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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 1, 1999
PROFESSIONALS GROUP, INC.
(Exact name of registrant as specified in its charter)
Michigan 0-21223 38-3273911
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
2600 Professionals Drive, Okemos, Michigan 48864
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (517) 349-6500
(Former name or former address, if changed since last report)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On July 1, 1999 Michigan Educational Employees Mutual Insurance
Company, a Michigan domiciled insurance company that provides personal
automobile and homeowners coverages to teachers and other educational employees
in the state of Michigan, completed its conversion to a stock insurance company.
As a result of the conversion, MEEMIC became a wholly-owned subsidiary of MEEMIC
Holdings, Inc., a publicly traded Michigan business corporation (Nasdaq: MEMH).
As part of MEEMIC's conversion, the registrant acquired beneficial
ownership of 5,065,517 shares, or 76.8%, of the outstanding common stock of
MEEMIC Holdings, at a price of $10 per share. Of these shares, 2,302,209 were
acquired upon the conversion of a $21.5 million promissory note (plus accrued
interest of $1,522,090) issued by MEEMIC to ProNational Insurance Company, a
wholly-owned insurance subsidiary of the registrant, on April 7, 1997. The
remaining 2,763,308 shares were purchased for cash. The sources of such funds
were working capital and other of ProNational.
Since July 1, 1997 ProNational has reinsured, on a quota-share basis,
40% of MEEMIC's net premiums. Since April 7, 1997, ProNational has provided
MEEMIC with information systems services and certain consulting services under a
management services agreement for a base fee of $2.0 million (which increases by
5% each year).
Also, three of the six current directors of MEEMIC Holdings, Victor T.
Adamo, R. Kevin Clinton and Annette E. Food are directors or executive officers
of the registrant or ProNational. Mr. Clinton is also the President and Chief
Executive Officer of MEEMIC Holdings and of MEEMIC.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired.
Included as Exhibit 99.1 are the financial statements of Michigan
Educational Employees Mutual Insurance Company as follows: (i)the report dated
March 12, 1999 of PricewaterhouseCoopers LLP, independent auditors, on the
consolidated financial statements of Michigan Educational Employees Mutual
Insurance Company; (ii) consolidated balance sheets of Michigan Educational
Employees Mutual Insurance Company as of December 31, 1998 and 1997; (iii)
consolidated statements of income of Michigan Educational Employees Mutual
Insurance Company for the years ended December 31, 1998, 1997 and 1996; (iv)
consolidated statements of policyholders' surplus and comprehensive income of
Michigan Educational Employees Mutual Insurance Company for the years ended
December 31, 1998, 1997 and 1996; (v) consolidated statements of cash flows of
Michigan Educational Employees Mutual Insurance Company for the years ended
December 31, 1998, 1997 and 1996; and (vi) notes to such consolidated financial
statements of Michigan Educational Employees Mutual Insurance Company.
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Included as Exhibit 99.2 are the Financial statements of Michigan
Educational Employees Mutual Insurance Company as follows: (i) unaudited
condensed consolidated balance sheet of Michigan Educational Employees Mutual
Insurance Company as of June 30, 1999; (ii) unaudited condensed consolidated
statements of income of Michigan Educational Employees Mutual Insurance Company
for the six months ended June 30, 1999 and 1998; (iii) unaudited condensed
consolidated statements of comprehensive income of Michigan Educational
Employees Mutual Insurance Company for the six months ended June 30, 1999 and
1998; (iv) unaudited condensed consolidated statements of cash flows of Michigan
Educational Employees Mutual Insurance Company for the six months ended June 30,
1999 and 1998; and (v) notes to such unaudited condensed consolidated financial
statements of Michigan Educational Employees Mutual Insurance Company.
(b) Pro Forma Financial Information.
Included as Exhibit 99.3 are the Pro forma financial statements of
Professionals Group, Inc. and MEEMIC Holdings, Inc. as follows: (i) unaudited
pro forma condensed combined statements of income for Professionals Group, Inc.
and MEEMIC Holdings, Inc. for the six months ended June 30, 1999 and for the
year ended December 31, 1998; (ii) an unaudited pro forma condensed combined
balance sheet of Professionals Group, Inc. and MEEMIC Holdings, Inc. at June 30,
1999; and (iii) notes to such unaudited pro forma condensed combined financial
statements.
(c) Exhibits.
Exhibit Reference Number Exhibit Description
- ------------------------ -------------------
2.1 Standby Purchase and Option Agreement dated
November 13, 1998 among MEEMIC Holdings, Inc.,
ProNational Insurance Company and Professionals
Group, Inc.*
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99.1 Financial statements of Michigan Educational
Employees Mutual Insurance Company as follows:
(A) the report dated March 12, 1999 of
PricewaterhouseCoopers LLP, independent
auditors, on the consolidated financial
statements Michigan Educational Employees
Mutual Insurance Company; (B) consolidated
balance sheets of Michigan Educational
Employees Mutual Insurance Company as of
December 31, 1998 and 1997; (C) consolidated
statements of income of Michigan Educational
Employees Mutual Insurance Company for the
years ended December 31, 1998, 1997 and 1996;
(D) consolidated statements of policyholders'
surplus and comprehensive income of Michigan
Educational Employees Mutual Insurance Company
for the years ended December 31, 1998, 1997 and
1996; (E) consolidated statements of cash flows
of Michigan Educational Employees Mutual
Insurance Company for the years ended December
31, 1998, 1997 and 1996; and (F) notes to such
consolidated financial statements of Michigan
Educational Employees Mutual Insurance
Company.*
99.2 Financial statements of Michigan Educational
Employees Mutual Insurance Company as follows:
(A) unaudited condensed consolidated balance
sheet of Michigan Educational Employees Mutual
Insurance Company as of June 30, 1999; (B)
unaudited condensed consolidated statements of
income of Michigan Educational Employees Mutual
Insurance Company for the six months ended June
30, 1999 and 1998; (C) unaudited condensed
consolidated statements of comprehensive income
of Michigan Educational Employees Mutual
Insurance Company for the six months ended June
30, 1999 and 1998; (D) unaudited condensed
consolidated statements of cash flows of
Michigan Educational Employees Mutual Insurance
Company for the six months ended June 30, 1999
and 1998; and (E) notes to such unaudited
condensed consolidated financial statements of
Michigan Educational Employees Mutual Insurance
Company.*
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99.3 Pro forma financial statements of Professionals
Group, Inc. and MEEMIC Holdings, Inc. as
follows: (i) unaudited pro forma condensed
combined statements of income for Professionals
Group, Inc. and MEEMIC Holdings, Inc. for the
six months ended June 30, 1999 and for the year
ended December 31, 1998; (ii) an unaudited pro
forma condensed combined balance sheet of
Professionals Group, Inc. and MEEMIC Holdings,
Inc. at June 30, 1999; and (iii) notes to such
unaudited pro forma condensed combined
financial statements.*
- -------------------
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PROFESSIONALS GROUP, INC.
Date: September 12, 1999 By: /s/ John F. Lang
---------------------------------------
John F. Lang
Its: Vice President, Treasurer and Chief
Accounting Officer (Principal
Financial Officer and Principal
Accounting Officer)
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Standby Purchase and Option Agreement dated
November 13, 1998 among MEEMIC Holdings, Inc.,
ProNational Insurance Company and Professionals
Group, Inc.*
99.1 Financial statements of Michigan Educational
Employees Mutual Insurance Company as follows:
(A) the report dated March 12, 1999 of
PricewaterhouseCoopers LLP, independent
auditors, on the consolidated financial
statements Michigan Educational Employees
Mutual Insurance Company; (B) consolidated
balance sheets of Michigan Educational
Employees Mutual Insurance Company as of
December 31, 1998 and 1997; (C) consolidated
statements of income of Michigan Educational
Employees Mutual Insurance Company for the
years ended December 31, 1998, 1997 and 1996;
(D) consolidated statements of policyholders'
surplus and comprehensive income of Michigan
Educational Employees Mutual Insurance Company
for the years ended December 31, 1998, 1997 and
1996; (E) consolidated statements of cash flows
of Michigan Educational Employees Mutual
Insurance Company for the years ended December
31, 1998, 1997 and 1996; and (F) notes to such
consolidated financial statements of Michigan
Educational Employees Mutual Insurance
Company.*
99.2 Financial statements of Michigan Educational
Employees Mutual Insurance Company as follows:
(A) unaudited condensed consolidated balance
sheet of Michigan Educational Employees Mutual
Insurance Company as of June 30, 1999; (B)
unaudited condensed consolidated statements of
income of Michigan Educational Employees Mutual
Insurance Company for the six months ended June
30, 1999 and 1998; (C) unaudited condensed
consolidated statements of comprehensive income
of Michigan Educational Employees Mutual
Insurance Company for the six months ended June
30, 1999 and 1998; (D) unaudited condensed
consolidated statements of cash flows of
Michigan Educational Employees Mutual Insurance
Company for the six months ended June 30, 1999
and 1998; and (E) notes to such unaudited
condensed consolidated financial statements of
Michigan Educational Employees Mutual Insurance
Company.*
99.3 Pro forma financial statements of Professionals
Group, Inc. and MEEMIC Holdings, Inc. as
follows: (i) unaudited pro forma condensed
combined statements of income for Professionals
Group, Inc. and MEEMIC Holdings, Inc. for the
six months ended June 30, 1999 and for the year
ended December 31, 1998; (ii) an unaudited pro
forma condensed combined balance sheet of
Professionals Group, Inc. and MEEMIC Holdings,
Inc. at June 30, 1999; and (iii) notes to such
unaudited pro forma condensed combined
financial statements.*
- -------------------
* Filed herewith.
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Exhibit 2.1
STANDBY PURCHASE AND OPTION AGREEMENT
This Standby Purchase and Option Agreement (the "Agreement") is entered
into as of November 13, 1998, by and between MEEMIC Holdings, Inc., a Michigan
corporation ("MEEMIC Holdings"), ProNational Insurance Company, a Michigan
domiciled stock insurance company ("ProNational") and Professionals Group, Inc.,
a Michigan corporation ("Professionals").
RECITALS
WHEREAS, on June 24, 1998, the Board of Directors of MEEMIC approved a
Plan of Conversion that contemplates the offering of stock in MEEMIC Holdings to
Eligible Policyholders of MEEMIC in accordance with the terms of the Plan of
Conversion;
WHEREAS, on June 24, 1998, MEEMIC filed the Plan of Conversion with the
Michigan Insurance Bureau for approval;
WHEREAS, before proceeding with the Offering contemplated by the Plan
of Conversion the parties desire to commit to writing the obligation of the
Purchaser to purchase Shares of MEEMIC Holdings in certain circumstances as set
forth in this Agreement; and
WHEREAS, pursuant to the Plan of Conversion and in connection with the
transactions contemplated by the Plan of Conversion, MEEMIC Holdings desires to
grant to the Purchaser, and the Purchaser desires to obtain from MEEMIC
Holdings, an option to purchase certain additional Shares of stock of MEEMIC
Holdings upon certain terms and conditions set forth in greater detail below.
NOW, THEREFORE, in consideration of the terms and conditions set forth
in this Agreement, the receipt and sufficiency of which is hereby acknowledged,
MEEMIC Holdings, PICOM and Professionals agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 DEFINITIONS INCORPORATED BY REFERENCE. The terms set forth
in this Section 1.1 are defined in the Plan of Conversion for MEEMIC, as
approved by the Board of Directors of MEEMIC on June 24, 1998. The parties agree
that for purposes of this Agreement, the terms set forth below, whenever
initially capitalized, shall have the meaning set forth in such Plan of
Conversion. MEEMIC Holdings, PICOM and Professionals acknowledge receiving a
copy of such Plan of Conversion.
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EFFECTIVE DATE;
ELIGIBLE POLICYHOLDERS;
MEEMIC;
OFFERING;
OFFERING MAXIMUM;
OFFERING MINIMUM;
PURCHASE PRICE;
SHARES; and
SUBSCRIPTION OFFERING.
SECTION 1.2 ADDITIONAL DEFINED TERMS. In addition to the defined terms
set forth in Section 1.1, the terms set forth below, whenever initially
capitalized, shall have the meaning set forth in this Section:
"ADJUSTED PURCHASE PRICE" has the meaning set forth in Section 3.1 of
this Agreement.
"AGREEMENT" has the meaning set forth in the first paragraph of this
Agreement.
"CLOSING" has the meaning set forth in Section 4.1 of this Agreement.
"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 of the Nasdaq stock
market (the "National Market System") on such date, the daily closing price per
share of the Shares on such exchange (or, if there is more than one, the
principal such exchange); (b) if the Shares are not listed for trading on any
securities exchange (including the National Market System) on such date but are
reported by Nasdaq, and the market information concerning the Shares is
published on a regular basis in THE NEW YORK TIMES, THE WALL STREET JOURNAL, or
Detroit News, the average of the bid and asked price per share of the Shares as
so published; or (c) if (a) is inapplicable and market information concerning
the Shares is not regularly published as described in (b), the average of the
daily bid and asked price per share of the Shares in the over-the-counter market
as reported by Nasdaq (or, if Nasdaq does not report such prices for the Shares,
another generally accepted reporting service).
"INITIAL PRICE FOR THE OPTION SHARES" has the meaning set forth in
Section 3.1 of this Agreement.
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"ISSUANCE DATE FOR OPTION SHARES" has the meaning set forth in Section
3.2 of this Agreement.
"MEEMIC HOLDINGS" has the meaning set forth in the first paragraph of
this Agreement.
"NASDAQ" means the National Association of Securities Dealers Automated
Quotation System.
"OPTION SHARES" means the Shares of MEEMIC Holdings which the Purchaser
has the right to Purchase pursuant to Article III of this Agreement.
