<PAGE> 1
As filed with the Securities and Exchange Commission on June 11, 1996
Registration No. 333-3138
===============================================================================
SECURITIES AND EXCHANGE COMMISSION DRAFT
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
(Exact name of registrant as specified in its charter)
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MICHIGAN 6331 38-3273911
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
4295 OKEMOS ROAD, OKEMOS, MICHIGAN 48864
(517) 349-6500
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
VICTOR T. ADAMO
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
4295 OKEMOS ROAD, OKEMOS, MICHIGAN 48864
(517) 349-6500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Brad B. Arbuckle, Esq.
Miller, Canfield, Paddock and Stone, P.L.C.
1400 N. Woodward Ave., Suite 100, Bloomfield Hills, Michigan 48304
(810) 645-5000
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this registration statement is declared
effective and consummation of the merger of PICOM Interim Insurance Company, a
wholly-owned subsidiary of the registrant, with and into PICOM Insurance
Company, pursuant to the Reorganization Agreement and the Agreement and Plan of
Merger among PICOM Insurance Company, the registrant and PICOM Interim
Insurance Company.
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
CALCULATION OF REGISTRATION FEE
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====================================================================================================
Proposed Proposed
Title of each maximum maximum Amount
class of securities Amount to be offering price aggregate of
to be registered(1) registered per share(1) offering price(1) registration fee(2)
- -----------------------------------------------------------------------------------------------------
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Common Stock, no par value 3,188,145 shares $24.3125 $77,571,775.31 $26,729
====================================================================================================
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(1) Estimated solely for purposes of calculating the registration fee.
(2) The registration fee has been computed pursuant to Rule 457(f)(1) and
Rule 457(c) under the Securities Act of 1933, as amended, based on (i) the
average of the high and low bid and asked prices of common stock of PICOM
Insurance Company reported on the Nasdaq National Market on June 5, 1996
($24.3125), and (ii) the maximum number of such shares (3,188,145 shares)
that may be exchanged for the securities being registered. The proposed
maximum offering price per share has been determined by dividing the
maximum aggregate offering price by the number of shares being registered.
Of the $26,729 registration fee payable, $24,258.71 was previously
paid upon the initial filing of this registration statement.
____________________
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE> 2
Cross-Reference Sheet Between Items in Form S-4 and Prospectus Pursuant to Item
501(b) of Regulation S-K
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Item No. Form S-4 Caption Heading in Prospectus
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A. INFORMATION ABOUT THE
TRANSACTION
Item 1. Forepart of Registration Cover Page of Registration Statement; Cross Reference Sheet;
Statement and Outside Front Cover Page of Outside Front Cover Page of Prospectus
Prospectus
Item 2. Inside Front and Outside Back Cover Pages of Inside Front Cover Page of Prospectus; Table of Contents;
Prospectus Available Information
Item 3. Risk Factors, Ratio of Earnings to Fixed Charges Introduction; Summary; Risk Factors; The Reorganization; Pro Forma
and Other Information Consolidated Financial Information**
Item 4. Terms of the Transaction Introduction; Summary; Professionals Insurance Company Management
Group; The PICOM Annual Meeting; The Reorganization; Certain
Federal Income Tax Consequences; Management and Operations After
the Reorganization; Certain Regulatory Considerations; Description
of Holding Company Capital Stock; Comparison of Shareholder
Rights; The Reorganization Agreement
Item 5. Pro Forma Financial Information Summary; Pro Forma Consolidated Financial Information (Unaudited)**
Item 6. Material Contacts with the Company Being Acquired Introduction; Summary; Professionals Insurance Company Management
Group; The Reorganization; Related Party Transactions of PICOM;
The Reorganization Agreement
Item 7. Additional Information Required for Reoffering by *
Persons and Parties Deemed to be Underwriters
Item 8. Interests of Named Experts and Counsel *
Item 9. Disclosure of Commission Position on *
Indemnification for Securities Act Liabilities
B. INFORMATION ABOUT THE REGISTRANT
Item 10. Information with Respect to S-3 Registrants *
Item 11. Incorporation of Certain Information by Reference *
Item 12. Information with Respect to S-2 or S-3 Registrants *
Item 13. Incorporation of Certain Information by Reference *
Item 14. Information with Respect to Registrants Other Introduction; Summary; Professionals Insurance Company Management
than S-2 or S-3 Registrants Group; 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 Operation of PICOM; Business and Properties of PICOM;
Management of PICOM; Beneficial Ownership of PICOM Common Stock;
Related Party Transactions of PICOM; Description of Holding
Company Common Stock; Comparison of Shareholder Rights; The
Reorganization Agreement; Experts; Shareholder Proposals; Pro
Forma Consolidated Financial Information; Index to Financial
Statements**
C. INFORMATION ABOUT THE COMPANY BEING ACQUIRED
Item 15. Information with Respect to S-3 Companies *
Item 16. Information with Respect to S-2 or S-3 Companies *
Item 17. Information with Respect to Companies Other than Introduction; Summary; Professionals Insurance Company Management
S-2 or S-3 Companies Group; The PICOM Annual Meeting; 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 Operation of PICOM; Business
and Properties of PICOM; Management of PICOM; Beneficial Ownership
of PICOM Common Stock; Related Party Transactions of PICOM;
Description of Holding Company Common Stock; Comparison of
Shareholder Rights; The Reorganization Agreement; Shareholder
Proposals; Pro Forma Consolidated Financial Information; Index to
Financial Statements**
D. VOTING AND MANAGEMENT INFORMATION
Item 18. Information if Proxies, Consents or Available Information; Summary; The PICOM Annual Meeting; The
Authorizations Are to be Solicited Reorganization; Management and Operations After the Reorganization
Item 19. Information if Proxies, Consents or *
Authorizations Are Not to be Solicited, or in an
Exchange Offer
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* Omitted because inapplicable or answer is in the negative.
** A narrative description of the pro forma effects of the transaction has
been furnished in lieu of pro forma financial statements in reliance on
Rule 11-02(b)(1) of Regulation S-X.
BHFS1\120993.11\070378-00056
<PAGE> 3
DRAFT 06/05/96
[PICOM LETTERHEAD]
June __, 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.
Sincerely,
W. Peter McCabe, M.D. Victor T. Adamo
Chairman President and Chief Executive Officer
<PAGE> 4
[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.
<PAGE> 5
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
Annette E. Flood
Okemos, Michigan Secretary
June __, 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.
BHFS1\120993.11\070378-00056
<PAGE> 6
Subject to Completion June ___, 1996
________________________________________
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 __, 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 $______ and $______, 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 JUNE __, 1996.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to shareholders of PICOM on or about June __, 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
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PAGE
AVAILABLE INFORMATION................................................................ 2
INTRODUCTION......................................................................... 3
SUMMARY.............................................................................. 4
The Companies................................................................... 4
Risk Factors.................................................................... 5
The PICOM Annual Meeting........................................................ 5
The Reorganization.............................................................. 6
Management and Operations After the Reorganization.............................. 9
Certain Regulatory Considerations............................................... 10
Pro Forma Consolidated Financial Information.................................... 10
Summary Consolidated Historical Financial Data of PICOM......................... 11
RISK FACTORS......................................................................... 13
Industry Factors................................................................ 13
Competition..................................................................... 13
Health Care Industry Consolidation.............................................. 14
Underwriting Losses and Reserves................................................ 14
Reinsurance..................................................................... 15
Reliance on Independent Insurance Agencies...................................... 15
Holding Company Structure....................................................... 16
Regulatory Considerations....................................................... 16
Tort Reform..................................................................... 16
Absence of Public Trading Market; Possible Price Fluctuation.................... 17
Anti-Takeover Provisions........................................................ 17
Potential Adverse Consequences of Acquisitions and Business Combinations........ 17
Shares Eligible for Future Sale................................................. 18
Authorization of Additional Securities.......................................... 18
CAPITALIZATION....................................................................... 19
PICOM COMPARATIVE PER SHARE DATA..................................................... 20
COMPARATIVE STOCK PRICES............................................................. 21
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP..................................... 22
THE PICOM ANNUAL MEETING............................................................. 23
Meeting of Shareholders......................................................... 23
Matters to be Considered........................................................ 23
Votes Required.................................................................. 23
Voting of Proxies............................................................... 24
Revocability of Proxies......................................................... 24
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Record Date; Shares Entitled to Vote; Quorum................................... 24
No Dissenters' Rights.......................................................... 24
Solicitation of Proxies........................................................ 24
THE REORGANIZATION.................................................................. 25
Method of Reorganization....................................................... 25
Reorganization Consideration; Exchange Ratio................................... 25
Reasons for Reorganization..................................................... 25
Recommendation of PICOM Board.................................................. 26
Closing; Effective Time........................................................ 26
Conditions to Consummation..................................................... 27
Regulatory Approvals Required.................................................. 27
Conversion of Shares; Procedures for Exchange of Certificates; Fractional Shares 28
Conduct of Business............................................................ 29
Holding Company 1996 Long Term Stock Incentive Plan............................ 29
Holding Company 1996 Non-Employee Directors Stock Option Plan.................. 34
Holding Company Stock Purchase Plan............................................ 36
Interests of Certain Persons................................................... 36
Anticipated Accounting Treatment............................................... 37
Resale of Holding Company Common Stock; Restrictions on Transfer............... 37
Stock Listing.................................................................. 37
No Dissenters' Rights.......................................................... 37
CERTAIN FEDERAL INCOME TAX CONSEQUENCES............................................. 37
MANAGEMENT AND OPERATIONS AFTER THE REORGANIZATION.................................. 39
Directors...................................................................... 39
Board Committees............................................................... 41
Executive Officers............................................................. 41
Dividend Policy................................................................ 42
BENEFICIAL OWNERSHIP OF HOLDING COMPANY COMMON STOCK................................ 42
CERTAIN REGULATORY CONSIDERATIONS................................................... 43
General........................................................................ 43
Change or Acquisition of Control............................................... 44
Insolvency Funds; Mandatory Pools.............................................. 45
Restrictions on Dividends...................................................... 45
Risk Based Capital............................................................. 45
NAIC-IRIS Ratios............................................................... 46
Effect of Federal Legislation.................................................. 46
SELECTED CONSOLIDATED FINANCIAL DATA OF PICOM....................................... 47
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF PICOM...................................................... 50
Overview....................................................................... 50
Financial Position............................................................. 50
Results of Operations -- Three month period ended March 31, 1996
versus Three month period ended March 31, 1995.............................. 52
Results of Operations -- Year ended December 31, 1995 versus
Year ended December 31, 1994................................................ 53
Results of Operations -- Year ended December 31, 1994 versus
Year ended December 31, 1993................................................ 54
Liquidity and Capital Resources................................................ 55
Impact of Inflation and Changing Prices........................................ 55
Effects of New Accounting Pronouncements....................................... 56
BUSINESS AND PROPERTIES OF PICOM.................................................... 56
Overview....................................................................... 56
Products and Services.......................................................... 57
Marketing...................................................................... 57
Underwriting................................................................... 58
Claims Management.............................................................. 58
Reserves and Losses............................................................ 59
Investments.................................................................... 62
Ceded Reinsurance.............................................................. 63
Competition.................................................................... 63
Regulation..................................................................... 64
Subsidiaries................................................................... 64
Employees...................................................................... 64
Properties..................................................................... 65
Legal Proceedings.............................................................. 65
MANAGEMENT OF PICOM................................................................. 65
Directors...................................................................... 65
Executive Officers............................................................. 65
Director Remuneration.......................................................... 65
PICOM Stock Purchase Plan...................................................... 66
Management Remuneration........................................................ 66
Employment Severance Compensation Plans........................................ 67
Compensation Committee Report.................................................. 68
Stock Performance Graph........................................................ 69
Compensation Committee Interlocks and Insider Participation.................... 70
BENEFICIAL OWNERSHIP OF PICOM COMMON STOCK.......................................... 71
RELATED PARTY TRANSACTIONS OF PICOM................................................. 72
</TABLE>
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PAGE
DESCRIPTION OF HOLDING COMPANY CAPITAL STOCK........................................ 72
General....................................................................... 72
Preferred Stock............................................................... 73
Common Stock.................................................................. 73
Transfer Agent................................................................ 73
Authorized But Unissued Shares................................................ 73
COMPARISON OF SHAREHOLDER RIGHTS.................................................... 74
General....................................................................... 74
Board of Directors; Voting for Directors; Removal of Directors................ 74
Director Nominations.......................................................... 75
Shareholder Voting Requirements............................................... 76
Anti-Takeover Laws............................................................ 78
Meetings of Shareholders...................................................... 79
Director Liability and Indemnification........................................ 80
Payment of Dividends.......................................................... 81
Charter Amendments............................................................ 81
Dissenters' Rights............................................................ 82
Other Matters................................................................. 82
THE REORGANIZATION AGREEMENT........................................................ 82
Representations and Warranties................................................ 83
Conduct of Business; Certain Covenants........................................ 83
Capitalization of INSCO....................................................... 83
Stock Listing................................................................. 84
Indemnification............................................................... 84
Conditions to Consummation.................................................... 85
Termination................................................................... 87
Expenses...................................................................... 88
Amendment; Waiver............................................................. 88
ELECTION OF PICOM DIRECTORS......................................................... 88
General....................................................................... 88
Information About Nominees and Incumbent Directors............................ 89
Committees and Meetings of PICOM Board........................................ 90
LEGAL MATTERS....................................................................... 90
EXPERTS............................................................................. 90
SHAREHOLDER PROPOSALS............................................................... 91
GLOSSARY OF SELECTED INSURANCE TERMS................................................ 92
</TABLE>
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<TABLE>
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PAGE
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION...................................... 93
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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-2-
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> 13
-3-
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, and pending approval
of the Insurance Commissioner of the State of Indiana (the "Indiana Insurance
Commissioner"), 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> 14
-4-
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> 15
-5-
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> 16
-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> 17
-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 April 30, 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> 18
-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.
Pending approval of the Indiana Insurance Commissioner, 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
11:59Ep.m. Eastern Time on the third business day following the Closing Date.
See "THE REORGANIZATION -- Closing; Effective Time."
<PAGE> 19
-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. In light of such Preliminary Order and the
proceedings before the Michigan Insurance Commissioner, Holding Company and
PICOM anticipate that the Michigan Insurance Commissioner will issue and enter
an Order of Acquisition Exemption and Final Approval of Merger granting final
approval of the Merger if the PICOM Reorganization Proposal is approved by
PICOM's shareholders. 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, then the Merger will not be consummated and the
Reorganization Agreement and the Plan of Merger will be terminated.
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> 20
-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> 21
-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> 22
-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 41,546 45,463 39,723
Total expenses 15,109 15,765 46,230 52,669 49,736 56,739 50,861
Income before cumulative effect of change in
accounting method $ 2,327 $830 $16,066 $ 5,154 $ 11,872 $ 9,091 $ 13,318
Cumulative effect of change in accounting
method(2) -- (8,125) (8,125) -- (2,006) (5,312) (3,594)
-------- -------- -------- -------- -------- -------- --------
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 $ 3.67 $ 2.81 $ 4.12
Cumulative effect of change in accounting
method(2) -- (2.51) (2.61) -- (0.62) (1.64) (1.11)
-------- ------- ------- -------- -------- -------- --------
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> 23
-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. Effective January 1, 1995, PICOM eliminated discounting of
loss and loss adjustment expense reserves, for GAAP reporting purposes.
(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> 24
-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> 25
-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> 26
-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> 27
-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> 28
-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> 29
-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> 30
-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> 31
-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........................................................$0.26
Cumulative effect of change in accounting method......................................................................(2.51)
-----
Net Loss.............................................................................................................$(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) =====
Income before cumulative effect of change in accounting method..........................................................$3.67
Cumulative effect of change in accounting method(1)..................................................................... (.62)
----
Net Income..............................................................................................................$3.05
=====
</TABLE>
- --------------------
(1) Effective January 1, 1995, PICOM eliminated discounting of loss and loss
adjustment expense reserves for GAAP reporting purposes, and in 1993,
PICOM changed its loss and loss adjustment reserve discount rate from
3.75% to 3%. Both of these changes represent changes in accounting
methods.
(2) Per share amounts have been restated to account for the effect of a
ten percent stock dividend paid on December 31, 1994.
<PAGE> 32
-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
will apply 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 ___, 1996)......................................................
</TABLE>
On May___, 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 $_________ and $__________,
respectively, per share. On June___, 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 $_______ and
$_________, respectively, per share. PICOM SHAREHOLDERS ARE ADVISED TO OBTAIN
CURRENT MARKET QUOTATIONS FOR THE PICOM COMMON STOCK.
On June 10, 1996, there were approximately ______ 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> 33
-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 to fund the initial operations of Holding
Company. 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."
<PAGE> 34
-24-
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 April 30, 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.
<PAGE> 35
-25-
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,
<PAGE> 36
-26-
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 ____, 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 $__________ and $___________, respectively, per
share. On June__, 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 $__________ and $__________,
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> 37
-27-
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. Pending approval of the Indiana Insurance
Commissioner, 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> 38
-28-
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> 39
-29-
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. 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, Chemical Mellon 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> 40
-30-
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."
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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 will apply 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
<PAGE> 49
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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
<PAGE> 50
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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> 51
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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> 52
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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> 53
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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> 54
-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 April 30, 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 April 30, 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> 55
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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 judgements 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 to the
same extent as PICOM is now.
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> 56
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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> 57
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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> 58
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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> 59
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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 41,546
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 49,736
------------ ---------- ---------- ---------- ----------
Equity in earnings of affiliate -- -- -- 612 145
------------ ---------- ---------- ---------- ----------
Income before federal income taxes and
cumulative effect of changes in accounting
methods 3,166 1,255 24,342 7,810 17,885
Federal income tax expense (839) (425) (8,276) (2,656) (6,013)
------------ ---------- ---------- ---------- ----------
Income before cumulative effect of
changes in accounting methods 2,327 830 16,066 5,154 11,872
Cumulative effect of changes in accounting
methods, net of tax(2) -- (8,125) (8,125) -- (2,006)
------------ ---------- ---------- ---------- ----------
Net income $ 2,327 $(7,295) $ 7,941 $ 5,154 $ 9,866
============ =========== ========== ========== ==========
NET INCOME PER COMMON SHARE(3):
Income before cumulative effect of
changes in accounting methods $ 0.74 $ 0.26 $ 5.16 $ 1.59 $ 3.67
Cumulative effect of changes in accounting
methods, net of tax(2) -- (2.51) (2.61) -- (0.62)
------------ ---------- ---------- ---------- ----------
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) 45,463 39,723
Increase in reserve for extended reporting
period claims 3,731 4,115
Policy acquisition and other underwriting
expenses 7,545 7,023
---------- ----------
Total expenses 56,739 50,861
---------- ----------
Equity in earnings of affiliate 87 84
Income before federal income taxes and ---------- ----------
cumulative effect of changes in accounting
methods 13,952 20,080
Federal income tax expense (4,861) (6,762)
---------- ----------
changes in accounting methods
Income before cumulative effect of
changes in accounting 9,091 13,318
Cumulative effect of changes in
accounting methods, net of tax(2) (5,312) (3,594)
---------- ----------
Net income $ 3,779 $ 9,724
========== ==========
NET INCOME PER COMMON SHARE(3):
Income before cumulative effect of
changes in accounting methods $ 2.81 $ 4.12
Cumlative effect of changes
in accounting methods, net of tax(2) (1.64) (1.11)
---------- ----------
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> 60
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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. Effective January 1, 1995, PICOM eliminated discounting of
loss and loss adjustment expense reserves for GAAP reporting purposes.
(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> 61
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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 $273.6 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 is dominated by
approximately $259.0 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 and all of those
securities were rated at investment grade levels (BBB 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. In 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 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 attributable to the termination of a reinsurance
treaty effective January 1, 1996. Amounts due from reinsurers increased by
$8.8 million from December 31, 1994 to December 31, 1995, which increase is
primarily attributable to PICOM-Illinois.
<PAGE> 62
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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> 63
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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 $0.6
million to net premiums written paid by physicians and surgeons. 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> 64
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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 book of
physicians and surgeons business written by PICOM-Illinois.
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 martgin 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.
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
<PAGE> 65
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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 an increase in the institutional health care
product line. 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 one percent 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 7.2%, as compared to incurred loss
and loss adjustment expenses of $42.3 million for 1993. 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 and incurred loss and loss adjustment expenses 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 $6.0 million in 1993. PICOM's effective federal
tax rate approximated 34.0% in 1994 and 33.6% 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 were reduced by $0.62 per share as a result of a cumulative effect
accounting change which resulted from reducing the reserve discount rate from
3.75% to 3.00% for all accident years.
<PAGE> 66
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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, and pending approval of the Indiana
Insurance Commissioner, 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> 67
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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 in 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 in 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, and pending
approval of the Indiana Insurance Commissioner, 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, in 1995,
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> 68
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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 PICOM offers policies 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> 69
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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
processional 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 policies are rated on 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> 70
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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) (26,691)
-------- -------- --------
Total incurred 35,558 44,853 41,546
-------- -------- --------
Effect of changes in accounting methods 12,310 -- 3,039
-------- -------- --------
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> 71
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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> 72
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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> 73
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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, whereas for
GAAP reporting, PICOM does not discount 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> 74
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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.
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. For a listing of PICOM's
reinsurers and their respective A.M. Best ratings see Note 3 to PICOM's
consolidated financial statements. See also "GLOSSARY OF SELECTED INSURANCE
TERMS" for a description of the rating continuum utilized by A.M. Best.
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.
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."
<PAGE> 75
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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, and pending approval of the Indiana Insurance Commissioner,
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.
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.
<PAGE> 76
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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> 77
-67-
$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> 78
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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> 79
-69-
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> 80
-70-
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> 81
-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> 82
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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> 83
-73-
(2) Number of shares and percentages are based on ownership of PICOM Common
Stock as of April 30, 1996. 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%.
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 to fund the initial operations of Holding Company. 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> 84
-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 Chemical Mellon 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> 85
-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
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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 by-laws unless the
articles of incorporation or by-laws of the corporation provide that the power
to adopt new by-laws is reserved exclusively to the shareholders or that the
by-laws or any particular by-law 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 by-laws.
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.
<PAGE> 94
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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> 95
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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 to fund the initial operations of Holding Company.
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> 96
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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> 97
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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> 98
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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> 99
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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.
