SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR SECTION 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
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Millers American Group, Inc.
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(Exact name of registrant as specified in its charter)
Texas 75-2810186
----------------------------- ----------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
777 Main Street, Suite 1000
Fort Worth, Texas 76102
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(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (817) 348-1600
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Securities to be registered pursuant to Section 12(b) of the Act:
NONE
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
SERIES B PREFERRED STOCK PURCHASE RIGHTS
<PAGE>
INTRODUCTORY NOTE
This registration statement contains certain forward-looking statements
that involve risks and uncertainties. Such statements can be identified by the
use of forward-looking terminology, such as "may," "will," "should,"
"anticipate," "believe," "estimate," "expect," "intend" and similar expressions.
Actual results could differ materially from those contemplated by the
forward-looking statements as a result of certain factors set forth elsewhere in
this registration statement, including, but not limited to, "Item 2. Financial
Information -- Management's Discussion and Analysis of Financial Condition and
Results of Operations." The factors that could cause actual results to differ
materially include, but are not limited to, the following: catastrophe and
natural peril losses, inadequate loss reserves, geographic concentration of
business, competitive factors and pricing pressures, changes in legal and
regulatory requirements, and general economic conditions. Undue reliance should
not be placed on any such forward-looking statements.
The executive offices of Millers American Group, Inc., a Texas corporation
(the "Company"), were adversely affected by the tornado that stuck downtown Fort
Worth, Texas on the evening of March 28, 2000. The Company's employees were not
allowed back onto the premises until April 24, 2000. As a result, the Company
was greatly hindered by the inconvenience of the catastrophe. Consequently,
certain parts of this Form 10 will be amended to include final information,
including, but not limited to, audited financial statements.
ITEM 1. BUSINESS.
The Company was formed on February 25, 1999. The Company serves as an
indirect holding company for Millers Insurance Company, a Texas stock insurance
company ("Millers Insurance") (f/k/a The Millers Mutual Fire Insurance Company,
a Texas mutual property and casualty insurance company ("Millers Mutual")), and
Phoenix Indemnity Insurance Company, an Arizona stock insurance company
("Phoenix Indemnity," together with Millers Insurance and its subsidiaries, the
"Insurance Subsidiaries"). The Company's executive offices are located at 777
Main Street, Suite 1000, Fort Worth, Texas 76102 and its telephone number is
(817) 348-1600.
On January 8, 1999, the Commissioner of Insurance of the State of Texas
(the "Commissioner") approved a Plan of Conversion (the "Plan of Conversion").
The Plan of Conversion was approved by the Millers Mutual policyholders and
became effective on April 21, 1999. Pursuant to the Plan of Conversion, Millers
Mutual (i) converted from a mutual insurance company to a stock insurance
company, (ii) changed its name to "The Millers Insurance Company," and (iii)
became a wholly-owned subsidiary of Trilogy Holdings, Inc., a Nevada business
corporation ("Trilogy Holdings"), which in turn became a wholly-owned subsidiary
of the Company. Pursuant to the Plan of Conversion, membership interests in
Millers Mutual were converted into one share of the Company's common stock, par
value $0.01 per share (the "Common Stock").
On September 1, 1999, the Company entered into a stock purchase agreement
(the "Stock Purchase Agreement") with the shareholders of Phoenix Indemnity.
Pursuant to the Stock Purchase Agreement, the Company acquired from such
shareholders all of the outstanding capital stock of Phoenix Indemnity for $25
million in cash. The acquisition was funded principally through a revolving line
of credit from a bank and cash.
The Company has no significant assets other than the stock of Trilogy
Holdings, which in turn has no significant assets other than the stock of
Millers Insurance and Phoenix Indemnity. With the exception of the $20 million
of debt incurred in the acquisition of Phoenix Indemnity, the assets and
liabilities of the Company on a consolidated basis are not materially different
from the assets and liabilities of the Insurance Subsidiaries. As a holding
company, the Company may make investments and engage in businesses not permitted
for an insurance company. Presently, the Company intends to evaluate
opportunities to acquire other companies and may issue capital stock to
consummate such acquisitions.
<PAGE>
Millers Insurance is a stock property and casualty insurance company formed
under the laws of the State of Texas. Millers Insurance is licensed to do
business in Texas and in 38 other states, including California, Florida and New
Mexico. Millers Insurance provides a variety of insurance products for
individuals and businesses. Millers Insurance had $122.1 million in admitted
assets and $34.65 million in total surplus for the year ended December 31, 1999.
Phoenix Indemnity is an Arizona stock insurance company formed under the
laws of the State of Arizona. Phoenix Indemnity is licensed to do business in
Arizona and in 23 other states, including New Mexico, Utah, Nevada and Kentucky.
Phoenix Indemnity primarily provides nonstandard automobile insurance products
for individuals and focuses primarily on rural demographic areas that provide
long-range growth prospects. Phoenix Indemnity had $58.5 million in admitted
assets and $15.68 million in total surplus for the year ended December 31, 1999.
History
Millers Insurance is one of the oldest insurance carriers domiciled in the state
of Texas. Millers Mutual, the predecessor to Millers Insurance, was incorporated
on March 1, 1898 under the laws of the State of Texas. Operations have been
conducted on a multiple line basis with broad underwriting power since the
absorption in 1952 of a former affiliated casualty organization, Texas National
Mutual Insurance Company. On April 21, 1999, Millers Mutual converted from a
mutual insurance company to a stock insurance company and adopted its current
name.
Phoenix Indemnity was incorporated in 1988 in connection with a strategic
alliance between Acceptance Insurance Company ("Acceptance") and Statewide
General Agency ("Statewide"), a managing general agency that represented
Acceptance. In April 1994, Acceptance purchased Statewide's entire ownership
interest in Phoenix Indemnity, and Phoenix Indemnity thereafter became a
wholly-owned subsidiary of Acceptance. On September 21, 1999, the Company
purchased all of the outstanding shares of the capital stock of Phoenix
Indemnity.
<PAGE>
Organization Chart
Set forth below is an organization chart of the Company and its significant
subsidiaries and affiliates as of the date of this registration statement.
______________________________
| |
| Shareholders |
|______________________________|
|
|
_______________|______________
| |
| Millers American Group, Inc. |
|______________________________|
|
| 100%
_______________|______________
| |
| Trilogy Holdings, Inc. |
|______________________________|
|
_______________|________________
| 100% 100% |
_______________|______________ _______________|______________
|The Millers Insurance Company | | |
| (f/k/a The Millers Mutual | | Phoenix Indemnity |
| Fire Insurance Company) | | Insurance Company |
|______________________________| |______________________________|
|
_____________|___________________________________
| 100% | 100% 100% |
________|________ ________|________ __________|________
| Millers General | | Millers Holding | | INSpire Insurance |
| Agency | | Corporation | | Solutions, Inc. |
|_________________| |_________________| |___________________|
|
_____________|______________
| 99.5% | 100%
________|________ ________|________
| The | | The |
|Millers Casualty | | Millers Direct |
|Insurance Company| |Insurance Company|
|_________________| |_________________|
Overview of the Property and Casualty Insurance Industry
The property and casualty insurance industry provides financial protection
for individuals, businesses and others against losses of property or losses by
third parties for which the insured is liable. Property and casualty insurers
underwrite insurance policies that cover various types of risks, which can
generally be divided into personal lines of insurance covering individuals and
commercial lines of insurance covering businesses. Personal lines generally
include automobile insurance (including physical damage and liability insurance)
and homeowners' insurance. Commercial lines generally include commercial
package, workers' compensation, general liability and automobile liability
insurance, as well as insurance covering other commercial risks.
<PAGE>
The property and casualty insurance industry is highly competitive.
Insurance companies compete primarily on the basis of price, consumer
satisfaction and claims paying ability. Based on statistics released by the
Insurance Services Office, an industry advisory organization ("ISO"), premium
revenues for the property and casualty insurance industry over the past several
years have been increasing by approximately 3% annually.
Insurance Operations
The Insurance Subsidiaries are multiple line companies that specialize in
standard personal lines, nonstandard personal lines and commercial lines of
insurance. Business is primarily produced via agency relationships (i.e., both
general and retail agents). The Insurance Subsidiaries offer a variety of
property and casualty insurance products primarily designed to meet the
insurance needs of the rural and suburban communities in which the Insurance
Subsidiaries do business. The following tables set forth the direct premiums
written, net premiums earned, net loss ratios, expense ratios and combined
ratios of the Insurance Subsidiaries by product line for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------
% of % of % of
1999 Total 1998 Total 1997 Total
-------- ------ ------- ------ -------- ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Direct Premiums Written:
Private passenger automobile $ 49,682 47% $24,584 35% $ 39,607 38%
Commercial multi-peril 21,082 20 22,892 32 26,439 25
Fire and allied 4,050 4 2,521 4 11,945 11
Commercial automobile 17,507 17 13,831 20 15,546 15
Other liability 1,633 1 2,223 3 4,062 4
Other 11,501 11 4,576 6 7,714 7
-------- ------ ------- ------ -------- ------
Total $105,455 100% $70,627 100% $105,313 100%
======== ====== ======= ====== ======== ======
Net Premiums Earned:
Private passenger automobile $ 53,331 51% $29,846 35% $ 38,415 39%
Commercial multi-peril 21,730 20 25,388 30 23,923 24
Fire and allied 2,438 2 5,618 6 12,389 13
Commercial automobile 18,737 18 16,360 19 13,989 14
Other liability 2,215 2 3,527 4 2,941 3
Other 6,947 7 4,996 6 6,993 7
-------- ------ ------- ------ -------- ------
Total $105,398 100% $85,735 100% $ 98,650 100%
======== ====== ======= ====== ======== ======
</TABLE>
Year Ended
December 31,
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1999 1998 1997
---- ---- ----
Net Loss Ratios:
Private passenger automobile 97% 89% 81%
Commercial multi-peril 60 75 91
Fire and allied 55 72 117
Commercial automobile 64 124 82
Other liability 1 61 93
Other 64 116 66
--- --- ---
Total 76% 91% 87%
=== === ===
Expense Ratios:
Private passenger automobile 39% 47% 56%
Commercial multi-peril 54 63 52
Fire and allied 36 79 47
Commercial automobile 50 65 58
Other liabilities 64 92 90
Other 29 30 22
--- --- ---
Total 43% 57% 53%
=== === ===
Combined Ratios:
Private passenger automobile 136% 136% 136%
Commercial multi-peril 114 138 143
Fire and allied 91 151 164
Commercial automobile 114 189 140
Other liabilities 65 153 183
Other 94 147 88
--- --- ---
Total 119% 148% 140%
=== === ===
Industry Combined Ratios(1) 106% 104% 100%
=== === ===
(1) The property and casualty industry as a whole, not companies with
comparable lines of coverage, was used by A.M. Best Company ("A.M. Best")
in calculating these ratios. The ratios for 1999 are estimates by A.M.
Best.
Private Passenger Automobile. Private passenger automobile coverage insures
individuals against losses incurred from personal bodily injury, bodily injury
to third parties, property damage to an insured's vehicle, property damage to
other vehicles and other property, and uninsured motorists.
Commercial Multi-Peril. Commercial multi-peril coverage insures businesses
against third party liability from accidents occurring on their premises or
arising out of their operations, such as injuries sustained from products sold.
It also insures business property for damage, such as that caused by fire, wind,
hail, water damage, theft and vandalism.
Fire and Allied. Fire coverage insures businesses against losses incurred
by fire. Allied coverage insures businesses against losses incurred by
windstorm, smoke, hail and other similar perils.
Commercial Automobile. Commercial automobile coverage insures businesses
against losses incurred from personal bodily injury, bodily injury to third
parties, property damage to an insured's vehicle and property damage to other
vehicles and other property. These policies are generally marketed in
conjunction with commercial multi-peril policies.
Other Liability. These policies include umbrella liability coverage,
premium liability coverage and general liability coverage.
Other. These policies include (i) homeowners' coverage, which covers
individuals for losses to their residences and personal property, such as those
caused by fire, wind, hail, water damage, theft and vandalism, and against third
party liability claims, and (ii) inland marine coverage, which covers
merchandise and cargo in transit.
Marketing
The Insurance Subsidiaries market their property and casualty insurance
products primarily through their network of general and independent agents. The
Insurance Subsidiaries manage their agents through quarterly business reviews
(which include underwriter participation) and the establishment of benchmarks
and goals for premium volume and underwriting results. In recent years, the
Insurance Subsidiaries have terminated relationships with low volume or
unprofitable agents. Most of the Insurance Subsidiaries' agents represent
multiple carriers and are established residents of the rural and suburban
communities in which they operate. The Insurance Subsidiaries consider their
relationships with their agents to be good.
The Insurance Subsidiaries depend in part upon their agency force to
produce new business and to provide customer service. The network of agents also
serves as an important source of information about the needs of the communities
served by the Insurance Subsidiaries. This information is utilized by the
Insurance Subsidiaries to develop new products and new product features. Agency
compensation is based on a fixed base commission with an opportunity for
profit-sharing depending on the agency's production goals and loss experience.
The Insurance Subsidiaries emphasize personal contact between their agents and
the policyholders. The Insurance Subsidiaries' agencies are monitored and
supported by agent representatives, who are employees of the Insurance
Subsidiaries and who have principal responsibility for recruiting and managing
agency relationships. To support their marketing efforts, the Insurance
Subsidiaries develop and produce print advertising and frequently meet with
their agents. The Insurance Subsidiaries' agent representatives conduct training
programs that provide technical training about their products.
For the year ended December 31, 1999, eight general agents accounted for
approximately 56% of direct premiums written, and over one thousand independent
agents accounted for the remaining direct premiums written. The largest general
agent accounted for approximately 27% of the total direct premiums written.
Underwriting
The Insurance Subsidiaries produce business in three distinct operating
segments: standard personal lines, nonstandard personal lines and commercial
lines. The Insurance Subsidiaries underwrite most of their business through
general and independent agents, which perform all of the underwriting functions
according to the underwriting guidelines established by the Insurance
Subsidiaries. The Insurance Subsidiaries employ underwriters to develop and
refine the underwriting guidelines based on the type of insurance product and
the state in which the agent operates and to monitor compliance by agents with
these underwriting guidelines.
The manner in which the Insurance Subsidiaries price products takes into
consideration the expected frequency and severity of losses; the costs of
providing the necessary coverage, including the cost of administering claims,
sales and other administrative and overhead costs; and a margin for profit.
Claims
The Insurance Subsidiaries' claims philosophy emphasizes timely
investigation, evaluation and fair settlement of claims, while maintaining
adequate case reserves and controlling claim adjustment expenses. The claims
philosophy is designed to support the Insurance Subsidiaries' marketing efforts
by providing prompt service and making the claims process a positive experience
for both the agents and the policyholders.
The Insurance Subsidiaries outsource their claims administration
responsibilities to INSpire Insurance Solutions, Inc., a Texas corporation and
an affiliate of the Company ("INSpire"), and to other outsourcing service
providers. INSpire and such other outsourcing service providers manage the
appraising, qualifying and settling of claims by insureds. The Insurance
Subsidiaries generally reimburse INSpire and such other outsourcing service
providers on a claims paid or percentage of premiums basis. Although INSpire is
an affiliate of the Company, it also provides claims administration services to
other companies that are not affiliated with the Company or INSpire.