"PRONATIONAL" has the meaning set forth in the first paragraph of this
Agreement.
"PLAN OF CONVERSION" means the Plan of Conversion for MEEMIC, as
approved by the Board of Directors of MEEMIC on June 24, 1998.
"PROFESSIONALS" has the meaning set forth in the first paragraph of
this Agreement.
"PURCHASER" means ProNational and Professionals.
"SUBSCRIPTION AMOUNT" means the dollar amount equal to the number of
Shares purchased in the Subscription Offering times the Purchase Price.
SECTION 1.3 CAPTIONS. The captions and headings used in this Agreement
are for convenience only and shall not be used in construing the provisions of
this Agreement.
SECTION 1.4 NUMBER AND GENDER. The use of any gender in this Agreement
shall be deemed to be or include the other genders, including neuter, and the
use of the singular shall be deemed to include the plural (and vice versa)
wherever applicable.
ARTICLE II
REQUIREMENT TO PURCHASE STOCK AND
OPTION TO PURCHASE STOCK
SECTION 2.1 REQUIREMENT TO PURCHASE STOCK. Subject only to the
preconditions to Closing set forth in Article IV of this Agreement, the
Purchaser hereby unconditionally obligates itself to subscribe for, acquire and
purchase the number of Shares which, when multiplied by the Purchase Price,
equals:
The positive difference, if any, remaining after the
Subscription Amount is subtracted from the Offering Minimum.
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SECTION 2.2 RIGHT TO PURCHASE STOCK. Subject only to the preconditions
to Closing set forth in Article IV of this Agreement, MEEMIC Holdings hereby
grants to the Purchaser the right to subscribe for, acquire and purchase the
number of Shares which, when multiplied by the Purchase Price, equals:
The positive difference, if any, remaining after the greater
of (i) the Subscription Amount or (ii) the Offering Minimum
is subtracted from the Offering Maximum.
SECTION 2.3 DETERMINATION OF SUBSCRIPTION AMOUNT. (a) MEEMIC Holdings
agrees to provide written notice to the Purchaser of the Subscription Amount
within five (5) business days after the end of the period in which Participants
are allowed to purchase Shares in the Subscription Offering. In the event that
the Purchaser shall be required to purchase Shares pursuant to Section 2.1 of
this Agreement, the notice from MEEMIC Holdings to the Purchaser shall specify
the number of Shares that the Purchaser is required to purchase and the
calculations in support thereof. In the event that the Purchaser shall have the
right to purchase Shares pursuant to Section 2.2 of this Agreement, the notice
from MEEMIC Holdings to the Purchaser shall specify the number of Shares that
the Purchaser has the right to purchase pursuant to Section 2.2 and the
calculations in support thereof.
(b) The Purchaser shall have five (5) business days after it receives
the notice described in (a) above to notify MEEMIC Holdings of the number of
Shares, if any, it desires to purchase pursuant to Section 2.2 of this
Agreement. Any such notice from the Purchaser to MEEMIC Holdings shall be
irrevocable after it is delivered and after it is delivered MEEMIC Holdings
shall be obligated to deliver the Shares specified in such notice to the
Purchaser in accordance with the terms of this Agreement.
SECTION 2.4 TERMS OF PURCHASE PRICE. The price that the Purchaser shall
pay for any Shares purchased pursuant to Sections 2.1 or 2.2 of this Agreement
shall be the Purchase Price.
SECTION 2.5 FRACTIONAL SHARES. Sections 2.1 and 2.2 of this Agreement
shall not be construed as requiring or allowing the Purchaser to purchase any
fractional Shares. In the event that the calculations set forth in Sections 2.1
and 2.2 of this Agreement would otherwise provide for the purchase of fractional
Shares, then the number of Shares that the Purchaser would be required or
allowed to purchase shall be rounded up to the next whole number.
ARTICLE III
OPTION TO PURCHASE ADDITIONAL STOCK OF MEEMIC HOLDINGS
SECTION 3.1 BASIC TERMS. The Purchaser shall have the irrevocable
right, subject to the terms and conditions of this Article III, to purchase from
MEEMIC Holdings and MEEMIC
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Holdings agrees to sell to the Purchaser the number of Option Shares specified
below, at the price as established below.
Number of Option (i) .51 multiplied by the number of
Shares: outstanding Shares of MEEMIC Holdings as of
the date the Purchaser gives notice of its
intent to exercise its option to purchase the
Option Shares; plus (ii) 153,000; less (iii)
the number of Shares issued to ProNational
pursuant to Section 7.1 of the Plan of
Conversion; less (iv) the number of Shares, if
any, purchased pursuant to Sections 2.1 and 2.2
of this Agreement; less (v) any other Shares
other than those identified in (iii) and (iv)
above and owned by the Purchaser at the time
the Purchaser gives notice of its intent to
exercise its option to purchase the Option
Shares.
the sum of (i) through (v) above shall then be
divided by .49.
Price for the (a) In the event that the Purchaser gives
Option Shares: MEEMIC Holdings notice within the first 90
calendar days on or after the Effective Date of
the Purchaser's intent to purchase the Option
Shares, then on the Issuance Date of the Option
Shares the Purchaser shall pay an initial price
(the "Initial Price for the Option Shares") in
an amount equal to (i) the number of Option
Shares, times (ii) 140% of the Purchase Price.
120 calendar days after the Effective Date
MEEMIC Holdings shall calculate an adjusted
purchase price for the Option Shares (the
"Adjusted Purchase Price") which shall be the
amount equal to (i) the number of Option
Shares, times (ii) the greater of (x) the
average of the Fair Market Value of the Shares
for the 20 calendar day period commencing 71
calendar days after the Effective Date, or (y)
140% of the Purchase Price. After MEEMIC
Holdings calculates the Adjusted Purchase
Price, MEEMIC Holdings shall provide the
Purchaser with notice of the Adjusted Purchase
Price, then the Purchaser shall immediately pay
to MEEMIC Holdings the difference between the
Initial Price for the Option Shares and the
Adjusted Purchase Price, if any.
(b) In the event that the Purchaser gives
MEEMIC Holdings notice after the first 90
calendar days on or after the Effective Date,
but prior to the expiration of the one year
period
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commencing on the Effective Date, of the
Purchaser's intent to purchase the Option
Shares, then on the Issuance Date of the Option
Shares the Purchaser shall pay an amount equal
to (i) the number of Option Shares, times (ii)
the greater of (x) the average of the Fair
Market Value of the Shares for the 20 calendar
day period immediately preceding the
Purchaser's notice to MEEMIC Holdings of its
intent to purchase the Option Shares, or (y)
140% of the Purchase Price.
SECTION 3.2. METHOD OF EXERCISE; FRACTIONAL SHARES. The right to
purchase the Option Shares pursuant to this Article is exercisable at the option
of the Purchaser only in whole and only during the one year period commencing on
the Effective Date. The right to purchase the Option Shares shall be exercisable
only after the Purchaser shall have satisfied its obligations under Section 2.1
of this Agreement. The Purchaser shall be required to provide MEEMIC Holdings
with written notice of its irrevocable election to purchase the Option Shares
pursuant to Section 3.1. After such notice is provided to MEEMIC Holdings, the
Purchaser and MEEMIC Holdings shall mutually agree upon a date, which date shall
be not later than twenty (20) calendar days after such notice is provided to
MEEMIC Holdings, for the issuance of the Option Shares to the Purchaser (the
"Issuance Date for Option Shares"). On the Issuance Date for Option Shares, the
Option Shares shall be issued to the Purchaser and the Purchaser shall pay for
the Option Shares as determined by Section 3.1 of this Agreement.
SECTION 3.3. ADJUSTMENT OF SHARES PURCHASABLE. The number of Shares
purchasable pursuant to Section 3.1 and the price for such Shares are subject to
adjustment from time to time as specified in Section 3.5 of this Agreement.
SECTION 3.4. LIMITED RIGHTS OF OWNER. The options conferred by Article
III of this Agreement do not entitle the Purchaser to any voting rights or other
rights as a stockholder of MEEMIC Holdings, or to any other rights whatsoever
except the rights herein expressed. No dividends are payable or will accrue on
the Shares purchasable under Section 3.1 of this Agreement until, and then only
to the extent that, any such Shares are deemed to have been issued to the
Purchaser pursuant to this Agreement. Upon the giving by the Purchaser to MEEMIC
Holdings of the written notice of exercise of the option set forth in Article
III of this Agreement and the tender of the applicable price for such Shares in
immediately available federal funds, the Purchaser shall be deemed to be the
holder of record of the Shares issuable upon such exercise, notwithstanding that
the stock transfer books of MEEMIC Holdings shall then be closed or that
certificates representing such Shares shall not then be actually delivered to
Purchaser.
SECTION 3.5. EFFECT OF STOCK SPLIT, ETC. If MEEMIC Holdings, by stock
dividend, split, reverse split, reclassification of shares, or otherwise,
changes the number or type of outstanding Shares, then the applicable price in
effect pursuant to this Article III, and the number of Shares purchasable under
this Article III, immediately prior to the date upon which the change becomes
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effective, shall be proportionately adjusted (the price to the nearest cent) in
such manner as shall fully preserve the economic benefits provided to Purchaser
under this Agreement.
SECTION 3.6. EFFECT OF MERGER, ETC. If MEEMIC Holdings consolidates
with or merges into another corporation or entity, the Purchaser shall
thereafter be entitled on exercise to purchase, with respect to each Share
purchasable hereunder immediately before the consolidation or merger becomes
effective, the securities or other consideration to which a holder of one Share
is entitled to in the consolidation or merger without any change in or payment
in addition to the price in effect immediately prior to the merger or
consolidation. MEEMIC Holdings shall not consolidate or merge unless, prior to
consummation, the successor company (if other than, MEEMIC Holdings) assumes the
obligations of this paragraph by written instrument executed and delivered to
the Purchaser. A sale or lease of all or substantially all the assets of MEEMIC
Holdings for a consideration (apart from the assumption of obligations)
consisting primarily of securities is a consolidation or merger for the
foregoing purposes.
SECTION 3.7. NOTICE OF ADJUSTMENT. On the happening of an event
requiring an adjustment of the price or the Shares purchasable pursuant to this
Article III, MEEMIC Holdings shall forthwith give written notice to the
Purchaser of such event.
SECTION 3.8. NOTICE AND EFFECT OF DISSOLUTION, ETC. In the case that a
voluntary or involuntary dissolution, liquidation, or winding up of MEEMIC
Holdings (other than in connection with a consolidation or merger covered by
Section 3.6 hereof) is at any time proposed, MEEMIC Holdings shall give at least
30 days' prior written notice to the Purchaser. Such notice shall contain: (a)
the date on which the transaction is to take place; (b) the record date (which
shall be no sooner than 45 days after the giving of the notice) as of which
holders of the Shares will be entitled to receive distributions as a result of
the transaction; (c) a brief description of the transaction; (d) a brief
description of the distributions to be made to holders of the Shares as a result
of the transaction; and (e) an estimate of the fair value of the distributions.
ARTICLE IV
CLOSING AND PRECONDITIONS TO CLOSING
SECTION 4.1 CLOSING. The issuance and purchase of the Shares pursuant
to Sections 2.1 and 2.2 of this Agreement and the execution and delivery of all
certificates and documents contemplated by this Agreement (the "Closing") shall
be consummated on the Effective Date, provided that all of the preconditions to
Closing set forth in this Agreement have been satisfied.
SECTION 4.2 PRECONDITIONS TO CLOSING. The issuance and purchase of the
Shares contemplated by Article II of this Agreement shall only be consummated on
the Effective Date if all of the following conditions have been satisfied:
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(i) The Michigan Insurance Bureau issues an Order approving
the Plan of Conversion and such Order has not been revoked;
(ii) The Plan of Conversion is approved by the affirmative
vote of at least two-thirds (2/3) of the votes cast at the special
meeting of Eligible Policyholders of MEEMIC and becomes effective in
accordance with its terms;
(iii) All consents, approvals, authorizations, licenses and
orders of any governmental authority necessary in connection with the
issuance of the Shares are received; and
(iv) The Subscription Offering contemplated by the Plan of
Conversion is completed.
SECTION 4.3 DELIVERIES AT CLOSING. At the Closing, the parties shall
deliver the following:
(i) The Purchaser shall deliver the applicable Purchase Price
per Share for the Shares to MEEMIC Holdings, in immediately available
federal funds; and
(ii) MEEMIC Holdings shall deliver to the Purchaser stock
certificates registered in the name of ProNational or Professionals, as
directed by the Purchaser, evidencing the Shares issued and purchased
pursuant to this Agreement and such Shares shall be fully paid and
non-assessable.