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> 100
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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> 101
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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> 102
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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 changes in accounting methods 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> 103
-93-
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> 104
-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> 105
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> 106
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> 107
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> 108
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> 109
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> 110
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> 111
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> 112
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> 113
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> 114
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> 115
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> 116
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> 117
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 Notes 1 and 7 to the consolidated financial statements, the
Company changed its method of accounting for certain investments and changed
the discount rate used in recording loss and loss adjustment expense reserves
in 1993.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
February 17, 1995
FS-13
<PAGE> 118
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> 119
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 41,546
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 49,736
------------ ------------ ------------
Income from operations before equity in earnings
of affiliate, federal income taxes, and cumulative
effect of changes in accounting methods 24,342 7,198 17,740
Equity in earnings of affiliate - 612 145
------------ ------------ ------------
Income before federal income taxes and cumulative
effect of changes in accounting methods 24,342 7,810 17,885
Federal income taxes (note 4) (8,276) (2,656) (6,013)
------------ ------------ ------------
Income before cumulative effect of changes in
accounting methods 16,066 5,154 11,872
Cumulative effect of changes in accounting methods (note 7):
Change in discount rate, net of deferred federal income tax
benefit of $1,033 - - (2,006)
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 changes in accounting methods $ 5.16 1.59 3.67
Cumulative effect of changes in accounting methods (2.61) - (0.62)
------------ ------------ ------------
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> 120
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> 121
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> 122
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> 123
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> 124
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> 125
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> 126
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> 127
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> 128
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> 129
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> 130
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> 131
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 5,538
------- ----- -----
$ 8,276 2,656 6,013
======= ===== =====
</TABLE>
FS-27
<PAGE> 132
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 6,013
Accounting changes (4,185) - (1,033)
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 6,260
Tax-exempt investment income (65) - -
Foreign capital gains (58) - -
Other, net (121) (78) (247)
------ ----- -----
Actual tax expense $8,276 2,656 6,013
====== ===== =====
</TABLE>
FS-28
<PAGE> 133
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> 134
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> 135
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 306 914
------- ------
Discounted losses and loss adjustment expenses incurred, net $44,853 41,546
======= ======
</TABLE>
Prior to 1995, loss and loss adjustment expense reserves have been adjusted
("discounted") to reflect anticipated investment income. The method of
discounting is based upon historical payment patterns and assumes an
interest rate at the same rate used for statutory reporting purposes. For
statutory reporting, the Company continued to lower its interest rate
assumptions and reduced its rate from 3.75% and to 3.0% in 1993 for all
accident years. Accordingly, the Company reduced the interest rate
assumption used for financial reporting purposes to the rate used for
statutory reporting; the effect of this accounting change on the
accompanying consolidated financial statements decreased net income by
$1,875,000 in 1993. ($0.64 per share). The cumulative effect of these
changes of $2,005,740 is included in earnings for 1993.
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> 136
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) (26,691)
-------- ------- -------
Total incurred 35,558 44,853 41,546
-------- ------- -------
Effect of changes in accounting methods 12,310 - 3,039
-------- ------- -------
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 $40,632,000 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> 137
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> 138
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) (5,538)
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 1,949
------- ------ ------
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> 139
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> 140
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 Changes in Changes in Net Income Per
Income Accounting Methods 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 (3,039) (922) (.28)
2nd 17,005 3,018 - 1,992 .62
3rd 19,977 6,070 - 4,006 1.24
4th 14,686 7,154 - 4,790 1.48
------- ------ ------- ------
Year $67,476 17,885 (3,039) 9,866
======= ====== ======= ======
</TABLE>
Results for the first three quarters of 1995 and 1993 have been restated
from those originally reported because the Company changed methods of
accounting for loss and loss adjustment expense reserves by changing its
discount rate effective January 1, 1993, and eliminating discounting of
such reserves effective January 1, 1995.
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> 141
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> 142
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> 143
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> 144
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> 145
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> 146
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> 147
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
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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>
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<TABLE>
<CAPTION>
PAGE
----
<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
</TABLE>
EXHIBITS
1. Agreement and Plan of Merger (not included)
2. Form of Affiliates Agreement (not included)
A-3
<PAGE> 150
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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<PAGE> 151
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
A-6
<PAGE> 153
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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<PAGE> 154
(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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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> 169
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> 170
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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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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(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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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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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.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
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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>
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PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Michigan Business Corporation Act, as amended ("MBCA"), provides that
a Michigan corporation, such as Professionals Insurance Company Management
Group (the "registrant"), may indemnify a director, officer, employee or agent
of the corporation (an "Indemnitee") against the Indemnitee's expenses and
judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending or completed action, suit
or proceeding (other than an action by or in the right of the corporation)
involving the Indemnitee by reason of the fact that the Indemnitee is or was a
director, officer, employee or agent of the corporation, if the Indemnitee
acted in good faith and in a manner the Indemnitee reasonably believed to be in
or not opposed to the best interest of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. The MBCA also provides that in derivative actions, a
corporation may indemnify a director, officer, employee or agent of the
corporation against expenses actually and reasonably incurred by the Indemnitee
to the extent that the Indemnitee is successful on the merits or otherwise in
any such action, suit or proceeding or in the defense of any claim, issue or
matter therein. Under the MBCA, no indemnification shall be made with respect
to any claim, issue or matter as to which an Indemnitee shall have been
adjudged to be liable to the corporation unless and only to the extent that the
court shall determine upon application that, despite the adjudication of
liability but in view of all of the circumstances of the case, the Indemnitee
is fairly and reasonably entitled to indemnity for such expenses which the
court shall deem proper. The MBCA also generally permits the advancement of
reasonable expenses and empowers the corporation to purchase and maintain
directors' and officers' insurance.
Article VI of the By-laws of the registrant contains provisions
authorizing indemnification of directors, officers, employees and agents of the
registrant that are substantially similar to those set forth in the MBCA and
authorizes the registrant to purchase directors' and officers' insurance.
Section 209 of the MBCA provides that the articles of incorporation of a
corporation may contain a provision eliminating or limiting the personal
liability of a director to the corporation or its shareholders for monetary
damages for breach of fiduciary duty as a director, provided that such
provision shall not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its
shareholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law, (iii) under Section 551(1)
of the MBCA (relating to liability for unauthorized acquisitions or redemptions
of, or dividends on, capital stock and loans to a director, officer, or
employee of the corporation or a subsidiary of the corporation), (iv) for any
transaction from which the director derived an improper personal benefit or (v)
for an act or omission occurring prior to the date such a provision becomes
effective. Article VII of the registrant's Articles of Incorporation include
such a provision.
The registrant has entered into individual indemnity agreements with its
officers and directors whereby the registrant will indemnify each of its
officers and directors for any amount which they may be obligated to pay
because of any claim made against them because of any omission or neglect or
breach of duty, including any actual or alleged error or misstatements or
misleading statement, committed or suffered when acting in their capacities as
officers, directors, employees and agents of the registrant, its subsidiaries
and certain other enterprises.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described in this
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<PAGE> 178
Item 20 or otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will be
governed by the final adjudication of such issue.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits. The following exhibits are filed as part of the registration
statement on Form S-4:
<TABLE>
<CAPTION>
Item 601
Regulation S-K Sequentially
Exhibit Reference Numbered
Number Exhibit Description Page
- ----------------- ------------------- ------------
<S> <C>
(2)(a)/(10)(a) Agreement and Plan of Reorganization dated
May 13, 1996 among the registrant, PICOM Interim
Insurance Company and PICOM Insurance Company.**
A conformed copy of this instrument (as executed
but without exhibits) is included as Annex A to
the Prospectus which is part of this
Registration Statement.
(2)(b)/(10)(b) Agreement and Plan of Merger dated May 13, 1996
among the registrant, PICOM Interim Insurance
Company and PICOM Insurance Company.**
A conformed copy of this instrument (as
executed) is included as Annex B to the
Prospectus which is part of this Registration
Statement.
(2)(c)/(99)(k) Order of Acquisition Exemption and Preliminary
Approval of Merger issued and entered May 6,
1996 by the Commissioner of Insurance of the
State of Michigan.**
(3)(a)/(4)(a) First Amended and Restated Articles of
Incorporation of the registrant and all
amendments thereto.*
(3)(b)/(4)(b) By-laws of the registrant.*
(4)(c) Specimen certificate for the registrant's common
stock.*
(5)(a) Opinion and consent of Miller, Canfield, Paddock
and Stone, P.L.C.**
(8)(a) Opinion and consent of Miller, Canfield, Paddock
and Stone, P.L.C.**
</TABLE>
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<PAGE> 179
<TABLE>
<CAPTION>
Item 601
Regulation S-K Sequentially
Exhibit Reference Numbered
Number Exhibit Description Page
- ----------------- ------------------- ------------
<S> <C>
(10)(c) Professionals Insurance Company Management Group
1996 Long Term Incentive Plan.**
(10)(d) Professionals Insurance Company Management Group
1996 Non-Employee Directors Stock Option Plan.**
(10)(e) Professionals Insurance Company Management Group
Stock Purchase Plan.*
(10)(f) Form of Non-Negotiable Promissory Note.*
(10)(g) Form of Pledge Agreement.*
(11) No statement is required to be filed with
respect to the registrant, PICOM Interim
Insurance Company or PICOM Insurance Company
because the computations can be clearly
determined from the materials contained in the
registration statement.
(16) Letter of Coopers & Lybrand, L.L.P., independent
certified public accountants, regarding change
in accountants.**
(18) Letter of KPMG Peat Marwick LLP, independent
certified public accountants, regarding change
in accounting method.**
(21)(a) List of subsidiaries of the registrant.**
(23)(a) Consent of Miller, Canfield, Paddock and Stone,
P.L.C. (included in Exhibit 5(a)).**
(23)(b) Consent of Miller, Canfield, Paddock and Stone,
P.L.C. (included in Exhibit 8(a)).**
(23)(c) Consent of KPMG Peat Marwick LLP, independent
certified public accountants.**
(23)(d) Consent of Coopers & Lybrand, L.L.P.,
independent certified public accountants.**
(24) Powers of Attorney (contained in signature pages
of the initial filing of this Registration
Statement).
(27) Financial Data Schedules of registrant, PICOM Interim
Insurance Company and PICOM Insurance Company.**
</TABLE>
II-3
<PAGE> 180
<TABLE>
<CAPTION>
Item 601
Regulation S-K Sequentially
Exhibit Reference Numbered
Number Exhibit Description Page
- ----------------- ------------------- ------------
<S> <C>
(99)(a) Articles of Incorporation of PICOM Insurance
Company.*
(99)(b) By-laws of PICOM Insurance Company.*
(99)(c) Form of Proxy for PICOM Insurance Company.**
(99)(d) List of subsidiaries of PICOM Insurance Company.**
(99)(e) PICOM Insurance Company Key Employee Retention
Plan.*
(99)(f) PICOM Insurance Company Employee Retention Plan,
as amended.*
(99)(g) PICOM Insurance Company Stock Purchase Plan.*
(99)(h) Articles of Incorporation of PICOM Interim
Insurance Company.**
(99)(i) By-laws of PICOM Interim Insurance Company.**
(99)(j) Consents of persons named as directors and
executive officers of the registrant. (The
consents of Victor T. Adamo, R. Kevin Clinton,
Annette E. Flood, W. Peter McCabe, John F.
McCaffery, and Ann F. Putallaz were filed with
the initial filing of this Registration
Statement. The consents of Jerry D. Campbell,
John F. Dodge, Jr., H. Harvey Gass, Isaac J.
Powell, William H. Woodhams, and Donald S. Young
are being filed with this Amendment No. 1.)**
</TABLE>
- -------------------
* Filed with initial filing of this Registration Statement.
** Filed with this Amendment No. 1.
(b) Financial Statement Schedules. The financial statement schedules are
omitted because of the absence of the conditions under which they are required
or because the required information is included in the financial statements, or
the notes thereto, that are a part of this registration statement.
(c) Information Pursuant to Item 4(b). Not Applicable.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be
II-4
<PAGE> 181
an underwriter within the meaning of Rule 145(c), the issuer undertakes that
such reoffering prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons who may be
deemed underwriters, in addition to the information called for by the other
items of the applicable form.
(2) That every prospectus: (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act of 1933 and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described in Item 20 or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
[THIS SPACE INTENTIONALLY LEFT BLANK]
II-5
<PAGE> 182
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment no. 1 to the registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Lansing, State of Michigan, on the 10th day of June, 1996.
PROFESSIONALS INSURANCE COMPANY
MANAGEMENT GROUP, a Michigan corporation
By /s/ Victor T. Adamo
------------------------------------------------
Name: Victor T. Adamo
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
no. 1 to the registration statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
Principal Executive Officer:
President and
Chief Executive Officer
/s/ Victor T. Adamo June 10, 1996
- -------------------------------
Victor T. Adamo
Principal Financial Officer and
Principal Accounting Officer:
Vice President, Treasurer,
Chief Financial Officer and
/s/ R. Kevin Clinton Chief Accounting Officer June 10, 1996
- -------------------------------
R. Kevin Clinton
</TABLE>
II-6
<PAGE> 183
Pursuant to the requirements of the Securities Act of 1933, this amendment
no. 1 to the registration statement has been signed by the following person in
the capacity and on the date indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Victor T. Adamo Director June 10, 1996
- -------------------
Victor T. Adamo
II-7
<PAGE> 184
<TABLE>
<CAPTION>
Item 601
Regulation S-K
Exhibit Reference
Number Description Page
- ----------------- ----------- ------------
<S> <C> <C>
(2)(a)/(10)(a) Agreement and Plan of Reorganization dated
May 13, 1996 among the registrant, PICOM Interim
Insurance Company and PICOM Insurance Company.**
A conformed copy of this instrument (as executed
but without exhibits) is included as Annex A to
the Prospectus which is part of this
Registration Statement.
(2)(b)/(10)(b) Agreement and Plan of Merger dated May 13, 1996
among the registrant, PICOM Interim Insurance
Company and PICOM Insurance Company.**
A conformed copy of this instrument (as
executed) is included as Annex B to the
Prospectus which is part of this Registration
Statement.
(2)(c)/(99)(k) Order of Acquisition Exemption and Preliminary
Approval of Merger issued and entered May 6,
1996 by the Commissioner of Insurance of the
State of Michigan.**
(3)(a)/(4)(a) First Amended and Restated Articles of
Incorporation of the registrant and all
amendments thereto.*
(3)(b)/(4)(b) By-laws of the registrant.*
(4)(c) Specimen certificate for the registrant's common
stock.*
(5)(a) Opinion and consent of Miller, Canfield, Paddock
and Stone, P.L.C.**
(8)(a) Opinion and consent of Miller, Canfield, Paddock
and Stone, P.L.C.**
</TABLE>
<PAGE> 185
<TABLE>
<CAPTION>
Item 601
Regulation S-K
Exhibit Reference
Number Description Page
- ----------------- ------------------- ------------
<S> <C>
(10)(c) Professionals Insurance Company Management Group
1996 Long Term Incentive Plan.**
(10)(d) Professionals Insurance Company Management Group
1996 Non-Employee Directors Stock Option Plan.**
(10)(e) Professionals Insurance Company Management Group
Stock Purchase Plan.*
(10)(f) Form of Non-Negotiable Promissory Note.*
(10)(g) Form of Pledge Agreement.*
(11) No statement is required to be filed with
respect to the registrant, PICOM Interim
Insurance Company or PICOM Insurance Company
because the computations can be clearly
determined from the materials contained in the
registration statement.
(16) Letter of Coopers & Lybrand, L.L.P., independent
certified public accountants, regarding change
in accountants.**
(18) Letter of KPMG Peat Marwick LLP, independent
certified public accountants, regarding change
in accounting method.**
(21)(a) List of subsidiaries of the registrant.**
(23)(a) Consent of Miller, Canfield, Paddock and Stone,
P.L.C. (included in Exhibit 5(a)).**
(23)(b) Consent of Miller, Canfield, Paddock and Stone,
P.L.C. (included in Exhibit 8(a)).**
(23)(c) Consent of KPMG Peat Marwick LLP, independent
certified public accountants.**
(23)(d) Consent of Coopers & Lybrand, L.L.P.,
independent certified public accountants.**
(24) Powers of Attorney (contained in signature pages
of the initial filing of this Registration
Statement).
(27) Financial Data Schedules of registrant, PICOM Interim
Insurance Company and PICOM Insurance Company.**
</TABLE>
<PAGE> 186
<TABLE>
<CAPTION>
Item 601
Regulation S-K
Exhibit Reference
Number Description Page
- ----------------- ------------------- ------------
<S> <C>
(99)(a) Articles of Incorporation of PICOM Insurance
Company.*
(99)(b) By-laws of PICOM Insurance Company.*
(99)(c) Form of Proxy for PICOM Insurance Company.**
(99)(d) List of subsidiaries of PICOM Insurance Company.**
(99)(e) PICOM Insurance Company Key Employee Retention
Plan.*
(99)(f) PICOM Insurance Company Employee Retention Plan,
as amended.*
(99)(g) PICOM Insurance Company Stock Purchase Plan.*
(99)(h) Articles of Incorporation of PICOM Interim
Insurance Company.**
(99)(i) By-laws of PICOM Interim Insurance Company.**
(99)(j) Consents of persons named as directors and
executive officers of the registrant. (The
consents of Victor T. Adamo, R. Kevin Clinton,
Annette E. Flood, W. Peter McCabe, John F.
McCaffery, and Ann F. Putallaz were filed with
the initial filing of this Registration
Statement. The consents of Jerry D. Campbell,
John F. Dodge, Jr., H. Harvey Gass, Isaac J.
Powell, William H. Woodhams, and Donald S. Young
are being filed with this Amendment No. 1.)**
</TABLE>
- -------------------
* Filed with initial filing of this Registration Statement.
** Filed with this Amendment No. 1.
<PAGE> 1
EXHIBIT (2)(a)/(10)(a)
CONFORMED COPY FILED WITH SEC
REORGANIZATION AGREEMENT
DATED AS OF MAY 13, 1996
AMONG
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP,
PICOM INTERIM INSURANCE COMPANY,
AND
PICOM INSURANCE COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1 Plan of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Stockholder Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.3 Merger Effective Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE II CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.1 Closing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 Sales and Transfer Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.3 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE III REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3.1 Representations and Warranties of the PICOM Companies . . . . . . . . . . . . . . . 4
3.2 Representations and Warranties of the Holding Company Entities . . . . . . . . . . . 6
ARTICLE IV COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.1 Covenants of PICOM Companies and Holding Company Entitles . . . . . . . . . . . . . 9
4.2 Securities Regulatory Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.3 Insurance Regulatory Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.4 Other Regulatory Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
4.5 Reservation of Shares for Issuance . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.6 Legal Conditions to Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.7 Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.8 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.9 Additional Agreements; Best Efforts . . . . . . . . . . . . . . . . . . . . . . . . 12
4.10 Plan of Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.11 Letter of Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.12 Loan Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
4.13 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
ARTICLE V CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
5.1 Conditions to Each Party's Obligation To Effect the Merger . . . . . . . . . . . . . 14
5.2 Conditions to Obligations of the Holding Company Entities . . . . . . . . . . . . . 17
5.3 Conditions to Obligations of the PICOM Companies . . . . . . . . . . . . . . . . . . 17
ARTICLE VI TERMINATION AND AMENDMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.3 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.4 Extension; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE VII GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7.1 Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
7.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.3 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.5 Entire Agreement; No Third Party Beneficiaries; Rights of Ownership . . . . . . . . 21
7.6 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.7 Enforcement of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.8 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7.9 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
EXHIBITS
1. Agreement and Plan of Merger
2. Form of Affiliates Agreement
-ii-
<PAGE> 4
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
-1-
<PAGE> 5
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
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
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<PAGE> 6
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).
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.
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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 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
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<PAGE> 8
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.
(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
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<PAGE> 9
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:
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<PAGE> 10
(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.
(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"
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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.
(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,
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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.
(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
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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, 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
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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
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<PAGE> 15
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.
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
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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 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.
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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.
(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.
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<PAGE> 18
(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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<PAGE> 19
(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
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<PAGE> 20
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.
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.
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<PAGE> 21
(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.
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,
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<PAGE> 22
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 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
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<PAGE> 23
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
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
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<PAGE> 24
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
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.
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<PAGE> 25
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> 26
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
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
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<PAGE> 27
EXHIBIT 1
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
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<PAGE> 28
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:
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,
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<PAGE> 29
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:
(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
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<PAGE> 30
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 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
1-4
<PAGE> 31
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
1-5
<PAGE> 32
or, if not reported thereby, 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"
1-6
<PAGE> 33
(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 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
1-7
<PAGE> 34
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.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
1-8
<PAGE> 35
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
By
------------------------------------
Name: Victor T. Adamo
Title: President and Chief
Executive Officer
Attest:
- --------------------------------
Name: Annette E. Flood
Title: Secretary
PICOM INTERIM INSURANCE COMPANY
By
------------------------------------
Name: Victor T. Adamo
Title: President
Attest:
- --------------------------------
Name: Annette E. Flood
Title: Secretary
PICOM INSURANCE COMPANY
By
------------------------------------
Name: Victor T. Adamo
Title: President and Chief
Executive Officer
Attest:
- --------------------------------
Name: Annette E. Flood
Title: Secretary
1-9
<PAGE> 36
EXHIBIT 2
AFFILIATE'S AGREEMENT
__________, 199_
Professionals Insurance Company
Management Group
4295 Okemos Road
Okemos, Michigan 48805
Gentlemen:
Reference is made to the Reorganization Agreement dated as of
_________________, 1996 (the "Reorganization Agreement"), by and among
Professionals Insurance Company Management Group, a Michigan corporation
("Holding Company"), PICOM Interim Insurance Company, a Michigan stock
insurance corporation and a wholly-owned subsidiary of Holding Company
("INSCO"), and PICOM Insurance Company, a Michigan stock insurance company
("PICOM"), and to the Agreement and Plan of Merger attached thereto as Exhibit
1. The Reorganization Agreement and the Plan of Merger contemplate, among
other things, (i) the merger of INSCO with and into PICOM, with the result that
PICOM will become a wholly-owned subsidiary of Holding Company and (ii) the
conversion of each issued and outstanding shares of PICOM Common Stock into one
share of Holding Company Common Stock.
The undersigned has been informed that the Merger constitutes a transaction
covered by Rule 145 promulgated under the Securities Act of 1933, as amended
(the "Securities Act"); that the undersigned may be deemed to be an "affiliate"
of PICOM within the meaning of Rule 145; and that, accordingly, the shares of
Holding Company Common Stock, which the undersigned may acquire in connection
with the Merger may be disposed of only in conformity with the provisions
hereof.
The capitalized terms used and not defined herein shall have the respective
meanings set forth in the Reorganization Agreement.
1. The undersigned, after inquiry of any agent with discretionary
power to transfer the undersigned's shares of PICOM Common Stock, represents,
warrants and agrees as follows:
(a) The undersigned has full power to execute this
Affiliate's Agreement and to make the representations, warranties and
agreements herein, and to perform his, her or its obligations hereunder.
(b) The undersigned is currently the owner of that number
of shares of PICOM Common Stock set forth in Schedule 1 hereto.
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<PAGE> 37
(c) The undersigned currently owns no shares of PICOM
Common Stock except as otherwise disclosed on Schedule 1 to this Agreement.
(d) The undersigned is not acquiring the shares of
Holding Company Common Stock which the undersigned may acquire in connection
with the Merger with a view to distribution thereof. The undersigned will not
sell, transfer or dispose of any of the shares of Holding Company Common Stock
which the undersigned may acquire in connection with the Mergers or any
securities which may be paid as a dividend or otherwise distributed thereon or
with respect thereto or issued or delivered in exchange or substitution
therefor (all such shares and other securities are sometimes collectively
referred to herein as "Restricted Securities"), or any option, right or other
interest with respect to any Restricted Securities, unless such sale, transfer
or disposition is effected (i) pursuant to Rule 145(d) under the Securities Act
as provided in Section 3 hereof, (ii) pursuant to an effective registration
statement under, and in compliance with, the Securities Act or (iii) pursuant
to an exemption from registration under the Securities Act provided that the
undersigned shall have furnished to Holding Company an opinion of counsel in
form and substance reasonably satisfactory to Holding Company to the effect
that the proposed sale, transfer or other disposition is exempt from
registration under the Securities Act; provided, however, that the undersigned
may make bona-fide gifts or distributions without consideration so long as the
recipients thereof agree not to sell, transfer or otherwise dispose of the
shares of Holding Company Common Stock except as provided herein.