Reinsurance
Following customary insurance industry practice, the Insurance Subsidiaries
reinsure a portion of their exposure and pay the reinsurers a portion of the
premiums received on all policies reinsured. The Insurance Subsidiaries cede
insurance principally to reduce net liability on individual risks, mitigate the
effect of individual loss occurrences (including catastrophic losses), stabilize
underwriting results, and increase the Insurance Subsidiaries' underwriting
capacity.
Reinsurance does not legally discharge the Insurance Subsidiaries from
primary liability for the full amount due under the reinsured policies. However,
the assuming reinsurer is obligated to reimburse the Insurance Subsidiaries to
the extent of the coverage ceded. The Insurance Subsidiaries determine the
amount and scope of reinsurance coverage to purchase each year based upon their
evaluations of the risks accepted, consultations with reinsurance
representatives, and reviews of market conditions, including the availability
and pricing of reinsurance. The Insurance Subsidiaries' reinsurance arrangements
are placed with non- affiliated reinsurers and are generally renegotiated
annually.
The insolvency or inability of any reinsurer to meet its obligations to the
Insurance Subsidiaries could have a material adverse effect on the results of
operations or financial condition of the Insurance Subsidiaries. The Insurance
Subsidiaries monitor the solvency of reinsurers through regular reviews of their
financial statements and their ratings by A.M. Best. The Insurance Subsidiaries
have not previously experienced any significant difficulties collecting amounts
due from reinsurers.
Loss and LAE Reserves
The Insurance Subsidiaries are required by applicable insurance laws and
regulations to maintain reserves for the payment of losses and "loss adjusted
expenses" ("LAE") for both reported claims and for claims "incurred but not
reported" ("IBNR") arising from the policies they have issued. These laws and
regulations require that provision be made for the ultimate cost of those claims
without regard to how long it takes to settle them or the time value of money.
The determination of reserves involves actuarial and statistical projections of
what the Insurance Subsidiaries expect the cost of the ultimate settlement and
administration of such claims to be based on facts and circumstances then known,
estimates of future trends in claims severity, and other variable factors, such
as inflation and changing judicial theories of liability.
The estimation of ultimate liability for unpaid losses and LAE is an
inherently uncertain process and does not represent an exact calculation of that
liability. The Insurance Subsidiaries' reserve policy recognizes this
uncertainty by maintaining reserves at a level that provides for the possibility
of adverse developments relative to the estimation process. The Insurance
Subsidiaries do not discount their reserves to recognize the time value of
money.
When a claim is reported to the Insurance Subsidiaries, claims personnel
establish a case reserve for the estimated amount of the ultimate payment. This
estimate reflects an informed judgment based upon general insurance reserve
practices and upon the experience and knowledge of the estimator regarding the
nature and value of the specific claim, the severity of injury or damage, and
the policy provisions relating to the type of loss. Case reserves are adjusted
by the Insurance Subsidiaries' claims staff as more information becomes
available. The Insurance Subsidiaries' policy is to settle each claim as
expeditiously as possible.
The Insurance Subsidiaries maintain IBNR reserves to provide for the future
reporting of claims already incurred and any developments on reported claims.
The IBNR reserve is determined by estimating the Insurance Subsidiaries'
ultimate net liability for both reported and IBNR claims and then subtracting
the case reserves and paid losses for the reported claims.
The Insurance Subsidiaries regularly compute their estimated ultimate
liability using principles and procedures applicable to the lines of business
written. However, because the establishment of loss reserves is an inherently
uncertain process, there can be no assurance that ultimate losses will not
exceed the Insurance Subsidiaries' loss reserves. Adjustments in aggregate
reserves, if any, are reflected in the operating results of the period during
which such adjustments are made. At the present time, the Insurance
Subsidiaries' management does not believe the Insurance Subsidiaries are subject
to any material potential claims.
The following table provides a reconciliation of the beginning and ending
loss and LAE reserve balances of the Insurance Subsidiaries for the last three
years ended December 31st as prepared in accordance with GAAP basis accounting:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998 1997
---- ---- ----
(unaudited) (in thousands)
<S> <C> <C> <C>
Reserves for losses and LAE at beginning
of year ................................... $ 103,708 $ 81,431 $ 60,626
Less reinsurance receivables ................ 47,080 33,310 29,417
--------- --------- ---------
Net reserves for loss and LAE at beginning
of year ................................ 56,028 48,121 31,209
Reserves acquired in Phoenix acquisition .. 24,017
Incurred losses and LAE related to:
Current year .............................. 83,102 71,385 72,894
Prior years ............................... (2,634) 6,576 12,815
--------- --------- ---------
Total incurred losses and LAE ............... 80,468 77,961 85,709
--------- --------- ---------
Payments related to:
Current year .............................. 49,802 38,967 44,266
Prior years ............................... 31,337 31,087 24,531
--------- --------- ---------
Total payments .............................. 81,139 70,054 68,797
--------- --------- ---------
Net reserves for losses and LAE at end
of year ................................ 79,374 56,028 48,121
Plus reinsurance receivables .............. 43,379 47,680 33,310
--------- --------- ---------
Total reserves for losses and LAE at end
of year .............................. $ 122,753 $ 103,708 $ 81,431
========= ========= =========
</TABLE>
The following table represents the development of GAAP balance sheet
reserves for the last ten years ended December 31st. The top line of the table
shows the reserves for the net unpaid claims and claim adjustment expenses for
the current and all prior years as recorded at the balance sheet date for each
of the indicated years. The reserves represent the estimated amount of claims
and claim adjustment expenses for claims arising in the current and all prior
years that are unpaid as of the balance sheet date, including IBNR.
The second portion of the following table shows the net cumulative amount
paid with respect to the previously recorded liability as of the end of each
succeeding year. The third portion of the table shows the reestimated amount of
the previously record net unpaid claims and claim adjustment expenses based on
the Company's experience as of the end of each succeeding year, including net
cumulative payments made since the end of the respective year.
Net cumulative deficiency represents the change in the estimate from the
original balance sheet date to the date of the current estimate. Conditions and
trends that have affected the development of liability in the past may or may
not necessarily occur in the future. Accordingly, it may or may not be
appropriate to extrapolate for redundancies or deficiencies based on the
information set forth in this table.
<TABLE>
<CAPTION>
As of and for the years ended December 31,
------------------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net unpaid claims & claim
adjustment expense: ..... $23,777 $23,693 $21,411 $ 22,503 $ 25,544 $ 24,459 $ 19,276 $ 31,212 $ 48,122 $56,029 $79,374
Net cumulative amount paid
as of:
One year later ........ 11,404 8,437 9,178 10,850 17,262 16,639 13,776 30,281 30,899 31,258
Two years later ....... 15,500 12,886 13,869 18,140 22,294 22,066 21,725 41,843 44,201
Three years later ..... 18,154 15,572 18,153 19,840 25,275 25,510 28,306 48,572
Four years later ...... 19,537 17,617 18,670 20,832 26,374 28,846 30,517
Five years later ...... 20,726 18,349 19,175 21,454 28,432 29,538
Six years later ....... 21,058 18,622 19,487 22,220 28,626
Seven years later ..... 21,453 18,610 20,106 22,325
Eight years later ..... 21,669 19,035 20,233
Nine years later ...... 21,716 19,132
Ten years later ....... 21,805
Net unpaid claims and
claim adjustment expenses
re-estimated as of:
End of year ........... $23,377 $23,693 $21,411 $ 22,503 $ 25,544 $ 24,459 $ 19,276 $ 31,212 $ 48,122 $56,029 $79,374
One year later ........ 23,562 21,204 21,190 22,210 27,839 26,154 23,311 49,775 54,510 54,401
Two years later ....... 22,903 20,944 21,345 23,522 28,735 26,654 31,924 53,320 55,505
Three years later ..... 23,579 20,555 21,637 23,490 27,789 30,412 33,584 54,272
Four years later ...... 23,047 20,559 21,505 22,538 29,091 31,896 32,881
Five years later ...... 23,155 20,593 20,433 23,358 30,614 31,133
Six years later ....... 23,095 19,440 21,050 24,105 29,889
Seven years later ..... 22,416 19,796 21,834 23,462
Eight years later ..... 22,717 20,536 21,250
Nine years later ...... 23,083 20,033
Ten years later ....... 22,637
Net cumulative deficiency 740 3,660 161 (959) (4,345) (6,674) (13,605) (23,060) (7,383) 1,628
</TABLE>
Investments
An important component of the operating results of the Insurance Subsidiaries
has been the return on invested assets. The Insurance Subsidiaries' investment
objectives are (i) to maximize current yield, (ii) to safeguard capital through
a balance of high quality, diversified investments that minimize risk, (iii) to
maintain adequate liquidity for their insurance operations, (iv) to meet
regulatory requirements, and (v) to increase surplus through appreciation. Asset
Allocation Management Company, LLC and Stonegate Asset Management Inc. provide
investment advisory services to the Company subject to investment policies and
guidelines established by the Company's Board of Directors (the "Board") and the
Company's management.
The following table sets forth certain information concerning the Insurance
Subsidiaries' investments:
As of As of
December 31, 1999 December 31, 1998
------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------- -------- -------- --------
(in thousands)
Fixed income securities
United States government and
government agencies ......... $ 13,673 $ 13,572 $ 5,573 $ 5,866
Obligations of states,
municipalities and political
subdivisions ................ 15,939 15,132 8,436 8,544
Public Utilities ............... 786 810 777 852
Corporate obligations .......... 26,856 25,871 29,207 30,145
Collateralized mortgage
obligations and pass through
certificates ................ 28,683 27,755 27,233 27,913
-------- -------- -------- --------
Total fixed income securities .... 85,937 83,140 71,226 73,320
Equity securities ................ 33,871 27,342 39,755 35,078
Other ............................ 21,707 21,707 9,725 9,725
-------- -------- -------- --------
Total Investments .............. $141,515 $132,189 $120,706 $118,123
======== ======== ======== ========
---------------
The majority distribution of the Company's investments in fixed maturities
as of December 31, 1999 is as follows:
Estimated
Amortized % of Fair % of
Maturity Cost Total Value Total
-------- ------- ----- ------- -----
(in thousands)
One year or less ................. $ 5,979 7.0% $ 5,915 7.1%
More than 1 year through 5 years . 21,239 24.7 20,447 24.6
More than 5 years through 10 years 7,301 8.5 6,795 8.2
More than 10 years ............... 22,735 26.5 22,228 26.7
Mortgage-backed securities ....... 28,683 33.3 27,755 33.4
------- ----- ------- -----
Total .......................... $85,937 100.0% $83,140 100.0%
======= ===== ======= =====
---------------
As of December 31, 1999, the Company did not have any non-performing fixed
maturity securities. As of December 31, 1999, the average duration of the
Insurance Subsidiaries fixed maturity investments, was approximately 4.2 years.
As a result, the market value of the Company's investments may fluctuate
significantly in response to changes in interest rates. In addition, the Company
may experience investment losses to the extent its liquidity needs require the
disposition of fixed maturity securities in unfavorable interest rate
environments.
A.M. Best Rating
A.M. Best rates insurance companies based on factors that concern
policyholders. In evaluating a company's financial and operating performance,
A.M. Best reviews a company's profitability, leverage and liquidity, as well as
its book of business, the adequacy and soundness of its reinsurance, the quality
and estimated market value of its assets, the adequacy of its loss reserves, the
adequacy of its surplus, its capital structure, the experience and competency of
its management and its market presence. No assurance can be given that the
Insurance Subsidiaries will improve their respective A.M. Best ratings or that
A.M. Best will not downgrade their current ratings in the future. At the present
time, Millers Insurance and Millers Casualty together have been assigned a B+
(Good) rating, and Phoenix Indemnity has been assigned a B++ (Very Good) rating.
Competition
The Insurance Subsidiaries operate in a highly regulated and highly
competitive industry. The Insurance Subsidiaries compete with stock insurance
companies, mutual insurance companies and other underwriting organizations.
Certain of these competitors have substantially greater financial, technical and
operating resources than the Insurance Subsidiaries. The Insurance Subsidiaries'
ability to compete successfully in their principal markets is dependent upon a
number of factors, many of which (including market and competitive conditions)
are outside the Insurance Subsidiaries' control. Many of the lines of insurance
written by the Insurance Subsidiaries are subject to significant price
competition. Some companies may offer insurance at lower rates through the use
of salaried personnel or other methods. In addition to price, competition in the
lines of business written by the Insurance Subsidiaries is based on the quality
of the products, the quality and speed of service (including claims service),
financial strength, ratings, distribution systems and technical expertise.
Regulation
Insurance companies are subject to supervision and regulation in the states
in which they transact business. Such supervision and regulation relates to
numerous aspects of an insurance company's business and financial condition. The
primary purpose of such supervision and regulation is the protection of
policyholders. The extent of such regulation varies, but generally is derived
from state statutes that delegate regulatory, supervisory and administrative
authority to state insurance departments. Accordingly, the authority of the
state insurance departments includes the establishment of standards of solvency
that must be met and maintained by insurers, the licensing to do business of
insurers and agents, the nature of and limitations on investments, the setting
of rates for property and casualty insurance, the provisions that insurers must
make for current losses and future liabilities, the deposit of securities for
the benefit of policyholders, the approval of policy forms, notice requirements
for the cancellation of policies and the approval of certain changes in control.
State insurance departments also conduct periodic examinations of the affairs of
insurance companies and require insurance companies to file annual and other
reports relating to their financial condition.
Examinations are conducted by both the Texas Department of Insurance and
the Arizona Department of Insurance every three to five years. The Texas
Department of Insurance's last examination of Millers Insurance was as of
December 31, 1995. As a result of this examination and subsequent discussions
with the Texas Department of Insurance, Millers Insurance agreed not to use
excess statutory reserves in its total reserve adequacy and recorded
approximately $6 million in a prior period adjustment to increase its IBNR
reserve. No substantive qualitative matters were indicated in the examination
reports that had a material adverse effect on the operations of Millers
Insurance. The Arizona Department of Insurance's last examination of Phoenix
Indemnity was as of December 31, 1997. No substantive qualitative matters were
indicated in the examination reports that had a material adverse effect on the
operations of Phoenix Indemnity.
In addition to state-imposed insurance laws and regulations, the National
Association of Insurance Commissioners (the "NAIC") has adopted risk-based
capital ("RBC") requirements that require insurance companies to calculate and
report information under a risk-based formula that attempts to measure statutory
capital and surplus needs based on the risks in a company's mix of products and
investment portfolio. Under the formula, a company first determines its
Authorized Control Level risk-based capital ("ACL") by taking into account (i)
the risk with respect to the insurer's assets, (ii) the risk of an adverse
insurance experience with respect to the insurer's liabilities and obligations,
(iii) the interest rate risk with respect to the insurer's business, and (iv)
all other business risks and such other relevant risks as are set forth in the
RBC instructions. A company's Total Adjusted Capital ("TAC") is the sum of
statutory capital and surplus and such other items as the RBC instructions may
provide. The formula is designed to allow state insurance regulators to identify
potential inadequately capitalized companies.