SECTION 4.4. CLOSING FOR PURCHASE OF SHARES PURCHASED PURSUANT TO
ARTICLE III. On the Issuance Date for Option Shares, the parties shall deliver
the following:
(i) The Purchaser shall deliver the applicable price for the
Option Shares to MEEMIC Holdings, in immediately available federal
funds; and
(ii) MEEMIC Holdings shall deliver to the Purchaser stock
certificates registered in the name of ProNational or Professionals, as
directed by the Purchaser, evidencing the Option Shares issued and
purchased pursuant to Article III hereof and such Option Shares shall
be fully paid and non-assessable.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
SECTION 5.1 REPRESENTATIONS AND WARRANTIES OF MEEMIC HOLDINGS. MEEMIC
Holdings hereby represents and warrants to Professionals and ProNational,
jointly and severally, as follows:
a. ORGANIZATION AND EXISTENCE. MEEMIC Holdings is a
Michigan corporation duly organized, validly existing and in good standing
under the laws of the State of Michigan with
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all requisite corporate power and corporate authority to carry on its
business as it is now being conducted.
b. AUTHORIZATION. MEEMIC Holdings has the requisite power
and authority to allow it to execute, deliver and perform this Agreement, and
has taken all necessary corporate action to issue, and shall reserve for
issuance, the maximum number of Shares issuable under Articles II and III of
this Agreement. The execution, delivery and performance of this Agreement have
been duly, validly and effectively authorized by all requisite action of MEEMIC
Holdings' Board of Directors, and no other proceedings on the part of MEEMIC
Holdings are necessary to authorize this Agreement or the consummation of the
transactions contemplated hereby.
c. EXECUTION AND DELIVERY; VALID AND BINDING. This
Agreement has been duly executed and delivered by MEEMIC Holdings and
constitutes the valid and binding obligations of MEEMIC Holdings, enforceable
against it in accordance with its terms.
d. NO DEFAULTS, VIOLATIONS OR CONFLICTS. MEEMIC Holdings is
not in violation of any term or provision of the Plan of Conversion, this
Agreement, its Articles of Incorporation or By-Laws which would prevent it from
fulfilling its obligations under this Agreement.
e. NO VIOLATIONS OF LAW. The execution, delivery and
performance of the terms of this Agreement and the Plan of Conversion by MEEMIC
Holdings (i) requires no action by or in respect of, or filing with, any
governmental body other than the Michigan Insurance Bureau, or agency or
official of the United States or any political subdivision thereof, except for
such notices, Registration Statements, or reports as may be required to be filed
with the Securities and Exchange Commission under the Securities Exchange Act of
1933, as amended, the Securities Exchange Act of 1934, as amended, the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and any
applicable State blue sky laws, and (ii) will not violate any statute or any
order, rule or regulation of any court or government agency or body in the
United States or any political subdivision thereof having jurisdiction over
MEEMIC Holdings, which violation could have a material adverse effect on the
financial condition of MEEMIC Holdings or the ability of MEEMIC Holdings to
perform its obligation under this Agreement or the Plan of Conversion.
f. DELIVERY OF THE SHARES. Delivery by MEEMIC Holdings of
the Shares to ProNational or Professionals, as set forth in this Agreement, will
transfer to ProNational or Professionals valid title to such Shares, free and
clear of all liens, encumbrances, restrictions and claims of any kind, and such
Shares are not subject to any preemptive rights. MEEMIC Holdings shall at all
times reserve and hold available sufficient Shares to satisfy all rights of the
Purchaser under this Agreement.
SECTION 5.2 REPRESENTATIONS AND WARRANTIES OF PRONATIONAL. ProNational
hereby represents and warrants to MEEMIC Holdings as follows:
a. ORGANIZATION AND EXISTENCE. ProNational is a Michigan
domiciled stock insurance company, duly organized, validly existing and with all
requisite power and authority to carry on its business as it is now being
conducted.
9
<PAGE> 10
b. AUTHORIZATION. ProNational has the requisite power and
authority to allow it to execute, deliver and perform this Agreement. The
execution, delivery and performance of this Agreement have been duly, validly
and effectively authorized by all requisite action of ProNational's Board of
Directors, and no other proceedings on the part of ProNational are necessary to
authorize this Agreement or the consummation of the transactions contemplated
hereby.
c. EXECUTION AND DELIVERY; VALID AND BINDING. This
Agreement has been duly executed and delivered by ProNational and constitutes
the valid and binding obligations of ProNational, enforceable against
ProNational in accordance with its terms.
d. NO DEFAULTS, VIOLATIONS OR CONFLICTS. ProNational is not
in violation of any term or provision of its Articles of Incorporation or
By-Laws, which would prevent it from fulfilling its obligations under this
Agreement.
e. NO VIOLATIONS, ETC. The execution, delivery and
performance of the terms of this Agreement by ProNational (i) requires no action
by or in respect of, or filing with, any governmental body other than the
Michigan Insurance Bureau, or agency or official of the United States or any
political subdivision thereof, except for such notices, Registration Statements,
or reports as may be required to be filed with the Securities and Exchange
Commission under the Securities Exchange Act of 1933, as amended, the Securities
Exchange Act of 1934, as amended, the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and any applicable State blue sky laws, and (ii) will
not violate any statute or any order, rule or regulation of any court or
government agency or body in the United States or any political subdivision
thereof having jurisdiction over ProNational, which violation could have a
material adverse effect on the ability of ProNational to perform any obligations
under this Agreement.
f. SECURITIES LAW REPRESENTATIONS AND WARRANTIES.
(i) SOPHISTICATION AND BACKGROUND. ProNational is an "accredited
investor" as that term is defined by Rule 501(a) promulgated
by the Securities and Exchange Commission. ProNational has
such knowledge and experience in financial, tax and business
matters to enable it to utilize the information made available
to it to evaluate the merits and risks of the prospective
investment and to make an informed investment decision with
respect to the prospective investment.
(ii) AVAILABILITY OF INFORMATION. ProNational understands that
MEEMIC Holdings has agreed to make all documents, records and
books pertaining to the Shares and its business and affairs
available for inspection by it and/or ProNational's advisors.
(iii) RISK OF INVESTMENT. ProNational recognizes that the purchase
of stock in any corporation involves substantial risks, that
no assurance or guarantee has or can be given that a
shareholder in the MEEMIC Holdings will receive a return on
the investment or realize a profit on such investment, and
that it may not be able to sell the Shares.
10
<PAGE> 11
SECTION 5.3 REPRESENTATIONS AND WARRANTIES OF PROFESSIONALS.
Professionals hereby represents and warrants to MEEMIC Holdings as follows:
a. ORGANIZATION AND EXISTENCE. Professionals is a Michigan
corporation, duly organized, validly existing and in good standing under the
laws of the State of Michigan with all requisite power and authority to carry on
its business as it is now being conducted in good standing under the laws of the
State of Michigan.
b. AUTHORIZATION. Professionals has the requisite power and
authority to allow it to execute, deliver and perform this Agreement. The
execution, delivery and performance of this Agreement have been duly, validly
and effectively authorized by all requisite action of Professionals' Board of
Directors, and no other proceedings on the part of Professionals are necessary
to authorize this Agreement or the consummation of the transactions contemplated
hereby.
c. EXECUTION AND DELIVERY; VALID AND BINDING. This
Agreement has been duly executed and delivered by Professionals and constitutes
the valid and binding obligations of Professionals, enforceable against
Professionals in accordance with its terms.
d. NO DEFAULTS, VIOLATIONS OR CONFLICTS. Professionals is
not in violation of any term or provision of its Articles of Incorporation or
By-Laws which would prevent it from fulfilling its obligations under this
Agreement.
e. NO VIOLATIONS, ETC. The execution, delivery and
performance of the terms of this Agreement by Professionals (i) requires no
action by or in respect of, or filing with, any governmental body other than the
Michigan Insurance Bureau, or agency or official of the United States or any
political subdivision thereof, except for such notices, Registration Statements,
or reports as may be required to be filed with the Securities and Exchange
Commission under the Securities Exchange Act of 1933, as amended, the Securities
Exchange Act of 1934, as amended, the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended, and any applicable State blue sky laws, and (ii) will
not violate any statute or any order, rule or regulation of any court or
government agency or body in the United States or any political subdivision
thereof having jurisdiction over Professionals, which violation could have a
material adverse effect on the ability of Professionals to perform any
obligations under this Agreement.
f. SECURITIES LAW REPRESENTATIONS AND WARRANTIES.
(i) SOPHISTICATION AND BACKGROUND. Professionals is an "accredited
investor" as that term is defined by Rule 501(a) promulgated
by the Securities and Exchange Commission. Professionals has
such knowledge and experience in financial, tax and business
matters to enable it to utilize the information made available
to it to evaluate the merits and risks of the prospective
investment and to make an informed investment decision with
respect to the prospective investment.
11
<PAGE> 12
(ii) AVAILABILITY OF INFORMATION. Professionals understands that
MEEMIC Holdings has agreed to make all documents, records and
books pertaining to the Shares and its business and affairs
available for inspection by it and/or Professionals's
advisors.
(iii) RISK OF INVESTMENT. Professionals recognizes that the purchase
of stock in any corporation involves substantial risks, that
no assurance or guarantee has or can be given that a
shareholder in the MEEMIC Holdings will receive a return on
the investment or realize a profit on such investment, and
that it may not be able to sell the Shares.
SECTION 5.4 LEGAL FEES, COSTS AND EXPENSES. Each party hereto shall
bear its own legal fees and expenses, and other costs and expenses incurred by
such party in connection with the transactions contemplated by this Agreement.
ARTICLE VI
REGISTRATION RIGHTS
SECTION 6.1 REGISTRATION RIGHTS. If MEEMIC Holdings is not permitted by
the Securities and Exchange Commission to include the Shares identified in
Sections 2.1, 2.2 and 3.1 of this Agreement in the Registration Statement
relating to the Plan of Conversion, then Purchaser shall have the right,
commencing on the date that MEEMIC Holdings is first eligible to use a
Registration Statement on Form S-3 for secondary offerings of securities by
selling shareholders, to demand (a "demand right") that MEEMIC Holdings register
such Shares as promptly as practicable, but in any event not less than 90 days
after the date of such demand. If, prior to making any such demand, MEEMIC
Holdings proposes to register a primary distribution of Shares to the public
under the Securities Act of 1933, as amended (other than pursuant to Form S-4 or
Form S-8), the Purchaser shall have the right (a "piggy back right") to include
the Shares identified in Sections 2.1, 2.2 and 3.1 of this Agreement in such
registration. MEEMIC Holdings and the Purchaser agree that the terms,
conditions, rights and obligations of the parties in the event of a demand or
piggy-back registration will be those customary in similar situations; that
MEEMIC Holdings shall bear all registration costs (other than the costs of
counsel for the Purchaser and any underwriting commissions or discounts relating
to the sale of the Note Shares); and that the Purchaser's piggy back right
shall be subject to the discretion of the managing underwriter to determine the
number of Shares that may be included, if the registration statement relates to
an underwriter offering.
ARTICLE VII
TERMINATION
SECTION 7.1 TERMINATION. This Agreement and the obligations of the
parties hereto may be terminated at any time only (a) by mutual consent of the
parties hereto, (b) by ProNational if any material representation or warranty in
this Agreement by MEEMIC Holdings proves to be untrue at the time it was made or
becomes untrue and such untrue statement is unable to be remedied, (c) by
Professionals if any material representation or warranty in this Agreement by
MEEMIC Holdings
12
<PAGE> 13
proves to be untrue at the time it was made or becomes untrue and such untrue
statement is unable to be remedied, (d) by MEEMIC Holdings if any material
representation or warranty in this Agreement by either ProNational or
Professionals proves to be untrue at the time it was made or becomes untrue and
such untrue statement is unable to be remedied, or (e) by any party hereto if
required by law or if the preconditions to Closing established in this Agreement
fail to be satisfied.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1 JOINT AND SEVERAL OBLIGATIONS OF THE PURCHASER AND RIGHTS
OF THE PURCHASER. The obligations of the Purchaser under this Agreement shall be
the joint and several obligations of ProNational and Professionals. The rights
of the Purchaser to purchase Shares pursuant to this Agreement shall be a right
that may be exercised by either ProNational or Professionals, or alternatively
by both ProNational and Professionals in such proportions, not to exceed the
total number of Shares that may be purchased by Purchaser hereunder, as may be
specified in written instructions to MEEMIC Holdings from both ProNational and
Professionals.
SECTION 8.2 GOVERNING LAW. This Agreement shall be governed by the laws
of the State of Michigan.
SECTION 8.3 ENTIRE AGREEMENT/AMENDMENT. This Agreement constitutes the
entire agreement and understanding between the parties and cannot be amended,
waived or modified unless the parties so agree in writing.
SECTION 8.4 ASSIGNMENT. None of the parties may assign any rights or
obligations under this Agreement without first obtaining the written consent of
the other parties hereto.
SECTION 8.5 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors and permitted assigns.
SECTION 8.6 NOTICES. All notices and statements to be given under this
Agreement shall be given in writing, delivered by hand, facsimile, overnight
express or similar service (fees prepaid), or first class United States
registered or certified mail with return receipt requested (postage prepaid), to
the following addresses (which may be changed by written notice):
ProNational: President
ProNational
2600 Professionals Drive
Box 150
Okemos, MI 48805-0150
Telephone No.: (800) 292-1036
Facsimile No.: (517) 347-6321
13
<PAGE> 14
Professionals: President
Professionals
2600 Professionals Drive
Box 150
Okemos, MI 48805-0150
Telephone No.: (800) 292-1036
Facsimile No.: (517) 347-6321
Purchaser: President
ProNational
2600 Professionals Drive
Box 150
Okemos, MI 48805-0150
Telephone No.: (800) 292-1036
Facsimile No.: (517) 347-6321
-and-
President
Professionals
2600 Professionals Drive
Box 150
Okemos, MI 48805-0150
Telephone No.: (800) 292-1036
Facsimile No.: (517) 347-6321
MEEMIC Holdings: President
MEEMIC Holdings
691 N. Squirrel Road
Suite 200
P.O. Box 21709
Auburn Hills, MI 48321
Telephone No.: (248) 377-8500
Facsimile No.: (248) 377-8555
All written notices and statements shall be deemed given, delivered, received
and effective upon personal delivery, the same day of sending by facsimile, one
calendar day after sending by overnight express or similar service, or three
calendar days after mailing by first class United States mail.
SECTION 8.7 SEVERABILITY. If any provision of this Agreement shall be
or become in violation of any local, state or federal law, said provision shall
be considered null and void, and all other provisions shall remain in full force
and effect. Each of the parties expressly releases each of the other parties
from any liability in the event such party cannot fulfill any obligation under
this Agreement as a result of any provisions of local, state or federal law
governing such provisions.
