pay certain anticipated operating costs
of Holding Company, such as legal and accounting costs, investment banking fees
and expenses, and directors fees. (It is anticipated that the proceeds of this
dividend will be invested by Holding Company until so expended.) The other
dividend will be in an amount equal to the amount then outstanding under the
Note, and Holding Company will then repay the proceeds of such dividend to PICOM
in full satisfaction of the Note. It is to be noted that on April 12, 1996 the
Financial Analysis Division of the Michigan Insurance Bureau determined (i) that
the $1,500,000 loan from PICOM to Holding Company was not material, (ii) that
such post-Merger dividends were not extraordinary, and (iii) that neither such
loan nor such post-Merger dividends required the prior approval of the Michigan
Insurance Commissioner. See "RELATED PARTY TRANSACTIONS OF PICOM" and "THE
REORGANIZATION AGREEMENT -- Capitalization of INSCO."
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THE PICOM ANNUAL MEETING
MEETING OF SHAREHOLDERS
The 1996 Annual Meeting of Shareholders of PICOM will be held at 10:00
a.m., local time, on Wednesday, July 31, 1996 at University Place Marriott, 300
M.A.C. Avenue, East Lansing, Michigan 48823.
MATTERS TO BE CONSIDERED
At the Annual Meeting, holders of PICOM Common Stock will consider and
vote upon two matters.
The first matter is a proposal to approve and adopt (i) the Reorganization
Agreement dated May 13, 1996 executed by and among PICOM, Holding Company and
INSCO, (ii) the Agreement and Plan of Merger dated May 13, 1996 executed by and
among PICOM, Holding Company and INSCO, and (iii) all of the transactions
contemplated by the Reorganization Agreement and the Plan of Merger. The
Reorganization Agreement and the Plan of Merger contemplate, among other
things, (a) that INSCO will be merged with and into PICOM, and with the result
that PICOM will become a wholly-owned subsidiary of Holding Company, and
(b) that upon consummation of the Merger each issued and outstanding share of
PICOM Common Stock will be converted into one share of Holding Company Common
Stock. See "THE REORGANIZATION" and "THE REORGANIZATION AGREEMENT." A
conformed copy of the Reorganization Agreement (without exhibits) is attached
as Annex A to this Proxy Statement/Prospectus. A conformed copy of the Plan of
Merger (without exhibits) is attached as Annex B to this Proxy
Statement/Prospectus.
The second matter is the election of four persons to the PICOM Board for
three year terms expiring at the 1999 Annual Meeting of Shareholders of PICOM
upon the election and qualification of their successors or upon their earlier
resignation or removal. PICOM shareholders will also consider and vote upon
such other matters as may be properly brought before the Annual Meeting. See
"ELECTION OF PICOM DIRECTORS."
VOTES REQUIRED
Each share of PICOM Common Stock is entitled to one vote on each matter
that is properly presented to shareholders for a vote at the Annual Meeting.
Approval of the PICOM Reorganization Proposal requires the affirmative vote of
a majority of the outstanding shares of PICOM Common Stock. Assuming the
presence of a quorum, PICOM Directors will be elected at the Annual Meeting
from among those persons duly nominated by a plurality of the votes cast by
holders of PICOM Common stock present in person or by proxy and entitled to
vote at the Annual Meeting in the election of directors.
As of May 31, 1996, directors and executive officers of PICOM and their
affiliates were beneficial owners of approximately 5.3% of the 3,188,145 issued
and outstanding shares of PICOM Common Stock, and 100% of the one (1)
outstanding share of Holding Company Common Stock. The directors and executive
officers of PICOM have indicated that they intend to vote all shares of PICOM
Common Stock owned by them FOR approval and adoption of the PICOM
Reorganization Proposal, and FOR the election to the PICOM Board of each of the
persons nominated for election by the PICOM Board.
As of May 31, 1996, Victor T. Adamo, a director and the President and
Chief Executive Officer of PICOM, was the beneficial owner of the one
(1) issued and outstanding share of Holding Company Common Stock (which share
represents 100% of Holding Company's outstanding shares of capital stock).
This share was issued to Mr. Adamo for $25.00 and for the purpose of organizing
the Holding Company and enabling it to form INSCO and enter into the
Reorganization Agreement and the Plan of Merger.
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THE PICOM BOARD APPROVED THE REORGANIZATION AGREEMENT AND THE PLAN OF
MERGER AND RECOMMENDS THAT PICOM SHAREHOLDERS VOTE FOR THE APPROVAL AND
ADOPTION OF THE PICOM REORGANIZATION PROPOSAL (WHICH APPROVAL AND ADOPTION
SHALL CONSTITUTE, AMONG OTHER THINGS, APPROVAL OF THE MERGER). The PICOM Board
also recommends that PICOM shareholders vote FOR the election to the PICOM
Board of each of the persons nominated for election by the PICOM Board.
VOTING OF PROXIES
Shares of PICOM Common Stock represented by properly executed proxies
received at or prior to the Annual Meeting will be voted at the Annual Meeting
in the manner specified by the holders of such shares. Properly executed
proxies which do not contain voting instructions will be voted FOR the PICOM
Reorganization Proposal, and FOR the election to the PICOM Board of each of the
persons nominated for election by the PICOM Board.
If any other matters are properly presented at the Annual Meeting for
consideration, including, among other things, consideration of a motion to
adjourn the Annual Meeting to another time and/or place (including, without
limitation, for the purpose of soliciting additional proxies), the persons
named in the relevant form of proxy enclosed herewith and acting thereunder
will have discretion to vote on such matters in accordance with their best
judgment. Neither Holding Company nor PICOM has any knowledge of any matters
to be presented at the Annual Meeting, other than the matters referred to and
described in this Proxy Statement/Prospectus.
REVOCABILITY OF PROXIES
The grant of a proxy on the enclosed form of proxy does not preclude a
shareholder from voting in person or otherwise revoking a proxy. Attendance at
the Annual Meeting will not in and of itself constitute revocation of a proxy.
A shareholder may revoke a proxy at any time prior to its exercise by filing
with the Secretary of PICOM a duly executed revocation or a proxy bearing a
later date or by voting in person at the Annual Meeting.
RECORD DATE; SHARES ENTITLED TO VOTE; QUORUM
Only holders of record of PICOM Common Stock at the close of business on
June 10, 1996 will be entitled to receive notice of and to vote at the Annual
Meeting. At May 31, 1996, PICOM had issued and outstanding 3,188,145 shares of
PICOM Common Stock. Shares representing 33 1/3% of the aggregate number of
outstanding shares of PICOM Common Stock entitled to vote must be represented
in person or by proxy at the Annual Meeting in order for a quorum to be present
at the Annual Meeting.
NO DISSENTERS' RIGHTS
Holders of shares of PICOM Common Stock will not have dissenters' rights
under the Michigan Insurance Code in connection with, or as a result of, the
matters to be acted upon at the Annual Meeting.
SOLICITATION OF PROXIES
PICOM will bear the cost of the solicitation of proxies from its
shareholders, and the cost of printing and mailing this Proxy
Statement/Prospectus.
Proxies will be solicited on behalf of PICOM by mail or personally, or by
telephone, telegraph or datagram, by directors, officers and regular employees
of PICOM and its subsidiaries (none of whom shall receive any additional
compensation for such services, but will be reimbursed for reasonable
out-of-pocket expenses incurred in connection with such solicitation).
Arrangements will be made with brokerage firms, nominees,
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fiduciaries and other custodians for the forwarding of solicitation materials
to the beneficial owners of shares held of record by such persons, and
PICOM will reimburse such persons for their reasonable out-of-pocket expenses
in connection therewith. In addition, Morrow & Co. will assist in the
solicitation of proxies by PICOM for a fee of $10,000, plus reasonable
out-of-pocket expenses.
SHAREHOLDERS SHOULD NOT SEND STOCK CERTIFICATES WITH THEIR PROXY CARDS
THE REORGANIZATION
METHOD OF REORGANIZATION
Pursuant to the Reorganization Agreement and the Plan of Merger, INSCO
will merge with and into PICOM, with PICOM being the surviving corporation in
the Merger and INSCO ceasing to exist, with the result that PICOM will become a
wholly-owned subsidiary of Holding Company and each issued and outstanding
share of PICOM Common Stock will be converted into one share of Holding Company
Common Stock. The name of the surviving insurance corporation following
consummation of the Merger will be "PICOM Insurance Company." Moreover,
following consummation of the Merger all direct and indirect insurance
subsidiaries of Holding Company (e.g., PICOM and PICOM-Illinois) will continue
to operate under their existing insurance licenses and none of such
subsidiaries will be required to reapply for any of such licenses.
REORGANIZATION CONSIDERATION; EXCHANGE RATIO
Upon consummation of the Merger, but subject to the provisions of the
Reorganization Agreement and the Plan of Merger regarding fractional shares and
other matters, each outstanding share of PICOM Common Stock will be
automatically converted into one (1) share of Holding Company Common Stock.
The determination of the exchange ratio was not the result of arm's length
negotiations as PICOM and Holding Company have a common director. However, the
PICOM Board believes that the Reorganization Agreement, the Plan of Merger and
the Merger are fair to the shareholders of PICOM because their proportionate
interest in the consolidated financial condition and the consolidated earnings
of PICOM will remain the same, and the transaction will not result in a change
of control of PICOM. In its Order of Acquisition Exemption and Preliminary
Approval of Merger issued and entered on May 6, 1996 granting preliminary
approval of the Merger in accordance with the Reorganization Agreement and the
Plan of Merger, the Michigan Insurance Commissioner found and concluded that
the terms of the Reorganization Agreement and the Plan of Merger were
reasonable and just. Shareholders should note that the opinion of an
independent third party as to the fairness of the Reorganization Agreement, the
Plan of Merger and the Merger has not been sought.
On May 10, 1996, the last trading day before the execution of the
Reorganization Agreement, the high and low bid prices of PICOM Common Stock on
the Nasdaq National Market were $22.00 and $21.75, respectively, per share. On
June 28, 1996, the last practicable trading day preceding the mailing of this
Proxy Statement/Prospectus, the high and low bid prices of PICOM Common Stock
on the Nasdaq National Market were $ 24.25 and $ 24.25, respectively,
per share.
REASONS FOR REORGANIZATION
For some time now, the PICOM Board has considered reorganizing PICOM and
its subsidiaries into an insurance holding company system headed by a business
corporation rather than an insurance corporation. The PICOM Board believes
that such a holding company system is the corporate structure used by most
publicly-traded insurance groups and that reorganizing PICOM into such a system
will provide PICOM with more financial and
<PAGE> 35
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operating flexibility than is currently available to PICOM. The PICOM Board
further believes that this flexibility will enhance PICOM's ability to
raise capital and enable PICOM and its subsidiaries to compete more effectively
in the ever-changing insurance industry. The PICOM Board also believes that
reorganizing PICOM into such a holding company system will facilitate potential
acquisitions of, or combinations with, other insurance companies and related
service providers (e.g., claims and risk management organizations). PICOM
evaluates acquisition opportunities, to the extent suitable opportunities may be
identified. However, PICOM is not currently engaged in any acquisition
negotiations and, except for the transactions and agreements that are the
subject of this Proxy Statement/Prospectus or are described in the next
sentence, PICOM is not presently a party to any agreements concerning
acquisitions or combinations. In a transaction valued at approximately $1.2
million, PICOM acquired all of the issued and outstanding shares of American
Insurance Management Corporation, a privately held Indiana corporation that
serves as the attorney-in-fact for American Medical Insurance Exchange, an
Indiana interinsurance reciprocal exchange. There can be no assurance that any
further acquisitions will be made or, if made, will be successful.
PICOM is presently regulated primarily as an insurance company. As a
regulated entity, PICOM's activities are subject to, among other things, the
regulatory oversight of the Michigan Insurance Commissioner and the
restrictions of the Michigan Insurance Code. With certain exceptions relating
to dividends and change in control, these restrictions will not apply to
Holding Company and it will enjoy the autonomy of a general business
corporation.
In addition, Holding Company, because it is a business corporation, will
not be subject to the risk-based capital ("RBC") rules of the National
Association of Insurance Commissioners. Consequently, Holding Company will
have more flexibility than PICOM in making investments in insurance
subsidiaries and subsidiaries engaged in other businesses. The RBC rules of
the NAIC provide that an insurance company that is the parent of another
insurance company, such as PICOM, must include in its own RBC the lesser of
either the RBC of the subsidiary or its investment in the subsidiary.
PICOM's present form also makes it impractical for PICOM to issue debt
securities to increase its insurance company statutory surplus and insurance
writing capacity. Under insurance accounting rules, PICOM would be required to
recognize the entire portion of the debt along with the assets derived by
selling the debt security, thus there would be no increase in statutory
surplus. However, Holding Company will be able to issue debt securities,
contribute the assets derived therefrom to PICOM (or any other insurance
subsidiary) and thereby directly increase the statutory surplus and the
insurance writing capacity of the insurance subsidiary.
RECOMMENDATION OF THE PICOM BOARD
For the reasons described in this Proxy Statement/Prospectus, the members
of the PICOM Board present at the meeting held on February 14, 1996 unanimously
approved the Reorganization Agreement, the Plan of Merger and the Merger. The
PICOM Board recommends that PICOM shareholders vote FOR the PICOM
Reorganization Proposal (which shall constitute, among other things, approval
of the Reorganization Agreement, the Plan of Merger and the Merger). The PICOM
Board also recommends that PICOM shareholders vote FOR the election to the
PICOM Board of each of the persons nominated for election by the PICOM Board.
CLOSING; EFFECTIVE TIME
Closing and Closing Date. Subject to the terms and conditions of the
Reorganization Agreement, the closing of the Merger will take place at 10:00
a.m. on the third business day following the satisfaction or waiver (subject to
applicable law) of the latest to occur of certain conditions set forth in the
Reorganization Agreement unless another time, date or place is provided for in
the Michigan Insurance Code or in any Orders issued by the
<PAGE> 36
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Michigan Insurance Commissioner pursuant to the Michigan Insurance Code, or is
agreed to in writing by Holding Company, INSCO and PICOM.
Effective Time. Subject to the provisions of the MBCA, the Michigan
Insurance Code, any Orders, the Reorganization Agreement and the Plan of
Merger, the Merger will become effective not later than 11:59 p.m. Eastern Time
on the third business day following the Closing Date.
Under certain circumstances, the Reorganization Agreement may be
terminated by Holding Company, INSCO and PICOM at any time prior to the
closing, whether before or after approval of the PICOM Reorganization Proposal
by the shareholders of PICOM. Among other reasons, the Reorganization
Agreement may be terminated by either party if the Reorganization has not been
consummated on or before December 31, 1996. See "THE REORGANIZATION AGREEMENT
- -- Termination."
CONDITIONS TO CONSUMMATION
The obligations of Holding Company, INSCO and PICOM to consummate the Merger
are subject to various conditions, including obtaining requisite shareholder
approvals, the absence of any inaccuracy in the representations and warranties
of the companies that would have a material adverse effect on their respective
results of operations or financial condition, and receipt of an opinion of
Miller, Canfield, Paddock and Stone, P.L.C. in respect of certain federal
income tax consequences of the Merger. See "THE REORGANIZATION AGREEMENT --
Conditions to Consummation."
REGULATORY APPROVALS REQUIRED
On February 13, 1996, Holding Company and PICOM filed with the Michigan
Insurance Commissioner (i) an application to incorporate and license INSCO as a
Michigan property and casualty insurance company for the purpose of effecting
the Merger, and (ii) a petition pursuant to Section 7604 of the Michigan
Insurance Code requesting preliminary approval of the Reorganization Agreement,
the Plan of Merger and the Merger.
On April 12, 1996 the Michigan Insurance Commissioner issued a Preliminary
Certificate of Authority for INSCO that established INSCO as a Michigan stock
insurance corporation and permitted INSCO to issue shares of its capital stock
to Holding Company. Among other things, the Preliminary Certificate of
Authority included a stipulation that INSCO was incorporated and organized for
the sole purpose of merging with and into PICOM and that INSCO would not engage
in any insurance activities or issue any insurance policies or assume any
insurance risk.
On April 23, 1996, the Michigan Insurance Commissioner conducted a
qualifying examination of INSCO and on April 26, 1996 issued a report on such
examination. On May 6, 1996, the Michigan Insurance Commissioner issued a
Final Certificate of Authority for INSCO and thereby authorized INSCO's
admission in Michigan as a domestic insurer.
On May 6, 1996, the Michigan Insurance Commissioner issued and entered an
Order of Acquisition Exemption and Preliminary Approval of Merger that, among
other things, (i) found and concluded that the terms of the Reorganization
Agreement and the Plan of Merger were reasonable and just, and (ii) granted
preliminary approval of the Merger. Under the Michigan Insurance Code, the
Michigan Insurance Commissioner cannot grant final approval of the Merger until
after the PICOM Reorganization Proposal has been approved by a majority of the
outstanding shares of PICOM Common Stock. If the Merger is so approved by
PICOM's
<PAGE> 37
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shareholders, then PICOM and Holding Company will promptly petition the
Michigan Insurance Commissioner for final approval of the Merger.
In addition, the Merger has been submitted to the Director of Insurance of
the State of Illinois (the "Illinois Insurance Director") for approval prior to
consummation. Under the Illinois Insurance Code, the Illinois Insurance
Director has authority to review any change in the ultimate controlling party
of an insurer domiciled in Illinois. Since the Merger will result in Holding
Company becoming the ultimate controlling party of PICOM-Illinois, the prior
approval of the Illinois Insurance Director is required. There can be no
assurances regarding when or whether the Illinois Insurance Director will
approve the Merger.
While Holding Company and PICOM believe that the transactions
contemplated by the Reorganization Agreement and the Plan of Merger (including,
without limitation, the Merger) should receive all required regulatory
approvals, there can be no assurances that the Michigan Insurance
Commissioner or any other regulatory authority with jurisdiction will grant
final approval of such transactions or, if finally approved, as to the date of
such final approvals. There can also be no assurances that any such approvals
will not contain a condition or requirement which causes such approvals to fail
to satisfy the conditions to the consummation of the Merger.
In the event requisite and appropriate shareholder and regulatory approvals
are not obtained, then the Merger will not be consummated and the Reorganization
Agreement and the Plan of Merger will be terminated. In addition, the shares of
Holding Company Common Stock covered by the Registration Statement will be
deregistered. See "THE REORGANIZATION -- Conditions to Consummation" and "THE
REORGANIZATION AGREEMENT -- Termination."
CONVERSION OF SHARES; PROCEDURES FOR EXCHANGE OF CERTIFICATES; FRACTIONAL
SHARES
The conversion of PICOM Common Stock into Holding Company Common Stock
will occur automatically at the Effective Time.
As soon as practicable after the Closing, ChaseMellon Shareholder
Services (or another bank or trust company chosen by Holding Company), in its
capacity as Exchange Agent (the "Exchange Agent"), will send to each holder of
PICOM Common Stock a form of letter of transmittal (which will specify that
delivery will be effected, and risk of loss and title to certificates for
shares of PICOM Common Stock will pass, only upon proper delivery of such
certificates to the Exchange Agent) and instructions for use in effecting the
exchange of certificates of PICOM Common Stock for shares of Holding Company
Common Stock and cash in lieu of fractional shares.
Until the certificates representing PICOM Common Stock are surrendered for
exchange after the consummation of the Merger, holders of such unsurrendered
certificates will not be paid dividends or other distributions with a record
date that is six months or more after the Closing with respect to the shares of
Holding Company Common Stock represented thereby. When such certificates are
surrendered, any such unpaid dividends or other distributions will be paid
(without interest) with respect to the number of whole shares of Holding
Company Common Stock represented by such certificates. For all other purposes
(including the right to vote at meetings of Holding Company's shareholders),
however, each unsurrendered certificate which represents shares of PICOM Common
Stock outstanding immediately prior to the Closing will be deemed to evidence
ownership of the number of whole shares of Holding Company Common Stock into
which such shares have been converted by virtue of the Merger.
SHAREHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES TO THE EXCHANGE AGENT,
HOLDING COMPANY, INSCO, PICOM OR ANY OTHER PERSON UNTIL THEY HAVE RECEIVED
TRANSMITTAL FORMS. SHAREHOLDERS SHOULD NOT RETURN STOCK CERTIFICATES WITH THE
ENCLOSED PROXY.
<PAGE> 38
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All shares of Holding Company Common Stock issued upon conversion of
shares of PICOM Common Stock shall be deemed to have been issued in
full satisfaction of all rights pertaining to such shares of PICOM Common
Stock, subject, however, to PICOM's obligation to pay any dividends or make any
other distributions with a record date prior to the Effective Time which may
have been declared or made by PICOM on such shares of PICOM Common Stock on or
prior to the Effective Time and which remain unpaid at the effective time of
the Merger.
No fractional shares of Holding Company Common Stock will be issued to any
PICOM shareholder upon consummation of the Merger. In lieu of the issuance of
any fractional share of PICOM Common Stock, cash payments will be made in
respect of any fractional share of PICOM Common Stock that would otherwise be
issuable in an amount equal to such fractional proportion of the "average
price" of a share of PICOM Common Stock. For such purposes, the "average
price" of a share of PICOM Common Stock will be the average of the high and low
bid prices for such shares as reported on the Nasdaq National Market over the
10 business days immediately preceding the Effective Time. No interest on the
cash payments to be made in lieu of the issuance of fractional shares will
accrue pending surrender to the Exchange Agent of certificates representing
PICOM Common Stock.
CONDUCT OF BUSINESS
Pursuant to the Reorganization Agreement, each of the PICOM Companies and
the Holding Company Entities has made various customary covenants regarding
their respective operations and activities during the period from May 13, 1996
until the earlier of the closing date or the termination of the Reorganization
Agreement. Generally speaking, and except as otherwise required or permitted
by the Reorganization Agreement or as consented to by either PICOM (in the case
of the Holding Company Entities) or Holding Company or INSCO (in the case of
the PICOM Companies), each of the PICOM Companies and the Holding Company
Entities will agree to carry on its respective business only in the usual,
regular and ordinary course in substantially the same manner as previously
conducted. In addition, because INSCO was incorporated as a stock insurance
company under the Michigan Insurance Code solely for the purpose of merging
with and into PICOM and establishing PICOM as a wholly-owned subsidiary of
Holding Company, the Reorganization Agreement limits the types of business
activities that INSCO may undertake and provides that INSCO shall not write or
underwrite any lines of insurance. See "THE REORGANIZATION AGREEMENT --
Conduct of Business; Certain Covenants."
HOLDING COMPANY 1996 LONG TERM STOCK INCENTIVE PLAN
In anticipation of the Merger, the Holding Company Board has adopted, and
Holding Company's sole shareholder has approved and adopted, a plan, designated
the Professionals Insurance Company Management Group 1996 Long Term Stock
Incentive Plan (the "Holding Company 1996 Incentive Plan"), under which options
to purchase shares of Holding Company Common Stock ("Options"); shares of such
stock ("Restricted Stock") or units denominated in such shares ("Restricted
Stock Units") that are nontransferable and subject to forfeiture for a
designated restricted period; awards of the right to receive the excess
of the fair market value at time of exercise of a share Holding Company Common
Stock over a designated price determined at time of grant ("Stock Appreciation
Rights" or "SARs"); awards denominated in and/or which may be settled in such
shares subject to satisfaction of designated performance criteria during a
designated performance period ("Performance Awards"); rights to receive the
equivalent of dividends or other distributions upon Holding Company Common
Stock ("Dividend Equivalents"); and other types of awards denominated or
payable in shares of Holding Company Common Stock ("Other Stock-Based Awards")
may be granted to eligible participants.
The general purposes of the Holding Company 1996 Incentive Plan are to
encourage selected employees of or consultants to Holding Company or an
Affiliate (as defined below) to acquire a proprietary interest in Holding
Company, in order to create an increased incentive for them to contribute to
Holding Company's success,
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and to enhance the ability of Holding Company and its Affiliates to
attract and retain exceptionally qualified employees and consultants, thus
enhancing the value of Holding Company for the benefit of its shareholders.
THE DISCUSSION WHICH FOLLOWS SUMMARIZES PRINCIPAL FEATURES OF THE HOLDING
COMPANY 1996 INCENTIVE PLAN (WHICH SUMMARY IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE DOCUMENT EMBODYING THE HOLDING COMPANY 1996 INCENTIVE PLAN, A
COPY OF WHICH HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AS AN
EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS PROXY STATEMENT/PROSPECTUS
IS A PART) AND PROVIDES CERTAIN ADDITIONAL INFORMATION RELATING TO THE HOLDING
COMPANY 1996 INCENTIVE PLAN.
Administration. The Holding Company 1996 Incentive Plan is to be
administered by the Compensation Committee of the Holding Company Board, or
such other board committee of at least two directors as the Holding Company
Board hereafter may designate (the "Committee"). All members of the Committee
must be "disinterested persons" for purposes of Rule 16b-3 promulgated under
the Exchange Act, as in effect and applicable with respect to Holding Company
at a given time ("Rule 16b-3"). Subject to the terms and limitations set forth
in the Holding Company 1996 Incentive Plan, the Committee has broad and sole
discretion concerning administration of the Holding Company 1996 Incentive Plan
and concerning awards thereunder, including, without limitation, the selection
of eligible employees and consultants to receive awards, the types of awards
granted, the terms and conditions of granted awards and the times at which
grants will be made. The Holding Company 1996 Incentive Plan also permits the
Committee to delegate to one or more other directors of Holding Company (who
need not be "disinterested persons" for purposes of Rule 16b-3) the Committee's
authority to grant awards to eligible individuals, but the Committee may not
delegate such authority with respect to any individuals who are directors or
officers of Holding Company for purposes of Section 16 of the Exchange Act
("Section 16 Reporting Persons").
Available Shares. Subject to adjustment as required or permitted by the
Holding Company 1996 Incentive Plan document, the maximum number
of shares available for awards under the Holding Company 1996 Incentive Plan is
300,000 shares. Generally, to the extent an award under the Holding Company
1996 Incentive Plan expires (other than by exercise of that or a tandem award),
or is canceled or forfeited, the shares theretofore subject to such expired,
canceled, or forfeited award would again become available for awards under the
Holding Company 1996 Incentive Plan, but such shares would only be available
for awards to Section 16 Reporting Persons to the extent permissible under Rule
16b-3.
Eligibility for Awards. In general, any employee of or consultant to
Holding Company or an Affiliate, including any officer or employee-director of
Holding Company, but not including any non-employee director (unless a
consultant), not including any director who could not qualify as a
"disinterested person" under the Rule 16b-3 and not including any consultant
who is not rendering consulting services under a written consulting agreement
or the nature of whose consulting arrangements would not permit shares that may
be acquired by him under the Holding Company 1996 Incentive Plan to be
registered on a registration statement on Form S-8, may be selected by the
Committee to receive any award under the Holding Company 1996 Incentive Plan.
However, Other Stock-Based Awards may not be granted to Section 16 Reporting
Persons. For purposes of the Holding Company 1996 Incentive Plan, an
"Affiliate" is an entity in which, at a given time, Holding Company has a
significant direct or indirect equity interest, either under generally accepted
accounting principles, or as determined by the Committee.
Types of Awards. The Holding Company 1996 Incentive Plan authorizes the
Committee from time to time after the Merger to grant, in its discretion, other
Options (which may be incentive stock options ("ISOs") or non-qualified stock
options ("NQSOs")), as the Committee may determine, and which, at the
Committee's discretion, may include a so-called "reload" feature (under which,
at time of exercise of the Option, if the holder continues to be eligible to be
granted awards under the Holding Company 1996 Incentive Plan and if the
exercise price is paid at least in part in shares of Holding Company Common
Stock owned by the holder for at least six months, the holder automatically
would receive another Option), Restricted Stock, Restricted Stock Units, Stock
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Appreciation Rights, Performance Awards, Dividend Equivalents and/or Other
Stock-Based Awards to eligible individuals. If so determined by the Committee,
any such award may be granted to an eligible individual in tandem with any
other such award, whether at the time of grant of such other award or
subsequently. In addition, except as limited by the terms of a given award,
the Committee will have the discretion to settle any award (other than an award
of Restricted Stock) in cash, in shares of Holding Company Common Stock, by
grant of another award, or in such other form of consideration as it deems
appropriate. The Committee also will have discretion to settle in
installments, or defer settlement of, any award (other than Restricted Stock)
as and to the extent it deems appropriate, except as limited by the terms of
the award, and, regardless of the terms of an award will be entitled at any
time to cancel the award upon payment to the holder of its value (as determined
by the Committee) in cash or another award.
The Holding Company 1996 Incentive Plan requires that any Options granted
by the Committee thereunder as ISOs meet all then-applicable requirements under
the Code and related regulations, such that the Options will qualify as ISOs at
time of grant. These requirements currently include that an ISO have a term no
longer than ten years (or five years in the case of an ISO granted to an
over-10% owner of Holding Company voting stock) and a per share exercise price
at least equal to a share's fair market value on date of grant (or 110% of such
value if granted to an over-10% owner) and not be granted after August 30,
2004. However, if an Option granted under the Holding Company 1996 Incentive
Plan and intended to be an ISO (or any portion of such an Option) nevertheless
fails to qualify as an ISO, whether at time of grant or subsequently, this will
not invalidate the Option (or portion), and it instead will be deemed to have
been granted as a NQSO.
Subject to the Holding Company 1996 Incentive Plan's limitations on
available shares and other limitations or requirements discussed herein, the
terms and conditions of any Option or other award granted by the Committee
under the Holding Company 1996 Incentive Plan, including, without limitation,
the expiration date, any vesting schedule, and the per share exercise price for
any Option, the method and form of payment for any exercised Option, the grant
price for any SAR, the restricted period for any award of Restricted Stock or
Restricted Stock Units, the performance criteria and performance period for any
Performance Award and the effect of termination of employment and/or consulting
relationships upon any outstanding award, would be entirely at the discretion
of the Committee.
There are no present plans or intentions to grant any award under the
Holding Company 1996 Incentive Plan to any person, including any person who
will be a director or executive officer of Holding Company after the Merger or
any other current PICOM director or executive officer, and, due to the nature
of the plan, the benefits or awards that any eligible person ultimately may
receive under the Holding Company Holding Company 1996 Incentive Plan cannot
presently be predicted.
Effect of Change in Control. Under the terms of the Holding Company 1996
Incentive Plan, upon the occurrence after the Merger of a Change in Control of
Holding Company (in general, defined therein to include certain substantial
changes in the composition of the Holding Company Board, certain accumulations
of beneficial ownership of over 30% of Holding Company's voting stock and,
unless the Holding Company Board has otherwise determined, the approval by
shareholders of certain significant corporate events such as liquidation, a
sale of substantially all assets or certain mergers involving Holding Company),
the exercisability of any then-outstanding Option or SAR would be accelerated
and any vesting conditions then in effect with respect to any other award under
the Holding Company 1996 Incentive Plan would be deemed fully satisfied. In
addition, the Committee (as constituted before a change in control) thereupon
would have discretion under the Holding Company 1996 Incentive Plan to redeem
any then-outstanding award for cash.
Certain Other Aspects. Upon the occurrence of any of certain events
specified in Section 4(b) of the Holding Company 1996 Incentive Plan affecting
the capitalization of Holding Company or otherwise affecting the Holding
Company Common Stock, the Committee will have the authority to make such
changes as it deems
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appropriate in the number and type of securities (or other
property) that thereafter may be the subject of awards under the Holding
Company 1996 Incentive Plan and in the terms and conditions of any
then-outstanding awards. The Committee also will have authority under the
Holding Company 1996 Incentive Plan to make adjustments in the terms and
conditions of outstanding awards in recognition of unusual or nonrecurring
events (including a change in control) affecting Holding Company, any
Affiliate, or the financial statements of any of them, whenever the Committee
determines that such adjustments are appropriate in order to prevent dilution
or enlargement of the benefits intended by such awards.
The Holding Company 1996 Incentive Plan may be amended, suspended or
terminated at any time by the Holding Company Board, with or without
shareholder approval, and the Holding Company Board or the Committee may amend
any outstanding award under the Holding Company 1996 Incentive Plan, except
that (a) no amendment of the Holding Company 1996 Incentive Plan shall be
effective without shareholder approval insofar as such approval is required in
order for the Holding Company 1996 Incentive Plan to continue to satisfy the
conditions of Rule 16b-3 or any applicable requirements of a national
securities exchange or the Nasdaq National Market or to permit the further
grant of ISOs thereunder, and (b) no amendment of the Holding Company 1996
Incentive Plan or an award thereunder may impair the rights of the holder of
such an award without his consent.
It is contemplated that, as soon as possible after the Effective Time of
the Merger, Holding Company will register the shares that may be acquired by
recipients of awards under the Holding Company 1996 Incentive Plan pursuant to
a registration statement on Form S-8. Until such registration becomes
effective, no awards may be granted under the Holding Company 1996 Incentive
Plan.
Certain Federal Tax Considerations. This subsection briefly discusses, in
general terms, certain differences under current federal income tax law between
ISOs and NQSOs that will or may be granted under the Holding Company 1996
Incentive Plan and provides certain information relevant to the Holding Company
1996 Incentive Plan concerning the provisions of a new Code section limiting
the deductibility of compensation paid to certain executives under certain
circumstances.
Under federal income tax law as currently in effect, the grant of an ISO
under the Holding Company 1996 Incentive Plan would not be a taxable event for
the optionee, and the optionee also would not recognize any income upon
exercise of the ISO (although the excess of the acquired shares' fair market
value at exercise over the exercise price paid would be an item of tax
preference for purposes of the federal alternative minimum tax). If the shares
acquired by exercise of the ISO are then held for a period of at least two
years from the date of grant of the ISO and one year from the exercise date (or
if exercise of the ISO occurred after the death of the grantee), any gain (or
loss) upon subsequent disposition of the acquired shares generally would be
treated for tax purposes as long-term gain (or loss), based on the positive (or
negative) difference between the consideration received in the disposition and
the basis in the shares (which usually would be the exercise price paid to
acquire them).
However, if the shares acquired by exercise of the ISO are disposed of by
the grantee before the end of the two-year and one-year holding periods
described above, the grantee would recognize ordinary income at the time of
such disposition equal to the excess, if any, of the value of what was received
by the grantee in such disposition (or, if less, the fair market value of the
shares at the time the ISO was exercised) over the aggregate exercise price for
the shares disposed of. Any further gain (or any loss) on such a disposition
generally would be treated as a capital gain (or loss), long-term or short-term
depending on the length of the period from exercise to disposition.
Under current federal income tax law, the tax treatment of a NQSO granted
under the Holding Company 1996 Incentive Plan would differ from the treatment
of an ISO in several respects. Generally, the grant of the NQSO would not be a
taxable event for the grantee, but the grantee would realize ordinary income at
the time of exercise, in an amount equal to the aggregate fair market value at
such time of the shares so acquired, less the
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aggregate exercise price for those shares. However, under current tax laws, if
the per share exercise price of a NQSO is at a substantial discount (e.g.,
over 50%) from the fair market value of a share of Holding Company Common Stock
at date of the grant of the NQSO, the deferral of ordinary income until date of
exercise that normally occurs with respect to a NQSO may not occur, and it is
possible that the grantee may be deemed to realize such income at time of grant
(or, if the NQSO is not immediately exercisable in full, as it becomes
exercisable) measured by the excess of the aggregate fair market value of the
covered shares at the grant date (or first exercisability date) over the
aggregate exercise price for such shares. In such a case, subsequent exercise
of the NQSO would not be a taxable event for federal income tax purposes. Any
gain or loss on subsequent disposition of the shares acquired by exercise of a
NQSO generally would be treated as capital gain or loss (long-term or
short-term depending on the length of time of the applicable holding period),
based on the difference between the consideration received in the disposition
and the basis in the disposed shares (which usually would equal the aggregate
exercise price paid). If a grantee realizes ordinary income in respect of a
NQSO prior to its exercise and the NQSO subsequently expires unexercised, the
grantee generally would realize a capital loss.
Generally, under current federal income tax law, subject to the Code's
normal limitations on the deduction of compensation and except as discussed
below, whenever the grantee of a NQSO realizes ordinary income with respect to
the NQSO, and whenever (if ever) the grantee of an ISO realizes ordinary income
with respect to the ISO, Holding Company would become entitled to a federal
income tax deduction in a corresponding amount.
In August of 1993, a new Section 162(m) was added to the Code, which, in
general, prohibits deductibility of certain compensation in excess of $1
million per year paid on or after January 1, 1994 by a publicly-held
corporation to any individual named in the corporation's Summary Compensation
Table for the year. Proposed regulations concerning Section 162(m) were issued
by the Internal Revenue Service (the "Service") last December, but the Service
already has announced plans to change certain aspects of these regulations when
they are finalized, certain other aspects of the proposed regulations have been
the subject of controversy, and no finalized regulations have been issued.
Some types of compensation are excluded from Section 162(m)'s
million-dollar deductibility limit, including compensation payable under
certain "grandfathered" agreements entered into before enactment of Section
162(m) and certain "performance-based" compensation. Compensation associated
with stock options or stock appreciation rights, or their exercise, can qualify
for a performance-based exclusion, as can other forms of compensation based on
objective performance criteria, provided certain requirements are satisfied.
However, while the outcome of this matter necessarily is uncertain in the
absence of final regulations, it appears unlikely, based on the proposed
regulations, that any Options, SARs, Performance Awards or other awards granted
under the Holding Company 1996 Incentive Plan would be considered eligible for
exclusion from the $1 million deductibility limit of Section 162(m), where such
limit is applicable.
The provisions of the Holding Company 1996 Incentive Plan authorizing the
Committee to defer settlement, or provide for settlement in installments, of
certain awards should enable the Committee to minimize effects (if any) that
otherwise might be experienced by Holding Company as a result of such awards
due to the provisions of Section 162(m). However, those provisions of the
Holding Company 1996 Incentive Plan do not apply to an award of Restricted
Stock and in general would be overridden in the event of a change in control by
the provisions of the Holding Company 1996 Incentive Plan applicable in such
event. In addition, there may well be times and situations in which the
Committee determines that, in light of other factors, the interests of Holding
Company and its shareholders would be better served by granting awards which,
by their terms, preclude the Committee from deferring settlement of such awards
or taking similar actions, or by refraining from exercising the discretion to
take such actions available to it under the Holding Company 1996 Incentive
Plan. Consequently, it is possible that at some time or times in the future
Section 162(m) may preclude Holding Company from deducting compensation that
otherwise would be deductible by it in respect of awards under the Holding
Company 1996 Incentive Plan.
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HOLDING COMPANY 1996 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
In anticipation of the Merger, the Holding Company Board has adopted, and
Holding Company's sole shareholder has approved and adopted, a plan, designated
the Professionals Insurance Company Management Group 1996 Non-Employee
Directors Stock Option Plan (the "Holding Company 1996 Non-Employee
Directors Plan"), under which options to purchase shares of Holding Company
Common Stock may be granted to eligible participants.
The general purposes of the Holding Company 1996 Non-Employee Directors
Plan are (i) to encourage non-employee directors of Holding Company to own
Holding Company Common Stock and (ii) to provide a means for tying a portion of
the compensation paid to non-employee directors for their service on the
Holding Company Board to the value of the Holding Company Common Stock, thus
more closely aligning the interests of such Directors with those of the
shareholders of Holding Company. The Holding Company 1996 Non-Employee
Directors Plan is intended to meet Rule16 b-3 criteria for a "formula plan."
Thus, although the Holding Company Board is designated as the administrator of
the Holding Company 1996 Non-Employee Directors Plan, neither the Holding
Company Board nor any other person or body would have discretion to select the
persons who will receive awards under the Holding Company 1996 Non-Employee
Directors Plan, the times at which awards will be granted, or the terms and
conditions of such awards. Instead, as more fully described below, all such
matters would be determined entirely by the terms of the Holding Company 1996
Non-Employee Directors Plan itself.
THE DISCUSSION WHICH FOLLOWS SUMMARIZES PRINCIPAL FEATURES OF THE HOLDING
COMPANY 1996 NON-EMPLOYEE DIRECTORS PLAN (WHICH SUMMARY IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE DOCUMENT EMBODYING THE HOLDING COMPANY 1996
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN, A COPY OF WHICH HAS BEEN FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION AS AN EXHIBIT TO THE REGISTRATION
STATEMENT OF WHICH THIS PROXY STATEMENT/PROSPECTUS IS A PART) AND PROVIDES
CERTAIN ADDITIONAL INFORMATION RELATING TO THE HOLDING COMPANY 1996
NON-EMPLOYEE DIRECTORS PLAN.
Eligibility and General Operation. Each person who is a non-employee
director of Holding Company automatically will be granted an option covering
500 shares of Holding Company Common Stock on the terms specified in the
Holding Company 1996 Non-Employee Directors Plan. So long as the Holding
Company 1996 Non-Employee Directors Plan remains in effect, and to the extent
shares remain available, at the adjournment of each organizational meeting of
the Holding Company Board following an annual meeting of shareholders of
Holding Company, each person who is then a non-employee director of Holding
Company automatically will be granted a plan option covering 500 shares of
Holding Company Common Stock (subject to adjustment as contemplated by the
Holding Company 1996 Non-Employee Directors Plan) or, if less, the maximum
number of shares then permissible for that Holding Company director under the
Holding Company 1996 Non-Employee Directors Plan.
No one other than a non-employee director of Holding Company (that is, a
person who at time of grant of a plan option is serving as a director of
Holding Company and is not also an employee of Holding Company or any
affiliated entity) will be eligible to receive any award under the Holding
Company 1996 Non-Employee Directors Plan, and the only awards non-employee
directors of Holding Company will receive under the Holding Company 1996
Non-Employee Directors Plan are the automatic grants of plan options described
above.
Plan Options. Subject to adjustment as contemplated by the Holding
Company 1996 Non-Employee Directors Plan, the per share exercise price of each
option granted under the Holding Company 1996 Non-Employee Directors Plan would
be the "fair market value" of a share of Holding Company Common Stock at the
date the option is granted.
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Ordinarily, each option granted under the Holding Company 1996
Non-Employee Directors Plan would become exercisable on the first anniversary
of the option's grant date. However, upon the occurrence of a change in
control (as defined in the Holding Company 1996 Non-Employee Directors Plan),
all outstanding plan options that were not then otherwise exercisable would be
deemed to have become fully exercisable immediately prior to such change in
control. Each outstanding option would terminate at the earlier of: (i) the
first anniversary of the date the grantee ceases to be a director of Holding
Company and (ii) its expiration date (that is, the seventh anniversary of the
option's grant date). Each plan option would be nontransferable, except by
will or the laws of descent and distribution, and would be exercisable only for
cash and, during the lifetime of the grantee, only by the grantee.
All plan options would be nonqualified stock options. As previously
discussed under "THE REORGANIZATION -- Holding Company 1996 Long Term Stock
Incentive Plan -- Certain Federal Tax Considerations," the current Federal
income tax consequences associated with NQSOs are generally more favorable to
Holding Company and less favorable to grantees than those associated with ISOs.
Holding Company does not believe that Section 162(m) of the Code will have any
adverse effect upon its ability to take any deductions otherwise proper for it
to take with respect to plan options.
Available Shares and Adjustments. Shares used for options granted under
the Holding Company 1996 Non-Employee Directors Plan may be either treasury
shares or new issuances. Subject to adjustment as contemplated by the Holding
Company 1996 Non-Employee Directors Plan, the aggregate maximum number of
shares that would be available for settlement of plan options is 50,000 and the
maximum number available for any given individual is 5,000. If a plan option
terminates or expires without having been exercised in full, the shares subject
to the option immediately before such termination or expiration would become
available for future awards under the Holding Company 1996 Non-Employee
Directors Plan.
The number and type of shares available for plan options, the numbers and
type of shares subject to outstanding plan options, and the per share exercise
prices thereof, are subject to appropriate adjustment pursuant to Section 7 of
the Holding Company 1996 Non-Employee Directors Plan should any of the events
described in that section occur. In addition, in the event of any merger,
consolidation, or combination of Holding Company with or into another
corporation (other than one in which Holding Company is the survivor and which
does not result in any reclassification or change of outstanding Holding
Company stock), the Holding Company Board would have authority to provide that
each holder of a plan option shall have the right thereafter and during the
term of the option to receive upon exercise the kind and amount of
consideration which would have been received in the merger, consolidation, or
combination had the option been exercised to the same extent immediately prior
to the merger, consolidation, or combination.
Duration; Amendments. The Holding Company 1996 Non-Employee Directors
Plan will continue until terminated by the Holding Company Board. The Holding
Company Board may at any time and from time to time amend, modify, suspend, or
terminate the plan, with or without shareholder approval, except that: (i) no
amendment or modification will be effective without shareholder approval if
such approval is then required by Rule 16b-3 or applicable rules of any
national securities exchange (including the Nasdaq National Market) on which
Holding Company Common Stock is then principally traded, (ii) none of the
foregoing actions by the Holding Company Board shall adversely effect any then
outstanding plan option without the holder's consent, and (iii) for as long as
necessary in order for the plan to satisfy Rule 16b-3 requirements for "formula
plans," the eligibility provisions of the plan and those plan provisions
concerning the number of shares to be covered by an option, the exercise prices
of options, or the times at which options shall be granted may not be amended
more than once every six months, other than to comport with changes in the
Code, the Employee Retirement Income Security Act of 1974, as amended, or the
rules thereunder.