The RBC requirements provide for four different levels of regulatory
attention. The "Company Action Level" is triggered if a company's TAC is less
than 2.0 times its ACL but greater than or equal to 1.5 times its ACL. At the
Company Action Level, a company must submit a comprehensive plan to the
regulatory authority that discusses proposed corrective actions to improve its
capital position. The "Regulatory Action Level" is triggered if a company's TAC
is less than 1.5 times but greater than or equal to 1.0 times its ACL. At the
Regulatory Action Level, the regulatory authority will perform a special
examination of a company and issue an order specifying corrective actions that
must be followed. The "Authorized Control Level" is triggered if a company's TAC
is less than 1.0 times but greater than or equal to 0.7 times its ACL. At the
Authorized Control Level, the regulatory authority may take any action it deems
necessary, including placing a company under regulatory control. The "Mandatory
Control Level" is triggered if a company's TAC is less than 0.7 times its ACL.
At the Mandatory Control Level, the regulatory authority is mandated to place a
company under its control. The Insurance Subsidiaries exceed the required levels
of capital. There can be no assurance, however, that the capital requirements
applicable to the business of the Insurance Subsidiaries will not increase in
the future.
The NAIC has also developed a set of eleven financial ratios, referred to
as the Insurance Regulatory Information System ("IRIS"), for use by state
insurance regulators in monitoring the financial condition of insurance
companies. The NAIC has established an acceptable range of values for each of
the eleven IRIS financial ratios. Generally, an insurance company will become
the subject of increased scrutiny when four or more of its IRIS ratio results
fall outside the range deemed acceptable by the NAIC. The nature of increased
regulatory scrutiny resulting from IRIS ratio results outside the acceptable
range is subject to the judgment of the applicable state insurance department,
but generally will result in accelerated review of annual and quarterly filings.
Depending on the nature and severity of the underlying cause of the IRIS ratio
results being outside the acceptable range, increased regulatory scrutiny could
range from increased but informal regulatory oversight to placing a company
under regulatory control. In 1999, the Insurance Subsidiaries had four ratios
which varied unfavorably from the "usual value" range. The unfavorable ratios
primarily were due to the decline in the value of the investment portfolio for
Millers Insurance, the purchase of Phoenix Indemnity and the cancellation of a
pooling arrangement with the parent company of Phoenix Indemnity.
Most of the states in which the Insurance Subsidiaries transact business
have guaranty fund laws pursuant to which insurers doing business in such states
are assessed a fee by the state insurance guaranty associations of up to 2% of
the insurer's direct premiums written in that state to fund liabilities to
policyholders and claimants of insolvent insurance companies upon the occurrence
of such insolvency. Because the likelihood and amount of any particular
assessment cannot be determined until an insolvency has occurred, potential
liabilities for assessments are not reflected by insurers.
The property and casualty insurance industry has recently received a
considerable amount of publicity because of rising insurance costs and the
unavailability of insurance. New regulations and legislation are being proposed
to limit damage awards, to control plaintiffs' counsel fees, to bring certain
aspects of the industry under regulation by the federal government and to
control premiums, policy terminations and other policy terms. It is not possible
to predict whether, in what form or in what jurisdictions any of these proposals
might be adopted or the effect, if any, they might have on the Insurance
Subsidiaries.
Most states have enacted legislation that regulates insurance holding
company systems. Each insurance company in a holding company system is required
to register with the insurance supervisory agency of its state of domicile and
furnish information concerning the operations of companies within the holding
company system that may materially affect the operations, management or
financial condition of the insurers within the system. Pursuant to these laws,
the respective insurance departments may examine the Company, Trilogy Holdings
and the Insurance Subsidiaries at any time; require the disclosure of material
transactions by the Company, Trilogy Holdings, and the Insurance Subsidiaries;
or require prior approval of certain transactions, such as extraordinary
dividends from the Insurance Subsidiaries to Trilogy Holdings.
All transactions within the holding company system affecting the Company,
Trilogy Holdings and the Insurance Subsidiaries must be fair and equitable.
Approval of the applicable insurance commissioner is required prior to
consummation of transactions affecting the control of an insurer. In some
states, including Texas and Arizona, the acquisition of 10% or more of the
outstanding capital stock of an insurer or its holding company is presumed to be
a change in control. These laws also require notice to the applicable insurance
commissioner of certain material transactions between an insurer and any person
in its holding company system and, in some states, certain of these transactions
cannot be consummated without the prior approval of the applicable insurance
commissioner.
Miller Insurance and Phoenix Indemnity are restricted by the insurance laws
of Texas and Arizona as to the amount of dividends or other distributions they
may pay to Trilogy Holdings without the prior approval of the Texas Department
of Insurance and the Arizona Department of Insurance. Under Texas law, the
maximum amount that may be paid by Millers Insurance during any twelve-month
period after notice to, but without prior approval of, the Texas Department of
Insurance cannot exceed the greater of 10% of Millers Insurance's statutory
surplus as reported on the most recent annual statement filed with the Texas
Department of Insurance, or the net income of Millers Insurance for the period
covered by such annual statement. As of December 31, 1999, the amount available
for payment of dividends in 2000 without the prior approval of the Texas
Department of Insurance is approximately $3.4 million. Under Arizona law, the
maximum amount that may be paid by Phoenix Indemnity during any twelve-month
period after notice to, but without prior approval of, the Arizona Department of
Insurance cannot exceed the lesser of 10% of Phoenix Indemnity's statutory
surplus as reported on the most recent annual statement filed with the Arizona
Department of Insurance, or the net investment income of Phoenix Indemnity for
the period covered by such annual statement. As of December 31, 1999, the amount
available for payment of dividends in 2000 without the prior approval of the
Arizona Department of Insurance is approximately $1.5 million.
There can be no assurance, however, that regulatory requirements will not
become more stringent in the future and have an adverse effect on the operations
of the Company.
Premiums
The premium rates for the Insurance Subsidiaries' property and casualty
insurance products are generally subject to state regulation. Premium rate
regulations vary greatly among states and product lines. The premium rates are
established by the Insurance Subsidiaries' management and are reviewed by the
regulatory authorities in most states. Any changes in premium rates generally
must be approved by these authorities.
Number of Employees
As of December 31, 1999, the Company and the Insurance Subsidiaries had a
total of seventy-one employees, of which fifty-one were located in Fort Worth,
Texas, nine were located in Phoenix, Arizona, five were located in Columbia,
South Carolina and the remaining six were located in various other states. None
of the employees is represented by a labor union. The Company considers its
employee relations to be good.
<PAGE>
ITEM 2. FINANCIAL INFORMATION.
Selected Financial Data
The following selected historical consolidated financial data of the
Company for and as of each of the last five years ended December 31 has been
derived from the Company's consolidated financial statements, including the
notes thereto, which have been audited by Deloitte & Touche LLP, independent
auditors (excluding audited data for 1999, which will be filed as an amendment
to this registration statement). The information set forth below is qualified in
its entirety by reference to, and should be read in conjunction with, "Item 2.
Financial Information -- Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto included elsewhere in this registration statement.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
(in thousands)
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Premium earned .................... $ 105,397 $ 85,735 $ 98,650 $ 82,190 $ 70,755
Software and outsourcing services . 18,838 6,096
Net investment income ............. 5,297 3,588 4,990 4,233 3,996
Net realized capital gains ........ 1,819 7,575 2,837 3,000 6,105
Other ............................. 1,482 455
--------- --------- --------- --------- ---------
Total revenues .................. 112,513 96,898 126,797 95,519 81,311
--------- --------- --------- --------- ---------
Losses and loss adjustment expenses 80,469 77,961 85,709 58,147 47,766
Cost of software and outsourcing
services ........................ 10,651 4,707
Policy acquisition and other
underwriting expenses ........... 45,430 40,359 56,037 38,666 32,355
Other ............................. 736 846 742 220
--------- --------- --------- --------- ---------
Total losses and expenses ....... 126,635 119,166 153,139 101,740 80,121
--------- --------- --------- --------- ---------
Equity in net earnings (losses) of
affiliate ....................... (3,271) 2,187 753
Gain on sale of interest in
affiliate ....................... 22,806 27,466
--------- --------- --------- --------- ---------
Total Other ..................... (3,271) 24,993 28,219
--------- --------- --------- --------- ---------
Income (loss) before income tax ... (17,393) 2,725 1,877 (6,221) 1,191
Income tax ........................ (5,873) 1,022 590 (1,483) 165
--------- --------- --------- --------- ---------
Net income (loss) ................. $ (11,519) $ 1,703 $ 1,287 $ (4,738) $ 1,026
========= ========= ========= ========= =========
Net loss after demutualization .... $ (10,905)
=========
GAAP insurance ratios:
Loss ratio ...................... 76% 91% 87% 71% 67%
Expense ratio ................... 43 57 53 45 44
--------- --------- --------- --------- ---------
Combined ratio .................. 119% 148% 140% 116% 111%
========= ========= ========= ========= =========
Balance sheet data:
Investments and cash ............ $ 144,191 $ 121,515 $ 120,492 $ 99,180 $ 97,726
Reinsurance receivable .......... 60,087 83,650 64,667 38,261 18,720
Premiums receivable ............. 31,580 27,036 32,361 33,736 22,273
Total assets ...................... 280,302 261,192 246,325 195,283 167,140
Reserve for losses and loss
adjustment expenses ............. 122,753 103,708 81,431 60,626 43,165
Unearned premiums ................. 55,997 53,633 66,686 47,972 41,288
Revolving credit facility ......... 20,000
Total liabilities ................. 230,995 195,983 177,307 129,955 95,859
Shareholders equity ............... 49,307 65,209 69,018 65,328 71,281
</TABLE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The Company writes property and casualty insurance for both personal and
commercial lines risks. The business is marketed through independent insurance
agents as well as several general agents.
The Company's revenues from operations are derived primarily from net premiums
earned on risks written or reinsured by the Insurance Subsidiaries, investment
income and investment gains or losses. The Company's expenses consist primarily
of payments for claims and underwriting expenses, including agents' commissions
and operating expenses.
Comparison of Fiscal Year 1999 to Fiscal Year 1998
Premiums, Loss and LAE
Net premiums earned increased by $19.7 million, or 23%, to $105.4 million
for the year ended December 31, 1999, from $85.7 million for the year ended
December 31, 1998. The increase primarily was due to the purchase of Phoenix
Indemnity coupled with the additional premiums retained net of reinsurance by
Millers Insurance.
Loss and LAE increased by $2.5 million, or 3%, to $80.4 million for the
year ended December 31, 1999 from $78 million for the year ended December 31,
1998. The loss and LAE ratio decreased for the year ended December 31, 1999 to
76% as compared to 91% at December 31, 1998. The improvement is primarily
attributed to the discontinuation of Millers Insurance's agribusiness operations
in 1998.
Policy Acquisitions Expenses and Other Underwriting Expenses
Policy acquisition expenses increased by $5 million, or 12%, to $45 million
for the year ended December 31, 1999, from $40 million for the year ended
December 31, 1998. The underwriting expense ratio improved from 57% in 1998 to
43% in 1999. The improvement in the expense ratio primarily is attributable to a
reduction in commission rates coupled with an increase in net written premiums
due to changes from reinsurance treaty retentions.
Net Investment Income
Net investment income increased by $1.7 million, or 48%, to $5.3 million
for the year ended December 31, 1999, from $3.6 million for the year ended
December 31, 1998 due to an overall reduction in investment related expenses.
Federal Income Taxes
The federal income tax benefit for the year ended December 31, 1999 was
$5.9 million compared to a federal income tax expense of $1 million for the year
ended December 31, 1998.
Net Income (Loss)
The Company had net losses of $11.5 million in 1999 as compared to net
income of $1.7 million in 1998. The net losses in 1999 were due to poor
underwriting results.
Comparison of Fiscal Year 1998 to Fiscal Year 1997
Premiums, Loss and LAE
Net premiums earned decreased by $12.9 million, or 13%, to $85.7 million
for the year ended December 31, 1998, from $98.6 million for the year ended
December 31, 1997. The significant decrease in net premiums earned primarily was
attributable to an $11.6 million decrease in Millers Insurance's agribusiness
operations.
Loss and LAE decreased by $7.7 million, or 9%, to $77.9 million for the
year ended December 31, 1998, from $85.7 million for the year ended December 31,
1997. The decrease in loss and LAE was primarily attributable to a reduction in
agribusiness loss and LAE of $7.3 million. The loss and LAE ratio for the year
ended December 31, 1998 was 91% as compared to 87% at December 31, 1997.
Policy Acquisition Expenses and Other Underwriting Expenses
Policy acquisition expenses decreased by $15.7 million, or 28%, to $40.3
million for the year ended December 31, 1998, from $56 million for the year
ended December 31, 1997. The decrease in policy acquisition costs primarily is
attributable to a decrease of an overall premium volume written.
Net Investment Income
Net investment income decreased by $1.4 million, or 28%, to $3.6 million
for the year ended December 31, 1998, from $5 million for the year ended
December 31, 1997. The Company increased its equity holdings in 1998 thereby
decreasing its investment yield.
Federal Income Taxes
Federal income taxes increased by $410,000 from $590,000 for the year ended
December 31, 1997 to $1 million for the year ended December 31, 1998 due to an
increase in pre-tax earnings of $850,000.
Net Income (Loss)
For the reasons discussed above, net income increased by $400,000 from $1.3
million for the year ended December 31, 1997 to $1.7 million for the year ended
December 31, 1998.
Liquidity and Capital Resources
The Company is a holding company whose principal asset is its investment in
the capital stock of the companies constituting the Millers American Group,
which is a group of wholly owned property and casualty insurance companies that
includes Millers Insurance and Phoenix Indemnity. The insurance subsidiaries
comprising the Millers American Group are individually supervised by various
state insurance regulators.
The principal use of funds at the holding company level are to pay
operating expenses, principal and interest on outstanding indebtedness and
deferrable capital securities and dividends to shareholders if declared by the
Board. During the last three years, the Insurance Subsidiaries have produced
operating results and paid dividends sufficient to fund the Company's needs.
Except for the regulatory restrictions described above, the Company is not aware
of any demands or commitments of the Insurance Subsidiaries that would prevent
them from paying dividends sufficient to meet the Company's anticipated needs
(including its debt service requirements) for at least the next 12 months.
Dividends
As a holding company with no other business operations, the Company relies
primarily upon dividend payments and management fees from its subsidiaries to
meet its cash requirements (including its debt service requirements) and to pay
dividends to its shareholders. Transactions between the Company and the
Insurance Subsidiaries, including the payment of dividends to the Company by
such subsidiaries, are subject to certain limitations under the insurance laws
of those subsidiaries' domiciliary states. The insurance laws of the state of
Texas, where Millers Insurance is domiciled, permit the payment of dividends in
any year which, together with other dividends or distributions made within the
preceding 12 months, do not exceed the greater of 10% of statutory surplus as of
the end of the preceding year or the net income for the preceding year, with
larger dividends payable only after receipt of prior regulatory approval. Under
Arizona law, the maximum amount that may be paid by Phoenix Indemnity during any
twelve-month period after notice to, but without prior approval of, the Arizona
Department of Insurance cannot exceed the lesser of 10% of Phoenix Indemnity's
statutory surplus as reported on the most recent annual statement filed with the
Arizona Department of Insurance, or the net investment income of Phoenix
Indemnity for the period covered by such annual statement.