SECTION 8.8 NO THIRD PARTY RIGHTS. This Agreement is made for the
sole benefit of the MEEMIC Holdings, Professionals and ProNational. Except
as otherwise expressly provided,
14
<PAGE> 15
nothing in this Agreement shall create or be deemed to create a relationship
between the parties hereto, or any of them, and any third person in the nature
of a third party beneficiary, equitable lien or fiduciary relationship.
SECTION 8.9 NO WAIVER. Failure on the part of any party to complain of
any action or non-action of another other party hereto shall not be deemed to be
a waiver of any rights under this Agreement. No waiver of any of the provisions
of this Agreement shall be deemed to be a waiver of any other provisions of this
Agreement, and a waiver at any time of any provisions of this Agreement shall
not be construed as a waiver at any subsequent time of the same provisions.
SECTION 8.10 INJUNCTIVE RELIEF. The parties acknowledge that damages
may be an inadequate remedy for a breach of this Agreement by any party hereto
and that the obligations of the parties hereto shall be enforceable by any other
party hereto through injunctive or other equitable relief in addition to any
other remedies to which such party may be entitled.
SECTION 8.11 COUNTERPARTS. This Agreement may be executed in any number
of counterparts. Each counterpart so executed shall be deemed an original, but
all such counterparts shall together constitute one and the same instrument.
SECTION 8.12 CONSTRUCTION. The parties each acknowledge that all the
terms and conditions in this Agreement have been the subject of active and
complete negotiation between the parties and represent the parties' agreement
based upon all relevant considerations. The parties agree that the terms and
conditions of this Agreement shall not be construed in favor of or against any
party by reason of the extent to which any party or its professional advisors
participated in the preparation hereof or thereof.
SECTION 8.13 FURTHER ASSURANCES. The parties agree to do such further
acts and things and to execute and deliver such additional documents,
assignments, agreements, certificates, powers and instruments as may be
reasonably required to carry into effect the purposes of this Agreement.
SECTION 8.14 FORBEARANCES. During the period from the date of this
Agreement to the earlier of (i) the Issuance Date of Option Shares or (ii) the
termination of this Agreement, except as expressly contemplated or permitted by
this Agreement or the Plan of Conversion, MEEMIC Holdings shall not, and MEEMIC
Holdings shall not permit MEEMIC or any subsidiary of MEEMIC Holdings or MEEMIC
to, without the prior written consent of the Purchaser:
(a) other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money in excess of $5,000,000 or
assume, guarantee, endorse or otherwise become obligated for, any indebtedness
in excess of $5,000,000;
(b) adjust, split, combine, reclassify, any capital stock, or pay
dividends or distributions in excess of $5,000,000 with respect to the capital
stock;
(c) issue additional capital stock except as contemplated by the Plan
of Conversion;
15
<PAGE> 16
(d) enter into an agreement to consolidate with or merge into any
Person;
(e) sell or transfer all or substantially all of its assets to any
Person; or
(f) amend the Plan of Conversion or its Articles of Incorporation, or
its Bylaws, except as contemplated by this Agreement or the Plan of Conversion.
* * * * *
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the date written on the first
page of this Agreement.
MEEMIC HOLDINGS, INC.
By: /s/ R. Kevin Clinton
----------------------------------------
R. Kevin Clinton
President
PRONATIONAL INSURANCE COMPANY
By: /s/ Annette E. Flood
----------------------------------------
Annette E. Flood
Vice President and Secretary
PROFESSIONALS GROUP, INC.
By: /s/ Victor T. Adamo
----------------------------------------
Victor T. Adamo
President and Chief Executive Officer
16
<PAGE> 1
EXHIBIT 99.1
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
CONTENTS
PAGES
Report of Independent Accountants..............................................1
Consolidated Financial Statements:
Consolidated Balance Sheets...............................................2
Consolidated Statements of Income.........................................3
Consolidated Statements of Policyholders' Surplus and
Comprehensive Income.................................................4
Consolidated Statements of Cash Flows.....................................5
Notes to Consolidated Financial Statements.............................6-23
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Michigan Educational Employees Mutual
Insurance Company:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and policyholders' surplus and comprehensive
income and of cash flows present fairly, in all material respects, the financial
position of Michigan Educational Employees Mutual Insurance Company and
Subsidiary (the "Company") at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Grand Rapids, Michigan
March 12, 1999
1
<PAGE> 3
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Investments (Note 4):
Fixed maturities available for sale, at fair value $ 122,996,615 $ 109,648,780
Short-term investments, at cost, which approximates fair value 1,906,496 1,894,475
------------- -------------
Total investments 124,903,111 111,543,255
Cash 3,977,602 2,204,325
Premiums due from policyholders 3,840,764 3,599,622
Amounts recoverable from reinsurers (Note 7) 43,066,086 42,027,449
Amounts recoverable from reinsurers, related party (Note 7) 16,193,962 5,307,000
Accrued investment income 1,604,457 1,486,324
Deferred federal income taxes (Note 8) 3,338,251 2,737,658
Property and equipment, at cost, net of accumulated depreciation (Note 9) 2,148,550 1,834,697
Deferred policy acquisition costs (Note 10) 278,067 1,604,449
Intangible assets, net of amortization 39,268,400 42,149,314
Other assets 710,369 364,080
------------- -------------
$ 239,329,619 $ 214,858,173
============= =============
</TABLE>
LIABILITIES AND POLICYHOLDERS' SURPLUS
<TABLE>
<S> <C> <C>
Liabilities:
Loss and loss adjustment expense reserves (Note 11) $ 92,297,908 $ 84,920,578
Unearned premiums 31,585,769 29,436,092
Surplus note (Note 12) 21,500,000 21,500,000
Payable related to acquisition (Note 6) 18,215,289 20,500,000
Accrued expenses and other liabilities 8,386,744 6,242,384
Accrued expenses and other liabilities, related party 2,356,815 1,845,944
Premiums ceded payable (Note 7) 4,464,952 4,836,000
Premiums ceded payable, related party (Note 7) 7,552,920 2,003,000
Federal income taxes payable 744,801 292,603
------------- -------------
Total liabilities 187,105,198 171,576,601
------------- -------------
Policyholders' surplus (Note 15):
Unassigned surplus 50,375,927 42,009,495
Accumulated other comprehensive income:
Net unrealized appreciation on investments, net of deferred federal income
taxes of
$952,254 and $655,313 in 1998 and 1997, respectively 1,848,494 1,272,077
------------- -------------
Total policyholders' surplus 52,224,421 43,281,572
------------- -------------
Total liabilities and policyholders' surplus $ 239,329,619 $ 214,858,173
============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE> 4
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Revenues and other income:
Premiums written $ 113,257,949 $ 106,349,578 $ 104,992,855
Premiums ceded, related party (42,693,652) (20,115,000) --
Premiums ceded, other (4,374,144) (11,234,345) (40,707,302)
------------- ------------- -------------
Net premiums written (Note 7) 66,190,153 75,000,233 64,285,553
Increase in unearned premiums, net of prepaid reinsurance premiums (2,149,677) (7,169,950) (1,788,666)
------------- ------------- -------------
Net premiums earned 64,040,476 67,830,283 62,496,887
Net investment income (Note 4) 6,958,429 6,676,783 5,150,035
Net realized investment gains on fixed maturities 31,012 32,214 36,715
Other income 2,110,545 840,725 588,729
------------- ------------- -------------
Total revenues and other income 73,140,462 75,380,005 68,272,366
------------- ------------- -------------
Expenses:
Losses and loss adjustment expenses, net (including $25,299,000
and $12,578,000 ceded to related party in 1998 and 1997,
respectively) (Note 11) 43,451,786 47,301,864 44,872,007
Policy acquisition and other underwriting expenses:
Other policy acquisition and underwriting expenses 23,579,800 13,158,221 3,606,118
Policy acquisition expense, related party -- 9,103,817 12,468,244
Ceding commissions, related party (12,994,651) (6,577,424) --
Management fees, related party 2,073,425 1,005,480 --
------------- ------------- -------------
12,658,574 16,690,094 16,074,362
Interest expense, related party 1,827,500 1,341,835 --
Amortization expense 2,940,914 714,395 --
Other expense 30,695 30,417 10,791
------------- ------------- -------------
Total expenses 60,909,469 66,078,605 60,957,160
------------- ------------- -------------
Income from operations before federal income taxes and
extraordinary items 12,230,993 9,301,400 7,315,206
Federal income taxes (Note 8) 3,561,466 2,672,239 2,064,305
------------- ------------- -------------
Income before extraordinary items (Note 15) 8,669,527 6,629,161 5,250,901
Extraordinary items:
Conversion costs, net of federal income taxes of $266,321 (516,977) -- --
Gain on early extinguishment of debt, net of federal income taxes
of $110,181 213,882 -- --
------------- ------------- -------------
Net income $ 8,366,432 $ 6,629,161 $ 5,250,901
============= ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 5
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF POLICYHOLDERS' SURPLUS AND COMPREHENSIVE INCOME
for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
UNASSIGNED COMPREHENSIVE POLICYHOLDERS'
SURPLUS INCOME SURPLUS
---------------- -------------------- -----------------
<S> <C> <C> <C>
Balances, January 1, 1996 $ 30,129,433 $ 1,042,736 $ 31,172,169
Net income 5,250,901 5,250,901
Net depreciation on investment securities (421,556) (421,556)
--------------- ------------------- ----------------
Balances, December 31, 1996 35,380,334 621,180 36,001,514
Net income 6,629,161 6,629,161
Net appreciation on investment securities 650,897 650,897
--------------- ------------------- ----------------
Balances, December 31, 1997 42,009,495 1,272,077 43,281,572
Net income 8,366,432 8,366,432
Net appreciation on investment securities 576,417 576,417
--------------- ------------------- ----------------
Balances, December 31, 1998 $ 50,375,927 $ 1,848,494 $ 52,224,421
=============== =================== ================
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996
---------------- -------------------- -----------------
<S> <C> <C> <C>
Comprehensive income: (Note 3)
Net income $ 8,366,432 $ 6,629,161 $ 5,250,901
Net unrealized appreciation (depreciation) on
investments, net of reclassification adjustment
and net of deferred federal income tax of
$296,942 in 1998, $335,311 in 1997 and
$(217,165) in 1996 576,417 650,897 (421,556)
--------------- ------------------- ----------------
Comprehensive income $ 8,942,849 $ 7,280,058 $ 4,829,345
=============== =================== ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 6
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 8,366,432 $ 6,629,161 $ 5,250,901
Adjustments to reconcile net income to net cash provided by
operating
activities:
Depreciation and amortization 3,483,469 1,359,541 540,268
Realized gains on investments (31,012) (32,214) (36,715)
Net accretion of discount on investments 36,140 99,191 96,833
Deferred federal income taxes (897,534) (327,761) (435,695)
Extraordinary gain on early extinguishment of debt (324,063) -- --
Changes in assets and liabilities:
Premiums due from policyholders (241,142) (421,280) (337,959)
Amounts due from reinsurers (6,746,727) (452,396) 223,119
Accrued investment income (118,133) (148,879) (281,099)
Prepaid reinsurance premiums -- 6,591,000 (627,000)
Deferred policy acquisition costs 1,326,382 376,805 16,109
Other assets (346,289) (64,453) (59,764)
Loss and loss adjustment expense reserves 7,377,330 4,567,896 9,238,625
Unearned premiums 2,149,677 578,950 2,415,666
Accrued expenses and other liabilities 2,655,231 3,489,408 855,059
Federal income taxes payable 452,198 (600,000) 1,179,137
-------------- ------------- -------------
Net cash provided by operating activities 17,141,959 21,644,969 18,037,485
-------------- ------------- -------------
Cash flows from investing activities:
Purchases of short-term investments (1,906,496) (1,894,475) (1,892,731)
Proceeds from sale or maturity of short-term investments 1,894,475 1,892,731 1,895,852
Proceeds from maturity of securities available for sale 13,881,163 15,355,796 8,934,651
Purchases of securities available for sale (26,360,768) (35,081,754) (27,161,758)
Proceeds from sales of property and equipment 41,871 107,532 --
Purchases of property and equipment (958,279) (1,135,100) (965,841)
Cash paid for acquired company, net -- (22,363,709) --
-------------- ------------- -------------
Net cash used in investing activities (13,408,034) (43,118,979) (19,189,827)
-------------- ------------- -------------
Cash flows from financing activities:
Issuance of surplus note -- 21,500,000 --
Payment on payable related to acquisition (1,960,648) -- --
-------------- ------------- -------------
Net cash (used in) provided by financing activities (1,960,648) 21,500,000 --
-------------- ------------- -------------
Net increase (decrease) in cash 1,773,277 25,990 (1,152,342)
Cash, beginning of year 2,204,325 2,178,335 3,330,677
-------------- ------------- -------------
Cash, end of year $ 3,977,602 $ 2,204,325 $ 2,178,335
============== ============= =============
Supplemental disclosures of cash flow information:
Federal income taxes paid $ 3,850,000 $ 3,200,000 $ 1,320,863
============== ============= =============
Interest paid $ 1,341,835 -- --
============== ============= =============
Supplemental disclosure of noncash transaction:
In connection with the acquisition entered into during 1997, the
Company recorded a liability for the deferred portion of the
purchase price equal to $20,500,000 as described in Note 6.