(e) The undersigned has consulted such legal and
financial counsel as the undersigned deems appropriate in connection with the
execution of this Affiliate's Agreement.
2. Holding Company agrees to use its best efforts to file all
reports and data with the Securities and Exchange Commission ("SEC") necessary
to permit the undersigned to sell Restricted Securities pursuant to and
otherwise in conformity with Rule 145(d) promulgated under the Securities Act,
so long as the undersigned holds the Restricted Securities but in no event in
excess of three years after consummation of the Merger.
3. Holding Company acknowledges that the provisions of Section
1(d) of this Affiliate's Agreement will be satisfied as to any sale by the
undersigned of Restricted Securities pursuant to Rule 145(d) under the
Securities Act, as evidenced by a letter from the undersigned stating the
number of shares, time, manner of sale, and that the requirements of Rule 145
have been met.
4. This Affiliate's Agreement shall be binding upon and
enforceable against administrators, executors, representatives, heirs, legatees
and devisees of the undersigned and any pledgee holding the Restricted
Securities of the undersigned as collateral.
5. This Affiliate's Agreement shall be governed by and construed
in accordance with the internal laws of the State of Michigan without regard to
any applicable conflicts of law.
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<PAGE> 38
IN WITNESS WHEREOF, the undersigned has executed the foregoing Affiliate's
Agreement as of the date first above written.
Very truly yours
- ----------------------------------------
Name:
AGREED TO AND ACCEPTED:
PROFESSIONALS INSURANCE COMPANY
MANAGEMENT GROUP
By:
-----------------------------------------
Name: Victor T. Adamo
Title: President and Chief Executive Officer
2-3
<PAGE> 39
Schedule 1
No. of Shares
of PICOM Common
Name/Holder Stock Owned
----------- ---------------
2-4
<PAGE> 1
EXHIBIT (2)(b)/(10)(b)
CONFORMED COPY FILED WITH SEC
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
<PAGE> 2
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:
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,
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<PAGE> 3
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:
(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
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<PAGE> 4
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 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
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<PAGE> 5
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
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<PAGE> 6
or, if not reported thereby, 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
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<PAGE> 7
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 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.
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<PAGE> 8
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.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
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<PAGE> 9
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
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
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<PAGE> 1
EXHIBIT (2)(c)/(99)(k)
CONFORMED COPY FILED WITH SEC
STATE OF MICHIGAN
DEPARTMENT OF COMMERCE
INSURANCE BUREAU
BEFORE THE COMMISSIONER OF INSURANCE
In the matter of the acquisition of the stock of
PICOM Insurance Company, and the merger of
PICOM Interim Insurance Company with and into
PICOM Insurance Company/ No. 96-134-M
Issued and entered
this 6th day of May, 1996
by D. Joseph Olson
Commissioner of Insurance
ORDER OF ACQUISITION EXEMPTION
AND PRELIMINARY APPROVAL
OF MERGER
I
BACKGROUND
By letters dated February 6 and 12, 1996, which were supplemented by letters
dated February 8, March 22, April 11, and May 1, 1996, PICOM Insurance Company
("PICOM") submitted a reorganization proposal (the "PICOM Reorganization
Proposal") whereby it would become a wholly owned subsidiary of Professionals
Insurance Company Management Group ("Holding Company"). The holding company
structure contemplated would be created through a "reverse triangular merger"
in which PICOM Interim Insurance Company ("INSCO"), a new insurance subsidiary
of Holding Company, would be merged with and into PICOM; with PICOM surviving
and INSCO ceasing to exist.
The PICOM Reorganization Proposal requires certain regulatory filings,
approvals, or exemptions:
1. Thirteen incorporators filed an application with the Michigan
Insurance Commissioner ("Commissioner"), to organize and
authorize, as a wholly-owned
<PAGE> 2
Order No. 96-134-M
Page 2
subsidiary of Holding Company, the Michigan stock property and
casualty insurance company known as PICOM Interim Insurance
Company.
2. A petition for exemption of the transaction whereby the stock
of PICOM Insurance Company will be acquired by Holding Company
has been filed with the Commissioner, pursuant to the
provisions of MCL 500.1317b.
3. A petition has been filed with the Commissioner for approval
of the merger of INSCO with and into PICOM pursuant to the
provisions of MCL 500. 7604. The filing includes a proposed
Reorganization Agreement ("Reorganization Agreement") by and
among Holding Company, INSCO and PICOM; and a proposed
Agreement and Plan of Merger (the "Plan of Merger") by and
among the same parties.
4. A promissory note (the "Note"), under which PICOM loaned to
Holding Company the funds necessary for the initial
capitalization of INSCO, has been filed with the Commissioner,
pursuant to the provisions of MCL 500.1341. The Note is
secured by a pledge of all of the shares of common stock of
INSCO issued to Holding Company.
5. A petition has been filed with the Commissioner for approval
of a post-merger dividend equal in amount to the principal
amount and all accrued interest of the Note, and an additional
amount of $2,000,000, to Holding Company, pursuant to the
provisions of MCL 500.1343. The proceeds will be used by
Holding Company to repay its loan to PICOM, and for its
capitalization.
6. A Form S-4 Registration Statement to register the shares of
Holding Company common stock to be issued in the reverse
triangular merger has been filed with the Securities Exchange
Commission under the Securities Act of 1933, as amended.
7. The indirect acquisition of PICOM Insurance Company of
Illinois, an Illinois stock insurance corporation and wholly
owned subsidiary of PICOM, that would result from the PICOM
Reorganization Proposal, requires either a Form A acquisition
filing with, or exemption therefrom, by the Illinois Director
of Insurance.
PICOM is a Michigan stock property and casualty insurance corporation,
authorized to transact insurance business in Michigan since 1980. PICOM is
publicly traded in the over-the-counter market and, since October, 1994, has
been listed for quotation on the Nasdaq National Market. Documents filed in
this matter indicate that no one person owns 10% or more of PICOM's common
stock.
<PAGE> 3
Order No. 96-134-M
Page 3
INSCO was incorporated on April 12, 1996. A qualifying examination of INSCO was
conducted on April 23, 1996, and the Qualifying Examination Report was filed as
a public document on April 26, 1996. On May 6, 1996 INSCO was issued its final
Michigan certificate of authority. INSCO is a wholly-owned subsidiary of
Holding Company, that was incorporated solely for the purpose of merging with
and into PICOM, and thereby establishing PICOM as a wholly-owned subsidiary of
Holding Company.
Holding Company is a stock Michigan business corporation incorporated on
January 31, 1996 for the express purpose of acquiring all of the issued and
outstanding stock of PICOM and its subsidiaries. Currently Victor T. Adamo, a
director and the President and Chief Executive Officer of PICOM is the
beneficial owner of the one issued and outstanding share of Holding Company
common stock, which share was issued for the purpose of organizing the Holding
Company and enabling it to enter into the proposed Reorganization Agreement and
the proposed Plan of Merger.
II
ANALYSIS
Regarding the petition for a Form A exemption, the Michigan Insurance Code of
1956, as amended, provides that, before a person acquires control of a domestic
insurer, that person shall secure the approval of the Commissioner. MCL
500.1311 (1), provides that:
A person other than the issuer shall not make a tender offer for or a
request or invitation for tenders of, or enter into any agreement to
exchange securities for, seek to acquire or acquire, in the open
market or otherwise, any voting security of a domestic insurer if,
after the consummation thereof, the person directly or indirectly, or
by conversion or by exercise of any right to acquire, would be in
control of the insurer.
A person shall not enter into an agreement to merge with or otherwise
to acquire control of a domestic insurer or any person controlling a
domestic insurer unless, at the time an offer, request, or invitation
is made or an agreement is entered into, or prior to the acquisition
of the securities, if no offer or agreement is involved, the person
has filed with the commissioner and has sent to the insurer which has
sent to its shareholders, a statement containing the information
required by this chapter and the offer, request, invitation, agreement
or acquisition has been approved by the commissioner in the manner
prescribed in this chapter.
MCL 500.115(b) provides:
"Control" including the terms "controlling", "controlled by" and
"under common control with", mean the possession or the contingent or
noncontingent right to
<PAGE> 4
Order No. 96-134-M
Page 4
acquire possession, direct or indirect, of the power to direct or
cause the direction of the management and policies of a person,
whether through the ownership of voting securities, by contract
including acquisition of assets or bulk reinsurance, other than a
commercial contract for goods or nonmanagement services, by pledge of
securities, or otherwise, unless the power is the result of an
official position with or corporate office held by the person. Control
is presumed to exist if any person, by formal or informal arrangement,
device, or understanding, 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 or for a mutual
insurer owns 10% or more of the insurer's surplus through surplus
notes, guarantee fund certificates or other evidence of indebtedness
issued by the insurer. This presumption may be rebutted by a showing
made in the manner provided by section 1332 that control does not in
fact exist. The commissioner may determine, after furnishing to all
persons in interest, notice and opportunity to be heard and making
specific findings of fact to support the determination that control in
fact exists notwithstanding the absence of a presumption to that
effect.
However, not all acquisitions of control are subject to the Commissioner's
approval. MCL 500.1317 provides:
The provisions of sections 1311 to 1319 shall not apply to: ...
(a) Any transaction subject to the provisions of chapter 76.
(b) Any offer, request, invitation, agreement or acquisition that
the commissioner by order exempts as not having been made or
entered into for the purpose and not having the effect of
changing or influencing the control of a domestic insurer or
as otherwise not comprehended within the purposes of sections
1311 to 1319.
Regarding the petition for approval of merger, MCL 500.7604(1) provides in
pertinent parts:
An insurer organized under the laws of this state and transacting
business under this act may consolidate or merge with or reinsure all
or any part of its outstanding risks for the purpose of effecting a
merger or consolidating with an insurer of generally like character
authorized to transact business in this state under terms that are
reasonable and just. "Consolidation" and "merger," as used in this
chapter, include a transaction where an insurer authorized to transact
business in this state, which is a wholly-owned subsidiary of a
controlling corporation, which need not be an insurer, distributes
shares of the capital stock of the controlling corporation in merging
another insurer into the subsidiary or in merging the subsidiary into
another insurer. If an insurer proposes to consolidate or merge with,
or reinsure all of the outstanding risk with, another
<PAGE> 5
Order No. 96-134-M
Page 5
insurer for the purpose of effecting a merger or consolidation, the
following procedure shall be followed:
(a) The insurers shall petition the commissioner, setting forth
the terms and conditions of the proposed consolidation,
merger, or agreement of reinsurance, to which the commissioner
may in his or her discretion grant preliminary, tentative, or
conditional approval.
(b) After securing the approval from the commissioner, the
insurers shall give notice, either personally or through
mailing at least 21 days before the time fixed for the
meeting, to the last known postal address of each stockholder,
subscriber, or member, that the question of the consolidation,
merger, or reinsurance will be voted upon at a regular or
special meeting of the stockholders, subscribers, or members,
which notice shall fairly but briefly describe the proposed
procedure.
(c) The consolidation, merger, or contract of reinsurance for the
purpose of effecting a merger or consolidation shall be
approved at the regular or special meeting held in pursuance
of the call and notice, by the affirmative vote of not less
than a majority of the members or subscribers voting in person
or by proxy if it is a mutual or a cooperative or assessment
corporation or a reciprocal or interinsurance exchange, or not
less than a majority of the outstanding capital stock, if it
is a stock company.
(d) The consolidation or merger agreement or contract of
reinsurance for the purpose of effecting a merger or
consolidation, together with proper proof that it has been
approved by the stockholders, subscribers, or members as
provided in this section, shall be submitted to the
commissioner for final approval. This contract shall not
become effective until the commissioner, in his or her
discretion, issues a certificate of final approval to the
petitioner. If the terms of the consolidation or merger or
reinsurance contract for the purpose of effecting a merger or
consolidation provide that securities shall pass to an insurer
assuming the liabilities for which the securities are held, a
public official, or other person or company holding the
securities shall upon the written order of the commissioner
deliver the securities to or credit the securities to the
account of the corporation, corporations, person, or persons
entitled to the securities by the terms of the contract and
the order of the commissioner.
MCL 500.7604(2) provides:
Consolidation, merger or reinsurance for the purpose of effecting a
merger or consolidation of all of the insurance risk of any membership
corporation under this section, shall act as a dissolution of the
corporation except in the case of a
<PAGE> 6
Order No. 96-134-M
Page 6
stock company which shall be dissolved in accordance with the business
corporation act, Act No. 284 of the Public Acts of 1972, being
sections 450.1101 to 450.2098 of the Michigan Compiled Laws. All
liability upon a stock company's certificates or contracts shall cease
upon the expiration of 5 days following the consolidation, merger, or
reinsurance for the purpose of effecting a merger or consolidation,
but its officers may thereafter perform any act or acts necessary to
close its affairs with the approval of the commissioner.
Section 804 of the business corporation act, MCL 450.1804 provides in pertinent
parts:
(1) A corporation may be dissolved by action of its board and
shareholders as provided in this section.
(2) A corporation's board may propose dissolution for action by the
shareholders.
(3) The board must recommend dissolution to the shareholders...
(4) The board may condition its submission of the proposal for
dissolution on any basis.
(5) The proposed dissolution shall be submitted for approval at a
meeting of shareholders...
(6) At the meeting a vote of shareholders shall be taken on the
proposed dissolution...
(7) If the dissolution is approved it shall be effected by the
execution and filing of a certificate of dissolution on behalf
of the corporation, setting forth all of the following:
(a) The name of the corporation.
(b) the date and place of the meeting of shareholders
approving the dissolution.
(c) A statement that dissolution was approved by the
requisite vote of the board and shareholders.
Regarding the voluntary termination of the certificate of authority of INSCO,
MCL 500.435(3) and (4) provide:
A certificate of authority at all times remains the property of the
state. Upon termination at the request of the insurer or revocation
by the commissioner, the
<PAGE> 7
Order No. 96-134-M
Page 7
certificate of authority shall be delivered promptly by the insurer
to the commissioner.
The commissioner shall not grant the request of an insurer to
terminate its certificate of authority as long as the insurer has any
obligations outstanding under a policy of insurance to policyholders
or claimants who are residents of this state unless...[the obligations
are secured]
A qualifying examination of INSCO was conducted on April 23, 1996 and it was
issued its final certificate of authority on May 6, 1996.
Review of Michigan Insurance Bureau corporate documents indicates both PICOM
and INSCO are property and casualty insurers organized under the laws of this
state, and authorized to transact the business of insurance in this state. No
one of PICOM's current stockholders owns 10% or more of its issued and
outstanding common stock. INSCO is wholly-owned by Holding Company.
PICOM, in its filings, indicates that the proposed reorganization:
1. will not cause a change in PICOM's current management,
officers, directors and operations,
2. will not change the proportionate interests of PICOM's
stockholders in the operations, financial condition or
earnings of PICOM, and
3. the books, accounts and records of PICOM, Holding Company, and
INSCO will be maintained so as to clearly and accurately
disclose the precise nature and details of the contemplated
transactions, and
4. the capital and surplus of PICOM will be essentially the same
except for a $2 million dividend from earned surplus to
Holding Company.
The Staff of the Michigan Insurance Bureau ("Staff") has conducted a review of
the financial condition of PICOM, and the overall plan, including proposed
loan, dividend and (temporary) pledge of stock, concluding:
1. The post-merger dividend is not extraordinary and the
intercompany loan is not material pursuant to MCL 500.1343 and
1341, respectively, and therefore do not require prior
Insurance Bureau approval.
2. In addition, PICOM will remain in compliance with Section 403
and will continue to be safe, reliable and entitled to public
confidence after the merger and related transactions.
<PAGE> 8
Order No. 96-134-M
Page 8
Staff has reviewed the Reorganization Agreement, the Plan of Merger, and other
related materials filed in this matter, and existing Insurance Bureau records.
The terms of the Reorganization Agreement and the Plan of Merger appear to be
reasonable and just. Staff recommends preliminary approval of the proposed
merger in accordance with the terms of the Reorganization Agreement and the
Plan of Merger.
PICOM indicates that it will, in essence, remain unchanged under the PICOM
Reorganization Proposal, and the proportionate interests of its stockholders
will remain the same, except on an indirect basis. Staff therefore recommends
that the Commissioner find the transactions contemplated under the PICOM
Reorganization Proposal to be exempt from the disclosure and filing
requirements of MCL 500.1311 to 1319, and not within the meaning of control as
that term is defined in MCL 500.115.
III
FINDINGS OF FACT AND CONCLUSIONS OF LAW
Based upon the materials filed in this matter and review of existing Insurance
Bureau records, the Commissioner FINDS and CONCLUDES that:
1. PICOM is a domestic insurer
2. The PICOM Reorganization Proposal:
a. will not cause a change in PICOM's current management,
officers, directors and operations,
b. will not change the proportionate interests of PICOM's
stockholders in the operations, financial condition or
earnings of PICOM, and
c. the books, accounts and records of PICOM, Holding Company, and
INSCO will be maintained so as to clearly and accurately
disclose the precise nature and details of the contemplated
transactions, and
d. the capital and surplus of PICOM will be essentially the same
after merger as before, except for a $2 million dividend from
earned surplus to Holding Company.
3. The Commissioner has jurisdiction and authority to approve the merger
of INSCO with and into PICOM pursuant to the provisions of MCL
500.7604.
4. Both PICOM and INSCO are property and casualty insurers organized
under the laws of this state, and authorized to transact the business
of insurance in this state.
<PAGE> 9
Order No. 96-134-M
Page 9
5. The conclusions of Staff cited in the analysis above, regarding the
financial aspects of the PICOM Reorganization Proposal, are
incorporated herein by reference as findings of fact.
6. The terms of the Reorganization Agreement and the Plan of Merger are
reasonable and just.
7. Upon preliminary approval by the Commissioner, the Reorganization
Agreement and the Plan of Merger require notice to, and approval by,
the shareholders of PICOM and INSCO, pursuant to the provisions of MCL
500.7604(1)(b) and (c).
8. The Commissioner has jurisdiction and authority to terminate the
certificate of authority of INSCO pursuant to MCL 500.435(2) upon
effect of the merger. Because INSCO is formed for the sole purpose of
facilitating the proposed merger, and has stipulated it will not
engage in any insurance activities or issue any insurance policies or
assume any insurance risk, there will be no policyholder obligations
to be secured, making the provisions of MCL 500.435(4) a moot
controversy
9. The certificate of authority of INSCO should be terminated effective
as of the effective date of the merger of INSCO with and into PICOM as
contemplated by the Reorganization Agreement and the Plan of Merger.
10. INSCO shall be dissolved effective with the execution of its
certificate of dissolution by its Board of Directors pursuant to the
provisions of MCL 500.7604(2). The certificate of dissolution must be
filed with the Commissioner.
11. The PICOM Reorganization Proposal, as regards the acquisition of PICOM
Insurance Company of Illinois, requires approval or exemption by the
Illinois Director of Insurance.
12. The Form S-4 registration statement (registration no. 333-3138) filed
under the Securities Act of 1933, as amended, by Holding Company for
the shares of Holding Company common stock, to be issued to holders of
PICOM common stock upon consummation of the merger of INSCO with and
into PICOM as contemplated by the Reorganization Agreement and the
Plan of Merger must be declared effective by the Securities and
Exchange Commission pursuant to the Securities Act of 1933, as
amended.
IV
ORDER
It is therefore ORDERED that:
<PAGE> 10
Order No. 96-134-M
Page 10
1. Pursuant to MCL 500.1317(a), the provisions of MCL 500.1311 to 1319 do
not apply to the transactions contemplated by the PICOM Reorganization
Proposal, which transactions are subject to the provisions of Chapter
76 of the Michigan Insurance Code of 1956, as amended.
2. Pursuant to MCL 500.1317(b), the transactions contemplated by the
PICOM Reorganization Proposal are exempt as not having been made or
entered into for the purpose and not having the effect of changing or
influencing the control of PICOM within the purposes of MCL 500.1311
to 1319.
3. Preliminary approval of the merger of INSCO with and into PICOM, in
accordance with the terms and conditions of the Reorganization
Agreement and the Plan of Merger is hereby granted, to be effective
not later than 11:59 p.m. Eastern Time on the third business day
following the "Closing Date" as defined in Section 2.1 of the
Reorganization Agreement.
4. This preliminary approval, and any final approval yet to be granted,
are specifically conditioned on the following:
a. Submission of evidence of notice to the stockholders of PICOM
and INSCO pursuant to MCL 500.7604(1)(b), and evidence of
approval of the Reorganization Agreement and the Plan of
Merger by a vote of not less than a majority of the
outstanding capital stock of PICOM and INSCO pursuant to MCL
500.7604(1)(c) and (d).
b. Submission of final, executed copies of the Reorganization
Agreement, Plan of Merger, Note, and Pledge Agreement.
c. Submission of evidence of approval or exemption of the PICOM
Reorganization Proposal by the Illinois Director of Insurance
as regards the acquisition of PICOM Insurance Company of
Illinois.
d. Submission of the final Form S-4 registration statement
(registration no. 333-3138) of Holding Company, as declared
effective by the Securities and Exchange Commission pursuant
to the Securities Act of 1933, as amended.
e. Submission of the Michigan certificate of authority of INSCO
dated May 6, 1996, to be terminated.
f. Submission of evidence that the board of INSCO has taken all
actions under Section 804 of the Michigan Business Corporation
Act, as referenced in MCL 500.7604(2), including submission of
the board's executed certificate of dissolution.
<PAGE> 11
Order No. 96-134-M
Page 11
/s/ D. Joseph Olson
-------------------------------------
D. Joseph Olson
Commissioner of Insurance
<PAGE> 1
[MILLER, CANFIELD, PADDOCK AND STONE, P.L.C. LETTERHEAD]
June 10, 1996
Professionals Insurance Company EXHIBIT (5)(a)
Management Group CONFORMED COPY
4295 Okemos Road FILED WITH SEC
Okemos, Michigan 48864
Re: Professionals Insurance Company Management Group
Registration Statement on Form S-4
Registration No. 333-3138
Ladies and Gentlemen:
We have acted as counsel to Professionals Insurance Company Management
Group, a Michigan corporation ("Holding Company"), and, at the request of
Holding Company, have examined the registration statement on Form S-4, as
amended (registration no. 333-3138) (the "Registration Statement"), filed by
Holding Company with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended and the regulations thereunder
(the "Act"). All capitalized terms not otherwise defined herein are defined
herein as in the Registration Statement.
The Registration Statement relates to, among other things, the
registration under the Act of 3,118,145 shares of Holding Company common stock,
no par value per share ("Holding Company Common Stock"), to be issued to
shareholders of PICOM Insurance Company, a Michigan stock insurance corporation
("PICOM"), upon consummation of the merger (the "Merger") of PICOM Interim
Insurance Company, a Michigan stock insurance company and wholly-owned
subsidiary of Holding Company ("Insurance Subsidiary"), with and into PICOM and
the other transactions. The Merger and such other transactions are to be
consummated pursuant to (i) the Reorganization Agreement dated May 13, 1996
(the "Reorganization Agreement") among Holding Company, Insurance Subsidiary,
and PICOM, and (ii) an Agreement and Plan of Merger dated May 13, 1996 (the
"Plan of Merger") among Holding Company, Insurance Subsidiary and PICOM, and
(iii) certain related instruments and agreements executed, or to be executed,
in connection with the Reorganization Agreement and the Plan of Merger (the
"Related Instruments").