Commercial Credit Facilities
Effective September 17, 1999, the Company entered into a revolving line of
credit (the "Loan Agreement") with a bank that expires on June 30, 2005, unless
otherwise terminated at an earlier date. As of December 31, 1999, the Company
had advances of $20,000,000 outstanding under the Loan Agreement. Advances under
the Loan Agreement bear interest at a variable rate based on either the bank
prime rate or LIBOR, as designated by the Company. The interest rate on such
advances was 8.6% as of December 31, 1999. No amounts currently are due under
the Loan Agreement. However, advances under the Loan Agreement are subject to a
declining maximum amount, which was $30,000,000 as of December 31, 1999. Future
amounts available under the Loan Agreement are as follows:
December 31, 1999 through June 30, 2001 $30,000,000
July 1, 2001 through June 30, 2002 26,000,000
July 1, 2002 through June 30, 2003 21,000,000
July 1, 2003 through June 30, 2004 15,000,000
July 1, 2004 through June 30, 2005 9,000,000
During February 2000, the Company made a principal payment to the bank in
the amount of $1.55 million.
Covenants
The Loan Agreement contains covenants that restrict the Company's ability
to incur additional indebtedness. In addition, the Loan Agreement requires the
Company to maintain certain minimum levels of consolidated net income, statutory
consolidated net income and statutory surplus, and also requires TAC to be at
least 125% of the applicable "company action level" for Miller Insurance's risk
based capital at any time. The Company's ability to comply with these covenants
and financial tests may be affected by events beyond the Company's control,
including economic, financial and industry conditions. Failure to comply with
covenants may result in a default under the Loan Agreement, and if any such
default is not remedied within the applicable grace period, if any, the bank
will be entitled to declare the amounts outstanding thereunder due and payable.
During 1999, the Company failed to maintain certain financial covenants
contained in the Loan Agreement. The Company is awaiting its covenant waivers
from the bank and will file an amendment to this registration statement upon
receipt of such waivers.
Subsidiaries
The principal sources of funds for the Insurance Subsidiaries are premiums,
investment income and proceeds from the sale or maturity of invested assets.
Such funds are used principally for the payment of claims, operating expenses,
commissions and the purchase of investments. On a consolidated basis, net cash
used in operations for the years ended December 31, 1999 and December 31, 1998
was $9.8 million and $24.6 million, respectively. The net cash used in
operations is primarily attributable to net loss from operations in both 1999
and 1998.
Known Trends and Uncertainties
Significant factors influencing results of operations include the supply
and demand for property and casualty insurance and reinsurance, as well as the
number and magnitude of catastrophic losses, such as hurricanes, windstorms,
fires and severely cold weather.
The Company seeks to manage its risk exposure by adjusting the mix and
volume of business written in response to changes in price, maintaining
extensive reinsurance and retrocessional programs and applying the Company's
knowledge of primary insurance markets to its reinsurance business.
The Company has historically followed a practice of reinsuring a portion of
in its primary business to reduce the variability of its earnings. The Company
chooses to cede portions of insurance risks while using its capital base to
gradually increase, on a selective basis, its retention of certain property
risks.
Because catastrophic loss events are by their nature unpredictable,
historical results of operations may not be indicative of the expected results
of future operations. The Company markets its primary personal insurance
products throughout the United States. While the Company seeks to reduce its
exposure to catastrophic events through the purchase of reinsurance, the
occurrence of one or more major catastrophes in any given period could have a
material adverse effect on the Company's results of operations and financial
condition and could result in substantial outflows of cash as losses are paid.
Year 2000 Issue
The Company experienced no material operational problems as a result of the
date change to the Year 2000. However, the Year 2000 issue is also a concern
from an underwriting standpoint regarding the extent of liability for coverage
under various general liability, property and directors and officers liability
and product policies. The Company believes that minimal coverage could exist
under some current liability and product policies. This exposure should be
minimal as commercial lines business has historically excluded any manufacturing
risks which produce computer and computer dependent products.
ISO recently developed policy language providing that no coverage exists
for certain Year 2000 occurrences. At this time, the liability exclusion has
been accepted in over forty states and a companion filing for property has been
accepted in at least twenty states. Several states have not adopted or approved
the property exclusion form citing specifically that, because there is no
coverage under the current property contracts, there is no reason to accept a
clarifying endorsement. The Company addressed the Year 2000 issue by attaching
the ISO exclusionary language to all general liability policies with a rating
classification that we believed could potentially result in Year 2000 losses.
The ISO exclusionary language endorsement is included on all property policies.
These actions should minimize any exposure to Year 2000 losses.
The foregoing information constitutes a Year 2000 Readiness Disclosure
pursuant to the Year 2000 Information and Readiness Disclosure Act.
ITEM 3. PROPERTIES.
The Company leases approximately 27,800 square feet of office space in Fort
Worth, Texas, which houses all operations other than those conducted by Phoenix
Indemnity. Pursuant to a ten year lease agreement, dated as of November 19,
1999, the Company's current monthly rental payment is approximately $32,000.
Effective April 2000, Phoenix Indemnity executed a three-year lease
agreement for 2,730 square feet of office space. Phoenix Indemnity's current
monthly rental payment is approximately $4,100. The Company believes that the
existing facilities described above are adequate to meet the Company's
requirements for the foreseeable future.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of April 1, 2000, 103,267 shares of Common Stock were issued and
outstanding. The following table sets forth the beneficial ownership of the
shares of Common Stock as of April 1, 2000 by each of the Company's directors
and executive officers, and the Company's directors and executive officers as a
group. As of April 1, 2000, to the Company's knowledge, no person beneficially
owned more than five percent of the issued and outstanding Common Stock.
Number of Shares
Name of Beneficial Owner Beneficially Owned Percent
------------------------ ------------------ -------
DIRECTORS & EXECUTIVE OFFICERS
Frank A. Bailey, III 647(1) *
Frank G. Dunham, Jr. 2,156(1) 2.1%
Joy J. Keller 2,587(1) 2.5%
Thomas L. Carlisle 647(1) *
Catherine B. Fryer 646(1) *
Lamar C. Smith 646(1) *
Frank C. Wilson 647(1) *
Angela Henry Robinson 1 *
Jill H. Driggers 1 *
Stephen Thomas Morgan 1 *
Robert B. Wilson 1 *
All Directors and Executive Officers
Combined (11 persons) 7,980(1) 7.7%
------------------------
* Less than one percent.
(1) Includes options to purchase shares of Common Stock that are currently
exercisable or will be exercisable within 60 days of the date of this
registration statement.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
Information concerning the directors and executive officers of the Company,
as of April 23, 2000, is set forth below:
Name Age Position
---- --- --------
Frank A. Bailey, III 55 Interim Chairman of the Board
Frank G. Dunham, Jr. 70 Vice Chairman of the Board
Joy J. Keller 39 Director, Interim President and Chief
Executive Officer
Thomas L. Carlisle 46 Director
Catherine B. Fryer 50 Director
Lamar C. Smith 52 Director
Frank C. Wilson 65 Director
Angela Henry Robinson 47 Vice President, Legal Counsel
Jill H. Driggers 31 Vice President, Treasurer
Stephen Thomas Morgan 51 Vice President, Actuary
Robert B. Wilson 33 Vice President, Reinsurance
Sharon B. Sholden 41 Vice President, Personal Lines
Joseph G. Smith 45 President, Phoenix Indemnity
Frank A. Bailey, III has served as a director of the Company since
1999 and as Interim Chairman of the Board since January 2000. His current
term as director expires in 2002. Mr. Bailey served as a director of
Millers Mutual from 1991 to 1999. Mr. Bailey has served as President of
Frank Bailey Grain Co., Inc. since 1997.
Frank G. Dunham, Jr. served as a director and Vice Chairman of the Board
from 1999 until his death on May 21, 2000. His current term as a director was to
expire in 2002. He served as Vice Chairman of the Board of Millers Mutual from
October 1998 to April 1999 and as Chairman of the Board of Millers Mutual from
1991 to October 1998. Mr. Dunham served as Chief Executive Officer of Millers
Mutual from 1991 to 1994 and from June 1997 to November 1998. From 1991 to 1994,
Mr. Dunham served as President of the Miller Mutual.
Joy J. Keller has served as a director of the Company since 1999 and as
Interim President and Chief Executive Officer of the Company since January 2000.
Her current term as director expires in 2001. Ms. Keller served as a director of
Millers Mutual from June 1997 to April 1999 and as Executive Vice President,
Chief Financial Officer and Treasurer of Millers Mutual from October 1996 to
April 1999. Ms. Keller served from February 1995 to October 1996 as Vice
President and Controller of Millers Mutual. From 1993 to 1995, Ms. Keller served
as Assistant Treasurer of Associates Insurance Group, a division of Associates
of North America. Ms. Keller is a certified public accountant.
Thomas L. Carlisle has served as a director of the Company since 1999.
His current term as a director expires in 2000. Mr. Carlisle served as a
director of Millers Mutual from March 1997 to April 1999. Mr. Carlisle has
served as Vice President, Secretary and Treasurer of Carlisle Insurance
Agency, Inc. since September 1975.
Catherine B. Fryer has served as a director of the Company since 1999.
Her current term as a director expires in 2000. Ms. Fryer served as a
director of Millers Mutual from 1994 to April 1999. Ms. Fryer has been a
partner with the law firm of Bickerstaff, Heath & Smiley, L.L.P. since
December 1986.
Lamar C. Smith has served as a director of the Company since 1999.
His current term as a director expires in 2002. Mr. Smith served as a
director of Millers Mutual from 1992 to April 1999. Since January 1992,
Mr. Smith has served as Chairman of the Board and Chief Executive Officer
of United Services Planning Association, Inc.
Frank C. Wilson has served as a director of the Company since 1999.
His current term as a director expires in 2001. Mr. Wilson served as a
director of Miller Mutual from 1992 to April 1999. Since January 1999, Mr.
Wilson has served as Director of Development of Cook Children's Medical
Center.
Angela Henry Robinson served as Vice President and General Counsel of the
Company from 1999 until her resignation in May 2000. Ms. Robinson served as Vice
President and General Counsel of Millers Mutual from 1997 to April 1999. From
1985 to 1997, Ms. Robinson was a partner with the law firm of McKay, McKay,
Henry & Foster, P.A. Ms. Robinson has her Juris Doctor Degree and is a member of
the South Carolina Bar Association, Texas Bar Association and American Bar
Association.
Jill H. Driggers has served as Vice President and Treasurer of the
Company since January 2000. She served as Assistant Vice President and
Assistant Controller of the Company from April 1999 to January 2000. Ms.
Driggers served as Assistant Vice President and Assistant Controller of
Millers Mutual from November 1997 to April 1999. From September 1990 to
November 1997, Ms. Driggers served as an audit manager with the accounting
firm of Deloitte & Touche LLP. Ms. Driggers is a certified public
accountant.
Stephen Thomas Morgan has served as Vice President and Actuary for
Millers Insurance since May 1997. From August 1996 to April 1997, Mr.
Morgan served as Vice President and Senior Consulting Actuary for Scruggs
Consulting. From September 1987 to August 1996, he served as Vice
President and Actuary for American Re-Insurance Company. Mr. Morgan is an
Associate of the Casualty Actuarial Society and a member of the American
Academy of Actuaries.
Robert B. Wilson has served as Vice President of Reinsurance and Programs
for Millers Insurance since April 1998. He served as Assistant Vice President of
Reinsurance from September 1997 to March 1998, as Reinsurance Manager from
January 1997 to August 1997 and in various other capacities at Millers Insurance
since December 1994. Mr. Wilson is a Chartered Property Casualty Underwriter.
Sharon B. Sholden has served as Vice President of Personal Lines for
Millers Insurance since April 1998. From December 1997 to March 1998, Ms.
Sholden served as Vice President of Gainsco, Inc. From August 1995 to November
1997, she served as the Senior Program Manager for TIG Insurance. From May 1993
to July 1995, she served as Vice President of the Associates Insurance Group, a
division of Associates of North America. Ms. Sholden is a Chartered Property
Casualty Underwriter and a certified public accountant.
Joseph G. Smith has served as President of Phoenix Indemnity since
July 1998. From 1994 to 1998, he served as Vice President of Acceptance
Insurance Group. Mr. Smith is a certified public accountant.
ITEM 6. EXECUTIVE COMPENSATION.
The following table sets forth certain information with respect to the
annual and long-term compensation of the Company's Chief Executive Officer and
the four most highly compensated executive officers of the Company and its
principal subsidiaries whose compensation exceeded $100,000 in the fiscal year
ended December 31, 1999.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
Long-Term Compensation
------------------------
Year Salary($) Bonus($) Restricted Securities All Others
---- -------- -------- Stock Underlying Compensation
Awards Options(#) ($)
----- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
F. George Dunham, III ....... 1999 200,000 - - 3,265 79,400
Chairman of the Board 1998 - - - - 41,133
and Chief Executive Officer 1997 210,213 2,627,877 - - 10,450
(1)
James D. Piper .............. 1999 180,000 - - - -
President and Chief 1998 180,000 - - - -
Operating Officer (2) 1997 225,154 - - - 12,781
Joy J. Keller ............... 1999 150,000 - - 3,918 38,659
Executive Vice President 1998 150,000 - - - 38,128
and Chief Financial Officer 1997 131,280 400,000 - - 13,319
Stephen T. Morgan ........... 1999 170,000 - - - 2,025
Vice President and Actuary 1998 169,166 - - - 2,036
1997 102,549 - - - 921
Angela H. Robinson .......... 1999 145,000 - - - -
Vice President and Legal 1998 144,167 - - - -
Counsel 1997 139,300 - - - -
David N. Thompson ........... 1999 300,000 - - - 81,903
Chief Executive Officer 1998 50,000 - - - 6,333
(3)
(1) In January 2000, F. George Dunham III resigned his positions as Chairman of
the Board and Chief Executive Officer of the Company. Mr. Dunham served as
Chief Executive Officer from September 1999 until his resignation and as
Chairman of the Board from November 1998 until his resignation.
(2) In December 1999, James D. Piper resigned his positions as President and
Chief Operating Officer of the Company.
(3) In September 1999, David N. Thompson resigned his position as Chief
Executive Officer of the Company.
</TABLE>
The following table sets forth certain information concerning the
options granted to the named executive officers during 1999.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Individual Grants
-----------------------------------------------------
Potential
Realizable
Value at
Assumed
Annual Rates
of Stock
% of Total Price
Number of Options Appreciation
Securities Granted to Exercise For Option
Underlying Employees in or Base Term ($)(2)
Options Fiscal Price Expiration ----------------------
Granted(#) Year(1) ($/Sh) Date 5% 10%
---------- ------------ -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
F. George Dunham, III 3,265(3) 45% $721.49(4) 4/25/2005 $801,151 $1,817,539
Joy J. Keller 3,918(3) 55% $721.49(4) 4/25/2005 $961,381 $2,181,047
____________________
(1) Options to purchase a total of 7,183 shares of Common Stock were granted to
employees in 1999.