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 7
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Michigan Educational Employees Mutual Insurance Company and Subsidiary
(the "Company") is a Michigan-licensed property and casualty mutual
insurance company that operates as a single segment writing full coverage
private passenger automobile protection and homeowner insurance products
for educational employees and their immediate families exclusively in the
State of Michigan. In September 1997, the Company began selling its
insurance contracts through its wholly owned subsidiary, MEEMIC Insurance
Services Corp., d/b/a MEIA Insurance Agency, which is the exclusive
distributor of the Company's products. Prior to that, the Company's
products were sold by Michigan Educators Insurance Agency, Inc. (see Note
6).
In preparing the 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.
The most significant estimates that are susceptible to significant change
in the near term relate to the determination of the losses and loss
adjustment expense reserves. Although considerable variability is
inherent in these estimates, management believes that the reserves are
adequate. The estimates are reviewed regularly and adjusted as necessary.
Such adjustments are reflected in current operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. BASIS OF PRESENTATION: The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiary, and have been prepared in accordance with generally
accepted accounting principles ("GAAP"), which vary in certain
respects from statutory accounting practices followed in reporting to
insurance regulatory authorities (see Note 15 for the effect of such
differences). All material intercompany balances and transactions have
been eliminated.
6
<PAGE> 8
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
b. INVESTMENTS: At December 31, 1998 and 1997, all of the Company's
securities are classified as available-for-sale and are those
securities that would be available to be sold in response to the
Company's liquidity needs, changes in market interest rates and
asset-liability management strategies, among others.
Available-for-sale securities are recorded at fair value, with
unrealized gains and losses, net of the related income tax effect,
excluded from income and reported as a separate component of
policyholders' surplus.
A decline in the fair value of an available-for-sale 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 fair values of the Company's investment
securities in 1998 or 1997 were deemed to be temporary.
Short-term investments, which consist principally of 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.
c. REVENUE RECOGNITION: Insurance premium income is recognized on a
monthly pro rata basis over the respective terms of the policies
in-force and unearned premiums represent the portion of premiums
written which is applicable to the unexpired terms of the policies
in-force.
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. Changes in
estimated outcomes are recognized currently.
d. LOSSES AND LOSS ADJUSTMENT EXPENSE RESERVES: Losses and loss
adjustment expense reserves represent the accumulation of individual
case estimates for reported losses and loss adjustment expenses, bulk
adjustments to case estimates and actuarial estimates for incurred but
not reported losses and loss adjustment expenses, based upon the
Company's actual experience, assumptions and projections as to claims
frequency, severity, inflationary trends and settlement payments. The
reserve for losses 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 reduced for
anticipated salvage and subrogation. Anticipated salvage and
subrogation approximated $985,000 and $985,000 at December 31, 1998
and 1997, respectively. The reserve is stated gross of reinsurance
ceded.
7
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
e. PROPERTY, EQUIPMENT AND DEPRECIATION: Property and equipment are
recorded at cost, net of accumulated depreciation. Depreciation is
computed either on the straight-line or accelerated methods over
periods ranging from three to seven years. Maintenance, repairs and
minor renewals are charged to expense as incurred.
Upon sale or retirement, the cost and related accumulated depreciation
of assets disposed of are removed from the accounts; any resulting
gain or loss is reflected in income.
f. 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 the related premiums are
earned.
g. 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 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. 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.
h. INTANGIBLES: Intangibles primarily consist of the excess of cost over
fair market value of net tangible assets of an acquired business.
Intangible assets, including noncompete agreements, are amortized on a
straight-line basis over periods ranging from 5 to 15 years.
Accumulated amortization totaled $3,655,309 and $714,395 at December
31, 1998 and 1997, respectively.
The carrying value of intangibles is periodically reviewed to
determine if any impairment has occurred. The Company measures the
potential impairment of recorded goodwill based on the estimated
undiscounted cash flows of the entity acquired over the remaining
amortization period.
i. SURPLUS DISTRIBUTIONS: Policyholder dividends, if any, are subject to
the limitations contained in the Michigan Insurance Code.
8
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. COMPREHENSIVE INCOME:
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
This standard establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of SFAS
No. 130 had no impact on the Company's results of operations or
policyholders' surplus. SFAS No. 130 requires unrealized gains or losses
on the Company's available-for-sale securities, which prior to adoption
were reported separately in policyholders' surplus, to be included in
other comprehensive income. Realized investment gains on securities held
as of the beginning of the year totaling $31,012, $32,214, and $36,715 in
1998, 1997, and 1996, respectively, had unrealized appreciation of
$56,570, $43,949, and $68,312 at the beginning of 1998, 1997 and 1996,
respectively. Prior period financial statements have been reclassified to
conform to the requirements of SFAS No. 130.
4. INVESTMENTS:
A summary of amortized cost, gross unrealized gains and losses and
estimated fair value of investments in securities as of December 31, 1998
and 1997, follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Fixed maturities available for sale:
U.S. Treasury securities and obligations of
U. S. government corporations and
agencies $ 18,708,252 $ 288,012 $ 14,757 $ 18,981,507
Debt securities issued by states of the
United States and political subdivisions
of the states 47,519,969 1,430,055 42,470 48,907,554
Corporate debt securities 19,232,634 488,748 7,940 19,713,442
Mortgage-backed securities:
Government 23,917,168 384,847 2,649 24,299,366
Other 4,011,498 133,902 -- 4,145,400
Other asset-backed securities 4,983,312 56,738 -- 5,040,050
Redeemable preferred stocks 1,823,034 88,014 1,752 1,909,296
------------- ---------- ---------- -------------
Total $ 120,195,867 $2,870,316 $ 69,568 $ 122,996,615
============= ========== ========== =============
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Fixed maturities available for sale:
U. S. Treasury securities and obligations of
U. S. government corporations and
agencies $ 18,067,473 $ 104,699 $ 14,412 $ 18,157,760
Debt securities issued by states of the
United States and political subdivisions
of the states 42,440,721 1,205,075 22,952 43,622,844
Corporate debt securities 16,127,289 328,035 7,279 16,448,045
Mortgage-backed securities:
Government 20,261,324 281,976 18,990 20,524,310
Other 4,024,503 13,097 -- 4,037,600
Other asset-backed securities 4,972,723 16,837 -- 4,989,560
Redeemable preferred stocks 1,827,357 45,340 4,036 1,868,661
------------- ---------- ---------- -------------
Total $ 107,721,390 $1,995,059 $ 67,669 $ 109,648,780
============= ========== ========== =============
</TABLE>
9
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. INVESTMENTS, CONTINUED:
The amortized cost and estimated fair value of fixed maturities at
December 31, 1998, by contractual maturity, are shown below. Expected
maturities 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>
ESTIMATED
COST FAIR VALUE
----------------- -----------------
<S> <C> <C>
Due in one year or less $ 8,216,771 $ 8,294,809
Due after one year through five years 42,400,968 43,488,100
Due after five years through ten years 28,335,892 29,198,546
Due after ten years 6,507,224 6,621,048
---------------- ----------------
85,460,855 87,602,503
Mortgage-backed securities:
Government 23,917,368 24,299,366
Other 4,011,298 4,145,400
Other asset-backed securities 4,983,312 5,040,050
Redeemable preferred stocks 1,823,034 1,909,296
---------------- ----------------
Total $ 120,195,867 $ 122,996,615
================ ================
</TABLE>
In 1998, 1997 and 1996, the Company did not have any voluntary sales of
fixed maturity securities. A summary of the sources of net investment
income follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
------------- -------------- --------------
<S> <C> <C> <C>
Fixed maturities $ 6,622,158 $ 5,794,546 $ 4,852,615
Short-term investments and cash 581,695 976,416 440,345
Other investment assets 126,986 195,245 58,536
------------ ------------- -------------
Total investment income 7,330,839 6,966,207 5,351,496
Less investment expenses 372,410 289,424 201,461
------------ ------------- -------------
Net investment income $ 6,958,429 $ 6,676,783 $ 5,150,035
============ ============= =============
</TABLE>
10
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. INVESTMENTS, CONTINUED:
Increases (decreases) in net unrealized gains of fixed maturities were
$873,359, $986,208 and ($638,721) at December 31, 1998, 1997 and 1996,
respectively.
At December 31, 1998, U. S. Treasury notes and certificates of deposit
with a carrying value of $520,000 were on deposit with regulatory
authorities, as required by law.
5. 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 insurance-related assets and liabilities and all nonfinancial
instruments from its disclosure requirements.
<TABLE>
<CAPTION>
1998 1997
------------------------------ ------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Investments $ 124,903,111 $ 124,903,111 $ 111,543,225 $ 111,543,225
Cash 3,977,602 3,977,602 2,204,325 2,204,325
Premiums due from policyholders 3,840,764 3,840,764 3,599,622 3,599,622
Amounts due from reinsurers 43,066,086 43,066,086 42,047,449 42,047,449
Accrued investment income 1,604,457 1,604,457 1,486,324 1,486,324
Surplus note (21,500,000) (21,500,000) (21,500,000) (21,500,000)
Payable related to acquisition (18,215,289) (18,215,289) (20,500,000) (20,500,000)
</TABLE>
The difference between the carrying value and fair value of payable
related to acquisition is due to the accelerated payment option available
to the Company (see Note 6). Because the interest rate on the surplus
note approximates current rates, and because of the short-term nature of
the premiums due from policyholders, amounts due from reinsurers and
accrued interest income, the fair value of these items approximate their
carrying value.
11
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. RELATED PARTY TRANSACTIONS:
Effective April 7, 1997, Professionals Insurance Company Management Group
("Professionals Group"), which is the parent of ProNational Insurance
Company ("ProNational") signed a definitive agreement with the Company
whereby:
- Nominees of Professionals Group were elected to all six positions on
the MEEMIC Board of Directors;
- ProNational purchased a $21.5 million surplus note from MEEMIC (Note
12);
- Effective July 1, 1997 ProNational began reinsuring 40 percent of
MEEMIC's net retained premiums on a quota share basis (Note 7).
Professionals Group also provided MEEMIC with information system services
and certain consulting services under a Management Services Agreement.
Fees for such services were $2,073,425 for 1998 and $1,005,480 for 1997
and were included in other underwriting expenses.
On September 22, 1997, the Company's wholly owned subsidiary MEIA
Insurance Agency purchased the assets of the Personal Lines and Life
Divisions of Michigan Educators Insurance Agency, Inc. (including all
rights to distribute MEEMIC insurance products) for a purchase price
equal to 3.75 percent of all premiums written through MEIA Insurance
Agency through July 14, 2004, payable annually, subject to a guaranteed
minimum payment of $43 million. The purchase was recorded at the
guaranteed minimum, which represented the fair value of the debt at the
date of acquisition plus $22.5 million that was paid at closing. In the
event MEIA is unable to meet this commitment, MEEMIC has guaranteed
payment of the next $3 million and Professionals Group has guaranteed
payment of the final $17.5 million. Any amounts paid in excess of the
guaranteed minimum payment would be recorded as goodwill. The goodwill of
$42,363,709 recorded from this acquisition is being amortized over 15
years. In the event that MEEMIC completes a conversion, the guaranteed
minimum payment may be accelerated at the individual option of the former
Agency shareholders. The accelerated payment amount would be equal to the
total of the remaining scheduled minimum payments plus $2 million, all
discounted at 7 percent at the time of the option exercise. If the
accelerated payment option is exercised, the impact would be recorded as
an extraordinary event related to the early extinguishment of debt.
During 1998, at the request of certain former Agency shareholders,
management approved an acceleration of individual amounts due to them
related to the above acquisition. The settlement of this early
extinguishment of debt resulted in an extraordinary gain of $213,882, net
of $110,181 of federal income taxes.
12
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. RELATED PARTY TRANSACTIONS, CONTINUED:
The following table sets forth the unaudited pro forma results of
operations for the years ended December 31, 1997 and 1996 as if the
acquisition had been consummated as of January 1, 1996. The unaudited pro
forma results of operations data consists of the historical results of
the Company and the Personal Lines and Life Divisions of Michigan
Educators Insurance Agency, Inc. as adjusted to give effect to (1)
amortization of intangible assets and (2) an increase in interest expense
attributable to financing of the acquisition. This pro forma information
does not purport to be indicative of what results would have been had the
acquisition been made as of that date or of results which may occur in
the future.
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Revenues and other income:
Net premiums earned $ 67,830,283 $ 62,496,887
Net investment income 6,676,783 5,150,035
Net realized investment gains on fixed maturities 32,214 36,715
Other income 2,057,547 1,847,596
--------------- --------------
Total revenues and other income 76,596,827 69,531,233
--------------- --------------
Expenses:
Losses and loss adjustment expenses, net 47,301,864 44,872,007
Policy acquisition and other underwriting expenses 15,927,802 13,650,853
Interest expense 1,827,500 1,886,036
Amortization expense 2,924,247 2,924,247
Other expense 30,417 10,905
--------------- --------------
Total expenses 68,011,830 63,344,048
--------------- --------------
Income from operations before federal income taxes 8,584,997 6,187,185
Federal income taxes 2,428,662 1,680,778
--------------- --------------
Net income $ 6,156,335 $ 4,506,407
=============== ==============
</TABLE>
13
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. REINSURANCE:
In the normal course of business, the Company 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 the Company's reinsurers to reimburse the Company for their
proportionate share of losses, they do not discharge the primary
liability of the Company. The Company remains 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.
The Company has various excess of loss and quota share reinsurance
agreements. As of December 31, 1998, MEEMIC's maximum current net
retention, subject to certain adjustments of risk on any single coverage
per claim after reinsurance is $150,000.
The Company continually reviews its reinsurers, considering a number of
factors, the most critical of which is their financial stability. Based
on these reviews, the Company evaluates its position with reinsurers with
respect to existing and future reinsurance.