It is our understanding that upon consummation of the Merger, among
other things, (i) PICOM will become a wholly-owned subsidiary
<PAGE> 2
[MILLER, CANFIELD, PADDOCK AND STONE, P.L.C. LOGO]
Professionals Insurance Company
Management Group -2- June 10, 1996
of Holding Company; and (ii) holders of common stock, $1.00 par value per
share, of PICOM (the "PICOM Common Stock"), will receive one share of Holding
Company Common Stock for each share of PICOM Common Stock held.
In the preparation of this opinion, we have examined originals or
copies identified to our satisfaction of (i) the First Amended and Restated
Articles of Incorporation of Holding Company, and all amendments thereto, as
filed with the State of Michigan, (ii) the Bylaws of Holding Company, (iii)
certain minutes of Holding Company made available to us by officers of Holding
Company, (iv) certain certificates from officers of Holding Company as to
certain factual matters material to the opinion expressed below, (v) the
Articles of Incorporation of Insurance Subsidiary as filed with the State of
Michigan, (vi) the Bylaws of Insurance Subsidiary, (vii) certain minutes of
Insurance Subsidiary made available to us by officers of Insurance Subsidiary,
(viii) certain certificates from officers of Insurance Subsidiary as to certain
factual matters material to the opinion expressed below, (ix) the Articles of
Incorporation of PICOM, and all amendments thereto, as filed with the State of
Michigan, (x) the Bylaws of PICOM, (xi) certain minutes of PICOM as made
available to us by officers of PICOM, (xii) certain certificates from officers
of PICOM as to certain factual matters material to the opinion expressed below,
and (xiii) the Registration Statement, including the exhibits thereto. We have
also examined originals or copies of such documents, corporate records,
certificates of public officials and other instruments, and have conducted such
other investigations of law and fact, as we have deemed necessary or advisable
for purposes of our opinion.
In our examinations, we have assumed, without investigation, the
genuineness of all signatures, the authenticity of all documents and
instruments submitted to us as originals, the conformity to the originals of
all documents and instruments submitted to us as certified or conformed copies
and the authenticity of the originals of such copies, the correctness of all
certificates, and the accuracy and completeness of all records, documents,
instruments and materials made available to us by Holding Company, Insurance
Subsidiary and/or PICOM.
In addition, in rendering this opinion we have assumed, without
investigation, (i) that the shares of Holding Company Common Stock will be
offered in the manner and on the terms identified or referred to in the
Registration Statement, (ii) that all conditions to and of the Merger have
been, or will be, met, and (iii) that the Merger will be consummated in
accordance with the terms of the Registration Statement, the Reorganization
Agreement, the Plan of Merger and the Related Instruments. We have also
relied, without independent investigation, upon the representations
<PAGE> 3
[MILLER, CANFIELD, PADDOCK AND STONE, P.L.C. LOGO]
Professionals Insurance Company
Management Group -3- June 10, 1996
and warranties of the parties to the Reorganization Agreement set forth in the
Reorganization Agreement.
Our opinion is limited to the matters set forth herein and we express
no opinion other than as expressly set forth herein. Our opinion is expressed
as the date hereof and is based on laws currently in effect. Accordingly, the
conclusions set forth in this opinion are subject to change in the event that
any laws should change or be enacted in the future. We are under no obligation
to update this opinion or to otherwise communicate with you in the event of any
such change.
Based upon and subject to the foregoing, and assuming (i) the
Registration Statement becomes and remains effective under the Act and fully
complies with all of the requirements of the Act and the Securities Exchange
Act of 1934, as amended, and the regulations thereunder (the "Exchange Act")
during all relevant periods, (ii) the Proxy Statement/Prospectus, and the
delivery procedures with respect thereto, fulfill all requirements of the Act
and the Exchange Act throughout all relevant periods, (iii) compliance with all
federal and state securities laws throughout all relevant periods, (iv) the
Merger has become effective under applicable state law, and (v) the shares of
Holding Company Common Stock are issued and delivered in the manner referred to
in the Reorganization Agreement, the Plan of Merger and the Registration
Statement, it is our opinion that upon consummation of the Merger the shares of
Holding Company Common Stock to be issued to holders of shares of PICOM Common
Stock in connection with the Merger, when issued, will be validly issued, fully
paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the Proxy Statement/Prospectus forming a part of the Registration
Statement. In giving such consent we do not hereby admit that we are within
the category of persons whose consent is required under Section 7 of the Act or
the rules or regulations of the Securities and Exchange Commission thereunder.
Sincerely,
Miller, Canfield, Paddock and
Stone, P.L.C.
caj
<PAGE> 1
[MILLER, CANFIELD, PADDOCK AND STONE, P.L.C. LETTERHEAD]
June 10, 1996
Professionals Insurance Company EXHIBIT (8)(a)
Management Group CONFORMED COPY
4295 Okemos Road FILED WITH SEC
Okemos, Michigan 48864
Re: Professionals Insurance Company Management Group
Registration Statement on Form S-4
Registration No. 333-3138
Ladies and Gentlemen:
We have acted as counsel to Professionals Insurance Company Management
Group, a Michigan corporation ("Holding Company"), in connection with the
contemplated merger (the "Merger") of PICOM Interim Insurance Company, a
Michigan stock insurance corporation and wholly-owned subsidiary of Holding
Company ("Insurance Subsidiary"), with and into PICOM Insurance Company, a
Michigan stock insurance company ("PICOM"). The Merger, and certain related
transactions, will be undertaken pursuant to the Michigan Insurance Code of
1956, as amended (the "Michigan Insurance Code"), a Reorganization Agreement
dated May 13, 1996 (the "Reorganization Agreement") among Holding Company,
Insurance Subsidiary and PICOM, and an Agreement and Plan of Merger dated May
13, 1996 (the "Plan of Merger") among Holding Company, Insurance Subsidiary and
PICOM. Our opinion is provided solely with respect to certain federal income
tax consequences of the Merger. This opinion is being delivered at your
request and pursuant to Section 5.1(m) of the Reorganization Agreement. (All
capitalized terms used herein, unless otherwise specified, have the meanings
assigned to them in the Reorganization Agreement.)
DESCRIPTION OF TRANSACTION
The Michigan Insurance Code, the Reorganization Agreement and the Plan of
Merger essentially provide for the merger of Insurance
<PAGE> 2
[MILLER, CANFIELD, PADDOCK AND STONE, P.L.C. LOGO]
Professionals Insurance Company
Management Group -2- June 10, 1996
Subsidiary with and into PICOM, and the conversion of each issued and
outstanding share of PICOM Common Stock into one share of Holding Company
Common Stock. Upon consummation of the Merger, (i) PICOM would succeed to all
of the assets and liabilities of Insurance Subsidiary, (ii) the 1,000,000
outstanding shares of common stock of Insurance Subsidiary would be converted
into 3,144,145 outstanding shares of the common stock of PICOM, $1.00 par value
per share ("PICOM Common Stock"), and (iii) each issued and outstanding share
of PICOM Common Stock held by the former shareholders of PICOM would be
converted, by operation of the Merger, into one share of Holding Company Common
Stock. Consequently, PICOM, as the surviving insurance corporation, would
become a wholly-owned subsidiary of Holding Company and PICOM's former
shareholders would become shareholders of Holding Company (which would then be
a publicly-held corporation). Moreover, since Insurance Subsidiary is a newly
created shell corporation with limited assets and no liabilities, PICOM,
post-merger, would be the same entity, practically as well as legally, as
PICOM, pre-merger. PICOM would remain a stock insurance company organized
under, and subject to, the Michigan Insurance Code.
In order to effect the PICOM Reorganization Proposal, Holding Company was
incorporated on January 31, 1996 under the Michigan Business Corporation Act,
as amended, for the express purpose of acquiring all of the issued and
outstanding capital stock of PICOM and serving as the holding company for PICOM
and its subsidiaries. In connection with the incorporation of Holding Company,
and for the purposes of organizing Holding Company and enabling it to form
Insurance Subsidiary and enter into the Reorganization Agreement and the Plan
of Merger, one share of Holding Company Common Stock was issued to Victor T.
Adamo, a Director and the President and Chief Executive Officer of PICOM, for
$25.00. In addition, Holding Company caused Insurance Subsidiary to be
incorporated under the Michigan Insurance Code for the sole purpose of merging
with and into PICOM. (It is to be noted that Insurance Subsidiary will not
engage in any insurance activities or issue any insurance policies or assume
any insurance risk.)
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 Insurance
Subsidiary in accordance with the Michigan Insurance Code. Holding Company
invested all of that sum in Insurance Subsidiary in exchange for all of the
issued and outstanding shares of capital stock of Insurance Subsidiary.
Insurance Subsidiary invested the $1,500,000 in United States government
obligations with maturities of less than one year (the
<PAGE> 3
[MILLER, CANFIELD, PADDOCK AND STONE, P.L.C. LOGO]
Professionals Insurance Company
Management Group -3- June 10, 1996
"Insurance Subsidiary 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 of the Merger or December 31, 1996 (the
"Note"). The Note is secured by a pledge of all of the issued and outstanding
shares of Insurance Subsidiary. Interest on the Note accrues at a rate
equivalent to the rate of interest paid on the Insurance Subsidiary Investment.
Upon consummation of the Merger, the Insurance Subsidiary 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 to fund the initial operations of Holding Company.
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.
FACTUAL ASSUMPTIONS, REPRESENTATIONS AND LIMITATIONS
In rendering our opinion, we have examined and relied upon, and our
opinion is conditioned upon the accuracy and completeness of, the facts,
information, covenants and representations contained herein and in originals or
copies, certified or otherwise identified to our satisfaction, of the
Reorganization Agreement, the Plan of Merger and the Registration Statement on
Form S-4, as amended (registration no. 333- 3138) (the "Registration
Statement"), filed by Holding Company under the Securities Act of 1933, as
amended, with respect to the shares of Holding Company common stock, no par
value per share ("Holding Company Common Stock"), to be issued to holders of
shares of PICOM common stock, $1.00 par value per share ("PICOM Common Stock"),
upon consummation of the Merger. We have also examined such other documents as
we have deemed necessary or appropriate as a basis for the opinion set forth
below. We have assumed, without investigation, the genuineness of all
signatures, the authenticity of all documents and instruments submitted to us
as originals, the conformity to the originals of all documents and instruments
submitted to us as certified or conformed copies and the authenticity of the
originals of such copies, the correctness of all certificates, and the accuracy
and completeness of all records, documents, instruments and materials made
available to us by Holding Company, Insurance Subsidiary and/or PICOM. We also
have assumed that the Merger will be consummated in accordance with the
Reorganization Agreement and the Plan of Merger and that the Merger will
qualify as a merger under applicable state law.
<PAGE> 4
[MILLER, CANFIELD, PADDOCK AND STONE, P.L.C. LOGO]
Professionals Insurance Company
Management Group -4- June 10, 1996
In addition, we have relied upon, and this opinion is expressly
conditioned on the accuracy of, certain representations made to us by PICOM,
Holding Company and Insurance Subsidiary (including, the representations
contained in the attached representation certificates from PICOM, Holding
Company and Insurance Subsidiary). We have assumed, without independent
verification, that said representations are true in all material respects as of
the date hereof.
OPINION
In order to qualify as a tax-free reorganization, a transaction must
satisfy certain statutory requirements set forth in the Internal Revenue Code
of 1986, as amended (the "Code"), and several judicially-created requirements
which have been developed through court rulings and Internal Revenue Service
interpretations. For example, it is well established that in order for the
proposed Merger to be treated as a tax- free reorganization under Section 368
of the Code, the transaction must satisfy a "continuity of shareholder
interest" requirement, a "continuity of business enterprise" requirement, and a
"business purpose" requirement. Based upon our review of certain
representations and documentation concerning the proposed Merger, we believe
that the applicable statutory and judicial requirements will be satisfied.
Based upon the foregoing, and subject to the qualifications, if any that
follow, we are of the opinion that under current law:
(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 Insurance Subsidiary, 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 Insurance Subsidiary 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.
<PAGE> 5
[MILLER, CANFIELD, PADDOCK AND STONE, P.L.C. LOGO]
Professionals Insurance Company
Management Group -5- June 10, 1996
(iv) No gain or loss will be recognized by Insurance Subsidiary 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 Insurance Subsidiary 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 parties do not intend to submit a ruling request regarding the
transaction to the National Office of the Internal Revenue Service. The
foregoing opinion is NOT binding upon the Internal Revenue Service.
In rendering our opinion, we have considered the applicable provisions of
the Code, Treasury Regulations and Proposed Treasury Regulations promulgated
thereunder, pertinent judicial authorities, interpretive rulings of the IRS and
such other authorities as we have considered relevant. It should be noted that
statutes, regulations, judicial decisions and administrative interpretations
are subject to change at any time and, in some circumstances, with retroactive
effect. A material change in the authorities upon
<PAGE> 6
[MILLER, CANFIELD, PADDOCK AND STONE, P.L.C. LOGO]
Professionals Insurance Company
Management Group -6- June 10, 1996
which our opinion is based could affect our conclusions. However, we assume no
obligation to revise or supplement this opinion if any subsequent change were
to occur.
The opinion set forth above is limited to the Federal law of the United
States of America and the laws of the State of Michigan. We express no opinion
as to any matter not addressed herein and no opinion as to matters addressed
herein other than as expressly set forth herein. Accordingly, and except as
expressly set forth above, we express no opinion as to the tax consequences,
whether federal, state, local or foreign, of the Merger, or of any transactions
related thereto.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Certain
Federal Income Tax Consequences" in the Proxy Statement/Prospectus forming a
part of the Registration Statement. In giving such consent we do not hereby
admit that we are within the category of persons whose consent is required
under Section 7 of the Act or the rules or regulations of the Securities and
Exchange Commission thereunder.
Sincerely,
Miller, Canfield, Paddock and
Stone, P.L.C.
<PAGE> 7
REPRESENTATION CERTIFICATE
OF
PICOM INSURANCE COMPANY
PICOM Insurance Company, a Michigan stock insurance corporation ("PICOM"),
makes the following representations to Miller, Canfield, Paddock and Stone,
P.L.C. for use by Miller, Canfield, Paddock and Stone, P.L.C. in rendering its
opinion relative to certain federal income tax consequences of the merger (the
"Merger") of PICOM Interim Insurance Company, a Michigan stock insurance
company ("Insurance Subsidiary") and wholly-owned subsidiary of Professionals
Insurance Company Management Group, a Michigan corporation ("Holding Company"),
with and into PICOM. The Merger, and certain related transactions, will be
undertaken pursuant to a Reorganization Agreement dated May 13, 1996 among
Holding Company, Insurance Subsidiary and PICOM and an Agreement and Plan of
Merger dated May 13, 1996 among Holding Company, Insurance Subsidiary and
PICOM. Upon consummation of the Merger, holders of shares of PICOM common
stock, $1.00 par value per share ("PICOM Common Stock"), will receive one (1)
share of Holding Company common stock, no par value per share ("Holding Company
Common Stock"), in exchange for each issued and outstanding share of PICOM
Common Stock held by them. PICOM acknowledges and agrees that each of the
following representations constitutes a material representation to be relied
upon by Miller, Canfield, Paddock and Stone, P.L.C. in rendering its opinion,
and any material inaccuracy in any of the following representations may render
the conclusions stated in the opinion of Miller, Canfield, Paddock and Stone,
P.L.C. incorrect.
1. The fair market value of the shares of Holding Company Common Stock
and other consideration to be received by each shareholder of PICOM will be
approximately equal to the fair market value of the shares of PICOM Common
Stock to be surrendered in the Merger.
2. To the knowledge of PICOM there is no plan or intention by the
shareholders of PICOM to sell, exchange, or otherwise dispose of a number of
shares of Holding Company Common Stock to be received in the Merger that would
reduce PICOM shareholders' ownership of Holding Company Common Stock to a
number of shares having a value, as of the date of the Merger, of less than 50
percent of the value of all of the formerly outstanding shares of PICOM Common
Stock as of the same date. For purposes of this representation, shares of
PICOM Common Stock exchanged for cash in lieu of fractional shares of Holding
Company Common Stock will be treated as outstanding shares of PICOM Common
Stock on the date of the Merger. Moreover, shares of PICOM Common Stock and
shares of Holding Company Common Stock held by PICOM shareholders and otherwise
sold, redeemed, or disposed of prior or subsequent to the Merger will be
considered in making this representation.
-1-
<PAGE> 8
3. Immediately following the Merger, PICOM (i) will hold at least 90
percent of the fair market value of its net assets and at least 70 percent of
the fair market value of its gross assets held by PICOM immediately prior to
the Merger, and (ii) will hold at least 90 percent of the fair market value of
Insurance Subsidiary's net assets and at least 70 percent of the fair market
value of Insurance Subsidiary's gross assets held by Insurance Subsidiary
immediately prior to the Merger. For purposes of this representation, amounts
used by PICOM to pay reorganization expenses, and all redemptions and
distributions made by PICOM will be included as assets of PICOM immediately
prior to the Merger.
4. PICOM has no plan or intention to issue additional shares of PICOM
Common Stock that would result in Holding Company losing "control" (within the
meaning of Section 368(c) of the Internal Revenue Code, as amended (the
"Code")) of PICOM immediately following the Merger.
5. PICOM and the shareholders of PICOM will pay their respective
expenses, if any, incurred in connection with the Merger.
6. There is no intercorporate indebtedness existing between PICOM and
Holding Company or between Insurance Subsidiary and PICOM that was issued, or
was acquired, or will be settled, at a discount.
7. In the Merger, shares of PICOM Common Stock representing "control"
(within the meaning of Section 368(c) of the Code) of PICOM will be exchanged
solely for voting stock of Holding Company. For purposes of this
representation, shares of PICOM Common Stock exchanged for cash or other
property originating with Holding Company will be treated as outstanding shares
of PICOM Common Stock on the date of the Merger.
8. At the time of the Merger, PICOM will not have outstanding any
warrants, options, convertible securities, or any other type of right pursuant
to which any person could acquire stock in PICOM that, if exercised or
converted, would affect Holding Company's acquisition or retention of "control"
(within the meaning of Section 368(c) of the Code) of PICOM immediately
following the Merger.
9. PICOM is not an investment company as defined in Section 368(a)(2)(F)
(iii) and (iv) of the Code.
10. On the date of the Merger, the fair market value of the assets of
PICOM will exceed the sum of its liabilities, plus the amount of liabilities,
if any, to which its assets are subject.
-2-
<PAGE> 9
11. PICOM is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code.
PICOM INSURANCE COMPANY
By: /s/ Victor T. Adamo Date: June 10, 1996
-----------------------------
Victor T. Adamo
Its: President and
Chief Executive Officer
-3-
<PAGE> 10
REPRESENTATION CERTIFICATE
OF
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
AND
PICOM INTERIM INSURANCE COMPANY
Professionals Insurance Company Management Group, a Michigan corporation
("Holding Company"), and PICOM Interim Insurance Company, a Michigan stock
insurance company and wholly-owned subsidiary of Holding Company ("Insurance
Subsidiary"), make the following representations to Miller, Canfield, Paddock
and Stone, P.L.C. for use by Miller, Canfield, Paddock and Stone, P.L.C. in
rendering its opinion relative to certain federal income tax consequences of
the merger (the "Merger") of Insurance Subsidiary with and into PICOM Insurance
Company, a Michigan stock insurance company ("PICOM"). The Merger, and certain
related transactions, will be undertaken pursuant to a Reorganization Agreement
dated May 13, 1996 among Holding Company, Insurance Subsidiary and PICOM and an
Agreement and Plan of Merger dated May 13, 1996 among Holding Company,
Insurance Subsidiary and PICOM. Upon consummation of the Merger, holders of
shares of PICOM common stock, $1.00 par value per share ("PICOM Common Stock"),
will receive one (1) share of Holding Company common stock, no par value per
share ("Holding Company Common Stock"), in exchange for each issued and
outstanding share of PICOM Common Stock held by them. Holding Company and
Insurance Subsidiary acknowledge and agree that each of the following
representations constitutes a material representation to be relied upon by
Miller, Canfield, Paddock and Stone, P.L.C. in rendering its opinion, and any
material inaccuracy in any of the following representations may render the
conclusions stated in the opinion of Miller, Canfield, Paddock and Stone,
P.L.C. incorrect.
1. The fair market value of the shares of Holding Company Common Stock
and other consideration to be received by each shareholder of PICOM will be
approximately equal to the fair market value of the shares of PICOM Common
Stock to be surrendered in the Merger.
2. To the knowledge of Holding Company and Insurance Subsidiary there is
no plan or intention by the shareholders of PICOM to sell, exchange, or
otherwise dispose of a number of shares of Holding Company Common Stock to be
received in the Merger that would reduce the PICOM shareholders' ownership of
Holding Company Common Stock to a number of shares having a value, as of the
date of the Merger, of less than 50 percent of the value of all of the formerly
outstanding shares of PICOM Common Stock as of the same date. For purposes of
this representation, shares of PICOM Common Stock exchanged for cash in lieu of
fractional shares of Holding Company Common Stock will be treated as
outstanding shares of PICOM Common Stock on the date of the Merger. Moreover,
shares of PICOM Common Stock and shares of Holding Company Common Stock held by
PICOM shareholders and otherwise sold, redeemed, or disposed of
-1-
<PAGE> 11
prior or subsequent to the Merger will be considered in making this
representation.
3. Immediately following the Merger, PICOM (i) will hold at least 90
percent of the fair market value of its net assets and at least 70 percent of
the fair market value of its gross assets held by PICOM immediately prior to
the Merger, and (ii) will hold at least 90 percent of the fair market value of
Insurance Subsidiary's net assets and at least 70 percent of the fair market
value of Insurance Subsidiary's gross assets held by Insurance Subsidiary
immediately prior to the Merger. For purposes of this representation, amounts
used by Holding Company or Insurance Subsidiary to pay reorganization expenses,
and all redemptions and distributions (except for regular normal dividends)
made by Holding Company will be included as assets of Holding Company or
Insurance Subsidiary, respectively, immediately prior to the Merger.
4. Prior to the Merger, Holding Company will be in "control" (within the
meaning of Section 368(c) of the Internal Revenue Code of 1986, as amended (the
"Code")) of Insurance Subsidiary. Immediately following the Merger, Holding
Company will be in "control" (within the meaning of Section 368(c) of the Code)
of PICOM.
5. Neither Holding Company nor Insurance Subsidiary has any plan or
intention to issue additional shares of its stock that would result in Holding
Company losing "control" (within the meaning of Section 368(c) of the Code) of
PICOM immediately following the Merger.
6. Holding Company has no current plan or intention to reacquire any of
the specific shares of Holding Company Common Stock to be issued in the Merger.
7. Holding Company has no plan or intention to (i) liquidate PICOM, (ii)
merge PICOM with or into any corporation other than Insurance Subsidiary, (iii)
sell or otherwise dispose of any stock of PICOM except for transfers of stock
to corporations controlled by Holding Company, or (iv) cause PICOM to sell or
otherwise dispose of any of its assets or of any of the assets acquired from
Insurance Subsidiary, except for dispositions made in the ordinary course of
business or transfers of assets to a corporation controlled by Holding Company.