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Future Awards. The extent to which any non-employee director of Holding
Company ultimately would receive options under the plan cannot be predicted in
advance, because this will depend on the length of time for which such a
director continues to serve on the Holding Company Board and also may depend on
the number of other non-employee directors serving on the Holding Company Board
at the times plan options are granted.
HOLDING COMPANY STOCK PURCHASE PLAN
In anticipation of the Merger, the Holding Company Board has adopted, and
Holding Company's sole shareholder has approved and adopted, a stock purchase
plan (the "Holding Company Stock Purchase Plan") designed to continue the
existing PICOM Stock Purchase Plan. Pursuant to the Holding Company Stock
Purchase Plan, employees and directors of Holding Company and its subsidiaries
will be permitted to purchase Holding Company Common Stock by means of payroll
deduction. Under the Holding Company Stock Purchase Plan, Holding Company may
elect to match participant purchases; and, following consummation of the
Merger, it is anticipated that Holding Company will initially match participant
purchases at the rate of $1.25 (of which $1.00 will be used to purchase Holding
Company Common Stock and $.25 will be applied to income taxes) for each $1.00
of participant purchases up to a maximum participant purchase of $6,000 per
year. (In the event that Holding Company is not the direct employer of a
participant, the match amount will be charged to the subsidiary that is the
employer of the participant.) The Holding Company Stock Purchase Plan will be
administered by an independent administrator and provides that all purchases of
Holding Company Common Stock will be made in open market transactions through a
licensed broker. Participants in the Holding Company Stock Purchase Plan will
exercise all rights of ownership with respect to shares of Holding Company
Common Stock purchased for their respective accounts.
INTERESTS OF CERTAIN PERSONS
Certain members of Holding Company's management and the Holding Company
Board, and PICOM's management and the PICOM Board, respectively, may be deemed
to have certain interests in the transactions contemplated by the
Reorganization Agreement and the Plan of Merger that are in addition to their
interests as shareholders of Holding Company or PICOM, as the case may be,
generally. The PICOM Board was aware of these interests and considered them,
among other matters, in approving the Reorganization Agreement and the Plan of
Merger and the transactions contemplated thereby.
Directorships. Upon consummation of the Merger, the Holding Company Board
will be comprised of ten directors: Victor T. Adamo, Esq., CPCU, Mr. Jerry D.
Campbell, John F. Dodge, Jr., Esq., H. Harvey Gass, M.D., Isaac J. Powell,
M.D., W. Peter McCabe, M.D., Mr. John F. McCaffrey, Ann F. Putallaz, Ph.D,
William H. Woodhams, M.D., and Donald S. Young, Esq. Upon consummation of the
Merger, the PICOM Board will consist of ten directors, all of whom will be the
current members of the PICOM Board. See "MANAGEMENT AND OPERATIONS AFTER THE
REORGANIZATION -- Directors" and "MANAGEMENT OF PICOM."
Management. Upon consummation of the Merger, the officers of Holding
Company will be W. Peter McCabe, M.D., Chairman, Victor T. Adamo, Esq., CPCU,
President and Chief Executive Officer, R. Kevin Clinton, FCAS, MAAA, Vice
President, Treasurer and Chief Financial Officer, and Annette E. Flood, Esq.,
R.N., Secretary. Upon consummation of the Merger, INSCO will be merged with
and into PICOM. It is anticipated that PICOM, as the surviving corporation,
will operate with PICOM's current officers. See "MANAGEMENT AND OPERATIONS
AFTER THE REORGANIZATION--Executive Officers" and "MANAGEMENT OF PICOM."
<PAGE> 46
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ANTICIPATED ACCOUNTING TREATMENT
For financial reporting purposes, it is anticipated that the Merger will
be accounted for as if a pooling of interests because the merging entities are
under common control. Accordingly, Holding Company will carry forward to its
accounts the assets and liabilities of PICOM at their respective amounts as
reported by PICOM.
RESALE OF HOLDING COMPANY COMMON STOCK; RESTRICTIONS ON TRANSFER
The shares of Holding Company Common Stock to be issued in the Merger will
be registered under the Securities Act and will be freely transferable under
the Securities Act, except for shares issued to any shareholder who may be
deemed to be an "affiliate" of Holding Company or PICOM for purposes of Rule
145 under the Securities Act. Affiliates may not sell their shares of Holding
Company Common Stock acquired in connection with the Merger except pursuant
to an effective registration statement under the Securities Act covering such
shares or in compliance with Rule 145 or another applicable exemption from the
registration requirements of the Securities Act. Persons who may be deemed to
be affiliates of Holding Company or PICOM generally include individuals or
entities that control, are controlled by or under common control with Holding
Company or PICOM, and may include certain officers and directors of Holding
Company or PICOM as well as principal shareholders of Holding Company or PICOM.
STOCK LISTING
The shares of Holding Company Common Stock to be issued in the Merger have
been admitted for quotation on the Nasdaq National Market subject to official
notice of issuance. PICOM Common Stock is traded through the Nasdaq National
Market under the symbol "PICM", and Holding Company has applied for the same
trading symbol. See "THE REORGANIZATION AGREEMENT -- Stock Listing."
In connection with the Merger and the admission for quotation on the
Nasdaq National Market the shares of Holding Company Common Stock to be issued
in the Merger, Holding Company will become subject to the informational and
periodic reporting requirements of the Exchange Act. In addition, PICOM will
delist the PICOM Common Stock on the Nasdaq National Market.
NO DISSENTERS' RIGHTS
Holders of shares of PICOM Common Stock will not have dissenters' rights
under the Michigan Insurance Code in connection with, or as a result of, the
matters to be acted upon at the Annual Meeting.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary describes the material federal income tax
consequences of the Merger. This summary is based on certain assumptions,
matters of reliance and on representations made by PICOM and Holding Company,
and is subject to certain exceptions and limitations. This summary also does
not discuss, and the opinion does not cover, the tax consequences to PICOM
shareholders who acquired their PICOM Common Stock as compensation. This
summary is limited to shareholders of PICOM who are citizens or residents of
the United States. In addition, the opinion assumes the PICOM shareholders
hold their PICOM Common Stock as capital assets and does not address state,
local or foreign tax consequences of the Merger. Finally, the summary does not
discuss all the tax consequences that might be relevant to any stockholders of
PICOM entitled to special treatment under the Internal Revenue Code of 1986, as
amended (including, without limitation, insurance companies, dealers in
securities, certain retirement plans, financial institutions, tax exempt
organizations or foreign persons). For purposes of this summary set forth
below, it is assumed that the Merger will be consummated in accordance with
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the Reorganization Agreement and the Plan of Merger and as described in this
Proxy Statement/Prospectus and will qualify as a merger under applicable law.
Consummation of the Merger is conditioned upon, among other things, the
receipt by Holding Company and PICOM of an opinion of Miller, Canfield, Paddock
and Stone, P.L.C., dated as of the Effective Time, to the effect that:
(i) Provided that (A) the Merger qualifies as a statutory merger under
applicable law, (B) after the Merger PICOM will hold substantially all of its
assets and substantially all of the assets of INSCO, and (C) in the
transaction PICOM shareholders will exchange solely for Holding Company
Common Stock an amount of PICOM Common Stock constituting "voting control" of
PICOM within the meaning of Section 368(c) of the Code, then the Merger will
constitute a reorganization within the meaning of Section 368(a) of the Code.
(ii) PICOM, Holding Company and INSCO will each be "a party to a
reorganization" within the meaning of Section 368(b) of the Code.
(iii) No gain or loss will be recognized by Holding Company upon its
receipt of PICOM Common Stock solely in exchange for Holding Company Common
Stock.
(iv) No gain or loss will be recognized by INSCO upon the transfer of
substantially all of its assets to PICOM in the Merger.
(v) No gain or loss will be recognized by PICOM upon the receipt of
assets of INSCO in the Merger.
(vi) No gain or loss will be recognized by PICOM shareholders on the
receipt of Holding Company Common Stock solely in exchange for their PICOM
Common Stock.
(vii) The basis of the Holding Company Common Stock received by the
PICOM shareholders solely in exchange for their PICOM Common Stock will be
the same as the basis of the PICOM Common Stock surrendered in exchange
therefor.
(viii) The holding period of the Holding Company Common Stock received
by PICOM shareholders will include the period during which the PICOM Common
Stock surrendered in exchange therefor was held, provided that such PICOM
Common Stock is held as a capital asset in the hands of PICOM shareholders on
the date of the exchange.
(ix) The payment of cash in lieu of fractional share interests of
Holding Company Common Stock will be treated as if the fractional shares were
distributed as part of the exchange and then redeemed by Holding Company.
Provided the fractional share interest surrendered by the shareholder
was held as a capital asset, any gain or loss recognized by the shareholder
on receipt of a payment of cash in exchange therefor should be taxable as a
capital gain or loss, long-term or short-term, depending on whether the
shareholder had held the share of PICOM Common Stock giving rise thereto for
more than one year prior to the Merger.
The opinion of Miller, Canfield, Paddock and Stone, P.L.C. will be based
upon the tax law in effect as of the date of issuance and will not be binding
upon any tax authority or any court. No assurance can be given that a position
contrary to that expressed in the opinion will not be asserted by a tax
authority and ultimately sustained by a court. The opinion will also be based
upon certain representations made by Holding Company and
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PICOM and upon certain assumptions. Receipt of the opinion of Miller,
Canfield, Paddock and Stone, P.L.C. as to such federal tax matters is a
condition to the Merger that will not be waived.
THE DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY.
THE DISCUSSION DOES NOT ADDRESS THE STATE, LOCAL OR FOREIGN TAX ASPECTS OF THE
MERGER. THE DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE CODE,
EXISTING AND PROPOSED TREASURY REGULATIONS THEREUNDER AND CURRENT
ADMINISTRATIVE RULINGS AND COURT DECISIONS. ALL OF THE FOREGOING ARE SUBJECT
TO CHANGE OR MODIFICATION (WHICH CAN BE RETROACTIVE IN EFFECT) BY SUBSEQUENT
LEGISLATIVE, REGULATORY, ADMINISTRATIVE, OR JUDICIAL DECISIONS. ANY SUCH
CHANGES COULD AFFECT THE CONTINUING VALIDITY OF THIS DISCUSSION. NO PARTY TO
THE MERGER HAS REQUESTED A RULING FROM THE INTERNAL REVENUE SERVICE WITH REGARD
TO THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. EACH PICOM SHAREHOLDER
SHOULD CONSULT SUCH SHAREHOLDER'S OWN TAX ADVISOR WITH RESPECT TO THE SPECIFIC
TAX CONSEQUENCES OF THE MERGER TO SUCH SHAREHOLDER, INCLUDING THE APPLICATION
AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS AND THE POSSIBLE EFFECTS OF
CHANGES IN FEDERAL LAWS OR OTHER TAX LAWS.
MANAGEMENT AND OPERATIONS AFTER THE REORGANIZATION
DIRECTORS
The Holding Company Board currently has one member - Victor T. Adamo, a
director and the President and Chief Executive Officer of PICOM. Upon
consummation of the Merger, the Holding Company Board will have ten members,
consisting of Victor T. Adamo, Esq., CPCU, Mr. Jerry D. Campbell, John F.
Dodge, Jr., Esq., H. Harvey Gass, M.D., W. Peter McCabe, M.D., Mr. John F.
McCaffrey, Isaac J. Powell, M.D., Ann F. Putallaz, Ph.D, William H. Woodhams,
M.D. and Donald S. Young, Esq. The Holding Company Board will be divided into
three classes, and directors for each class will be elected at the annual
meeting of stockholders held in the year in which the term of such class
expires and will serve thereafter for three years. Mr. Adamo is the only
director of Holding Company who is expected to be an employee of Holding
Company or any subsidiary of Holding Company.
Directors who are not also employees of Holding Company or a subsidiary
will receive an annual retainer of $10,000 and an additional $1,000 for each
meeting of the Holding Company Board or a committee attended plus reimbursement
for reasonable expenses in connection with attending such meetings. Such
directors will also receive, annually, an option to purchase up to 500 shares
of Holding Company Common Stock pursuant to the Holding Company 1996
Non-Employee Directors Plan and will be eligible to participate in Holding
Company's Stock Purchase Plan. See "THE REORGANIZATION -- Holding Company 1996
Non-Employee Directors Stock Option Plan" and "-- Holding Company Stock
Purchase Plan."
Information with respect to those persons who will serve as directors of
Holding Company, which information was provided by such persons, is set forth
below.
Class of
Name Age Directors Term Ending
- ---- --- --------- -----------
Victor T. Adamo, Esq., CPCU 48 Class I 1997
John F. McCaffrey 58 Class I 1997
Isaac J. Powell, M.D. 55 Class I 1997
John F. Dodge, Jr., Esq. 69 Class II 1998
<PAGE> 49
-41-
Class of
Name Age Directors Term Ending
- ---- --- --------- -----------
H. Harvey Gass, M.D. 80 Class II 1998
Ann F. Putallaz, Ph.D 51 Class II 1998
Jerry D. Campbell 56 Class III 1999
W. Peter McCabe, M.D. 56 Class III 1999
Donald S. Young, Esq. 59 Class III 1999
William H. Woodhams, M.D. 58 Class III 1999
For the biographies of Messrs. Adamo and Dodge, and Drs. Gass, McCabe,
Powell and Woodhams, see "ELECTION OF PICOM DIRECTORS -- Information About
Nominees and Incumbent Directors."
Jerry D. Campbell, age 56, has been a director, and the Chairman and Chief
Executive Officer, of Republic Bancorp Inc., a publicly held Michigan
corporation and bank holding company, since 1986. Mr. Campbell is also a
director of Newcor, Inc., a publicly held Delaware corporation, and Mercantile
Bank of Naples, Florida. Mr. Campbell has a B.S. degree in liberal arts from
Central Michigan University, a M.B.A. degree from Wayne State University and a
M.B.A. degree from The University of Michigan. The common stock of Republic
Bancorp Inc. is listed on the Nasdaq National Market under the symbol "RBNC",
and the common stock of Newcor, Inc. is listed on the Nasdaq National Market
under the symbol "NEWC".
John F. McCaffrey, age 58, is the founder and President of Belle Meade
Group, Inc., a privately held brokerage development corporation headquartered
in Chicago, Illinois. Prior to founding Belle Meade Group in July, 1993, and
from March, 1988 to September, 1992, he was Senior Vice President of Aon
Corporation and the Vice-Chairman of Rollins Burdick Hunter Co. From June,
1988 to September, 1991, he served as Director of Life of Virginia and Director
of Union Fidelity Life Insurance Company. Mr. McCaffrey is a former member of
the Board of Trustees of the American Institute for Property and Liability
Underwriters, Inc./Insurance Institute of America, Inc. he is also a former
Director of the National Association for Casualty & Surety Agents. He has
served as a Director of the Board and Member of the Executive Committee of
the National Association of Insurance Brokers. He attended the University of
Virginia and the University of Michigan.
Ann F. Putallaz, Ph.D, age 51, is the Vice President and Director of
Fiduciary Services of Munder Capital Management, a privately held general
partnership and the investment adviser to The Munder Funds, a Maryland
corporation and an open-end investment company registered under the Investment
Company Act of 1940, as amended. From June 1992 to December 1994, she was the
Director of Client and Marketing Services and Mutual Fund Product Management of
Woodbridge Capital Management, a predecessor-in-interest to Munder Capital
Management. From July 1990 to June 1992, she was the Director of Marketing,
Economics and Quantitative Analysis of Comerica Capital Management, a
predecessor-in-interest to Woodbridge Capital Management. Ms. Putallaz has a
B.A. degree in economics from Smith College, a M.A. degree and a Ph.D degree in
economics from The University of Michigan.
Donald S. Young, Esq., age 59, is a principal in Dykema Gossett PLLC, a
law firm headquartered in Detroit, Michigan. Mr. Young has a B.A. degree in
economics from The University of Michigan and an LL.B. degree from Harvard
University. Mr. Young serves as a director of Attorneys' Liability Assurance
Society (Bermuda) Ltd. and Attorneys' Liability Assurance Society Inc. which
provide professional liability insurance for large law firms. Dykema Gossett
PLLC has in the past provided legal services to PICOM and to certain of its
directors.
<PAGE> 50
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No director or executive officer of Holding Company or PICOM is related to
any other director or to any executive officer of Holding Company or PICOM or
of any of its subsidiaries by blood, marriage or adoption, and there are no
arrangements or understandings between a director or executive officer and any
other person pursuant to which such person was elected a director or executive
officer of Holding Company or PICOM or any of their respective subsidiaries.
BOARD COMMITTEES
Upon consummation of the Merger, the following committees of the Holding
Company Board will be established: (i) an Executive Committee (the "Holding
Company Executive Committee"), (ii) an Audit Committee (the "Holding Company
Audit Committee"), and (iii) a Compensation Committee (the "Holding Company
Compensation Committee"). Holding Company will not have a standing nominating
committee or committee performing similar functions. In the event one or more
of such persons is unable or unwilling to serve in such capacity, the Holding
Company Board will appoint a substitute. The members of these committees have
yet to be determined; however, the members of either the Holding Company Audit
Committee or the Holding Company Compensation Committee will not include any
person who is also an employee of Holding Company and PICOM.
The Holding Company Executive Committee will be authorized to exercise the
powers and authority of the Holding Company Board in the management and affairs
of Holding Company, if the Holding Company Board is not meeting, except as
limited by the MBCA and the articles of incorporation and bylaws of Holding
Company. The Holding Company Audit Committee will be authorized to confer with
the auditors and financial officers of Holding Company and its subsidiaries,
review reports submitted by the auditors, establish or review, and monitor
compliance with, codes of conduct of Holding Company and its subsidiaries,
inquire about procedures for compliance with laws and regulations relating to
the management of Holding Company and its subsidiaries, and report and make
recommendations to the Holding Company Board. The Holding Company Compensation
Committee will be responsible for recommending to the Holding Company Board
policies and levels of compensation with respect to compensation and benefits
of all executive officers of Holding Company and all key employees of Holding
Company and its subsidiaries. Except as otherwise described in this Proxy
Statement/Prospectus or the applicable plan document, the Holding Company
Compensation Committee will also serve as the administrative committee under
the Holding Company 1996 Incentive Plan and the Holding Company 1996
Non-Employee Directors Plan, and will be responsible for administering such
plans, including designating employees to be granted options, prescribing the
terms and conditions of options granted under the plans, interpreting the plans
and making all other determinations deemed necessary for the administration of
the plans.
EXECUTIVE OFFICERS
Upon consummation of the Merger, the executive officers of Holding Company
will consist of the persons set forth below. Executive officers are elected
annually and serve at the pleasure of the Holding Company Board.
Name Age Position
---- --- --------
W. Peter McCabe, M.D. 56 Chairman
Victor T. Adamo, Esq., CPCU 48 President and Chief Executive Officer
R. Kevin Clinton, FCAS, MAAA 41 Vice President, Treasurer and
Chief Financial Officer
Annette E. Flood, Esq., R.N. 37 Secretary
For the biographies of the executive officers of Holding Company listed
above see "MANAGEMENT OF PICOM -- Executive Officers."
<PAGE> 51
-43-
DIVIDEND POLICY
The holders of Holding Company Common Stock are entitled to receive such
dividends as may be declared from time to time by the Holding Company Board out
of funds legally available therefor. Holding Company is not expected to
declare dividends on Holding Company Common Stock for the foreseeable future
following the Merger, as it is expected that earnings of Holding Company and
its subsidiaries will be retained and used for operations. Any future
dividends will depend upon, among other things, future financial results and
requirements and contractual restrictions applicable to Holding Company or its
subsidiaries. The ability of Holding Company to fund its operations and to pay
dividends on Holding Company Common Stock following consummation of the Merger
will be dependent upon its receipt of dividends from PICOM. The ability of
PICOM to pay dividends is subject to regulatory restrictions. There can
be no assurance as to any future dividends by Holding Company or PICOM. See
"CERTAIN REGULATORY CONSIDERATIONS."
BENEFICIAL OWNERSHIP OF HOLDING COMPANY COMMON STOCK
The following table sets forth information provided by the persons
indicated with respect to the beneficial ownership (as defined under applicable
rules of the Commission) of shares of Holding Company Common Stock by (i) each
person known by Holding Company who is, or upon consummation of the Merger will
become, the owner of more than 5% of the outstanding shares of Holding Company
Common Stock, (ii) each person who is, or upon consummation of the Merger will
become, a director or an executive officer of Holding Company, and (iii) all
persons who are, or upon consummation of the Merger will become, directors or
executive officers of Holding Company as a group:
<TABLE>
<CAPTION>
PERCENTAGE OF BENEFICIAL
NUMBER OF SHARES OWNERSHIP
----------------------------- -----------------------------
PRINCIPAL SHAREHOLDERS(1) PRE-MERGER(2) POST-MERGER(3) PRE-MERGER(2) POST-MERGER(3)
- ------------------------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Heartland Advisors, Inc. -- 222,000 * 7.0%
<CAPTION>
NAMED DIRECTORS AND
EXECUTIVE OFFICERS(1)
- ---------------------
<S> <C> <C> <C> <C>
Victor T. Adamo 1 42,415 100% 1.3%
Jerry D. Campbell -- 3,000 * *
R. Kevin Clinton -- 28,867 * *
John F. Dodge, Jr. -- 14,671 * *
Annette E. Flood -- 3,553 * *
H. Harvey Gass, M.D. -- 11,112 * *
W. Peter McCabe, M.D. -- 30,318 * 1.0%
John F. McCaffrey -- -- * *
Isaac J. Powell, M.D. -- 2,705 * *
Ann F. Putallaz -- -- * *
William H. Woodhams, M.D. -- 4,136 * *
Donald S. Young -- -- * *
All directors and
executive officers of
Holding Company as a
group (12 persons)(1) 1 140,777 100% 4.4%
</TABLE>
- ---------------
<PAGE> 52
-44-
(1) Unless otherwise noted, Holding Company believes that all persons named
in the table have, or will have, (i) sole voting and investment power with
respect to all shares of Holding Company Common Stock owned by them,
except to the extent that authority is shared by spouses under applicable
law, and (ii) record and beneficial ownership of such shares. The address
of Heartland Advisors, Inc. is 790 North Milwaukee Street, Milwaukee,
Wisconsin 53202. The address of all other persons listed in the table is
4295 Okemos Road, Box 2510, Okemos, Michigan 48805-9510.
(2) Number of shares and percentages are based on ownership of Holding
Company Common Stock as of May 31, 1996. An asterisk indicates
ownership of less than 1%. Mr. Adamo was issued one share of Holding
Company Common Stock for $25.00 for the sole purpose of organizing Holding
Company and facilitating the Merger.
(3) Number of shares and percentages are based on ownership of PICOM Common
Stock as of May 31, 1996 and the exchange ratio of one share of Holding
Company Common Stock for each share of PICOM Common Stock held. At
April 30, 1996, there were 3,188,145 issued and outstanding shares of
PICOM Common Stock. An asterisk indicates ownership of less than 1%.
CERTAIN REGULATORY CONSIDERATIONS
The following is a summary of certain statutes and regulations affecting
Holding Company, PICOM, and their respective subsidiaries. This summary is
qualified in its entirety by such statutes and regulations. A change in
applicable laws or regulations may have a material effect on Holding Company,
PICOM, their respective subsidiaries and the respective businesses of Holding
Company, PICOM, and their respective subsidiaries.
GENERAL
Insurance holding companies and insurance companies are extensively
regulated. Such regulation has had significant effect on the operating results
of insurance holding companies and insurance companies in the past and is
expected to have significant effects in the future. Periodically legislation
is considered and adopted which has resulted in, or that could result in,
further regulation or deregulation of insurance holding companies and insurance
companies. No assurance can be given as to whether any additional legislation
will be adopted or as to the effect such legislation would have on the business
of Holding Company, PICOM, and their respective subsidiaries.
Insurance companies are subject to regulation by government agencies in
the states in which they are licensed. PICOM is licensed as a property and
casualty insurer in Michigan, Illinois, Indiana and Ohio. PICOM Insurance
Company of Illinois, an Illinois stock insurance corporation and a wholly-owned
subsidiary of PICOM, is licensed as a property and casualty insurer in
Illinois. INSCO, which is a wholly-owned subsidiary of Holding Company, is
licensed as a property and casualty insurer in Michigan. 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 expenses 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.
<PAGE> 53
-45-
PICOM and PICOM-Illinois principally write medical malpractice insurance
and additional requirements are placed upon them to report detailed information
with regard to the settlements or judgments against their respective insureds.
In addition to the reporting to the states of medical malpractice settlements
and judgments, payments must also be reported to the National Practitioners
Data Bank. Penalties attach should reports to the states and to the data bank
not be made.
Every insurance company is subject to a periodic examination under the
authority of the insurance commissioner of its state of domicile. Any other
state interested in participating in a periodic examination may do so. The
last periodic examination of PICOM was based on its December 31, 1992 financial
statements and a report was issued on June 18, 1993. PICOM-Illinois has yet to
undergo a periodic examination. Various states also conduct "market conduct
examinations" which are periodic, unscheduled examinations designed to monitor
the compliance with state laws and regulations concerning the filing of rates
and forms.
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. 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 addition to being regulated as an insurance company, PICOM is also
subject to regulation as an insurance holding company because of its ownership
of PICOM-Illinois. PICOM, as the ultimate parent company, is required to file
information relating to its capital structure, ownership, and financial
condition and general business operations of its insurance subsidiaries. As an
insurance holding company, PICOM is also subject to special reporting and prior
approval requirements with respect to transactions among affiliates. If the
Merger is consummated, Holding Company will replace PICOM as the ultimate
parent company and will be regulated as an insurance holding company.
CHANGE OR ACQUISITION OF CONTROL
PICOM is a Michigan stock, property and casualty, insurance company
organized under the Michigan Insurance Code. Similarly, PICOM-Illinois is an
Illinois stock, property and casualty insurance company organized under the
Illinois Insurance Code. The Michigan Insurance Code and the Illinois
Insurance Code both 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 (commonly known as a "Form A") containing
certain information required by statute and published regulations and provide a
copy of such Form A to the domestic insurer. In both Michigan and Illinois,
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
Holding Company or PICOM would also generally require prior approval by the
Michigan Insurance Commissioner and the Illinois Insurance Director and would
require preacquisition notification in those states which have adopted
preacquisition notification
<PAGE> 54
-46-
provisions and in which the insurers are admitted. Such requirements may
deter, delay or prevent certain transactions that could be advantageous to the
shareholders of Holding Company or PICOM.
INSOLVENCY FUNDS; MANDATORY POOLS
Most states require admitted property and casualty insurers to become
members of insolvency or guaranty funds or associations which generally protect
policyholders against the insolvency of such insurers. Members of the fund or
association must contribute to the payment of certain claims made against
insolvent insurers. Maximum contributions required by law in any one year vary
between 1% and 2% of annual premium written by a member in that state. No
assessments from guaranty funds were charged to PICOM in 1995, 1994 or 1993.
Assessments from guaranty funds may, to a limited extent, be recovered through
future premium tax reductions.
Insurance companies are also required to participate in various mandatory
insurance facilities or in funding mandatory pools, which are generally
designed to provide insurance coverage for consumers who are unable to obtain
insurance in the voluntary insurance market. Pools are typically found in
insurance lines such as workers' compensation, homeowners and personal
automobile insurance. PICOM does not currently offer any of these insurance
lines, but could do so in the future. These pools typically require all
companies writing applicable lines of insurance in the state for which the pool
has been established to fund deficiencies experienced by the pool based upon
each company's relative premium writings in that state, with any excess funding
typically distributed to the participating companies on the same basis. To the
extent that these assessments are imposed on PICOM, they could have an adverse
effect on PICOM.
RESTRICTIONS ON DIVIDENDS
Insurance companies are subject to various state 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 shareholders. The restrictions are generally based on
certain levels of surplus, investment income and operating income, as
determined under statutory accounting principles.
The Michigan Insurance Code and the Illinois Insurance Code regulate the
distribution of dividends and other payments to a holding company by its
insurance subsidiaries. Under both the Michigan Insurance Code and the
Illinois Insurance Code, an insurer may pay dividends or distribute cash or
other property so long as such dividends or distributions, together with all
other dividends or distributions made within the preceding year, do not exceed
the greater of (i) 10% of the insurer's policyholders' surplus as of
December 31 of the preceding year or (ii) the net income, not including
realized capital gains, for the twelve-month period ending December 31 of the
preceding year, with larger dividends payable only upon prior regulatory
approval. Following consummation of the Merger, such restrictions or any
additional subsequently imposed restrictions may in the future affect Holding
Company's ability to fund its operations, pay principal and interest on its
debt, pay its expenses and pay any cash dividends to its shareholders. Future
dividends from Holding Company's subsidiaries may also be limited by business
considerations. See "MANAGEMENT AND OPERATIONS AFTER THE REORGANIZATION --
Dividend Policy."
RISK-BASED CAPITAL
The NAIC has adopted a new 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 enable 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
<PAGE> 55
-47-
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 RBC rules of the NAIC provide for different
levels of regulatory attention depending on the ratio of an insurer's total
adjusted capital to its "authorized control level" ("ACL") of RBC. Based on
calculations made by PICOM, the risk-based capital levels for each of PICOM and
PICOM-Illinois exceed levels that would trigger regulatory attention. At
December 31, 1995, PICOM's RBC was $38.6 million, and the threshold requiring
the least regulatory involvement was $26.1 million and PICOM-Illinois' RBC was
$2.9 million, and the threshold requiring regulatory involvement was $1.9
million. At December 31, 1995, the total adjusted surplus of PICOM was $67
million and the total adjusted surplus of PICOM-Illinois was $6.0 million.
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 1995, PICOM did not have any ratios which varied from the "usual value"
range.
In 1995, PICOM-Illinois had two ratios which varied from the "usual value"
range as follows:
<TABLE>
<CAPTION>
Ratio Usual Range PICOM-Illinois Value
- -------------------------------- ------------ --------------------
<S> <C> <C>
Two year overall operating ratio up to 100% 125%
Change in surplus (10%) to 50% (26%)
</TABLE>
In 1995, new and comprehensive tort reform became law in Illinois. During
the three months prior to the effective date of the new legislation, a
significant number of claims were filed against PICOM-Illinois insureds in an
effort by the plaintiff bar to have claims adjudicated under prior Illinois
law. The increase in claims frequency resulted in a higher than anticipated
operating ratio and a decrease in statutory surplus for PICOM-Illinois. In an
effort to remediate the variances in those two ratios, effective January 1,
1996, PICOM-Illinois entered into a quota share reinsurance contract with PICOM
whereby 90% of the net retained lines of PICOM-Illinois are reinsured by PICOM.
This reinsurance mechanism, which will not affect PICOM's consolidated
results, is expected to stabilize the underwriting results of PICOM-Illinois.
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 health care
reform, product liability claims, environmental regulation, pension regulation
(ERISA), examination of the taxation of insurers and reinsurers, minimum levels
of liability insurance and safety regulations. See "RISK FACTORS -- Regulatory
Considerations" and "-- Tort Reform."
<PAGE> 56
-48-
SELECTED CONSOLIDATED FINANCIAL DATA OF PICOM
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table presents selected consolidated financial data of PICOM
at the dates and for the periods presented. All information is presented in
accordance with GAAP, except for the selected statutory data, which are
presented in accordance with SAP. The consolidated financial data is derived
from the consolidated financial statements and accounting records of PICOM.
The consolidated financial statements as of December 31, 1995 and for the year
then ended have been audited by KPMG Peat Marwick LLP. The consolidated
financial statements as of December 31, 1994, 1993, 1992 and 1991 and for the
years then ended have been audited by Coopers & Lybrand LLP. The selected
consolidated financial data for the three-month periods ended March 31, 1996
and 1995, and as of March 31, 1996, have been derived from the unaudited
condensed consolidated financial statements of PICOM included elsewhere in this
Proxy Statement/Prospectus and, in the opinion of PICOM management, reflect all
adjustments (consisting only of normally recurring accruals) necessary for a
fair presentation of the financial position and the operating results for such
periods. The operating results for any interim period are not necessarily
indicative of the operating results for a full year. The selected consolidated
financial data set forth below should be read in conjunction with the
historical consolidated financial statements of PICOM, and the notes thereto,
which appear elsewhere in this Proxy Statement/Prospectus under "FINANCIAL
STATEMENTS;" and with "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF PICOM" which also appears elsewhere in
this Proxy Statement/Prospectus.
<PAGE> 57
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SELECTED CONSOLIDATED FINANCIAL DATA OF PICOM, CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months
----------------------------
Ended March 31, Years Ended December 31,
---------------------------- --------------------------------------
1996 1995 1995 1994 1993
--------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA(1):
Premiums written $ 20,711 $19,559 $ 67,727 $ 51,110 $ 50,514
Premiums ceded (4,263) (4,981) (12,576) (2,332) (2,337)
------------ ---------- ---------- ---------- ----------
Net premiums written $ 16,448 $14,578 $ 55,151 $ 48,778 $ 48,177
============ =========== ========== ========== ==========
Premiums earned $ 14,337 $13,935 $ 55,684 $ 48,490 $ 48,192
Net investment income 3,869 2,971 14,729 13,379 12,363
Net realized investment gains (losses) (14) 114 (6) (2,006) 6,916
Other income 83 -- 165 4 5
------------ ---------- ---------- ---------- ----------
Total revenues and other income 18,275 17,020 70,572 59,867 67,476
------------ ---------- ---------- ---------- ----------
Losses and loss adjustment expenses(2) 12,416 13,493 35,558 44,853 44,585
Increase in reserve for extended reporting
period claims 100 332 1,344 500 752
Policy acquisition and other underwriting
expenses 2,593 1,940 9,328 7,316 7,438
------------ ---------- ---------- ---------- ----------
Total expenses 15,109 15,765 46,230 52,669 52,775
------------ ---------- ---------- ---------- ----------
Equity in earnings of affiliate -- -- -- 612 145
------------ ---------- ---------- ---------- ----------
Income before federal income taxes and
cumulative effect of change in accounting
method 3,166 1,255 24,342 7,810 14,846
Federal income tax expense (839) (425) (8,276) (2,656) (4,980)
------------ ---------- ---------- ---------- ----------
Income before cumulative effect of
change in accounting method 2,327 830 16,066 5,154 9,866
Cumulative effect of change in accounting
method, net of tax(2) -- (8,125) (8,125) -- --
------------ ---------- ---------- ---------- ----------
Net income $ 2,327 $(7,295) $ 7,941 $ 5,154 $ 9,866
============ =========== ========== ========== ==========
NET INCOME PER COMMON SHARE(3):
Income before cumulative effect of
change in accounting method $ 0.74 $ 0.26 $ 5.16 $ 1.59 $ 3.05
Cumulative effect of change in accounting
method, net of tax(2) -- (2.51) (2.61) -- --
------------ ---------- ---------- ---------- ----------
Net income $ 0.74 $(2.25) $ 2.55 $ 1.59 $ 3.05
============ ========== ========== ========== ==========
Pro forma amounts, assuming elimination of
loss and LAE reserve discounting is applied
retroactively:
Net income $ 2,327 $ 830 $ 16,066 $ 5,356 $ 12,475
Net income per common share $ 0.74 $ 0.26 $ 5.16 $ 1.65 $ 3.85
Weighted average shares outstanding(3) 3,126 3,239 3,115 3,239 3,239
<CAPTION>
As of March 31, As of December 31
-------------------------- --------------------------------------
1996 1995 1995 1994 1993
------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total investments $273,736 $259,260 $280,607 $249,979 $253,133
Total assets 329,683 323,035 330,712 297,926 301,106
Loss and loss adjustment expense reserves(1) 200,904 208,593 199,605 188,544 191,221
Reserve for extended reporting period
claims 14,182 13,069 14,082 12,738 12,238
Unearned premiums 27,008 26,880 23,122 24,557 24,347
Shareholders' equity 78,532 58,850 78,411 63,142 64,839
Book value per share(3) $24.98 $18.17 $25.17 $19.49 $20.02
<CAPTION>
Years Ended December 31,
--------------------------
1992 1991
----------- -----------
<S> <C> <C>
INCOME STATEMENT DATA(1):
Premiums written $49,549 $47,327
Premiums ceded (2,073) (1,903)
---------- ----------
Net premiums written $47,476 $45,424
========== ==========
Premiums earned $48,778 $47,899
Net investment income 14,338 15,758
Net realized investment gains (losses) 7,485 7,196
Other income 3 4
Total revenues and other income ---------- ----------
70,604 70,857
---------- ----------
Losses and loss adjustment expenses(2) 53,511 45,168
Increase in reserve for extended reporting
period claims 3,731 4,115
Policy acquisition and other underwriting
expenses 7,545 7,023
---------- ----------
Total expenses 64,787 56,306
---------- ----------
Equity in earnings of affiliate 87 84
Income before federal income taxes and ---------- ----------
cumulative effect of change in accounting
method 5,904 14,635
Federal income tax expense (2,125) (4.911)
---------- ----------
Income before cumulative effect of
change in accounting method 3,779 9,724
Cumulative effect of change in
accounting method, net of tax(2) -- --
---------- ----------
Net income $ 3,779 $ 9,724
========== ==========
NET INCOME PER COMMON SHARE(3):
Income before cumulative effect of
change in accounting method $ 1.17 $ 3.01
Cumlative effect of change
in accounting method, net of tax(2) -- --
---------- ----------
Net income $ 1.17 $ 3.01
Pro forma amounts, assuming elimination of ========== ==========
loss and LAE reserve discounting is applied
retroactively:
Net income $ 9,967 $14,253
Net income per common share $ 3.08 $ 4.41
Weighted average shares outstanding(3) 3,238 3,231
<CAPTION>
As of December 31,
--------------------------
1992 1991
---------- ----------
<S> <C> <C>
BALANCE SHEET DATA:
Total investments $235,091 $226,515
Total assets 284,245 274,914
Loss and loss adjustment expense reserves(1) 184,758 178,132
Reserve for extended reporting period
claims 11,486 7,755
Unearned premiums 24,305 25,391
Shareholders' equity 54,974 55,640
Book value per share(3) $16.97 $17.22
</TABLE>
<PAGE> 58
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SELECTED CONSOLIDATED FINANCIAL DATA OF PICOM, CONTINUED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
As of March 31, As of December 31,
--------------------------- ---------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED STATUTORY DATA:
Loss ratio(4)(5) 87.3% 101.5% 71.5% 93.5% 94.0% 117.3% 110.5%
Expense ratio 16.2% 19.0% 17.1% 15.5% 15.8% 15.6% 14.2%
------------- ---------- ---------- ---------- ---------- ---------- ----------
Combined ratio 103.5% 120.5% 88.6% 109.0% 109.8% 132.9% 124.7%
============= ========== ========== ========== ========== ========== ==========
Policyholders' surplus $ 70,286 $47,691 $ 67,006 $ 47,149 $ 40,431 $27,169 $20,902
Net premiums written to policyholders'
surplus(6) .81x 1.15x .82x 1.03x 1.19x 1.75x 2.17x
</TABLE>
- --------------------
(1) Effective January 1, 1995, PICOM began writing a book of business
previously written by an Illinois insurance company.
(2) PICOM discounted loss and loss adjustment expense reserves through 1994. In
1993, 1992 and 1991 PICOM changed its loss and loss adjustment expense
reserve discount rate from 3.75% to 3%, 5.625% to 3.75%, and 7% to 5.625%,
respectively. These reductions in reserve discount rate were treated as
changes in accounting estimates and resulted in decreases in net income of
$2,006,000 for 1993, $5,312,000 for 1992 and $3,594,000 for 1991. The
effects of such changes in the reserve discount rate, which were previously
presented as changes in accounting principles, have been reclassified and
presented as changes in accounting estimates. Effective January 1, 1995,
PICOM eliminated discounting of loss and in loss adjustment expense reserves
for GAAP reporting purposes. The elimination of reserve discounting was
treated as a change in accounting method.
(3) Weighted average shares outstanding in thousands. Prior period amounts
have been restated for the effects of 10% stock dividends on
December 1, 1994 and 1993, respectively.
(4) In 1995, PICOM reduced its estimated liability for loss and loss
adjustment expense reserves by $12,300,000 for redundancies.
(5) The statutory loss ratio is calculated based upon incurred losses plus the
change in reserve for extended reporting period claims.
(6) Net written premiums for the prior twelve-month period divided by ending
surplus.
<PAGE> 59
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PICOM
The following discussion provides additional information regarding the
financial condition and the results of operations for PICOM for the three-month
periods ended March 31, 1996 and 1995 and for each of the years ended December
31, 1995, 1994 and 1993. This discussion should be read in conjunction with
the consolidated financial statements of PICOM, and the notes thereto, which
appear elsewhere in this Proxy Statement/Prospectus.
OVERVIEW
PICOM Insurance Company is a licensed property and casualty insurer
domiciled in the State of Michigan. PICOM, and its wholly owned subsidiary,
PICOM Insurance Company of Illinois, write professional liability insurance for
physicians, surgeons, dentists, hospitals, other health care providers,
lawyers, and law firms. The accompanying financial results for PICOM are
reported on a consolidated basis.
FINANCIAL POSITION
Assets. Total assets were $329.7 million at March 31, 1996, as compared
with total assets of $330.7 million at December 31, 1995, and total assets of
$297.9 million at December 31, 1994. The decrease in total assets at March 31,
1996 was primarily the result of unrealized depreciation, net of deferred
federal income taxes, in the value of PICOM's fixed maturity investment
portfolio. The increase in total assets at December 31, 1995 was primarily the
result of strong cash flows from PICOM-Illinois and an unrealized appreciation,
net of deferred federal income taxes, in the value of PICOM's fixed maturity
investment portfolio. Invested assets of $273.7 million represented
approximately 83% of PICOM's total assets at March 31, 1996. Invested assets
of $280.6 million represented approximately 85% of PICOM's total assets at
year-end 1995.
As of March 31, 1996, PICOM's investment portfolio was dominated by
approximately $258.7 million of fixed maturity securities, and primarily
consists of U.S. government and agency bonds, high-quality corporate bonds, and
tax-exempt U.S. municipal bonds. As of March 31, 1996 approximately 98% of the
fixed maturity securities held by PICOM were rated A or better. As of
March 31, 1996 and December 31, 1995, all fixed maturity securities were
classified as available-for-sale and carried at market value. At year-end
1994, some fixed maturity securities were classified as held-to-maturity and
carried at amortized cost. Equity securities at March 31, 1996 and December
31, 1995 consisted primarily of shares held in Physicians Insurance Company of
Wisconsin, Inc. ("PIC-WIS"), an unrelated stock insurance company providing
professional liability insurance to health care providers primarily in
Wisconsin. PICOM's fixed maturity investment portfolio is sensitive to
interest rate changes. As of March 31, 1996 and year-end 1995, this portfolio
had a modified duration of approximately 4 years. A one hundred basis point
increase in market interest rates would decrease the value of this portfolio by
four percent, whereas a one hundred basis point decrease in market interest
rates would increase the value of this portfolio by four percent.
Net deferred federal income taxes increased from $18.3 million at
December 31, 1995 to $19.6 million at March 31, 1996, due primarily to
unrealized losses in PICOM's fixed maturity investment portfolio. Net deferred
federal income taxes decreased from $28.3 million at December 31, 1994 to $18.3
million at December 31, 1995, due to the utilization of net operating loss
carryforwards and the unrealized appreciation in investments.
Amounts due from reinsurers decreased by $1.6 million from December 31,
1995 to March 31, 1996, as a result of a decrease in ceded loss and loss
adjustment expense reserves. Amounts due from reinsurers increased by
$8.8 million from December 31, 1994 to December 31, 1995, primarily the result
of additional ceded losses in the PICOM-Illinois reinsurance program.
<PAGE> 60
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Liabilities. Loss and loss adjustment expense reserves represented 80% of
PICOM's consolidated liabilities as of March 31, 1996 and 79% of PICOM's
consolidated liabilities as of December 31, 1995. These reserves are
determined on the basis of individual claims and actuarially determined
estimates of future losses based on PICOM's past loss experience and
projections as to future claims frequency, severity, inflationary trends and
settlement patterns. Estimating professional liability reserves is a complex
process which relies heavily on judgment and involves many uncertainties. As a
result, reserve estimates may vary significantly from the eventual outcome.
The assumptions used in establishing PICOM's reserves are reviewed and updated
as new data becomes available. At year-end 1994, PICOM's loss and loss
adjustment expense reserves were discounted using a three percent interest rate
assumption. Effective January 1, 1995, PICOM eliminated the practice of
discounting reserves for financial reporting and, accordingly, loss and loss
adjustment expense reserves have been established on an undiscounted basis
thereafter.