(2) The amounts under the columns labeled "5%" and "10%" are included by the
Company pursuant to certain rules promulgated by the Securities and
Exchange Commission (the "Commission") and are not intended to forecast
future appreciation, if any, in the price of the Common Stock. Such amounts
are based on the assumption that the named persons will hold the options
for the full term of the options. The actual value of the options will vary
in accordance with the market price of the Common Stock.
(3) Options are subject to a two-year vesting schedule, with 33% becoming
exercisable on each of the date of grant and the first anniversary of the
date of grant and 34% becoming exercisable on the second anniversary of the
date of grant.
(4) There is no established trading market for the Common Stock. The exercise
price was estimated on the date of grant using the Black-Scholes
option-pricing model assuming a risk-free interest rate of 5.5% and an
expected life of six years.
</TABLE>
The following table sets forth certain information concerning options
exercised in 1999 by the named executive officers and all unexercised options
held by the named executive officers as of December 31, 1999.
<TABLE>
<CAPTION>
Aggregate Option Exercises in Last Fiscal Year and
Fiscal Year End Option Values
Number of Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options at
Shares Year-End (#) Fiscal Year-End (1)
Acquired Value --------------------------- ---------------------------
on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
--------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
F. George Dunham, III - - 1,077 2,188 - -
Joy J. Keller - - 1,293 2,625 - -
---------------------
(1) None of the options are in-the-money.
</TABLE>
EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution profit sharing plan where by
all employees are eligible to participate on the first day of the quarter
following their employment date and are considered fully vested after five years
of service. Participants are permitted to contribute 1% to 15% of their annual
compensation (not to exceed $10,000) on a tax deferred basis and the Company
will match 50% of the first 6% contributed by the employee. Employer
contributions were approximately $62,000 in 1999, $85,000 in 1998 and $167,000
in 1997.
Substantially all of the Company's employees are covered by a qualified,
non-contributory defined benefit pension plan (the "Pension Plan"), which
provides retirement, death and disability benefits for full- time employees
completing at least 1,000 hours of service during any 12- month period. The
funding policy contributes such amounts and at such times as required to
maintain the qualified status of the Pension Plan. No contributions were made to
the Pension Plan in 1999, 1998 or 1997.
The following table reconciles the beginning and ending balances of the
benefit obligation and the plan assets for the years ended December 31, 1999 and
December 31, 1998, respectively:
Year Ended December 31,
----------------------------
1999 1998
------------ ------------
Change in benefit obligation:
Benefit obligation at beginning of year ..... $ 10,040,552 $ 10,072,417
Service cost ................................ 102,431 136,746
Interest cost ............................... 665,907 665,110
Actuarial (gain) loss ....................... (818,957) 181,245
Benefits paid ............................... (887,202) (1,014,966)
------------ ------------
Benefit obligation at end of year ........... $ 9,102,731 $ 10,040,552
============ ============
Change in plan assets:
Fair value of plan assets at beginning of
year ...................................... $ 14,193,174 $ 11,832,685
Actual return on plan assets ................ 2,536,905 3,375,455
Benefits paid ............................... (887,202) (1,014,966)
------------ ------------
Fair value of plan assets at end of year .... $ 15,842,877 $ 14,193,174
============ ============
The Company's 1999 Stock Option Plan
In April 1999, the Board adopted the Millers American Group, Inc. 1999
Stock Option Plan (the "Stock Option Plan"). The Stock Option Plan enables the
Company to grant stock options to acquire shares of the Common Stock to
employees and nonemployee directors. The Stock Option Plan contains certain
transferability restrictions, manner of exercise requirements, change of control
provisions, and termination and repurchase provisions. The Stock Option Plan is
administered by the Board and provides that the maximum number of shares of the
Common Stock that may be issued pursuant to the exercise of stock options
granted under the Stock Option Plan shall be 3,000,000 shares in the aggregate
and 1,200,000 shares per person. Options granted will have a six year term and
vest either on the date of grant or over a period of up to two years of
continued employment or service to the Company. The Stock Option Plan may be
amended from time to time; however, certain amendments require the approval of a
majority of the shares of Common Stock.
Employee Stock Ownership Plan and Trust
In April 1999, the Board adopted the Millers American Group, Inc. Employee
Stock Ownership Plan and Trust (the "ESOP"). The ESOP enables employees of the
Company or its Insurance Subsidiaries who are participants thereof to acquire
ownership of shares of the Common Stock pursuant to the terms thereof. The ESOP
contains participant eligibility requirements, employer contribution and
forfeiture provisions, participant vesting provisions, time and method of
payment provisions, and a repurchase feature. The ESOP is administered by an
Advisory Committee. The ESOP also appoints the trustee and establishes the
trustee's powers and duties. In April 1999, the ESOP purchased 675 shares of
series A preferred stock of the Company (the "Series A Shares") for $499,500.
This purchase was funded by a loan from Millers Insurance.
Meetings, Committees and Director Compensation.
The Board held approximately fifteen regular and committee meetings
during 1999. The compensation committee is mainly composed of outside
directors and determines salary, bonus and director fees for executive
officers and outside directors. F. George Dunham III, Frank G. Dunham,
Jr., Frank A. Bailey, III, Frank C. Wilson, and Lamar C. Smith composed the
1999 compensation committee.
Each director is paid an annual honorarium of $15,000. Each director
serving on the executive committee receives an additional $5,000 per year. Any
outside director serving as Chairman of a committee receives an additional
$3,000 for each committee the director chairs. An outside director is any
director not presently or previously serving the Company in a management
position.
In addition to an honorarium, each director receives an attendance fee of
$800 for each regular or special meeting attended and $250 for each committee
meeting attended.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Insurance Subsidiaries received policy and claims administration
services, data processing services and software services from INSpire under the
terms of various agreements. F. George Dunham, III served as Chairman of the
Board and Chief Executive Officer of INSpire and Chairman of the Board and Chief
Executive Officer of the Company during 1999 and resigned from his positions
with the Company in January 2000. The fees paid to INSpire under the agreements
totaled approximately $26 million, $26.37 million, and $18.9 million in 1999,
1998 and 1997, respectively.
From July 1, 1995 through December 31, 1997, the Insurance Subsidiaries had
various agreements with INSpire to provide management and administrative
services. Total fees earned by Millers Insurance in 1997 were approximately $1.3
million. Effective January 1, 1998, a new agreement was entered into whereby the
Insurance Subsidiaries receive benefits administration services from INSpire for
a monthly fee of $15,000. Total fees paid under this contract were $180,000 in
each of 1999 and 1998.
The Insurance Subsidiaries utilize an agency sales force that is provided
by an agency associated with Thomas Carlisle, a director of the Company. In
1999, 1998 and 1997, commissions of approximately $68,000, $109,000 and
$143,000, respectively, were paid to the agency on premiums written of
approximately $468,000, $830,000 and $815,000, respectively. As of December 31,
1999 and 1998, no significant amounts were due from the agency.
In November 1998, Millers Insurance sold its home office building to a
partnership controlled by F. George Dunham, III for $8 million. Millers
Insurance recognized a gain of approximately $1.6 million on the sale.
Additionally, Millers Insurance entered into a one year lease agreement with the
purchaser for a portion of the building. The rental expenses incurred under such
agreement for 1999 and 1998 were $242,000 and $22,000, respectively. In November
1999, upon expiration of the lease agreement, the Company relocated its home
office to its current location.
In September 1999, the Company entered into an asset and employment
transfer agreement with INSpire, pursuant to which INSpire agreed to acquire
from the Company and its Insurance Subsidiaries certain assets and employees
used in the conduct of Phoenix Indemnity's policy and claims administration for
a purchase price of $3.5 million. Such agreement is pending necessary regulatory
authority approval.
On April 21, 1999, Millers Insurance loaned $499,500 (the "Loan") to the
ESOP. The Loan is secured by a security interest in the Series A Shares. The
interest rate on the Loan is 8%. The ESOP used the Loan to purchase the Series A
Shares. The ESOP must repay the principal amount of the Loan, plus all accrued
but unpaid interest, in five annual installments.
ITEM 8. LEGAL PROCEEDINGS.
On December 3, 1999, a shareholder class action lawsuit was filed in
the United States District Court for the Northern District of Texas on
behalf of all purchasers of the common stock of INSpire during the period
between January 28, 1998 and October 14, 1999 (Southland Securities
Corporation et al. v. INSpire Insurance Solutions, Inc. et al. (7-99CV-243-
R)) (the "Southland Case"). The named defendants include INSpire, certain
officers and directors of INSpire, and Millers Insurance. The claim is
based upon allegedly false and misleading statements, false financial
reporting and illegal insider trading during the class period in violation
of Section 10(b), Rule 10b-5 promulgated thereunder and Section 29(a) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Judgment has been requested to declare this action to be a proper class
action and to award damages, including interest, and such other relief as
the court may deem proper. Two additional shareholder class action
lawsuits, nearly identical to the one set forth above, have been filed
against the same defendants in the United States District Court for the
Northern District of Texas: (i) Larry Altobell and Lawrence J. Miller et
al. v. INSpire Insurance Solutions, Inc. et al. (7-99CV-248-R) filed on
December 16, 1999, and (ii) Stacy B. and Rhonda K. Lofton et al. v. INSpire
Insurance Solutions, Inc. et al. (7-00CV-001-R) filed on January 3, 2000.
Millers Insurance intends to defend these lawsuits vigorously in all
aspects. However, the ultimate outcome of these matters cannot presently
be determined.
In the normal course of its operations, the Insurance Subsidiaries have
been named as defendants in various legal actions seeking payments for claims
denied by the Insurance Subsidiaries and other monetary damages. In the opinion
of the Company's management, the ultimate liability, if any, resulting from the
disposition of these claims will not have a material adverse effect on the
Company's consolidated financial position, results of operations or case flows.
The Company's management believes that unpaid claims and claim adjustment
expenses are adequate to cover liabilities from claims that arise in the normal
course of the insurance business of the Insurance Subsidiaries.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for the Company's Common
Stock. As of April 1, 2000, there were 103,267 shareholders of record of the
Common Stock of the Company.
The Company's ability to pay dividends is limited by the amount of
dividends it receives from Trilogy Holdings and is subject to the rights of
holders of any outstanding shares of preferred stock. Trilogy Holding's ability
to pay dividends is, in turn, limited by the amount of dividends it receives
from the Insurance Subsidiaries. Millers Insurance and Phoenix Indemnity are
restricted by the insurance laws of states of Texas and Arizona as to the amount
of dividends or other distributions they may pay to Trilogy Holdings without the
prior approval of the Texas Department of Insurance and the Arizona Department
of Insurance. Under Texas law, the maximum amount that may be paid by Millers
Insurance during any twelve- month period after notice to, but without prior
approval of, the Texas Department of Insurance cannot exceed the greater of 10%
of Millers Insurance's statutory surplus as reported on the most recent annual
statement filed with the Texas Department of Insurance, or the net income of
Millers Insurance for the period covered by such annual statement. Under Arizona
law, the maximum amount that may be paid by Phoenix Indemnity during any
twelve-month period after notice to, but without prior approval of, the Arizona
Department of Insurance cannot exceed the lesser of 10% of Phoenix Indemnity's
statutory surplus as reported on the most recent annual statement filed with the
Arizona Department of Insurance, or the net investment income of Phoenix
Indemnity for the period covered by such annual statement. The Board declared
and paid a dividend of $1.55 million from Phoenix Indemnity to the Company in
January 2000. The Company utilized the funds to reduce its outstanding debt.
The Company does not anticipate paying dividends to holders of its Common
Stock. In addition, the Loan Agreement places certain restrictions on the
dividends the Company can pay. Under the Loan Agreement, the Company may not
declare and pay cash dividends in any year in excess of 50% of the Company's Net
Income (as defined in the Loan Agreement) for the preceding year. The Company,
though, may pay dividends by issuing additional shares of Common Stock.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
The issuance of the Common Stock pursuant to the Plan of Conversion was
exempt from registration under Section 3(a)(10) of the Securities Act of 1933,
as amended (the "Securities Act"). The Commissioner approved the fairness of the
terms and conditions of the proposed issuance of stock under the Plan of
Conversion after a public hearing required by Texas statute.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
Common Stock - On January 28, 1998 (the "Adoption Date"), the Board adopted
the Plan of Conversion. The Plan of Conversion became effective April 21, 1999
(the "Effective Date") upon satisfaction of all the conditions to its
effectiveness specified in the Plan of Conversion. Pursuant to the Plan of
Conversion, Millers Mutual converted to a stock insurance company and changed
its name to "The Millers Insurance Company" and became a wholly-owned subsidiary
of Trilogy Holdings, which in turn become a wholly-owned subsidiary of the
Company. Under the Plan of Conversion, an owner of a policy issued by Millers
Mutual that was in force on the Adoption Date (an "Eligible Policyholder")
exchanged a membership interest in Millers Mutual for a share of common stock,
par value $40.00 per share, of Millers Mutual (the "Millers Common Stock").
Immediately thereafter, the shares of Millers Common Stock owned by the Eligible
Policyholders were exchanged for shares of Common Stock on the basis of one
share of Millers Common Stock for one share of Common Stock. As a result, under
the Plan of Conversion, each Eligible Policyholder ultimately received one share
of Common Stock and became a shareholder of the Company. Every policy that was
in force on the Effective Date remained as it existed on and after the Effective
Date, except that all membership interests associated with the policies were
extinguished on the Effective Date. The Plan of Conversion did not, in any way,
change the premiums or insurance coverage under the policies.
The Company has authorized 50,000,000 shares of Common Stock. At the
present time, 103,267 shares of Common Stock are outstanding. The common
shareholders are entitled to vote as a separate class and are entitled to one
vote for each share of Common Stock on all matters voted upon by shareholders,
except for the election of directors. The common shareholders do not have
cumulative voting rights. The holders of Common Stock, series A preferred stock,
par value $1.00 per share ("Series A Preferred Stock"), and any other capital
stock vote together as a single class to elect the members of the Board. Subject
to the rights of the holders of any then outstanding shares of preferred stock,
the holders of Common Stock are entitled to such dividends as may be declared in
the discretion of the Board out of funds legally available therefor. See "Item
9. Market Price of and Dividends on the Registrant's Common Equity and Related
Stockholder Matters." The common shareholders are entitled to share ratably in
the net assets of the Company upon liquidation after payment or provision for
all liabilities and any preferential liquidation rights of the preferred stock
then outstanding. The common shareholders do not have preemptive rights to
purchase shares of the Company's capital stock. The shares of Common Stock are
not subject to any redemption provisions and are not convertible into any other
securities of the Company. All outstanding shares of Common Stock are fully paid
and nonassessable. The rights, preferences and privileges of the common
shareholders are subject to those of the holders of any shares of the preferred
stock that the Company has issued or may issue in the future.