8. All liabilities of Insurance Subsidiary to be assumed by PICOM upon
consummation of the Merger, if any, and all liabilities, if any, encumbering
assets of Insurance Subsidiary that are to be transferred to PICOM upon
consummation of the Merger, were incurred by Insurance Subsidiary in the
ordinary course of business.
9. Following the Merger, PICOM will continue its historic business or
use a significant portion of its assets in a historic business.
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<PAGE> 12
10. Holding Company and Insurance Subsidiary will pay their respective
expenses, if any, incurred in connection with the Merger. PICOM will not pay
any of the expenses of Insurance Subsidiary (except to the extent it pays such
expenses in its capacity as the surviving corporation of the Merger) or of the
shareholders of Holding Company or Insurance Subsidiary.
11. There is no intercorporate indebtedness existing between PICOM and
Holding Company or between Insurance Subsidiary and PICOM that was issued, or
was acquired, or will be settled, at a discount.
12. In the Merger, shares of PICOM Common Stock representing "control"
(within the meaning of Section 368(c) of the Code) of PICOM will be exchanged
solely for voting stock of Holding Company. For purposes of this
representation, shares of PICOM Common Stock exchanged for cash or other
property originating with Holding Company will be treated as outstanding PICOM
Common Stock on the date of the Merger.
13. At the time of the Merger, none of Holding Company, Insurance
Subsidiary and PICOM will have outstanding any warrants, options, convertible
securities, or any other type of right pursuant to which any person could
acquire stock in PICOM that, if exercised or converted, would affect Holding
Company's acquisition or retention of "control" (within the meaning of Section
368(c) of the Code) of PICOM immediately following the Merger.
14. Holding Company does not directly own, nor has it directly owned
during the past five years, any shares of the stock of PICOM.
15. The undersigned are not investment companies as defined in Section
368(a)(2)(F)(iii) and (iv) of the Code.
16. The fair market value of the assets of Insurance Subsidiary
transferred to PICOM upon consummation of the Merger will equal or exceed the
sum of the liabilities assumed by PICOM, plus the amount of liabilities, if
any, to which the transferred assets are subject. On the date of the Merger,
the fair market value of the assets of PICOM will exceed the sum of its
liabilities, plus the amount of liabilities, if any, to which the assets are
subject.
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17. The undersigned are not under the jurisdiction of a court in a Title
11 or similar case within the meaning of Section 368(a)(3)(A) of the Code.
PROFESSIONALS INSURANCE COMPANY
MANAGEMENT GROUP
By: /s/ Victor T. Adamo Date June 10, 1996
---------------------------------
Victor T. Adamo
Its: President and
Chief Executive Officer
PICOM INTERIM INSURANCE SUBSIDIARY
By: /s/ Victor T. Adamo Date June 10, 1996
---------------------------------
Victor T. Adamo
Its: President
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<PAGE> 1
EXHIBIT (10)(c)
CONFORMED COPY FILED WITH SEC
AS ADOPTED
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
1996 LONG TERM STOCK INCENTIVE PLAN
Section 1. Purposes
The general purposes of this 1996 Long Term Stock Incentive Plan (the
"Plan") are to encourage selected employees of and consultants to Professionals
Insurance Company Management Group (the "Company") and its Affiliates (as
hereinafter defined) to acquire a proprietary interest in the Company in order
to create an increased incentive to contribute to the Company's future success
and prosperity, and to enhance the ability of the Company and its Affiliates to
attract and retain exceptionally qualified individuals upon whom the sustained
progress, growth, and profitability of the Company depend, thus enhancing the
value of the Company for the benefit of its stockholders.
Section 2. Certain Additional Definitions
The following terms have the following respective meanings under the
Plan:
"Affiliate" means any entity in which the Company directly or
indirectly has a significant equity interest under generally accepted
accounting principles and any other entity in which the Company has a
significant direct or indirect equity interest as determined by the
Committee.
"Award" means any Option, Stock Appreciation Right, Restricted
Stock, Restricted Stock Unit, Performance Award, Dividend Equivalent,
or Other Stock-Based Award granted under the Plan.
"Award Agreement" means a written agreement, contract, or
other instrument or document evidencing an Award.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means a committee of the Company's directors
designated by the Board to administer the Plan and composed of not
less than two directors, each of whom is a "disinterested person"
within the meaning of Rule 16b-3, or, to the extent provided in
Section 3 of the Plan, another director or group of directors to whom
authority has been delegated pursuant to Section 3(m).
<PAGE> 2
"Disability" means, with respect to a given Participant at a
given time, any medically determinable physical or mental impairment
that the Committee, on the basis of competent medical evidence,
reasonably determines has rendered or will render the Participant
permanently and totally disabled with the meaning of Section 422(c)(6)
of the Code (or such successor section as is in effect at the time).
"Dividend Equivalent" means a right granted under Section 6(f)
of the Plan.
"Effective Time" means the Effective Time as defined in the
Reorganization Agreement dated May 13, 1996 among the Company, PICOM
Interim Insurance Company and PICOM Insurance Company.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Fair Market Value" means, with respect to a Share on a given
date: (a) if the Shares are listed for trading on a national
securities exchange (including, for this purpose, the National Market
System ("NMS") of the National Association of Securities Dealers
Automated Quotation System ("NASDAQ")) on such date, the closing Share
price on such exchange (or, if there is more than one, the principal
such exchange), or, for the NMS, the last sale price, on the day
immediately preceding the date as of which Fair Market Value is being
determined, or on the next preceding day on which Shares were there
traded if no Shares were traded on the immediately preceding day; (b)
if the Shares are not listed for trading on any securities exchange
(including the NMS) on such date but are reported by NASDAQ, and
market information concerning the Shares is published on a regular
basis in The New York Times or The Wall Street Journal, the average of
the daily bid and asked prices of the Shares, as so published, on the
day nearest preceding the date in question for which such prices were
published; (c) if (a) is inapplicable and market information
concerning the Shares is not regularly published as described in (b),
the average of the high bid and low asked prices of the Shares in the
over-the-counter market on the day nearest preceding the date in
question as recorded by NASDAQ (or, if NASDAQ does not record such
prices for the Shares, another generally accepted reporting service);
or (d) if none of the foregoing are applicable, the fair market value
of a Share as of the date in question, as determined by the Committee.
"Incentive Stock Option" means an Option that meets the
requirements of Section 422 of the Code (or any successor provision in
effect at a relevant time) and that is identified as intended to be an
Incentive Stock Option in the Award Agreement evidencing the Option.
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<PAGE> 3
"Non-Qualified Stock Option" means an Option that is not an
Incentive Stock Option.
"Option" means an option to purchase Shares granted under
Section 6(b) of the Plan.
"Other Stock-Based Award" means a right granted under Section
6(g) of the Plan.
"Participant" means an employee of or consultant to the
Company or any Affiliate designated to be granted any other Award
under the Plan.
"Performance Award" means a right granted under Section 6(e)
of the Plan.
"Restricted Period" means the period of time during which an
Award of Restricted Stock or Restricted Stock Units is subject to
transfer restrictions and potential forfeiture.
"Restricted Stock" means a Share granted under Section 6(d) of
the Plan.
"Restricted Stock Unit" means a right granted under Section
6(d) of the Plan that is denominated in Shares.
"Rule 16b-3" means Securities and Exchange Commission Rule
16b-3 (or any successor rule or regulation), as applicable with
respect to the Company at a given time.
"Section 16" means Section 16 of the Exchange Act and the
rules and regulations thereunder, or any successor provision, rule, or
regulation in effect at a given time.
"Section 16 Reporting Person" means a person who is a director
or officer of the Company for purposes of Section 16.
"Shares" means shares of the Company's common stock, no par
value per share, or such other securities or property as may become
the subject of Awards, or become subject to Awards, pursuant to an
adjustment made under Section 4(b) of the Plan.
"Stock Appreciation Right" means a right granted under Section
6(c) of the Plan.
Section 3. Administration
The Committee shall administer the Plan. Subject to the terms and
limitations set forth in the Plan, and to applicable law, the Committee's
authority shall include without limitation the power to:
(a) designate Participants;
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<PAGE> 4
(b) determine the types of Awards to be granted
and the times at which Awards will be granted;
(c) determine the number of Shares to be covered
by Awards and any payments, rights, or other matters to be
calculated in connection therewith;
(d) determine the terms and conditions of Awards
and amend the terms and conditions of outstanding Awards;
(e) determine how, whether, to what extent, and
under what circumstances Awards may be settled or exercised in
cash, Shares, other Awards, or other securities or property,
or canceled, forfeited, or suspended;
(f) determine how, whether, to what extent, and
under what circumstances cash, Shares, other Awards, other
securities or property, or other amounts payable with respect
to an Award shall be deferred, whether automatically or at the
election of the holder thereof or of the Committee;
(g) determine the methods and procedures for
establishing the value of any property (including, without
limitation, Shares or other securities) transferred,
exchanged, given, or received with respect to the Plan or any
Award;
(h) prescribe and amend the forms of Award
Agreements and other instruments required under or advisable
with respect to the Plan;
(i) designate Options as Incentive Stock Options;
(j) interpret and administer the Plan, Award
Agreements, Awards, and any contract, document, instrument, or
agreement relating thereto;
(k) establish, amend, suspend, or waive such
rules and regulations and appoint such agents as it shall deem
appropriate for the administration of the Plan;
(l) decide all questions and settle all
controversies and disputes which may arise in connection with
the Plan, Award Agreements, or Awards;
(m) delegate to one or more other directors of
the Company (who need not be "disinterested persons" within
the meaning of Rule 16b-3) the authority to designate and
grant Awards to eligible Participants, provided such
Participants are not Section 16 Reporting Persons;
(n) make any other determination and take any
other action that the Committee deems necessary or desirable
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<PAGE> 5
for the interpretation, application, or administration of the
Plan, Award Agreements, or Awards.
All designations, determinations, interpretations, and other decisions
under or with respect to the Plan, Award Agreements, or any Award shall be
within the sole discretion of the Committee, may be made at any time, and shall
be final, conclusive, and binding. To the extent that and for so long as the
Committee may delegate to one or more other directors its authority to
designate Participants and grant Awards as permitted by subsection (m) above,
subsequent references in the Plan to the "Committee" shall be construed to
include such other director or directors acting pursuant to such delegated
authority.
Section 4. Shares Available for Awards
(a) Shares Available. Subject to adjustment as provided
in Section 4(b):
(i) Initial Authorization. There shall be
300,000 Shares initially available for issuance under the Plan.
(ii) Acquired Shares. In addition to the amount
set forth above, up to 300,000 Shares acquired by the Company
subsequent to the Effective Time as full or partial payment
for the exercise price for an Option or any other stock option
granted by the Company, or otherwise acquired by the Company,
in open market transactions or otherwise, may thereafter be
included in the Shares available for Awards. Except as
otherwise provided in paragraph (iii) below, if any Shares
covered by an Award or to which an Award relates are
forfeited, or if an Award expires, terminates, or is canceled,
then the Shares covered by such Award, or to which such Award
relates, or the number of Shares otherwise counted against the
aggregate number of Shares available under the Plan by reason
of such Award, to the extent of any such forfeiture,
expiration, termination, or cancellation, may thereafter be
available for further granting of Awards and included as
acquired Shares for purposes of the preceding sentence.
(iii) Accounting for Awards. For purposes of this
Section 4:
(A) if an Award (other than a Dividend
Equivalent) is denominated in Shares, the number of
Shares covered by such Award, or to which such Award
relates, shall be counted on the date of grant of
such Award against the aggregate number of Shares
available for granting Awards under the Plan, to the
extent determinable on such date, and, insofar as the
number of Shares is not then
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<PAGE> 6
determinable, under procedures adopted by the
Committee consistent with the purposes of the Plan;
and
(B) Dividend Equivalents and Awards not
denominated in Shares shall be counted against the
aggregate number of Shares available for granting
Awards under the Plan in such amount and at such time
as the Committee shall determine under procedures
adopted by the Committee consistent with the purposes
of the Plan;
provided, however, that Awards that operate in tandem with
(whether granted simultaneously with or at a different time
from), or that are substituted for, other Awards or restricted
stock awards or stock options granted under any other plan of
the Company may be counted or not counted under procedures
adopted by the Committee in order to avoid double counting;
and, provided further, that in no event shall any Shares that
otherwise become available for further Awards pursuant to the
last sentence of paragraph (ii) above be available or counted
as available for any Award to a Section 16 Reporting Person if
such Share may not be so counted for purposes of Rule 16b-3.
(iv) Sources of Shares Deliverable Under Awards.
Any Shares delivered pursuant to an Award may consist, in
whole or in part, of authorized but unissued Shares or of
Shares reacquired by the Company, including but not limited to
Shares purchased on the open market.
(b) Adjustments. Upon the occurrence after the Effective
Time of any dividend or other distribution (whether in the form of
cash, Shares, other securities, or other property), change in the
capital or shares of capital stock, recapitalization, stock split,
reverse stock split, reorganization, merger, consolidation, split-up,
spin-off, combination, repurchase, or exchange of Shares or other
securities of the Company, issuance of warrants or other rights to
purchase Shares or other securities of the Company, or extraordinary
transaction or event which affects the Shares, then the Committee
shall have the authority to make such adjustment, if any, in such
manner as it deems appropriate, in (i) the number and type of Shares
(or other securities or property) which thereafter may be made the
subject of Awards, (ii) outstanding Awards, including, without
limitation, the number and type of Shares (or other securities or
property) subject thereto, and (iii) the grant, purchase, or exercise
price with respect to outstanding Awards, and, if deemed appropriate,
make provision for cash payments to the holders of outstanding Awards;
provided, however, that the number of Shares subject to any Award
denominated in Shares shall always be a whole number.
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<PAGE> 7
Section 5. Eligibility
Any employee of or consultant to the Company or any Affiliate,
including any officer or officer-director of the Company (but excluding any
member of the Committee (but not excluding any otherwise eligible director to
whom authority may be delegated under Section 3(m) of the Plan), excluding any
person who serves only as a director of the Company, and excluding any
consultant to the Company or an Affiliate who is not rendering services
pursuant to a written agreement with the entity in question or who would not be
considered an "employee" under the instructions to Securities and Exchange
Commission Form S-8 or such successor form or may be in effect at the relevant
time), as may be selected from time to time by the Committee or by the
directors to whom authority may be delegated pursuant to Section 3(m) hereof in
its or their discretion, is eligible to be designated a Participant with
respect to any Award, except that an Other Stock-Based Award may not be granted
to a Section 16 Reporting Person.
Section 6. Awards
(a) [INTENTIONALLY OMITTED.]
(b) Options. The Committee is authorized to grant
Options to eligible Participants.
(i) Committee Determinations. Subject to the
terms and limitations of the Plan, the Committee shall
determine:
(A) the number of Shares subject to each
Option and the exercise price per Share;
(B) the term of each Option;
(C) the time or times at which an Option
may be exercised, in whole or in part, the method or
methods by which and the form or forms (including,
without limitation, cash, Shares, other Awards, or
other property, or any combination thereof, having a
fair market value on the exercise date equal to the
relevant exercise price) in which payment of the
exercise price with respect thereto may be made or
deemed to have been made; and
(D) whether the Option is intended to be
an Incentive Stock Option or a Nonqualified Stock
Option.
Any Option intended to be an Incentive Stock Option shall be so
designated in the Award Agreement evidencing such Option, and the
terms and conditions of any Option intended to be
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<PAGE> 8
Incentive Stock Option shall be such as are determined by the
Committee, after consulting with Company counsel, to be necessary,
appropriate, or advisable to cause such Option to comply at the time
of grant in all respects with all applicable requirements of Section
422 of the Code (or any successor thereto then in effect) and any
regulations promulgated thereunder. The Committee may impose such
additional or other conditions or restrictions on any Option as it
deems appropriate and as are not inconsistent with the terms of the
Plan.
(ii) Other Terms. Unless otherwise determined by
the Committee:
(A) A Participant electing to exercise
an Option shall give written notice to the Company,
as may be specified by the Committee, of exercise of
the Option and the number of Shares elected for
exercise, such notice to be accompanied by such
instruments or documents as may be required by the
Committee, and shall tender the aggregate exercise
price of the Shares elected for exercise.
(B) At the time of exercise of an
Option, payment in full in cash shall be made for all
Shares then being purchased.
(C) If the employment of or consulting
arrangement with a Participant terminates for any
reason (including termination by reason of the fact
that an entity is no longer an Affiliate) other than
the Participant's death, the Participant may
thereafter exercise the Option as provided below,
except that the Committee may terminate the
unexercised portion of the Option concurrently with
or at any time following termination of the
employment or consulting arrangement (including
termination of employment upon a change of status
from employee to consultant) if it shall determine
that the Participant has engaged in any activity
detrimental to the interests of the Company or an
Affiliate. If such termination is voluntary on the
part of the Participant (other than by reason of
retirement of an employee-Participant on or after
normal retirement date), the Option may be exercised
only within ten days after the date of termination.
If such termination is involuntary on the part of the
Participant, if an employee-Participant retires on or
after normal retirement date, or if the Participant's
employment or consulting relationship is terminated
by reason of his Disability, the Option may be
exercised within three months after the date of
termination or retirement. For purposes of this
subsection (D), a
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<PAGE> 9
Participant's employment or consulting arrangement
shall not be considered terminated (i) in the case of
approved sick leave or other bona fide leave of
absence (not to exceed one year), (ii) in the case of
a transfer of employment or the consulting
arrangement among the Company and Affiliates, or
(iii) by virtue of a change of status from employee
to consultant or from consultant to employee, except
as provided above.
(D) If a Participant dies at a time when
entitled to exercise an Option, then at any time or
times within one year after death such Option may be
exercised, as to all or any of the Shares which the
Participant was entitled to purchase immediately
prior to death. The Company may decline to deliver
Shares to a designated beneficiary until it receives
indemnity against claims of third parties
satisfactory to the Company. Except as so exercised,
such Option shall expire at the end of such period.
(E) An Option may be exercised only if
and to the extent such Option was exercisable at the
date of termination of employment or the consulting
arrangement, and an Option may not be exercised at
any time when the Option would not have been
exercisable had the Participant's employment or
consulting arrangement continued.
(iii) Restoration Options. At the time of grant of
an Option (for purposes of this subsection, an "original
Option") that is not itself a Restoration Option (as
hereinafter defined), or at the time a Restoration Option
arises, or at any other time while the grantee continues to be
eligible for Awards and the original Option or a Restoration
Option (either, a "predecessor Option") is outstanding, the
Committee may provide that the predecessor Option shall carry
with it a right to receive an Option (for purposes of this
subsection, a "Restoration Option") if, while still eligible
to be granted an Option, the grantee exercises the predecessor
Option (or a portion thereof) and pays some or all of the
applicable exercise price in Shares that have been owned by
the grantee for at least six months prior to exercise. In
addition to being subject to any other terms and conditions
(including additional limitations on exercisability) that the
Committee deems appropriate, and except to the extent the
Committee otherwise provides with respect to a given
Restoration Option, each Restoration Option shall be subject
to the following:
(A) the number of Shares subject to the
Restoration Option shall be the lesser of: (x) the
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<PAGE> 10
number of whole Shares delivered in exercise of the
predecessor Option, and (y) the number of Shares
available for grant under the Plan at the time the
Restoration Option arises;
(B) the Restoration Option automatically
shall arise and be granted (if ever) at the time of
payment of the exercise price in respect of the
predecessor Option;
(C) the per Share exercise price of the
Restoration Option shall be the Fair Market Value of
a Share on the date the Restoration Option arises;
(D) the expiration date of the
Restoration Option shall be the same as that of the
predecessor Option;
(E) the Restoration Option shall first
become exercisable six months after it arises; and
(F) the Restoration Option shall be a
Nonqualified Stock Option.
(c) Stock Appreciation Rights. The Committee is
authorized to grant Stock Appreciation Rights to eligible
Participants. Subject to the terms of the Plan, a Stock Appreciation
Right granted under the Plan shall confer on the holder thereof a
right to receive, upon exercise thereof, the excess of (i) the Fair
Market Value of one Share on the date of exercise or, if the Committee
shall so determine in the case of any such right other than one
related to any Incentive Stock Option, at any time during a specified
period before or after the date of exercise over (ii) the grant price
of the right as specified by the Committee. Subject to the terms of
the Plan, the Committee shall determine the grant price, term, methods
of exercise and settlement of such Stock Appreciation Right, the
effect thereon of termination of the Participant's employment and/or
consulting relationships, and any other terms of the Stock
Appreciation Right the Committee deems appropriate, and the Committee
may impose such conditions or restrictions on the exercise of any
Stock Appreciation Right as it may deem appropriate.
(d) Restricted Stock and Restricted Stock Units.
(i) Grants. The Committee is authorized to grant
to eligible Participants Awards of Restricted Stock, which
shall consist of Shares, and Awards of Restricted Stock Units,
which shall give the Participant the right to receive cash,
Shares, other securities, other Awards, or other property, in
each case subject to the
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<PAGE> 11
termination of the Restricted Period for such Award determined
by the Committee.
(ii) Restrictions. The Restricted Period
determined by the Committee for Restricted Stock and
Restricted Stock Units may differ among Participants, and any
Restricted Period may have different expiration dates with
respect to portions of Shares or Units covered by the same
Award. During the applicable Restriction Period, Restricted
Stock Units and Restricted Stock shall be nontransferable
(except as provided in Section 6(h)(v) of the Plan) and
subject to forfeiture as provided in subsection (iv) of this
Section 6(d)(ii). Subject to the terms of the Plan, Awards of
Restricted Stock and Restricted Stock Units also shall be
subject to such other restrictions as the Committee may impose
(including, without limitation, limitations on the right to
vote Restricted Stock or the right to receive any dividend or
other right or property), which restrictions may lapse
separately or in combination, at such time or times, in
installments or otherwise, as the Committee may determine.
Unless the Committee shall otherwise determine, any Shares or
other securities distributed with respect to Restricted Stock
or which a Participant is otherwise entitled to receive by
reason of such Shares shall be subject to the restrictions
contained in the applicable Award Agreement. Subject to the
aforementioned restrictions and the provisions of the Plan,
Participants shall have all of the rights of a stockholder
with respect to Shares of Restricted Stock.
(iii) Certificates. Any Shares granted as Restricted
Stock shall be evidenced by certificates bearing such
restrictive transfer legends as the Committee determines to be
advisable in order to prevent impermissible transfer of the
Shares prior to the end of the applicable Restricted Period,
and such certificates shall be retained in the possession of
the Company until the Shares no longer are subject to
forfeiture. Each Award Agreement concerning an Award of
Restricted Stock shall include the grantee's consent to
transfer to the Company of any forfeited Restricted Stock
without the need for any further consent, direction, or other
action by the grantee.
(iv) Forfeiture. Except as otherwise determined by
the Committee:
(A) If the employment of or consulting
arrangement with a Participant terminates for any
reason (including termination by reason of the fact
that any entity is no longer an Affiliate), other
than the Participant's death or Disability or, in the
case of an employee, retirement on or after
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<PAGE> 12
normal retirement date, all Shares of Restricted
Stock and all Restricted Stock Units theretofore
awarded to the Participant which are still subject to
restrictions shall upon such termination of
employment or the consulting relationship be
forfeited and (in the case of Restricted Stock)
transferred back to the Company. For purposes of
this subsection (A), a Participant's employment or
consulting arrangement shall not be considered
terminated (i) in the case of approved sick leave or
other bona fide leave of absence (not to exceed one
year), (ii) in the case of a transfer of employment
or the consulting arrangement among the Company and
Affiliates, or (iii) other than as provided in
subsection (D) of this Section 6(d)(iv), by virtue of
a change of status from employee to consultant or
from consultant to employee.