At December 31, 1998, amounts due from reinsurers were as follows:
<TABLE>
<CAPTION>
AMOUNTS
DUE FROM
REINSURERS
--------------
<S> <C>
Michigan Catastrophic Claims Association $ 33,677,052
American Reinsurance Company 6,298,442
Continental Casualty Company 2,678,582
Other 412,010
--------------
43,066,086
ProNational Insurance Company, related party 16,193,962
--------------
$ 59,260,048
==============
</TABLE>
The Michigan Catastrophic Claims Association ("MCCA") is an
unincorporated nonprofit association created by Michigan law to provide
unlimited coverage in excess of $250,000 per occurrence for personal
injury losses. Every insurer engaged in writing personal protection
insurance coverage in Michigan is required to be a member of the MCCA and
the MCCA acts in the same manner as a reinsurer covering any personal
injury losses incurred by the company in excess of $250,000. Member
companies of the MCCA are charged an annual assessment, based on the
number of vehicles for which coverage is written, to cover losses
reported by all member companies. Accordingly, there is no direct
relationship between the annual premiums and losses ceded to MCCA.
14
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. REINSURANCE, CONTINUED:
Amounts due from reinsurers consisted of amounts related to:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Paid losses and loss adjustment expenses $ 5,926,808 $ 429,449
Unpaid losses and loss adjustment expenses 53,333,240 46,905,000
-------------- --------------
Amounts recoverable from reinsurers 59,260,048 47,334,449
Premiums ceded payable (4,464,952) (4,836,000)
Premiums ceded payable, related party (7,552,920) (2,003,000)
-------------- --------------
$ 47,242,176 $ 40,495,449
============== ==============
</TABLE>
Premiums earned and losses and loss adjustment expenses are net of the
following reinsurance ceded amounts:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Premiums earned $ 47,067,796 $ 37,939,925 $ 40,080,646
Losses and loss adjustment expenses incurred 30,277,700 22,741,000 23,227,000
</TABLE>
Effective July 1, 1997, the Company entered into a coinsurance treaty
with ProNational to cede 40 percent of its net retained premiums on a
quota share basis. Ceding commissions were $12,994,651 in 1998 and
$6,577,424 in 1997. A summary of reinsurance amounts, which are included
above, that were ceded to ProNational follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Premiums earned $ 42,693,652 $ 20,115,000
Losses and loss adjustment expenses incurred 25,299,000 12,578,000
</TABLE>
15
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. FEDERAL INCOME TAXES:
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,
-----------------------------------------------
1998 1997 1996
-------------- ------------- --------------
<S> <C> <C> <C>
Current $ 4,459,000 $ 3,000,000 $ 2,500,000
Deferred (897,534) (327,761) (435,695)
------------- ------------ -------------
$ 3,561,466 $ 2,672,239 $ 2,064,305
============= ============ =============
</TABLE>
Actual federal income taxes vary from amounts computed by applying the
current federal income tax rate of 34 percent to income or loss before
federal income taxes. For the years ended December 31, 1998, 1997 and
1996, the reasons for these differences, and the tax effects thereof, are
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
------------- -------------- --------------
<S> <C> <C> <C>
Expected tax expense $ 4,158,537 $ 3,162,476 $ 2,487,170
Dividends received deduction (30,245) (34,566) (23,222)
Tax-exempt interest (688,130) (596,986) (485,978)
Other, net 121,304 141,315 86,335
------------ ------------- -------------
Actual tax expense $ 3,561,466 $ 2,672,239 $ 2,064,305
============ ============= =============
</TABLE>
16
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. 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>
YEARS ENDED
DECEMBER 31,
------------------------------
1998 1997
------------- --------------
<S> <C> <C>
Deferred federal income tax assets arising from:
Loss and loss adjustment expense reserves $ 1,358,289 $ 1,326,019
Unearned premium reserves 2,147,832 2,001,654
Accruals for fringe benefits 712,836 456,481
Advanced premiums 113,572 105,654
Other, net 112,209 108,398
------------ -------------
Total deferred federal income tax assets 4,444,738 3,998,206
------------ -------------
Deferred federal income tax liabilities arising from:
Deferred policy acquisition costs 94,543 545,513
Unrealized gains on investments 952,254 655,313
Salvage and subrogation recoverable 25,118 25,118
Other 34,572 34,604
------------ -------------
Total deferred federal income tax liabilities 1,106,487 1,260,548
------------ -------------
Net deferred federal income taxes $ 3,338,251 $ 2,737,658
============ =============
</TABLE>
In assessing the reliability 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 Company's operating results
for 1998, 1997 and 1996, management believes it is more likely than not
that the Company will fully realize the net deferred federal income tax
assets. Accordingly, no valuation allowance has been established.
17
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. PROPERTY AND EQUIPMENT:
At December 31, 1998 and 1997, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Data processing equipment, including software $ 2,432,930 $ 2,734,598
Furniture, fixtures and equipment 2,340,855 2,086,340
------------- -------------
4,773,785 4,820,938
Accumulated depreciation 2,625,235 2,986,241
------------- -------------
Total property and equipment $ 2,148,550 $ 1,834,697
============= =============
</TABLE>
10. DEFERRED POLICY ACQUISITION COSTS:
Changes in deferred policy acquisition costs are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net asset balance, beginning of year $ 1,604,449 $ 1,981,254 $ 1,997,363
--------------- --------------- ---------------
Amounts deferred:
Commissions to agents 13,610,598 12,702,913 12,468,244
Ceding commission income 13,027,889 8,614,936 6,748,078
--------------- --------------- ---------------
Net amounts deferred 582,709 4,087,977 5,720,166
Net amortization 1,909,091 4,464,782 5,736,275
--------------- --------------- ---------------
Net asset balance, end of year $ 278,067 $ 1,604,449 $ 1,981,254
=============== =============== ===============
</TABLE>
18
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES:
Activity in loss and loss adjustment expense reserves is summarized as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1998 1997 1996
---------------- ---------------- ---------------
<S> <C> <C> <C>
Balance, beginning of year $ 84,920,578 $ 80,352,682 $ 71,114,057
Less reinsurance balance recoverable 46,905,000 44,657,000 41,544,000
--------------- --------------- --------------
Net balance, beginning of year 38,015,578 35,695,682 29,570,057
Incurred related to:
Current year 47,073,649 54,053,427 47,600,725
Prior years (3,621,863) (6,751,563) (2,728,718)
--------------- --------------- --------------
Total incurred 43,451,786 47,301,864 44,872,007
Paid related to:
Current year 31,009,016 30,176,142 25,981,678
Prior years 11,493,680 14,805,826 12,764,704
--------------- --------------- --------------
Total paid 42,502,696 44,981,968 38,746,382
--------------- --------------- --------------
Net balance, end of year 38,964,668 38,015,578 35,695,632
Plus reinsurance balances recoverable 53,333,240 46,905,000 44,657,000
--------------- --------------- --------------
Balance, end of year $ 92,297,908 $ 84,920,578 $ 80,352,632
=============== =============== ==============
</TABLE>
As a result of recent favorable development in estimates of prior years'
reserves on auto liability business, the provision for losses and loss
adjustment expenses in 1998, 1997 and 1996 decreased by $3,621,863,
$6,751,563 and $2,728,718, respectively. Management believes 1994
legislative tort reform in the State of Michigan produced better than
expected loss experience and resulted in reductions in prior years' loss
reserves in 1998 and 1997. The 1994 legislation became effective in 1996
and the effects were uncertain at that time. As time has passed, the data
and effects of that reform have stabilized and management has reduced
reserves related to prior accident years accordingly.
19
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. SURPLUS NOTE:
On April 7, 1997, ProNational Insurance Company purchased a $21,500,000
surplus note from the Company. Interest is payable annually at a rate of
8.5 percent. The entire principal and any accrued unpaid interest is due
on April 7, 2009. However, repayment of any principal or interest is
subject to written authorization by the Commissioner of Insurance of the
State of Michigan and approval by the Company's Board of Directors. At
December 31, 1998, this note had an outstanding balance of $21,500,000
with accrued interest of $1,827,500. On May 26, 1998, the accrued
interest for 1997 of $1,341,835 was paid to ProNational following the
State and Board's approval.
In conjunction with the Company's plan of conversion, as more fully
described in Note 17, ProNational has elected to exchange the $21.5
million surplus note and accrued but unpaid interest of $1,522,090 as of
November 1, 1998, for shares of common stock of MEEMIC Holdings, Inc. to
be issued upon completion of the Company's conversion.
13. EMPLOYEE BENEFIT PLANS:
The Company has a qualified defined contribution 401(k) plan which covers
substantially all of its employees. The Company matches 50 percent of
employees' contributions up to a maximum rate of 2.5 percent of eligible
compensation. In addition, the Company is required to make an elective
contribution on behalf of each participant in an amount determined
annually by the Company's Board of Directors. However, such elective
contribution for a year may, at the discretion of the Company, be omitted
in a year in which a net loss is experienced. The charge to income under
this plan was $505,024, $477,068 and $282,578 for 1998, 1997 and 1996,
respectively.
The Company also has a qualified defined contribution money purchase
plan, covering substantially all employees, in which the Company is
required to make a contribution on behalf of each participant in an
amount equal to 3 percent of eligible compensation. The charge to income
under this plan was $171,886 in 1998, $169,964 in 1997 and $120,611 in
1996.
Effective January 1, 1997, the Company established a short-term incentive
plan covering all full time permanent employees hired before March 1 for
each plan year. Incentive payouts are based on achievement of corporate
and individual goals and are calculated as a percentage of base
compensation. The charge to income under this plan was approximately
$500,000 in both 1998 and 1997.
20
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. LEASE AGREEMENTS:
The Company is obligated under an operating lease for office space.
At December 31, 1998, future minimum lease payments are as follows:
<TABLE>
<S> <C>
1,999 $ 778,000
2,000 778,000
2,001 778,000
2002 778,000
2003 and thereafter 3,002,000
-------------
$ 6,114,000
=============
</TABLE>
The base rate will increase annually at the start of each new lease year
by the percentage increase in the CPI-U (Common Price Index for all urban
consumers).
Rental expense was $1,146,019, $981,159 and $974,880 in 1998, 1997 and
1996, respectively.
15. STATUTORY INSURANCE ACCOUNTING PRACTICES:
MEEMIC is required to file financial statements prepared in accordance
with statutory insurance accounting practices ("SAP") prescribed or
permitted by the Michigan Insurance Bureau. The Company does not utilize
any permitted accounting practices.
Accounting practices used to prepare statutory-basis financial statements
differ in some respects from GAAP. A reconciliation of statutory capital
and surplus at December 31, 1998 and 1997, and statutory net income for
the years ended December 31, 1998, 1997 and 1996, as filed with the
Michigan Insurance Bureau, to the amounts shown in the accompanying
financial statements follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997
----------------- ----------------
<S> <C> <C>
Statutory capital and surplus $ 40,372,903 $ 34,512,849
Net unrealized appreciation on securities available for sale 2,800,748 1,927,390
Deferred policy acquisition costs capitalized for GAAP 278,067 1,604,449
Deferred federal income taxes recorded for GAAP 3,338,251 2,737,658
Assets nonadmitted for SAP 26,934,452 23,999,226
Surplus note (21,500,000) (21,500,000)
---------------- ---------------
Total policyholders' surplus per accompanying
consolidated balance sheets $ 52,224,421 $ 43,281,572
================ ===============
</TABLE>
21
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
15. STATUTORY INSURANCE ACCOUNTING PRACTICES, CONTINUED:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Statutory net income $ 6,066,977 $ 6,315,333 $ 4,816,465
Deferred federal income tax expense recorded
for GAAP 897,534 327,761 435,695
Deferred policy acquisition costs capitalized for GAAP (1,326,383) (376,805) (16,109)
Equity in net income of subsidiary unconsolidated for
statutory reporting 2,728,304 361,622 --
Other -- 1,250 14,850
------------- ------------- -------------
Net income per accompanying consolidated
statements of income $ 8,366,432 $ 6,629,161 $ 5,250,901
============= ============= =============
</TABLE>
Certain regulations that affect MEEMIC and the insurance industry are
promulgated by the National Association of Insurance Commissioners
("NAIC"), which is an association of state insurance commissioners,
regulators and support staff that acts as a coordinating body for the
state insurance regulatory process. The NAIC has 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 minimum threshold or take corrective measures
to achieve that threshold. MEEMIC has calculated its RBC level based on
these requirements and has determined that it passed the RBC test and has
capital and surplus in excess of the minimum threshold.
16. CONTINGENCIES:
The Company participates in the Property and Casualty Guarantee
Association ("Association") of the State of Michigan which protects
policyholders and claimants against losses due to insolvency of insurers.
When an insolvency occurs, the Association is authorized to assess member
companies up to the amount of the shortfall of funds, including expenses.
Member companies are assessed based on the type and amount of insurance
written during the previous calendar year. Assessments to date are not
significant; however, the ultimate liability for future assessments is
not known. Accordingly, the Company is unable to predict whether such
future assessments will materially affect the financial condition of the
Company.
22
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. CONVERSION:
On June 24, 1998, the Board of Directors approved a plan of conversion
for changing the corporate form of the Company from the mutual form to
the stock form. Under the plan, eligible policyholders, officers and
directors will have the opportunity to acquire stock in a newly formed
holding company, MEEMIC Holdings, Inc.
MEEMIC Holdings, Inc. will in turn acquire all of the newly issued stock
of the Company upon conversion. Prior to the conversion, MEEMIC Holdings,
Inc. will not engage in any significant operations and will have no
assets or liabilities. On September 2, 1998, the Michigan Insurance
Bureau concluded that MEEMIC's plan of conversion complied with
applicable laws and approved such plan. On January 20, 1999, the Company
filed Amendment No. 1 to its registration statement with the Securities
and Exchange Commission ("SEC") for this offering. Pending clearance of
the Company's offering materials by the SEC, the plan must then be
approved by at least two-thirds of the votes cast by eligible
policyholders in order to become effective.