From the Effective Date until the third anniversary of the Effective Date,
in the event the Company proposes to raise capital by the sale of Common Stock
for cash in a Qualified Stock Offering (as defined below), the Company will
conduct a one time subscription offering pursuant to which the Company shall
issue non-transferable subscription rights ("Subscription Rights") to the
Eligible Policyholders to purchase shares of Common Stock in such Qualified
Stock Offering. The number of shares that an Eligible Policyholder may purchase
shall be determined by multiplying the aggregate number of shares offered in a
Qualified Stock Offering by a fraction the numerator of which is the number of
shares of Common Stock issued to such Eligible Policyholder pursuant to the Plan
of Conversion and the denominator of which is the aggregate number of shares of
Common Stock outstanding on a fully diluted basis immediately prior to such
Qualified Stock Offering. The price per share of such Qualified Stock Offering
shall be determined by the Board in its sole discretion. The Subscription Rights
shall apply to the first Qualified Stock Offering conducted by the Company
during such three-year period. The Subscription Rights shall expire on the
earlier of (i) the date a Qualified Stock Offering is consummated (whether or
not any Eligible Policyholders participate in such Qualified Stock Offering) or
(ii) the third anniversary of the Effective Date.
A "Qualified Stock Offering" means any offering of Common Stock by the
Company, but does not include (i) a private placement of Common Stock by the
Company that does not exceed an aggregate placement amount of $10 million, (ii)
an offering of Common Stock by the Company for any consideration other than
cash, or (iii) an issuance of Common Stock upon the exercise of stock options or
the acquisition of Common Stock by the ESOP upon the conversion of any shares of
preferred stock that may be issued by the Company in the future.
From the Effective Date until the earlier of (i) the third anniversary of
the Effective Date or (ii) the effective date of an Initial Public Offering (as
defined below), the common shareholders cannot transfer, either directly or
indirectly, all or any portion of their shares, or any right or interest
therein, except as provided in the paragraphs below. An "Initial Public
Offering" means an offering of Common Stock by the Company that is registered
under the Securities Act and that results in proceeds to the Company of at least
$25 million.
If a common shareholder receives an offer to transfer all or any portion of
the shares then owned by the shareholder, the shareholder must offer such shares
to the Company at the same price and on substantially the same terms as
contained in the offer. The Company has 35 days from the date of the receipt of
the written notice of the offer from the shareholder to accept such offer. If
the Company proposes to accept such offer, the Company shall inform the
shareholder in writing of its acceptance and the current book value per share of
the shares. The shareholder will then have seven days after receiving the
Company's written notice of acceptance to notify the Company whether the
shareholder elects to sell the shares to the Company. If the shareholder elects
not to sell the shares to the Company, the shareholder shall be deemed to have
withdrawn the shares from the offer. If the Company fails to accept such offer
within such 35-day period, the shareholder shall have 60 days to consummate such
transfer pursuant to the terms of the offer. If after 60 days the shareholder
has not consummated the transfer pursuant to the terms of the offer, the
Company's right of first refusal will again be in effect with respect to all of
the shares of such common shareholder.
This right of first refusal will not apply, however, to a transfer of
shares by a common shareholder, without consideration, to any of the following
parties, whether such transfer be inter vivos, testamentary or by intestate
succession: (i) a spouse of such common shareholder or (ii) descendants of such
common shareholder, and upon such transfer, the shares so transferred will
continue to be restricted as set forth in the above paragraphs. Subject to
certain limitations, the Company may elect, in its sole discretion, to offer to
purchase shares of Common Stock issued to the Eligible Policyholders at any time
after the Effective Date. In the event any such offer is made, each common
shareholder will be entitled to accept or decline such offer.
Series A Preferred Stock - On April 21, 1999, the Board of Directors
authorized 200,000 shares of Series A Preferred Stock. At the present time, 675
shares of Series A Preferred Stock are outstanding, all of which are held by the
ESOP. The holders of the Series A Preferred Stock will be entitled to one vote
for each share held and to vote as a separate class on all matters voted upon by
shareholders, including, but not limited to, a merger, consolidation, sale of
all or substantially all of the assets of the Company or any reclassification,
stock split, or stock dividend with respect to the capital stock of the Company
or any amendment to the Articles. The holders of the Series A Preferred Stock
will vote together as a single class with the holders of the Common Stock and
any other capital stock with respect to the election of the members of the
Board.
The holders of the Series A Preferred Stock shall be entitled to receive
the same amount, on a per share basis, of all cash and noncash dividends
distributable to each holder of Common Stock. The right of the holders of the
Series A Preferred Stock to receive dividend distributions declared by the
Company shall be senior to the right of the holders of Series B Preferred Stock,
par value $1.00 per share (the "Series B Preferred Stock"), and of the holders
of Common Stock to receive such dividend distributions. The holders may, at any
time, elect to convert any share of Series A Preferred Stock into one share of
Common Stock. In the event of the voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of the Series A Preferred
Stock shall be entitled to a payment equal to the greater of $0.10 per share for
each share of Series A Preferred Stock held or the liquidation distribution
attributable to the Common Stock, after payment or provision for the payment of
debts but before any distribution of assets to the holders of Series B Preferred
Stock or to the holders of Common Stock. Shares of Series A Preferred Stock are
not subject to any redemption provisions.
Series B Preferred Stock - On April 21, 1999, the Board of Directors
authorized 300,000 shares of Series B Preferred Stock in connection with the
adoption of the Rights Agreement (as defined and more fully described below).
Anti-Takeover Considerations
Anti-Takeover Statute - The Company is subject to Part 13 of the Texas
Business Corporation Act (the "TBCA"), which, subject to certain exceptions,
prohibits a Texas corporation from engaging in any "business combination" with
an "affiliated shareholder" for three years following the date that such
shareholder became an affiliated shareholder, unless: (i) prior to such date,
the board of directors of the corporation approved either the business
combination or the transaction that resulted in the shareholder becoming an
affiliated shareholder or (ii) the business combination is authorized at a
meeting of shareholders called not less than six months after such date by the
affirmative vote of at least two-thirds of the outstanding voting shares not
owned by the affiliated shareholder.
Part 13 generally defines a "business combination" to include: (i) any
merger, share exchange or conversion involving a corporation and an affiliated
shareholder, (ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 10% or more of the assets of a corporation to an affiliated
shareholder, (iii) subject to certain exceptions, any transaction that results
in the issuance or transfer by a corporation of any stock of the corporation to
an affiliated shareholder, (iv) any transaction involving a corporation that has
the effect of increasing the proportionate ownership percentage of the stock of
any class or series of the corporation beneficially owned by an affiliated
shareholder, (v) any receipt by an affiliated shareholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits provided by or
through a corporation or (vi) any adoption of a plan or proposal for the
liquidation or dissolution of a corporation proposed by, or pursuant to any
agreement or understanding with, an affiliated shareholder. In general, Part 13
defines an "affiliated shareholder" as any entity or person beneficially owning
20% or more of the outstanding voting stock of a corporation and any entity or
person affiliated with or controlling or controlled by such entity or person.
The provisions of Part 13 could have the effect of delaying, deferring or
preventing a change of control of the Company even if a change of control were
in the shareholders' interests.
Classified Board Of Directors - The Articles provide for the Board to be
divided into three classes serving staggered three-year terms. The term of
office of the first class of directors will expire at the 2000 annual meeting of
shareholders, the term of office of the second class will expire at the 2001
annual meeting of shareholders and the term of office of the third class will
expire at the 2002 annual meeting of shareholders. The terms of office of the
current directors of the Company are set forth herein under Item 5. "Directors
and Executive Officers."
At each annual meeting of shareholders, the class of directors to be
elected at such meeting will be elected for a three-year term, and the directors
in the other two classes will continue in office. The staggered terms for
directors may affect the shareholders' ability to effect a change of control of
the Company even if a change of control were in the shareholders' interests.
Shareholder Action - If provided for in a company's articles of
incorporation, the TBCA permits shareholder action without a meeting, without
prior notice, and without a vote, upon the written consent of less than all of
the holders of outstanding stock. The Articles prohibit shareholder action
without a meeting, except by unanimous written consent. In addition, the
Company's bylaws (the "Bylaws") provide that special meetings of the
shareholders may be called only by the President, Chairman of the Board, a
majority of the Board or the holders of at least 10% of all shares entitled to
vote at the proposed meeting. These provisions could have the effect of
delaying, deferring or preventing a change of control of the Company even if a
change of control were in the shareholders' interests.
Rights Agreement - On April 19, 1999, the Board authorized and declared a
dividend distribution of one right (a "Right") for each outstanding share of
Common Stock on such date (the "Record Date"). In addition, one Right will be
issued for each share of Common Stock that becomes outstanding between the
Record Date and the earlier to occur of the Redemption Date (as defined below)
and the Final Expiration Date (as defined below). Except as described below,
each Right represents the right to purchase one one-hundredth (1/100) of a share
of Series B Preferred Stock from the Company at a price of $3100.00 (the
"Exercise Price"), subject to adjustment. The mechanics of such adjustment, the
timing of the exercise of the Rights, and the terms and preferences of the
Rights are set forth in the Rights Agreement (the "Rights Agreement") between
the Company and U.S. Trust Company of Texas, N.A., as rights agent. A copy of
the Rights Agreement has been filed with the Commission as an exhibit to this
registration statement. This summary of the Rights and the Rights Agreement does
not purport to be complete and is qualified in its entirety by reference to the
Rights Agreement.
The Rights will be evidenced by the Common Stock certificates and not by
separate certificates until the earlier of: (i) the tenth day after the Stock
Acquisition Date (as defined below), or (ii) the tenth business day (or such
later date as may be determined by action of the Board prior to such time as any
Person (as defined in the Rights Agreement) becomes an Acquiring Person (as
defined below)) after the date of the commencement by any Person (other than an
Exempt Person (as defined in the Rights Agreement)) of, or the first public
announcement of the intent of any Person (other than an Exempt Person) to
commence, a tender or exchange offer within the meaning of Rule 14d-2(a) of the
Exchange Act upon the successful consummation of which such Person, together
with its affiliates and associates, would be the beneficial owner of 15% or more
of the then outstanding shares of voting stock of the Company (the earlier of
such dates being herein referred to as the "Distribution Date"). The "Stock
Acquisition Date" means the first date on which a public announcement is made by
the Company or an Acquiring Person that a Person has become an Acquiring Person
(which, for purposes of this definition, shall include, without limitation, a
report filed pursuant to Section 13(d) of the Exchange Act). Under the Rights
Agreement, an "Acquiring Person" means any person that together with all
affiliates and associates beneficially holds 15% or more of the voting power of
the Company.
Until the Distribution Date, the Rights shall be transferred with, and only
with, the Common Stock, and any transfer of Common Stock certificates shall also
constitute the transfer of the Rights associated therewith. Following the
Distribution Date, separate certificates evidencing the Rights (the "Right
Certificates") will be mailed to the record holders of Common Stock as of the
close of business on the Distribution Date, and thereafter such separate Right
Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date and will expire
upon the earliest of: (i) the close of business on April 19, 2009 (the "Final
Expiration Date"), (ii) date of the redemption of the Rights by the Company as
described below (the "Redemption Date"), (iii) the date on which the Rights
expire pursuant to the Rights Agreement or (iv) date on which the Rights are
exchanged by the Company as described below.
Unless the Rights are earlier redeemed, in the event that a person or group
becomes an Acquiring Person, each holder of Rights will thereafter have the
right to exercise its Rights and to receive, upon payment of the Exercise Price
(as adjusted) for each of its Rights, such number of shares of Common Stock (or
in certain circumstances, cash, property or other securities of the Company) as
shall have a value equal to the Exercise Price divided by 50% of the Fair Market
Value (as defined in the Rights Agreement) of a share of Common Stock. Until a
Right is exercised, the holder thereof, as such, will have no rights as a
shareholder of the Company, including the right to vote or to receive dividends.
The Exercise Price payable and the number of shares of Series B Preferred
Stock, Common Stock or other securities or property issuable upon exercise of a
Right, and the number of Rights outstanding, are subject to adjustment from time
to time to prevent dilution. In addition, if at any time on or after the
Distribution Date the Company is merged into or consolidates with another person
and the Company does not survive such merger or consolidation or all or a
portion of the shares of Common Stock are exchanged for securities of another
person in connection with such merger or consolidation, or the Company or one or
more of the subsidiaries of the Company transfers to any other person 50% or
more of the assets or earning power of the Company and the subsidiaries, proper
provision will be made so that each holder of a Right will thereafter have the
right to receive, upon exercise at the then current Exercise Price of the Right,
common stock of the applicable issuer or the surviving company having a value
equal to twice the Exercise Price of the Right.
Upon the exercise of a Right, the Company will not be required to issue
fractional shares of Series B Preferred Stock (other than fractions in multiples
of one one-hundredth of a shares of Series B Preferred Stock), and in lieu
thereof may issue depositary receipts evidencing fractions of such shares or
cash based on the Fair Market Value of the shares of Series B Preferred Stock.
At any time after the date of the Rights Agreement until the earlier of ten
days after the Stock Acquisition Date or the Final Expiration Date, the Company
may, upon approval by a majority of the Board, redeem the Rights in whole, but
not in part, at a price of $0.01 per Right (the "Redemption Price"), subject to
adjustment. The Redemption Price may, at the option of the Company, be paid in
cash, shares of Series B Preferred Stock or shares of Common Stock. The Rights
will thereupon terminate and the only right of the holders of Rights will be to
receive the Redemption Price.
At any time after a person or group of affiliated or associated persons
becomes an Acquiring Person and prior to the acquisition by any such person or
group of 50% or more of the voting power of the Company, the Board may exchange
the Rights (other than Rights owned by such person or group that have become
void), in whole or in part, at an exchange ratio of one share of Common Stock
(or a fraction of a share of Series B Preferred Stock or other consideration
having equivalent value) per Right, subject to adjustment.
As long as no Person is an Acquiring Person, the provisions of the Rights
Agreement may be amended by the Company without the approval of any holders of
the Rights. Any amendment adopted thereafter may not materially adversely affect
the interests of the Acquiring Person.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the Company
other than pursuant to a tender offer or other transaction approved by the
Board. The Rights, however, provide a ten-day period to the Board and the
Acquiring Person to negotiate such a merger or consolidation before the Rights
become exercisable. If an acceptable arrangement is reached within this period,
the Board may redeem all of the Rights.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As permitted by the provisions for indemnification of directors and
officers in the TBCA, which applies to the Company, the Articles provide for
indemnification of any director or officer in connection with an actual or
threatened action, suit or proceeding, whether civil, criminal, administrative,
arbitrative, or investigative, any appeal in such an action, suit, or
proceeding, and any inquiry or investigation that could lead to such an action,
suit, or proceeding (whether or not by or in the right of the Company), by
reason of the fact that such person is or was a director or officer or is or was
serving at the request of the Company as a director, officer, partner, venturer,
proprietor, trustee, employee, agent or similar functionary of another
organization, against all judgments, penalties (including excise and similar
taxes), fines, settlements, and reasonable expenses (including attorneys' fees
and court costs) actually and reasonably incurred to the fullest extent
permitted by any applicable law.