(B) If a Participant ceases to be
employed or retained by the Company or an Affiliate
by reason of death or Disability, or if following
retirement a Participant continues to have rights
under an Award of Restricted Stock or Restricted
Stock Units and thereafter dies, the Award shall
fully vest and no longer be subject to forfeiture.
(C) If an employee ceases to be employed
by the Company or an Affiliate by reason of
retirement on or after normal retirement date, the
restrictions contained in the Award of Restricted
Stock shall continue to lapse in the same manner as
though employment had not terminated.
(D) However, notwithstanding the provisions
of subsections (B) and (C) above, if a Participant
continues to hold an Award of Restricted Stock or
Restricted Stock Units following termination of his
employment or consulting arrangement (including
retirement and termination of employment upon a
change of status from employee to consultant), the
Restricted Stock or Restricted Stock Units which
remain subject to restrictions shall nonetheless be
forfeited, and (in the case of Restricted Stock)
transferred back to the Company, if the Committee at
any time thereafter determines that the Participant
has engaged in any activity detrimental to the
interests of the Company or an Affiliate.
(E) At the expiration of the Restricted
Period as to Shares covered by an Award of Restricted
Stock, or as to Restricted Stock Units to be settled
in Shares, the Company shall deliver
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<PAGE> 13
the Shares as to which the Restricted Period has
expired, as follows:
(1) if an assignment to a trust has
been made in accordance with Section
6(h)(v)(B)(2)(c), to such trust; or
(2) if the Restricted Period has
expired by reason of death and a beneficiary
has been designated in form approved by the
Company, to the beneficiary so designated; or
(3) in all other cases, to the
Participant or the legal representative of
the Participant's estate.
(e) Performance Awards. The Committee is authorized to
grant Performance Awards to eligible Participants. Subject to the
terms of the Plan, a Performance Award granted under the Plan (i) may
be denominated or payable in cash, Shares (including, without
limitation, Restricted Stock), other securities, other Awards, or
other property and (ii) shall confer on the holder thereof rights
valued as determined by the Committee and payable to, or exercisable
by, the holder of the Performance Award, in whole or in part, upon the
achievement of such performance goals during such performance periods
as the Committee shall establish. Subject to the terms of the Plan,
the performance goals to be achieved during any performance period,
the length of any performance period, the amount of any Performance
Award granted, the amount of any payment or transfer to be made
pursuant to any Performance Award, and the other terms and conditions
of any Performance Award, including the effect upon such Award of
termination of the Participant's employment and/or consulting
relationships, shall be determined by the Committee.
(f) Dividend Equivalents. The Committee is authorized to
grant to eligible Participants Awards under which the holders thereof
shall be entitled to receive payments equivalent to dividends or
interest with respect to a number of Shares determined by the
Committee, and the Committee may provide that such amounts (if any)
shall be deemed to have been reinvested in additional Shares or
otherwise reinvested. Subject to the terms of the Plan, such Awards
may have such terms and conditions as the Committee shall determine.
(g) Other Stock-Based Awards. The Committee is
authorized to grant to eligible Participants such other Awards that
are denominated or payable in, valued in whole or in part by reference
to, or otherwise based on or related to Shares (including, without
limitation, securities convertible into Shares), as are deemed by the
Committee to be consistent with the purposes of the Plan; provided,
however, that such grants may not be made to Section 16 Reporting
Persons. Subject to
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<PAGE> 14
the terms of the Plan, the Committee shall determine the terms and
conditions of such Other Stock-Based Awards. Shares or other
securities delivered pursuant to a purchase right granted under this
Section 6(g) shall be purchased for such consideration, which may be
paid by such method or methods and in such form or forms, including,
without limitation, cash, Shares, other securities, other Awards,
other property, or any combination of the foregoing, as the Committee
shall determine.
(h) General.
(i) Effect of Incentive Stock Option
Disqualification. If an Option intended to be an Incentive
Stock Option (or any portion of such Option) for any reason
does not qualify as an incentive stock option under the Code,
whether at the time of grant or subsequently, such failure to
qualify shall not invalidate the Option (or Option portion),
and instead the nonqualified portion (or, if necessary, the
entire Option) shall be deemed to have been granted as a
Nonqualified Stock Option irrespective of the manner in which
it is designated in the applicable Award Agreement.
(ii) No Cash Consideration for Awards. Awards may
be granted for no cash consideration or for such minimal cash
consideration as may be required by applicable law.
(iii) Awards May Be Granted Separately or Together.
Awards may, in the discretion of the Committee, be granted
either alone or in addition to, in tandem with (or, except in
the case of a Substituted Option, in substitution for) any
other Award or any award granted under any other plan of the
Company or any Affiliate. Awards granted in addition to or in
tandem with other Awards or in addition to or in tandem with
awards granted under another plan of the Company or an
Affiliate, may be granted either at the same time as or at a
different time from the grant of such other Awards or awards.
(iv) Forms of Payment Under Awards. Subject to the
terms of the Plan and of any applicable Award Agreement,
payments or transfers to be made by the Company or an
Affiliate upon the grant, exercise, or payment of an Award may
be made in such form or forms as the Committee shall
determine, including, without limitation, cash, Shares, other
securities, other Awards, or other property, or any
combination thereof, and may be made in a single payment or
transfer, in installments, or on a deferred basis, in each
case in accordance with rules and procedures established by
the Committee. Such rules and procedures may include, without
limitation, provisions for the payment or crediting of
reasonable interest on installment or deferred payments or the
grant or
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<PAGE> 15
crediting of Dividend Equivalents in respect of installment or
deferred payments. Notwithstanding the foregoing, however,
the Committee shall not have discretion or authority to settle
an exercised Substituted Option in any form other than in
Shares, to settle such a Substituted Option in installments,
or to defer settlement of such a Substituted Option, without
the prior written consent of the holder.
(v) Limits on Transfer of Awards.
(A) Except as the Committee may
otherwise determine, no Award or right under any
Award may be sold, encumbered, pledged, alienated,
attached, assigned, or otherwise transferred in any
manner, and any attempt to do any of the foregoing
shall be void and unenforceable against the Company.
(B) Notwithstanding the provisions of
paragraph (A) above, except as provided in paragraph
(C) below:
(1) An Option may be transferred:
(a) to a beneficiary
designated by the Participant in
writing on a form approved by the
Committee; or
(b) by will or the
applicable laws of descent and
distribution to the personal
representative, executor or
administrator of the Participant's
estate.
(2) A Participant may assign or
transfer rights under an Award of Restricted
Stock or Restricted Stock Units:
(a) to a beneficiary
designated by the Participant in
writing on a form approved by the
Committee;
(b) by will or the
applicable laws of descent and
distribution to the personal
representative, executor or
administrator of the Participant's
estate; or
(c) to a revocable
grantor trust established by
the Participant for the sole benefit
of the Participant during the
Participant's life, and under the
terms of which the Participant is
and remains the sole trustee until
death or
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<PAGE> 16
physical or mental incapacity. Such
assignment shall be effected by a
written instrument in form and
content satisfactory to the
Committee, and the Participant shall
deliver to the Committee a true copy
of the agreement or other document
evidencing such trust. If in the
judgment of the Committee the trust
to which a Participant may attempt
to assign rights under such an Award
does not meet the criteria of a
trust to which an assignment is
permitted by the terms hereof, or
if, after assignment (whether
because of amendment, by operation
of law, or for any other reason)
such trust no longer meets such
criteria, such attempted assignment
shall be void and may be disregarded
by the Committee and the Company and
all rights to any such Awards shall
revert to and remain solely in the
Participant. Notwithstanding a
qualified assignment, the
Participant, and not the trust to
which rights under such an Award may
be assigned, for the purpose of
determining compensation arising by
reason of the Award shall continue
to be considered an employee or
consultant, as the case may be, of
the Company or an Affiliate, but
such trust and the Participant shall
be bound by all of the terms and
conditions of the Award Agreement
and this Plan. Shares issued in the
name of and delivered to such trust
shall be conclusively considered
issuance and delivery to the
Participant.
(3) The Committee shall not
permit Section 16 Reporting Persons to
transfer or assign Awards except as and to
the extent (if any) permitted under Rule
16b-3.
(C) The Committee, the Company, and its
officers, agents, and employees may rely upon any
beneficiary designation, assignment, or other
instrument of transfer, copies of trust agreements,
and any other documents delivered to any of them by
or on behalf of a Participant, which they believe
genuine, and any action taken by any of them in
reliance thereon shall be conclusive and binding upon
the Participant, the personal representatives of the
Participant's estate, and all persons asserting a
claim based on an Award to the Participant. The
delivery by a Participant of a beneficiary
designation, or an assignment of rights
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<PAGE> 17
under an Award as permitted hereunder, shall
constitute the Participant's irrevocable undertaking
to hold the Committee, the Company, and its officers,
agents, and employees harmless against claims,
including any cost or expense incurred in defending
against claims, of any person (including the
Participant) which may be asserted or alleged to be
based on an Award subject to a beneficiary
designation or an assignment. In addition, the
Company may decline to deliver Shares to a
beneficiary until it receives indemnity against
claims of third parties satisfactory to the Company.
(vi) Change in Control. (A) Notwithstanding any
of the provisions of this Plan or any Award Agreement, upon a
Change in Control of the Company (as hereinafter defined) the
vesting of all rights of Participants under outstanding Awards
shall be accelerated and all restrictions thereon shall
terminate in order that Participants may fully realize the
benefits intended to be made available under such Awards.
Such acceleration shall include, without limitation, the
immediate exercisability in full of all Options and the
termination of restrictions on Restricted Stock and Restricted
Stock Units. Further, upon such Change in Control, in
addition to the Committee's authority set forth in Section
4(b), the Committee, as constituted before such Change in
Control, is authorized and has sole discretion, as to any
Award, to take any one or more of the following actions: (i)
cause any such Award then outstanding to be assumed, or new
rights substituted therefor, by the acquiring or surviving
entity or other person giving rise to such Change in Control;
(ii) make such adjustment to any such Award then outstanding
as the Committee deems appropriate to reflect such Change in
Control; and (iii) provide for the purchase of any such Award
(other than a Substituted Option), upon the Participant's
request, for an amount of cash equal to the amount that could
have been attained upon the exercise of such Award or
realization of the Participant's rights had such Award been
currently exercisable or payable.
(B) A Change in Control shall occur if, after the
Effective Time:
(1) any "person" or "group" (as such
terms are used in Sections 13(d) and 14(d) of the
Exchange Act and the regulations thereunder), other
than pursuant to a transaction or agreement
previously approved by the Board (whether before, at,
or after the Effective Time and including, but not
limited to, a transaction or agreement contemplated
by the Reorganization Agreement),
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<PAGE> 18
directly or indirectly purchases or otherwise becomes
the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act) of voting securities
representing 30 percent or more of the combined
voting power of all outstanding voting securities of
the Company;
(2) during any period of two consecutive
years, the individuals who at the beginning of such
period constitute the Board cease for any reason to
constitute at least a majority thereof, unless the
appointment or nomination for election by the
Company's stockholders of each new director during
such period has been approved by a vote of at least
two-thirds of the directors then still in office who
were directors at the beginning of such period; or
(3) the stockholders of the Company
approve (i) an agreement to merge or consolidate the
Company in a transaction in which the Company is not
the surviving entity, (ii) an agreement to sell or
dispose of substantially all of the Company's assets,
or (iii) a plan to liquidate the Company, unless, in
the case of an event described in (i), (ii), or
(iii), the Board determines prior to the occurrence
of the event that the effects described in Section
6(h)(vi)(A) will not apply with respect to such
event.
(vii) Cash Settlement. Notwithstanding any
provision of this Plan or of any Award Agreement to the
contrary, any Award outstanding hereunder, other than a
Substituted Option, may at any time be canceled in the
Committee's sole discretion upon payment of the value of such
Award to the holder thereof in cash or in another Award
hereunder, such value to be determined by the Committee in its
sole discretion.
(viii) Certain Securities Law Considerations. The
Company intends, as soon as possible after the Effective time,
to register with the Securities and Exchange Commission on
Form S-8 the total number of Shares that may be acquired by
Participants under the Plan. Until such Form S-8 Registration
Statement is filed and effective no Awards shall be granted
under the Plan.
(ix) Award Agreements. Each Award shall be
evidenced by an Award Agreement in such form as the Committee
shall prescribe.
Section 7. Amendment, Suspension, or Termination; Certain Other Matters.
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<PAGE> 19
Except to the extent prohibited by applicable law and unless otherwise
expressly provided in an Award Agreement or in the Plan:
(a) Amendments, Suspension, or Termination. The Board
may amend, suspend, or terminate the Plan or any portion thereof at
any time, with or without stockholder approval, and the Board or the
Committee may amend any outstanding Award; provided, however, that (i)
no Plan amendment shall be effective until approved by stockholders of
the Company, insofar as stockholder approval thereof is required in
order for the Plan to continue to satisfy the conditions of Rule 16b-3
or any applicable requirements of a national securities exchange or
the NMS or to permit the further grant of Incentive Stock Options, and
(ii) without the consent of an affected Participant no amendment of
the Plan or of any Award may impair the rights of the Participant
under any outstanding Award.
(b) Adjustments of Awards Upon the Occurrence of Certain
Unusual or Nonrecurring Events. The Committee shall be authorized to
make adjustments in the terms and conditions of, and the criteria
included in, Awards in recognition of unusual or nonrecurring events
(including, without limitation, the events described in Section 4(b)
hereof or a Change in Control as defined in Section 6(h)(vi) hereof)
affecting the Company, any Affiliate, or the financial statements of
the Company or any Affiliate, or of changes in applicable laws,
regulations, or accounting principles, whenever the Committee
determines that such adjustments are appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended
to be made available to holders of outstanding Awards under the Plan.
(d) Correction of Defects, Omissions, and
Inconsistencies. The Committee may correct any defect, supply any
omission, or reconcile any inconsistency in the Plan or any Award in
the manner and to the extent it shall deem desirable to effectuate the
Plan.
Section 8. Miscellaneous
(a) No Rights to Awards. Subject only to the express
requirements of the Plan, there is no obligation for uniformity of
treatment of Participants or holders or beneficiaries of Awards under
the Plan, and no Participant or other person shall have any claim to
be granted any Award. The terms and conditions of Awards of the same
type, and the determination of the Committee to grant a waiver or
modification of the terms and conditions of any Award, need not be the
same with respect to each Participant.
(b) Withholding. The Company or any Affiliate shall be
authorized to withhold from any Award granted or any payment
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<PAGE> 20
due or transfer made under any Award or under the Plan the amount (in
cash, Shares, other securities, other Awards or other property) of
withholding taxes due in respect of an Award, its exercise, or any
payment or transfer under such Award or under the Plan and to take
such other action as may be necessary in the opinion of the Company or
Affiliate to satisfy all obligations for the payment of such taxes.
(c) No Limit on Other Compensation Arrangements. Nothing
contained in the Plan shall prevent the Company or any Affiliate from
adopting or continuing in effect other or additional compensation
arrangements, including the grant of options and other stock-based
awards, and such arrangements may be either generally applicable or
applicable only in specific cases.
(d) No Right to Employment. The grant of an Award shall
not be construed as giving a Participant the right to be retained in
the employ of the Company or any Affiliate. Further, the Company or an
Affiliate may at any time dismiss a Participant from employment, free
from any liability, or any claim under the Plan, unless otherwise
expressly provided in the Award Agreement or another written agreement
with the Participant.
(e) Governing Law. Except to the extent, if any,
preempted by Federal law, the validity, construction, and effect of
the Plan, any rules and regulations relating to the Plan established
by the Committee, and any Award Agreement shall be determined in
accordance with the laws of the State of Michigan.
(f) Severability. If any provision of the Plan or any
Award is or becomes or is deemed to be invalid, illegal, or
unenforceable in any jurisdiction or as to any person or Award, or
would disqualify the Plan or any Award under any law deemed applicable
by the Committee, such provision shall be construed or deemed amended
to conform to applicable laws, or if it cannot be so construed or
deemed amended without, in the determination of the Committee,
materially altering the intent of the Plan or the Award, such
provision shall be stricken as to such jurisdiction, person or Award,
and the remainder of the Plan and any such Award shall remain in full
force and effect.
(g) No Trust or Fund Created. Neither the Plan nor any
Award shall create or be construed to create a trust or separate fund
of any kind or a fiduciary relationship between the Company or any
Affiliate and a Participant or any other person. To the extent that
any person acquires a right to receive payments from the Company or
any Affiliate pursuant to an Award, such right shall be no greater
than the right of any unsecured general creditor of the Company or any
Affiliate.
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<PAGE> 21
(h) No Fractional Shares. No fractional Shares shall be
issued or delivered pursuant to the Plan or any Award, and the
Committee shall determine whether cash, other securities, or other
property shall be paid or transferred in lieu of any fractional
Shares, or whether such fractional Shares or any rights thereto shall
be canceled, terminated, or otherwise eliminated.
(i) Stockholder Status. Neither the grantee of an Award,
nor any other person to whom the Award or the grantee's rights
thereunder may pass, shall be, or have any right or privileges of, a
holder of Shares in respect of any Shares issuable pursuant to or in
settlement of such Award, unless and until certificates representing
such Shares have been issued in the name of such grantee or other
person.
(j) Headings. Headings are given to the Sections and
subsections of the Plan solely as a convenience to facilitate
reference. Such headings shall not be deemed in any way material or
relevant to the construction or interpretation of the Plan or any
provision thereof.
Section 9. Effectiveness and Duration
The Plan shall be effective as of the date of its approval by the
Company's stockholders and shall continue in effect thereafter until terminated
by the Board.
Adopted by the Board of Directors of the Company: April 3, 1996
Approved by the Stockholder of the Company: April 20, 1996
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<PAGE> 1
EXHIBIT (10)(d)
CONFORMED COPY FILED WITH SEC
AS ADOPTED
PROFESSIONALS INSURANCE COMPANY MANAGEMENT GROUP
1996 NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
Section 1 -- Purposes
The purposes of this 1996 Non-Employee Directors Stock Option Plan are
to assist the Company in attracting and retaining individuals of exceptional
ability to serve as its directors and to more closely align their interests
with those of the Company's shareholders, through the periodic grant of options
to purchase Shares.
Section 2 -- Certain Definitions
The following terms have the following respective meanings under the
Plan:
"Affiliated Entity" means any corporation, partnership, or other
business enterprise in which the Company directly or indirectly has a
significant equity interest under generally accepted accounting principles.
"Board" means the Board of Directors of the Company.
"Change in Control" has the meaning given in Section 6 hereof.
"Company" means Professionals Insurance Company Management Group.
"Fair Market Value" means, for any given date: (i) if the Shares are
then listed for trading on one or more national securities exchanges (including
for this purpose the Nasdaq National Market), the average of the high and low
sale prices for a Share on the principal such exchange on the date in question
(or, if no Share traded on such exchange on such date, the next preceding date
on which such trading occurred); (ii) if (i) is then inapplicable but bid and
asked prices for Shares are quoted through Nasdaq, the average of the highest
bid and lowest asked prices so quoted for a Share on the date in question (or,
if no prices for Shares were quoted on that date, the next preceding date on
which they were quoted); and (iii) if both (i) and (ii) are inapplicable, the
fair market value of a Share on the date in question as determined in good
faith by the Board.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Nasdaq" means the National Association of Securities Dealers, Inc.
Automated Quotation System.
"Non-Employee Director" means a person who is either a member of the
Board and who is not an employee of the Company or any Affiliated Entity.
<PAGE> 2
"Option" means an option to purchase Shares granted under the Plan.
"Plan" means this 1996 Non-Employee Director Stock Option Plan.
"Rule 16b-3" means Securities and Exchange Commission Rule 16b-3 (or
any successor rule or regulation), as in effect and applicable to the Company
at a given time.
"Shares" means shares of the Company's common stock, no par value per
share, or such other securities or other property as may become subject to an
Option pursuant to an adjustment made under Section 7 hereof.
Section 3 -- Administration
3.1 The Plan shall be administered by the Board, which shall have
full power and authority to prescribe and amend the forms of option agreements,
notices, and all other documents or instruments required under or determined by
the Board to be advisable with respect to the Plan, to establish, revise,
suspend, and waive such rules and procedures and appoint such agents as it
deems appropriate for the administration or operation of the Plan, to construe
and interpret the Plan, any option agreement, and any other instrument or
document relating to the Plan or any Option, to decide any question and settle
any dispute which may arise in connection with the Plan or any Option, and to
make any other determination and take any other action that the Board deems
necessary or desirable for the administration or operation of the Plan. All
interpretations, determinations, or other decisions of the Board concerning the
Plan or any Option shall be conclusive and binding upon all interested parties.
3.2 Notwithstanding the foregoing or any other provision of the
Plan to the contrary, however, it being the intention that all Options shall
satisfy all then applicable criteria for "formula awards" under Rule 16b-3, the
Board shall have no authority or discretion at any time to make any
determination or take any other action which would cause any Option then
outstanding or which thereafter may be granted to fail to meet such criteria.
Section 4 -- Eligibility
The only persons who shall be granted Options are those individuals
who at time of grant are Non-Employee Directors.
Section 5 -- Available Shares
Subject to adjustment as provided in Section 7, the aggregate maximum
number of Shares available for settlement of Options is 50,000, and the maximum
number of Shares available for settlement of Options granted to any given
individual is 5,000, which Shares may be either authorized and issued Shares
acquired by the Company and held in its treasury ("treasury shares") or
authorized and unissued Shares. There shall be reserved at all times for
issuance under the Plan a number of Shares equal to aggregate maximum number of
Shares that may be issued in settlement of Options then outstanding and which
thereafter may be granted under the Plan, less the number of treasury shares
then reserved for Options. If an Option terminates or
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<PAGE> 3
expires for any reason without having been exercised in full, the Shares
subject to the Option immediately prior to such expiration or termination shall
again become available for grants under the Plan.
Section 5 -- Option Terms
5.1 At the adjournment of each organizational meeting of the Board
following an annual meeting of shareholders of the Company, each individual
then serving on the Board as a Non-Employee Director automatically shall
receive and be granted an Option to purchase 500 Shares or, if less, the
maximum number of Shares then permitted to be granted to such Non-Employee
Director under the terms of the Plan. If the aggregate maximum number of
Shares then available for Options is insufficient for grants as contemplated in
the preceding sentence, then no Options shall be granted.
5.2 Each Option shall be evidenced by a written option agreement
in form approved by the Board, which agreement shall identify the Option as one
granted under the Plan, the name of the grantee, and the date of grant; provide
that, in the event of any inconsistency between the Plan and the agreement, the
terms of the Plan shall govern; and set forth the number of Shares subject to
the Option, the exercise price per Share (which shall be the Fair Market Value
of a Share on the grant date), and, either expressly or by reference to the
Plan, the other terms and conditions of the Option.