Loss and loss adjustment expense reserves increased less than one percent
on a net basis during the first quarter of 1996, to $200.9 million from
$199.6 million at December 31, 1995. Loss and loss adjustment expense reserves
increased 5.9% during 1995, to $199.6 million from $188.5 million at December
31, 1994. This increase in reserves in each of 1996 and 1995 is primarily
attributable to the book of business written by PICOM-Illinois and the
elimination of the reserve discount. The increases in reserves for 1996 and
1995 claims activity was mitigated by favorable reserve development of prior
years' reserves. The loss and LAE reserves correspond with the best estimate
of PICOM's in-house actuary.
Based on favorable development of prior years' loss reserves and supported
by a detailed actuarial study, PICOM reduced its Michigan reserves by
approximately $12.3 million at year end 1995. Effective January 1, 1995, PICOM
eliminated the practice of discounting reserves for financial reporting
purposes. PICOM now reports reserves on an undiscounted basis, a more
conservative accounting practice which is used by most publicly-traded
insurance companies. The after tax effect as of January 1, 1995, of
eliminating the reserve discount ($8.1 million, or $2.61 per share) is
displayed as a cumulative effect accounting change on PICOM's income statement.
Reinsurance. PICOM utilizes reinsurance arrangements to limit its maximum
loss, provide additional capacity for growth and protect shareholders' equity.
At the present time, PICOM has both excess of loss reinsurance and "errors and
omissions" reinsurance.
Reinsurance recoverable on paid and unpaid losses represented 17.3% of
shareholders' equity at March 31, 1996, compared to 18.2% of shareholders'
equity at December 31, 1995, and 6.3% of shareholders' equity at December 31,
1994. The higher levels in 1996 and 1995 relative to 1994 are primarily due to
the PICOM-Illinois' reinsurance program. Because the ceding of reinsurance
does not discharge the primary liability of the original insurer, PICOM places
reinsurance with other carriers only after a thorough review of each
reinsurer's credit quality. Neither PICOM nor its subsidiaries has experienced
any difficulty in obtaining payment from reinsurers, and PICOM believes there
is no significant exposure to uncollectible reinsurance balances recoverable at
March 31, 1996 or December 31, 1995.
Shareholders' Equity. Shareholders' equity was $78.5 million at March 31,
1996 versus shareholder's equity of $78.4 million at December 31, 1995 and
$63.1 million at December 31, 1994. Net income of $2.3 million during the
first quarter of 1996 was offset by $2.9 million of net unrealized depreciation
on investments, net of deferred federal income taxes which resulted from rising
interest rates in the bond market. The substantial increase during 1995 was
due to favorable underwriting results and unrealized appreciation, net of
deferred federal income taxes, in the value of PICOM's fixed maturity
portfolio. PICOM expects to use retained earnings to increase its capital base
and finance future growth and will defer consideration of cash dividends for
the foreseeable future.
<PAGE> 61
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RESULTS OF OPERATIONS -- THREE-MONTH PERIOD ENDED MARCH 31, 1996 VERSUS
THREE-MONTH PERIOD ENDED MARCH 31, 1995
Premiums. Net premiums written in the first quarter of 1996 were $16.4
million, an increase of 12.8% over first quarter 1995 net premiums written of
$14.6 million. The increase in net premiums written included an increase in
retained premiums in the PICOM-Illinois reinsurance program, which added $1.3
million to net premiums written paid by physicians and surgeons. In addition,
premiums paid by hospitals and other health care providers in the first quarter
of 1996 were $0.7 million, an increase of 240% over the first quarter of 1995,
when premiums paid by hospitals and other health care providers totaled $0.2
million. Of the net premiums written in the first quarter of 1996,
approximately 89% was paid by physicians and surgeons, five percent was paid by
dentists, five percent was paid by hospitals and other health care providers
and one percent was paid by law firms and lawyers. Of the net premiums written
in the first quarter of 1995, approximately 93% was paid by physicians and
surgeons, five percent was paid by dentists, and two percent was paid by
hospitals and other health care providers.
Investment Income and Capital Gains/Losses . Investment income totaled
$3.9 million for the first quarter of 1996, compared to $3.0 million for the
same quarter in 1995. Investment income in the first quarter of 1995 was lower
than historical levels due to a $0.6 million write-down in two securities.
PICOM posted a $14 thousand net realized investment loss in the first quarter
of 1996 versus a $114 thousand net realized investment gain for the first
quarter of 1995.
Loss and Loss Adjustment Expenses. Incurred loss and loss adjustment
expenses including the increase in reserve for extended reporting period claims
decreased 9.5% to $12.5 million in the first quarter of 1996 from $13.8 million
for the same period last year. The first quarter 1995 results were negatively
affected by a $1 million adverse underwriting result in the State of Illinois
arising from a surge in the number of lawsuits filed by the plaintiff bar prior
to the March 9, 1995 effective date of Illinois' tort reform law.
Policy Acquisition and Underwriting Expenses. Underwriting expenses were
$2.6 million in the first quarter of 1996, a 33.7% increase over underwriting
expenses of $1.9 million in the first quarter of 1995. As a percentage of
premiums earned, the underwriting expense ratio was 18.1% in the first quarter
of 1996, up from the underwriting expense ratio of 13.9% in the first quarter
of 1995. The difference between periods reflects an increase in salary
expenses of $250,000 paid in the form of bonuses during the first quarter of
1996, and a reduction in expenses during the first quarter of 1995 attributable
to a non-recurring profit commission arising from the commutation of a
reinsurance contract (which offset expenses in the amount of $336,000).
Federal Income Taxes. PICOM recorded $0.8 million in federal income tax
expense in the first quarter of 1996 compared to $0.4 million in the first
quarter of 1995. PICOM's effective federal tax rate approximated 27% in the
first quarter of 1996 and was 34% in the first quarter of 1995. The lower
effective tax rate in 1996 is due to a shift in PICOM's investment portfolio to
tax-exempt investment securities in order to maximize after tax net income.
PICOM completely utilized its net operating loss carryforwards as of
December 31, 1995.
Net Income. Net income for the first quarter of 1996 was $2.3 million, or
$0.74 per share, on revenues of $18.3 million. This compares to net income for
the first quarter of 1995 of $0.8 million, or $0.26 per share, on revenues of
$17.0 million. The 1996 earnings were primarily attributable to a significant
improvement in net investment income. The net income figure for the first
quarter of 1995 is exclusive of a $7.3 million, or $2.51
<PAGE> 62
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per share, cumulative effect loss attributable to a change in accounting
method involving the elimination of the reserve discount that was retroactively
applied to January 1, 1995.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1995 VERSUS YEAR ENDED
DECEMBER 31, 1994
Premiums. Net premiums written in 1995 were $55.2 million, an increase of
13.1% over 1994 net premiums written of $48.8 million. Of such increase in net
premiums written, approximately $7.9 million resulted from the purchased book of
physicians and surgeons business written by PICOM-Illinois, which began writing
business effective January 1, 1995. In addition, premiums paid by hospitals
and other health care providers in 1995 were $1.6 million, an increase of 67%
over 1994, when premiums paid by hospitals and other health care providers
totaled $0.9 million. PICOM also wrote $0.6 million of professional liability
policies for lawyers and law firms in 1995, following the introduction of this
insurance product in late 1994.
Of the net premiums written in 1995, approximately 88% was paid by
physicians and surgeons, seven percent was paid by dentists, four percent was
paid by hospitals and other health care providers and one percent was paid by
law firms and lawyers. Of the net premiums written in 1994, approximately 89%
was paid by physicians and surgeons, nine percent was paid by dentists, and two
percent was paid by hospitals and other healthcare providers. During 1995 and
1994, PICOM continued to balance its need for upward rate adjustments with the
goal of maintaining market share in a very competitive environment in both
Michigan and Illinois. As a result, PICOM offered discounts to its published
premium rates to retain market share and experienced margin or price
reductions as a result of competitive market conditions in those years.
Although PICOM has maintained profitability and is endeavoring to offset lower
premiums charged through more selective underwriting practices, there can be
no assurance that these practices will be successful in the long term. See
"RISK FACTORS - Industry Factors."
Investment Income and Capital Gains/Losses. Investment income, excluding
realized capital gains (losses), was $14.7 million for 1995, up 10.0%, as
compared to total investment income of $13.4 million for 1994. The increase in
total investment income is reflective of the larger asset base in 1995. During
1994, PICOM posted net realized investment losses of $2.0 million; net realized
investment losses in 1995 were negligible.
Loss and Loss Adjustment Expenses. Incurred loss and loss adjustment
expenses including the increase in reserve for extended reporting period claims
for 1995 totaled $36.9 million, down 18.6%, as compared to incurred loss and
loss adjustment expenses of $45.4 million for 1994. As a percentage of
premiums earned, the incurred loss and loss adjustment expense ratio (including
the increase in reserve for extended reporting period claims) improved to 66.3%
in 1995 from 93.5% in 1994. The 1995 results include the effect of reserve
reduction of $12.3 million at year-end 1995. In addition, underwriting results
improved significantly from 1994, where adverse results arose from a surge in
the number of lawsuits filed by the plaintiff bar in the two week period
preceding the April 1, 1994 effective date of Michigan's tort reform law.
Policy Acquisition and Underwriting Expenses. Underwriting expenses were
$9.3 million in 1995, a 27.5% increase over underwriting expenses of $7.3
million in 1994. As a percentage of premiums earned, the underwriting expense
ratio was 16.8% in 1995, up from the underwriting expense ratio of 15.1% in
1994. The increase in underwriting expenses in 1995 relative to
1994 is attributable to PICOM's purchase in 1995, through PICOM-Illinois, of
the right to solicit and write a block of medical professional liability
business in Illinois. Such acquisition resulted in an $18 million increase in
PICOM's written premiums (before reinsurance) in 1995. The acquisition and
operating expenses associated with PICOM-Illinois, which were partially offset
by a non-recurring profit commission of $336,000 arising from the commutation
of a reinsurance contract.
Federal Income Taxes. PICOM recorded $8.3 million in federal income tax
expense in 1995 compared to $2.7 million in 1994. PICOM's effective federal
tax rate approximated 34.0% in 1995 and 1994. The aggregate net operating loss
carryforwards of approximately $23.3 million at December 31, 1994 were fully
utilized during 1995.
<PAGE> 63
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Net Income. Net income for 1995 was $7.9 million, or $2.55 per share, on
revenues of $70.6 million. This compares to net income of $5.2 million, or
$1.59 per share, on revenues of $59.9 million in 1994. The strong 1995 earnings
were primarily attributable to a significant improvement in underwriting
results, including favorable development of prior years' reserves. The 1995 net
income figures were reduced by $2.61 per share as a result of a cumulative
effect accounting change which resulted from the elimination of the reserve
discount.
RESULTS OF OPERATIONS -- YEAR ENDED DECEMBER 31, 1994 VERSUS YEAR ENDED
DECEMBER 31, 1993
Premiums. Net premiums written in 1994 were $48.8 million, an increase of
1.2% over 1993 net premiums written of $48.2 million. The difference in net
premiums written resulted from a 164% increase in premiums paid by hospitals
and other health care providers, which increased to $1.0 million in 1994 from
approximately $0.4 million in 1993. Of the net premiums written in 1994,
approximately 89% was paid by physicians and surgeons, nine percent was
paid by dentists, and two percent was paid by hospitals and other health care
providers. Of the net premiums written in 1993, approximately 90% was paid by
physicians and surgeons, nine percent was paid by dentists, and one percent was
paid by hospitals and other health care providers.
Investment Income and Capital Gains/Losses. Investment income for 1994
was $13.4 million, up 8.2% from 1993's investment income of $12.4 million. The
increase reflects generally higher prevailing interest rates. During 1994,
PICOM posted net realized investment losses of $2.0 million which compares to
net realized investment gains of $6.9 million in 1993.
Loss and Loss Adjustment Expenses. Incurred loss and loss adjustment
expenses (including the increase in reserve for extended reporting period
claims) for 1994 totaled $45.4 million, up slightly from incurred loss
and loss adjustment expenses of $45.3 million for 1993. In 1993, PICOM reduced
the interest rate assumption it used to discount loss and loss adjustment
expense reserves from 3.75% to 3.00%. The effect of this reduction in interest
rate added $3.0 million to incurred losses and loss adjustment expenses for the
year.
During 1994, PICOM experienced an increase of 26.2% in the number of new
claims reported for the year for all insureds. Overall, PICOM's inventory of
open claims increased to 1,628 at year end 1994 as compared to 1,504 open
claims at year end 1993. The increase in claims in 1994 was due to a surge in
the number of lawsuits filed by the plaintiff bar in the two week period
preceding the April 1, 1994 effective date of Michigan's tort reform law.
Policy Acquisition and Underwriting Expenses. Underwriting expenses were
$7.3 million in 1994, a 1.6% decrease from underwriting expenses of $7.4
million in 1993. As a percentage of premiums earned, the underwriting expense
ratio was 15.1% in 1994 versus 15.4% in 1993.
Federal Income Taxes. PICOM recorded $2.7 million in federal income tax
expense in 1994 compared to $5.0 million in 1993. PICOM's effective federal
tax rate approximated 34.0% in 1994 and 33.5% in 1993. The effective tax rate
is reflective of PICOM's policy of utilizing its existing net operating loss
carryforwards to realize higher returns generally available from taxable
investments.
The aggregate net operating loss carryforwards were approximately $23.3
million at December 31, 1994.
Net Income. Net income for 1994 was $5.2 million, or $1.59 per share, on
revenues of $59.9 million. This compares to net income of $9.9 million, or
$3.05 per share, on revenues of $67.5 million in 1993. The 1993 net income
figures included the effects of lowering the reserve discount rate from 3.75% to
3.00% during the year, which reduced net income by $0.62 per share for the
year.
<PAGE> 64
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity describes the ability to generate sufficient cash flows to meet
the cash requirements of continuing operations. There are typically two
distinct operations in an insurance company -- underwriting and investing. Net
cash flows from underwriting operations are used to build an investment
portfolio, which in turn produces future cash from investment income. PICOM
continuously monitors available cash and short-term investment balances in
relation to projected cash needs to maintain adequate balances for current
payments while maximizing cash available for longer term investment
opportunities.
The payment of losses, loss adjustment expenses and operating expenses in
the ordinary course of business remains PICOM's principal need for liquid
funds. Payments for loss and loss adjustment expenses are distributed fairly
evenly throughout the year. Payments for reinsurance are made within 30 days
subsequent to the end of each quarter, with adjustments made after each
reinsurance year. Cash used to pay these items has been provided by
operations. PICOM did not borrow any funds in the three-month period ended
March 31, 1996 or in the years ended December 31, 1995 and 1994, and currently
has no requirements indicating a need to borrow funds in the foreseeable
future. As of December 31, 1995, PICOM did not have any material commitments
for capital expenditures.
On July 5, 1995 PICOM repurchased 254,823 shares of PICOM Common Stock
(approximately 7.9% of the issued and outstanding shares of PICOM Common Stock)
owned by Physicians Insurance Company of Ohio at a price of $17 per share.
During 1995, PICOM negotiated a reciprocal stock purchase agreement with
Physicians Insurance Company of Wisconsin. Under the agreement, PICOM acquired
1,583 shares of PIC-WIS common stock (representing 6.8% of the then outstanding
shares of PIC-WIS common stock) for $2.5 million and PIC-WIS purchased 131,579
shares of PICOM Common Stock (representing 4.2% of the then issued and
outstanding shares of PICOM Common Stock) for $2.5 million. The transaction
replaced more than one-half of the equity used to accomplish the previously
reported repurchase of shares of PICOM Common Stock held by Physicians
Insurance Company of Ohio. In addition, in a transaction valued at
approximately $1.2 million, PICOM acquired all of the issued and outstanding
shares of American Insurance Management Corporation, a privately held Indiana
corporation that serves as the attorney-in-fact for American Medical Insurance
Exchange, an Indiana interinsurance reciprocal exchange.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. The primary assets and liabilities of
PICOM are monetary in nature. As a result, interest rates have a more
significant impact on PICOM's performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or
magnitude as the cost of paying losses and loss adjustment expenses.
Insurance premiums are established before the amount of loss and loss
adjustment expenses, and the extent to which inflation may affect such
expenses, are known. Consequently, PICOM attempts to anticipate the future
impact of inflation when establishing rate levels. PICOM may be limited in
raising its premium levels for competitive and regulatory reasons, in which
case PICOM, rather than its insureds, would be required to absorb the effects
of inflation. Inflation also affects the market value of PICOM's investment
portfolio and the investment rate of return. Future economic changes which
result in prolonged and increasing levels of inflation could cause increases in
the dollar amount of loss and loss adjustment expense reserves and thereby
adversely affect future reserve development. To minimize such risk, PICOM
maintains what management considers to be strong and adequate reinsurance,
conducts regular actuarial reviews of reserves and maintains adequate asset
liquidity.
<PAGE> 65
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EFFECTS OF NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, which is effective for fiscal years beginning after December 15, 1995.
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used, or disposed of, by an entity be reviewed for
impairment, and be reported at the lower of the carrying amount or fair value
less cost to sell, if applicable. The adoption of SFAS No. 121 is not expected
to have a material effect on PICOM's operating results or financial condition.
During the last quarter of 1995, FASB permitted movement of securities out
of the held-to-maturity account without penalty. Consequently, PICOM
restructured its investment portfolio to match current asset/liability
strategies and reclassified all of PICOM's fixed income securities as
available-for-sale. As a result, all fixed income securities were valued at
fair market value as of year-end 1995.
BUSINESS AND PROPERTIES OF PICOM
OVERVIEW
PICOM Insurance Company is a stock insurance company incorporated under
the laws of the State of Michigan in 1980. PICOM, which is licensed as a
property and casualty insurer in Michigan, Illinois, Indiana and Ohio, began
business on June 27, 1980 by assuming the assets, liabilities and business of
the Brown-McNeely Insurance Fund. (The Brown-McNeely Fund was created by the
State of Michigan in 1975 to provide doctors with an effective and reliable
source of medical malpractice insurance.) Beginning July 1, 1980, PICOM
offered its own policies to doctors and physician clinics throughout Michigan.
PICOM began insuring dentists in 1983 and hospitals and other health care
institutions in 1993, and began offering professional liability insurance to
lawyers and law firms in 1994. Since January 1, 1995, PICOM, through
PICOM-Illinois, has insured doctors and physician clinics in Illinois. The
principal product currently offered by PICOM is professional liability
insurance for providers of health care services in Michigan and Illinois. Of
the net premiums written by PICOM in the first quarter of 1996, approximately
89% was paid by physicians and surgeons, six percent was paid by dentists, four
percent was paid by hospitals and other health care providers and one percent
was paid by law firms and lawyers. PICOM had consolidated assets of
approximately $330 million at March 31, 1996 and approximately $331 million at
December 31, 1995. The principal executive offices of PICOM are located at
4295 Okemos Road, Box 2510, Okemos, Michigan 48805-9510, and its telephone
number is (517) 349-6500.
PICOM has five subsidiaries: PICOM Insurance Agency, PICOM Claims Services
Corporation, PICOM Financial Services Corporation, PICOM Insurance Company of
Illinois and R. Hardy & Associates, Inc. In addition, in a transaction valued
at approximately $1.2 million, PICOM acquired all of the issued and outstanding
shares of American Insurance Management Corporation, a privately held Indiana
corporation that serves as the attorney-in-fact for American Medical Insurance
Exchange, an Indiana interinsurance reciprocal exchange. PICOM Insurance
Agency, PICOM Financial Services Corporation and R. Hardy & Associates, Inc. are
currently inactive.
During 1994 and 1995, PICOM took significant strides toward its goals of
geographical diversification and product line diversification. Through
PICOM-Illinois, PICOM successfully purchased the right to solicit and write a
block of medical professional liability business in Illinois, for which $18
million in premium (before reinsurance) was written in 1995. PICOM also
obtained insurance licenses in Indiana, Illinois and Ohio for the purpose of
distributing insurance products on a regional basis. In addition, PICOM
insured its eleventh hospital and added its first non-health care line by
entering the lawyers' professional liability business. By year-end 1995,
<PAGE> 66
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written premium exceeded $600,000 for the lawyers' professional liability
business. PICOM will continue to explore alternatives that provide an
opportunity to grow and diversify while sustaining long term profitability.
Such alternatives may include diversification into related insurance product
lines and acquisitions of, or consolidations with, other insurers.
PRODUCTS AND SERVICES
Professional Liability Insurance for Health Care Providers. Since 1980,
PICOM has offered its own policies to doctors and physician clinics throughout
Michigan. PICOM began insuring dentists in 1983 and hospitals and other health
care institutions in 1993. Since January 1, 1995 PICOM, through
PICOM-Illinois, has insured doctors and physician clinics in Illinois.
The principal product currently offered by PICOM is professional liability
insurance for providers of health care services. Professional liability
insurance provides insurance against the legal liability of an insured (and
against loss, damage or expense incidental to a claim of such liability)
arising out of bodily injury, sickness, disease, or death sustained by a
patient arising from an act or omission occurring in the furnishing of
professional services to a patient. PICOM currently offers its professional
liability insurance products in Michigan and Illinois to physicians, hospitals,
clinics, other health care institutions, managed care organizations, and
dentists. (PICOM has recently obtained licenses to provide such insurance
products in Indiana and Ohio.) Substantially all of PICOM's premiums in each
of the last three years have been derived from the issuance of professional
liability insurance policies to physicians, dentists and related clinics.
PICOM has the capacity to insure medical professional liability risks up
to $5,000,000 per incident; however, most policies are issued at lower limits.
In Michigan, PICOM generally retains up to $300,000 per risk, with certain
adjustments, and reinsures limits in excess of $300,000. In Illinois, PICOM
generally retains up to $250,000 per risk, and reinsures limits in excess of
$250,000. The majority of medical professional liability policies issued by
PICOM are written on a claims-made form, although approximately 13% of PICOM's
medical professional liability premiums are derived from policies written on an
occurrence form.
Professional Liability Insurance for Lawyers and Law Firms. In 1994,
PICOM expanded into other professional liability lines by providing malpractice
coverage to lawyers and law firms. PICOM writes primary policies on a
claims-made basis and has capacity to write policy limits of up to $5,000,000
per incident.
Ratings. PICOM is rated B++ by A.M. Best Company, Inc. ("A.M. Best") and
BBB by Standard & Poor's Corporation ("Standard & Poor's"). In developing
their respective ratings, A.M. Best and Standard & Poor's each evaluate a
company's financial and operating performance including a quantitative
evaluation of profitability, leverage and liquidity and a qualitative
evaluation of spread of risk, appropriateness of reinsurance, quality and
diversification of assets, adequacy of reserves and surplus, and management
experience. These ratings are based on factors of concern to policyholders,
agents and intermediaries and are not directed towards the protection of
investors. See "GLOSSARY OF SELECTED INSURANCE TERMS" for a description of the
rating continuums utilized by A.M. Best and Standard & Poor's.
MARKETING
PICOM is licensed to write insurance in Michigan, Illinois, Indiana and
Ohio, and currently markets its products in Michigan and Illinois. PICOM has a
branch office in Oak Brook, Illinois, and intends to expand the marketing of
its products into Indiana and Ohio in the future. PICOM has applied for
licenses in Iowa and Pennsylvania. There can be no assurances as to whether or
when such licenses will be granted.
<PAGE> 67
-59-
The marketing and sales of PICOM insurance products is carried out by
PICOM in cooperation with local independent insurance agencies. PICOM is
primarily responsible for general marketing activities such as advertising,
product information, convention participation and relationships with various
professional associations of which PICOM insureds are members. Such
independent insurance agencies are primarily responsible for the sale of PICOM
insurance products by pursuing leads generated by PICOM's marketing activities
and through agency-generated leads in their local communities. As of
December 31, 1995, PICOM's top ten agencies accounted for approximately 55% of
PICOM's direct in-force premiums, with the top agency, Willis Corroon
Corporation of Michigan, located in suburban Detroit, accounting for
approximately 10% of PICOM's direct in-force premiums.
PICOM typically enters into written agreements with those independent
insurance agencies offering PICOM insurance products. These written agreements
typically authorize an insurance agency to act as PICOM's agent for the sale
and service of specified PICOM insurance products in a specific State. Such
agreements are for a stated duration (typically from one year to five years)
and are terminable only upon prior written notice. Each insurance agency
executing such an agreement acts as an independent contractor and is
responsible for all expenses incurred by it. These agreements also (i) provide
for direct billing and collection of all premiums by PICOM, (ii) provide for
specific commissions payable to the insurance agency, (iii) provide for
arbitration in the event of disputes, and (iv) prohibit assignment by the
insurance agency without the prior written consent of PICOM.
UNDERWRITING
All underwriting decisions are made by PICOM through its underwriting
staff. Prospective insureds are required to submit a full application for
coverage that reviews professional training, area and scope of practice, and
claims history. PICOM's underwriting process involves an evaluation of the
application which, in certain situations, can be supplemented through on-site
risk management evaluations. Generally speaking, PICOM makes an assessment of
the quality and pricing of the risk with particular emphasis on loss history
and practice specialty.
PICOM's insurance policy rates are based upon several factors, the most
important of which are practice specialty and location of practice. Generally,
physicians practicing in surgical specialties, such as neurosurgery,
obstetrics, general surgery, orthopedic surgery and plastic surgery, are
assessed higher premium charges than non-surgeons; and, practices located in
larger metropolitan areas are assessed higher premium charges than those
located in more rural areas. As of December 31, 1995, approximately 68% of
PICOM's direct medical malpractice written premium was generated from
non-surgical risk groups and 32% was generated from surgical risk groups. In
terms of practice location, approximately 52% of such written premiums were
derived from larger metropolitan areas (such as metropolitan Detroit, Michigan
and metropolitan Chicago, Illinois) and 48% of such written premiums were
derived from more rural areas.
CLAIMS MANAGEMENT
PICOM emphasizes early evaluation and aggressive management of claims.
Claims are generally reported directly to PICOM by the insured after the
insured has received a court summons or a pre-suit notice of claim. The
reported claim is logged in by PICOM's claims staff, which then determines
whether the potential loss is covered by an insurance policy issued by PICOM.
If the claim is so covered, it will be assigned to a PICOM claims professional
for investigation and analysis. If the claim is in litigation, the claim is
also assigned to one of PICOM's selected outside counsel specializing in the
field of professional liability claims. Approximately 75% of PICOM claims are
litigated and ultimately resolved through settlement, dismissal or trial.
Approximately 25% of PICOM claims are resolved outside of the litigation
process through settlement or the abandonment of the claim by the plaintiff.
<PAGE> 68
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During the life of a claim, PICOM's claims staff evaluates and establishes
an initial reserve for the claim within the first 90 days. Reserves are
revised thereafter if new information about the claim develops. For litigated
claims, PICOM's claims staff works closely with outside counsel to develop case
strategies and to foster full communications with the insured. Medical or
other professional experts are retained to assist in the analysis and defense
of claims and a claims committee consisting of certain PICOM Board members and
outside medical specialists meets regularly to provide medical insights and
input for complex cases. PICOM's claims staff meets on a weekly basis to
review cases scheduled for trial. PICOM's claims staff frequently attends
court settlement conferences along with outside counsel and monitors cases
during trial.
RESERVES AND LOSSES
PICOM establishes balance sheet reserves based on its estimates of the
future amounts necessary to pay claims and expenses associated with
investigation and settlement of claims. These estimates include two
components: case reserves and bulk reserves. Case reserves are estimates of
future losses and loss adjustment expenses ("losses and LAE") for reported
claims and are established by the claims department. Non-case reserves, which
include a provision for losses that have occurred but have not been reported to
PICOM as well as development on reported claims, are the difference between
(i) the sum of case reserves and paid losses and (ii) actuarially estimated
ultimate incurred losses. Ultimate incurred losses are an actuarially
determined estimate of total losses and LAE necessary for the ultimate
settlement of all reported claims and incurred but not reported claims
including amounts already paid. The assumptions used by PICOM in establishing
reserves are reviewed and updated semi-annually based on the then current
circumstances.
As the process of estimating reserves is inherently uncertain and involves
an evaluation of many variables (including social and economic conditions), and
a significant period of time may elapse between the report of a claim and the
ultimate settlement of the claim, reserve estimates may vary significantly from
the eventual outcome. The inherent uncertainty of establishing reserves is
relatively greater for companies writing long-tail casualty insurance,
including medical malpractice insurance, due primarily to the longer-term
nature of the resolution of claims. There can be no assurance that the
ultimate liability will not exceed the amounts reserved.
The following table sets forth a reconciliation of beginning and ending
loss and loss adjustment expense reserves as shown in PICOM's consolidated
financial statements for the years indicated. See also Note 7 to PICOM's
consolidated financial statements.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1995 1994 1993
--------- -------- ---------
<S> <C> <C> <C>
(in thousands)
Balance, beginning of year $188,544 $191,220 $184,757
Less reinsurance balances recoverable (3,760) (4,040) (2,403)
-------- -------- --------
Net balance, beginning of year 184,784 187,180 182,354
-------- -------- --------
Incurred related to:
Current year 63,027 68,610 68,237
Prior years (27,469) (23,757) (23,652)
-------- -------- --------
Total incurred 35,558 44,853 44,585
-------- -------- --------
Effect of change in accounting method 12,310 -- --
-------- -------- --------
Paid related to:
Current year 3,053 4,433 3,539
Prior years 44,180 42,816 36,220
-------- -------- --------
Total paid 47,233 47,249 39,759
-------- -------- --------
Net balance, end of year 185,419 184,784 187,180
Plus reinsurance balances recoverable 14,186 3,760 4,040
-------- -------- --------
Balance, end of year $199,605 $188,544 $191,220
======== ======== ========
</TABLE>
<PAGE> 69
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The following table presents the development of the net liability for
undiscounted loss and loss adjustment expense reserves for the calendar years
1986 through 1995. (Through 1994 PICOM discounted loss and LAE reserves.
Effective January 1, 1995, PICOM discontinued this practice.) The amounts
shown for each year on the top line of the table represent PICOM's estimate of
its loss and LAE reserves as originally reported to shareholders. The loss and
LAE reserves as originally reported is presented net of reinsurance receivables
relating to unpaid losses through 1991, net of loss and LAE reserve discount
through 1994, and gross of such amounts thereafter. The net liability-end of
year line represents the undiscounted estimated amount of unpaid losses and LAE
for claims arising in all prior years that were unpaid at the balance sheet
date, including losses that had been incurred but not yet reported, net of
reinsurance ceded. The portion of the table labeled "cumulative paid as of"
shows the net cumulative payments for losses and LAE made in succeeding years
for losses incurred prior to the balance sheet date. The next 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, followed by a line
indicating the change from the original estimate to the most current
re-estimate.
<PAGE> 70
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ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE DEVELOPMENT
(in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1986 1987 1988 1989 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Loss & LAE Reserves as
originally reported $ 96,837 $131,795 $150,745 $162,509 $167,982
Less reinsurance recoverable
Add pro forma change to reflect
elimination of discount 27,515 39,138 43,637 41,161 32,781
-------- -------- -------- -------- --------
Net liability - end of year $124,352 $170,933 $194,382 $203,670 $200,763
Cumulative paid as of:
One year later................. 27,510 39,750 44,596 42,611 35,703
Two years later................ 66,722 83,355 84,376 73,226 69,720
Three years later.............. 106,478 118,865 108,547 99,872 87,375
Four years later............... 131,185 135,454 126,619 110,475 99,051
Five years later............... 141,505 148,437 134,396 118,884 107,379
Six years later................ 150,078 154,114 141,288 125,012
Seven years later.............. 153,650 160,278 146,704
Eight years later.............. 157,194 165,436
Nine years later............... 160,557
Re-estimated net liability as of:
End of year.................... 124,352 170,933 194,382 203,670 200,763
One year later................. 164,956 195,574 206,473 198,911 192,046
Two years later................ 185,896 201,781 202,528 191,402 172,650
Three years later.............. 185,997 199,484 191,995 173,376 161,494
Four years later............... 185,326 192,060 180,919 165,398 146,942
Five years later............... 180,508 188,621 175,759 155,570 144,384
Six years later................ 179,223 186,145 169,167 154,533
Seven years later.............. 176,695 182,785 170,139
Eight years later.............. 173,874 185,280
Nine years later............... 175,527
Net cumulative.................
(deficiency) redundancy (51,175) (14,347) 24,243 49,137 56,379
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1991 1992 1993 1994 1995
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Loss & LAE Reserves as
originally reported $183,603 $184,758 $191,220 $188,544 $199,605
Less reinsurance recoverable (2,403) (4,040) (3,760) (14,186)
Add pro forma change to reflect
elimination of discount 27,839 16,568 12,616 12,310 -
-------- -------- ------- ------- --------
Net liability - end of year $211,442 $198,923 $199,796 $197,094 $185,419
Cumulative paid as of:
One year later................. 43,300 36,220 42,816 44,180
Two years later................ 68,512 65,570 73,183
Three years later.............. 88,126 84,334
Four years later............... 99,732
Five years later...............
Six years later................
Seven years later..............
Eight years later..............
Nine years later...............
Re-estimated net liability as of:
End of year.................... 211,442 198,923 199,796 197,094 185,420
One year later................. 183,353 171,318 173,013 169,625
Two years later................ 167,450 152,998 158,403
Three years later.............. 151,492 145,128
Four years later............... 147,193
Five years later...............
Six years later................
Seven years later..............
Eight years later..............
Nine years later...............
Net cumulative.................
(deficiency) redundancy 64,249 53,795 41,393 27,469
</TABLE>
In evaluating the information in the table above, it should be noted that
each column includes the effects of changes in amounts for prior periods. The
table does not present accident year or policy year development data.
Conditions and trends that have affected the development of liabilities in the
past may not necessarily occur in the future. Accordingly, it may not be
appropriate to extrapolate future redundancies or deficiencies based on this
table.
From 1980 to 1986 all insurance policies written by PICOM were written on
an occurrence basis. Since 1987 PICOM has written medical malpractice
insurance on a claims-made basis and on an occurrence basis.
<PAGE> 71
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The following table presents a reconciliation of reserves of PICOM in
accordance with SAP with reserves reflected in the consolidated financial
statements prepared in accordance with GAAP as of December 31, 1995.
RECONCILIATION OF SAP RESERVES WITH GAAP RESERVES
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Loss and LAE reserves on a SAP basis....... $177,936 $176,026
Add:
Discount................................... 9,393 9,393
Provision for reinsurance on unpaid losses. 13,575 14,186
--------- ------------
Loss and LAE reserves on a GAAP basis...... $200,904 $199,605
========= ============
</TABLE>
For SAP reporting, PICOM discounts its loss reserves at a three percent
discount rate, as permitted by insurance regulatory authorities. For GAAP
reporting, effective January 1, 1995, PICOM eliminated discounting of its
reserves. Under SAP, loss and LAE reserves are presented net of the provision
for reinsurance, whereas under GAAP, loss and LAE reserves are presented gross
of reinsurance and amounts due from reinsurers are presented as an asset.
INVESTMENTS
PICOM invests principally in debt securities such as United States
government obligations, agency mortgage-backed securities and investment grade
corporate bonds. Investment policy and the performance of investment managers
are reviewed quarterly by or on behalf of the PICOM Board. The current
investment policy establishes a target duration and limits fixed income
purchases (absent specific authorization of the PICOM Board) to securities
rated BBB/Baa or better by Moody's Investor Services, Inc. ("Moody's"),
Standard & Poor's, Duff & Phelps Inc. or Fitch Investors Service Inc. PICOM's
investment manager selects specific bond issues within these guidelines.
PICOM's investment policy limits holdings in common stocks and preferred
stocks, cumulatively, to twenty percent of PICOM's statutory surplus.
In general, the investment policy of PICOM is to maximize after tax
investment yield, subject to constraints on investment quality, maturity and
liquidity. PICOM's investment policy establishes a range for the appropriate
allocation among asset classes. The precise allocation varies depending on an
evaluation of the economic environment and on PICOM's tax position. Currently,
PICOM's investment portfolio is being managed with emphasis on United States
government agency, corporate and municipal bonds. As of December 31, 1995, the
securities in PICOM's fixed income portfolio had an average rating of Aa2 as
rated by Moody's and AA as rated by Standard & Poor's for securities not rated
by Moody's. None of the rated securities in PICOM's fixed income portfolio
were rated below investment grade.
As of March 31, 1996 and December 31, 1995, all fixed maturity securities
were classified as available-for-sale and carried at estimated fair value. For
these securities, temporary unrealized gains and losses, net of tax, are
reported directly through shareholders' equity, and have no effect on net
income. As of March 31, 1996, aggregate amortized cost of fixed maturity
securities exceeded the estimated fair value by $1,436,000 and shareholders'
equity was decreased by that amount, reduced for $373,000 in deferred federal
income tax benefit. As of December 31, 1995, estimated fair value of fixed
maturity securities exceeded the aggregate amortized cost by $2,850,000 and
shareholders' equity was increased by that amount, reduced for $963,000 in
deferred federal income taxes. See Notes 2 and 4 to PICOM's consolidated
financial statements. PICOM's fixed maturity
<PAGE> 72
-64-
investment portfolio is sensitive to interest rate changes. As of March
31, 1996 and year-end 1995, a one hundred basis point increase in market
interest rates would decrease the value of this portfolio by four percent,
whereas a one hundred basis point decrease in market interest rates would
increase the value of this portfolio by four percent.
CEDED REINSURANCE
Insurance companies purchase reinsurance to limit risk on individual
exposures, protect against catastrophic losses and increase their capacity to
write insurance. Reinsurance involves an insurance company transferring, or
ceding, all or a portion of its exposure on insurance to a reinsurer. The
reinsurer assumes the exposure in return for a portion of the premium received
by the insurance company. Reinsurance does not discharge the insurer from its
obligation to its insureds. If the reinsurer fails to meet its obligations,
the ceding insurer remains liable to pay the insured.
PICOM cedes a material amount of its business to reinsurers to spread risk
and limit loss per exposure, and to protect shareholders' equity from large or
unusual loss activity. At the present time, PICOM has both excess of loss
reinsurance (i.e., reinsurance in which PICOM has ceded to a reinsurer, and
such reinsurer has assumed, all or a portion of losses associated with a given
policy in excess of a specified retention level up to a predetermined limit)
and "errors and omissions" reinsurance (i.e., reinsurance which protects PICOM
against losses in excess of policy limits claims).
The excess of loss reinsurance programs protects PICOM above a retention of
$300,000 in Michigan with certain adjustments, and $250,000 in Illinois, and
subject to certain aggregate maximum recoveries. Individual losses are covered
by the excess of loss reinsurance on a per incident basis up to $1 million for
physicians and dentists in Michigan; up to $2 million for physicians and
physician clinics in Illinois; and up to $5 million for health care
institutions, lawyers and law firms in all states and certain physician
accounts. The "errors and omissions" reinsurance protects PICOM against losses
in excess of policy limits claims up to $15 million, subject to a $500,000
retention and a 5% quota share provision for each claim. See Note 3 to PICOM's
consolidated financial statements.
The following table identifies PICOM's most significant reinsurers, their
percentage participation in PICOM's aggregate reinsured risk based upon premiums
paid by PICOM and their respective ratings as of December 31, 1995. No other
single reinsurer's percentage participation in 1995 exceeded 3% of total
reinsurance premiums:
<TABLE>
<CAPTION>
1995
Total % of Total
Amounts Ceded Ceded
A.M. Best Due From Premiums Premiums
Rating (1) Reinsurers Written Written
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
(dollars in thousands)
Underwriters Reinsurance Company ....... A $ 4,125 $ 2,500 19.9%
TIG Reinsurance ........................ A 2,909 4,586 36.5
Skandia American ....................... A- 1,165 0 0.0
PMA Reinsurance Company ................ A+ 1,091 2,001 15.9
Continental Casualty Company ........... A 1,001 1,705 13.6
Lloyd's of London ...................... Not Rated 746 585 4.6
Princeton Insurance Company ............ A- 269 442 3.5
Other .................................. Not Rated 958 757 6.0
------- ------- -----
$12,264 $12,576 100.0%
======= ======= =====
</TABLE>
- ---------------
(1) See "GLOSSARY OF SELECTED INSURANCE TERMS" for a description of the rating
continuum utilized by A.M. Best. See also Note 3 to PICOM's consolidated
financial statements.
PICOM, through its reinsurance intermediary, annually reviews the financial
stability of all of its reinsurers. This review includes a ratings analysis of
each reinsurer participating in a reinsurance contract. On the basis of such
review, as of March 31, 1996 and December 31, 1995, PICOM concluded that there
was no material exposure to uncollectible reinsurance balances payable to PICOM
by its reinsurers. PICOM has not experienced any material difficulties in
collecting amounts due from reinsurers (reinsurance recoverables) and believes
(i) that its reinsurance is maintained with financially stable reinsurers and
(ii) that any reinsurance security maintained is adequate to protect its
interests. However the inability of PICOM to collect on its aggregate
reinsurance recoverable, or the inability of PICOM's reinsurers to make
payments under the terms of reinsurance treaties (due to insolvency or
otherwise), could have a material adverse effect on PICOM's future results of
operations and financial position.
It is to be noted that the reinsurers to which PICOM cedes reinsurance
include certain Lloyd's of London syndicates. In recent years, Lloyd's of
London has reported substantial aggregate losses which have had adverse effects
on Lloyd's of London in general and on certain syndicates in particular. These
losses and other adverse developments could affect the ability of certain
syndicates to continue to trade and the ability of insureds to continue to place
business with particular syndicates. It is not possible to predict what effects
the circumstances described above may have on Lloyd's of London and PICOM's
contractual relationship with Lloyd's of London syndicates in future years.
<PAGE> 73
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COMPETITION
PICOM competes with numerous national insurance companies as well as
various monoline medical malpractice insurers and self-insurance mechanisms.
Many of these competitors have substantially greater financial resources than
does PICOM. Competition may take several forms, including pricing, the breadth
and flexibility of coverages and the quality and level of services provided.
The competitive environment could result in lower premiums, reduced
profitability and loss of market share. The success of PICOM may also be
influenced by general economic conditions in the geographic markets served by
it. No assurance can be given that favorable economic conditions will exist in
such markets. See "RISK FACTORS -- Industry Factors" and -- Competition."
REGULATION
Because insurance holding companies and insurance companies are heavily
regulated, the success of PICOM is impacted not only by competitive factors but
also by regulations affecting insurance holding companies and insurance
companies. These regulations are primarily intended to protect policyholders,
not shareholders. Regulation of the insurance industry is undergoing
continuous change and the ultimate effect of such changes cannot be predicted.
Regulations now affecting PICOM may be modified at any time and new regulations
affecting PICOM may be enacted. There is no assurance that such modifications
will not adversely affect the business of PICOM. See "RISK FACTORS --
Regulatory Considerations" and "CERTAIN REGULATORY CONSIDERATIONS."
Such supervision and regulation generally derives from state statutes
which delegate broad regulatory, supervisory and administrative authority to
state insurance departments. Under the insolvency or guaranty fund laws of
most of the states in which Holding Company and PICOM operate, insurers doing
business in those states may be assessed for policyholder losses of insolvent
insurance companies. In addition, from time to time, states may make special
assessments in response to extraordinary circumstances. No assurance can be
given that there will not be such assessments in the future. See "RISK FACTORS
- -- Regulatory Considerations" and "CERTAIN REGULATORY CONSIDERATIONS."
SUBSIDIARIES
PICOM has five wholly-owned subsidiaries: PICOM Insurance Agency ("PIA"),
PICOM Claims Services Corporation ("PCSC"), PICOM Financial Services
Corporation ("PFSC"), PICOM Insurance Company of Illinois and R. Hardy &
Associates, Inc. ("R. Hardy").
PIA is an inactive Michigan insurance agency incorporated under the laws
of the State of Michigan on March 31, 1981. PCSC provides claims management
services on a fee for service basis and was incorporated under the laws of the
State of Michigan on December 10, 1985. PFSC is an inactive business
corporation incorporated under the laws of the State of Michigan on May 29,
1986. PICOM-Illinois is a stock, property and casualty insurer incorporated
under the laws of the State of Illinois on December 5, 1994. PICOM-Illinois
provides medical malpractice insurance to physicians and clinics in the State
of Illinois. R. Hardy is an inactive Illinois insurance agency incorporated
under the laws of the State of Illinois on December 22, 1994. Prior to its
acquisition by PICOM, R. Hardy served as an agent for, and received certain
insurance commissions from, PICOM-Illinois. PICOM-Illinois ceased paying such
commissions to R. Hardy as of January 1, 1996.
In addition, in a transaction valued at approximately $1.2 million, PICOM
acquired all of the issued and outstanding shares of American Insurance
Management Corporation, a privately held Indiana corporation that serves as the
attorney-in-fact for American Medical Insurance Exchange, an Indiana
interinsurance reciprocal exchange.
Following consummation of the Merger all direct and indirect insurance
subsidiaries of Holding Company (e.g., PICOM and PICOM-Illinois) will continue
to operate under their existing insurance licenses and none of such
subsidiaries will be required to reapply for any of such licenses.