The Company has received a tax opinion regarding the tax treatment of the
conversion as a tax-free reorganization. In the event that the plan is
executed, the converted company will be subject to certain insurance laws
and regulations specific to stock insurance companies as well as
regulations of the SEC. Limitations on the payment of dividends and
Insurance Holding Company regulations are among the types of regulatory
requirements with which MEEMIC Holdings, Inc. will have to comply. In
addition, the Management Services Agreement with Professionals will be
terminated upon completion of the conversion.
In connection with the conversion, certain professional service costs
have been incurred that, due to their nature, have been recorded as
extraordinary costs in the accompanying 1998 consolidated statement of
income.
23
<PAGE> 1
EXHIBIT 99.2
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1999
(Unaudited) December 31, 1998
----------------- ------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at fair value $121,926,696 $122,996,615
Short-term investments, at cost, which approximate fair value 1,908,815 1,906,496
----------------- ------------------
Total investments 123,835,511 124,903,111
Cash 5,698,453 3,977,602
Premiums due from policyholders 4,867,405 3,840,764
Amounts recoverable from reinsurers 41,409,956 43,066,086
Amounts recoverable from reinsurers, related party 20,057,406 16,193,962
Accrued investment income 1,643,648 1,604,457
Deferred federal income taxes 4,228,955 3,338,251
Property and equipment, at cost, net of accumulated depreciation 2,447,873 2,148,550
Deferred policy acquisition costs 335,934 278,067
Intangible assets, net of amortization 37,806,276 39,268,400
Other assets 1,189,520 710,369
----------------- ------------------
Total assets $243,520,937 $239,329,619
================= ==================
LIABILITIES AND POLICYHOLDERS' SURPLUS
Liabilities:
Loss and loss adjustment expense reserves $94,633,751 $92,297,908
Unearned premiums 33,172,891 31,585,769
Surplus note 21,500,000 21,500,000
Payable related to acquisition 16,217,331 18,215,289
Accrued expenses and other liabilities 8,250,520 8,386,744
Accrued expenses and other liabilities, related party 3,281,474 2,356,815
Premiums ceded payable 4,551,619 4,464,952
Premiums ceded payable, related party 7,946,481 7,552,920
Federal income taxes payable 494,801 744,801
----------------- ------------------
Total liabilities 190,048,868 187,105,198
----------------- ------------------
Policyholders' surplus:
Unassigned surplus 53,552,237 50,375,927
Accumulated other comprehensive income: Net unrealized (depreciation)
appreciation on investments, net of deferred federal income taxes of
($41,299) and $952,254 in 1999 and 1998, respectively (80,168) 1,848,494
----------------- ------------------
Total policyholders' surplus 53,472,069 52,224,421
----------------- ------------------
Total liabilities and policyholders' surplus $243,520,937 $239,329,619
================= ==================
</TABLE>
See the accompanying notes to the unaudited condensed consolidated financial
statements.
<PAGE> 2
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
June 30, JUNE 30,
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues and other income:
Premiums written $31,743,624 $29,342,633 $59,917,405 $55,431,242
Premiums ceded, related party (11,352,116) (10,505,699) (22,513,126) (20,885,584)
Premiums ceded, other (1,052,466) (884,948) (2,047,470) (1,877,925)
---------------- ---------------- ---------------- ----------------
Net premiums written 19,339,042 17,951,986 35,356,809 32,667,733
Increase in unearned premiums, net
of prepaid reinsurance premiums (2,306,404) (2,038,353) (1,587,121) (1,180,926)
---------------- ---------------- ---------------- ----------------
Net premiums earned 17,032,638 15,913,633 33,769,688 31,486,807
Net investment income 1,756,879 1,785,776 3,519,146 3,464,096
Net realized investment gains
(losses) on fixed maturities (19,014) (116) (2,558) 361
Other income 397,735 506,231 773,763 976,130
--------------- ---------------- ---------------- ----------------
Total revenues and other income 19,168,238 18,205,524 38,060,039 35,927,394
---------------- ---------------- ---------------- ----------------
Expenses:
Losses and loss adjustment expenses incurred,
net 11,634,724 11,366,782 24,062,152 21,920,341
Policy acquisition and other underwriting
expenses:
Policy acquisition and underwriting
expenses 6,557,606 6,123,869 12,724,861 12,301,319
Ceding commissions, related party (3,405,635) (3,151,710) (6,753,938) (6,265,675)
Management fees, related party 547,726 499,902 1,065,534 993,053
---------------- ---------------- ---------------- ----------------
3,699,697 3,472,061 7,036,457 7,028,697
Interest expense, related party 455,632 455,624 906,248 906,240
Amortization expense 731,062 731,061 1,462,124 1,478,790
Other expense (124) 12,280 6,756 28,792
---------------- ---------------- ---------------- ----------------
Total expenses 16,520,991 16,037,808 33,473,737 31,362,860
---------------- ---------------- ---------------- ----------------
Income from operations before federal
income taxes and extraordinary
item 2,647,247 2,167,716 4,586,302 4,564,534
Federal income taxes 707,996 499,838 1,537,278 1,179,195
---------------- ---------------- ---------------- ----------------
Income before extraordinary item 1,939,251 1,667,878 3,049,024 3,385,339
Extraordinary item:
Gain on early extinguishment of debt,
net of federal income taxes of $89,257
and $65,571 for the three and six month
periods ended June 30, 1999 173,264 - 127,286 -
---------------- ---------------- ---------------- ----------------
Net income* $2,112,515 $1,667,878 $3,176,310 $3,385,339
================ ================ ================ ================
</TABLE>
* Earnings per share not meaningful.
See the accompanying notes to the unaudited condensed consolidated financial
statements.
<PAGE> 3
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Comprehensive income:
Net income $2,112,515 $1,667,878 $3,176,310 $3,385,339
Net unrealized (depreciation) appreciation on
investments, net of reclassification
adjustment and net of deferred federal
income taxes (1,424,614) 124,248 (1,928,662) 55,034
-------------- ------------- -------------- -------------
Comprehensive income $687,901 $1,792,126 $1,247,648 $3,440,373
============== ============= ============== =============
</TABLE>
See the accompanying notes to the unaudited condensed consolidated financial
statements.
<PAGE> 4
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 1999 and 1998 (Unaudited)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $3,176,310 $3,385,339
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,524,377 1,756,819
Realized (gains) losses on investments 2,558 (361)
Net accretion of discounts on investments 48,821 28,365
Deferred federal income taxes 102,849 (620,804)
Extraordinary gain on early extinguishment of debt (192,857) -
Changes in assets and liabilities:
Premiums due from policyholders (1,026,642) (474,169)
Amounts due from reinsurers (1,727,086) (6,255,959)
Accrued investment income (39,191) (76,216)
Deferred policy acquisition costs (57,867) 935,409
Other assets (479,151) (156,046)
Loss and loss adjustment expense reserves 2,335,843 7,424,984
Unearned premiums 1,587,121 1,180,926
Accrued expenses and other liabilities 788,435 1,697,997
Federal income taxes payable (250,000) (700,000)
---------- ----------
Net cash provided by operating activities 5,793,520 8,126,284
---------- ----------
Cash flows from investing activities:
Proceeds from sale or maturity of short-term investments 948,474 1,894,475
Purchases of short-term investments (950,793) (1,896,943)
Proceeds from maturity of securities available for sale 8,988,621 5,862,315
Purchases of securities available for sale (10,892,295) (10,050,923)
Proceeds from sales of property and equipment 572,445 41,756
Purchases of property and equipment (934,020) (580,376)
---------- ----------
Net cash used in investing activities (2,267,568) (4,729,696)
---------- ----------
Cash flows from financing activities:
Payment on payable related to acquisition (1,805,101) -
---------- ----------
Net cash used in financing activities (1,805,101) -
---------- ----------
Net increase in cash 1,720,851 3,396,588
Cash, beginning of year 3,977,602 2,204,325
---------- ----------
Cash, end of period $5,698,453 $5,600,913
========== ==========
</TABLE>
See the accompanying notes to the unaudited condensed consolidated financial
statements.
<PAGE> 5
MICHIGAN EDUCATIONAL EMPLOYEES MUTUAL INSURANCE
COMPANY AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) DESCRIPTION OF BUSINESS
Michigan Educational Employees Mutual Insurance Company and
Subsidiary ("MEEMIC" or the "Company") is a Michigan-licensed property
and casualty mutual insurance company that operates as a single segment
writing full coverage private passenger automobile protection and
homeowner insurance products for educational employees and their
immediate families exclusively in the State of Michigan. MEEMIC sells
its insurance contracts through its wholly owned subsidiary, MEEMIC
Insurance Services Corp., d/b/a MEIA Insurance Agency, which is the
exclusive distributor of the Company's products. MEEMIC Holdings, Inc.
("Holdings") was formed to be the holding company for MEEMIC after its
conversion to a stock company. Before the conversion described in Note
(4) below, Holdings did not engage in any significant operations. On
July 1, 1999 the effective date of the conversion, MEEMIC became a
wholly owned subsidiary of Holdings. See Note (4).
In preparing the 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.
The most significant estimates that are susceptible to
significant change in the near term relate to the determination of the
loss and loss adjustment expense reserves. Although considerable
variability is inherent in these estimates, management believes that
the reserves are adequate. The estimates are reviewed regularly and
adjusted as necessary. Such adjustments are reflected in current
operations.
(2) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, and have been
prepared in accordance with generally accepted accounting principles
("GAAP") for Form 10-Q and Rule 10-01 of Regulation S-X financial
information. Accordingly, they have not been audited and they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. All
significant intercompany transactions have been eliminated in
consolidation.
In the opinion of management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of
financial position and results of operations have been included. The
operating results for the three month and six month periods ended June
30, 1999 are not necessarily indicative of the results to be expected
for the year ending December 31, 1999.
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
(3) RELATED PARTY TRANSACTIONS
Effective April 7, 1997, Professionals Group, Inc.
(Nasdaq: PICM) ("Professionals"), which is the parent of ProNational
Insurance Company ("ProNational") signed a definitive agreement with
the Company whereby:
- - Nominees of Professionals were elected to all six positions on the
MEEMIC Board of Directors;
- - ProNational purchased a $21.5 million surplus note from MEEMIC;
- - Effective July 1, 1997 ProNational began reinsuring 40 percent of
MEEMIC's net retained premiums on a quota share basis.
Professionals also provides MEEMIC with information system
services and certain consulting services under a management services
agreement. Fees for such services were $547,726 and $499,902 for the
three months ended June 30, 1999 and 1998, respectively. Fees for such
services were $1,065,534 and $993,053 for the six months ended June 30,
1999 and 1998, respectively.
MEEMIC completed its conversion on July 1, 1999 and the $21.5
million surplus note of MEEMIC owned by Professionals was converted
into shares of Holdings. After the conversion, Professionals now owns
approximately 77% of the issued and outstanding shares of Holdings. In
conjunction with the plan of conversion MEEMIC terminated its
management services agreement with Professionals on July 1, 1999. The
registration statement of Holdings (Registration No. 333-66671) should
be consulted for additional information concerning the conversion of
MEEMIC and the role of Professionals.
From July 1, 1997 to July 1, 1999 the Company had a
coinsurance treaty with ProNational to cede 40 percent of its net
retained premiums on a quota share basis. Ceding commissions were
$3,405,635 and $3,151,710 for the three months ended June 30, 1999 and
1998, respectively. Ceding commissions were $6,753,938 and $6,265,675
for the six months ended June 30, 1999 and 1998, respectively. A
summary of reinsurance amounts that were ceded to ProNational for the
three months and six months ended June 30, 1999 and 1998 follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Premiums earned . . . . . . . . $11,352,116 $10,505,699 $22,513,126 $20,885,584
Losses and loss adjustment
expenses incurred $ 7,218,367 $ 5,893,573 $15,596,159 $11,520,839
</TABLE>
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
(4) CONVERSION
On June 24, 1998, the Board of Directors approved a plan of
conversion for changing the corporate form of the Company from the
mutual form to the stock form. Under the plan, eligible policyholders,
officers and directors had the opportunity to acquire stock in
Holdings, which would acquire all of the newly issued stock of the
Company upon conversion. Prior to the conversion, Holdings did not
engage in any significant operations and did not have assets or
liabilities. On September 2, 1998, The Michigan Insurance Bureau
concluded that MEEMIC's plan of conversion complied with applicable
laws and approved such plan. On April 20, 1999, the Securities and
Exchange Commission declared effective the registration statement on
Form S-1 filed by Holdings. The Company has also received a tax opinion
regarding the tax treatment of the conversion as a tax-free
reorganization.
At a special policyholder meeting held on May 25, 1999,
MEEMIC's plan of conversion was approved by policyholder vote. On July
1, 1999 MEEMIC converted to a stock insurance company and became a
wholly owned subsidiary of Holdings. MEEMIC policyholders subscribed
for 1,533,983 shares of common stock in MEEMIC Holdings. Also pursuant
to the plan of conversion, Professionals converted the $21.5 million
surplus note (plus accrued interest) of MEEMIC owned by Professionals
into 2,302,209 shares of MEEMIC Holdings; and, Professionals has
fulfilled its obligations as standby purchaser by purchasing 2,763,308
shares in the subscription offering. As a result, Professionals owns
approximately 77% of the issued and outstanding shares of MEEMIC
Holdings. Since July 2, 1999 MEEMIC Holdings, Inc. has been trading on
the Nasdaq National Market under the symbol "MEMH".
<PAGE> 1
EXHIBIT 99.3
PROFESSIONALS GROUP, INC.