The Bylaws provide for substantially similar indemnification of any
director or officer. This indemnification, however, is limited to circumstances
in which the director or officer was determined to have conducted himself in
good faith and to have reasonably believed that the conduct was in the Company's
best interests and not unlawful. The Bylaws further prohibit indemnification in
circumstances in which the director or officer is found liable for willful or
intentional misconduct in the performance of his duties to the Company.
The Bylaws authorize the Company to purchase insurance for any director or
officer to insure against any liability that may be asserted against him and
incurred by him by reason of the fact that such a person is or was a director or
officer, whether or not the Company would have the power to indemnify him
against that liability under the Bylaws. The Company maintains insurance
coverage for its directors and officers as well as coverage to reimburse the
Company for potential costs of its corporate indemnification of directors and
officers.
The Company has entered into indemnification agreements with each of its
directors. Each indemnification agreement provides that the Company shall
indemnify the director against certain liabilities and expenses actually
incurred by the director in connection with any threatened, pending or completed
action, suit or proceeding, including an action by or on behalf of shareholders
of the Company or by or in the right of the Company, to which the director is,
or is threatened to be made, a party by reason of his status as a director,
provided that such individual did not derive an improper benefit, such
individual did not commit acts or omissions that were not in good faith or that
involved intentional misconduct or a knowing violation of the law, or such
indemnification is not otherwise disallowed by the Articles, the Bylaws or the
law.
ITEM 13. FINANCIAL DATA AND SUPPLEMENTARY STATEMENTS.
See "Item 15. Financial Statements and Exhibits."
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and 1998 (Draft).
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997 (Draft).
Consolidated Statements of Comprehensive Income for the years ended
December 31, 1999, 1998 and 1997 (Draft).
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997 (Draft).
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997 (Draft).
(b) Exhibits filed with this Form 10 Registration Statement are as
follows:
Exhibit No. Description of Exhibit
----------- ----------------------
3.1* Articles of Incorporation.
3.2* Bylaws.
10.1* Millers American Group, Inc. 1999 Stock Option
Plan.
10.2* Loan Agreement, dated as of September 17, 1999,
between Millers American Group, Inc., as
borrower, and LaSalle Bank National Association,
as lender. A list identifying the contents of
the Schedules to the Loan Agreement is attached.
10.3* Office Lease, effective April 1, 2000, between
Metropolitan Life Insurance Company, as lessor,
and Phoenix Indemnity Insurance Company, as
lessee.
10.4* Sublease Agreement, effective November 19, 1999,
between Union Pacific Resources Group, Inc., as
sublessor, and Miller American Group, Inc., as
sublessee.
10.5* Stock Purchase Agreement, dated May 10, 1999, by
and between Millers American Group, Inc. and
Acceptance Insurance Company.
10.6* Amended and Restated Consolidated Federal Income
Tax Allocation Agreement.
10.7* Severance Agreement by and between Millers
American Group, Inc. and David N. Thompson.
10.8* Form of Stock Option Agreement.
10.9* Form of Indemnification Agreement.
10.10* Rights Agreement, dated as of April 19, 1999, by
and between Millers American Group, Inc. and U.S.
Trust Company of Texas, N.A., as rights agent.
10.11* Millers American Group, Inc. Employee Stock
Ownership Plan and Trust Agreement.
10.12* Policy Life Cycle Services Agreement, effective
as of May 1, 1997, by and between Millers
Integrated Claims Resources, Inc. dba MiliRisk
and Millers Casualty Insurance Company.
10.13* Amendment No. 1 to Policy Life Cycle Services Agreement
by and between INSpire Insurance Solutions, Inc. and
Millers Casualty Insurance Company.
10.14* Claims Life Cycle Services Agreement, effective
as of June 1, 1997, by and between Millers
Integrated Claims Resources, Inc. dba MiliRisk
and Millers Casualty Insurance Company.
10.15* Second Amended Information Services Contract, dated October,
1, 1997, by and among The Millers Mutual Fire Insurance
Company, The Millers Casualty Insurance Company and INSpire
Insurance Solutions, Inc.
10.16* Policy Administration Services Agreement,
effective as of October 1, 1997, by and among
INSpire Insurance Solutions, Inc., The Millers
Mutual Fire Insurance Company and The Millers
Casualty Insurance Company.
10.17* Claims Administration Services Agreement, dated as of
October, 1, 1997 (the "Claims Administration Agreement"), by
and among The Millers Mutual Fire Insurance Company, The
Millers Casualty Insurance Company and INSpire Insurance
Solutions, Inc.
10.18* Amendment No. 1 to the Claims Administration
Agreement.
10.19* Amended and Restated Benefits Administration Contract, dated
January 1, 1998, by and between The Millers Mutual Fire
Insurance Company and INSpire Insurance Solutions, Inc.
11.1* Statement Regarding Computation of Earnings Per
Share.
21.1* Subsidiaries of the Registrant.
-------------------
* Filed herewith.
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities and Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
MILLERS AMERICAN GROUP, INC.
Dated: May 31, 2000 By: /S/ JOY J. KELLER
-----------------------------------
Joy J. Keller, President and
Chief Executive Officer
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
MILLERS AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998
--------------------------------------------------------------------------------
ASSETS 1999 1998
Investments:
Debt securities, at estimated fair
value, cost of $85,937,330 for 1999
and $71,226,124 for 1998 $ 83,139,842 $ 73,319,688
Equity securities, at estimated fair
value, cost of $33,870,820 for 1999
and $39,754,620 for 1998 27,342,643 35,078,700
Other investments 21,706,578 9,724,669
------------- -------------
Total investments 132,189,063 118,123,057
Cash and cash equivalents 12,001,810 3,391,878
Reinsurance receivables 60,086,513 83,649,521
Premiums receivable 31,580,081 27,036,450
Investment in affiliate, at cost plus
equity in undistributed earnings 6,388,904 9,212,302
Deferred policy acquisition costs 8,358,689 3,983,812
Deferred tax asset 9,962,229 1,552,000
Property and equipment, net 8,125,772 6,614,769
Other assets 11,608,898 7,628,430
------------- -------------
TOTAL $ 280,301,959 $ 261,192,219
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Reserve for losses and loss adjustment
expenses $ 122,752,861 $ 103,707,833
Unearned premiums 55,997,227 53,632,606
Accounts payable and accrued expenses 15,717,241 13,880,588
Reinsurance payable 1,703,387 15,251,179
Due to affiliate 5,882,005 2,466,478
Other liabilities 8,942,476 7,044,466
Revolving credit facility 20,000,000
------------- -------------
Total liabilities 230,995,197 195,983,150
Commitments and contingencies (Note 18)
Stockholders' equity:
Preferred stock, $1.00 par value;
1,000,000 shares authorized, 675
shares issued and outstanding in 1999 675
Common stock, $0.01 par value;
50,000,000 shares authorized; 103,267 1,033
shares issued and outstanding in 1999
Additional paid-in capital 66,771,510
Retained earnings (accumulated deficit) (10,905,261) 66,887,613
Unreleased employee stock ownership plan
shares (499,500)
Accumulated other comprehensive income
(loss), net of tax (6,061,695) (1,678,544)
------------- -------------
Total stockholders' equity 49,306,762 65,209,069
------------- -------------
TOTAL $ 280,301,959 $ 261,192,219
============= =============
<PAGE>
<TABLE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
MILLERS AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
--------------------------------------------------------------------------------
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Revenues:
Net premiums earned $ 105,397,511 $ 85,734,610 $ 98,649,740
Software and outsourcing
services 18,838,414
Net investment income 5,296,702 3,588,419 4,990,061
Realized capital gains and
losses 1,818,862 7,575,245 2,836,787
Other operating income 1,482,069
------------- ------------- -------------
Total revenues 112,513,075 96,898,274 126,797,071
------------- ------------- -------------
Costs and expenses:
Losses and loss adjustment
expenses 80,468,707 77,960,662 85,708,669
Cost of software and outsourcing
services 10,651,056
Amortization of deferred policy
acquisition costs 27,644,207 33,917,415 30,520,000
Underwriting and operating
expenses 17,786,038 6,442,036 25,517,035
------------- ------------- -------------
Total expenses 125,898,952 118,320,113 152,396,760
------------- ------------- -------------
Operating loss (13,385,877) (21,421,839) (25,599,689)
Other income (expense):
Equity in net earnings (loss) of
affiliate (3,270,676) 2,186,940 753,015
Gain on sale of interest in
affiliate 22,806,425 27,466,267
Other expense (736,031) (846,023) (742,576)
------------- ------------- -------------
Total other income (expense) (4,006,707) 24,147,342 27,476,706
------------- ------------- -------------
Income (loss) before income taxes (17,392,584) 2,725,503 1,877,017
Income tax expense (benefit) (5,873,428) 1,022,705 589,534
------------- ------------- -------------
Net income (loss) $ (11,519,156) $ 1,702,798 $ 1,287,483
============= ============= =============
Net loss after Conversion $ (10,905,261)
=============
Loss per common share after
Conversion -
Basic and diluted $ (105.60)
=============
Pro forma earnings (loss) per
common share -
Basic and diluted $ (101.50) $ 28.14 $ 18.25
============= ============= =============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
MILLERS AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
----------------------------------------------------------------------------------
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net income (loss) $(11,519,156) $ 1,702,798 $ 1,287,483
Other comprehensive income (loss),
before income tax:
Unrealized holding gains (losses)
arising during period (4,924,447) (904,606) 6,533,636
Less: Reclassification adjustment
for gains (losses) included
in net income (loss) 1,818,862 7,575,245 2,836,787
------------ ------------ ------------
Other comprehensive income (loss),
before income tax (6,743,309) (8,479,851) 3,696,849
Income tax benefit (provision)
related to items of other
comprehensive income (loss) 2,360,158 2,967,948 (1,293,897)
------------ ------------ ------------
Other comprehensive income (loss),
net of income tax (4,383,151) (5,511,903) 2,402,952
------------ ------------ ------------
Net comprehensive income (loss) $(15,902,307) $ (3,809,105) $ 3,690,435
============ ============ ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
MILLERS AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
----------------------------------------------------------------------------------------------------------------------------------
Retained Accumulated
Additional Unreleased Earnings Other Comprehensive
Preferred Common Paid-in ESOP (Accumulated Income
Stock Stock Capital Shares Deficit) (Loss) Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ -- $ -- $ -- $ -- $ 63,897,332 $ 1,430,407 $ 65,327,739
Net income 1,287,483 1,287,483
Change in net unrealized holding
gains (losses), net of tax of
$1,293,897 2,402,952 2,402,952
--------- --------- ------------ ---------- ------------ ------------ ------------
Balance at December 31, 1997 65,184,815 3,833,359 69,018,174
Net income 1,702,798 1,702,798
Change in net unrealized holding
gains (losses), net of tax
benefit of $2,967,948 (5,511,903) (5,511,903)
--------- --------- ------------ ---------- ------------ ------------ ------------
Balance at December 31, 1998 66,887,613 (1,678,544) 65,209,069
Net loss before Conversion (613,895) (613,895)
Issuance of 103,267 shares of
common stock in connection
with Conversion transaction 1,033 66,272,685 (66,273,718)
675 shares Class A preferred
stock purchased by ESOP 675 498,825 (499,500)
Net loss after Conversion (10,905,261) (10,905,261)
Change in net unrealized holding
gains (losses), net of tax
benefit of $2,360,158 (4,383,151) (4,383,151)
--------- --------- ------------ ---------- ------------ ------------ ------------
Balance at December 31, 1999 $ 675 $ 1,033 $ 66,771,510 $ (499,500) $(10,905,261) $ (6,061,695) $ 49,306,762
========= ========= ============ ========== ============ ============ ============
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
MILLERS AMERICAN GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
-------------------------------------------------------------------------------------------------------
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(11,519,156) $ 1,702,798 $ 1,287,483
Adjustments to reconcile net income (loss) to cash used
in operating activities:
Gain on sale of interest in affiliate (22,806,425) (27,466,267)
Equity in net earnings of affiliate 3,270,676 (2,178,148) (753,015)
Premium deficiency 1,429,881 2,847,776
Depreciation and amortization 32,128,016 35,262,825 32,781,746
Deferred income taxes (5,873,428) 836,000 (535,000)
Additions to deferred acquisition costs (32,019,084) (33,458,788) (33,596,000)
Net realized gains on investments (1,818,862) (7,575,245) (2,787,930)
Net gain on sale of property and equipment (1,566,045)
Changes in operating assets and liabilities (net of
effects of acquisition):
Reinsurance receivables 23,573,082 (18,982,739) (26,405,655)
Premiums receivable 4,184,314 5,324,551 1,374,965
Other assets 4,176,683 (1,273,643) (163,169)
Reserve for losses and loss adjustment expenses (4,972,323) 22,276,733 20,805,415
Unearned premiums (12,914,172) (13,053,862) 18,714,263
Accounts payable and accrued expenses 174,604 3,813,410 2,570,316
Reinsurance payable (13,547,792) 1,025,842 4,036,661
Due to affiliate 3,415,527 1,333,613 1,132,865
Other liabilities 1,898,010 3,280,258 3,863,377
------------ ------------ ------------
Net cash used in operating activities (9,843,905) (24,608,984) (2,292,169)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (3,024,384) (3,968,354) (1,715,802)
Proceeds from investment maturities and sales 78,710,149 46,686,691 47,815,429
Purchases of investments (55,706,056) (60,856,316) (50,029,536)
Proceeds from sale of property and equipment 8,231,769 1,452,817
Investments in affiliates (2,018,413) (10,500,000)
Proceeds from sale of interest in affiliate 24,260,612 34,029,819
Change in other investments (11,429,668) (3,351,165) (4,673,504)
Acquisition of Phoenix Indemnity, net of cash received (10,096,204)
------------ ------------ ------------
Net cash provided by (used in) investing
activities (1,546,163) 8,984,824 16,379,223
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES -
Advances under revolving credit facility 20,000,000
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 8,609,932 (15,624,160) 14,087,054
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,391,878 19,016,038 4,928,984
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 12,001,810 $ 3,391,878 $ 19,016,038
============ ============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for:
Interest $ 591,121 $ 105,101 $ 183,085
Income taxes -- 3,000,000 1,800,000
SUPPLEMENTAL NONCASH INVESTING ACTIVITY -
Exchange of common stock of Millers Specialty Insurance
Company for preferred stock of acquiring company $ -- $ 3,800,000 $ --
See notes to consolidated financial statements.
</TABLE>
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
MILLERS AMERICAN GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Millers American Group, Inc. (the "Company") is primarily engaged in the
property and casualty insurance business through its subsidiaries,
principally The Millers Insurance Company ("Millers"), The Millers Casualty
Insurance Company ("Casualty") and Phoenix Indemnity Insurance Company
("Phoenix").
The Company was formed on February 25, 1999 in conjunction with a plan of
conversion (the "Conversion") of the former The Millers Mutual Fire Insurance
Company ("Mutual"). On the same date, the Company formed a wholly-owned
subsidiary, Trilogy Holdings, Inc. ("Trilogy"). Pursuant to the Conversion
which became effective on April 21, 1999, Mutual was converted from a mutual
property and casualty insurance company to a stock property and casualty
insurance company and renamed Millers Insurance Company. Immediately
thereafter, all of the initial shares of common stock of Millers were
exchanged for shares of the Company, and Millers became a wholly-owned
subsidiary of Trilogy.