<PAGE> 74
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EMPLOYEES
PICOM had 83 full-time employees and one part-time employee as of May 31,
1996. None of these employees is represented by a collective bargaining agent.
PICOM believes that it enjoys good relations with its personnel.
PROPERTIES
PICOM owns its principal executive offices in Okemos, Michigan which
houses the majority of PICOM's employees. PICOM also owns, primarily for
investment purposes, an office building in Williamston, Michigan. PICOM leases
an office facility in Oak Brook, Illinois and operating equipment under
cancelable and noncancelable agreements.
LEGAL PROCEEDINGS
There are no material legal proceedings to which PICOM or any of its
subsidiaries is a party or to which any of their property is subject.
MANAGEMENT OF PICOM
DIRECTORS
The directors of PICOM are Victor T. Adamo, Esq., CPCU, John F. Dodge,
Jr., Esq., H. Harvey Gass, M.D., David W. Heeke, D.D.S., Richard P. Horsch,
M.D., W. Peter McCabe, M.D., Robert E. Paxton, M.D., Isaac J. Powell, M.D.,
Sharon S. Smith, M.D., and William H. Woodhams, M.D. For additional
information concerning the directors of PICOM, see "ELECTION OF PICOM
DIRECTORS."
EXECUTIVE OFFICERS
The executive officers of PICOM are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
Victor T. Adamo, Esq., CPCU 48 President and Chief Executive Officer
John O. Bashant 46 Vice President, Marketing & Sales
R. Kevin Clinton, FCAS, MAAA 41 Vice President, Chief Financial Officer, Actuary
Annette E. Flood, Esq., RN 37 Vice President, Corporate Secretary, Legal Counsel
Darryl K. Thomas, Esq. 39 Vice President, Claims
</TABLE>
No director or executive officer of Holding Company or PICOM is related to
any other director or to any executive officer of Holding Company or PICOM or
of any of its subsidiaries by blood, marriage or adoption, and there are no
arrangements or understandings between a director or executive officer and any
other person pursuant to which such person was elected a director or executive
officer of Holding Company or PICOM or any of their respective subsidiaries.
DIRECTOR REMUNERATION
All directors of PICOM are paid a per diem fee of $750 for attendance at
meetings of the PICOM Board or any committee thereof, and an annual fee of
$6,000 provided that the director has attended three-fourths of the meetings of
the PICOM Board during the preceding calendar year. PICOM's Chairman of the
Board receives an additional annual fee of $7,500, and the chairman of each
standing committee receives an additional annual fee of
<PAGE> 75
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$1,200. Aggregate fees paid for all directors as a group (a total of ten
persons) equaled $184,700 in 1995. Directors of PICOM are also eligible to
participate in PICOM's stock purchase plan.
Mr. Dodge performs certain legal services for PICOM. Mr. Dodge was paid
$26,763 in 1995 for legal services and expenses in connection with his
representation of PICOM. Dr. H. Harvey Gass serves as PICOM's Claims Medical
Consultant. Dr. Gass was paid $29,800 in 1995 with respect to consulting
services rendered to PICOM.
PICOM STOCK PURCHASE PLAN
PICOM has adopted a stock purchase plan (the "PICOM Stock Purchase Plan")
through which employees and directors of PICOM and its wholly owned
subsidiaries may purchase PICOM Common Stock by means of payroll deduction.
Pursuant to the PICOM Stock Purchase Plan, PICOM may elect to match participant
purchases; and PICOM is currently matching at the rate of $1.25 (of which $1.00
is used to purchase PICOM Common Stock and $.25 is applied to income taxes) for
each $1.00 of participant purchases up to a maximum participant purchase of
$6,000 per year. This plan is administered by an independent administrator and
all purchases of PICOM Common Stock are made in open market transactions
through a licensed broker. Participants in this plan exercise all rights of
ownership with respect to shares of PICOM Common Stock purchased for their
respective accounts.
MANAGEMENT REMUNERATION
Summary Compensation Table. The following table sets forth information
concerning compensation for services in all capacities awarded to, earned by or
paid to each of the five most highly compensated executive officers and/or
employees of PICOM and its subsidiaries (the "Named PICOM Executives") for the
last three completed fiscal years whose salary and bonus exceeded $100,000 in
1995.
<TABLE>
<CAPTION>
Long Term Compensation
-------------------------------------------
Annual Compensation Awards Payout
------------------- ------------------------------ -----------
Other Annual Restricted Stock Options All Other
Name and Salary Bonus Compensation Award(s) /SARs LTIP Payout Compensation
Principle Position Year ($) ($) ($)(a) ($) (#) ($) ($)(b)
- ------------------ ---- ------- ------ -------------------- -------------------- -------- ----------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Victor T. Adamo 1995 214,731 5,312 10,500 10,624 -- -- 21,229
President & CEO 1994 205,485 8,171 11,250 16,342 -- -- 18,831
1993 195,700 10,450 10,500 16,000 -- -- 25,554
R. Kevin Clinton 1995 209,080 5,222 -- 10,445 -- -- 21,116
Vice President & 1994 200,077 7,990 -- 15,980 -- -- 19,167
Treasurer 1993 190,550 10,175 -- 15,735 -- -- 24,897
John O. Bashant 1995 125,000 3,782 -- 7,663 -- -- 21,902
Vice President, 1994 99,697 10,639 -- 11,278 -- -- 17,558
Marketing & Sales 1993 94,950 4,950 -- 13,403 -- -- 15,838
Annette E. Flood 1995 110,000 3,692 -- 7,363 -- -- 19,681
Vice President, 1994 95,000 2,729 -- 5,458 -- -- 15,499
Secretary 1993 85,000 -- -- -- -- -- 7,703
</TABLE>
- --------------------------------
(a) Amounts shown consist of director fees.
<PAGE> 76
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(b) Amounts shown for 1995 consist of the following: (i) Mr. Adamo:
matching contribution to purchases of PICOM Common Stock under the PICOM
Stock Purchase Plan of $2,500 and contributions under the PICOM pension
plan for the benefit of Mr. Adamo of $18,729; (ii) Mr. Clinton: matching
contribution to purchases of PICOM Common Stock under the PICOM Stock
Purchase Plan of $2,500 and contributions under the PICOM pension plan for
the benefit of Mr. Clinton of $18,616; (iii) Mr. Bashant: matching
contribution to purchases of PICOM Common Stock under the PICOM Stock
Purchase Plan of $2,500 and contributions under the PICOM pension plan for
the benefit of Mr. Bashant of $19,402; and (iv) Ms. Flood: matching
contribution to purchases of PICOM Common Stock under the PICOM Stock
Purchase Plan of $2,500 and contributions under the PICOM pension plan for
the benefit of Ms. Flood of $17,181. Amounts shown for 1994 consist of
the following: (i) Mr. Adamo: matching contribution to purchases of
PICOM Common Stock under the PICOM Stock Purchase Plan of $1,250 and
contributions under the PICOM pension plan for the benefit of Mr. Adamo of
$17,581; (ii) Mr. Clinton: matching contribution to purchases of PICOM
Common Stock under the PICOM Stock Purchase Plan of $1,250 and
contributions under the PICOM pension plan for the benefit of Mr. Clinton
of $17,917; (iii) Mr. Bashant: matching contribution to purchases of
PICOM Common Stock under the PICOM Stock Purchase Plan of $1,250 and
contributions under the PICOM pension plan for the benefit of Mr. Bashant
of $16,308; and (iv) Ms. Flood: matching contribution to purchases of
PICOM Common Stock under the PICOM Stock Purchase Plan of $1,250 and
contributions under the PICOM pension plan for the benefit of Ms. Flood of
$14,249. Amounts shown for 1993 consist of the following: (i) Mr. Adamo:
matching contribution to purchases of PICOM Common Stock under the PICOM
Stock Purchase Plan of $1,250 and contributions under the PICOM pension
plan for the benefit of Mr. Adamo of $24,304; (ii) Mr. Clinton: matching
contribution to purchases of PICOM Common Stock under the PICOM Stock
Purchase Plan of $1,250 and contributions under the PICOM pension plan for
the benefit of Mr. Clinton of $23,647; (iii) Mr. Bashant: matching
contribution to purchases of PICOM Common Stock under the PICOM Stock
Purchase Plan of $1,250 and contributions under the PICOM pension plan for
the benefit of Mr. Bashant of $14,588; and (iv) Ms. Flood: matching
contribution to purchases of PICOM Common Stock under the PICOM Stock
Purchase Plan of $1,250 and contributions under the PICOM pension plan for
the benefit of Ms. Flood of $6,453.
EMPLOYMENT SEVERANCE COMPENSATION PLANS
Key Employee Retention Plan. PICOM has established a Key Employee
Retention Plan which provides each executive of PICOM who is designated as a
"key employee" with a severance payment and certain insurance and other
benefits in the event that there is a change in control of PICOM that is
coupled with the actual involuntary or constructive termination (as defined in
the plan) of such executive within two years after such change in control. The
amount of the severance payment is equal to two-times the executive's base
salary plus bonus (average of last three years).
Under this plan, a "change in control" is deemed to have occurred if
(i) any person or entity (other than the person or entity in control of PICOM
as of January 1, 1996, or other than a trustee or other fiduciary holding
securities under an employee benefit plan of PICOM, or a corporation owned
directly or indirectly by the shareholders of PICOM in substantially the same
proportions as their ownership of stock of PICOM which adopts the plan) becomes
the beneficial owner, directly or indirectly, of securities of PICOM
representing more than 24.9% of the combined voting power of PICOM's then
outstanding securities; or (ii) during any period of two consecutive years (not
including any period prior to the effective date of the plan), the shareholders
of PICOM approve (A) a plan of complete liquidation of PICOM; or (B) an
agreement for the sale or disposition of all or substantially all of PICOM's
assets; or (C) the sale or reinsurance of all or substantially all of the
insurance business of PICOM so as to cause PICOM to cease to function on a
going forward basis as a medical professional liability insurance company; or
(D) a merger, consolidation, or reorganization of PICOM with or involving any
other corporation, other than a merger, consolidation, or reorganization that
would result in the voting securities of PICOM outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of such surviving entity at least 51% of the
combined voting power of the voting securities of the Company (or such
surviving entity) outstanding immediately after such merger, consolidation, or
reorganization. However, in no event shall a change in control be deemed to
have occurred, with respect to a plan participant, if that participant is part
of a purchasing group which consummates the change in control transaction. A
participant will be deemed "part of a purchasing group" if the participant is
an equity participant or has agreed to become an equity participant in the
purchasing company or group (except for (i) passive ownership or less than five
percent of the stock of the purchasing company; or (ii) ownership of equity
participation in the purchasing company or group which is otherwise deemed not
to be significant, as determined prior to the change in control by a majority
of the nonemployee continuing Directors of PICOM).
<PAGE> 77
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Those executives of PICOM currently covered by the Key Employee Retention
Plan include Victor T. Adamo, John O. Bashant, R. Kevin Clinton, Annette E.
Flood and Darryl K. Thomas. The Merger will not constitute a
"change-in-control" for purposes of this plan. This plan has been assumed by
Holding Company, which assumption will become effective upon consummation of
the Merger.
Employee Retention Plan. PICOM has established an "Employee Retention
Plan" covering certain full-time and regular part-time employees. Under this
plan PICOM will provide a covered employee with the option to receive a lump
sum severance payment equal to one year's W-2 pay and certain other benefits
upon the employee's termination of employment due to (i) the elimination of the
employee's position, (ii) a reduction in the employee's base salary by 10% or
more, (iii) the employee's job site is relocated outside of fifty miles from
their current job site at the time of a "change in control", or (iv) the
employee's employment status is involuntarily changed from regular full-time to
regular part-time, any of which occur within one year after the acquisition of
PICOM by another organization, the merger of PICOM with another organization
where PICOM is not the controlling entity after the merger, or liquidation.
Additional benefits include one year of health insurance coverage, payment for
earned vacation and career assistance. For purposes of this plan, the
definition of "change in control" is the same as under PICOM's Key Employee
Retention Plan. The Merger will not constitute a "change-in-control" for
purposes of this plan. This plan has been assumed by Holding Company, which
assumption will become effective upon consummation of the Merger.
COMPENSATION COMMITTEE REPORT
The PICOM Compensation Committee's report on executive compensation
follows:
The officers of PICOM, including the Chief Executive Officer, are
compensated through a combination of salaries and annual discretionary
incentive compensation.
Salaries are the primary element in executive compensation at PICOM. It
is the goal of the PICOM Compensation Committee to establish competitive
salaries in comparison to market practice. In determining salaries, the
PICOM Compensation Committee considers several factors including job
responsibilities and job performance, education, training, market
opportunities and salaries at comparable companies within the insurance
industry. In establishing salaries, the PICOM Compensation Committee
particularly reviewed a survey of executive compensation published
annually by the Physician Insurers Association of America. The survey
reports on the compensation practice of member insurance companies
throughout the United States that specialize in medical malpractice
insurance.
The PICOM Compensation Committee awards annual incentive compensation
based upon the PICOM Compensation Committee's assessment of the
performance of PICOM during the prior year and the contribution made by
the officers. In exercising its discretion, the PICOM Compensation
Committee considers performance against PICOM's strategic plan,
competitive and other environmental factors and the market performance of
PICOM's Common Stock. Incentive compensation is generally paid primarily
in PICOM Common Stock.
In mid-1993, a new Section 162(m) was added to the Internal Revenue Code
of 1986, as amended. Subject to certain exceptions (including exceptions
relating to stock options and for "performance-based" compensation if
certain conditions are met), Section 162(m) of the Code prohibits the
deduction of compensation in excess of $1 million paid in any year
beginning with 1994 by a publicly-held corporation to any executive named
in PICOM's Summary Compensation Table for the year. For 1995, the
compensation paid to each of PICOM's executive officers was well below $1
million, and the PICOM Compensation Committee expects the same will be
true for the current
<PAGE> 78
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fiscal year. Consequently, for the present the PICOM Compensation Committee
has decided to defer consideration of any compensation policies relating to
Section 162(m) of the Code.
W. Peter McCabe, M.D., Chairman H. Harvey Gass, M.D.
John F. Dodge, Jr. Isaac J. Powell, M.D.
STOCK PERFORMANCE GRAPH
The following graph sets forth the cumulative total shareholder return to
PICOM shareholders during the five year period ended December 31, 1995. Also
displayed for this time period are the overall stock market index (Nasdaq Stock
Market) and PICOM's peer group index (Nasdaq Insurance Stocks).
TOTAL RETURN ANALYSIS
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
PICOM 100.00 214.81 222.22 228.15 197.19 389.89
Nasdaq Insurance Stocks 100.00 141.90 191.10 197.00 189.70 269.10
Nasdaq Stock Market (U.S. Companies) 100.00 160.60 186.90 214.50 209.70 296.30
</TABLE>
<PAGE> 79
-71-
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the PICOM Compensation Committee in 1995 were W. Peter
McCabe, M.D., Chairperson, H. Harvey Gass, M.D., Isaac J. Powell, M.D. and
John F. Dodge, Jr., Esq.
Mr. Dodge performs certain legal services for PICOM. Mr. Dodge was paid
$26,763 in 1995 for legal services and expenses in connection with his
representation of PICOM. Dr. H. Harvey Gass serves as PICOM's Claims Medical
Consultant. Dr. Gass was paid $29,800 in 1995 with respect to consulting
services rendered to PICOM. See "RELATED PARTY TRANSACTIONS OF PICOM."
No executive officer of PICOM served as a member of the compensation
committee (or other board committee performing equivalent functions or, in the
absence of any such committee, the entire board of directors) of another
entity, one of whose executive officers served on the compensation committee of
PICOM. No executive officer of PICOM served as a director of another entity,
one of whose executive officers served on the compensation committee of PICOM.
No executive officer of PICOM served as a member of the compensation committee
(or other board committee performing equivalent functions or, in the absence of
any such committee, the entire board of directors) of another entity, one of
whose executive officers served as a director of PICOM.
<PAGE> 80
-72-
BENEFICIAL OWNERSHIP OF PICOM COMMON STOCK
The following table sets forth information provided by the persons
indicated with respect to the beneficial ownership (as defined under applicable
rules of the Commission) of shares of PICOM Common Stock by (i) each person
known by PICOM who is currently the owner of more than 5% of the outstanding
shares of PICOM Common Stock, (ii) each person who is currently a director or
an executive officer of PICOM and (iii) all persons who are currently
directors or executive officers of PICOM as a group:
<TABLE>
<CAPTION>
PERCENTAGE OF
BENEFICIAL
PRINCIPAL SHAREHOLDERS(1) NUMBER OF SHARES(2) OWNERSHIP(2)
- ------------------------- ------------------- --------------------
<S> <C> <C>
Heartland Advisors, Inc. 222,000 7.0%
NAMED DIRECTORS AND
EXECUTIVE OFFICERS(1)
- ---------------------
Victor T. Adamo 42,414 1.3%
John O. Bashant 8,670 *
R. Kevin Clinton 28,867 *
John F. Dodge, Jr. 14,671 *
Annette E. Flood 3,553
H. Harvey Gass, M.D. 11,112 *
David W. Heeke, D.D.S. 3,087 *
Richard P. Horsch, M.D. 13,371 *
W. Peter McCabe, M.D. 30,318 1.0%
Robert E. Paxton, M.D. 2,260 *
Isaac J. Powell, M.D. 2,705 *
Sharon S. Smith, M.D. 1,777 *
Darryl K. Thomas 922 *
William H. Woodhams, M.D. 4,136 *
All directors and executive officers of PICOM
as a group (14 persons) 167,863 5.3%
</TABLE>
- -------------------
(1) Unless otherwise noted, PICOM believes that all persons named in the
table have, or will have, (i) sole voting and investment power with
respect to all shares of PICOM Common Stock owned by them, except to the
extent that authority is shared by spouses under applicable law, and (ii)
record and beneficial ownership of such shares. The address of Heartland
Advisors, Inc. is 790 North Milwaukee Street, Milwaukee, Wisconsin 53202.
The address of each person listed in the table is 4295 Okemos Road, Box
2510, Okemos, Michigan 48805-9510.
<PAGE> 81
-73-
(2) Number of shares and percentages are based on ownership of PICOM Common
Stock as of May 31, 1996. At May 31, 1996, there were 3,188,145 issued
and outstanding shares of PICOM Common Stock. An asterisk indicates
ownership of less than 1%.
RELATED PARTY TRANSACTIONS OF PICOM
Mr. Dodge performs certain legal services for PICOM. Mr. Dodge was paid
$26,763 in 1995 for legal services and expenses in connection with his
representation of PICOM. Dr. H. Harvey Gass serves as PICOM's Claims Medical
Consultant. Dr. Gass was paid $29,800 in 1995 with respect to consulting
services rendered to PICOM.
In connection with the transactions contemplated by the Reorganization
Agreement and the Plan of Merger, PICOM loaned $1,500,000 to Holding Company for
the purpose of enabling Holding Company to form and capitalize INSCO in
accordance with the Michigan Insurance Code. Holding Company invested all of
that sum in INSCO in exchange for all of the issued and outstanding shares of
capital stock of INSCO. INSCO invested the $1,500,000 in United States
government obligations with maturities of less than one year (the "INSCO
Investment"). The loan from PICOM to Holding Company is evidenced by a
short-term, non-renewable, interest bearing promissory note having a stated
principal amount of $1,500,000 and a maturity date of the earlier of the
Effective Time or December 31, 1996. The Note is secured by a pledge of all of
the issued and outstanding shares of INSCO. Interest on the Note accrues at a
rate equivalent to the rate of interest paid on the INSCO Investment. Upon
consummation of the Merger, the INSCO Investment, and all interest accrued
thereon, will become and be the property of PICOM. Following consummation of
the Merger, PICOM will declare and pay to Holding Company certain cash
dividends. One of these dividends will be in the amount of $2,000,000 and will
be used primarily to pay certain anticipated operating costs of Holding Company,
such as legal and accounting costs, investment banking fees and expenses, and
directors fees. (It is anticipated that the proceeds of this dividend will be
invested by Holding Company until so expended.) The other dividend will be in an
amount at least equal to the amount then outstanding under the Note. Holding
Company will then repay the proceeds of such dividend to PICOM in full
satisfaction of the Note. It is to be noted that on April 12, 1996 the
Financial Analysis Division of the Michigan Insurance Bureau determined (i) that
the $1,500,000 loan from PICOM to Holding Company was not material, (ii) that
such post-Merger dividends were not extraordinary, and (iii) that neither such
loan nor post-Merger dividends required the prior approval of the Michigan
Insurance Commissioner.
Any future transactions between PICOM and its officers, directors or
affiliates will be on terms no less favorable to PICOM, in the opinion of the
disinterested members of the PICOM Board, than could be obtained from
independent third parties. Any such transaction shall also be approved by a
majority of such disinterested directors.
DESCRIPTION OF HOLDING COMPANY CAPITAL STOCK
The following description of the capital stock of Holding Company does not
purport to be complete and is subject to and qualified in its entirety by
reference to Holding Company's First Amended and Restated Articles of
Incorporation, which are filed as an exhibit to the Registration Statement of
which this Proxy Statement/Prospectus forms a part and are incorporated herein
by reference. The following description should be read carefully by the
shareholders of PICOM since, upon consummation of the Merger, the issued and
outstanding shares of PICOM Common Stock will be converted into cash and shares
of Holding Company Common Stock. SEE ALSO "COMPARISON OF SHAREHOLDER RIGHTS."
GENERAL
Holding Company's total authorized capital stock currently consists of
(i) 5,000,000 shares of preferred stock, no par value per share ("Holding
Company Preferred Stock"), and (ii) 25,000,000 shares of common stock, no par
value per share.
<PAGE> 82
-74-
No shares of Holding Company Preferred Stock are currently issued or
outstanding. As of May 31, 1996, one (1) share of Holding Company Common Stock
was issued and outstanding, and such share was owned by Victor T. Adamo, a
director and the President and Chief Executive Officer of PICOM. Mr. Adamo was
issued that share for $25.00 and for the purpose of facilitating the Merger.
Upon consummation of the Merger, 3,188,146 shares of Holding Company Common
Stock will be issued and outstanding.
PREFERRED STOCK
The Holding Company Preferred Stock may be issued in one or more series at
such time or times and for such consideration or considerations as the Holding
Company Board may determine. The Holding Company Board is expressly authorized
at any time, and from time to time, to provide for the issuance of Holding
Company Preferred Stock with such voting powers, full or limited, or without
voting powers, and with such designations, preferences and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, as shall be stated and expressed in the
First Amended and Restated Articles of Incorporation of Holding Company or in
the resolutions of the Holding Company Board providing for the issuance
thereof. The Holding Company Board is authorized to, among other things,
designate the series and the number of shares comprising such series, the
dividend rate or rates on the shares of such series, the redemption rights, if
any, any purchase, retirement or sinking fund, any conversion rights and any
special voting rights. Shares of Holding Company Preferred Stock redeemed or
acquired by Holding Company return to the status of authorized and unissued
shares of Holding Company Preferred Stock, without designation as to series,
and may be reissued by the Holding Company Board.
COMMON STOCK
Subject to the rights of any outstanding shares of Holding Company
Preferred Stock, the holders of Holding Company Common Stock are entitled to
receive such dividends as may from time to time be declared by the Holding
Company Board. With respect to every issue submitted to them as Holding
Company shareholders at a meeting of shareholders or otherwise (including,
without limitation, the election of directors), they are entitled to one vote
per share of Holding Company Common Stock. In the event of liquidation they
are entitled, after payment in full of the liquidation preference of any
outstanding Holding Company Preferred Stock, to share ratably in all assets of
Holding Company available for distribution to holders of shares of Holding
Company Common Stock. Holders of shares of Holding Company Common Stock do not
have preemptive rights. All shares of Holding Company Common Stock now issued
and outstanding are fully paid and nonassessable.
TRANSFER AGENT
The registrar and transfer agent for the Holding Company Common Stock is
expected to be ChaseMellon Shareholders Services.
AUTHORIZED BUT UNISSUED SHARES
The Holding Company Board believes that the availability of shares of
Holding Company Common Stock is advisable to provide Holding Company with the
flexibility to take advantage of opportunities to issue such stock in order to
obtain capital, as consideration for possible acquisitions or for other
purposes (including, without limitation, the issuance of additional shares of
Holding Company Common Stock through stock splits and stock dividends in
appropriate circumstances). There are, at present, no plans, understandings,
agreements or arrangements concerning the issuance of additional shares of
Holding Company Common Stock, except for (i) the shares of Holding Company
Common Stock to be issued pursuant to the Merger, and (ii) shares of Holding
Company Common Stock presently reserved for issuance.
<PAGE> 83
-75-
Uncommitted authorized but unissued shares of Holding Company Common Stock
may be issued from time to time to such persons and for such consideration as
the Holding Company Board may determine and holders of the then outstanding
shares of Holding Company Common Stock may or may not be given the opportunity
to vote thereon, depending upon the nature of any such transactions, applicable
law, the rules and policies of the National Association of Securities
Dealers, Inc. and the judgment of the Holding Company Board regarding the
submission of such issuance to Holding Company's shareholders. Holding Company
shareholders have no preemptive rights to subscribe to newly issued shares.
Moreover, it is possible that additional shares of Holding Company Common
Stock would be issued for the purpose of making an acquisition by an unwanted
suitor of a controlling interest in Holding Company more difficult,
time-consuming or costly or to otherwise discourage an attempt to acquire
control of Holding Company. Under such circumstances the availability of
authorized and unissued shares of Holding Company Common Stock may make it more
difficult for shareholders to obtain a premium for their shares. Such
authorized and unissued shares could be used to create voting or other
impediments or to frustrate a person seeking to obtain control of Holding
Company by means of a merger, tender offer, proxy contest or other means. Such
shares could be privately placed with purchasers who might cooperate with the
Holding Company Board in opposing such an attempt by a third party to gain
control of Holding Company. The issuance of new shares of Holding Company
Common Stock could also be used to dilute ownership of a person or entity
seeking to obtain control of Holding Company. Although Holding Company does
not currently contemplate taking such action, shares of Holding Company Common
Stock could be issued for the purposes and effects described above and the
Holding Company Board reserves its rights (if consistent with its fiduciary
responsibilities) to issue such stock for such purposes.
COMPARISON OF SHAREHOLDER RIGHTS
Certain material differences between the rights of holders of Holding
Company Common Stock and the rights of holders of PICOM Common Stock are
described and summarized below. The following discussion is not meant to be
relied upon as an exhaustive list or a detailed description of such differences
and is not intended to constitute a detailed comparison or description of the
provisions of Holding Company's First Amended and Restated Articles of
Incorporation and bylaws (the "Holding Company Charter Documents"), the
Michigan Business Corporation Act, as amended, PICOM's Articles of
Incorporation and bylaws (the "PICOM Charter Documents"), or the Michigan
Insurance Code of 1956, as amended. The following discussion is qualified in
its entirety by reference to the Holding Company Charter Documents, the PICOM
Charter Documents, and the laws of the State of Michigan, and the shareholders
of Holding Company and the shareholders of PICOM are referred to the complete
text of such documents, agreements and laws.
GENERAL
In the event the Merger is consummated and PICOM is merged with and into
INSCO, each issued and outstanding share of PICOM Common Stock will be
converted into one (1) share of Holding Company Common Stock, and the
shareholders of PICOM will become shareholders of Holding Company. The rights
of Holding Company shareholders are governed by the provisions of the Holding
Company Charter Documents and the MBCA. Currently, the rights of the
shareholders of PICOM are governed by the PICOM Charter Documents and the
Michigan Insurance Code. There are differences between the Holding Company
Charter Documents and the PICOM Charter Documents which will affect
shareholders' rights. Moreover, although the MBCA and the Michigan Insurance
Code are similar in many respects, there are differences between those statutes
which may affect shareholders' rights. Certain of such differences are
summarized below.
BOARD OF DIRECTORS; VOTING FOR DIRECTORS; REMOVAL OF DIRECTORS
<PAGE> 84
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The Holding Company Board currently consists of one director, Victor T.
Adamo, a director and the President and Chief Executive Officer of PICOM, and
will remain at one director through the date of Holding Company's first annual
meeting of shareholders (the "Reformation Date"). Holding Company's first
annual meeting of shareholders will be held at least one business day prior to
the date the Merger is consummated. Mr. Adamo will be the sole shareholder of
Holding Company on the Reformation Date and at that meeting. From and after
the Reformation Date, the Holding Company Board will be comprised of not less
than nine directors and not more than eighteen directors, and the number of
directors constituting the Holding Company Board, within such limitations, may
be determined from time to time by resolution of the Holding Company Board.
Upon consummation of the Merger, the Holding Company Board will have ten
members, consisting of Victor T. Adamo, Esq., CPCU, Mr. Jerry D. Campbell,
John F. Dodge, Jr., Esq., H. Harvey Gass, M.D., W. Peter McCabe, M.D., Mr. John
F. McCaffrey, Isaac J. Powell, M.D., Ann F. Putallaz, Ph.D, William H.
Woodhams, M.D., and Donald S. Young, Esq. See "MANAGEMENT AND OPERATIONS AFTER
THE REORGANIZATION -- Directors."
The PICOM Board may be comprised of no less than nine directors and not
more than eighteen directors and the number constituting the PICOM Board,
within such limitations, may be determined from time to time by resolution of
the PICOM Board. The PICOM Board currently consists of ten directors. The
Michigan Insurance Code requires that at least one director of PICOM be a
resident of the State of Michigan. The PICOM Charter Documents require that a
majority of PICOM's directors be physicians or dentists.
Neither PICOM's shareholders nor Holding Company shareholders have the
right to cumulate their votes in the election of directors. Accordingly, with
respect to an election of directors, both PICOM's shareholders and Holding
Company shareholders are entitled to one vote for each voting share held.
PICOM's Articles of Incorporation generally provide that PICOM directors
are subject to removal by shareholders only for cause and only by the
affirmative vote of the holders of a majority of the shares of PICOM's Common
Stock entitled to vote at an election of directors; however, PICOM's
shareholders are entitled to remove one director without cause each year.
Under the MBCA, directors may be removed with or without cause unless the
corporation's articles of incorporation provide otherwise. Since Holding
Company's First Amended and Restated Articles of Incorporation provide
otherwise, Holding Company directors are subject to removal by shareholders
only for cause and only upon the affirmative vote of the holders of a majority
of the outstanding shares of Holding Company Common Stock.
DIRECTOR NOMINATIONS
Holding Company. Only persons who are nominated in accordance with the
procedures set forth in Article XI of Holding Company's First Amended and
Restated Articles of Incorporation are eligible for election as directors of
Holding Company. Nominations of persons for election to the Holding Company
Board may be made at a meeting of shareholders by or at the direction of the
Holding Company Board or by any Holding Company shareholder entitled to vote
for the election of directors at the meeting who gives timely written notice to
Holding Company's corporate secretary. To be timely, a shareholder's notice
must be delivered to and received at the principal executive offices of Holding
Company not later than (i) with respect to an election to be held at the annual
meeting of shareholders to be held in 1997, not later than February 1, 1997,
(ii) with respect to an election to be held at an annual meeting of
shareholders held after December 31, 1997, 120 days prior to the date one year
from the date of the immediately preceding annual meeting of shareholders, and
(iii) with respect to an election to be held at a special meeting of
shareholders, the close of business on the 10th day following that date that is
the earlier of (A) the date on which public disclosure of such special meeting
is first made and (B) the date on which formal notice of such special meeting
is first given to shareholders.
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The shareholder's notice required by Article XI of the Holding Company's
First Amended and Restated Articles of Incorporation must set forth (i) as to
each person whom the shareholder proposes to nominate for election or
re-election as a director of Holding Company, (A) the name, age, business
address and residence address of such person, (B) the principal occupation or
employment of such person, (C) the class and number of shares of the capital
stock of the corporation which are beneficially owned by such person and
(D) any other information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors of the
corporation, or is otherwise required, in each case pursuant to Regulation 14A
under the Exchange Act (including without limitation such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director of Holding Company if elected); and (ii) as to the shareholder giving
the notice (A) the name and address, as they appear on Holding Company's books,
of such shareholder, (B) a representation that the shareholder is a holder of
record of shares of Holding Company entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to nominate the person
or persons specified in the notice, (C) a description of all arrangements,
understandings or relationships between the shareholder and each nominee and
any other person or persons (naming such person or persons) pursuant to which
the nomination or nominations are to be made by the shareholder, (D) such other
information regarding each nominee proposed by such shareholder as would be
required to be included in a proxy statement filed pursuant to Regulation 14A
under the Exchange Act had the nominee been nominated, or intended to be
nominated by the Holding Company Board, and (E) a consent signed by each such
nominee to serve as a director of Holding Company if so elected. At the
request of the Holding Company Board any person nominated by the Holding
Company Board for election as a director of Holding Company must furnish to
Holding Company's corporate secretary the information required to be set forth
in a shareholder's notice of nomination which pertains to the nominee. The
chairman of the meeting of Holding Company shareholders at which directors are
to be elected must, if the facts warrant, determine and declare to the meeting
that a nomination was not made in accordance with the procedures outlined
above, and if the chairman so determines, he must so declare to the meeting and
the defective nomination must be disregarded.
PICOM. Nominations for the election of directors may be made by the PICOM
Board or a nominating committee appointed by the PICOM Board or by any PICOM
shareholder entitled to vote in the election of directors generally. However,
any shareholder entitled to vote in the election of directors may nominate one
or more persons for election as directors at a meeting, only if written notice
of such shareholder's intent to make such nomination has been given, either by
personal delivery or by United States mail, postage prepaid, to PICOM's
corporate secretary not later than (i) with respect to an election to be held
at an annual meeting of shareholders, 90 days in advance of the date of the
PICOM's proxy statement released to security holders in connection with the
previous year's annual meeting of shareholders, and (ii) with respect to an
election to be held at a special meeting of shareholders, the close of business
on the seventh day following the date on which notice of such meeting is first
given to PICOM shareholders.
The PICOM shareholder's notice must set forth (i) the name and address of
the shareholder and of the person to be nominated; (ii) a representation that
the shareholder is a holder of record of PICOM Common Stock entitled to vote at
such meeting and intends to appear in person or by proxy at the meeting to
nominate the persons specified in the notice; (iii) a description of all
arrangements or understandings between the shareholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nominations are to be made by the shareholder; (iv) such other information
regarding each nominee proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules promulgated
under the Michigan Insurance Code had the nominee been nominated, or intended
to be nominated, by the PICOM Board; and (v) the consent of each nominee to
serve as a director of PICOM if so elected. The chairman of the meeting shall
refuse to acknowledge the nomination of any person not made in compliance with
the foregoing procedure.
SHAREHOLDER VOTING REQUIREMENTS
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General. Pursuant to the MBCA, all matters submitted to a vote of Holding
Company shareholders, other than the election of directors (for which the
affirmative vote of a plurality of the votes cast at an election is required),
the amendment of Holding Company's bylaws and certain provisions of Holding
Company's First Amended and Restated Articles of Incorporation, and certain
business combination transactions involving a 10% shareholder or an affiliate
thereof, are determined by a vote of the holders of shares entitling them to
exercise a majority of the voting power of Holding Company.
Pursuant to the Michigan Insurance Code, all matters submitted to a vote
of PICOM's shareholders, other than the election of directors (for which the
affirmative vote of a plurality of the votes cast at an election is required),
the amendment of PICOM's bylaws and certain provisions of PICOM's Articles of
Incorporation, and certain business combination transactions involving a 10%
shareholder or an affiliate thereof, are determined by the holder(s) of shares
entitled to exercise a majority of the total voting power of PICOM.
The MBCA and the Michigan Insurance Code provide similar voting rights
with respect to mergers, sales of substantially all of the assets of a
corporation and other extraordinary corporate transactions.
Holding Company Supermajority Voting Provisions. Article XII of Holding
Company's First Amended and Restated Articles of Incorporation provide that
Holding Company's Bylaws shall not be adopted, amended or repealed by the
shareholders of Holding Company except by the vote of the holders of not less
than three-quarters of the outstanding shares of capital stock of Holding
Company entitled to vote thereon and, in the case of any matter on which the
holders of shares of any class or series of such capital stock shall be
entitled to vote as a class or series, the affirmative vote of not less than
three-quarters of each such class or each such series, as the case may be;
provided further, however, that such three-quarters vote shall not be required
for any such adoption, amendment or repeal recommended to shareholders by the
affirmative vote of not less than two-thirds of the Holding Company Board, in
which case such adoption, amendment or repeal requires only the vote, if any,
required under the MBCA.
Article XVII of Holding Company's First Amended and Restated Articles of
Incorporation provides that none of Articles VII (limitations on director
liability), VIII (quorum requirement), IX (shareholder action by unanimous
written consent), X (shareholder proposal and notification requirements), XI
(director nomination and notification requirements), XII (by-law amendments),
XIII (size and classification of board of directors), XIV (control share
acquisition) or XVII (supermajority vote requirement) thereof shall be amended,
or repealed in any respect, nor shall any provision which will either (i) have
the effect of modifying or permitting circumvention of any of those provisions
of Holding Company's First Amended and Restated Articles of Incorporation, or
(ii) establish cumulative voting in the election of directors of Holding
Company be adopted and added to Holding Company's First Amended and Restated
Articles of Incorporation, except upon the affirmative vote of not less than
three-quarters of the shares of capital stock of Holding Company issued and
outstanding entitled to vote thereon and, in the case of any matter on which
the holders of shares of any class or series of such capital stock shall be
entitled to vote as a class or series, upon the affirmative vote of not less
than three-quarters of each such class or each such series, as the case may be.
PICOM Supermajority Voting Provisions. Article XVIII of PICOM's Articles
of Incorporation provides that the affirmative vote of the holders of 80% of
the PICOM Common Stock, voting separately as a class, together with the
affirmative vote of an "Independent Majority of Shareholders" is required to
approve certain mergers or consolidations, sales, leases or exchanges of
assets, or reinsuring of risks, involving PICOM and an "Interested Person" or
an affiliate or associate of an Interested Person (collectively, a "Business
Combination"). Article XVIII of PICOM's Articles of Incorporation defines the
term "Interested Person" to mean any person which is the beneficial owner of
10% or more of the outstanding shares of PICOM Common Stock (including, for
such purposes, shares of PICOM Common Stock beneficially owned by all
affiliates or associates of such person. For purposes of Article XVIII of
PICOM's Articles of Incorporation, an "Independent Majority of Shareholders"
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generally means the holders of a majority of the outstanding shares of PICOM
Common Stock not beneficially owned by an Interested Person.
Article XVIII of PICOM's Articles of Incorporation provides that the
supermajority voting provisions contained therein do not apply to any Business
Combination (i) approved by a majority vote of the PICOM Board at any time
prior to the time at which the person involved in the transaction as an
Interested Person became an Interested Person, or (ii) approved by a majority
vote of the PICOM Board at any time after the time at which the person involved
in the transaction became an Interested Person, so long as such approval by the
PICOM Board included the affirmative vote of at least three directors who were
members of the PICOM Board at the time such Interested Person became an
Interested Person.
In addition to Business Combinations receiving the approval of the PICOM
Board as specified above, Article XVIII of PICOM's Articles of Incorporation
does not apply to a proposed Business Combination satisfying certain price,
form of consideration and procedural requirements designed to ensure the
fairness of the proposed Business Combination.
By virtue of the prior approval of the Reorganization Agreement and the
Plan of Merger and the transactions contemplated thereby by the PICOM Board,
Article XVIII of PICOM's Articles of Incorporation do not apply to the Merger.
Section 5 of Article XVIII of PICOM's Articles of Incorporation provides
that said Article XVIII cannot be amended or rescinded except by the
affirmative vote of the holders of 80% of the outstanding shares of PICOM
Common Stock, and the affirmative vote of an Independent Majority of
Shareholders.
ANTI-TAKEOVER LAWS
Holding Company is subject to the Michigan "Fair Price" statute
(Chapter 7A of the MBCA), which applies to certain "business combinations" such
as mergers, substantial sales of assets or securities issuances and
liquidation, recapitalization or reorganization plans. Generally, the statute
requires that prior to entering into a business combination with an
"interested shareholder" (generally, the holder of 10% or more of a class of a
corporation's voting stock), a corporation must receive (i) an advisory
statement from the corporation's board of directors, the approval of holders of
90% of each class of the corporation's outstanding voting stock and the
approval of two-thirds of the holders of each such class other than the
interested shareholder. The supermajority voting requirements do not apply
where the interested shareholder's offer meets certain price, form of
consideration and procedural requirements designed to make such offers fair to
all shareholders or where the board of directors has approved the transaction
with respect to a particular interested shareholder prior to the interested
shareholder becoming an interested shareholder.
Holding Company is also subject to the Michigan "Control Share
Acquisition" statute (Chapter 7B of the MBCA). Generally, the statute provides
that an entity that acquires "control shares" may vote the control shares on
any matter only if a majority of all shares, and of all non-"interested
shares," entitled to vote thereon and of each class of stock entitled to vote
as a class, approve such voting rights. "Interested shares" are defined
generally as those shares owned by officers of the corporation, employee
directors of the corporation and the entity making the control share
acquisition. "Control shares" are defined generally as shares that when added
to shares already owned by an entity, would give the entity voting power in the
election of directors within any of three thresholds: one-fifth, one-third and
a majority. The effect of the statute is to condition the acquisition of
voting control of a Michigan corporation on the approval of a majority of its
pre-existing disinterested shareholders.
The provisions of the Michigan "Fair Price" statute do not apply to the
Merger because the Merger will not alter the contract rights of the Holding
Company Common Stock as set forth in Holding Company's First
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Amended and Restated Articles of Incorporation. The provisions of the
Michigan "Control Share Acquisition" statute do not apply to the Merger because,
among other things, Holding Company is a party to the Reorganization Agreement
and the Plan of Merger and the Merger will be effected in compliance with the
applicable provisions of Chapter 7 of the MBCA.
PICOM is not subject to any statute analogous to the Michigan "Fair Price"
statute or the Michigan "Control Share Acquisition" statute. However, under
the Michigan Insurance Code the acquisition or change of "control" of a
domestic insurer (such as PICOM) or of any person that controls a domestic
insurer (such as Holding Company) cannot be consummated without the prior
approval of the Michigan Insurance Commissioner. See "CERTAIN REGULATORY
CONSIDERATIONS."
MEETINGS OF SHAREHOLDERS
Holding Company. At any annual or special meeting of Holding Company's
shareholders, only such business shall be conducted as shall have been properly
brought before such meeting. To be properly brought before such meeting
business must be (i) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Holding Company Board,
(ii) otherwise properly brought before the meeting by or at the direction of
the Holding Company Board, or (iii) otherwise properly brought before the
meeting by a Holding Company shareholder. For business to be properly brought
before such meeting by a Holding Company shareholder, the shareholder must have
given timely notice thereof in writing to Holding Company's corporate
secretary. To be timely, a shareholder's notice must be delivered to and
received at the principal executive offices of Holding Company, (i) in the case
of the annual meeting of shareholders to be held in 1997, not later than
February 1, 1997; (ii) in the case of an annual meeting of shareholders held
after December 31, 1997, not later than 120 days prior to the date one year
from the date of the immediately preceding annual meeting of shareholders, or
(iii) in the case of a special meeting of shareholders, not later than the
close of business on the 10th day following that date that is the earlier of
(A) the date on which public disclosure of such special meeting is made and
(B) the date on which formal notice of such special meeting is first given to
shareholders.
The shareholder's notice must set forth as to each matter the shareholder
proposes to bring before the meeting (i) a brief description of the business
desired to be brought before the meeting (including the complete text of any
resolutions to be presented at the meeting) and the reasons for conducing such
business at the meeting, (ii) the name and address, as they appear on Holding
Company's books, of the shareholder proposing such business, (iii) a
representation that the shareholder is a holder of record of shares of Holding
Company entitled to vote at such meeting and intends to appear in person or by
proxy at the meeting to bring before the meeting each matter specified in the
notice, (iv) a description of all arrangements, understandings or relationships
between the shareholder and any other person or persons (naming such person or
persons) with respect to shares of the capital stock of Holding Company or each
matter specified in the notice, (v) the class and number of shares of capital
stock of Holding Company which are beneficially owned by the shareholder, and
(vi) any material interest of the shareholder in each matter specified in the
notice. The chairman of the meeting of Holding Company shareholders must, if
the facts warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the procedures outlined
above, and if the chairman so determines, he must so declare to the meeting and
any such business not properly brought before the meeting must not be
transacted.
A special meeting of Holding Company shareholders may be called at any
time by the chairman of the board or the president of Holding Company, or by a
majority of the members of the Holding Company Board then in office, or by
shareholders owning, in the aggregate, not less than 25% of all the shares
entitled to vote at such special meeting. The method by which such meeting may
be called is as follows: Upon receipt of a specification in writing setting
forth the date and objects of such proposed special meeting, signed by the
chairman of the board, or the president of Holding Company, or by a majority of
the members of the Holding Company Board then in
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office, or by shareholders as above provided, Holding Company's corporate
secretary must prepare, sign and mail the notices requisite to such meeting.