AND MEEMIC HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
June 30, 1999
(In thousands)
<TABLE>
<CAPTION>
Professionals Professionals MEEMIC
Group Proforma Group Holdings
Historical Adjustments Proforma Historical
---------- ----------- -------- ----------
Assets
------
<S> <C> <C> <C> <C>
Investments:
Fixed maturities available for sale, at fair value $ 618,152 $ (21,500)(a) $ 596,652 $ 121,927
Equity securities available for sale, at fair value 4,496 23,022 (a) 55,151 -
27,633 (b)
Short-term investments, at cost 51,642 (27,633)(b) 24,009 1,909
Real estate, at cost, net of accumulated
depreciation 410 410 -
------------ ----------- ------------ ----------
Total investments 674,700 1,522 676,222 123,836
Cash, unrestricted 744 744 5,698
Cash, restricted 2,070 2,070 -
Premiums due from policyholders 29,789 29,789 4,867
Reinsurance balances 134,725 134,725 61,467
Accrued investment income 10,922 (1,522)(a) 9,400 1,644
Deferred federal income taxes 29,871 29,871 4,229
Property and equipment, at cost, net of
accumulated depreciation 9,754 9,754 2,448
Deferred policy acquisition costs 1,004 1,004 336
Intangible assets - - 37,806
Other assets 17,228 17,228 1,190
------------ ----------- ------------ ----------
Total assets $ 910,807 $ - $ 910,807 $ 243,521
============ =========== ============ ==========
Liabilities and Shareholders' Equity
Liabilities:
Loss and loss adjustment expense reserves $ 563,684 $ - $ 563,684 $ 94,634
Reserve for extended reporting period claims 27,174 27,174 -
Unearned premiums 58,713 58,713 33,173
Long-term debt 17,500 17,500 -
Surplus contributions 10,094 10,094 21,500
Payable related to acquisition - - 16,217
Minority interest - - -
Negative goodwill - - -
Accrued expenses and other liabilities 17,860 17,860 24,525
------------ ----------- ------------ ----------
Total liabilities 695,025 - 695,025 190,049
------------ ----------- ------------ ----------
Shareholders' Equity:
Preferred stock, no par value - - -
Common stock, no par value 8,351 8,351 -
Additional paid-in capital 33,062 33,062 -
Retained earnings 176,865 176,865 53,552
Accumulated other comprehensive income (2,496) (2,496) (80)
------------ ----------- ------------ ----------
Total shareholders' equity 215,782 - 215,782 53,472
------------ ----------- ------------ ----------
Total liabilities and shareholders' equity $ 910,807 $ - $ 910,807 $ 243,521
============ =========== ============ ==========
</TABLE>
<TABLE>
<CAPTION>
MEEMIC Combined
Proforma Holdings Proforma Proforma
Adjustments Proforma Adjustments Combined
----------- -------- ----------- --------
Assets
------
<S> <C> <C> <C> <C>
Investments:
Fixed maturities available for sale, at fair value $ - $ 121,927 $ - $ 718,579
Equity securities available for sale, at fair value - (50,655)(d) 4,496
Short-term investments, at cost 1,909 25,918
Real estate, at cost, net of accumulated
depreciation - 410
----------- ---------- ----------- -----------
Total investments - 123,836 (50,655) 749,403
Cash, unrestricted 41,773 (b) 32,471 33,215
(15,000)(c)
Cash, restricted - 2,070
Premiums due from policyholders 4,867 34,656
Reinsurance balances 61,467 196,192
Accrued investment income 1,644 11,044
Deferred federal income taxes (414)(c) 3,815 947 (d) 34,633
Property and equipment, at cost, net of
accumulated depreciation 2,448 (2,448)(d) 9,754
Deferred policy acquisition costs 336 (336)(d) 1,004
Intangible assets 37,806 (37,806)(d) -
Other assets 1,190 18,418
----------- ---------- ----------- -----------
Total assets $ 26,359 $ 269,880 $ (90,298) $ 1,090,389
=========== ========== =========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Loss and loss adjustment expense reserves $ - $ 94,634 $ - $ 658,318
Reserve for extended reporting period claims - 27,174
Unearned premiums 33,173 91,886
Long-term debt - 17,500
Surplus contributions (21,500)(a) - 10,094
Payable related to acquisition (16,217)(c) - -
Minority interest - 18,816 (d) 18,816
Negative goodwill - 9,956 (d) 9,956
Accrued expenses and other liabilities (1,522)(a) 23,003 40,863
----------- ---------- ----------- -----------
Total liabilities (39,239) 150,810 28,772 874,607
----------- ---------- ----------- -----------
Shareholders' Equity:
Preferred stock, no par value - -
Common stock, no par value 23,022 (a) 64,795 (64,795)(d) 8,351
41,773 (b)
Additional paid-in capital - 33,062
Retained earnings 803 (c) 54,355 (54,355)(d) 176,865
Accumulated other comprehensive income (80) 80 (d) (2,496)
----------- ---------- ----------- -----------
Total shareholders' equity 65,598 119,070 (119,070) 215,782
----------- ---------- ----------- -----------
Total liabilities and shareholders' equity $ 26,359 $ 269,880 $ (90,298) $ 1,090,389
=========== ========== =========== ===========
</TABLE>
<PAGE> 2
PROFESSIONALS GROUP, INC.
AND MEEMIC HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the Year Ended December 31, 1998
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Professionals MEEMIC
Group Holdings Proforma Proforma
Historical Historical Adjustments Combined
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues and other income:
Net premiums written $ 143,922 $ 66,190 $ - $ 210,112
Decrease (increase) in unearned premiums,
net of prepaid reinsurance premiums 9,527 (2,150) 7,377
------------ ------------ ------------ -----------
Premiums earned, net 153,449 64,040 - 217,489
Net investment income 38,443 6,958 (1,827)(a) 43,574
Net realized investment gains 4,810 31 4,841
Reinsurance experience refunds 3,071 - 3,071
Other 3,896 2,111 (2,073)(a) 3,934
------------ ------------ ------------ -----------
Total revenues and other income 203,669 73,140 (3,900) 272,909
------------ ------------ ------------ -----------
Expenses:
Losses and loss adjustment expenses, net 171,040 43,452 214,492
Increase in reserve for extended reporting
period claims 1,046 - 1,046
Policy acquisition and other underwriting
expenses 38,234 12,659 (2,073)(a) 46,916
(1,604)(c)
(300)(d)
Interest expense 1,313 1,827 (1,827)(a) 1,313
Other 1,399 2,971 (2,941)(b) 1,429
------------ ------------ ------------ -----------
Total expenses 213,032 60,909 (8,745) 265,196
------------ ------------ ------------ -----------
Income (loss) from operations before federal
income taxes (benefit) and minority interest (9,363) 12,231 4,845 7,713
Federal income taxes (benefit) (6,132) 3,561 1,647 (e) (924)
Minority interest - - (2,713)(f) (2,713)
------------ ------------ ------------ -----------
Income (loss) before extraordinary items $ (3,231) $ 8,670 $ 485 $ 5,924
============ ============ ============ ===========
Income (loss) before extraordinary items per share:
Basic $ (0.39) $ - $ - $ 0.71
============ ============ ============ ===========
Assuming dilution $ (0.39) $ - $ - $ 0.70
============ ============ ============ ===========
Weighted average shares outstanding:
Basic 8,368,753 - - 8,368,753
============ ============ ============ ===========
Assuming dilution 8,368,753 - 72,172 (g) 8,440,925
============ ============ ============ ===========
</TABLE>
<PAGE> 3
PROFESSIONALS GROUP, INC.
AND MEEMIC HOLDINGS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the Six Months Ended June 30, 1999
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Professionals MEEMIC
Group Holdings Proforma Proforma
Historical Historical Adjustments Combined
---------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Revenues and other income:
Net premiums written $ 86,839 $ 35,357 $ - $ 122,196
Increase in unearned premiums,
net of prepaid reinsurance premiums (8,312) (1,587) (9,899)
------------- ----------- ----------- -----------
Premiums earned, net 78,527 33,770 - 112,297
Net investment income 18,604 3,519 (906)(a) 21,217
Net realized investment gains 2,670 (3) 2,667
Other 2,238 774 (1,066)(a) 1,946
------------- ----------- ----------- -----------
Total revenues and other income 102,039 38,060 (1,972) 138,127
------------- ----------- ----------- -----------
Expenses:
Losses and loss adjustment expenses, net 64,323 24,062 88,385
Increase in reserve for extended reporting
period claims 500 - 500
Policy acquisition and other underwriting
expenses 20,313 7,037 (1,066)(a) 26,134
(150)(d)
Interest expense 554 906 (906)(a) 554
Other 1,075 1,469 (1,462)(b) 1,082
------------- ----------- ----------- -----------
Total expenses 86,765 33,474 (3,584) 116,655
------------- ----------- ----------- -----------
Income from operations before federal
income taxes and minority interest 15,274 4,586 1,612 21,472
Federal income taxes 3,515 1,537 548 (e) 5,600
Minority interest - - (933)(f) (933)
------------- ----------- ----------- -----------
Income before extraordinary items $ 11,759 $ 3,049 $ 131 $ 14,939
============= =========== =========== ===========
Income before extraordinary items per share:
Basic $ 1.40 $ - $ - $ 1.78
============= =========== =========== ===========
Assuming dilution $ 1.38 $ - $ - $ 1.76
============= =========== =========== ===========
Weighted average shares outstanding:
Basic 8,377,878 - - 8,377,878
============= =========== =========== ===========
Assuming dilution 8,500,553 - - 8,500,553
============= =========== =========== ===========
</TABLE>
<PAGE> 4
Professionals Group, Inc.
MEEMIC Holdings, Inc.
Notes to Unaudited Condensed Combined Proforma Financial Statements
1. Balance Sheet
The accompanying unaudited condensed combined proforma balance sheet as of
June 30, 1999 has been prepared as if the following transactions had been
consummated as of June 30, 1999. Accordingly, we have presented the
proforma adjustments for Professionals Group, Inc. and MEEMIC Holdings,
Inc. as well as the combined proforma adjustments:
(a) Conversion of $21.5 million surplus note owned by Professionals
Group plus accrued interest of $1.5 million from January 1, 1998 to
November 11, 1998 into 2,302,209 shares of MEEMIC Holdings common
stock at $10 per share (in thousands):
<TABLE>
<S> <C>
Surplus note $21,500
Accrued interest 1,522
-------
$23,022
=======
</TABLE>
(b) Sale of 4,297,291 shares of MEEMIC Holdings common stock at $10
per share (in thousands):
<TABLE>
<S> <C>
Proceeds from Professionals Group $27,633
Proceeds from MEEMIC policyholders 15,340
Less, estimated offering expenses (700)
Less, donation to MEEMIC Foundation (500)
-------
$41,773
=======
</TABLE>
(c) Use of a portion of net proceeds received to retire the payable
related to acquisition to former agency shareholders. The former
agency shareholders may elect to exercise an accelerated payment
option on the payable related to acquisition. The accelerated
payment option will result in an additional $2.0 million bonus
payable, before applying a 7% discount to the entire unpaid purchase
price at time of option. The discount for early extinguishment of
debt will result in extraordinary income to MEEMIC Holdings of
$1,217,000 before federal income taxes of $414,000, or $803,000 of
extraordinary income after federal income taxes (in thousands):
<TABLE>
<S> <C>
Balance of payable related to acquisition $16,217
Discount, net of bonus, related to option exercised 1,217
-------
Proceeds utilized for accelerated retirement $15,000
=======
</TABLE>
<PAGE> 5
Professionals Group, Inc.
MEEMIC Holdings, Inc.
Notes to Unaudited Condensed Combined Proforma Financial Statements, continued
1. Balance Sheet, continued
(d) Purchase accounting adjustments necessary to properly reflect
consolidation, including elimination of MEEMIC's goodwill and
writeoff of certain non-financial assets prior to recognition of
negative goodwill resulting from the purchase.
2. Statements of Income
The accompanying unaudited condensed combined proforma statements of
income for the year ended December 31, 1998 and six months ended June
30, 1999 present results as if the transaction described in Note 1 of
the Notes to Unaudited Condensed Combined Proforma Financial Statements
had been consummated on January 1, 1998.
(a) Eliminate inter-company transactions:
<TABLE>
<CAPTION>
Year ended December Six months ended
31, 1998 June 30, 1999
----------------------------------------------------------
(in thousands)
<S> <C> <C>
Management fees $2,073 $1,066
Interest on surplus
note 1,827 906
</TABLE>
(b) Eliminate MEEMIC goodwill amortization.
(c) Reduce amortization of MEEMIC's deferred policy acquisition
costs for the year ended December 31, 1998 (purchase adjustment
made at purchase date).
(d) Reduce depreciation of MEEMIC's property and equipment
(purchase adjustment made at purchase date).
(e) Increase income taxes to reflect the impact of items (a)
through (d) above at the statutory rate of 34%.
<PAGE> 6
Professionals Group, Inc.
MEEMIC Holdings, Inc.
Notes to Unaudited Condensed Combined Proforma Financial Statements, continued
2. Statements of Income, continued
(f) Reflect minority interest:
<TABLE>
<CAPTION>
Year ended December Six months ended
31, 1998 June 30, 1999
-----------------------------------------------
(In thousands)
<S> <C> <C>
MEEMIC net income $8,670 $3,049
Plus: pretax impact of
purchase adjustments in (a) -
(c) above 4,545 1,462
Less: income taxes (1,545) (497)
------ ------
Subtotal 11,670 4,014
Minority interest
percent 23.25% 23.25%
------ ------
Minority interest $2,713 $ 933
====== ======
</TABLE>
(g) Increase weighted average shares outstanding to reflect proper
dilution for the year ended December 31, 1998.