5.3 Except as otherwise provided under Section 6, each Option
shall first become exercisable with respect to 100% of the total number of
Shares subject to the Option (but in any event only for whole Shares) on the
first anniversary of its date of grant and, to the extent that the Option was
not then exercisable, shall terminate at the time the grantee ceases to be a
Non-Employee Director. Each Option shall terminate in its entirety at the
earlier of (i) the first anniversary of the date on which the grantee ceased to
be a Non-Employee Director and (ii) the expiration date of the Option. To the
extent not theretofore exercised or terminated, each Option shall expire on the
seventh anniversary of its date of grant. Each Option shall be
non-transferable except by will or the laws of descent and distribution, and
during the lifetime of the grantee may be exercised only by the grantee.
5.4 To the extent then exercisable, an Option may be exercised, in
whole or in part, by delivery to the Secretary of the Company (or any of such
other Company officers or employees as the Board from time to time may
designate) of a written notice of exercise in form acceptable to the Board and
payment in full in cash of the aggregate exercise price for the number of
shares for which the Option is being exercised.
Section 6 -- Effect of Change in Control
In the event of a Change in Control of the Company, all then
outstanding Options shall be deemed to have become fully exercisable
immediately prior to such Change in Control. For purposes of the Plan, "Change
in Control" means a change in control of the Company (or similar event) that
would be required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Exchange Act, as said Item 6(e) is in
effect on the
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<PAGE> 4
date on which the Plan becomes effective (the "effective date") or, if said
Item 6(e) is no longer in effect, under any regulations issued by the
Securities and Exchange Commission pursuant to the Exchange Act or other
legislation enacted by Congress (together regulations promulgated thereunder)
which serve similar purposes. Without limitation of the foregoing, a Change in
Control shall be deemed to have occurred if and when: (i) any "person" (as such
term is used in Section 13(d) and 14(d) of the Exchange Act on the effective
date) is or becomes the beneficial owner, directly or indirectly, of securities
of the Company representing 30% or more of the combined voting power of the
Company's then outstanding securities ordinarily having the right to vote for
the election of directors of the Company, (ii) the Company shall have merged or
consolidated with another corporation and as a result of such merger or
consolidation less than 70% of the outstanding securities ordinarily having the
right to vote for the election of directors of the surviving or resulting
corporation shall be owned in the aggregate by the shareholders of the Company
immediately prior to such merger or consolidation, (iii) the Company shall have
sold or otherwise disposed of, or agreed to sell or otherwise dispose of, to a
person (as hereinabove defined) in a single transaction or more than one person
in a series of related transactions assets of the Company constituting all or a
major portion of the assets of a business segment of the Company, or (iv)
individuals who are members of the Board immediately prior to a meeting of the
shareholders of the Company involving a contest for the election of directors
shall not constitute a majority of the Board following such meeting.
Section 7 -- Adjustments
In the event of any dividend or other distribution (whether in cash,
Shares, other securities, or other property), stock split, reverse stock split,
recapitalization, reorganization, split-up, spin-off, merger, consolidation,
share exchange, rights offering, or other change in the capital or corporate
structure of the Company affecting the Shares, there shall be made such
adjustment or adjustments (if any) in the number and type of Shares which
thereafter may be made subject to Options and in the numbers and type of Shares
subject to outstanding Options and the per Share exercise prices thereof as the
Board determines to be appropriate in light of such event in order to continue
to make available the benefits intended by the Plan and outstanding Options;
provided, that in no event shall any adjustment require the issuance or
delivery of any fractional Share. Without limiting the preceding sentence in
any respect, in the event of any merger, consolidation, or combination of the
Company with or into another corporation (other than a merger, consolidation,
or combination in which the Company is the surviving corporation and which does
not result in any reclassification or change of outstanding Shares or other
Company securities), the Board prior thereto may provide that each holder of an
Option shall have the right thereafter and during the term of such Option to
receive upon exercise of such Option, or any portion thereof, for each Share as
to which the Option shall be exercised, the kind and amount of shares of the
surviving or new corporation, cash, securities, evidences of indebtedness,
other property, or any combination thereof, which would have been received upon
such merger, consolidation, or combination by a party holding one Share
immediately prior to such merger, consolidation, or combination. In the event
of a merger, consolidation, or combination in which the consideration issued
with respect to Shares is a combination of different types of property, the
Board may designate the property or combination of property to be received upon
the exercise of each such outstanding Option.
-4-
<PAGE> 5
Section 8 -- Miscellaneous
8.1 The Board may at any time and from time to time amend, modify,
suspend, or terminate the Plan, with or without the approval of shareholders of
the Company, except that: (i) no amendment or modification of the Plan shall
be effective without shareholder approval at any time at which such approval is
required, either by the applicable rules of any securities exchange (including
the Nasdaq National Market) on which Company stock is then principally traded,
or by Rule 16b-3; (ii) none of the foregoing actions by the Board shall
adversely affect any then outstanding Option without the holder's consent; and
(iii) for so long as may be 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 Internal Revenue Code, the Employee Retirement
Income Security Act, or the rules thereunder.
8.2 The Plan has been adopted by the Board subject to shareholder
approval and shall become effective when, and only when, such approval is
obtained.
8.3 If at any time the Board shall determine that the listing,
registration, or qualification of any Shares upon any national securities
exchange or under any Federal, state, local, or foreign law, or the consent or
approval of any governmental regulatory body, is necessary or desirable as a
condition of, or in connection with, the issuance or delivery of Shares
pursuant to the Plan, then, notwithstanding any other provision of the Plan to
the contrary, no Shares shall be issued or delivered unless and until such
listing, registration, qualification, consent, or approval shall have been
effected or obtained, or otherwise provided for, free of any conditions not
acceptable to the Board.
8.4 Neither the grantee of an Option, nor any other person to whom
the Option or the grantee's rights thereunder may pass, shall be, or have any
rights or privileges of, a holder of Shares in respect of any Shares subject to
such Option, unless and until it has been duly exercised and certificates
representing such Shares have been issued in the name of such grantee or other
person.
8.5 The Company shall have the right to require the holder of an
Option to make payments in cash upon the exercise of the Option, in connection
with any obligation of the Company to withhold taxes upon such exercise. Any
such required payment shall be a condition precedent to settlement of such
Option.
8.6 The Plan and all actions taken under it shall be governed by the
internal laws of the State of Michigan.
Adopted by the Board of Directors of the Company: April 3, 1996
Approved by the Shareholder of the Company: April 20, 1996
-5-
<PAGE> 1
EXHIBIT 16
[COOPERS & LYBRAND LETTERHEAD]
June 5, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have read the statements made by Picom Insurance Company (copy attached)
which we understand will be filed with the Commission, pursuant to Item 601 of
Regulation S-K, Exhibit 16, as part of the Company's Amendment No. 1 to Form
S-4. We agree with the Statements concerning our Firm in such Form S-4.
Very truly yours,
Coopers & Lybrand L.L.P.
MEF:bss
<PAGE> 2
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 changes in accounting methods 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 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.
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 by ___________________ , 1997.
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
<PAGE> 1
[KPMG PEAT MARWICK LLP LETTERHEAD]
EXHIBIT 18
The Board of Directors
PICOM Insurance Company:
We have audited the consolidated balance sheet of PICOM Insurance Company and
Subsidiaries (the "Company") as of December 31, 1995, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended, and have reported thereon under date of February 20, 1996. The
aforementioned consolidated financial statements and our audit report thereon
are included in the Company's Form S-4 for the year ended December 31, 1995. As
stated in Notes 1 and 7, the Company changed its method of accounting for
reporting loss and loss adjustment expense reserves by eliminating the practice
of discounting its loss and loss adjustment expense reserves. The Company
states that the newly adopted accounting principle is preferable in these
circumstances because this change is more conservative and is practiced by
most publicly held insurers. In accordance with your request, we have
reviewed and discussed with Company officials the circumstances and
business judgment and planning upon which the decision to make this change in
the method of accounting was based.
With regard to the aforementioned accounting change, authoritative criteria
have not been established for evaluating the preferability of one acceptable
method of accounting over another acceptable method. However, for purposes of
the Company's compliance with the requirements of the Securities and Exchange
Commission, we are furnishing this letter.
Based on our review and discussion, with reliance on management's business
judgment and planning, we concur that the newly adopted method of accounting is
preferable in the Company's circumstances.
Very truly yours,
KPMG PEAT MARWICK LLP
East Lansing, Michigan
February 20, 1996
<PAGE> 1
EXHIBIT (21)(a)
SUBSIDIARY OF PROFESSIONALS INSURANCE
COMPANY MANAGEMENT GROUP
PICOM Interim Insurance Company, a Michigan stock, property and casualty
insurer incorporated April 12, 1996.
<PAGE> 1
EXHIBIT 23(c)
INDEPENDENT AUDITOR'S CONSENT
The Board of Directors and Shareholders
PICOM Insurance Company:
We consent to the use of our report dated February 20, 1996, included herein
and to the reference to our firm under the heading "Experts" in the prospectus.
Our report dated February 20, 1996, refers to a change in method of accounting
for loss and loss adjustment expense reserves to eliminate discounting of such
reserves.
KPMG PEAT MARWICK LLP
East Lansing, Michigan
June 7, 1996
<PAGE> 2
EXHIBIT 23(c)
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Shareholder
Professionals Insurance Company Management Group:
We consent to the use of our report dated May 3, 1996, included herein and to
the reference to our firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
East Lansing, Michigan
June 7, 1996
<PAGE> 3
EXHIBIT 23(c)
INDEPENDENT AUDITORS' CONSENT
The Board of Directors and Shareholder
PICOM Interim Insurance Company:
We consent to the use of our report dated May 3, 1996, included herein and to
the reference to our firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
East Lansing, Michigan
June 7, 1996
<PAGE> 1
EXHIBIT 23(d)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement (Amendment No. 1) on
Form S-4 (File No. 333-3138) of our report dated February 17, 1995, on our
audits of the consolidated financial statements of PICOM Insurance Company and
Subsidiaries as of December 31, 1994 and for the years ended December 31, 1994
and 1993. We also consent to the reference to our Firm under the caption
"Experts."
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
June 7, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PROFESSIONALS INSURANCE COMPANY MANAGEMENT
GROUP AND SUBSIDIARY AS OF APRIL 30, 1996, AND FOR THE PERIOD FROM JANUARY 31,
1996, DATE OF INCEPTION, THROUGH APRIL 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-31-1996
<PERIOD-END> APR-30-1996
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,455,470
<CASH> 44,632
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 1,500,102
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 1,500,077
0
0
<COMMON> 25
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,500,102
0
<INVESTMENT-INCOME> 77
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 77
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PICOM INTERIM INSURANCE COMPANY AS OF APRIL 30, 1996
AND FOR THE PERIOD FROM APRIL 12, 1996, DATE OF INCEPTION, THROUGH APRIL 30,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 1-MO
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-12-1996
<PERIOD-END> APR-30-1996
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,455,470
<CASH> 44,607
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 1,500,077
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 1,000,000
<OTHER-SE> 500,051
<TOTAL-LIABILITY-AND-EQUITY> 1,500,077
0
<INVESTMENT-INCOME> 77
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 77
<INCOME-TAX> 26
<INCOME-CONTINUING> 51
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PICOM INSURANCE COMPANY AS OF DEC. 31, 1995
AND 1994, AND FOR THE THREE YEAR PERIOD THEN ENDED AND THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS OF PICOM INSURANCE COMPANY AS OF MAR. 31,
1996 AND DEC. 31, 1995, AND FOR THE THREE-MONTH PERIODS ENDED MAR. 31, 1996 AND
AND 1995
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> MAR-31-1996 DEC-31-1995
<DEBT-HELD-FOR-SALE> 258,733 259,979
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 2,684 2,641
<MORTGAGE> 0 0
<REAL-ESTATE> 470 475
<TOTAL-INVEST> 273,736 280,607
<CASH> 1,323 1,279
<RECOVER-REINSURE> 21 48
<DEFERRED-ACQUISITION> 866 1,092
<TOTAL-ASSETS> 329,683 330,712
<POLICY-LOSSES> 200,904 199,605
<UNEARNED-PREMIUMS> 27,008 23,122
<POLICY-OTHER> 14,182 14,082
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 0 0
3,239 3,239
0 0
<COMMON> 0 0
<OTHER-SE> 75,293 75,172
<TOTAL-LIABILITY-AND-EQUITY> 329,683 330,712
14,337 55,684
<INVESTMENT-INCOME> 3,869 14,729
<INVESTMENT-GAINS> (14) (6)
<OTHER-INCOME> 83 165
<BENEFITS> 12,516 36,902
<UNDERWRITING-AMORTIZATION> 0 0
<UNDERWRITING-OTHER> 2,593 9,328
<INCOME-PRETAX> 3,166 24,342
<INCOME-TAX> 839 8,276
<INCOME-CONTINUING> 2,327 16,066
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 (8,125)
<NET-INCOME> 2,327 7,941
<EPS-PRIMARY> .074 2.55
<EPS-DILUTED> .074 2.55
<RESERVE-OPEN> 199,605 184,784
<PROVISION-CURRENT> 0 63,027
<PROVISION-PRIOR> 0 (27,469)
<PAYMENTS-CURRENT> 0 3,053
<PAYMENTS-PRIOR> 0 44,180
<RESERVE-CLOSE> 0 199,605
<CUMULATIVE-DEFICIENCY> 200,904 0
</TABLE>
<PAGE> 1
EXHIBIT (99)(c)
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS AND MANAGEMENT OF PICOM INSURANCE COMPANY
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON WEDNESDAY, JULY 31, 1996
The undersigned Shareholder appoints Victor T. Adamo, Esq., W. Peter
McCabe, M.D., and Isaac J. Powell, M.D., and each of them, each with the power
to appoint his substitute, attorneys and proxies to represent the Shareholder
and to vote and act with respect to all shares of common stock, $1.00 par value
per share (the "PICOM Common Stock"), of PICOM Insurance Company ("PICOM") that
the Shareholder would be entitled to vote on all matters which come before the
Annual Meeting of Shareholders of PICOM referred to above, which is to be held
at University Place Marriott, 300 M.D.C. Avenue, East Lansing, Michigan 48823,
and any adjournment(s) or postponement(s) of that meeting.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS AND
MANAGEMENT OF PICOM.
IF THIS PROXY IS PROPERLY EXECUTED, THE SHARES OF PICOM COMMON STOCK
REPRESENTED BY THIS PROXY WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS
MADE, SUCH SHARES WILL BE VOTED FOR THE ELECTION OF ALL OF THE NOMINEES FOR
DIRECTOR LISTED ON THE OTHER SIDE OF THIS PROXY, AND FOR THE PICOM
REORGANIZATION PROPOSAL LISTED ON THE OTHER SIDE OF THIS PROXY. THE SHARES OF
PICOM COMMON STOCK REPRESENTED BY THIS PROXY WILL BE VOTED IN THE DISCRETION OF
THE PROXIES ON ANY OTHER MATTERS WHICH MAY COME BEFORE THE MEETING.
The undersigned Shareholder hereby (i) revokes any and all proxies
previously executed with respect to the annual meeting of shareholders of PICOM
referred to above, and (ii) acknowledges receipt of the notice and proxy
statement for said annual meeting of shareholders.
PLEASE DATE AND SIGN THE OTHER SIDE OF THIS PROXY
- --------------------------------------------------------------------------------
FOLD AND DETACH HERE
<TABLE>
<S><C>
Please mark
your votes as
indicated in
this example /X/
1. Approval and adoption of (a) the Reorganization Agreement dated May 13, 1996 (the "Reorganization Agreement") among
PICOM, Professionals Insurance Company Management Group ("Holding Company") and PICOM Interim Insurance Company ("INSCO"), (b)
the Agreement and Plan of Merger dated May 13, 1996 (the "Plan of Merger") among PICOM, Holding Company and INSCO, and (c) all
of the transactions contemplated by the Reorganization Agreement and the Plan of Merger (including, without limitation, the
merger of INSCO with and into PICOM).
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THIS PROPOSAL.
FOR AGAINST ABSTAIN
/ / / / / /
2. The election of four directors to a three year term, namely: Victor T. Adamo, Esq., W. Peter McCabe, M.D., Sharon S. Smith,
M.D., and William H. Woodhams, M.D.
Vote for all Withhold authority YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR ALL DIRECTOR NOMINEES LISTED
nominees to ABOVE.
listed above. vote for all (Instruction: To withhold authority for any nominee(s) listed above, list name(s) of
nominees listed nominee(s) in the space provided below.)
above.
/ / / /
___________________________________________________________________________________
Please sign exactly as name appears on this
proxy. When shares are held by joint
tenants, both should sign. When signing as
attorney, executor, administrator, trustee
or guardian, please give full title as such.
If a corporation, please sign in full
corporate name by an authorized officer. If
a partnership, please sign in partnership
name by authorized person.
Dated: _________________________________,1996
____________________________________________
Signature
____________________________________________
Title
____________________________________________
Signature if held jointly
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY
PROMPTLY USING THE ENCLOSED POSTAGE PAID
RETURN ENVELOPE.
- ----------------------------------------------------------------------------------------------------------------------------------
FOLD AND DETACH HERE
</TABLE>
<PAGE> 1
EXHIBIT (99)(d)
SUBSIDIARIES OF PICOM INSURANCE COMPANY
PICOM Insurance Agency, an inactive Michigan insurance agency that was
incorporated March 31, 1981.
PICOM Claims Services Corporation, a Michigan corporation that provides claims
management services and was incorporated December 10, 1985.
PICOM Financial Services Corporation, an inactive Michigan corporation that was
incorporated May 29, 1986.
PICOM Insurance Company of Illinois, an Illinois stock, property and casualty
insurer that was incorporated December 5, 1994.
R. Hardy & Associates, Inc., an inactive Illinois insurance agency that was
incorporated December 22, 1994.
American Insurance Management Corporation, an Indiana corporation that serves
as the attorney-in-fact for American Medical Insurance Exchange, an Indiana
interinsurance reciprocal exchange.
<PAGE> 1
EXHIBIT (99)(h)
CONFORMED COPY FILED WITH SEC
ARTICLES OF INCORPORATION
OF THE
PICOM INTERIM INSURANCE COMPANY
We, the undersigned, desiring to become incorporated under the provisions
of Act No. 218 of the Public Acts of 1956, as amended, do hereby make, execute,
and adopt the following articles of incorporation, to-wit:
ARTICLE I.
The names of the incorporators and their respective places of residence are
as follows:
<TABLE>
<CAPTION>
NAME PLACE OF RESIDENCE
- ---------- ---------------------------
<S> <C>
Victor T. Adamo 1314 Dennison
East Lansing, Michigan 48823
R. Kevin Clinton 412 Oxford
East Lansing, Michigan 48823
Annette E. Flood 310 N. Bridge Street
Dewitt, Michigan 48820
Kathryn A. Neville 201 Greencroft
Lansing, Michigan 48910
Karen R. Blohm 6901 Kingdon
Holt, Michigan 48842
Tamara J. Daniels 1322 Dexter Trail
Dansville, Michigan 48819
Brad B. Arbuckle 6789 Woodcrest Drive
Troy, Michigan 48098
Sally A. Hamby 6808 Granger Drive
Troy, Michigan 48098
Ann M. Maiuri 349 Aspinwall
Troy, Michigan 48098
J. Kevin Trimmer 641 Yarmouth
Bloomfield Hills, MI 48301
</TABLE>
<PAGE> 2
<TABLE>
<CAPTION>
NAME PLACE OF RESIDENCE
- -------------- ---------------------------
<S> <C>
Stephen G. Palms 784 East Square Lake Road
Bloomfield Hills, Michigan 48304
Lisa D. Pick 5929 Naneva Court
West Bloomfield, Michigan 48322
Cecilia A. Jacobson 8280 Ellis Creek Drive
Clarkston, Michigan 48348
</TABLE>
ARTICLE II.
The name assumed by this Corporation and by which it shall be known in law
is PICOM Interim Insurance Company and its principal office for the transaction
of business shall be in the County of Ingham, State of Michigan.
ARTICLE III.
This Corporation is organized for the following purposes, as authorized by
Chapter 6, Act No. 218 of the Public Acts of 1956, as amended, namely:
To write those kinds of insurance defined in said Chapter 6, except life
insurance;
To reinsure risks of every kind or description, except life insurance; and
To, consistent with the above purposes, have and enjoy all of the powers,
rights and authority as is or may be conferred upon corporations of its
class by the laws of the State of Michigan.
ARTICLE IV.
The term of existence of this Corporation shall be perpetual.
ARTICLE V.
The annual meeting of the shareholder shall be held on the 1st Wednesday
of June, or such other date as may be designated by the Board of Directors.
The meeting shall be held at the time and place within or without the State of
Michigan as is set forth in the notice of meeting. At such meeting the
shareholder shall elect Directors, as required by the Articles of
Incorporation, and transact such other business as shall lawfully come before
the meeting.
2
<PAGE> 3
ARTICLE VI.
CAPITAL STOCK
The aggregate number of shares which the Corporation shall have the
authority to issue is one million (1,000,000) consisting of one class only,
designated as Common Shares at a par value of One Dollar ($1.00) per share. No
Common Share shall be issued or sold for less than One and 50/100 Dollars
($1.50) cash. The minimum capital of the Corporation which shall be paid in
before the Corporation shall commence business shall be One Million Five
Hundred Thousand Dollars ($1,500,000); consisting of One Million Dollars
($1,000,000) paid-in-capital and Five Hundred Thousand Dollars ($500,000)
additional contributed surplus.
ARTICLE VII.
ELECTION AND TERMS OF DIRECTORS
1. The Board of Directors shall consist of three directors.
2. Each director shall hold office until the annual meeting next
succeeding his or her election or until his or her earlier resignation, removal
from office, or death.
3. At any duly called annual or special meeting of the shareholder, the
shareholder may remove a director with or without cause. The vote for removal
shall be by a majority of shares entitled to vote at an election of directors.
4. Any vacancy in the Board of Directors, unless otherwise provided by
law, shall be filled by a majority vote of the directors then in office, though
less than a quorum, at any regular or special meeting of the Board of Directors
or at any annual or special meeting of the shareholder. Any person elected by
the Board of Directors to fill a vacancy on the Board shall serve until the
next election of directors by the shareholder. If elected by the shareholder,
the person elected to fill the vacancy shall serve for the balance of the
unexpired term.
5. A majority of the Board of Directors then in office shall constitute a
quorum for the transaction of business, and the acts of the majority of the
directors present at a meeting at which a quorum is present shall be the acts
of the Board of Directors.
ARTICLE VIII.
POWERS OF DIRECTORS
Except as otherwise provided by law or by these Articles, the powers of
the Corporation shall be exercised by or under the authority of the Board of
Directors. In addition to such other powers as are provided by law, the
Directors have the power:
a) To make, amend or repeal the Bylaws;
3
<PAGE> 4
b) To elect officers and fix their compensation;
c) To remove any officer of the corporation elected by the Board as
permitted by law;
d) To establish committees of Directors and other committees and to
delegate to such committees those powers which by law it may so delegate;
e) In addition to the duties and powers enumerated herein, the Board
of Directors shall have all powers and duties necessary or incident to
their office.
ARTICLE IX.
OFFICERS
1. The officers of the Corporation shall be a President, a Secretary and
a Treasurer. The Board of Directors may from time to time fill any vacancies,
create such other offices and elect such other officers as it may determine.