Notwithstanding the foregoing provisions of Holding Company's First
Amended and Restated Articles of Incorporation, the MBCA entitles the holders
of not less than 10% of the shares of Holding Company Common Stock entitled to
vote at a meeting to apply to the circuit court of Ingham County, Michigan and,
upon good cause shown, to obtain a court order that a special meeting of
shareholders be held.
Holding Company's Charter Documents do not permit a shareholder to
participate in an annual meeting or special meeting of Holding Company
shareholders by a conference telephone or by other similar communications
equipment.
PICOM. Proposals to be submitted for consideration at any meeting of
shareholders may be made by the PICOM Board or any shareholder entitled to vote
on such proposal at such meeting. However, any shareholder intending to make a
proposal at a meeting at which the shareholder is entitled to vote on the
proposal shall be entitled to make the proposal, only if written notice of such
shareholder's intent to make such proposal has been given, either by personal
delivery or by United States mail, postage prepaid, to PICOM's corporate
secretary not later than (i) with respect to a proposal to be made at an annual
meeting of shareholders, 90 days in advance of the date of PICOM's proxy
statement released to security holders in connection with the previous year's
annual meeting of shareholders, and (ii) with respect to a proposal to be made
at a special meeting of shareholders, the close of business on the seventh day
following the date on which notice of such meeting is first given to
shareholders.
The PICOM shareholder's notice must set forth: (i) the name and address
of the shareholder who intends to make the proposal and the complete text of
the proposal; (ii) a representation that the shareholder is a holder of record
of PICOM Common Stock entitled to vote at such meeting and intends to appear in
person or by proxy at the meeting to make the proposal specified in the notice;
and (iii) a description of all arrangements or understandings between the
shareholder and any person (naming such person) pursuant to which the proposal
is to be made by the shareholder. The chairman of the meeting shall refuse to
permit the introduction of any proposal not made in compliance with the
foregoing procedure.
PICOM's Charter Documents provide that special meetings of shareholders
may be called at any time by the chairman of the board, the president or a
majority of the PICOM Board acting with or without a meeting, or by the
president or secretary upon the written request of the holder or holders of
record of one-fourth of all shares of PICOM capital stock outstanding and
entitled to vote thereat.
Unlike the MBCA, the Michigan Insurance Code does not provide shareholders
with the right to apply to a court to cause a special meeting of PICOM
shareholders to be held.
DIRECTOR LIABILITY AND INDEMNIFICATION
As permitted by the MBCA, Holding Company's First Amended and Restated
Articles of Incorporation provide that a director of Holding Company will not
be personally liable for monetary damages for breach of the director's
fiduciary duty as a director. Under the MBCA, a limitation on a director's
liability such as that contained in Holding Company's First Amended and
Restated Articles of Incorporation does not eliminate or limit the director's
liability for breaches of the duty of loyalty, for acts or omissions not made
in good faith or which involve intentional misconduct or a knowing violation of
law, or for any transaction in which the director derived an improper personal
benefit.
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As permitted by the Michigan Insurance Code, PICOM's Articles of
Incorporation provide that a director of PICOM will not be personally liable
for monetary damages for breach of the director's fiduciary duty as a director.
Under the Michigan Insurance Code, a limitation on a director's liability such
as that contained in PICOM's Articles of Incorporation does not eliminate or
limit the director's liability for breaches of the duty of loyalty, for acts or
omissions not made in good faith or which involve intentional misconduct or a
knowing violation of law, or for any transaction in which the director derived
an improper personal benefit.
The Michigan Insurance Code and the MBCA provide similar rights to
indemnity and expense advancement for directors of corporations chartered under
the laws of their respective states. Accordingly, the rights to indemnity and
expense advancement provided to the directors of PICOM and Holding Company are
substantially similar. PICOM maintains directors and officers' liability
insurance with an unrelated insurance company. It is anticipated that Holding
Company will also maintain directors and officers' liability insurance with an
unrelated insurance company.
INSOFAR AS INDEMNIFICATION FOR LIABILITIES ARISING UNDER THE SECURITIES
ACT MAY BE PERMITTED TO DIRECTORS, OFFICERS OR PERSONS CONTROLLING HOLDING
COMPANY PURSUANT TO THE FOREGOING PROVISIONS, HOLDING COMPANY HAS BEEN INFORMED
THAT IN THE OPINION OF THE SECURITIES AND EXCHANGE COMMISSION SUCH
INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED IN THE SECURITIES ACT AND
IS THEREFORE UNENFORCEABLE. IN THE EVENT A CLAIM FOR INDEMNIFICATION AGAINST
SUCH LIABILITIES (OTHER THAN THE PAYMENT BY HOLDING COMPANY OF EXPENSES
INCURRED OR PAID BY A DIRECTOR, OFFICER OR CONTROLLING PERSON OF HOLDING
COMPANY IN A SUCCESSFUL DEFENSE OF ANY ACTION, SUIT OR PROCEEDING) IS ASSERTED
BY SUCH DIRECTOR, OFFICER OR CONTROLLING PERSON IN CONNECTION WITH THE
SECURITIES BEING REGISTERED PURSUANT TO THE REGISTRATION STATEMENT, HOLDING
COMPANY WILL, UNLESS IN THE OPINION OF ITS COUNSEL THE MATTER HAS BEEN SETTLED
BY CONTROLLING PRECEDENT, SUBMIT TO A COURT OF APPROPRIATE JURISDICTION THE
QUESTION OF WHETHER SUCH INDEMNIFICATION IS AGAINST PUBLIC POLICY AS EXPRESSED
IN THE SECURITIES ACT AND WILL BE GOVERNED BY THE FINAL ADJUDICATION OF SUCH
ISSUE.
PAYMENT OF DIVIDENDS
Holding Company. Under the MBCA, Holding Company may not make
distributions to its shareholders if, after giving effect to the distribution,
it would not be able to pay its debts as they become due in the usual course of
business, or its total assets would be less than the sum of its total
liabilities plus, unless its articles of incorporation permit otherwise, the
amount that would be needed, if Holding Company were to be dissolved at the
time of the distribution, to satisfy the preferential rights upon dissolution
of shareholders whose preferential rights are superior to those receiving the
distribution.
PICOM. PICOM's ability to declare and pay dividends is regulated under
the Michigan Insurance Code. See "CERTAIN REGULATORY CONSIDERATIONS."
CHARTER AMENDMENTS
Generally speaking, under the MBCA and the Michigan Insurance Code, a
corporation's charter may be amended by the affirmative vote of a majority of
the outstanding stock entitled to vote thereon, and a majority of the
outstanding stock entitled to vote thereon as a class, subject to such
supermajority vote requirements as may be provided for in the corporation's
charter. Except for certain provisions thereof which are subject to
supermajority vote requirements as described above, Holding Company's First
Amended and Restated Articles of Incorporation may be amended by the
affirmative vote of a majority of the outstanding shares of Holding Company
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Common Stock. Similarly, except for certain provisions thereof which are
subject to supermajority vote requirements as described above, PICOM's Articles
of Incorporation may be amended by the affirmative vote of a majority of the
outstanding shares of PICOM Common Stock.
Holding Company. Under the MBCA, the shareholders or the board of
directors of the corporation may adopt, amend or repeal the bylaws unless the
articles of incorporation or bylaws of the corporation provide that the power
to adopt new bylaws is reserved exclusively to the shareholders or that the
bylaws or any particular bylaw shall not be altered or repealed by the board
of directors. Holding Company's First Amended and Restated Articles of
Incorporation provide that Holding Company's bylaws may be amended or repealed
by a majority vote of the Holding Company Board. As indicated above, the
adoption, amendment or repeal of Holding Company's bylaws by its shareholders
requires the affirmative vote of the holders of not less than three-quarters of
the outstanding shares of capital stock of Holding Company entitled to vote
thereon and, in the case of any matter on which the holders of shares of any
class or series of such capital stock shall be entitled to vote as a class or
series, the affirmative vote of not less than three-quarters of each such
class or each such series, as the case may be; provided further, however, that
such three-quarters vote shall not be required for any such adoption, amendment
or repeal recommended to shareholders by the affirmative vote of not less than
two-thirds of the Holding Company Board, in which case such adoption, amendment
or repeal requires only the vote, if any, required under the MBCA.
PICOM. Under the Michigan Insurance Code, the shareholders or the board
of directors of an insurance corporation may adopt, amend or repeal bylaws.
PICOM's Charter Documents provide that PICOM's Bylaws of the corporation may be
amended at any regular or special meeting of the PICOM Board by a vote of the
majority of the directors present at a meeting at which a quorum is present.
The PICOM Bylaws may also be amended at any regular or special meeting of PICOM
shareholders upon receiving the affirmative vote of the holders of at least the
majority of the shares voting at a meeting at which a quorum is present,
provided that a statement of the nature of the proposed amendment is included
in the notice of such meeting of the shareholders.
DISSENTERS' RIGHTS
Holding Company shareholders have such dissenters' rights as are provided
for by the MBCA. The MBCA expressly authorizes shareholders of a Michigan
corporation to exercise dissenters' rights with respect to certain amendments
to the articles of incorporation of such Michigan corporation which adversely
affect the rights of the class of shares held by them. Similarly, the MBCA
expressly permits shareholders to exercise dissenters' rights of appraisal in
connection with the sale or exchange of all or substantially all of the
property of a Michigan corporation if the shareholder is entitled to vote
thereon. However, the Michigan Insurance Code does not provide for, and,
consequently, PICOM shareholders do not have, dissenters' rights.
OTHER MATTERS
The MBCA contains a provision permitting shareholder action by less than
unanimous written consent, but it requires a provision to that effect to be
included in a corporation's articles of incorporation. Because Holding
Company's First Amended and Restated Articles of Incorporation do not contain a
provision authorizing shareholder action by less than unanimous written
consent, shareholders of Holding Company do not have this right.
Neither the Michigan Insurance Code nor the PICOM Charter Documents
contain any provisions with respect to shareholder action by written consent in
lieu of a meeting. Accordingly, PICOM's shareholders do not have this right.
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THE REORGANIZATION AGREEMENT
The following is a summary of certain provisions of the Reorganization
Agreement and is qualified in its entirety by reference to the Reorganization
Agreement, a conformed copy (without exhibits) of which is attached as Annex A
to this Proxy Statement/Prospectus and which is incorporated by reference
herein. Shareholders are urged to read the Reorganization Agreement carefully.
REPRESENTATIONS AND WARRANTIES
In the Reorganization Agreement, each of PICOM and its subsidiaries, and
each of Holding Company and INSCO made certain customary representations and
warranties relating to, among other things, (i) their respective organization
and certain corporate matters; (ii) the authorization, execution, delivery,
performance and enforceability of the Reorganization Agreement and related
matters; (iii) the accuracy of information supplied by each of PICOM and
Holding Company in connection with this Proxy Statement/Prospectus and the
Registration Statement; (iv) compliance with applicable laws; and (v) the
absence of material pending or threatened litigation.
CONDUCT OF BUSINESS; CERTAIN COVENANTS
Pursuant to the Reorganization Agreement, each of the PICOM Companies and
the Holding Company Entities made various customary covenants regarding their
respective operations and activities during the period from May 13, 1996 until
the earlier of the Closing Date or the termination of the Reorganization
Agreement.
Generally speaking, and except as otherwise required or permitted by the
Reorganization Agreement or as consented to by either PICOM (in the case of the
Holding Company Entities) or Holding Company (in the case of the PICOM
Companies), each of the PICOM Companies and the Holding Company Entities agreed
(i) to carry on its respective business only in the usual, regular and ordinary
course in substantially the same manner as previously conducted, (ii) to use
all reasonable efforts to preserve intact its business organizations, rights
and franchises, customer relationships and goodwill, and (iii) not to enter
into any material transaction not in the ordinary course of business. In
addition, because INSCO was incorporated as a stock insurance company under the
Michigan Insurance Code solely for the purpose of merging with and into PICOM
and establishing PICOM as a wholly-owned subsidiary of Holding Company, the
Reorganization Agreement limits the types of business activities that INSCO may
undertake and provides that INSCO shall not write or underwrite any lines of
insurance.
In addition, and except as otherwise provided in, or contemplated by, the
Reorganization Agreement or as consented to by either PICOM (in the case of the
Holding Company Entities) or Holding Company (in the case of the PICOM
Companies), each of the PICOM Companies and the Holding Company Entities agreed
not to: (i) amend or propose publicly to amend the articles of incorporation,
bylaws and certain other governing documents of such party; (ii) take any
action intended to result in any of its representations and warranties set
forth in the Reorganization Agreement being or becoming untrue in any material
respect, or in any of the conditions precedent to the consummation of the
Merger not being satisfied; (iii) take any action which would adversely affect
the ability of such party to obtain any of the "Requisite Regulatory Approvals"
(as defined under "-- Conditions to Consummation" below) without imposition of
a "Materially Burdensome Condition" (as defined under "-- Conditions to
Consummation" below) except, in every case, as may be required by applicable
law; or (iv) take or cause to be taken any action, whether before or after the
Closing Date, which would disqualify the Merger as a "reorganization" within
the meaning of Section 368(a) of the Code.
CAPITALIZATION OF INSCO
In connection with the transactions contemplated by the Reorganization
Agreement and the Plan of Merger, PICOM loaned $1,500,000 to Holding Company
for the purpose of enabling Holding Company to form and
<PAGE> 93
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capitalize INSCO in accordance with the Michigan Insurance Code. Holding
Company invested all of that sum in INSCO in exchange for all of the issued and
outstanding shares of capital stock of INSCO. INSCO invested the $1,500,000 in
the INSCO Investment, which consists of United States government obligations
with maturities of less than one year. The loan from PICOM to Holding Company
is evidenced by a short-term, non-renewable, interest bearing promissory note
having a stated principal amount of $1,500,000 and a stated maturity date that
is the earlier of the Effective Time or December 31, 1996. The Note is secured
by a pledge of all of the issued and outstanding shares of INSCO. Interest on
the Note accrues at a rate equivalent to the rate of interest paid on the INSCO
Investment. Upon consummation of the Merger, the INSCO Investment, and all
interest accrued thereon, will become and be the property of PICOM. Following
consummation of the Merger, PICOM will declare and pay to Holding Company
certain cash dividends. One of these dividends will be in the amount of
$2,000,000 and will be used primarily to pay certain operating costs of Holding
Company, such as legal and accounting costs, investment banking fees and
expenses, and directors fees. (It is anticipated that the proceeds of this
dividend will be invested by Holding Company until so expended.) The other
dividend will be in an amount equal to the amount then outstanding under the
Note, and Holding Company will then repay the proceeds of such dividend to PICOM
in full satisfaction of the Note. It is to be noted that on April 12, 1996
the Financial Analysis Division of the Michigan Insurance Bureau determined (i)
that the $1,500,000 loan from PICOM to Holding Company was not material, (ii)
that such post-Merger dividends were not extraordinary, and (iii) that neither
such loan nor such post-Merger dividends required the prior approval of the
Michigan Insurance Commissioner.
STOCK LISTING
Pursuant to the Reorganization Agreement, Holding Company, INSCO and PICOM
agreed to use their best efforts to cause the shares of Holding Company Common
Stock to be issued in the Merger to be admitted for quotation on the Nasdaq
National Market upon official notice of issuance. The shares of Holding
Company Common Stock to be issued in the Merger have been admitted for
quotation on the Nasdaq National Market subject to official notice of issuance.
PICOM Common Stock is traded through the Nasdaq National Market under the
symbol "PICM", and Holding Company has applied for the same trading symbol.
In connection with the Merger and the admission for quotation on the
Nasdaq National Market the shares of Holding Company Common Stock to be issued
in the Merger, Holding Company will become subject to the informational and
periodic reporting requirements of the Exchange Act. In addition, PICOM will
delist the PICOM Common Stock on the Nasdaq National Market.
INDEMNIFICATION
Under Section 4.13 of the Reorganization Agreement, (i) PICOM, Holding
Company and INSCO are obligated to indemnify, defend and hold harmless each
person who is now an incorporator, officer or director of PICOM, Holding
Company and/or INSCO, respectively, and (ii) Holding Company is obligated to
indemnify, defend and hold harmless each person who is now an incorporator,
officer or director of PICOM, Holding Company and INSCO (such persons described
in clause (i) and (ii) above being the "Indemnified Parties"), in each case
against all losses, claims, damages, costs, expenses, liabilities or judgments,
or amounts that are paid in a settlement approved by the Board of Directors of
the party providing the indemnification (the "Indemnifying Party"), of or in
connection with any claim, action, suit, proceeding or investigation (each a
"Claim") based in whole or in part on or arising in whole or in part out of the
fact that such person is or was an incorporator, a director, an officer, an
employee or an agent of PICOM, Holding Company and/or INSCO, as applicable, or
is or was serving at the request of PICOM, Holding Company and/or INSCO, as
applicable, as an incorporator, a director, an officer, an employee or an
agent of another corporation, partnership, joint venture, trust or other
enterprise, if such Claim pertains to any matter or fact arising, existing or
occurring prior to the consummation of the Merger, regardless of whether such
Claim is asserted or claimed prior to, or at or after, the consummation of the
Merger to the full extent PICOM, Holding Company and/or INSCO, as applicable,
is or would have been permitted under applicable law, to indemnify such person
(and PICOM, Holding Company and/or INSCO, as
<PAGE> 94
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applicable, shall pay expenses in advance of the final disposition of any
such Claim to each Indemnified Party to the full extent permitted by applicable
law, upon receipt of any undertaking required by applicable law). The
indemnification provisions of Section 4.13 of the Reorganization Agreement are
in addition to, and are not intended to supersede or replace, any rights of any
Indemnified Party (or any obligations of any Indemnifying Party) under the
indemnification, advancement of expenses or other provisions of the Certificate
or articles of incorporation or bylaws of PICOM, Holding Company and/or INSCO,
any indemnification agreement between any Indemnifying Party and any Indemnified
Party, or otherwise available under applicable law.
CONDITIONS TO CONSUMMATION
The obligation of each of the PICOM Companies and Holding Company Entities
to effect the Merger is subject to certain conditions, including (without
limitation) the following:
(i) the Reorganization Agreement and the Plan of Merger shall have been
approved and adopted by the requisite vote of the shareholders of PICOM and
INSCO;
(ii) all authorizations, consents, orders or approvals of, or
declarations or filings with, and all expirations of waiting periods imposed
by, any governmental entity (collectively, the "Consents") which are
prescribed by law as necessary for the consummation of the Merger and the
other transactions contemplated by the Reorganization Agreement, other than
immaterial Consents the failure to obtain which would have no material
adverse effect on the consummation of the Merger or the other transactions
contemplated by the Reorganization Agreement, or on the corporations
surviving the Merger, shall have been filed, occurred or been obtained (all
such authorizations, consents, orders, approvals, declarations or filings and
the lapse of all such waiting periods being referred to as the "Requisite
Regulatory Approvals"), as the case may be and all such Requisite Regulatory
Approvals shall be in full force and effect;
(iii) the Registration Statement, of which this Proxy
Statement/Prospectus forms a part, shall have become effective under the
Securities Act and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been initiated or threatened;
(iv) the sale of the Holding Company Common Stock shall have been
qualified or registered with the appropriate "Blue Sky" authorities of all
states in which qualification or registration is required and such
qualifications or registrations shall not have been suspended or revoked;
(v) no order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition (an
"Injunction") preventing the consummation of the Merger or any of the
transactions contemplated by the Reorganization Agreement shall be in effect,
nor shall any proceeding by any governmental entity seeking any such
Injunction be pending, nor shall any lawsuit or governmental proceeding be
pending or threatened against any of the PICOM Companies, any of the Holding
Company Entities, or any of their respective directors, seeking substantial
damages in connection with the transactions contemplated by the
Reorganization Agreement;
(vi) no statute, rule, regulation, order, injunction or decree shall
have been enacted, entered, promulgated or enforced by any governmental
entity which prohibits, restricts or makes illegal consummation of the
Merger;
(vii) there shall not be any action taken, or any law, rule, regulation,
order, judgment or decree proposed, promulgated, enacted, entered, enforced
or deemed applicable to the Merger or any of the transactions contemplated by
the Reorganization Agreement, by any governmental entity or by any court
<PAGE> 95
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or other tribunal, including the entry of a preliminary injunction, which,
(A) in connection with the grant of a Requisite Regulatory Approval, imposes
any condition or restriction upon any of the PICOM Companies or the Holding
Company Entities, which would so materially adversely impact the economic or
business benefits of the transactions contemplated by the Reorganization
Agreement as to render inadvisable, in the reasonable judgment of the Board of
Directors of PICOM, Holding Company or INSCO, the consummation of the Merger
(a "Materially Burdensome Condition"), it being understood, however, that any
condition or restriction of a character comparable to condition(s) or
restriction(s) imposed by any governmental entity in transactions comparable
to the transactions contemplated by the Reorganization Agreement shall not in
any event constitute a Materially Burdensome Condition; or (B) in the
reasonable opinion of any party, (1) makes the Reorganization Agreement, the
Plan of Merger or the Merger, or any of the other transactions contemplated by
the Reorganization Agreement, illegal, (2) results in a material delay in the
ability of the PICOM Companies or the Holding Company Entities to consummate
the Merger or any of the other transactions contemplated by the Reorganization
Agreement, (3) requires the divestiture by the PICOM Companies or the Holding
Company Entities of a material portion of the business of the PICOM Companies,
taken as a whole, or the Holding Company Entities, taken as a whole, or (4)
otherwise prohibits or restricts or delays in a material respect consummation
of the Merger or any of the other transactions contemplated by the
Reorganization Agreement or impairs in a material respect the contemplated
benefits to the PICOM Companies or the Holding Company Entities of the
Reorganization Agreement, the Merger, or any of the other transactions
contemplated by the Reorganization Agreement;
(viii) no holder of any outstanding shares of PICOM Common Stock shall
have exercised, or attempted to exercise, dissenters' rights, if any.
(ix) the PICOM Companies and the Holding Company Entities shall have
received the opinion of Miller, Canfield, Paddock and Stone, P.L.C., dated
the effective date of the Registration Statement and the Effective Time, as
to certain federal tax matters as specified in Section 5.1(m) of the
Reorganization Agreement. See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES."
The obligation of the Holding Company Entities to effect the Merger will
be subject to the satisfaction by the PICOM Companies or waiver by the Holding
Company Entities prior to the Effective Time of certain additional conditions,
including the following:
(i) the representations and warranties of the PICOM Companies in the
Reorganization Agreement must be true and correct in all material respects as
of the date of the Reorganization Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the
Effective Time as though made on and as of such time, except as otherwise
contemplated by the Reorganization Agreement; provided, however, that this
condition will be deemed to have been satisfied even if such representations
or warranties are not true and correct unless the failure of any of the
representations or warranties to be so true and correct, in the reasonable
opinion of Holding Company Entities, would have or would be reasonably likely
to have, individually or in the aggregate, a material adverse effect on
PICOM;
(ii) the PICOM Companies shall have performed in all material respects
all obligations required to be performed by any of them under the
Reorganization Agreement at or prior to the Effective Time;
The obligation of the PICOM Companies to effect the Mergers will be
subject to the satisfaction by the Holding Company Entities or the waiver by
the PICOM Companies prior to the Effective Time of certain additional
conditions, including the following;
<PAGE> 96
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(i) the representations and warranties of the Holding Company Entities
set forth in the Reorganization Agreement shall be true and correct in all
material respects as of the date of the Reorganization Agreement and (except
to the extent such representations and warranties speak as of an earlier
date) as of the Effective Time as though made on and as of such time, except
as otherwise contemplated by the Reorganization Agreement; provided, however,
that notwithstanding anything in the Reorganization Agreement to the
contrary, this condition shall be deemed to have been satisfied even if such
representations or warranties are not true and correct unless the failure of
any of the representations or warranties to be so true and correct, in the
reasonable opinion of the PICOM Companies would have or would be reasonably
likely to have, individually or in the aggregate, a material adverse effect
on Holding Company;
(ii) the Holding Company Entities shall have performed in all material
respects all obligations required to be performed by them under the
Reorganization Agreement at or prior to the Effective Time;
With respect to waiver of conditions, none of Holding Company, INSCO or
PICOM has determined under what circumstances, if any, one or more of these
conditions or any other conditions would be waived. However, receipt of the
opinion of Miller, Canfield, Paddock and Stone, P.L.C. as to certain federal
tax matters as specified in Section 5.1(m) of the Reorganization Agreement is a
condition to the Merger that will not be waived.
TERMINATION
The Reorganization Agreement, the Plan of Merger, and the transactions
contemplated by all of the foregoing, may be terminated at any time prior to
the Effective Time, whether before or after approval of the matters presented
in connection with the Merger by the shareholders of PICOM:
(i) by mutual consent of Holding Company, INSCO and PICOM if the Board
of Directors of each so determines by a vote of a majority of the members of
its entire Board of Directors;
(ii) by Holding Company, INSCO or PICOM if (A) any Requisite Regulatory
Approval shall have been denied or (B) any governmental entity of competent
jurisdiction shall have issued a final nonappealable order enjoining or
otherwise prohibiting the consummation of the transactions contemplated by
the Reorganization Agreement;
(iii) by Holding Company, INSCO or PICOM if the Merger shall not have
been consummated on or before December 31, 1996;
(iv) by Holding Company, INSCO or PICOM if any approval of the
shareholders of PICOM (in the case of Holding Company or INSCO) or Holding
Company or INSCO (in the case of PICOM) required for the consummation of the
Mergers shall not have been obtained by reason of the failure to obtain the
required vote of shareholders;
(v) by Holding Company, INSCO or PICOM if there shall have been a breach
of any of the representations or warranties set forth in the Reorganization
Agreement on the part of any of the PICOM Companies (in the case of Holding
Company or INSCO) or any of the Holding Company Entities (in the case of
PICOM), as if any such breach were being made as of the date of
determination, and which breach by its nature cannot be cured prior to the
earlier of the date scheduled for the Closing or 60 days following receipt by
the breaching party of written notice of the breach from any other party
hereto, and which breach would, in the reasonable opinion of the
non-breaching party, individually or in the aggregate, have, or be reasonably
likely to have, a material adverse effect on the breaching party;
<PAGE> 97
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(vi) by Holding Company or INSCO upon written notice to PICOM if the
PICOM Board, after recommending that shareholders approve and adopt the
Reorganization Agreement and the Plan of Merger, shall have withdrawn,
modified or amended such recommendation in any respect materially adverse to
Holding Company or INSCO.
In the event requisite and appropriate shareholder and regulatory
approvals are not obtained, then the Merger will not be consummated and the
Reorganization Agreement and the Plan of Merger will be terminated. In the
event of termination, the Reorganization Agreement will become void and have no
effect except with respect to certain specified provisions of the
Reorganization Agreement relating to indemnification. In addition, the shares
of Holding Company Common Stock covered by the Registration Statement will be
deregistered.
EXPENSES
Whether or not the Merger is consummated, all costs and expenses incurred
in connection with the Reorganization Agreement and the transactions
contemplated thereby will be paid by PICOM.
AMENDMENT; WAIVER
The Reorganization Agreement may be amended by the parties thereto, by
action taken or authorized by their respective Boards of Directors, at any time
before or after approval of the matters presented in connection with the Merger
by the shareholders of PICOM; provided, however, that no amendment shall be
made which by law requires further approval by the Michigan Insurance
Commissioner or the Illinois Insurance Director without such further approval,
and provided, further, that after any such approval by the shareholders of
PICOM, no amendment shall be made which by law requires further approval by
such shareholders without such further approval. The Reorganization Agreement
may not be amended except by an instrument in writing signed on behalf of each
of the parties thereto.
At any time prior to the Effective Time the parties to the Reorganization
Agreement, by action taken or authorized by their respective Board of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
thereto, (ii) waive any inaccuracies in the representations and warranties
contained therein or in any document delivered pursuant thereto, and
(iii) waive compliance with any of the agreements or conditions contained
therein. Any agreement on the part of a party to the Reorganization Agreement
to any such extension or waiver will be valid only if set forth in a written
instrument signed on behalf of such party. None of Holding Company, INSCO and
PICOM presently has any intention to waive or modify the terms of the PICOM
Reorganization Proposal, the Reorganization Agreement or the Plan of Merger.
Moreover, receipt of the opinion of Miller, Canfield, Paddock and Stone,
P.L.C., as to certain tax matters as specified in Section 5.1(m) of the
Reorganization Agreement is a condition to the Merger that will not be waived.
ELECTION OF PICOM DIRECTORS
GENERAL
The PICOM Charter Documents provide that the PICOM Board shall consist of
not less than nine directors and not more than 18 directors, with the number of
directors to be determined from time to time by the PICOM Board. Currently,
the number of directors is ten. The PICOM Board is divided into three classes
with each class of directors elected to a three year term of office on a
rotating basis. At each annual meeting of shareholders, a class of directors
is elected to succeed the class of directors whose term of office expires at
that meeting.
<PAGE> 98
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The term of office of four directors expires at the 1996 Annual Meeting of
Shareholders of PICOM. The PICOM Board has nominated four individuals for
election as directors of PICOM at the Annual Meeting. The nominees, all of
whom are incumbent directors elected by the shareholders of PICOM, are
Victor T. Adamo, Esq., CPCU, W. Peter McCabe, M.D., Sharon S. Smith, M.D., and
William H. Woodhams, M.D. All the nominees have consented to their nominations
and have agreed to serve as directors of PICOM if elected. The PICOM Board is
not aware of any other individual who will be nominated for election as a
director at the meeting.
The shares represented by valid proxies will be voted at the Annual
Meeting in the manner specified in the proxies. If no instructions are
specified, the shares will be voted to approve the election of the four
nominees named above. Although it is not anticipated, if any of these nominees
are unable to serve, the shares may be voted to approve the election of any
substitute nominees recommended by the PICOM Board. If no substitute nominees
are recommended, the number of directors to be elected at the Annual Meeting
may be reduced by the number of nominees who are unable to serve.
Assuming the presence of a quorum, directors will be elected at the Annual
Meeting, from among those persons duly nominated, by a plurality of the votes
cast by holders of PICOM Common Stock present in person or by proxy and
entitled to vote at the Annual Meeting in the election of directors. Thus,
those nominees who receive the first, second, third and fourth highest numbers
of votes for their election as directors will be elected, regardless of the
number of votes which for any reason, including abstention, broker non-vote, or
withholding of authority to vote, are not cast for the election of such
nominees.
The individuals who are elected as directors at the Annual Meeting will
hold office for a term expiring at PICOM's 1999 Annual Meeting of Shareholders
upon the election and qualification of their respective successors or upon
earlier resignation or removal.
INFORMATION ABOUT NOMINEES AND INCUMBENT DIRECTORS
The following information is provided for each nominee for election as a
director at the Annual Meeting and for each of the incumbent directors whose
term of office will continue after the Annual Meeting.
DIRECTOR NOMINEES -- TERMS EXPIRING AT 1996 PICOM ANNUAL MEETING
<TABLE>
<CAPTION>
Principal Occupation and Business Experience Director
Nominee Name Age During Past 5 Years and Other Directorships Since
- ------------ --- ------------------------------------------- --------
<S> <C> <C> <C>
Victor T. Adamo, Esq., CPCU 48 President and Chief Executive Officer of PICOM 1990
W. Peter McCabe, M.D. 56 Plastic Surgeon; President of Michigan State 1980
Medical Society
Sharon S. Smith, M.D. 50 Physician, Internal Medicine 1980
William H. Woodhams, M.D. 58 Physician, Family Practice 1980
</TABLE>
INCUMBENT DIRECTORS -- TERMS EXPIRING AT 1997 PICOM ANNUAL MEETING
<TABLE>
<CAPTION>
Principal Occupation and Business Experience Director
Nominee Name Age During Past 5 Years and Other Directorships Since
- ------------ --- ------------------------------------------- --------
<S> <C> <C> <C>
</TABLE>
<PAGE> 99
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<TABLE>
<S> <C> <C> <C>
John F. Dodge, Jr., Esq. 69 Attorney 1980
H. Harvey Gass, M.D. 80 Neurosurgeon 1980
Robert E. Paxton, M.D. 68 Physician, Family Practice, Retired 1990
Isaac J. Powell, M.D. 55 Urologist; Faculty member, Wayne State 1980
University School of Medicine
</TABLE>
INCUMBENT DIRECTORS -- TERMS EXPIRING AT 1998 PICOM ANNUAL MEETING
<TABLE>
<CAPTION>
Principal Occupation and Business Experience Director
Nominee Name Age During Past 5 Years and Other Directorships Since
- ------------ --- ------------------------------------------- --------
<S> <C> <C> <C>
David W. Heeke, D.D.S. 58 Dentist 1991
Richard P. Horsch, M.D. 61 Anesthesiologist; Retired 1987
</TABLE>
COMMITTEES AND MEETINGS OF PICOM BOARD
The PICOM Board has several committees on which members of the PICOM Board
serve, including an Executive Committee, an Audit Committee, an Investment
Committee and a Compensation Committee.
Executive Committee. The Executive Committee is comprised of Drs. McCabe,
Gass and Powell, and Messrs. Dodge and Adamo. The Executive Committee also
serves as the nominating committee. In its role as the nominating committee,
the Executive Committee met one time during 1995 for the purpose of
recommending to the PICOM Board persons for election as directors of PICOM at
the Annual Meeting.
Audit Committee. The Audit Committee is comprised of Dr. Smith,
Chairperson, Drs. McCabe, Horsch and Powell, and Mr. Dodge. The Audit
Committee recommends to the PICOM Board the appointment of the independent
accountants to audit the books and records of PICOM and its subsidiaries;
discusses with the independent accountants the plan and scope of the audit;
reviews recommendations by the independent accountants to management with
respect to accounting methods and systems of internal control and reviews the
scope and adequacy of internal controls and the results of the annual audit.
Compensation Committee. The Compensation Committee is comprised of Dr.
McCabe, Chairperson, Drs. Gass and Powell, and Mr. Dodge. The Compensation
Committee met one time during 1995 to recommend to the PICOM Board compensation
arrangements for executive officers. See also "MANAGEMENT OF PICOM --
Compensation Committee Report."
Board and Committee Meetings. There were five meetings of the PICOM Board
during 1995. All incumbent directors attended at least 75% of the aggregate
number of meetings held by the PICOM Board and by all the committees of the
PICOM Board on which the respective directors served.
<PAGE> 100
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LEGAL MATTERS
The legality of the shares of Holding Company Common Stock to be issued in
the Merger is being passed upon by Miller, Canfield, Paddock and Stone, P.L.C.,
1400 North Woodward Avenue, Suite 100, Bloomfield Hills, Michigan 48304.
EXPERTS
The financial statements of Holding Company and INSCO included in this
Proxy Statement/Prospectus and in the Registration Statement have been audited
by KPMG Peat Marwick LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of that firm as experts in auditing and accounting in giving said
reports.
The consolidated financial statements of PICOM at December 31, 1995 and
for the year then ended included in this Proxy Statement/Prospectus and in the
Registration Statement have been audited by KPMG Peat Marwick LLP, independent
certified public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of that firm as
experts in auditing and accounting in giving said report. As noted in KPMG
Peat Marwick LLP's report, PICOM changed its method of accounting for loss and
loss adjustment expense reserves by eliminating discounting of such reserves in
1995.
The consolidated financial statements of PICOM at December 31, 1994 and
for each of the two years in the period ended December 31, 1994 included in
this Proxy Statement/Prospectus and in the Registration Statement have been
audited by Coopers & Lybrand LLP, independent certified public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of that firm as experts in auditing and accounting
in giving said report. Coopers & Lybrand LLP's report contained an explanatory
paragraph due to a change in method of accounting for certain investments and
a change in the discount rate used in recording loss and loss adjustment
expense reserves in 1993.
The Holding Company Board has appointed KPMG Peat Marwick LLP as
independent auditors for Holding Company for the purpose of the financial
statements of Holding Company included in this Proxy Statement/Prospectus and
the Registration Statement and for the calendar year ending December 31, 1996.
The PICOM Board has appointed KPMG Peat Marwick LLP as independent auditors for
PICOM for the calendar year ending December 31, 1996.
At a meeting of the PICOM Board held on September 21, 1995 and after
recommendation by the Audit Committee of the PICOM Board, the accounting firm
of KPMG Peat Marwick LLP was engaged by PICOM to perform future independent
audits of PICOM commencing with calendar year 1995. KPMG Peat Marwick LLP
thereby replaced Coopers & Lybrand LLP as PICOM's independent auditors. The
change in accountants resulted from PICOM's putting its audit work out to bid
and did not reflect any dissatisfaction or disagreement with Coopers & Lybrand
LLP. Coopers & Lybrand LLP participated in the bidding process. In a letter
dated October 3, 1995, Coopers & Lybrand LLP confirmed that the change in
certifying accountants did not result from disagreement on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope of procedure. During PICOM's two most recent fiscal years PICOM did not
engage any independent accountants other than KPMG Peat Marwick LLP and
Coopers & Lybrand LLP to audit the financial statements of PICOM or any
significant subsidiary of PICOM.
Representatives of KPMG Peat Marwick LLP are expected to be present at the
Annual Meeting. These representatives will have an opportunity to make
statements if they so desire and will be available to respond to appropriate
questions.
<PAGE> 101
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SHAREHOLDER PROPOSALS
If the Merger is not consummated, then any PICOM shareholder who wishes to
submit a proposal for presentation at the 1997 Annual Meeting of Shareholders
of PICOM, and for inclusion, if appropriate, in PICOM's proxy statement and the
form of proxy relating to such annual meeting, must comply with the Michigan
Insurance Code and the rules and regulations thereunder then in effect and must
submit such proposal to the Secretary of PICOM at the principal office of PICOM
a reasonable time before the solicitation of proxies for such annual meeting is
made. PICOM will consider such a proposal to have been received by the
Secretary of PICOM a reasonable time before such solicitation if such proposal
was received at least sixty days prior to the commencement of such
solicitation.
If the Merger is consummated, then it is currently anticipated that
Holding Company's 1997 Annual Meeting of Shareholders will be held on or about
June 4, 1997. Any Holding Company shareholder who wishes to submit a proposal
for presentation to such annual meeting, and for inclusion, if appropriate, in
Holding Company's proxy statement and the form of proxy relating to such annual
meeting, must comply with the rules and regulations of the Securities and
Exchange Commission then in effect and the Holding Company Charter Documents
and must submit such proposal to the Secretary of Holding Company at the
principal office of Holding Company. Any non-binding shareholder proposal
submitted pursuant to Rule 14a-8 of the Commission's rules and regulations must
be received by the Secretary of Holding Company a reasonable time before the
solicitation of proxies for such annual meeting is made. (Holding Company will
consider a non-binding shareholder proposal submitted pursuant to said
Rule 14a-8 to have been received a reasonable time before any such solicitation
if such proposal was received at least sixty days prior to the commencement of
such solicitation.) Under Holding Company's First Amended and Restated
Articles of Incorporation, all other shareholder proposals must be delivered to
and received at Holding Company's principal executive offices not later than
February 1, 1997.
GLOSSARY OF SELECTED INSURANCE TERMS
A.M. Best Rating. A.M. Best Ratings are divided into "Secure" and
"Vulnerable" rating groups as follows. Secure Ratings: A++,A+ (Superior);
A,A- (Excellent); and B++,B+ (Very Good). Vulnerable Ratings: B,B-
(Adequate); C++,C+ (Fair); C,C- (Marginal); D (Very Vulnerable); E (Under State
Supervision); and F (In Liquidation).
Cede. To transfer to another insurer (the reinsurer) all or part of the
insurance risk underwritten by an insurer.
Combined Ratio. The sum of the expense ratio and the loss and LAE ratio.
Excess of Loss Reinsurance. A form of reinsurance in which the insurer
cedes to a reinsurer, and such reinsurer assumes, all or a portion of losses in
excess of a specified retention level up to a predetermined limit.
Expense Ratio. The ratio of underwriting expenses to net premiums earned.
Incurred But Not Reported. The liability for future payments on losses
which have occurred but have not yet been reported.
Loss Adjustment Expenses (LAE). The expenses of settling claims,
including legal and other fees.
Loss and LAE Ratio. The ratio of incurred losses and loss adjustment
expenses to premiums earned. Losses include increases in reserves for extended
reporting period claims.
<PAGE> 102
-94-
Net Premiums Written. Premiums retained by an insurer after deducting
premiums on business ceded to others.
Premiums Earned. The portion of net premiums written applicable to the
expired period of policies.
Reinsurance. A procedure whereby an insurer remits or cedes a portion of
the premium to a reinsurer as payment to the reinsurer for assuming a portion
of the risk or liability under the policy. Reinsurance can be effected by
"treaties" under which all risks of a defined category, amount and type for a
primary insurer are covered, or on a "facultative" basis under which risks are
covered on an individual, contract-by-contract basis.
Standard & Poor's Ratings. Standard & Poor's Claims-Paying Ability
Ratings are divided into "Secure Range" and "Vulnerable Range" groupings as
follows. Secure Range: AAA (Superior); AA (Excellent); A (Good); and BBB
(Adequate). Vulnerable Range: BB (May be Adequate); B (Vulnerable); CCC
(Extremely Vulnerable); and R (Regulatory Action).
Statutory Accounting Principles (SAP). Those principles required by state
law which must be followed by insurers in submitting their financial statements
to state insurance departments.
Statutory Surplus. The amount remaining after all liabilities of an
insurance company are subtracted from all of its admitted assets, applying
statutory accounting principles.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
It is anticipated that the Merger will be accounted for in a manner
similar to a pooling of interests, and Holding Company will carry forward to
its accounts the assets and liabilities of PICOM at their respective amounts as
reported by PICOM. Moreover, because Holding Company did not exist for the
periods that would normally be presented and its assets are insignificant in
comparison to the assets of PICOM, the transactions contemplated by the
Reorganization Agreement and the Plan of Merger will not result in a material
change to either the consolidated statements of income or the consolidated
balance sheets of PICOM appearing elsewhere in this Proxy Statement/Prospectus.
Accordingly, and in reliance on Rule 11-02(b)(1) of Regulation S-X, no pro
forma consolidated financial information for Holding Company and PICOM has been
included in this Proxy Statement/Prospectus. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PICOM," and
"FINANCIAL STATEMENTS."
<PAGE> 103
INDEX TO FINANCIAL STATEMENTS
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
(Audited)
<TABLE>
Page
----
<S> <C>
Independent Auditors' Report -- KPMG Peat Marwick LLP ............. FS-2
Consolidated Balance Sheet as of April 30, 1996 ................... FS-3
Consolidated Statement of Income and Retained Earnings
For the Period from January 31, 1996, date of inception,
through April 30, 1996........................................... FS-4
Consolidated Statement of Cash Flows For the Period
from January 31, 1996, date of inception, through April 30, 1996. FS-5
Notes to Consolidated Financial Statements ........................ FS-6
PICOM INTERIM INSURANCE COMPANY
(Audited)
Independent Auditors' Report -- KPMG Peat Marwick LLP ........... FS-7
Balance Sheet as of April 30, 1996 .............................. FS-8
Statement of Income and Retained Earnings for the Period
from April 12, 1996, date of inception, through April 30, 1996. FS-9
Statement of Cash Flows for the Period from April 12, 1996,
date of inception, through April 30, 1996 ..................... FS-10
Note to Financial Statements .................................... FS-11
PICOM INSURANCE COMPANY
Independent Auditors' Report -- KPMG Peat Marwick LLP ........... FS-12
Independent Auditors' Report -- Coopers & Lybrand LLP ........... FS-13
Consolidated Balance Sheets as of December 31, 1995 and
December 31, 1994 ............................................. FS-14
Consolidated Statements of Income for the Years Ended
December 31, 1995, 1994 and 1993 .............................. FS-15
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31 1995, 1994 and 1993 ................... FS-16
Consolidated Statements of Cash Flows for the Years Ended
December 31 1995, 1994 and 1993 ............................... FS-17
Notes to Consolidated Financial Statements ...................... FS-18
Condensed Consolidated Balance Sheets as of March 31, 1996
(unaudited) and December 31, 1995 ............................. FS-38
Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 1996 and 1995 (unaudited)......... FS-39
Condensed Consolidated Statements of Shareholders' Equity
for the Three Months Ended March 31, 1996 and 1995 (unaudited). FS-40
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1995 (unaudited) ........ FS-41
Notes to Condensed Consolidated Financial Statements for the
Three Months Ended March 31, 1996 and 1995 (unaudited),
and December 31, 1995 ......................................... FS-42
</TABLE>
FS-1
<PAGE> 104
Independent Auditors' Report
The Board of Directors and Shareholder
Professionals Insurance Company Management Group:
We have audited the accompanying consolidated balance sheet of Professionals
Insurance Company Management Group and subsidiary as of April 30, 1996, and the
related consolidated statements of income and retained earnings, and cash flows
for the period from January 31, 1996, date of inception, through April 30,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Professionals
Insurance Company Management Group and subsidiary as of April 30, 1996, and the
results of their operations and their cash flows for the period from January
31, 1996, date of inception, through April 30, 1996, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
East Lansing, Michigan
May 3, 1996
FS-2
<PAGE> 105
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARY
Consolidated Balance Sheet
April 30, 1996
<TABLE>
<CAPTION>
Assets
<S> <C>
Cash $ 44,632
Short-term investment, at cost, which approximates market 1,455,470
----------
Total assets $1,500,102
==========
Liability and Shareholder's Equity
Liability - note and accrued interest payable to affiliate (note 2) $1,500,077
----------
Shareholder's equity:
Preferred stock, no par value; 5,000,000 shares authorized; no
shares issued and outstanding -
Common stock, no par value; 25,000,000 shares authorized;1 share
issued and outstanding 25
----------
Total shareholder's equity 25
----------
Total liability and shareholder's equity $1,500,102
==========
</TABLE>
See accompanying notes to consolidated financial statements.
FS-3
<PAGE> 106
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARY
Consolidated Statement of Income and Retained Earnings
Period from January 31, 1996, date of inception,
through April 30, 1996
<TABLE>
<S> <C>
Revenue - interest $77
Expense - interest 77
---
Net income -
---
Retained earnings:
Beginning of period -
---
End of year $ -
===
</TABLE>
See accompanying notes to consolidated financial statements.
FS-4
<PAGE> 107
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARY
Consolidated Statement of Cash Flows
Period from January 31, 1996, date of inception,
through April 30, 1996
<TABLE>
<S> <C>
Cash flows from operating activities - net income $ -
Adjustment to reconcile net income to net cash provided by operating
activities - increase in accrued interest payable to affiliate 77
----------
Cash provided by operating activities 77
----------
Cash flows used in investing activities - purchase of short-term investment (1,455,470)
----------
Cash flows from financing activities:
Increase in note payable to affiliate 1,500,000
Issuance of common stock 25
----------
Cash provided by financing activities 1,500,025
----------
Net increase in cash 44,632
Cash - beginning of period -
----------
Cash - end of period $ 44,632
==========
</TABLE>
See accompanying notes to consolidated financial statements.
FS-5
<PAGE> 108
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND SUBSIDIARY
Notes to Consolidated Financial Statements
April 30, 1996
(1) Summary of Significant Accounting Policies
(a) General
Professionals Insurance Company Management Group (Company) is an
insurance holding company incorporated under the laws of the State of
Michigan on January 31, 1996. The Company owns 100 percent of PICOM
Interim Insurance Company (INSCO), a Michigan-domiciled insurance
company incorporated on April 12, 1996, for the sole purpose of
merging with and into PICOM Insurance Company (PICOM), an affiliate,
and establishing PICOM as a wholly owned subsidiary of the Company.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and INSCO, and have been prepared in
accordance with generally accepted accounting principles.
All significant intercompany transactions have been eliminated in
consolidation.
(2) Note Payable to Affiliate
Under a promissory note dated April 15, 1996, the Company borrowed
$1,500,000 from PICOM for the purpose of forming and capitalizing INSCO.
This note bears interest at a rate equal to the rate earned on INSCO's
investments acquired with such funds and is due at the earlier of the date
the aforementioned merger is consummated or December 31, 1996.
(3) Stock Options and Awards
The Company has established the 1996 Long Term Stock Incentive Plan
(Incentive Plan) under which, subject to adjustment, 300,000 shares of the
Company's common stock are available to grant incentive and non-qualified
stock options, stock appreciation rights (SARs), restricted stock,
restricted stock units, performance awards, dividend equivalents, and other
stock-based awards to employees of, including any officer or
officer-director, or consultants to the Company and its subsidiaries. All
terms and conditions of any grants under the Incentive Plan are at the
discretion of the Compensation Committee of the Board of Directors. As of
April 30, 1996, no grants had been made under the Incentive Plan.
The Company has also established the 1996 Non-Employee Directors Stock
Option Plan (Directors Plan) under which non-qualified options for 50,000
shares of the Company's common stock may be granted to non-employee
directors (maximum of 5,000 shares to one individual) of the Company.
Options become exercisable one year from the date of grant and expire seven
years from the date of grant. As of April 30, 1996, no stock options had
been granted under the Directors Plan.
FS-6
<PAGE> 109
Independent Auditors' Report
The Board of Directors and Shareholder
PICOM Interim Insurance Company:
We have audited the accompanying balance sheet of PICOM Interim Insurance
Company as of April 30, 1996, and the related statements of income and retained
earnings, and cash flows for the period from April 12, 1996, date of inception,
through April 30, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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 audit provides 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 PICOM Interim Insurance
Company as of April 30, 1996, and the results of its operations and its cash
flows for the period from April 12, 1996, date of inception, through April 30,
1996, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
East Lansing, Michigan
May 3, 1996
FS-7
<PAGE> 110
PICOM INTERIM INSURANCE COMPANY
(a wholly owned subsidiary of Professionals Insurance Company Management Group)
Balance Sheet
April 30, 1996
Assets
<TABLE>
<S> <C>
Cash $ 44,607
Short-term investment, at cost, which approximates market 1,455,470
----------
$1,500,077
==========
Liability and Shareholder's Equity
Liability - federal income taxes payable $ 26
----------
Shareholder's equity:
Common stock, $1 par value; 1,000,000 shares authorized,
issued, and outstanding 1,000,000
Additional paid-in capital 500,000
Retained earnings 51
----------
Total shareholder's equity 1,500,051
----------
Total liability and shareholder's equity $1,500,077
==========
</TABLE>
See accompanying note to financial statements.
FS-8
<PAGE> 111
PICOM INTERIM INSURANCE COMPANY
(a wholly owned subsidiary of Professionals Insurance Company Management Group)
Statement of Income and Retained Earnings
Period from April 12, 1996, date of inception,
through April 30, 1996
<TABLE>
<S> <C>
Income - interest $77
Federal income tax expense 26
---
Net income 51
Retained earnings:
Beginning of period -
---
End of period $51
===
</TABLE>
See accompanying note to financial statements.
FS-9
<PAGE> 112
PICOM INTERIM INSURANCE COMPANY
(a wholly owned subsidiary of Professionals Insurance Company Management Group)
Statement of Cash Flows
Period from April 12, 1996, date of inception,
through April 30, 1996
<TABLE>
<S> <C>
Cash flows from operating activities - net income $ 51
Adjustment to reconcile net income to cash provided by operating
acitivities - increase in federal income taxes payable 26
-----------
Cash provided by operating activities 77
Cash flows used in investing activities - purchase of short-term investment (1,455,470)
Cash flows from financing activities - issuance of common stock 1,500,000
-----------
Net increase in cash 44,607
Cash - beginning of period -
-----------
Cash - end of period $ 44,607
===========
</TABLE>
See accompanying note to financial statements.
FS-10
<PAGE> 113
PICOM INTERIM INSURANCE COMPANY
(a wholly owned subsidiary of Professionals Insurance Company Management Group)
Note to Financial Statements
April 30, 1996
(1) Organization and Significant Accounting Policy
(a) Organization
PICOM Interim Insurance Company (Company), a wholly owned subsidiary
of Professionals Insurance Company Management Group (Professionals),
is a Michigan-domiciled property and casualty insurance company
licensed to write professional liability insurance for physicians,
surgeons, dentists, hospitals, other health care providers, and
lawyers and law firms in the State of Michigan. The Company was
formed on April 12, 1996, solely for the purpose of merging with and
into PICOM Insurance Company (PICOM), an affiliate under common
control, and establishing PICOM as a wholly owned subsidiary of
Professionals. Accordingly, the Company will not engage in any
business activities.
(b) Basis of Presentation
The accompanying financial statements were prepared in accordance with
generally accepted accounting principles.
FS-11
<PAGE> 114
Independent Auditors' Report
The Board of Directors and Shareholders
PICOM Insurance Company:
We have audited the accompanying consolidated balance sheet of PICOM Insurance
Company and subsidiaries as of December 31, 1995, and the related consolidated
statements of income, shareholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PICOM Insurance
Company and subsidiaries as of December 31, 1995, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
As discussed in notes 1 and 7 to the consolidated financial statements, the
Company changed its method of accounting for loss and loss adjustment expense
reserves by eliminating discounting of such reserves in 1995.
KPMG Peat Marwick LLP
East Lansing, Michigan
February 20, 1996
FS-12
<PAGE> 115
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
PICOM Insurance Company and Subsidiaries
We have audited the accompanying consolidated balance sheet of PICOM Insurance
Company and Subsidiaries as of December 31, 1994, and the related consolidated
statements of income, shareholders' equity and cash flows for the years December
31, 1994 and 1993. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PICOM Insurance
Company and Subsidiaries as of December 31, 1994, and the consolidated results
of its operations and its cash flows for the years ended December 31, 1994 and
1993 in conformity with generally accepted accounting principles.
As described in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for certain investments in 1993. As
described in Note 7 to the consolidated financial statements, the Company
changed the discount rate used in recording loss and loss adjustment expense
reserves in 1993. The effect of changing the discount rate, which was
previously presented as a change in accounting principle, has been reclassified
and presented as a change in estimate.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
February 17, 1995
FS-13
<PAGE> 116
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
-------------------
Assets 1995 1994
------ ---- ----
(In thousands, except share data)
<S> <C> <C>
Investments (note 2):
Fixed maturities:
Available for sale, at market value (amortized cost: $257,129 and $125,554) $259,979 114,433
Held to maturity, at amortized cost (market value of $87,259) - 92,644
Equity securities available for sale, at market value (cost: $2,608 and $152) 2,641 163
Equity security, at equity value - 1,901
Short-term investments, at cost 17,512 40,347
Real estate, at cost, net of accumulated depreciation of $49 and $29 in 1995 and
1994, respectively 475 491
-------- -------
Total investments 280,607 249,979
Cash 1,279 940
Premiums due from policyholders 7,618 8,176
Amounts due from reinsurers (note 3) 12,264 3,455
Accrued investment income 3,612 2,997
Prepaid reinsurance premiums (note 3) 76 978
Deferred federal income taxes (note 4) 18,264 28,257
Property and equipment, net of accumulated depreciation and amortization (note 5) 2,341 2,032
Deferred policy acquisition costs (note 6) 1,092 1,112
Other assets (note 12) 3,559 -
-------- -------
Total assets $330,712 297,926
======== =======
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Loss and loss adjustment expense reserves (note 7) $199,605 188,544
Reserve for extended reporting period claims 14,082 12,738
Unearned premiums 23,122 24,557
Drafts outstanding 3,445 3,463
Payable for securities 3,205 -
Balance due on purchased book of business (note 12) 2,694 -
Accrued expenses and other liabilities 6,148 5,482
-------- -------
Total liabilities 252,301 234,784
-------- -------
Shareholders' equity (notes 9 and 10):
Common stock, $1 par value; 10,000,000 shares authorized; 3,238,959 shares
issued and outstanding, including shares in treasury 3,239 3,239
Additional paid-in capital 8,417 8,181
Retained earnings 66,994 59,053
Net unrealized appreciation (depreciation) on investments, net of deferred
federal income tax expense (benefit) of $963 and ($3,777) in 1995 and 1994,
respectively 1,882 (7,331)
-------- ------
80,532 63,142
Less cost of common stock in treasury; 123,244 shares in 1995 (note 2) (2,121) -
-------- -------
Total shareholders' equity 78,411 63,142
-------- -------
Commitments and contingencies (notes 3 and 12)
Total liabilities and shareholders' equity $330,712 297,926
======== =======
</TABLE>
See accompanying notes to the consolidated financial statements.
FS-14
<PAGE> 117
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
(In thousands, except per-share data)
Revenues and other income:
Premiums written $ 67,727 51,110 50,514
Premiums ceded (12,576) (2,332) (2,337)
------------ ------------ ------------
Net premiums written 55,151 48,778 48,177
Decrease (increase) in unearned premiums, net of prepaid
reinsurance premiums 533 (288) 15
------------ ------------ ------------
Premiums earned 55,684 48,490 48,192
Investment income, net of expenses (note 2) 14,729 13,379 12,363
Net realized investment gains (losses) (note 2) (6) (2,006) 6,916
Other 165 4 5
------------ ------------ ------------
Total revenues and other income 70,572 59,867 67,476
------------ ------------ ------------
Expenses:
Losses and loss adjustment expenses, net (note 7) 35,558 44,853 44,585
Increase in reserve for extended reporting period claims 1,344 500 752
Policy acquisition and other underwriting expenses 9,328 7,316 7,438
------------ ------------ ------------
Total expenses 46,230 52,669 52,775
------------ ------------ ------------
Income from operations before equity in earnings
of affiliate, federal income taxes, and cumulative
effect of change in accounting method 24,342 7,198 14,701
Equity in earnings of affiliate - 612 145
------------ ------------ ------------
Income before federal income taxes and cumulative
effect of change in accounting method 24,342 7,810 14,846
Federal income taxes (note 4) (8,276) (2,656) (4,980)
------------ ------------ ------------
Income before cumulative effect of change in
accounting method 16,066 5,154 9,866
Cumulative effect of change in accounting method (note 7):
Elimination of loss and loss adjustment expense reserve
discount, net of deferred federal income tax benefit of $4,185 (8,125) - -
------------ ------------ ------------
Net income (note 10) $ 7,941 5,154 9,866
============ ============ ============
Net income per common share:
Income before cumulative effect of change in accounting method $ 5.16 1.59 3.05
Cumulative effect of change in accounting method (2.61) - -
------------ ------------ ------------
Net income per common share $ 2.55 1.59 3.05
============ ============ ============
Pro forma amounts, assuming the elimination of loss and loss
adjustment expense reserve discounting is applied retroactively:
Net income $ 16,066 5,356 12,475
============ ============ ============
Net income per common share $ 5.16 1.65 3.85
============ ============ ============
Weighted average shares outstanding (note 9) 3,114,735 3,238,959 3,238,959
============ ============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
FS-15
<PAGE> 118
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1995, 1994, and 1995
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
Common Stock (Depreciation)
------------------------------------ on Investments, Cost of
Shares Additional Net of Deferred Common Total
-------------------------- Paid-in Retained Federal Income Stock in Shareholders'
Issued In Treasury Amount Capital Earnings Tax Effect Treasury Equity
------ ----------- ------ ------- -------- --------------- -------- -------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December
31, 1992 2,678,701 - $2,679 818 51,987 (510) - 54,974
Net income - - - - 9,866 - - 9,866
Issuance of 10%
stock dividend 266,835 - 267 3,402 (3,683) - - (14)
Net appreciation on
debt and equity
securities - - - - - 13 - 13
--------- -------- ------ ----- ------ ------ ------ ------
Balances, December
31, 1993 2,945,536 - 2,946 4,220 58,170 (497) - 64,839
Net income - - - - 5,154 - - 5,154
Issuance of 10%
stock dividend 293,423 - 293 3,961 (4,271) - - (17)
Net depreciation on
debt and equity
securities - - - - - (6,834) - (6,834)
--------- -------- ------ ----- ------ ------ ------ ------
Balances, December
31, 1994 3,238,959 - 3,239 8,181 59,053 (7,331) - 63,142
Net income - - - - 7,941 - - 7,941
Purchase of
treasury shares, at
cost (note 9) - 254,823 - - - - (4,385) (4,385)
Sale of treasury
shares (note 2) - (131,579) - 236 - - 2,264 2,500
Net appreciation on
debt securities
transferred from
held-to-maturity
classification
(note 2) - - - - - 511 - 511
Net appreciation on
debt and equity
securities - - - - - 8,702 - 8,702
--------- -------- ------ ----- ------ ------ ------ ------
Balances,
December 31, 1995
3,238,959 123,344 $3,239 8,417 66,994 1,882 (2,121) 78,411
========= ======== ====== ===== ====== ====== ====== ======
</TABLE>
See accompanying notes to the consolidated financial statements.
FS-16
<PAGE> 119
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,941 5,154 9,866
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,056 2,256 1,670
Undistributed equity in earnings of affiliate - (612) (145)
Realized (gains) losses on investments 6 2,006 (6,916)
Proceeds from sale or maturity of trading securities - - 461,625
Purchases of trading securities - - (417,565)
Deferred federal income taxes 5,250 2,306 4,505
Changes in assets and liabilities:
Premiums due from policyholders 558 185 (198)
Amounts due from reinsurers (8,809) 346 (1,841)
Accrued investment income (615) (443) (150)
Prepaid reinsurance premiums 902 77 (57)
Deferred policy acquisition costs 20 (84) (122)
Other assets (331) - -
Loss and loss adjustment expense reserves 11,061 (2,677) 6,463
Reserve for extended reporting period claims 1,344 500 752
Unearned premiums (1,435) 210 42
Drafts outstanding (18) 388 (387)
Accrued expenses and other liabilities 667 104 74
-------- -------- --------
Net cash provided by operating activities 17,597 9,716 57,616
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale or maturity of short-term investments 658,437 239,905 349,449
Purchases of short-term investments (634,287) (231,308) (357,549)
Proceeds from maturity of securities available for sale 43,847 9,265 -
Proceeds from sale of securities available for sale 115,684 70,518 -
Purchases of securities available for sale (216,175) (88,189) -
Proceeds from maturity of securities held to maturity 27,686 29,180 19,011
Proceeds from sale of securities held to maturity 758 1,455 -
Purchases of securities held to maturity (12,861) (40,852) (67,014)
Payable for securities 3,205 - -
Purchases of property and equipment (774) (224) (926)
Payment on liability for purchased book of business (893) - -
-------- -------- --------
Net cash used in investing activities (15,373) (10,250) (57,029)
-------- -------- --------
Cash flows from financing activities:
Purchase of treasury shares (4,385) - -
Sale of treasury shares 2,500 - -
Cash paid in lieu of fractional shares - (16) (14)
-------- -------- --------
Net cash used in financing activities (1,885) (16) (14)
-------- -------- --------
Net increase (decrease) in cash 339 (550) 573
Cash, beginning of year 940 1,490 917
-------- -------- --------
Cash, end of year $ 1,279 940 1,490
======== ======== ========
Supplemental disclosure of cash flow information -
federal income taxes paid (recovered) $ (159) 350 385
Supplemental schedule of noncash investing activities -
purchase of book of business (note 12):
Intangible assets acquired $ 3,587 - -
Amount due (3,587) - -
</TABLE>
See accompanying notes to the consolidated financial statements.
FS-17
<PAGE> 120
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
December 31, 1995, 1994, and 1993
(1) Organization and Significant Accounting Policies
(a) General
PICOM Insurance Company (the Company), formerly Physicians Insurance
Company of Michigan, is a Michigan-domiciled property and casualty
insurance company providing professional liability insurance for
physicians, surgeons, dentists, hospitals, other health care
providers, and lawyers and law firms in the State of Michigan. In
addition to Michigan, the Company is also licensed in Illinois,
Indiana, and Ohio.
The term "PICOM" as used herein refers to all entities within the
consolidated group.
Following is a description of the more significant risks facing
property/casualty insurers and how PICOM mitigates those risks:
Legal/Regulatory Risk is the risk that the legal or regulatory
environment in which an insurer operates will change and create
additional loss costs or expenses not anticipated by the insurer in
pricing its products. That is, regulatory initiatives designed to
reduce insurer profits, or new legal theories, may create costs for
the insurer beyond those recorded in the financial statements. PICOM
mitigates this risk through underwriting and loss adjusting practices
which identify and minimize the adverse impact of this risk.
Credit Risk is the risk that issuers of securities owned by PICOM
will default, or other parties, including reinsurers which owe PICOM
money, will not pay. Also, PICOM writes a significant amount of
business under which policyholders reimburse PICOM for policy
deductibles. PICOM minimizes this risk by adhering to a conservative
investment strategy, by maintaining sound reinsurance and credit and
collection policies, and by providing for any amounts deemed
uncollectible.
Interest Rate Risk is the risk that interest rates will change and
cause a decrease in the value of an insurer's investments. PICOM
mitigates this risk by attempting to match the maturity schedule of
its assets with the expected payout of its liabilities. To the
extent that liabilities come due more quickly than assets mature, an
insurer would have to sell assets prior to maturity and recognize a
gain or loss. At December 31, 1995, the estimated market value of
PICOM's bond portfolio was greater than its amortized costs.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and the following subsidiaries:
PICOM Insurance Company of Illinois (PICOM-Illinois), a wholly owned
subsidiary of the Company, is an Illinois-domiciled property and
casualty insurance company providing professional liability insurance
for physicians and surgeons in the State of Illinois. PICOM-Illinois
was formed in December 1994 to write the book of business purchased
effective January 1, 1995 (see note 12).
PICOM Claims Services Corporation (Claims Services), a wholly owned
subsidiary of the Company, provides claims processing services to a
nonaffiliated professional liability company.
FS-18
<PAGE> 121
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(1) Organization and Significant Accounting Policies, Continued
(b) Principles of Consolidation, Continued
PICOM Financial Services Corporation, a wholly owned subsidiary of the
Company, is an inactive financial services company.
PICOM Insurance Agency, a wholly owned subsidiary of the Company, is
an inactive insurance agency.
All significant intercompany transactions and balances have been
eliminated in consolidation.
(c) Basis of Presentation
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles (GAAP), which vary in
certain respects from statutory accounting followed in reporting to
insurance regulatory authorities (see note 10 for effects of such
differences). In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the dates of the
balance sheets, and revenues and expenses for the periods then ended.
Actual results may differ from those estimates. Material estimates
that are susceptible to significant change in the near term relate to
the determination of the loss and loss adjustment expense reserves and
the recoverability of deferred federal income tax assets.
(d) Investments
Effective December 31, 1993, PICOM adopted Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. Under the provisions of
SFAS No. 115, investment securities are classified upon acquisition
into one of three categories: trading, available-for-sale, or
held-to-maturity. The adoption of SFAS No. 115 had no impact on
earnings for the year ended December 31, 1993.
Trading securities are bought and held principally for the purpose of
selling them in the near term. PICOM held no trading securities in
either 1995 or 1994. Held-to-maturity securities are those securities
PICOM has the positive intent and ability to hold until maturity. All
other securities are classified as available-for-sale and are those
securities that would be available to be sold in response to PICOM's
liquidity needs, changes in market interest rates, and asset-liability
management strategies, among others.
Trading and available-for-sale securities are recorded at market
value. Held-to-maturity securities are recorded at amortized cost,
adjusted for the amortization or accretion of premiums or discounts,
respectively. Unrealized gains and losses on trading securities are
recognized in income, whereas unrealized gains and losses, net of the
related income tax effect, on available-for-sale securities are
excluded from income and reported as a separate component of
shareholders' equity. Transfers of securities between categories are
recorded at fair value at the date of transfer. Unrealized gains and
losses associated with transfers of securities from held-to-maturity
to available-for-sale are recorded as a separate component of
shareholders' equity.
FS-19
<PAGE> 122
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(1) Organization and Significant Accounting Policies, Continued
(d) Investments, Continued
A decline in the market value of an available-for-sale or
held-to-maturity security below cost that is deemed other than
temporary results in a charge to income, resulting in the
establishment of a new cost basis for the security. All declines in
market values of PICOM's investment securities in 1995, 1994, or 1993
were deemed to be temporary.
Investments in common stock of nonaffiliates are stated at market
value. Market values are based on quoted market prices or dealer
quotes. If a quoted market price is not available, market value is
estimated using quoted market prices for similar securities.
The investment in common stock of Physicians Insurance Company of
Indiana (PICI), an affiliate which was sold in 1995 (see note 2), was
accounted for on the equity method, whereby PICOM's equity in the
earnings of PICI was credited directly to income.
Short-term investments, which consist principally of commercial
paper, money market funds, and U.S. government securities, are stated
at cost, which approximates fair value.
Premiums and discounts are amortized or accreted, respectively, over
the life of the related debt security as an adjustment to yield using
the yield-to-maturity method. Dividends and interest income are
recognized when earned. Realized gains and losses are included in
earnings and are derived using the specific-identification method for
determining the cost of securities sold.
(e) Revenue Recognition
Insurance premium income is recognized on a monthly pro rata basis
over the respective terms of the policies, and unearned premiums
represent the portion of premiums written which is applicable to the
unexpired terms of the policies.
Reinsurance arrangements are prospective contracts for which prepaid
reinsurance premiums are amortized ratably over the related policy
terms based on the estimated ultimate amounts to be paid.
(f) Loss and Loss Adjustment Expense Reserves
Loss and loss adjustment expense reserves represent the accumulation
of individual case estimates for reported losses and loss adjustment
expenses, bulk adjustments to losses and loss adjustment expenses,
based upon PICOM's actual experience, assumptions, and projections as
to claims frequency, severity, inflationary trends, and settlement
payments. The reserve for loss and loss adjustment expenses is
intended to cover the ultimate net cost of all losses and loss
adjustment expenses incurred but unsettled through the balance sheet
date. The reserve is stated gross of reinsurance ceded. The
assumptions used in making such reserve estimates are continually
reviewed and updated, and the ultimate liability may be more or less
than the current estimate. The effects of changes in the estimated
reserve are included in the results of operations in the period in
which the estimate is revised.
FS-20
<PAGE> 123
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(1) Organization and Significant Accounting Policies, Continued
(f) Loss and Loss Adjustment Expense Reserves, Continued
Through December 31, 1994, the Company discounted loss and loss
adjustment expense reserves to present value. Effective January 1,
1995, the Company eliminated discounting, a change in method of
accounting (see note 7).
(g) Reserve for Extended Reporting Period Claims
The reserve for extended reporting period claims coverage is recorded
during the term of the original claims-made policy, utilizing the
pure-premium approach, in amounts adequate to pay for estimated
future claims reported subsequent to current policyholders' death,
disability, or retirement. Changes in this reserve are charged or
credited to income.
(h) Property and Equipment
Property and equipment are recorded at cost, net of accumulated
depreciation. Depreciation is computed on the straight-line method
over periods ranging from 4 to 25 years, the estimated useful lives
of the respective assets. Maintenance, repairs, and minor renewals
are charged to expense as incurred.
The cost and related accumulated depreciation of assets sold are
removed from the related accounts, and the resulting gains or losses
are reflected in income.
(i) Deferred Policy Acquisition Costs
Policy acquisition costs, specifically commissions, are deferred,
subject to ultimate recoverability from future income, including
investment income, and amortized to expense over the period in which
related premiums are earned.
(j) Federal Income Taxes
Deferred federal income tax assets and liabilities are recognized for
the expected future tax consequences attributable to differences
between the financial statement carrying amount of existing assets
and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which these temporary
differences are expected to be recovered or settled, and the effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(k) Intangible Assets
The cost of the purchased book of business is being amortized on a
straight-line basis over ten years.
(l) Net Income Per Share
Net income per share is computed by dividing net income by the
weighted average number of shares outstanding during each year after
giving effect to stock dividends and treasury shares.
FS-21
<PAGE> 124
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(1) Organization and Significant Accounting Policies, Continued
(m) Accounting Standards Not Yet Adopted
In March 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets To Be Disposed Of, which is effective for fiscal
years beginning after December 15, 1995. SFAS No. 121 requires that
long-lived assets and certain identifiable intangibles to be held and
used, or disposed of, by an entity be reviewed for impairment, and be
reported at the lower of the carrying amount or fair value less cost
to sell, if applicable. The adoption of SFAS No. 121 is not expected
to have a material effect on PICOM's operating results or financial
condition.
(n) Financial Statement Presentation
Certain amounts in the consolidated financial statements for prior
years have been reclassified to conform with the current year's
presentation.
(2) Investments
In November 1995, the FASB issued a Guide to Implementation of Statement
115 on Accounting for Certain Investment in Debt and Equity Securities.
This guide allowed companies to reassess the appropriateness of the
classification of securities as of the date of the implementation guide,
but no later than December 31, 1995. As a result, PICOM made a one-time
transfer of approximately $77,893,000 in investment securities previously
classified as held-to-maturity to the available-for-sale classification.
The effect of such reclassification increased shareholders' equity by
$511,000, net of deferred federal income taxes.
A summary of amortized cost, gross unrealized gains and losses, and
estimated market value of investments in securities as of December 31, 1995
and 1994, follows:
<TABLE>
<CAPTION>
1995
-------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
--------- ---------- ---------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Fixed maturities available for sale:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies $136,064 1,988 40 138,012
Debt securities issued by foreign governments 606 88 - 694
Corporate securities 35,567 831 61 36,337
Mortgage-backed securities:
Government 67,610 236 481 67,365
Other 17,282 318 29 17,571
------- ---- --- ------
$257,129 3,461 611 259,979
======== ===== === =======
Equity securities available for sale $ 2,608 66 33 2,641
======== ===== === =======
</TABLE>
FS-22
<PAGE> 125
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(2) Investments, Continued
<TABLE>
<CAPTION>
1994
---------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Market Value
--------- ---------- ---------- ------------
(In thousands)
<S> <C> <C> <C> <C>
Fixed maturities available for sale:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 68,191 - 7,224 60,967
Debt securities issued by foreign governments 8,461 - 1,226 7,235
Corporate securities 14,523 5 934 13,594
Mortgage-backed securities:
Government 27,928 1 1,548 26,381
Other 6,451 - 195 6,256
-------- --- ------ -------
$125,554 6 11,127 114,433
======== === ======= =======
Equity securities available for sale $ 152 26 15 163
======== === ====== =======
Fixed maturities held to maturity:
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 14,924 - 482 14,442
Corporate securities 11,346 26 1,128 10,244
Mortgage-backed securities:
Government 42,163 1 2,710 39,454
Other 24,211 33 1,125 23,119
------- -- ------ -------
$ 92,644 60 5,445 87,259
======== == ====== =======
</TABLE>
The amortized cost and estimated market value of fixed maturities at
December 31, 1995, by contractual maturity, are shown below. Actual
maturities, or estimated average life on certain corporate and
mortgage-backed securities, may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Approximate
Cost Market Value
--------- ------------
(In thousands)
<S> <C> <C>
Due in one year or less $ 2,852 2,850
Due after one year through five years 82,771 83,752
Due after five years through ten years 95,599 97,112
Due after ten years, primarily U.S. government and
mortgage-backed securities 75,907 76,265
-------- -------
$257,129 259,979
======== =======
</TABLE>
At December 31, 1995, 99 percent of the fixed maturity portfolio was rated
"A" or above by Moody's Investors Services, Inc., or Standard and Poor's
Corporation.
FS-23
<PAGE> 126
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(2) Investments, Continued
Proceeds and related gross realized gains and gross realized losses on
sales of fixed maturities follow:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1995 1994 1993
---- ---- ----
( In thousands)
<S> <C> <C> <C>
Proceeds $116,441 71,637 450,574
======= ====== =======
Gross realized gains $ 1,672 887 7,976
Gross realized losses (1,345) (3,024) (1,060)
------- ------- -------
Net realized gains (losses) $ 327 (2,137) 6,916
======= ======= =======
</TABLE>
A summary of the sources of investment income follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Fixed maturities $ 11,920 12,863 11,792
Equity securities 2 2 2
Short-term investments, and cash and cash equivalents 3,176 1,232 1,512
Real estate 70 59 26
Other investment assets 477 490 -
------- ------ ------
Total investment income 15,645 14,646 13,332
Less investment expenses 916 1,267 969
------- ------ ------
Net investment income $14,729 13,379 12,363
======= ====== ======
</TABLE>
FS-24
<PAGE> 127
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(2) Investments, Continued
Realized gains (losses) and increases (decreases) in net unrealized gains
(losses) follow:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net realized gains (losses):
Fixed maturities $ 327 (2,137) 6,916
Equity securities (333) 131 -
------- ------- -----
Net realized gains (losses) $ (6) (2,006) 6,916
======= ======= =====
Change in net unrealized gains (losses):
Fixed maturities $19,356 (15,506) (188)
Equity securities 22 (82) 56
------- ------- -----
Total change in net unrealized
gains (losses) $19,378 (15,588) (132)
======= ======= =====
</TABLE>
During 1994, PICOM sold all its Federal National Mortgage Association
(FNMA) interest-only strip bonds, having an aggregate amortized cost of
$1,146,255, from its held-to-maturity portfolio for $1,455,032, resulting
in a net gain of $308,777. The sale of these securities resulted from
management's decision to eliminate the interest rate risk associated with
these investments, and accordingly, management does not intend to invest in
this type of security prospectively. Because these investment securities
were unique in PICOM's investment portfolio, management's intent to hold
other debt securities until maturity was not affected by these sales.
During 1995, PICOM tendered a fixed maturity security having an amortized
cost of $747,146 from its held-to-maturity portfolio for $757,862,
resulting in a gain of $10,716. This security was tendered because the
future creditworthiness of the issuer was not determinable.
Investment in common stock of affiliate represented PICOM's 32 percent
ownership of PICI, which had a financial statement value of $1,900,882 at
December 31, 1994. In 1995, PICOM sold this investment for $1,557,207,
resulting in a realized loss of $343,675.
On December 28, 1995, under a reciprocal stock purchase agreement with
Physicians Insurance Company of Wisconsin, Inc. (PIC-Wis), the Company
acquired 1,583 shares of PIC-Wis' common stock (representing 6.77 percent
of PIC-Wis' outstanding stock) for $2,500,000, and PIC-Wis acquired 131,579
shares of the Company's common stock (representing 4.2 percent of the
Company's outstanding stock) for $2,500,000.
At December 31, 1995, U.S. Treasury notes and certificates of deposit with
a carrying value of $3,558,000 were on deposit with regulatory authorities,
as required by law.
FS-25
<PAGE> 128
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(3) Reinsurance
In the normal course of business, PICOM seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. Amounts receivable from reinsurers are
estimated in a manner consistent with the claim liability associated with
the reinsured policy. Although reinsurance agreements contractually
obligate PICOM's reinsurers to reimburse PICOM for their proportionate
share of losses, they do not discharge the primary liability of PICOM.
PICOM is contingently liable for the ceded amount of reserves for unpaid
losses and loss adjustment expenses and unearned premiums in the event the
assuming insurance organizations are unable to meet their contractual
obligations.
PICOM has various excess of loss and quota share reinsurance agreements.
As of December 31, 1995, the Company and PICOM-Illinois' maximum current
net retention, subject to certain adjustments of risk on any single
coverage per claim after reinsurance, follows:
<TABLE>
<CAPTION>
Net
Retention
---------
<S> <C>
PICOM Insurance Company $300,000
PICOM Insurance Company of Illinois 250,000
</TABLE>
PICOM continually reviews its reinsurers, considering a number of factors,
the most critical of which is their financial stability. Based on these
reviews, PICOM evaluates its position with reinsurers with respect to
existing and future reinsurance.
At December 31, 1995, amounts due from and premiums prepaid to reinsurers
follow:
<TABLE>
<CAPTION>
Amounts Prepaid
A.M. Best Due from Reinsurance
Rating Reinsurers Premiums
--------- ---------- -----------
(In thousands)
<S> <C> <C> <C>
Underwriters Reinsurance Company A $4,125 -
TIG Reinsurance A 2,909 7
PMA Reinsurance Corporation A+ 1,091 -
Continental Casualty Company A 1,001 -
Skandia American A- 1,165 -
Lloyds of London Not Rated 746 48
Princeton Insurance Company A- 269 5
Other Not Rated 958 16
------- --
$12,264 76
======= ==
</TABLE>
Of the above, approximately $615,000 is collateralized by irrevocable
letters of credit at December 31, 1995.
FS-26
<PAGE> 129
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(3) Reinsurance, Continued
Amounts due from reinsurers consisted of amounts related to:
<TABLE>
<CAPTION>
December 31,
---------------------
1995 1994
---- ----
(In thousands)
<S> <C> <C>
Paid losses and loss adjustment expenses $ 48 212
Unpaid losses and loss adjustment expenses 14,186 3,760
Premiums ceded payable (2,074) (600)
Other 104 83
------- ------
$12,264 3,455
======= ======
</TABLE>
Ceded premiums earned and reinsurance recoveries on losses and loss
adjustment expenses follow:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Ceded premiums earned $13,478 2,409 2,280
Reinsurance recoveries on losses and loss adjustment
expenses 11,475 1,910 2,717
</TABLE>
Ceded premiums earned and reinsurance recoveries increased in 1995 because
of PICOM-Illinois' reinsurance program.
(4) Federal Income Taxes
PICOM files a consolidated federal income tax return which includes all
subsidiaries. Income tax expense is computed under the liability method,
whereby deferred income taxes reflect the estimated future tax effects of
temporary differences between the carrying value of assets and liabilities
for financial reporting purposes and those for income tax purposes. A
valuation allowance is then required to be established to reduce a deferred
tax asset if it is "more likely than not" that the related tax benefits
will not be realized.
The provision for federal income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Current $(1,159) 350 475
Deferred 9,435 2,306 4,505
------- ----- -----
$ 8,276 2,656 4,980
======= ===== =====
</TABLE>
FS-27
<PAGE> 130
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(4) Federal Income Taxes, Continued
The significant components of federal income tax expense (benefit) are as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Continuing operations $ 8,276 2,656 4,980
Accounting changes (4,185) - -
Shareholders' equity 4,740 (3,525) 10
------- ------ ------
$ 8,831 (869) 4,990
======= ====== ======
</TABLE>
Federal income taxes differed from the "expected" tax expense (computed by
applying the federal corporate tax rate to income before federal income
taxes and cumulative effect of changes in accounting methods) as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Computed ("expected") tax expense $8,520 2,734 5,196
Tax-exempt investment income (65) - -
Foreign capital gains (58) - -
Other, net (121) (78) (216)
------ ----- -----
Actual tax expense $8,276 2,656 4,980
====== ===== =====
</TABLE>
FS-28
<PAGE> 131
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(4) Federal Income Taxes, Continued
The tax effects of temporary differences that give rise to deferred federal
income tax assets and deferred federal income tax liabilities follow:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
(In thousands)
<S> <C> <C>
Deferred federal income tax assets arising from:
Net operating loss carryforwards $ - 7,919
Loss and loss adjustment expense reserves 16,655 13,057
Unearned premium reserves 1,567 2,470
Alternative minimum tax credits 1,840 1,534
Unrealized losses on investments - 3,777
Other, net 72 49
------- ------
Total deferred federal income tax assets 20,134 28,806
------- ------
Deferred federal income tax liabilities:
Deferred acquisition costs 371 378
Unrealized gains on investments 963 -
Other 536 171
------- ------
Total deferred federal income tax liabilities 1,870 549
------- ------
Net deferred federal income taxes $18,264 28,257
======= ======
</TABLE>
In assessing the realizability of deferred federal income tax assets,
management considers whether it is more likely than not that some portion
of the deferred federal income tax assets will not be realized. Because of
the carryforward provisions of the Internal Revenue Code, the expectation
that temporary differences will reverse during periods in which taxable
income is generated, and the fact that PICOM has not incurred an operating
loss for either financial or federal income tax reporting purposes since
1987, management believes it is more likely than not that PICOM will fully
realize the net deferred federal income tax assets. Accordingly, no
valuation allowance has been established.
FS-29
<PAGE> 132
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(5) Property and Equipment
At December 31, 1995 and 1994, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
1995 1994
---- ----
(In thousands)
<S> <C> <C>
Real estate $ 1,813 1,800
Data processing equipment, including software 1,780 1,787
Furniture, fixtures, and equipment 1,051 967
------- ------
4,644 4,554
Accumulated depreciation (2,303) (2,522)
------- ------
$ 2,341 2,032
======= ======
</TABLE>
Total depreciation expense was $419,737 in 1995, $492,146 in 1994, and
$485,401 in 1993.
(6) Deferred Policy Acquisition Costs
Changes in deferred policy acquisition costs are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net asset balance, beginning of period $ 1,112 1,028 906
------- ------ ------
Amounts deferred:
Commissions to agents 3,181 2,257 2,171
Ceding commission income (1,161) (59) (105)
------- ------ ------
Net deferred 2,020 2,198 2,066
------- ------ ------
Net amortization (2,040) (2,114) (1,944)
------- ------ ------
Net asset balance, end of period $ 1,092 1,112 1,028
======= ====== ======
</TABLE>
(7) Loss and Loss Adjustment Expense Reserves
In 1994 and 1993, loss and loss adjustment expense reserves were discounted
to reflect anticipated investment income. Discounts were based on
historical payment patterns and same rate used for statutory reporting
purposes.
FS-30
<PAGE> 133
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(7) Loss and Loss Adjustment Expense Reserves, Continued
Discounted loss and loss adjustment expense reserves as of December 31,
1994 (in thousands), follow:
<TABLE>
<S> <C>
Loss and loss adjustment expense reserves $200,854
Present value of future investment income (12,310)
--------
Discounted loss and loss adjustment expense reserves $188,544
========
</TABLE>
The losses and loss adjustment expenses incurred for the years ended
December 31, 1994 and 1993, follow:
<TABLE>
<CAPTION>
1994 1993
------ ------
(In thousands)
<S> <C> <C>
Losses and loss adjustment expenses incurred $44,547 40,632
Change in present value of future investment income 306 3,953
------- ------
Discounted losses and loss adjustment expenses incurred, net $44,853 44,585
======= ======
</TABLE>
Prior to 1995, loss and loss adjustment expense reserves had been adjusted
("discounted") to reflect anticipated investment income. The method of
discounting was based upon historical payment patterns and assumes an
interest rate at the same rate used for statutory reporting purposes. In
1993, the Company reduced its discount rate assumption from 3.75% to 3.00%
for all accident years. The effect of this reduction in discount rate was
previously presented as a change in accounting principle (cumulative
effect of $2,006,000). The effect of this reduction in discount rate has
been reclassified and presented as a change in estimate resulting in an
increase in losses and loss adjustment expenses of $3,039,000 and a
decrease in federal income taxes of $1,033,000.
Effective January 1, 1995, the Company eliminated discounting of loss and
loss adjustment expense reserves for GAAP reporting purposes, a change in
method of accounting. PICOM believes it is preferable not to discount
reserves, because it is more conservative and is practiced by most publicly
held insurers. This change in method of accounting resulted in a one-time
cumulative charge of $8,125,000, net of deferred federal income taxes, as
of January 1, 1995 (see note 10).
FS-31
<PAGE> 134
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(7) Loss and Loss Adjustment Expense Reserves, Continued
Activity in loss and loss adjustment expense reserves is summarized as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Balance, beginning of year $188,544 191,220 184,757
Less reinsurance balances recoverable (3,760) (4,040) (2,403)
-------- ------- -------
Net balance, beginning of year 184,784 187,180 182,354
-------- ------- -------
Incurred related to:
Current year 63,027 68,610 68,237
Prior years (27,469) (23,757) (23,652)
-------- ------- -------
Total incurred 35,558 44,853 44,585
-------- ------- -------
Effect of changes in accounting methods 12,310 - --
-------- ------- -------
Paid related to:
Current year 3,053 4,433 3,539
Prior years 44,180 42,816 36,220
-------- ------- -------
Total paid 47,233 47,249 39,759
-------- ------- -------
Net balance, end of year 185,419 184,784 187,180
Plus reinsurance balances recoverable 14,186 3,760 4,040
-------- ------- -------
Balance, end of year $199,605 188,544 191,220
======== ======= =======
</TABLE>
PICOM establishes conservative reserves for the most recent accident years
and adjusts the reserves as new information becomes available. This
conservative reserving practice has resulted in favorable development in
estimates of prior years' reserves.
Had the elimination of discounting been retroactively applied to 1992,
total incurred losses would have been $44,547,000 and $43,671,000 in 1994
and 1993, respectively.
(8) Employee Benefit Plans
PICOM currently maintains two defined contribution employee benefit
plans--a 401(k) plan and a money purchase plan--which cover substantially
all employees meeting certain eligibility requirements.
With respect to the 401(k) plan, PICOM annually contributes 5 percent of an
employee's salary and matches employee contributions up to 5 percent of an
employee's salary. During 1995, 1994, and 1993, PICOM's expense under the
401(k) plan was $261,000, $298,000, and $286,000, respectively.
FS-32
<PAGE> 135
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(8) Employee Benefit Plans, Continued
With respect to the money purchase plan, PICOM annually contributes 3
percent of an employee's salary up to a prescribed maximum, plus 5 percent
of the excess of an employee's salary over the prescribed maximum. During
1995, 1994, and 1993, PICOM's expense under the money purchase plan was
$114,000, $118,000, and $110,000, respectively.
PICOM has a stock purchase plan through which employees and directors of
PICOM and its wholly owned subsidiaries may purchase PICOM common stock by
means of payroll deduction. Pursuant to this plan, PICOM may elect to
match participant purchases, which it is currently matching at the rate of
$1.25 (of which $1.00 is used to purchase PICOM common stock and $0.25 is
applied to income taxes) for each $1.00 of participant purchases up to a
maximum participant purchase of $6,000 per year. In 1995, 1994, and 1993,
PICOM incurred expenses of $82,000, $64,000, and $42,000, respectively,
under this plan.