Any two or more offices may be held by the same person, but no officer shall
execute, acknowledge or verify any instrument in more than one capacity.
2. Officers of the Corporation shall hold office until the next meeting
of the Board of Directors following the annual meeting of the shareholder and
until their successors are elected and qualified, subject however to removal by
the Board of Directors, as permitted by law, or prior death or resignation.
ARTICLE X.
INDEMNIFICATION
Subject to statutory limitations, the Corporation shall have the power to
indemnify and reimburse any person for expenses (including attorney's fees,
judgments, fines, settlements and other costs) reasonably incurred by him or
her and for liabilities imposed upon him or her in connection with or arising
out of any action, suit or proceeding, civil or criminal, or threat thereof, in
which he or she may be involved by reason of being or having been a Director,
officer, employee, trustee or agent of the Corporation or of any firm,
corporation or organization with respect to which he or she served in any
capacity at the request of the Corporation.
ARTICLE XI.
INCORPORATORS' COVENANTS
The undersigned shall not permit the corporation to commence business
until sufficient funds, as required by law, have been paid into the capital and
surplus account of the corporation,
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<PAGE> 5
nor until a Certificate of Authority has been issued to the corporation by the
Michigan Commissioner of Insurance.
ARTICLE XII.
DIRECTOR LIABILITY
1. Except as provided in Section 2 below, a Director shall not be
personally liable to the corporation, its shareholders, or its policyholders
for any monetary damages arising out of a breach, or a claim thereof, of the
Director's fiduciary duty to the corporation, its shareholder or policyholders.
2. The limitation of liability of a Director stated in Section 1 does not
apply to any of the following:
a) A breach of the Director's duty of loyalty to the corporation,
its shareholders or policyholders;
b) Acts or omissions not in good faith or that involve intentional
misconduct or knowing violation of law;
c) A transaction from which the Director derived an improper
personal benefit; and
d) An act or omission occurring before January 1, 1989.
ARTICLE XIII.
AMENDMENTS OF BYLAWS
The Bylaws of the Corporation may be amended at any regular or special
meeting of the Board of Directors by a vote of the majority of the directors
present. No amendment to the Bylaws shall become operative unless and until it
shall have been filed with the Commissioner of Insurance of the State of
Michigan.
ARTICLE XIV.
AMENDMENTS OF ARTICLES
Amendments to these Articles of Incorporation may be made at any special
meeting of the shareholder duly called for that purpose, or at any annual
meeting of the shareholder, provided that a statement of the nature of the
proposed amendment is included in the notice of the meeting, upon receiving the
affirmative vote of the holder of a majority of the outstanding shares entitled
to vote thereon.
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<PAGE> 6
IN WITNESS WHEREOF, We, the parties hereby associating, for the purpose of
giving legal effect to these articles, hereunto sign our names this 20th day of
March, A.D. 1996.
/s/ Victor T. Adamo /s/ Brad B. Arbuckle
- --------------------------------- -----------------------------------
Victor T. Adamo Brad B. Arbuckle
/s/ R. Kevin Clinton /s/ Sally A. Hamby
- --------------------------------- -----------------------------------
R. Kevin Clinton Sally A. Hamby
/s/ Annette E. Flood /s/ Anna M. Maiuri
- --------------------------------- -----------------------------------
Annette E. Flood Anna M. Maiuri
/s/ Kathryn A. Neville /s/ J. Kevin Trimmer
- --------------------------------- -----------------------------------
Kathryn A. Neville J. Kevin Trimmer
/s/ Karen R. Blohm /s/ Stephen G. Palms
- --------------------------------- -----------------------------------
Karen R. Blohm Stephen G. Palms
/s/ Tamara J. Daniels /s/ Lisa D. Pick
- --------------------------------- -----------------------------------
Tamara J. Daniels Lisa D. Pick
/s/ Cecilia A. Jacobson
-----------------------------------
Cecilia A. Jacobson
STATE OF MICHIGAN )
) ss.
COUNTY OF INGHAM )
On this 20th day of March, 1996, before me, a notary public in and for
said county, personally appeared Victor T. Adamo, R. Kevin Clinton, Annette E.
Flood, Kathryn A. Neville, Karen R. Blohm, Tamara J. Daniels, Brad B. Arbuckle,
Sally A. Hamby, Anna M. Maiuri, J. Kevin Trimmer, Stephen G. Palms, Lisa D.
Pick and Cecilia A. Jacobson known to me to be the persons named in and who
executed the foregoing instrument, and severally acknowledged that they
executed the same freely and for the intents and purposes therein mentioned.
/s/ Brenda K. Sheldon
--------------------------------------
Brenda K. Sheldon
Notary Public, Macomb County, Michigan
My commission expires 04/03/99
Acting in Oakland County
6
<PAGE> 1
EXHIBIT (99)(i)
BYLAWS
OF
PICOM INTERIM INSURANCE COMPANY
ARTICLE I
Meeting of Shareholder
Section 1. Annual Meeting. The annual meeting of the shareholder, for the
purpose of electing directors and transacting such other business as may come
before the meeting, shall be held on the first Wednesday in June of each year,
or such other date as may be designated by the Board of Directors.
Section 2. Special Meetings. Special meetings of the shareholder may be
called at any time by the chairman of the Board, the president or a majority of
the Board of Directors acting with or without a meeting, or by the president or
secretary upon the written request of the shareholder.
Section 3. Place of Meeting. Meetings of the shareholder shall be held at
the principal office of the Corporation unless the Board of Directors
designates some other place, within or without the State of Michigan, and
causes the notice thereof to so specify.
Section 4. Notice of Meetings. Notice of all meetings of the shareholder
shall be given by mailing to the shareholder a copy of such notice, postage
prepaid, directed to the shareholder's last known post office address not less
than 21 days nor more than 60 days prior to the time fixed for such meeting,
and such notice shall state the time and place, and if it be a special meeting,
the purpose of such meeting.
Section 5. Waiver of Notice. The shareholder may waive in writing any
notice required to be given by law or under these bylaws; provided, however,
that the attendance of the shareholder at any meeting without protesting, prior
to or at the commencement of the meeting, shall be deemed to be a waiver of
notice of such meeting.
ARTICLE II
Directors
Section 1. General Powers. All the capacity of the Corporation shall be
vested in, and all its power and authority, except as otherwise provided by
law, the Articles of Incorporation or the Bylaws shall be exercised by its
Board of Directors.
<PAGE> 2
Section 2. Number of Directors. The Board of Directors shall consist of
three Directors.
Section 3. Term of Office.
(a) Each Director shall hold office until the annual meeting next
succeeding his or her election or until his or her earlier resignation, removal
from office, or death.
(b) At any duly called annual or special meeting of the shareholder, the
shareholder may remove a director with or without cause. The vote for removal
shall be by a majority of shares entitled to vote at an election of directors.
Section 4. Vacancies. Any vacancy in the Board of Directors, unless
otherwise provided by law, shall be filled by a majority vote of the Directors
then in office, at any regular or special meeting of the Board of Directors or
at any annual or special meeting of the shareholder; Any person elected by the
Board of Directors to fill a vacancy on the Board shall serve until the next
election of Directors by the shareholder. If elected by the shareholder, the
person elected to fill the vacancy shall serve for the balance of the unexpired
term.
ARTICLE III
Meeting of Directors
Section 1. Meetings of the Board. (a) A meeting of the Board of Directors
shall be held immediately following the adjournment of each annual meeting of
the shareholder. Notice of such meeting need not be given.
(b) Regular meetings of the Board of Directors may be held without notice
at such time and place as shall from time to time be determined by the Board of
Directors.
(c) Special meetings of the Board of Directors may be held at any time and
place upon call of the chairman of the Board, the president, or any two
directors.
(d) Meetings of the Board of Directors, whether regular or special, may be
held either within or without the State of Michigan. Any or all members of the
Board of Directors may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating at the meeting can hear each other. Participation in a meeting
by means of conference telephone or similar equipment constitutes presence in
person at the meeting.
Section 2. Notice of Special Meetings. Unless waived, written notice of
the time and place and purpose of each special meeting of the Board of
Directors shall be given to each director either by personal delivery or by
mail, telegram, or cablegram at least forty-eight (48) hours before the
meeting, and unless otherwise indicated in the notice, any business may be
transacted at the meeting.
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<PAGE> 3
Section 3. Waiver of Notice. Notice of any meeting of the Board of
Directors may be waived by a director in writing. The attendance of a director
at a meeting of the Board without protesting of lack of proper notice, prior to
or at the commencement of the meeting, shall be deemed to be a waiver of notice
of such meeting.
Section 4. Quorum. A majority of the qualified directors then in office
shall constitute a quorum for all purposes. At each meeting of the Board of
Directors, at which a quorum is present all questions and business shall be
determined by a vote of the majority of the directors present unless a
different vote is required by law. At any meeting duly called, whether or not
a quorum is present, a majority of the directors present may adjourn from time
to time and from place to place within or without the State of Michigan without
notice other than by announcement at the meeting. At any such adjourned
meeting at which a quorum is present any business may be transacted which might
have been transacted at the meeting as originally called.
Section 5. Action Without a Meeting. Any action which may be authorized or
taken at a meeting of directors may be authorized or taken without a meeting in
a writing or writings signed by all the directors.
ARTICLE IV
Officers
Section 1. Officers Designated. The Board of Directors, at its
organizational meeting, and at each meeting of the Board of Directors following
the annual meeting of the shareholder, shall elect a President, a Secretary,
and a Treasurer. Any two or more officers, except President and Vice
President, may be held by the same person, but no officer shall execute,
acknowledge, or verify any instrument in more than one capacity.
Section 2. Term of Office. Officers of the Corporation shall hold office
until the next following meeting of the Board of Directors following the annual
meeting of the shareholder and until their successors are elected and
qualified, subject however to prior death, resignation or removal.
Section 3. President. The president shall be the chief executive officer
of the Corporation. The president shall have and exercise general charge and
supervision of the affairs of the Corporation and shall do and perform such
other duties as may be assigned to him or her by the Board of Directors, or as
may be permitted or provided elsewhere in these Bylaws.
Section 4. Secretary. The secretary shall have charge of such books,
documents and papers as the Board of Directors may determine; the secretary
shall attend and keep the minutes of all the meetings of the Board of Directors
and the shareholder of the Corporation; and such books shall be open for
inspection as prescribed by law. He or she shall, in general, perform all the
duties incident to the office of the secretary subject to the control of the
Board of Directors and shall do and perform such other duties as may be
assigned to him by the Board of Directors.
3
<PAGE> 4
Section 5. Treasurer. The treasurer shall have the custody of all funds,
property and securities of the Corporation subject to such regulations as may
be imposed by the Board of Directors. When necessary or proper, he or she may
endorse on behalf of the Corporation for collection, checks, notes and other
obligations, and shall deposit the same to the credit of the Corporation at
such depositories as the Board of Directors may designate. He or she shall
make such payments as may be necessary or proper to be made on behalf of the
Corporation. He or she shall keep and maintain or supervise the maintenance of
adequate books and records for the purpose of keeping and maintaining an
accurate account of all the moneys and obligations received and paid or
incurred by him or her for or on account of the Corporation, which books shall
be open at all reasonable times for inspection by any director for any
reasonable purpose and at all reasonable times at the office of the
Corporation. He or she shall, in general, perform all the duties incident to
the office of treasurer, subject to the control of the Board of Directors.
Section 6. Removal. Any officer may be removed from office at any time
with or without cause by action of the Board of Directors. Such removal shall
be effected by written notice given by mail or personal delivery to such
officer.
Section 7. Compensation. The directors, by the affirmative vote of a
majority of those in office, and irrespective of any personal interest of any
of them, shall have authority to establish reasonable salary, compensation and
benefits, which may include pension, disability and death benefits, for
services to the Corporation by officers. Any payments made to an officer of
the Corporation as compensation for services, interest, rent, reimbursement of
expenses or otherwise which shall be disallowed in whole or in part as a
deductible expense by the Internal Revenue Service shall, if so requested by
the Board of Directors, be reimbursed by such officer of the Corporation to the
full extent of such disallowance; and, in lieu of direct reimbursement by the
officer, any amount owed to the Corporation by such officer pursuant to this
Section may be withheld from future payments by the Corporation to such officer
to the extent authorized by the Board of Directors.
Section 8. Bond of Officers and Employees. Any officer or employee of the
Corporation handling funds or negotiable instruments or any other property of
the Corporation shall furnish such bond or shall be covered by a blanket bond
in such amounts and with such surety and sureties as may be required by the
Board of Directors. The premium of any such bond shall be paid by the
Corporation.
ARTICLE V
Indemnification of Officers, Directors and Employees
Section 1. The Corporation shall indemnify and reimburse any person who was
or is a party or is threatened to be made a party to a threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal, administrative,
or investigative and whether formal or informal, other than an action by or in
the right of the Corporation, by reason of the fact that he or she is or was a
Director, officer, employee, or agent of the Corporation, or is or was serving
at the request of the Corporation as a Director, officer, partner, trustee,
employee, or agent of another foreign or domestic corporation, partnership,
joint venture, trust, or other
4
<PAGE> 5
enterprise, whether for profit or not, against reasonable expenses, including
attorneys' fees, judgments, penalties, fines, and amounts paid in settlement
actually and reasonably incurred by him or her in connection with the action,
suit, or proceeding, if the person acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of the
Corporation or its shareholder or policyholders, and with respect to a criminal
action or proceeding, if the person had no reasonable cause to believe his or
her conduct was unlawful. The termination of an action, suit, or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, does not, of itself, create a presumption that the person did
not act in good faith and in a manner which he or she reasonably believed to be
in or not opposed to the best interests of the Corporation or its shareholder
or policyholders, and, with respect to a criminal action or proceeding, had
reasonable cause to believe that his or her conduct was unlawful.
Section 2. The Corporation shall indemnify and reimburse any person who was
or is a party to or is threatened to be made a party to a threatened, pending,
or completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he or she is or was a
Director, officer, employee, or agent of the Corporation, or is or was serving
at the request of the Corporation as a Director, officer, partner, trustee,
employee, or agent of another foreign or domestic corporation, partnership,
joint venture, trust, or other enterprise, whether for profit or not, against
reasonable expenses, including actual and reasonable attorneys' fees, and
amounts paid in settlement incurred by the person in connection with the action
or suit, if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
Corporation or its shareholder or policyholders. However, indemnification
shall not be made for a claim, issue, or matter in which the person has been
found liable to the Corporation unless and only to the extent that the court in
which the action or suit was brought has determined upon application that,
despite the adjudication of liability but in view of all circumstances of the
case, the person is fairly and reasonably entitled to indemnification for the
expenses which the court considers proper.
Section 3. (a) To the extent that a Director, officer, employee, or agent
of the Corporation has been successful on the merits or otherwise in defense of
an action, suit, or proceeding referred to in Section 1 or 2, or in defense of
a claim, issue, or matter in the action, suit, or proceeding, he or she shall
be indemnified against expenses, including actual and reasonable attorneys'
fees, incurred by him or her in connection with the action, suit, or proceeding
and an action, suit, or proceeding brought to enforce the mandatory
indemnification provided in this subsection.
(b) An indemnification under Section 1 or 2, unless ordered by a court,
shall be made by the Corporation only as authorized in the specific case upon a
determination that indemnification of the Director, officer, employee, or agent
is proper in the circumstances because he or she has met the applicable
standard of conduct set forth in Sections 1 and 2. This determination shall be
made in any of the following ways:
(i) By a majority vote of a quorum of the Board
consisting of Directors who were not parties to the
action, suit, or proceeding.
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<PAGE> 6
(ii) If the quorum described in subdivision (i) is not
obtainable, then by a majority vote of a committee of
Directors who are not parties to the action. The
committee shall consist of not less than 2
disinterested Directors.
(iii) By independent legal counsel in a written opinion.
(iv) By the shareholder.
(c) If a person is entitled to indemnification under Section 1 or 2
for a portion of expenses including attorneys' fees, judgments, penalties,
fines, and amounts paid in settlement, but not for the total amount thereof,
the Corporation may indemnify the person for the portion of the expenses,
judgments, penalties, fines, or amounts paid in settlement for which the person
is entitled to be indemnified.
Section 4. Expenses incurred in defending a civil or criminal action,
suit, or proceeding described in Section 1 or 2 may be paid by the Corporation
in advance of the final disposition of the action, suit, or proceeding upon
receipt of an undertaking by or on behalf of the Director, officer, employee,
or agent to repay the expenses if it is ultimately determined that the person
is not entitled to be indemnified by the Corporation. The undertaking shall be
by unlimited general obligation of the person on whose behalf advances are made
but need not be secured.
Section 5. (a) The indemnification or advancement of expenses
provided under Sections 1 to 4 is not exclusive of other rights to which a
person seeking indemnification or advancement of expenses may be entitled under
the Articles of Incorporation, Bylaws, or a contractual agreement. However,
the total amount of expenses advanced or indemnified from all sources combined
shall not exceed the amount of actual expenses incurred by the person seeking
indemnification or advancement of expenses.
(b) The indemnification provided for in Sections 1 to 4 continues as
to a person who ceases to be a Director, officer, employee, or agent and shall
inure to the benefit of the heirs, executors, and administrators of the person.
Section 6. For purposes of Sections 1 to 5:
(a) "Corporation" includes all constituent corporations absorbed in a
consolidation or merger and the resulting or surviving corporation, so that a
person who is or was a director, officer, employee, or agent of the constituent
corporation or is or was serving at the request of the constituent corporation
as a director, officer, partner, trustee, employee, or agent of another foreign
or domestic corporation, partnership, joint venture, trust, or other enterprise
whether for profit or not shall stand in the same position under the provisions
of this Article with respect to the resulting or surviving corporation as the
person would if he or she had served the resulting or surviving corporation in
the same capacity.
(b) "Agent" does not include licensed insurance agents when acting in
the capacity of independent sales agents of the Corporation.
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<PAGE> 7
ARTICLE VI
Seal
The Board of Directors may adopt a seal for the Corporation.
If a seal is adopted, it shall be circular in form and contain the name of the
Corporation.
ARTICLE VII
Amendments
These Bylaws may be amended at any regular or special meeting
of the Board of Directors by a vote of the majority of the directors present at
a meeting. The Bylaws may also be amended at any regular or special meeting of
the shareholder.
7
<PAGE> 1
EXHIBIT (99)(j)
CONFORMED COPY FILED WITH SEC
Director/Executive Officer
CONSENT
In the Proxy Statement/Prospectus included in the Registration Statement on
Form S-4 to which this Consent is an exhibit (the "Prospectus"), I am named as
a person who is, or in connection with the consummation of the Merger (as that
term is used in the Prospectus) will be or become, a director of Professionals
Insurance Company Management Group ("Holding Company"). I hereby consent to
being so named and confirm my consent to serve in such capacity. In addition,
to the extent I am named in the Prospectus as a person who is, or will be or
become, an Executive Officer or other officer of Holding Company or a director
or officer of any subsidiary thereof (including, without limitation, PICOM
Insurance Company), I hereby consent to being so named and confirm my consent
to serve in such capacity.
Date: Signature:
June 10 , 1996 /s/ Jerry D. Campbell
- ------------------ ---------------------------------
Jerry D. Campbell
<PAGE> 2
Director/Executive Officer
CONSENT
In the Proxy Statement/Prospectus included in the Registration Statement on
Form S-4 to which this Consent is an exhibit (the "Prospectus"), I am named as
a person who is, or in connection with the consummation of the Merger (as that
term is used in the Prospectus) will be or become, a director of Professionals
Insurance Company Management Group ("Holding Company"). I hereby consent to
being so named and confirm my consent to serve in such capacity. In addition,
to the extent I am named in the Prospectus as a person who is, or will be or
become, an Executive Officer or other officer of Holding Company or a director
or officer of any subsidiary thereof (including, without limitation, PICOM
Insurance Company), I hereby consent to being so named and confirm my consent
to serve in such capacity.
Date: Signature:
June 10 , 1996 /s/ John F. Dodge, Jr.
- ------------------ ---------------------------
John F. Dodge, Jr.
<PAGE> 3
Director/Executive Officer
CONSENT
In the Proxy Statement/Prospectus included in the Registration Statement on
Form S-4 to which this Consent is an exhibit (the "Prospectus"), I am named as
a person who is, or in connection with the consummation of the Merger (as that
term is used in the Prospectus) will be or become, a director of Professionals
Insurance Company Management Group ("Holding Company"). I hereby consent to
being so named and confirm my consent to serve in such capacity. In addition,
to the extent I am named in the Prospectus as a person who is, or will be or
become, an Executive Officer or other officer of Holding Company or a director
or officer of any subsidiary thereof (including, without limitation, PICOM
Insurance Company), I hereby consent to being so named and confirm my consent
to serve in such capacity.
Date: Signature:
June 10 , 1996 /s/ H. Harvey Gass
- ------------------ ------------------------
H. Harvey Gass
<PAGE> 4
Director/Executive Officer
CONSENT
In the Proxy Statement/Prospectus included in the Registration Statement on
Form S-4 to which this Consent is an exhibit (the "Prospectus"), I am named as
a person who is, or in connection with the consummation of the Merger (as that
term is used in the Prospectus) will be or become, a director of Professionals
Insurance Company Management Group ("Holding Company"). I hereby consent to
being so named and confirm my consent to serve in such capacity. In addition,
to the extent I am named in the Prospectus as a person who is, or will be or
become, an Executive Officer or other officer of Holding Company or a director
or officer of any subsidiary thereof (including, without limitation, PICOM
Insurance Company), I hereby consent to being so named and confirm my consent
to serve in such capacity.
Date: Signature:
June 10 , 1996 /s/ Isaac J. Powell
- ------------------ ---------------------------
Isaac J. Powell
<PAGE> 5
Director/Executive Officer
CONSENT
In the Proxy Statement/Prospectus included in the Registration Statement on
Form S-4 to which this Consent is an exhibit (the "Prospectus"), I am named as
a person who is, or in connection with the consummation of the Merger (as that
term is used in the Prospectus) will be or become, a director of Professionals
Insurance Company Management Group ("Holding Company"). I hereby consent to
being so named and confirm my consent to serve in such capacity. In addition,
to the extent I am named in the Prospectus as a person who is, or will be or
become, an Executive Officer or other officer of Holding Company or a director
or officer of any subsidiary thereof (including, without limitation, PICOM
Insurance Company), I hereby consent to being so named and confirm my consent
to serve in such capacity.
Date: Signature:
June 10 , 1996 /s/ William H. Woodhams
- ------------------ -----------------------------
William H. Woodhams
<PAGE> 6
Director/Executive Officer
CONSENT
In the Proxy Statement/Prospectus included in the Registration Statement on
Form S-4 to which this Consent is an exhibit (the "Prospectus"), I am named as
a person who is, or in connection with the consummation of the Merger (as that
term is used in the Prospectus) will be or become, a director of Professionals
Insurance Company Management Group ("Holding Company"). I hereby consent to
being so named and confirm my consent to serve in such capacity. In addition,
to the extent I am named in the Prospectus as a person who is, or will be or
become, an Executive Officer or other officer of Holding Company or a director
or officer of any subsidiary thereof (including, without limitation, PICOM
Insurance Company), I hereby consent to being so named and confirm my consent
to serve in such capacity.
Date: Signature:
June 10 , 1996 /s/ Donald S. Young
- ------------------ ------------------------
Donald S. Young