(9) Shareholders' Equity
Without prior regulatory approval, the Michigan and Illinois Insurance
Codes limit the amount of dividends that the Company can pay to its
shareholders or that PICOM-Illinois can pay to its parent in any 12-month
period to the greater of statutory net income for the preceding year,
excluding realized gains (losses) on sales of investments, or 10 percent of
policyholders' surplus as of the preceding year-end. As of January 1,
1996, approximately $23,694,000 and $598,000 could be paid without prior
regulatory approval by the Company and PICOM-Illinois, respectively. In
1995, neither the Company nor PICOM-Illinois paid any dividends.
Effective July 5, 1995, PICOM purchased 254,823 shares of its common stock
(approximately 7.9 percent of its then-issued and outstanding shares) from
Physicians Insurance Company of Ohio for $4,331,991 ($17 per share), plus
$53,000 for advisory and finder fees. These shares, net of 131,579 shares
sold in December 1995 (see note 2), are held as treasury stock available
for resale.
On September 22, 1994, and September 15, 1993, the Company declared a 10
percent stock dividend, issued on December 1, 1994 and 1993, respectively,
to shareholders of record as of October 28, 1994, and November 1, 1993,
respectively. All per-share information in the accompanying consolidated
financial statements has been adjusted to give retroactive effect to these
stock dividends.
(10)Statutory Insurance Accounting Principles
The Company and PICOM-Illinois are required to file financial statements
prepared in accordance with statutory insurance accounting principles
("SAP") prescribed or permitted by Michigan and Illinois with their
respective domiciliary states. The only material statutory accounting
method utilized by the Company that is permitted rather than prescribed is
the Company's discounting of its loss and loss adjustment expense reserves.
The impact of such permitted practice is to increase statutory
policyholders' surplus of the Company by $9,393,000 and $12,310,000 at
December 31, 1995 and 1994, respectively.
Both the Company and PICOM-Illinois are required by the Michigan Insurance
Bureau (MIB) and the Insurance Department of the State of Illinois,
respectively, to maintain capital and surplus of $1,500,000.
FS-33
<PAGE> 136
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(10)Statutory Insurance Accounting Principles, Continued
Accounting principles used to prepare statutory-basis financial statements
differ in some respects from GAAP. A reconciliation of statutory
policyholders' surplus at December 31, 1995 and 1994, and statutory net
income for the years ended December 31, 1995, 1994, and 1993, of the
Company and PICOM-Illinois, as applicable (as filed with their respective
insurance regulatory authorities), to the amounts shown in the accompanying
consolidated financial statements follows:
<TABLE>
<CAPTION>
December 31,
--------------
1995 1994
---- ----
(In thousands)
<S> <C> <C>
Statutory policyholders' surplus $67,006 47,149
Net unrealized appreciation (depreciation) on securities
available for sale 2,832 (11,127)
Deferred policy acquisition costs capitalized for GAAP 1,092 1,112
Deferred federal income taxes recorded for GAAP 18,264 28,257
Assets non-admitted for SAP 640 560
Loss and loss adjustment expense reserve discount (9,393) -
Liabilities for GAAP in excess of SAP (2,700) (3,700)
Liabilities required for SAP in excess of those required
for GAAP 572 651
Other 98 240
------- -------
Total shareholders' equity per accompanying consolidated
balance sheets $78,411 63,142
======= =======
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1994 1993
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Statutory net income $22,201 6,537 13,458
Deferred federal income tax expense recorded for
GAAP (9,435) (2,306) (4,505)
Change in loss and loss adjustment expense reserve
discount 1,925 - -
Change in liabilities for GAAP in excess of SAP 1,000 - -
Cumulative effect of changes in accounting methods (8,125) - -
Other 371 926 916
------- ------ ------
Combined net income of insurance companies based on
GAAP 7,937 5,157 9,869
Net income (loss) attributable to non-insurance
subsidiaries 4 (3) (3)
------- ------ ------
Net income per accompanying consolidated statements
of income $ 7,941 5,154 9,866
======= ====== ======
</TABLE>
FS-34
<PAGE> 137
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(10) Statutory Insurance Accounting Principles, Continued
Certain regulations that affect PICOM and the insurance industry are
promulgated by the National Association of Insurance Commissioners (NAIC).
The NAIC is an association of state insurance commissioners, regulators,
and support staff that acts as a coordinating body for the state insurance
regulatory process. In 1994, the NAIC established risk-based capital
("RBC") requirements to assist regulators in monitoring the financial
strength and stability of property and casualty insurers. Under the NAIC
requirements, each insurer must maintain its total capital and surplus
above a calculated threshold or take corrective measures to achieve the
threshold. The Company and PICOM-Illinois have calculated their RBC levels
based on these requirements and have determined that they passed the RBC
test and have capital and surplus in excess of the threshold.
(11) Concentrations and Credit Risk
The Company writes approximately 90 percent of its premiums through
approximately 30 independent agents and approximately 10 percent of its
premiums directly. In 1995, 1994, and 1993, 3 agents individually produced
between 10 and 15 percent of the Company's premiums written. In 1995,
1994, and 1993, 6 agents, in aggregate, produced approximately 57, 57, and
58 percent, respectively, of the Company's premiums written.
PICOM-Illinois writes approximately 47 percent of its premiums through 23
independent agents and approximately 53 percent directly. In 1995, 1 agent
produced 19.4 percent of PICOM-Illinois' premiums written.
All premiums are directly billed to policyholders, and premiums due are
secured by the related unearned premiums. When insureds fail to pay their
premiums, coverage is canceled. PICOM requires policyholders to remit a
minimum of 40 percent of the premium at policy origination date.
Subsequent scheduled payments are monitored to prevent PICOM from providing
coverage beyond the date for which payment has been received. In the
opinion of management, the net amounts carried on the accompanying
consolidated balance sheets are collectible.
(12) Commitments
PICOM is engaged in various legal actions incident to the nature of its
insurance business. Management is of the opinion that none of the
litigation will have a material effect on PICOM's results of operations as
well as its financial position.
Effective January 1, 1995, PICOM purchased the right to solicit and write
medical professional liability insurance in Illinois that was formerly
written by another Illinois insurance company. The purchase price, which
is a percentage of annualized gross premiums written through 1999, will be
a minimum of $3,452,954, plus $134,000 attributable to a non-compete
covenant. The aggregate minimum purchase price of
$3,586,954, net of amortization approximating $358,700, is recorded as an
intangible asset at December 31, 1995. To the extent the purchase price
exceeds the minimum, such excess will be capitalized.
FS-35
<PAGE> 138
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(13) Quarterly Financial Data (Unaudited)
The unaudited operating results by quarter for 1995, 1994, and 1993 are
summarized below:
<TABLE>
<CAPTION>
Income Before
Income Taxes and Pretax
Total Cumulative Effect Effect of Net
Revenues and Other of Change in Change in Net Income Per
Income Accounting Method Accounting Income Common Share
------------------ -------------------- ---------- ------ --------------
(In thousands, except per-share data)
<S> <C> <C> <C> <C> <C>
1995:
1st $17,020 1,255 (12,310) (7,295) (2.25)
2nd 17,292 3,593 - 2,371 .73
3rd 18,110 3,861 - 2,548 .85
4th 18,150 15,633 - 10,317 3.45
------- ------ ------- ------
Year $70,572 24,342 (12,310) 7,941
======= ====== ======= ======
1994:
1st $14,843 2,241 - 1,479 .46
2nd 14,271 97 - 64 .02
3rd 15,474 2,847 - 1,879 .58
4th 15,279 2,625 - 1,732 .53
------- ------ ------- ------
Year $59,867 7,810 - 5,154
======= ====== ======= ======
1993:
1st $15,808 1,643 - 1,084 .34
2nd 17,005 2,018 - 1,332 .41
3rd 19,977 4,070 - 2,686 .83
4th 14,686 7,115 - 4,764 1.47
------- ------ ------- ------
Year $67,476 14,846 - 9,866
======= ====== ======= ======
</TABLE>
Results for the first three quarters of 1995 have been restated from those
originally reported because the Company changed its method of accounting
for loss and loss adjustment expense reserves by eliminating discounting
of such reserves effective January 1, 1995.
Results for the first three quarters of 1993 have been reclassified from
those originally reported because the Company changed its loss and loss
adjustment expense reserve discount rate from 3.75% to 3%.
Net income was negatively impacted during the second quarter of 1994 due to
an increase in claims filed just prior to the effective date of Michigan's
tort reform laws.
FS-36
<PAGE> 139
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to the Consolidated Financial Statements, Continued
(14) Fair Value of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosures of fair-value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable
to estimate the value. In situations where quoted market prices are not
available, fair values are to be based on estimates using present value or
other valuation techniques. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure
requirements.
Under SFAS No. 107, PICOM's investment securities, cash, short-term
investments, drafts outstanding, and balance due on purchased book of
business constitute financial instruments. The carrying amounts of all
financial instruments--other than investment securities, which are
presented in note 2--approximated their fair values at December 31, 1995
and 1994.
FS-37
<PAGE> 140
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
Assets 1996 1995
------ --------- ------------
(Unaudited)
<S> <C> <C>
Investments:
Fixed maturities - available for sale, at market value (amortized cost: $260,169 and
$257,129) $258,733 259,979
Equity securities available for sale, at market value (cost: $2,623 and $2,608) 2,684 2,641
Short-term investments, at cost 11,849 17,512
Real estate, at cost, net of accumulated depreciation 470 475
-------- -------
Total investments 273,736 280,607
Cash 1,323 1,279
Premiums due from policyholders 11,005 7,618
Amounts due from reinsurers 10,676 12,264
Accrued investment income 3,621 3,612
Prepaid reinsurance premiums 1,851 76
Deferred federal income taxes 19,624 18,264
Property and equipment, net of accumulated depreciation and amortization 2,278 2,341
Deferred policy acquisition costs 866 1,092
Other assets 4,703 3,559
-------- -------
Total assets $329,683 330,712
======== =======
Liabilities and Shareholders' Equity
------------------------------------
Liabilities:
Loss and loss adjustment expense reserves $200,904 199,605
Reserve for extended reporting period claims 14,182 14,082
Unearned premiums 27,008 23,122
Drafts outstanding 2,486 3,445
Payable for securities - 3,205
Balance due on purchased book of business 1,800 2,694
Accrued expenses and other liabilities 4,771 6,148
-------- -------
Total liabilities 251,151 252,301
-------- -------
Shareholders' equity:
Common stock, $1 par value; 10,000,000 shares authorized; 3,238,959 shares
issued and outstanding, including shares in treasury 3,239 3,239
Additional paid-in capital 8,624 8,417
Retained earnings 69,321 66,994
Net unrealized appreciation (depreciation) on investments, net of deferred
federal income tax expense (benefit) of ($354) and $963 in 1996 and 1995,
respectively (1,021) 1,882
-------- -------
80,163 80,532
Less cost of common stock in treasury (94,814 and 123,244 shares) (1,631) (2,121)
-------- -------
Total shareholders' equity 78,532 78,411
-------- -------
Total liabilities and shareholders' equity $329,683 330,712
======== =======
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
FS-38
<PAGE> 141
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In thousands, except per-share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Revenues and other income:
Premiums written $ 20,711 19,559
Premiums ceded (4,263) (4,981)
---------- ---------
Net premiums written 16,448 14,578
Increase in unearned premiums, net of prepaid reinsurance premiums (2,111) (643)
---------- ---------
Premiums earned 14,337 13,935
Investment income, net of expenses 3,869 2,971
Net realized investment gains (losses) (14) 114
Other 83 -
---------- ---------
Total revenues and other income 18,275 17,020
---------- ---------
Expenses:
Losses and loss adjustment expenses, net 12,416 13,493
Increase in reserve for extended reporting period claims 100 332
Policy acquisition and other underwriting expenses (note 3) 2,593 1,940
---------- ---------
Total expenses 15,109 15,765
---------- ---------
Income from operations before federal income taxes and cumulative
effect of change in accounting method 3,166 1,255
Federal income taxes (839) (425)
---------- ---------
Income before cumulative effect of change in accounting method 2,327 830
Cumulative effect of change in accounting method - elimination of
loss and loss adjustment expense reserve discount, net of
deferred federal income tax benefit of $4,185 - (8,125)
---------- ---------
Net income $ 2,327 (7,295)
========== =========
Net income per common share:
Income before cumulative effect of change in accounting method $ 0.74 0.26
Cumulative effect of change in accounting method - (2.51)
---------- ---------
Net income per common share $ 0.74 (2.25)
========= =========
Weighted average shares outstanding 3,126,025 3,238,959
========= =========
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
FS-39
<PAGE> 142
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders' Equity
Three months ended March 31, 1996 and 1995
<TABLE>
<CAPTION>
Net Unrealized
Appreciation
Common Stock (Depreciation)
------------------------------------ on Investments, Cost of
Shares Additional Net of Deferred Common Total
-------------------------- Paid-in Retained Federal Income Stock in Shareholders'
Issued In Treasury Amount Capital Earnings Tax Effect Treasury Equity
------ ----------- ------ ------- -------- --------------- -------- -------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December
31, 1994 3,238,959 - $3,239 8,181 59,053 (7,331) - 63,142
Net loss (unaudited) - - - - (7,295) - - (7,295)
Net appreciation on
debt and equity
securities
(unaudited) - - - - - 3,003 - 3,003
--------- ------- ------ ----- ------ ------ ------ ------
Balances, March 31,
1995 (unaudited) 3,238,959 - $3,239 8,181 51,758 (4,328) - 58,850
========= ======= ====== ===== ====== ====== ====== ======
Balances, December
31, 1995 3,238,959 123,244 $3,239 8,417 66,994 1,882 (2,121) 78,411
Net income (unaudited) - - - - 2,327 - - 2,327
Issuance of treasury
shares (note 3)
(unaudited) - (28,430) - 207 - - 490 697
Net depreciation on
debt and equity
securities
(unaudited) - - - - - (2,903) - (2,903)
--------- ------- ------ ----- ------ ------ ------ ------
Balances, March 31,
1996 (unaudited) 3,238,959 94,814 $3,239 8,624 69,321 (1,021) (1,631) 78,532
========= ======= ====== ===== ====== ====== ====== ======
</TABLE>
See accompanying notes to the consolidated financial statements.
FS-40
<PAGE> 143
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,327 (7,296)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 467 947
Realized (gains) losses on investments (14) 114
Deferred federal income taxes (23) (3,760)
Stock bonus award 697 -
Changes in assets and liabilities:
Premiums due from policyholders (3,387) (1,988)
Amounts due from reinsurers 1,588 (5,173)
Accrued investment income (9) 863
Prepaid reinsurance premiums (1,775) (1,679)
Deferred policy acquisition costs 226 (3,445)
Other assets (1,233) (302)
Loss and loss adjustment expense reserves 1,299 20,049
Reserve for extended reporting period claims 100 331
Unearned premiums 3,886 2,323
Drafts outstanding (958) (925)
Accrued expenses and other liabilities (1,378) 7,624
-------- -------
Net cash provided by operating activities 1,813 7,683
-------- -------
Cash flows from investing activities:
Proceeds from sale or maturity of short-term investments 96,471 81,739
Purchases of short-term investments (90,668) (79,080)
Proceeds from maturity of securities available for sale 1,000 3,100
Proceeds from sale of securities available for sale 53,952 9,915
Purchases of securities available for sale (58,372) (14,255)
Purchases of securities held to maturity - (7,579)
Payable for securities (3,205) -
Purchases of property and equipment (53) (108)
Payment on liability for purchased book of business (894) -
-------- -------
Net cash used in investing activities (1,769) (6,268)
-------- -------
Net increase in cash 44 1,415
Cash, beginning of period 1,279 940
-------- -------
Cash, end of period $ 1,323 2,355
======== =======
Supplemental disclosure of cash flow information - federal income taxes paid $ 215 -
Supplemental schedule of noncash investing activities:
Purchase of book of business:
Intangible assets acquired $ - 3,587
Amount due - (3,587)
Issuance of treasury shares through stock bonus award 697 -
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
FS-41
<PAGE> 144
PICOM INSURANCE COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Three Months Ended March 31, 1996 and 1995, (Unaudited)
and December 31, 1995
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
PICOM Insurance Company and subsidiaries ("the Company") have been prepared
in accordance with generally accepted accounting principles and pursuant to
the rules and regulations of the Securities and Exchange Commission for
interim financial information. In management's opinion, all adjustments,
consisting of normal recurring adjustments, which are necessary for a fair
presentation of financial position and results of operations have been
made. It is recommended that these condensed consolidated financial
statements be read in conjunction with the consolidated financial
statements and notes related thereto included elsewhere herein.
(2) Net Income Per Share
Net income per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period,
calculated on a daily basis.
(3) Shareholders' Equity
On February 28, 1996, the Company awarded 28,430 shares of common stock
held in treasury to 78 directors, officers, and employees of the Company as
a one-time stock bonus award. Compensation expense for this stock bonus
award approximated $697,000, which was charged to policy acquisition and
other underwriting expenses.
FS-42
<PAGE> 145
CONFORMED COPY
ANNEX A
REORGANIZATION AGREEMENT
DATED AS OF MAY 13, 1996
AMONG
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP,
PICOM INTERIM INSURANCE COMPANY,
AND
PICOM INSURANCE COMPANY
A-1
<PAGE> 146
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I THE MERGER........................................................... A-5
1.1 Plan of Merger.................................................... A-5
1.2 Stockholder Meetings.............................................. A-5
1.3 Merger Effective Time............................................. A-5
ARTICLE II CLOSING............................................................. A-6
2.1 Closing Date...................................................... A-6
2.2 Sales and Transfer Taxes.......................................... A-6
2.3 Further Assurances................................................ A-6
ARTICLE III REPRESENTATIONS AND WARRANTIES..................................... A-6
3.1 Representations and Warranties of the PICOM Companies............. A-6
3.2 Representations and Warranties of the Holding Company Entities.... A-8
ARTICLE IV COVENANTS........................................................... A-10
4.1 Covenants of PICOM Companies and Holding Company Entities......... A-10
4.2 Securities Regulatory Matters..................................... A-11
4.3 Insurance Regulatory Matters...................................... A-11
4.4 Other Regulatory Matters.......................................... A-11
4.5 Reservation of Shares for Issuance................................ A-12
4.6 Legal Conditions to Merger........................................ A-12
4.7 Affiliates........................................................ A-12
4.8 Expenses.......................................................... A-12
4.9 Additional Agreements; Best Efforts............................... A-13
4.10 Plan of Merger.................................................... A-13
4.11 Letter of Accountants............................................. A-13
4.12 Loan Covenants.................................................... A-13
4.13 Indemnification................................................... A-13
ARTICLE V CONDITIONS PRECEDENT................................................. A-14
5.1 Conditions to Each Party's Obligation To Effect the Merger........ A-14
5.2 Conditions to Obligations of the Holding Company Entities......... A-17
5.3 Conditions to Obligations of the PICOM Companies.................. A-17
ARTICLE VI TERMINATION AND AMENDMENT........................................... A-18
6.1 Termination....................................................... A-18
6.2 Effect of Termination............................................. A-19
6.3 Amendment......................................................... A-19
6.4 Extension; Waiver................................................. A-19
ARTICLE VII GENERAL PROVISIONS................................................. A-19
7.1 Agreements........................................................ A-19
7.2 Notices........................................................... A-20
7.3 Interpretation.................................................... A-20
7.4 Counterparts...................................................... A-21
</TABLE>
A-2
<PAGE> 147
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
7.5 Entire Agreement; No Third Party Beneficiaries; Rights of Ownership....... A-21
7.6 Governing Law............................................................. A-21
7.7 Enforcement of Agreement.................................................. A-21
7.8 Severability.............................................................. A-21
7.9 Assignment................................................................ A-22
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EXHIBITS
1. Agreement and Plan of Merger (not included)
2. Form of Affiliates Agreement (not included)
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REORGANIZATION AGREEMENT
THIS REORGANIZATION AGREEMENT (this "Agreement") is entered into as of the
13th day of May, 1996, by and among Professionals Insurance Company Management
Group, a Michigan business corporation ("Holding Company"), PICOM Interim
Insurance Company, a Michigan stock insurance company and wholly-owned
subsidiary of Holding Company ("INSCO", and together with Holding Company, the
"Holding Company Entities"), and PICOM Insurance Company, a Michigan stock
insurance company ("PICOM," and together with its subsidiaries, the "PICOM
Companies").
WITNESSETH:
WHEREAS, PICOM is a stock insurance company organized under the Michigan
Insurance Code of 1956, as amended (the "Insurance Code"), that currently has
several subsidiaries; and
WHEREAS, PICOM recently caused Holding Company to be organized as a
business corporation under the Michigan Business Corporation Act, as amended
(the "MBCA"), solely for the purpose of acting as a holding company for PICOM
and its subsidiaries; and
WHEREAS, PICOM recently caused INSCO to be organized as a stock insurance
company under the Insurance Code solely for the purpose of consummating the
transactions contemplated by this Agreement and the Agreement and Plan of
Merger attached hereto as Exhibit 1 (the "Plan of Merger"); and
WHEREAS, the parties hereto desire to effect the holding company structure
through the merger of INSCO with and into PICOM, with PICOM being the surviving
corporation (the "Merger"), and the stockholders of PICOM exchanging each of
their shares of PICOM common stock, $1.00 par value per share ("PICOM Common
Stock"), for one share of Holding Company common stock, no par value per share
("Holding Company Common Stock"); and
WHEREAS, as a result of the Merger and such exchange of shares PICOM will
become a wholly owned subsidiary of Holding Company, and PICOM stockholders
will become stockholders of Holding Company; and
WHEREAS, this Agreement and the Plan of Merger, which is being executed
and delivered by the parties thereto contemporaneously with the execution and
delivery of this Agreement, set forth the terms and conditions upon which INSCO
will merge with and into PICOM and the stockholders of PICOM will exchange
their shares of PICOM Common Stock for shares of Holding Company Common Stock;
and
WHEREAS, the respective Boards of Directors of Holding Company, INSCO and
PICOM have determined that it is in the best interests of Holding Company,
INSCO and PICOM and their respective stockholders for INSCO to merge with and
into PICOM upon the terms and conditions set forth in this Agreement and the
Plan of Merger and in accordance with the Insurance Code; and
WHEREAS, the respective Boards of Directors of Holding Company, INSCO and
PICOM have adopted resolutions approving this Agreement, the Plan of Merger and
the Merger, and the Board of Directors of PICOM has resolved to recommend
approval of this Agreement, the Plan of Merger and the Merger to PICOM's
stockholders; and
WHEREAS, for Federal income tax purposes, it is intended that the Merger
qualify as a reorganization under the provisions of Section 368 of the Internal
Revenue Code of 1986, as amended (the "Code"); and
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WHEREAS, in the Merger, the holders of PICOM Common Stock will receive an
amount of Holding Company Common Stock in exchange for the shares of capital
stock of PICOM constituting "control" of Holding Company (as such term is
defined in Section 368(c) of the Code); and
WHEREAS, Holding Company, INSCO and PICOM desire to make certain
representations, warranties and agreements in connection with the transactions
contemplated herein and also to prescribe various conditions to the
transactions contemplated herein.
NOW, THEREFORE, in consideration of the premises and the respective
representations, warranties, covenants and agreements set forth herein, and
intending to be legally bound hereby, the parties hereto agree as follows:
ARTICLE I
THE MERGER
1.1 Plan of Merger. The Plan of Merger sets forth (a) the name of each
constituent corporation of the Merger and the name of the surviving corporation
of the Merger (the "Surviving Corporation"), (b) the designation and number of
outstanding shares of each class of and series of capital stock of each of the
constituent corporations to the Merger and the class and series entitled to
vote, (c) the terms and conditions of the Merger, including the manner and
basis of converting (i) the outstanding shares of PICOM Common Stock into
shares of Holding Company Common Stock and cash in lieu of fractional shares
and (ii) the outstanding shares of INSCO common stock, $1.00 par value per
share ("INSCO Common Stock"), into shares of common stock of Surviving
Corporation, and (d) other provisions with respect to the transactions
contemplated therein. PICOM shall be the Surviving Corporation. The Plan of
Merger is intended to constitute the "plan of merger" contemplated by the
Insurance Code and Section 701 of the MBCA.
1.2 STOCKHOLDER MEETINGS. (a) PICOM shall take all steps necessary to
duly call, give notice of, convene and hold a meeting of its stockholders to be
held as soon as is reasonably practicable after the date the "Registration
Statement" (as defined in Section 3.2(b)(iii) below) becomes effective for the
purpose of voting upon the approval and adoption of this Agreement, the Plan of
Merger and the Merger. PICOM will, through its Board of Directors, subject to
its fiduciary obligation as determined by it after consultation with outside
counsel, recommend to its stockholders approval and adoption of such matters.
(b) Prior to the Merger Effective Time (as defined in Section 1.3 hereof),
Holding Company, INSCO, and Holding Company as the sole stockholder of INSCO,
shall take all action proper or convenient for the consummation of the Merger
by INSCO.
1.3 MERGER EFFECTIVE TIME. Subject to the provisions of the MCBA, the
Insurance Code, this Agreement, the Plan of Merger, and any Order of
Acquisition Exemption and Preliminary Approval of Merger (a "Preliminary
Order") or any Order of Acquisition Exemption and Final Approval of Merger (a
"Final Order," and together with any Preliminary Order, the "Orders") issued by
the Commissioner of Insurance of the State of Michigan (the "Insurance
Commissioner") pursuant to the Insurance Code, the Merger shall become
effective (the "Effective Time") not later than 11:59 p.m. Eastern Time on the
third business day following the "Closing Date" (as defined in Section 2.1
below).
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ARTICLE II
CLOSING
2.1 CLOSING DATE. Subject to the terms and conditions hereof, the closing
of the Merger (the "Closing") will take place at 10:00 a.m. on the third
business day following the satisfaction or waiver (subject to applicable law)
of the latest to occur of the conditions set forth in Article V hereof (the
"Closing Date") at the offices of Miller, Canfield, Paddock and Stone, P.L.C.,
Bloomfield Hills, Michigan, unless another time, date or place is provided for
in the Insurance Code or the Orders or is agreed to in writing by Holding
Company, INSCO and PICOM. All transactions occurring and all documents
executed and/or delivered at the Closing shall be deemed to occur
simultaneously, and no transaction shall be deemed to have occurred and no
document shall be deemed to have been executed or delivered unless all
transactions shall have occurred and all such documents shall have been
executed and delivered.
2.2 SALES AND TRANSFER TAXES. All applicable sales, transfer, stamp,
documentary, and other similar taxes and governmental fees, if any, which may
be due or payable as a result of the Merger shall be borne and paid by PICOM.
2.3 FURTHER ASSURANCES. From time to time subsequent to the Closing Date,
Holding Company, INSCO and PICOM shall at the request of Holding Company
execute and deliver such additional documents, instruments, certifications,
papers and other assurances as may be requested by Holding Company as
necessary, appropriate, convenient, useful or desirable to effectively carry
out the intent of this Agreement and/or the Plan of Merger and/or the Orders.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF THE PICOM COMPANIES. The PICOM
Companies, jointly and severally, represent and warrant to the Holding Company
Entities as follows:
(a) ORGANIZATION, STANDING AND POWER. Each of the PICOM Companies is a
corporation duly incorporated, validly existing and in good standing under the
laws of its jurisdiction of incorporation, has all requisite power and
authority (corporate and other) to own, lease and operate its properties and to
carry on its business as now being conducted, and is duly qualified and in good
standing to do business in each jurisdiction in which the nature of its
business or the ownership or leasing of its properties makes such qualification
necessary other than in such jurisdictions where the failure to so qualify
would not have a material adverse effect on PICOM. As used in this Agreement,
(i) any reference to any event, change or effect being "material" with respect
to any of the PICOM Companies or any of the Holding Company Entities means an
event, change or effect which is material in relation to the condition
(financial or otherwise), assets, liabilities, businesses, results of
operations or prospects of the PICOM Companies taken as a whole or the Holding
Company Entities taken as a whole, as the case may be, and (ii) the term
"material adverse effect" means, with respect to PICOM, Holding Company, INSCO
or Surviving Corporation, as the case may be, a material adverse effect on (x)
the business, assets, liabilities, results of operations, condition (financial
or otherwise) or prospects of the PICOM Companies taken as a whole in the case
of PICOM, the Holding Company Entities taken as a whole in the case of Holding
Company, or such surviving corporation and its subsidiaries taken as a whole in
the case of the Surviving Corporation, or (y) on the ability of any of the
PICOM Companies in the case of PICOM, any of the Holding Company Entities in
the case of Holding Company, or the Surviving Corporation, as the case may be,
to perform its obligations hereunder or to consummate the transactions
contemplated hereby, it being understood that a material adverse effect on any
entity shall not include a change with respect to such entity resulting from
any change in law, rule or regulation or
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generally accepted accounting principles which impairs both the PICOM
Companies and the Holding Company Entities in a substantially similar manner.
(b) AUTHORITY. (i) Each of the PICOM Companies has all requisite
corporate power and authority to enter into this Agreement and the Plan of
Merger and, subject to approval and adoption of this Agreement and the Plan of
Merger by the stockholders of PICOM, to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the Plan of Merger and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of each of the PICOM Companies subject to the approval and adoption
of this Agreement and the Plan of Merger by the stockholders of PICOM. No
approval or adoption of the stockholders of PICOM is required to consummate the
Merger and the other transactions contemplated hereby other than as
specifically set forth in Section 5.1(a) hereof. This Agreement and the Plan
of Merger have been duly executed and delivered by each of the PICOM Companies
that is a party hereto and thereto and constitutes a legal, valid and binding
obligation of each of the PICOM Companies that is a party hereto and thereto,
enforceable against each of them in accordance with its terms except as
enforcement may be limited by general principles of equity, whether applied in
a court of law or a court of equity, and bankruptcy, insolvency and similar
laws affecting creditors' rights and remedies generally.
(ii) The execution and delivery of this Agreement and the Plan of Merger
and the consummation of the transactions contemplated hereby and thereby will
not conflict with, give rise to or result in any violation of, or default (with
or without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or the loss of a
material benefit under, or the creation of an "Encumbrance" on any assets (any
such conflict, violation, default, right, loss or creation being referred to
herein as a "Violation") pursuant to, any provision of the Articles of
Incorporation or Bylaws of any of the PICOM Companies or, be, give rise to or
result in any Violation pursuant to, or require the consent of any other Person
that is a party to, any loan or credit agreement, note, mortgage, indenture,
lease, sublease, PICOM benefit plan or other agreement, obligation, instrument,
permit, concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to any of the PICOM Companies or their
respective properties or assets which Violations or the failure to obtain such
consents would in the aggregate have a material adverse effect on PICOM. For
the purposes of this Agreement, (x) the term "Encumbrance" means any pledge,
lien, security interest, encumbrance, mortgage, claim, proxy, voting trust,
voting agreement, obligation, option, equity interest, demand, lease, sublease,
tenancy, license, easement or rights of occupancy or use by another Person or
other interest whatsoever and (y) the term "Person" means any entity, whether a
natural person, trustee, corporation, partnership, limited liability company,
joint stock company, trust, unincorporated organization, business association
or firm, joint venture, government or agency, instrumentality or public
subdivision thereof, court, or otherwise.
(iii) No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality, domestic or foreign (each a
"Governmental Entity"), is required by or with respect to any of the PICOM
Companies in connection with the execution and delivery of this Agreement or
the Plan of Merger by any of the PICOM Companies, or the consummation by any of
the PICOM Companies of the transactions contemplated hereby or thereby, the
failure of which to obtain or make would in the aggregate have a material
adverse effect on PICOM, except for (A) such filings with the Insurance
Commissioner as are required or contemplated by the Insurance Code or the
Orders, (B) such filings with the Director of Insurance of the State of
Illinois (the "Illinois Insurance Director") as are required or contemplated by
the Illinois Insurance Code, and (C) the filing of appropriate documents with
the relevant authorities of other states in which any of the PICOM Companies
are qualified to do business.
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(c) INFORMATION SUPPLIED. None of the information supplied or to be
supplied by any of the PICOM Companies for inclusion in (i) the Registration
Statement will, at the time the Registration Statement becomes effective under
the Securities Act of 1933, as amended (the "Securities Act"), contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, and (ii) the
proxy statement/prospectus constituting a part of the Registration Statement
(the "Proxy Statement/Prospectus") and any amendment or supplement thereto will
not, at the date of mailing to stockholders and at the times of the meetings of
stockholders of PICOM to be held in connection with the Merger, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
Proxy Statement/Prospectus (except for such portions thereof that relate only
to the Holding Company Entities) will comply in all material respects with the
provisions of the Insurance Code and the rules and regulations promulgated
thereunder, and the Registration Statement (except for portions thereof that
relate only to the Holding Company Entities) will comply in all material
respects with the provisions of the Securities Act and the rules and
regulations thereunder.
(d) COMPLIANCE WITH APPLICABLE LAWS. To the best knowledge of the PICOM
Companies, each of the PICOM Companies holds all permits, licenses, variances,
exemptions, orders and approvals of all Governmental Entities which are
necessary for the operation of the businesses of the PICOM Companies or the
use, operation or ownership of the property of the PICOM Companies (the "PICOM
Permits"), except for PICOM Permits the failure of which to hold would not,
individually or in the aggregate, have a material adverse effect on PICOM. To
the best knowledge of the PICOM Companies, each of the PICOM Permits is in full
force and effect. To the best knowledge of the PICOM Companies, each of the
PICOM Companies is in compliance in all material respects with the terms of the
PICOM Permits and all applicable laws and regulations, except for possible
violations which, individually or in the aggregate, would not have a material
adverse effect on PICOM. No investigation by any Governmental Entity with
respect to any of the PICOM Companies is pending or, to the best knowledge of
the PICOM Companies, threatened, other than, in each case, those the outcome of
which, as far as reasonably can be foreseen, will not have a material adverse
effect on PICOM. None of the PICOM Companies is required, or has ever been
required, to be registered under the Investment Company Act of 1940, as
amended.
(e) LITIGATION. There is no claim, suit, action, arbitration or
governmental proceeding or investigation pending or, to the best knowledge of
the PICOM Companies, threatened, against or affecting any of the PICOM
Companies as to which there is a reasonable possibility of an adverse
determination and which, if adversely determined, would, individually or in the
aggregate, have a material adverse effect on PICOM, nor, to the best knowledge
of the PICOM Companies, is there any reasonable basis for any such claim, suit,
action, arbitration or governmental proceeding or investigation. There is no
judgment, decree, injunction, rule or order of any Governmental Entity or
arbitrator outstanding against any of the PICOM Companies having, or which,
insofar as reasonably can be foreseen, in the future could have, any material
adverse effect on PICOM.
3.2 REPRESENTATIONS AND WARRANTIES OF THE HOLDING COMPANY ENTITIES. The
Holding Company Entities, jointly and severally, represent and warrant to the
PICOM Companies as follows:
(a) ORGANIZATION, STANDING AND POWER. Each of the Holing Company Entities
is a corporation duly incorporated, validly existing and in good standing under
the laws of its jurisdiction of incorporation, has all requisite power and
authority to own, lease and operate its properties and to carry on its business
as now being conducted and is duly qualified and in good standing to do
business in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification necessary other
than in such jurisdictions where the failure to so qualify would not have a
material adverse effect on Holding Company.
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(b) AUTHORITY. (i) Each of the Holding Company Entities has all requisite
corporate power and authority to enter into this Agreement and the Plan of
Merger and, subject to the approval and adoption of this Agreement and the Plan
of Merger by the sole stockholder of INSCO, to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and the Plan of Merger and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of each of the Holding Company Entities that is a party thereto
subject to the approval and adoption of this Agreement and the Plan of Merger
by the sole stockholder of INSCO. This Agreement and the Plan of Merger have
been duly executed and delivered by each of the Holding Company Entities that
is a party thereto and constitutes a legal, valid and binding obligation of
each of the Holding Company Entities that is a party thereto enforceable
against each of them in accordance with its terms, except as enforcement may be
limited by general principles of equity, whether applied in a court of law or a
court of equity, and bankruptcy, insolvency and similar laws affecting
creditors' rights and remedies generally.
(ii) The execution and delivery of this Agreement and the Plan of Merger
and the consummation of the transactions contemplated hereby and thereby, will
not conflict with, give rise to or result in any Violation pursuant to any
provision of the Articles of Incorporation or Bylaws of any of the Holding
Company Entities or, be, give rise to or result in any Violation pursuant to,
or require the consent of any other Person that is a party to, any loan or
credit agreement, note, mortgage, indenture, lease, sublease, Holding Company
Entities benefit plan or other agreement, obligation, instrument, permit,
concession, franchise, license, judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to any of the Holding Company Entities
or their respective properties or assets which Violations or the failure to
obtain such consents would in the aggregate have a material adverse effect on
Holding Company.
(iii) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to any of the Holding Company Entities in connection with the execution
and delivery of this Agreement or the Plan of Merger by any of the Holding
Company Entities or the consummation by any of the Holding Company Entities of
the transactions contemplated hereby or thereby, the failure of which to obtain
or make would in the aggregate have a material adverse effect on Holding
Company, except for (A) the filing with the Securities and Exchange Commission
("SEC") of a Registration Statement on Form S-4 (or another appropriate form)
by Holding Company in connection with the issuance of shares of Holding Company
Common Stock contemplated by this Agreement and the Plan of Merger (the
"Registration Statement"), (B) such filings and approvals as are required to be
made or obtained under the securities or "Blue Sky" laws of various states in
connection with the issuance of any of the Holding Company Common Stock
contemplated by this Agreement and the Plan of Merger, (C) such filings with
the Insurance Commissioner as are required or contemplated by the Insurance
Code or the Orders, (D) such filings with the Illinois Insurance Director as
are required or contemplated by the Illinois Insurance Code, and (E) the filing
of appropriate documents with the relevant authorities of other states in which
any of the Holding Company Entities are qualified to do business.
(c) INFORMATION SUPPLIED. None of the information supplied or to be
supplied by any of the Holding Company Entities for inclusion in (i) the
Registration Statement will, at the time the Registration Statement becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading and (ii) the Proxy Statement/Prospectus
and any amendment or supplement thereto will, at the date of mailing to
stockholders and at the times of the meetings of stockholders of PICOM to be
held in connection with the Merger, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Registration
Statement (except for such portions thereof that relate only to the PICOM
Companies) will comply in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
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(d) COMPLIANCE WITH APPLICABLE LAWS. To the best knowledge of the Holding
Company Entities, each of the Holding Company Entities holds all permits,
licenses, variances, exemptions, orders and approvals of all Governmental
Entities which are necessary for the operation of the businesses of the Holding
Company Entities or the use, operation or ownership of the property of the
Holding Company Entities (the "Holding Company Permits"), except for Holding
Company Permits the failure of which to hold would not, individually or in the
aggregate, have material adverse effect on Holding Company. To the best
knowledge of the Holding Company Entities, each of the Holding Company Permits
is in full force and effect. To the best knowledge of the Holding Company
Entities, each of the Holding Company Entities is in compliance in all material
respects with the terms of the Holding Company Permits and all applicable laws
and regulations, except for possible violations which, individually or in the
aggregate, would not have a material adverse effect on Holding Company. No
investigation by any Governmental Entity with respect to any of the Holding
Company Entities is pending or, to the best knowledge of the Holding Company
Entities, threatened, other than, in each case, those the outcome of which, as
far as reasonably can be foreseen, will not have a material adverse effect on
Holding Company. None of the Holding Company Entities is required, or has ever
been required, to be registered under the Investment Company Act of 1940, as
amended.
(e) LITIGATION. There is no claim, suit, action, arbitration or
governmental proceeding pending or, to the best knowledge of the Holding
Company Entities, threatened, against or affecting any of the Holding Company
Entities as to which there is a reasonable possibility of an adverse
determination and which, if adversely determined, would, individually or in the
aggregate, have a material adverse effect on Holding Company, nor, to the best
knowledge of the Holding Company Entities, is there any reasonable basis for
any such claim, suit, action, arbitration or governmental proceeding or
investigation. There is no judgment, decree, injunction, rule or order of any
Governmental Entity or arbitrator outstanding against any of the Holding
Company Entities having, or which, as far as reasonably can be foreseen, in the
future could have, a material adverse effect on Holding Company Entities.
ARTICLE IV
COVENANTS
4.1 COVENANTS OF PICOM COMPANIES AND HOLDING COMPANY ENTITIES. During the
period from the date of this Agreement and continuing until the Closing Date,
each of the PICOM Companies on the one hand and each of the Holding Company
Entities on the other hand agrees that, except as expressly contemplated or
permitted by this Agreement or to the extent that PICOM (in the case of the
Holding Company Entities) or Holding Company (in the case of the PICOM
Companies) shall otherwise consent in writing:
(a) ORDINARY COURSE. Each such party shall carry on its respective
business in, and only in, the usual, regular and ordinary course in
substantially the same manner as heretofore conducted and use all reasonable
efforts to preserve intact its present business organizations, maintain its
rights and franchises and preserve its relationships with customers, suppliers
and others having business dealings with it to the end that its goodwill and
ongoing business shall not be impaired in any material respect and will not
enter into any material transaction not in the ordinary course of business.
INSCO was incorporated as a stock insurance company under the Insurance Code
solely for the purpose of merging with and into PICOM and establishing PICOM as
a wholly-owned subsidiary of Holding Company, all as provided in this
Agreement, the Plan of Merger and the Orders, and is not expected to write or
underwrite any lines of insurance. Accordingly, (i) INSCO shall not write or
underwrite any lines of insurance and (ii) INSCO shall not engage in any
business activities other than those business activities as are expressly
provided for or contemplated by this Agreement, the Plan of Merger, the Orders
or any Preliminary Certificate of Authority or Final Certificate of Authority
issued by the Insurance Commissioner in connection with the incorporation of
INSCO.
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(b) GOVERNING DOCUMENTS. No party shall amend or propose publicly to
amend the Certificate or Articles of Incorporation or Bylaws of such party.
(c) OTHER ACTIONS. No party shall take any action that is intended to
result in any of its representations and warranties set forth in this Agreement
being or becoming untrue in any material respect, or in any of the conditions
to the Merger set forth in Article V not being satisfied or in a violation of
any provision of this Agreement or which would adversely affect the ability of
such party to obtain any of the "Requisite Regulatory Approvals" (as defined in
Section 5.1(c) hereof) without imposition of a "Materially Burdensome
Condition" (as defined in Section 5.1(g) hereof) except, in every case, as may
be required by applicable law.
(d) ADVICE OF CHANGES; GOVERNMENT FILINGS. Each party shall promptly
advise the other orally and in writing of any change or event having, or which,
insofar as can reasonably be foreseen, could have, a material adverse effect on
such party or which would cause or constitute a material breach of any of the
representations, warranties or covenants of such party contained herein, or
which, insofar as can be reasonably foreseen, result in a condition set forth
in Article V hereof not being satisfied as of the date set for Closing as
provided in Section 2.1 hereof.
(e) TAX-FREE REORGANIZATION TREATMENT. No party shall take or cause to be
taken any action, whether before or after the Closing Date, which would
disqualify the Merger as a "reorganization" within the meaning of Section
368(a) of the Code, or would disqualify the Merger as a "pooling-of-interests"
for accounting purposes.
4.2 SECURITIES REGULATORY MATTERS. (a) PICOM, Holding Company and INSCO
shall promptly prepare and file with the SEC the Registration Statement, in
which the Proxy Statement/Prospectus will be included. Each of PICOM, Holding
Company and INSCO shall use all reasonable efforts to have the Registration
Statement declared effective under the Securities Act as promptly as
practicable after such filing, and thereafter mail the Proxy
Statement/Prospectus to the stockholders of PICOM. PICOM, Holding Company and
INSCO shall also use their respective best efforts to obtain all necessary
state securities law or "Blue Sky" permits and approvals required to carry out
the transactions contemplated by this Agreement and the Plan of Merger, and
PICOM and Holding Company, as applicable, shall furnish all information
concerning PICOM and the holders of PICOM Common Stock and Holding Company,
INSCO and the holders of Holding Company Common Stock as may be reasonably
requested in connection with any such action.
(b) PICOM and Holding Company shall use their respective best efforts to
cause the shares of Holding Company Common Stock to be issued in connection
with the Merger to be admitted for quotation on the Nasdaq National Market upon
official notice of issuance.
(c) In order to register the Holding Company Common Stock under the
Exchange Act, Holding Company shall use its best efforts to (i) prepare and
file with the SEC a registration statement under Section 12 of the Exchange Act
and (ii) secure effectiveness thereof.
4.3 INSURANCE REGULATORY MATTERS. Each of the PICOM Companies and the
Holding Company Entities shall promptly prepare and file with the Insurance
Commissioner and the Illinois Insurance Director all such forms, requests,
matters and things as are necessary or appropriate to obtain all insurance
orders, permits, approvals and/or exemptions as are required under the
Insurance Code and the Illinois Insurance Code to carry out the transactions
contemplated by this Agreement and the Plan of Merger. Each of the PICOM
Companies and the Holding Company Entities shall use its best efforts to obtain
all such orders, permits, approvals and/or exemptions.
4.4 OTHER REGULATORY MATTERS. (a) The parties hereto shall cooperate with
each other and use their best efforts to promptly prepare and file all
necessary documentation, to effect all necessary applications, notices,
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petitions, filings and other documents, to obtain as promptly as practicable
all necessary permits, consents, approvals and authorizations of all other
Persons and Governmental Entities necessary or advisable to consummate the
transactions contemplated by this Agreement and the Plan of Merger. In
exercising the foregoing right, each of the parties hereto shall act reasonably
and as promptly as practicable. The parties hereto agree that they will
consult with each other with respect to the obtaining of all permits, consents,
approvals and authorizations of all third parties and Governmental Entities
necessary or advisable to consummate the transactions contemplated by this
Agreement and the Plan of Merger and each party will keep the other apprised of
the status of matters relating to completion of the transactions contemplated
herein.
(b) Each of the PICOM Companies and each of the Holding Company Entities
shall, upon request, use their best efforts to furnish each other with all
information concerning themselves, their directors, officers and stockholders,
all financial information or other information, including accountant comfort
letters relating thereto, certificates, and consents, and such other matters as
may be reasonably necessary or advisable in connection with the Registration
Statement or any other statement, filing, notice or application made by or on
behalf of any of the PICOM Companies or any of the Holding Company Entities to
any Governmental Entity or any other Person in connection with the Merger, and
the other transactions contemplated by this Agreement and the Plan of Merger.
(c) Each of the PICOM Companies and each of the Holding Company Entities
shall promptly furnish each other with copies of written communications
received by any of them or any of their respective Affiliates or Associates (as
such terms are defined in Rule 12b-2 under the Exchange Act as in effect on the
date hereof) from, or delivered by any of the foregoing to, any Governmental
Entity in respect of the transactions contemplated hereby.
4.5 RESERVATION OF SHARES FOR ISSUANCE. Holding Company shall take all
corporate action necessary for it to issue the shares of Holding Company Common
Stock issuable pursuant to this Agreement and the Plan of Merger.
4.6 LEGAL CONDITIONS TO MERGER. Each of the PICOM Companies and the
Holding Company Entities shall use their best efforts (i) to take, or cause to
be taken, all actions necessary to comply promptly with all legal requirements
which may be imposed on such party with respect to the Merger (including,
without limitation, any requirements imposed by the Insurance Code or the
Orders) and, subject to the conditions set forth in Article V of this
Agreement, or in the Insurance Code, or in the Orders, to consummate the
transactions contemplated by this Agreement, the Plan of Merger and the Orders,
and (ii) to obtain (and to cooperate with the other party to obtain) any
consent, authorization, order or approval of, or any exemption by, any
Governmental Entity and any other public or private Person which is required to
be obtained or made by such party in connection with the Merger and the
transactions contemplated by this Agreement and the Plan of Merger. Each of
the parties will promptly cooperate with and furnish information to the other
in connection with any such condition or restriction suffered by, or
requirement imposed upon, any of them in connection with the foregoing.
4.7 AFFILIATES. PICOM and Holding Company shall use their respective best
efforts to cause each director, executive officer and other Person who is an
"affiliate" (for purposes of Rule 145 under the Securities Act) of each of
them, respectively, to deliver to Holding Company, on or prior to the Closing
Date a written agreement in substantially the form attached as Exhibit 2
hereto.
4.8 EXPENSES. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the Plan of Merger, and
the transactions contemplated hereby and thereby (including, without
limitation, all expenses incurred in connection with printing and mailing the
Proxy Statement/Prospectus and the Registration Statement) shall be borne and
paid by PICOM.
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4.9 ADDITIONAL AGREEMENTS; BEST EFFORTS. Subject to the terms and
conditions of this Agreement, each of the parties hereto agrees to use its best
efforts to take, or cause to be taken, all action and to do, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement, including, without limitation, cooperating fully with the other
parties hereto, providing the other parties hereto with any appropriate
information and making all necessary filings in connection with the Requisite
Regulatory Approvals. In case at any time after the Closing Date any further
action is necessary, or desirable to carry out the purposes of this Agreement
or the Plan of Merger or to vest the Surviving Corporation with full title to
all properties, assets, rights, approvals, immunities and franchises of any of
the constituent corporations of the Merger, the proper officers and directors
of each party to this Agreement shall take all such necessary action.
4.10 PLAN OF MERGER. Immediately after the execution of this Agreement,
the parties thereto shall execute and deliver the Plan of Merger.
4.11 LETTERS OF ACCOUNTANTS. [INTENTIONALLY OMITTED.]
4.12 LOAN COVENANTS. On or before the date of this Agreement, PICOM shall
lend to Holding Company the sum of $1,500,000 pursuant to a promissory note in
form and substance acceptable to PICOM. Said promissory note shall be secured
by a pledge of all of the shares of INSCO Common Stock issued to and held by
Holding Company. Said pledge shall be made on or before the date of this
Agreement and pursuant to a pledge agreement in form and substance acceptable
to PICOM. All of the terms and conditions of said promissory note and said
pledge agreement are incorporated in, and are made a part of, this Agreement by
this reference.
4.13 INDEMNIFICATION.
(a) From and after the Effective Time, (i) Holding Company and PICOM
shall, and Holding Company shall cause PICOM to, indemnify, defend and hold
harmless each person who is now an incorporator, officer or director of Holding
Company, INSCO and/or PICOM, respectively, and (ii) Holding Company shall
indemnify, defend and hold harmless each person who is now an incorporator,
officer or director of Holding Company, INSCO and/or PICOM (such persons
described in clause (i) and (ii) above being referred to herein as the
"Indemnified Parties"), in each case against all losses, claims, damages,
costs, expenses, liabilities or judgments, or amounts that are paid in a
settlement approved by the Board of Directors of the party providing the
indemnification (the "Indemnifying Party"), of or in connection with any claim,
action, suit, proceeding or investigation (each a "Claim") based in whole or in
part on or arising in whole or in part out of the fact that such person is or
was an incorporator, director, officer, employee or agent of Holding Company,
INSCO and/or PICOM, as applicable, or is or was serving at the request of
Holding Company, INSCO and/or PICOM, as applicable, as an incorporator,
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, if such Claim pertains to any matter or
fact arising, existing or occurring prior to the Effective Time, regardless of
whether such Claim is asserted or claimed prior to, or at or after, the
Effective Time to the full extent Holding Company, INSCO and/or PICOM, as
applicable, is or would have been permitted under applicable law, to indemnify
such person (and Holding Company, INSCO and/or PICOM, as applicable, shall pay
expenses in advance of the final disposition of any such Claim to each
Indemnified Party to the full extent permitted by applicable law, upon receipt
of any undertaking required by applicable law). None of Holding Company, INSCO
and PICOM shall make any amendment to its Certificate or Articles of
Incorporation or Bylaws that would limit or impair the right to indemnification
set forth in the preceding sentence. Any action or determination required to
be taken or made with respect to indemnification or advancement of expenses
shall be taken and made by the Indemnifying Party required to provide such
indemnification or advancement of expenses as promptly as practical under the
circumstances and at the expense of such Indemnifying Party. All such
determinations shall be made by a quorum of directors of the Indemnifying Party
who are not parties or threatened to be made parties to the Claim or, if such
quorum as not obtainable, by independent legal counsel in a written
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opinion. Any Indemnified Party wishing to claim indemnification under this
Section 4.13, upon learning of any Claim, shall notify Holding Company, INSCO
and/or PICOM, as applicable (but the failure to notify the respective
Indemnifying Party shall not relieve such party from any liability which it may
have under this Section 4.13 except to the extent such failure materially
prejudices such party), and shall deliver to Holding Company, INSCO and/or
PICOM, as applicable, the undertaking, if any, required by applicable law.
(b) If Holding Company, INSCO and/or PICOM or any of their respective
successors or assigns (i) shall consolidate with or merge into any other
corporation or entity and shall not be the continuing or surviving corporation
or entity of such consolidation or merger, or (ii) shall transfer all or
substantially all of its properties and assets to any individual, corporation
or their entity, then and in each such case, proper provision shall be made so
that the successors and assigns of such party shall assume the obligations set
forth in this Section 4.13.
(c) The provisions of this Section 4.13 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party, his heirs and
representatives. The provisions of this Section 4.13 are in addition to, and
are not intended to supersede or replace, any rights of any Indemnified Party
(or any obligations of any Indemnifying Party) under the indemnification,
advancement of expenses or other provisions of the Certificate or Articles of
Incorporation or Bylaws of Holding Company, INSCO and/or PICOM, any
indemnification agreement between any Indemnifying Party and any Indemnified
Party, or otherwise available under applicable law. The provisions of this
Section 4.13 shall survive the consummation of the Merger and/or the
termination of this Agreement.
ARTICLE V
CONDITIONS PRECEDENT
5.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger shall be subject to
the satisfaction prior to the Effective Time of the following conditions:
(a) STOCKHOLDER APPROVAL. This Agreement and the Plan of Merger and the
Merger shall have been duly approved and adopted by the affirmative vote of (i)
the holders of a majority of the outstanding shares of PICOM Common Stock
entitled to vote thereon, and (ii) the holders of a majority of the outstanding
shares of INSCO Common Stock entitled to vote thereon.
(b) NASDAQ NATIONAL MARKET. The shares of Holding Company Common Stock
issuable to the PICOM stockholders pursuant to this Agreement and the Plan of
Merger shall have been admitted for quotation on Nasdaq National Market upon
official notice of issuance.
(c) OTHER APPROVALS. All authorizations, consents, orders (including,
without limitation, the Orders) or approvals of, or declarations or filings
with, and all expirations of waiting periods imposed by, any Governmental
Entity (collectively, the "Consents") which are prescribed by law as necessary
for the consummation of the Merger and the other transactions contemplated
hereby, other than immaterial Consents the failure to obtain which would have
no material adverse effect on the consummation of the Merger or the other
transactions contemplated hereby, or on the Surviving Corporation, shall have
been filed, occurred or been obtained (all such authorizations, consents,
orders, approvals, declarations or filings and the lapse of all such waiting
periods being referred to as the "Requisite Regulatory Approvals"), as the case
may be and all such Requisite Regulatory Approvals shall be in full force and
effect. All conditions imposed by the Consents and/or the Requisite Regulatory
Approvals shall have been satisfied.
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(d) REGISTRATION STATEMENT. The Registration Statement shall have become
effective under the Securities Act and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been initiated or threatened by the SEC
nor the "Blue Sky" authorities of any jurisdiction nor shall any of such
authorities have instituted or threatened to institute any proceedings with
respect to a stop order.
(e) BLUE SKY MATTERS. The Holding Company Common Stock to be issued in
the Merger shall have been qualified or registered with the appropriate "Blue
Sky" authorities of all states in which qualification or registration is
required and such qualifications or registrations shall not have been suspended
or revoked.
(f) NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No order, injunction or
decree issued by any court or agency of competent jurisdiction or other legal
restraint or prohibition (an "Injunction") preventing the consummation of the
Merger or any of the transactions contemplated hereby shall be in effect, nor
shall any proceeding by any Governmental Entity seeking any such Injunction be
pending, nor shall any lawsuit or governmental proceeding be pending or
threatened against any of the PICOM Companies, any of the Holding Company
Entities, or any of their respective directors, seeking substantial damages in
connection with the transactions contemplated in this Agreement. No statute,
rule, regulation, order, injunction or decree shall have been enacted, entered,
promulgated or enforced by any Governmental Entity which prohibits, restricts
or makes illegal consummation of the Merger.
(g) NO BURDENSOME CONDITION. There shall not be any action taken, or any
statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger or any of the transactions contemplated hereby, by any
Governmental Entity which, in connection with the grant of a Requisite
Regulatory Approval, imposes any condition or restriction upon any of the PICOM
Companies, the Holding Company Entities, or the Surviving Corporation which
would so materially adversely impact the economic or business benefits of the
transactions contemplated by this Agreement as to render inadvisable, in the
reasonable judgment of the Board of Directors of PICOM, Holding Company or
INSCO, the consummation of the Merger (a "Materially Burdensome Condition"), it
being understood, however, that any condition or restriction of a character
comparable to condition(s) or restriction(s) imposed by any Governmental Entity
in transactions comparable to the transactions contemplated by this Agreement
shall not in any event constitute a Materially Burdensome Condition.
(h) DISSENTERS RIGHTS. No holder of any of the outstanding shares of
PICOM Common Stock shall have exercised, or attempted to exercise, appraisal
rights, if any.
(i) GOVERNMENTAL ACTION. There shall not have been any action taken, or
any law, rule, regulation, order, judgment, or decree proposed, promulgated,
enacted, entered, enforced, or deemed applicable to the transactions
contemplated by this Agreement by any Governmental Entity or by any court or
other tribunal, including the entry of a preliminary or permanent injunction,
which, in the reasonable opinion of such party, (i) makes this Agreement, the
Plan of Merger or the Merger, or any of the other transactions contemplated by
this Agreement, illegal, (ii) results in a material delay in the ability of the
PICOM Companies or the Holding Company Entities to consummate the Merger or any
of the other transactions contemplated by this Agreement, (iii) requires the
divestiture by the PICOM Companies or the Holding Company Entities of a
material portion of the business of the PICOM Companies, taken as a whole, or
the Holding Company Entities, taken as a whole, or (iv) otherwise prohibits or
restricts or delays in a material respect consummation of the Merger or any of
the other transactions contemplated by this Agreement or impairs in a material
respect the contemplated benefits to the PICOM Companies or the Holding Company
Entities of this Agreement, the Merger, or any of the other transactions
contemplated by this Agreement.
(j) AFFILIATE AGREEMENTS. The Affiliates Agreements described in Section
4.7 shall have been executed and delivered by the persons described in Section
4.7.
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(k) LITIGATION. At the Effective Time, there shall not be in effect any
order, or pending or threatened action which, if successful, would have the
effect of, restraining, enjoining, or prohibiting the consummation of the
transactions contemplated by this Agreement.
(l) LETTERS OF ACCOUNTANTS. [INTENTIONALLY OMITTED.]
(m) TAX OPINION. PICOM, Holding Company and INSCO shall have received a
reasonably satisfactory opinion from Miller, Canfield, Paddock and Stone,
P.L.C. (which opinion shall contain such assumptions and exceptions as the
issuer thereof deems necessary or appropriate) to the effect that, as of the
Effective Time:
(i) Provided that (A) the Merger qualifies as a statutory merger under
applicable law, (B) after the Merger PICOM will hold substantially all of its
assets and substantially all of the assets of INSCO, and (C) in the transaction
PICOM stockholders will exchange solely for Holding Company Common Stock an
amount of PICOM Common Stock constituting "voting control" of PICOM within the
meaning of Section 368(c) of the Code, then the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code.
(ii) PICOM, Holding Company and INSCO will each be "a party to a
reorganization" within the meaning of Section 368(b) of the Code.
(iii) No gain or loss will be recognized by Holding Company upon its
receipt of PICOM Common Stock solely in exchange for Holding Company Common
Stock.
(iv) No gain or loss will be recognized by INSCO upon the transfer of
substantially all of its assets to PICOM in the Merger.
(v) No gain or loss will be recognized by PICOM upon the receipt of assets
of INSCO in the Merger.
(vi) No gain or loss will be recognized by PICOM stockholders on the
receipt of Holding Company Common Stock solely in exchange for their PICOM
Common Stock.
(vii) The basis of the Holding Company Common Stock received by the PICOM
stockholders solely in exchange for their PICOM Common Stock will be the same
as the basis of the PICOM Common Stock surrendered in exchange therefor.
(viii) The holding period of the Holding Company Common Stock received by
PICOM stockholders will include the period during which the PICOM Common Stock
surrendered in exchange therefor was held, provided that such PICOM Common
Stock is held as a capital asset in the hands of PICOM stockholders on the date
of the exchange.
(ix) The payment of cash in lieu of fractional share interests of Holding
Company Common Stock will be treated as if the fractional shares were
distributed as part of the exchange and then redeemed by Holding Company.
Provided the fractional share interest surrendered by the stockholder was held
as a capital asset, any gain or loss recognized by the stockholder on receipt
of a payment of cash in exchange therefor should be taxable as a capital gain
or loss, long-term or short-term, depending on whether the stockholder had held
the share of PICOM Common Stock giving rise thereto for more than one year
prior to the Merger.
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5.2 CONDITIONS TO OBLIGATIONS OF THE HOLDING COMPANY ENTITIES. The
obligation of the Holding Company Entities to effect the Merger is also subject
to the satisfaction or waiver by the Holding Company Entities prior to the
earlier to occur of the Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the PICOM Companies set forth in this Agreement shall be true and correct in
all material respects as of the date of this Agreement and (except to the
extent such representations and warranties speak as of an earlier date) as of
the Effective Time as though made on and as of such time, except as otherwise
contemplated by this Agreement, and Holding Company Entities shall have
received certificates signed on behalf of each of the PICOM Companies by its
respective Chairman and Chief Executive Officer and Chief Financial Officer to
such effect; provided, however, that notwithstanding anything herein to the
contrary, this Section 5.2(a) shall be deemed to have been satisfied even if
such representations or warranties are not true and correct unless the failure
of any of the representations or warranties to be so true and correct, in the
reasonable opinion of Holding Company Entities, would have or would be
reasonably likely to have, individually or in the aggregate, a material adverse
effect on PICOM.
(b) PERFORMANCE OF OBLIGATIONS OF THE PICOM COMPANIES. Each of the PICOM
Companies shall have performed in all material respects all obligations
required to be performed by any of them under this Agreement at or prior to the
Effective Time, and Holding Company Entities shall have received certificates
signed on behalf of each of the PICOM Companies by its respective Chairman and
Chief Executive Officer and Chief Financial Officer to such effect.
5.3 CONDITIONS TO OBLIGATIONS OF THE PICOM COMPANIES. The obligation of
the PICOM Companies to effect the Merger is also subject to the satisfaction or
waiver by the PICOM Companies prior to the Effective Time of the following
conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Holding Company Entities set forth in this Agreement shall be true and
correct in all material respects as of the date of this Agreement and (except
to the extent such representations and warranties speak as of an earlier date)
as of the Effective Time as though made on and as of such time, except as
otherwise contemplated by this Agreement, and the PICOM Companies shall have
received certificates signed on behalf of the Holding Company Entities by each
of its respective Chairman and Chief Executive Officer and Chief Financial
Officer to such effect; provided, however, that notwithstanding anything herein
to the contrary, this Section 5.3(a) shall be deemed to have been satisfied
even if such representations or warranties are not true and correct unless the
failure of any of the representations or warranties to be so true and correct,
in the reasonable opinion of the PICOM Companies would have or would be
reasonably likely to have, individually or in the aggregate, a material adverse
effect on Holding Company.
(b) PERFORMANCE OF OBLIGATIONS OF THE HOLDING COMPANY ENTITIES. The
Holding Company Entities shall have performed in all material respects all
obligations required to be performed by them under this Agreement at or prior
to the Effective Time, and the PICOM Companies shall have received certificates
signed on behalf of the Holding Company Entities by its respective Chairman and
Chief Executive Officer and Chief Financial Officer to such effect.
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ARTICLE VI
TERMINATION AND AMENDMENT
6.1 TERMINATION. This Agreement and the Plan of Merger may be terminated
at any time prior to the Effective Time, whether before or after approval of
the matters presented in connection with the Merger by the stockholders of
PICOM:
(a) by mutual consent of PICOM, Holding Company and INSCO in a written
instrument, if the Board of Directors of each so determines by a vote of a
majority of the members of its entire Board;
(b) by PICOM, Holding Company or INSCO upon written notice to the others
if (i) any Requisite Regulatory Approval shall have been denied or (ii) any
Governmental Entity of competent jurisdiction shall have issued a final
nonappealable order enjoining or otherwise prohibiting the consummation of the
transactions contemplated by this Agreement;
(c) by PICOM, Holding Company or INSCO upon written notice to the others
if the Merger shall not have been consummated on or before December 31, 1996;
(d) by PICOM, Holding Company or INSCO upon written notice to the others
if any approval of the stockholders of PICOM (in the case of Holding Company or
INSCO) or Holding Company or INSCO (in the case of PICOM) required for the
consummation of the Merger shall not have been obtained by reason of the
failure to obtain the required vote at a duly held meeting of stockholders or
at any adjournment or postponement thereof, provided that any such notice of
termination must be given not later than 45 days after the conclusion of such
meeting or within such longer period as may be agreed upon by PICOM, Holding
Company and INSCO;
(e) by PICOM, Holding Company or INSCO upon written notice to the others
if there shall have been a breach of any of the representations or warranties
set forth in this Agreement on the part of any of the PICOM Companies (in the
case of Holding Company or INSCO) or any of the Holding Company Entities (in
the case of PICOM), as if any such breach were being made as of the date of
determination, and which breach by its nature cannot be cured prior to the
earlier of the date scheduled for the Closing as provided in Section 2.1 or 60
days following receipt by the breaching party of written notice of the breach
from any other party hereto, and which breach would, in the reasonable opinion
of the non-breaching party, individually or in the aggregate, have, or be
reasonably likely to have, a material adverse effect on the breaching party;
(f) by Holding Company or INSCO upon written notice to PICOM if the Board
of Directors of PICOM does not, or shall indicate to Holding Company or INSCO
that it is unwilling or unable to, publicly recommend in the Proxy
Statement/Prospectus that its stockholders approve and adopt this Agreement and
the Plan of Merger, or if after recommending in the Proxy Statement/Prospectus
that stockholders approve and adopt this Agreement and the Plan of Merger, the
Board of Directors of PICOM shall have withdrawn, modified or amended such
recommendation in any respect materially adverse to Holding Company or INSCO,
provided that any such notice of termination must be given not later than 45
days after the later of the date Holding Company or INSCO shall have been
advised by PICOM in writing that it is unable or unwilling to so recommend in
the Proxy Statement or that it has withdrawn, modified or amended such
recommendation, or such later date as may be agreed upon by PICOM, Holding
Company and INSCO.
6.2 EFFECT OF TERMINATION. In the event of termination of this Agreement
as provided in Section 6.1 hereof, this Agreement shall forthwith become void
and have no effect except as otherwise expressly provided in this Agreement.
6.3 AMENDMENT. This Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors, at any time
before or after approval of the matters presented in connection with the Merger
by the stockholders of PICOM; provided, however, that no amendment shall be
made which by law requires further approval by the Insurance Commissioner or
the Illinois Insurance Director without such
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further approval, and provided, further, that after any such approval by the
stockholders of PICOM, no amendment shall be made which by law requires further
approval by the stockholders of PICOM without such further approval. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
6.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Board of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto, and (iii) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall
be valid only if set forth in a written instrument signed on behalf of such
party.
ARTICLE VII
GENERAL PROVISIONS
7.1 AGREEMENTS. None of the representations, warranties, covenants and
agreements in this Agreement or in any instrument delivered pursuant to this
Agreement shall survive the Effective Time, except for those covenants and
agreements contained herein and therein which by their terms apply in whole or
in part after the Effective Time.
7.2 NOTICES. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (with
confirmation) or mailed by registered or certified mail (return receipt
requested) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
(a) if to any of the PICOM Companies, to:
PICOM Insurance Company
4295 Okemos Road
Okemos, Michigan 48805
Attention: President and Chief Executive Officer
Fax: (517) 349-3127
with copies to:
Miller, Canfield, Paddock and Stone, P.L.C.
1400 North Woodward Avenue, Suite 100
Bloomfield Hills, Michigan 48304
Attention: Brad B. Arbuckle, Esq.
Fax: (810) 258-3036
and
(b) if to any of the Holding Company Entities, to:
Professionals Insurance Company Management Group
4295 Okemos Road
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Okemos, Michigan 48805
Attention: President and Chief Executive Officer
Fax: (517) 349-3127
with a copy to:
Miller, Canfield, Paddock and Stone, P.L.C.
1400 North Woodward Avenue, Suite 100
Bloomfield Hills, Michigan 48304
Attention: Brad B. Arbuckle, Esq.
Fax: (810) 258-3036
7.3 INTERPRETATION. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation". The phrases "the date of this Agreement", "the date hereof" and
terms of similar import, unless the context otherwise requires, shall be deemed
to refer to the date first above written.
7.4 COUNTERPARTS. This Agreement may be executed in counterparts, all of
which shall be considered one and the same agreement and shall become effective
when counterparts have been signed by each of the parties and delivered to the
other parties, it being understood that all parties need not sign the same
counterpart. An executed counterpart received by telecopy shall have the same
effect as an originally executed counterpart.
7.5 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES; RIGHTS OF OWNERSHIP.
This Agreement and the Exhibits hereto and the Plan of Merger (including the
documents and the instruments referred to herein and therein) (a) constitute
the entire agreement and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof, and (b) are not intended to confer upon any Person other than the
parties hereto any rights or remedies hereunder or thereunder except (i) if and
only if, the Merger is consummated for the right of the stockholders of PICOM
to receive the merger consideration described in the Plan of Merger, and (ii)
the provisions of Section 4.13 hereof are intended for the benefit of each
Indemnified Party as provided in Section 4.13(c) hereof. For the purposes
hereof, "party" shall mean Holding Company, INSCO and PICOM and shall not
include any other Person whatsoever, whether a stockholder, warrant holder,
option holder, employee, officer, director or otherwise. The parties hereby
acknowledge that, except as hereinafter agreed to in writing, no party shall
have the right to acquire or shall be deemed to have acquired shares of common
stock of other party pursuant to the Merger until consummation thereof.
7.6 GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of Michigan, without regard to any
applicable conflicts of law.
7.7 ENFORCEMENT OF AGREEMENT. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
was not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any court of the United States
or any state having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
7.8 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
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rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
7.9 ASSIGNMENT. Neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any of the parties hereto
(whether by operation of law or otherwise) without the prior written consent of
the other parties. Subject to the preceding sentence, this Agreement will be
binding upon, inure to the benefit of and be enforceable by the parties and
their respective successors and assigns.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 166
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the date
first above written.
PROFESSIONALS INSURANCE COMPANY
MANAGEMENT GROUP
<TABLE>
<S> <C>
By /s/ Victor T. Adamo
-----------------------------------------------
Name: Victor T. Adamo
Title: President and Chief Executive
Officer
Attest:
/s/ Annette E. Flood
----------------------------
Name: Annette E. Flood
Title: Secretary
PICOM INTERIM INSURANCE COMPANY
By /s/ Victor T. Adamo
-----------------------------------------------
Name: Victor T. Adamo
Title: President
Attest:
/s/ Annette E. Flood
----------------------------
Name: Annette E. Flood
Title: Secretary
PICOM INSURANCE COMPANY
By /s/ Victor T. Adamo
-----------------------------------------------
Name: Victor T. Adamo
Title: President and Chief Executive
Officer
Attest:
/s/ Annette E. Flood
----------------------------
Name: Annette E. Flood
Title: Secretary
</TABLE>
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<PAGE> 167
CONFORMED COPY
ANNEX B
AGREEMENT AND PLAN OF MERGER
DATED AS OF MAY 13, 1996
AMONG
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP,
PICOM INTERIM INSURANCE COMPANY,
AND
PICOM INSURANCE COMPANY
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<PAGE> 168
ANNEX B
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Plan of Merger") is entered into
as of the 13th day of May, 1996 by and among Professionals Insurance Company
Management Group, a Michigan business corporation ("Holding Company"), PICOM
Interim Insurance Company, a Michigan stock insurance corporation and
wholly-owned subsidiary of Holding Company ("INSCO"), and PICOM Insurance
Company, a Michigan stock insurance corporation ("PICOM").
W I T N E S S E T H
WHEREAS, the parties hereto have previously entered into a Reorganization
Agreement of even date herewith (the "Reorganization Agreement"); and
WHEREAS, the Reorganization Agreement provides for a merger of INSCO with
and into PICOM (the "Merger"), with the result that PICOM will become a wholly
owned subsidiary of Holding Company and PICOM stockholders will exchange their
shares of common stock of PICOM for shares of common stock of Holding Company;
and
WHEREAS, the parties hereto are entering into this Plan of Merger to set
forth the terms and conditions of the Merger; and
WHEREAS, PICOM has authorized capital stock consisting solely of
10,000,000 shares of common stock, $1.00 par value per share ("PICOM Common
Stock"), and has issued 3,238,959 shares; and
WHEREAS, of the 3,238,959 issued shares of PICOM Common Stock, 50,814
shares are owned by PICOM as treasury stock and 3,188,145 shares are issued and
outstanding and entitled to vote; and
WHEREAS, INSCO has an authorized capital stock consisting solely of
1,000,000 shares of common stock, $1.00 par value per share ("INSCO Common
Stock"), of which 1,000,000 shares are issued and outstanding as of the date of
this Plan of Merger and entitled to vote, and all of which are owned by Holding
Company; and
WHEREAS, the respective Boards of Directors of Holding Company, INSCO and
PICOM have determined that it is in the best interests of Holding Company,
INSCO, PICOM and their respective stockholders for INSCO to be merged with and
into PICOM upon the terms and subject to the conditions set forth in this Plan
of Merger and the Reorganization Agreement and in accordance with the Michigan
Insurance Code of 1956, as amended (the "Insurance Code"); and
WHEREAS, the respective Boards of Directors of Holding Company, INSCO and
PICOM have adopted resolutions approving this Plan of Merger and the Merger and
the Board of Directors of PICOM has resolved to recommend approval of this Plan
of Merger, the Reorganization Agreement and the Merger, to PICOM's
stockholders; and
WHEREAS, PICOM has agreed to duly call and hold a meeting of its
stockholders to vote upon the approval and adoption of this Plan of Merger, the
Reorganization Agreement and the Merger.
NOW, THEREFORE, in consideration of the premises and the respective
covenants and agreements set forth herein and in the Reorganization Agreement,
and intending to be legally bound hereby, the parties hereto agree as follows:
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<PAGE> 169
ARTICLE I
THE MERGER
1.1 EFFECTIVE TIME OF THE MERGER. Subject to the provisions of the
Michigan Business Corporation Act, as amended, the Insurance Code, this Plan of
Merger, the Reorganization Agreement, and any Order of Acquisition Exemption
and Preliminary Approval of Merger (a "Preliminary Order") or any Order of
Acquisition Exemption and Final Approval of Merger (a "Final Order," and
together with any Preliminary Order, the "Orders") issued by the Commissioner
of Insurance of the State of Michigan (the "Insurance Commissioner") pursuant
to the Insurance Code, the Merger shall become effective (the "Effective Time")
not later than 11:59 p.m. Eastern Time on the third business day following the
"Closing Date" (defined herein as in the Reorganization Agreement).
1.2 EFFECTS OF THE MERGER.
(a) At the Effective Time,
(i) the separate existence of INSCO shall cease and it shall be merged
with and into PICOM, which shall be the Surviving Corporation (as defined in
Section 1.2(b) below) of the Merger;
(ii) the Articles of Incorporation of PICOM, as in effect immediately
prior to the Effective Time, shall be the Articles of Incorporation of the
Surviving Corporation until duly amended in accordance with the provisions
thereof and the Insurance Code;
(iii) the Bylaws of PICOM, as in effect immediately prior to the Effective
Time, shall be the Bylaws of the Surviving Corporation until amended in
accordance with the provisions thereof and the Insurance Code; and
(iv) the officers and directors of the Surviving Corporation shall be
those persons who are the officers and directors of PICOM immediately prior to
the Effective Time, and such persons shall serve as the officers and directors
of the Surviving Corporation until their respective successors shall have been
duly appointed or elected or until earlier death, resignation or removal.
(b) As used in this Plan of Merger, the term "Surviving Corporation" shall
mean PICOM.
(c) At and after the Effective Time, the Merger will have the effects set
forth in this Plan of Merger and the Reorganization Agreement and in the
Insurance Code.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK
OF THE CONSTITUENT CORPORATIONS;
EXCHANGE OF CERTIFICATES
2.1 EFFECT ON CAPITAL STOCK. At the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of PICOM
Common Stock or the holder of any shares of INSCO Common Stock:
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<PAGE> 170
(a) CANCELLATION OF TREASURY STOCK. All shares of PICOM Common Stock that
are owned by PICOM as treasury stock shall be canceled and retired and shall
cease to exist and no stock of Holding Company or other consideration shall be
delivered in exchange therefor. As used in this Plan of Merger, the word
"Subsidiary" when used with respect to any party means any corporation or other
organization, whether incorporated or unincorporated, of which such party
directly or indirectly owns or controls at least a majority of the securities
or other interests having by their terms ordinary voting power to elect a
majority of the board of directors or others performing similar functions with
respect to such corporation or other organization, or any organization of which
such party is a general partner.
(b) CONVERSION OF PICOM COMMON STOCK.
(i) Subject to Section 2.2(e) below, each issued and outstanding share of
PICOM Common Stock (other than shares to be canceled and retired in accordance
with Section 2.1(a) above) shall be converted into one share of Holding Company
Common Stock.
(ii) All such shares of PICOM Common Stock shall no longer be outstanding
and shall automatically be canceled and retired and shall cease to exist, and
each certificate (each, a "Certificate") previously representing any such
shares shall thereafter represent (x) the whole number of shares of Holding
Company Common Stock, and (y) the right to receive cash in lieu of fractional
shares into which such PICOM Common Stock has been converted pursuant to this
Section 2.1(b). Certificates previously representing shares of PICOM Common
Stock shall be exchanged for certificates representing whole shares of Holding
Company Common Stock and cash in lieu of fractional shares issued in
consideration therefor upon the surrender of such Certificates in accordance
with Section 2.2 below without any interest thereon.
(c) CONVERSION OF INSCO STOCK. Each of the issued and outstanding shares
of INSCO Common Stock shall be converted into 3.188145 duly authorized, validly
issued, fully paid and nonassessable shares of common stock of the Surviving
Corporation ("Surviving Corporation Stock"). Each outstanding stock
certificate which prior to the Effective Time represented shares of INSCO
Common Stock automatically and for all purposes shall be deemed to represent
the number of shares of Surviving Corporation Stock into which the shares of
INSCO Common Stock represented by such certificate have been converted pursuant
to this Section 2.1(c).
2.2 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. As of the Effective Time, INSCO shall deposit, or
shall cause to be deposited, with Mellon Securities Transfer Services, or such
other bank or trust company or exchange agent as is acceptable to the parties
(the "Exchange Agent"), for the benefit of the holders of shares of PICOM
Common Stock, for exchange in accordance with this Article II, (i) certificates
representing the shares of Holding Company Common Stock, and the cash in lieu
of fractional shares (such cash and certificates for shares of Holding Company
Common Stock, together with any dividends or distributions with respect
thereto, being hereinafter referred to as the "Exchange Fund") to be issued
pursuant to Section 2.1 above and paid pursuant to this Section 2.2 in exchange
for outstanding shares of PICOM Common Stock.
(b) EXCHANGE PROCEDURES. Promptly after the Effective Time, Holding
Company shall cause the Exchange Agent to mail to each holder of record of a
Certificate or Certificates (i) a letter of transmittal which shall specify
that delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the Exchange Agent and
shall be in such form and have such other provisions as Holding Company and
PICOM may reasonably specify, and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing shares
of Holding Company Common Stock and cash in lieu of fractional shares. Upon
surrender of a Certificate for cancellation to the Exchange Agent together with
such
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letter of transmittal, duly executed, the holder of such Certificate shall
be entitled to receive in exchange therefor (x) a certificate representing that
number of whole shares of Holding Company Common Stock, and (y) a check
representing the amount of cash in lieu of fractional shares, if any, and unpaid
dividends and distributions, if any, which such holder has the right to receive
in respect of the Certificate surrendered pursuant to the provisions of this
Article II, and the Certificate so surrendered shall forthwith be canceled. No
interest will be paid or accrued on the cash in lieu of fractional shares or
unpaid dividends and distributions, if any, payable to holders of Certificates.
Except as otherwise provided in the next sentence, no transfer taxes shall be
payable by any holder of a Certificate in respect of the issuance of
certificates representing the Holding Company Common Stock pursuant to this Plan
of Merger. In the event of a transfer of ownership of PICOM Common Stock which
is not registered in the transfer records of PICOM, certificates representing
the proper number of shares of Holding Company Common Stock, together with a
check for the cash to be paid in lieu of fractional shares, may be issued to
such a transferee if the Certificate representing such PICOM Common Stock is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and to evidence that any applicable stock
transfer taxes have been paid.
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES; VOTING. Whenever a
dividend or other distribution is declared by Holding Company on the Holding
Company Common Stock, the record date for which is at or after the Effective
Time, the declaration shall include dividends or other distributions on all
whole shares of Holding Company Common Stock issuable pursuant to this Plan of
Merger, provided that no dividends or other distributions declared or made with
respect to the Holding Company Common Stock with a record date that is six
months or more after the Effective Time shall be paid to the holder of any
unsurrendered Certificate with respect to the shares of Holding Company Common
Stock represented thereby until the holder of such Certificate shall surrender
such Certificate in accordance with this Article II. Subject to the effect of
applicable laws, following surrender of any such Certificate, there shall be
paid to the holder of the certificates representing whole shares of Holding
Company Common Stock issued in exchange therefor, without interest, (i) at the
time of such surrender, the amount of dividends or other distributions with a
record date after the Effective Time theretofore payable with respect to such
whole shares of Holding Company Common Stock and not paid, and (ii) at the
appropriate payment date, the amount of dividends or other distributions with a
record date after the Effective Time but prior to surrender and a payment date
subsequent to surrender payable with respect to such whole shares of Holding
Company Common Stock. Holders of unsurrendered Certificates shall be entitled
to vote after the Effective Time at any meeting of Holding Company stockholders
the number of whole shares of Holding Company Common Stock represented by such
Certificates, regardless of whether such holders have exchanged their
Certificates.
(d) TRANSFERS. After the Effective Time, there shall be no transfers on
the stock transfer books of PICOM of the shares of PICOM Common Stock which
were outstanding immediately prior the Effective Time. If after the Effective
Time, certificates are presented to the Surviving Corporation, they shall be
canceled and exchanged for the shares of Holding Company Common Stock and cash
in lieu of fractional shares, if any, deliverable in respect thereof pursuant
to this Plan of Merger in accordance with the procedures set forth in this
Article II. Certificates surrendered for exchange by any person constituting
an "affiliate" of PICOM for purposes of Rule 145(c) under the Securities Act of
1933, as amended (the "Securities Act"), shall not be exchanged until Holding
Company has received a written agreement from such person as provided in
Section 4.7 of the Reorganization Agreement.
(e) FRACTIONAL SHARES. No fractional shares of Holding Company Common
Stock shall be issued pursuant hereto. In lieu of the issuance of any
fractional share of Holding Company Common Stock pursuant to Section 2.1(b)
above, cash adjustments will be paid to holders in respect of any fractional
share of Holding Company Common Stock that would otherwise be issuable, and the
amount of such cash adjustment shall be equal to such fractional proportion of
the "Average Price" of a share of PICOM Common Stock. The "Average Price" of a
share of PICOM Common Stock shall be the average of the high and low bid prices
for such shares as reported on the Nasdaq National Market (as reported by The
Wall Street Journal or, if not reported thereby,
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<PAGE> 172
by another authoritative source) over the ten (10) business days
immediately preceding the day of the Effective Time.
(f) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund
(including the proceeds of any investments thereof and any Holding Company
Common Stock) that remains unclaimed by the stockholders of PICOM for nine
months after the Effective Time shall be paid to Holding Company. Any
stockholders of PICOM who have not theretofore complied with this Article II
shall thereafter look only to Holding Company for payment of their shares of
Holding Company Common Stock, cash in lieu of fractional shares, and unpaid
dividends and distributions on the Holding Company Common Stock deliverable in
respect of each share of PICOM Common Stock such stockholder holds as
determined pursuant to this Plan of Merger, in each case, without any interest
thereon. Notwithstanding the foregoing, none of Holding Company, INSCO, PICOM,
the Exchange Agent or any other person or entity shall be liable to any former
holder of shares of PICOM Common Stock for any amount properly delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
(g) LOST CERTIFICATE(S). In the event any Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming such Certificate to be lost, stolen or destroyed and, if
required by Holding Company, the posting by such person of a bond in such
amount as Holding Company may direct as indemnity against any claim that may be
made against it with respect to such Certificate, the Exchange Agent shall
issue in exchange for such lost, stolen or destroyed Certificate the shares of
Holding Company Common Stock and cash in lieu of fractional shares and unpaid
dividends and distributions deliverable in respect thereof pursuant to this
Plan of Merger.
ARTICLE III
TERMINATION AND ABANDONMENT
3.1 TERMINATION. This Plan of Merger may be terminated and the Merger
abandoned at any time prior to the Effective Time, whether before or after
approval of this Plan of Merger, the Reorganization Agreement and the Merger by
the stockholders of PICOM, as provided in Section 8.1 of the Reorganization
Agreement.
3.2 EFFECT OF TERMINATION. In the event of termination of this Plan of
Merger as provided in Section 3.1, this Plan of Merger shall forthwith become
void and have no effect except with respect to this Section 3.2 and Sections
4.2 and 4.3 and (ii) each party shall be relieved and released from any and all
liabilities or damages arising out of, or incidental or consequential to, the
breach by such party of any provision of this Plan of Merger.
3.3 AMENDMENT. This Plan of Merger may be amended by the parties hereto
by action taken or authorized by their respective Boards of Directors at any
time before or after approval of this Plan of Merger, the Reorganization
Agreement and the Merger by the stockholders of PICOM; provided, however, that
no amendment shall be made which by law requires further approval by the
Insurance Commissioner or the "Illinois Insurance Director" (defined herein as
in the Reorganization Agreement) without such further approval and, provided,
further, that after any such approval by the stockholders of PICOM, no
amendment shall be made which by law requires further approval by the
stockholders of PICOM without such further approval. This Plan of Merger may
not be amended except by an instrument in writing signed on behalf of each of
the parties hereto.
3.4 EXTENSION; WAIVER. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Board of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the
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<PAGE> 173
representations and warranties contained herein or in any document delivered
pursuant hereto, and (iii) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party hereto to any
such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party.
ARTICLE IV
MISCELLANEOUS
4.1 COUNTERPARTS. This Plan of Merger may be executed in counterparts,
all of which shall be considered one and the same agreement and shall become
effective when counterparts have been signed by each of the parties and
delivered to the other parties, it being understood that all parties need not
sign the same counterpart. An executed counterpart received by telecopy shall
have the same effect as an originally executed counterpart.
4.2 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES; RIGHTS OF OWNERSHIP.
This Plan of Merger and the Reorganization Agreement (including the documents
and the instruments referred to herein and therein) (a) constitutes the entire
agreement and supersedes all prior agreements and understandings, both written
and oral, among the parties with respect to the subject matter hereof, and
(b) is not intended to confer upon any person other than the parties hereto any
rights or remedies hereunder except if and only if, the Merger is consummated
for the right of holders of PICOM Common Stock to receive the Holding Company
Common Stock and cash in lieu of fractional shares as provided herein. For the
purposes hereof, the parties shall mean Holding Company, INSCO and PICOM and
shall not include other Person whatsoever, whether a stockholder, warrant
holder, option holder, employee, officer, director or otherwise. The parties
hereby acknowledge that, except as hereinafter agreed to in writing, no party
shall have the right to acquire or shall be deemed to have acquired shares of
common stock of the other party pursuant to the Merger until consummation
thereof.
4.3 GOVERNING LAW. This Plan of Merger shall be governed and construed in
accordance with the laws of the State of Michigan, without regard to any
applicable conflicts of law.
4.4 SEVERABILITY. Any term or provision of this Plan of Merger which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Plan of Merger or affecting the validity or enforceability of any of the terms
or provisions of this Plan of Merger in any other jurisdiction. If any
provision of this Plan of Merger is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
4.5 ASSIGNMENT. Neither this Plan of Merger nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this Plan of
Merger will be binding upon, inure to the benefit of and be enforceable by the
parties and their respective successors and assigns.
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IN WITNESS WHEREOF, the parties hereto have caused this Plan of Merger to
be signed by their respective officers thereunto duly authorized as of the date
first above written.
PROFESSIONALS INSURANCE COMPANY
MANAGEMENT GROUP
<TABLE>
<S> <C>
By /s/ Victor T. Adamo
-------------------------------------------------------
Name: Victor T. Adamo
Title: President and Chief Executive Officer
Attest:
/s/ Annette E. Flood
- ----------------------------
Name: Annette E. Flood
Title: Secretary
PICOM INTERIM INSURANCE COMPANY
By /s/ Victor T. Adamo
-------------------------------------------------------
Name: Victor T. Adamo
Title: President
Attest:
/s/ Annette E. Flood
- ----------------------------
Name: Annette E. Flood
Title: Secretary
PICOM INSURANCE COMPANY
By /s/ Victor T. Adamo
-------------------------------------------------------
Name: Victor T. Adamo
Title: President and Chief Executive Officer
Attest:
/s/ Annette E. Flood
- ----------------------------
Name: Annette E. Flood
Title: Secretary
</TABLE>
B-8