Millers' wholly-owned subsidiaries are Millers General Agency, Inc.
("General") and Millers Holding Corporation, Inc. ("Holding"), a downstream
holding company. Holding owns 100% of the outstanding common stock of The
Millers Direct Insurance Company ("Direct"), an inactive Texas property and
casualty insurer, and 99.5% of the outstanding common stock of Casualty.
Millers and Casualty are property and casualty insurance companies domiciled
in the state of Texas and licensed to write business in 39 and 27 states,
respectively.
In June 1999, the Company established Financial & Actuarial Resources,
Inc. ("FAR") and Effective Litigation Management, Inc. ("ELM") to
provide financial and actuarial and litigation services, respectively.
FAR and ELM were inactive during 1999.
Effective September 1, 1999 the Company entered into a stock purchase
agreement (the "Purchase Agreement") dated as of September 17, 1999, with the
shareholders of Phoenix, pursuant to which the Company agreed to acquire from
such shareholders all of the outstanding capital stock of Phoenix for
approximately $25 million in cash. Phoenix is a property and casualty
insurance company domiciled in the state of Arizona and licensed to write
business in 24 states. The acquisition was funded principally through a
revolving line of credit from a bank and cash.
The acquisition was accounted for using the purchase method of accounting
and, accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based on their relative fair market values.
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
As of the acquisition date, assets acquired and liabilities assumed were as
follows (in thousands):
Purchase price $ 25,364
Fair values of net assets acquired:
Tangible assets 56,071
Liabilities (40,958)
15,113
Goodwill and other intangible assets $ 10,251
Unaudited pro forma data reflecting results of the Company as if the
acquisition was effective at January 1, 1998 are as follows (in thousands,
except share date):
December 31,
----------------------
1999 1998
Total revenues $ 145,828 $ 142,580
========= =========
Operating loss $ (14,538) $ (23,601)
========= =========
Net income (loss) $ (11,714) $ 590
========= =========
Loss per common share after Conversion:
Basic and diluted $ (106.64)
=========
Earnings (loss) per common share:
Basic and diluted $ (113.44) $ 5.71
========= =========
Weighted average common shares:
Basic and diluted 103,267 103,267
========= =========
Pro forma results are unaudited and are based on historical results. Pro
forma results do not reflect any synergies that might be achieved from
combined operations and, therefore, in management's opinion, are not
indicative of what actual results would have been if the acquisition had
occurred at January 1, 1998. In addition, such pro forma results are not
intended to be a projection of future results.
The operating results of the acquired business are included from September
17, 1999, the date of the acquisition.
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
Summary of Significant Accounting Policies
The accompanying consolidated financial statements are presented in
conformity with generally accepted accounting principles ("GAAP"). These
accounting principles differ in certain respects from accepted accounting
practices prescribed or permitted by the insurance departments of the states
of which the Company's insurance subsidiaries are domiciled.
Principles of Consolidation - The consolidated financial statements include
the financial statements of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Since August 1997 the Company's investment in INSpire Insurance Solutions,
Inc. ("INSpire") has been accounted for using the equity method.
Use of Estimates - The preparation of financial statements in accordance with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. The most significant of
estimates include those used in determining deferred policy acquisition costs
and reserves for losses and loss adjustment expenses. Actual results could
differ from those estimates.
Investments - Debt and equity securities and other investments are classified
as available for sale and are carried at estimated fair values with
unrealized holding gains and losses net of income tax effects reported as a
separate component of equity until realized. Realized gains and losses upon
disposition of securities are determined by using the specific identification
method.
Cash and Cash Equivalents - The Company considers all investments with
maturities at acquisition of three months or less to be cash equivalents.
Cash equivalents consist primarily of amounts invested in overnight
repurchase agreements in connection with money market arrangements.
Deferred Policy Acquisition Costs - Acquisition costs such as commissions,
premium taxes and certain other expenses which vary with and are directly
related to the production of business, are deferred and amortized over the
effective period of the related insurance policies. The method followed in
computing deferred policy acquisition costs limits the amount of such
deferred costs to their estimated realizable value, which gives effect to
premiums to be earned, loss and loss adjustment expenses and certain other
maintenance costs expected to be incurred as the premiums are earned. To the
extent that deferred policy acquisition costs are not realizable, the
deficiency is charged to income currently.
Reinsurance Receivables - Reinsurance is commonly utilized within the
industry as a means of risk-sharing, and the Company is involved in many
treaties and facultative agreements for different lines of business. The
reinsuring companies are obligated to the Company to the extent of the
reinsured portion of the underlying risks. The amounts for ceded losses, loss
adjustment expenses and unearned premiums represent a continuing liability
for the Company in the event that reinsurers are unable to meet their
obligations under the reinsurance agreements.
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
Reserve for Losses and Loss Adjustment Expenses - The reserve for unpaid
losses and loss adjustment expenses is based on aggregate case basis
estimates for reported losses and estimates of incurred but not reported
losses based on past experience. Such reserve is based upon estimates and,
while management believes that the amount is fairly stated, the ultimate
liability may vary from the amount provided. The methods used to make such
estimates and to establish the resulting liability are continually reviewed
and any adjustments to these methods are reflected in current operations.
Premiums and Commissions - Premiums are earned on a pro rata basis over the
terms of the policies. Unearned premiums represent the portion of premiums
written that relates to the unexpired terms of the policies in force. Earned
premiums include amounts received relating to assumed reinsurance and are
stated net of reinsurance ceded.
Property and Equipment - Property and equipment are stated at cost less
accumulated depreciation. Depreciation and amortization are computed using
the straight-line method with estimated useful lives ranging from 5 to 7
years for furniture, equipment, and automobiles.
Federal Income Taxes - Deferred taxes are provided for the tax effects of
expected future tax consequences of temporary differences between the
carrying amounts and tax bases of the assets and liabilities.
Net Income (Loss) Per Share - Basic net income (loss) per common share is
computed based upon net income (loss) divided by the weighted average number
of common shares outstanding during each period. Diluted net income (loss)
per common share is computed based upon net income (loss) divided by the
weighted average number of common shares outstanding during each period
adjusted for the effect of dilutive potential common shares calculated using
the treasury stock method. The weighted average number of shares outstanding
(basic) at December 31, 1999 was 103,267. There were no dilutive potential
common shares at December 31, 1999.
Pensions - Amounts reported for pensions are based upon estimates as
calculated by consulting actuaries. While management believes the amount is
fairly stated, the ultimate liability may vary from the amount provided.
Reclassifications - Certain reclassifications have been made to the 1998 and
1997 consolidated financial statements to conform to the 1999 presentation.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards ("SFAS") Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" - SFAS No. 133
establishes standards for derivative instruments and hedging activities. The
following items are the main requirements in this Statement: (1) all
derivatives will be reported in the financial statements at their fair value;
(2) gains and losses as a result of changes in the fair values of derivatives
will be reported as an increase or decrease in net income if the derivatives
do not meet certain criteria to qualify for hedge accounting; (3) gains or
losses on derivatives that qualify for hedge accounting generally will have
little or no net effect on net income, and net income will be affected only
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
if the hedge is not fully effective; and (4) derivatives may be designated as
fair value hedges (of risks related to firm commitments). Gains or losses on
fair value hedges will have little or no effect on equity. Gains or losses on
cash flow hedges will be recognized immediately when the forecasted
transaction affects earnings. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000. The Company does not expect the adoption of
SFAS No. 133 will have a material impact on its consolidated financial
statements because the Company does not currently hold any derivatives.
Statement of Position ("SOP") 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments" - SOP 97-3 provides guidance
for accruing liabilities for guaranty fund-type assessments. Assessments
covered by this statement include any charge mandated by statute or other
regulatory authority that is related directly or indirectly to underwriting
activities (except for income taxes and premium taxes). The statement
specifies that the accrual of an assessment depends on the type of assessment
and the cause that obligates an insurer to pay the assessment. SOP 97-3 is
effective in 1999. Adoption did not have a material effect on the Company's
consolidated financial statements.
SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use"- SOP 98-1 establishes criteria for determining the
costs of developing internal use computer software that should be expensed
immediately and that which should be capitalized and amortized over the
estimated useful life of the software. SOP 98-1 states that external direct
costs of materials and services (i.e., consulting and other professional
fees) and payroll and payroll-related costs for employees who are directly
associated with and who devote time to the internal use computer software
project should be capitalized as a long-lived asset. General and
administrative, overhead, and training costs are considered to be period
costs that should be expensed as incurred. SOP 98-1 is effective in 1999.
Adoption did not have a material effect on the Company's consolidated
financial statements.
SOP 98-5, "Reporting on the Costs of Start-Up Activities" - SOP 98-5
establishes criteria for determining the costs of and the accounting for
start-up activities. Start-up activities are defined as one-time costs
relating to the opening of a new facility, introducing a new product or
service, conducting business with a new class of customer, initiating a new
process in an existing facility or commencing some new operation. The
statement indicates that all start-up costs, as defined above, are to be
expensed as they are incurred. All costs not defined above as startup costs
(e.g., organizational costs) are not addressed by this statement. SOP 98-5 is
effective in 1999. Adoption did not have a material effect on the Company's
consolidated financial statements.
SOP 98-7, "Deposit Accounting: Accounting for Insurance and Reinsurance
Contracts That Do Not Transfer Insurance Risk" - SOP 98-7 specifies the
appropriate accounting for insurance and reinsurance contracts that do not
transfer insurance risk. The statement does not apply to long- duration life
insurance contracts. Insurance risk entails both timing and underwriting
risks. The appropriate accounting depends on whether the insurance or
reinsurance contract transfers significant timing risk, underwriting risk,
neither timing risk nor underwriting risk, or has indeterminate risk. SOP
98-7 is effective for fiscal years beginning after June 15, 1999. Adoption is
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
not expected to have a material effect on the Company's consolidated
financial statements.
Statutory Pronouncements and Developments
NAIC Codification - In March 1998, the National Association of Insurance
Commissioners ("NAIC") adopted the Codification of Statutory Accounting
Principles (the "Codification"). The Codification, which is intended to
standardize regulatory accounting and reporting for the insurance industry,
is proposed to be effective January 1, 2001. However, statutory accounting
principles will continue to be established by individual state laws and
permitted practices. The Company has not finalized the quantification of the
effects of the Codification on its statutory financial statements.
2. PRO FORMA FINANCIAL INFORMATION
The following pro forma information for the years ended December 31, 1999,
1998 and 1997 gives effect to the Conversion as if it had occurred on January
1, 1997:
1999 1998 1997
Net income (loss) $(11,519,156) $ 1,702,798 $ 1,287,483
Pro forma adjustment 1,037,677 1,203,510 597,558
------------ ------------ ------------
Pro forma net income (loss) $(10,481,479) $ 2,906,308 $ 1,885,041
============ ============ ============
Pro forma earnings (loss) per
common share -
basic and diluted $ (101.50) $ 28.14 $ 18.25
============ ============ ============
The pro forma adjustment assumes all Conversion expenses were incurred prior
to January 1, 1997.
The pro forma financial information above is used to present comparative
earnings per common share amounts for the years ended for December 31, 1999,
1998 and 1997. Net losses after Conversion and net losses per common share
after Conversion on the consolidated statements of operations reflect net
losses and net losses per common share for the period from April 21, 1999,
the effective date of the Conversion, through December 31, 1999.
3. INVESTMENTS
Net investment income for the years ended December 31 is as follows:
1999 1998 1997
Gross investment income:
Debt securities $4,976,512 $4,748,630 $4,035,942
Equity securities 781,851 961,624 1,190,096
Other investments 1,368,019 434,765 273,504
Cash and cash equivalents 38,465 238,686 992,756
Premium notes 111,907
---------- ---------- ----------
Total investment income 7,164,847 6,383,705 6,604,205
Less investment expenses 1,868,145 2,795,286 1,614,144
---------- ---------- ----------
Net investment income $5,296,702 $3,588,419 $4,990,061
========== ========== ==========
The cost or amortized cost, gross unrealized gains and losses, and estimated
fair value of investments in available-for-sale securities as of December 31,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
December 31, 1999
-----------------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Debt securities:
U. S. Treasury securities
and obligations of
U. S. government
agencies $13,672,687 $ 7,113 $ 108,162 $13,571,638
Obligations of states and
political subdivisions 15,939,129 26,905 833,602 15,132,432
Public utilities 786,657 22,737 809,394
Corporate securities 26,855,739 135,975 1,120,306 25,871,408
Mortgage-backed
securities 28,683,118 29,976 958,124 27,754,970
----------- ----------- ----------- -----------
Total debt securities $85,937,330 $ 222,706 $ 3,020,194 $83,139,842
=========== =========== =========== ===========
Equity securities:
Preferred stocks $14,737,419 $ 258,302 $ 612,412 $14,383,309
Common stocks 19,133,401 411,618 6,585,685 12,959,334
----------- ----------- ----------- -----------
Total equity securities $33,870,820 $ 669,920 $ 7,198,097 $27,342,643
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
<S> <C> <C> <C> <C>
Debt securities:
U. S. Treasury
securities and
obligations of U. S
government agencies $ 5,573,286 $ 293,236 $ -- $ 5,866,522
Obligations of
states and political
subdivisions 8,436,367 180,415 73,030 8,543,752
Public utilities 776,345 75,146 851,491
Corporate securities 29,207,318 3,157,456 2,219,838 30,144,936
Mortgage-backed
securities 27,232,808 783,032 102,853 27,912,987
----------- ----------- ----------- -----------
Total debt securities $71,226,124 $ 4,489,285 $ 2,395,721 $73,319,688
=========== =========== =========== ===========
Equity securities:
Preferred stocks $21,234,954 $ 686,687 $ 1,046,002 $20,875,639
Common stocks 18,519,666 967,728 5,284,333 14,203,061
----------- ----------- ----------- -----------
Total equity securities $39,754,620 $ 1,654,415 $ 6,330,335 $35,078,700
=========== =========== =========== ===========
</TABLE>
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
Property and casualty insurance companies are required to maintain assets
with state regulatory authorities. Such assets are included as components of
debt securities and have an aggregate market value of $12,254,500 and
$8,538,967 at December 31, 1999 and 1998, respectively.
The amortized cost and estimated fair value of debt securities at December
31, 1999, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without penalties.
December 31, 1999
-------------------------
Amortized Estimated
Cost Fair Value
Due in one year or less $ 5,978,775 $ 5,915,478
Due after one year through five years 21,238,961 20,446,803
Due after five years through ten years 7,301,216 6,794,839
Due after ten years 22,735,260 22,227,752
Mortgage-backed securities 28,683,118 27,754,970
Total $85,937,330 $83,139,842
Exclusive of the proceeds from the sale of INSpire common stock in 1998 and
1997, proceeds from sales of investments during 1999, 1998 and 1997 were
$68,751,136, $50,486,691 and $45,830,241, respectively. Exclusive of the gain
on sale of INSpire common stock in 1998, gross gains of $4,731,717,
$8,552,516 and $3,469,161 and gross losses of $2,912,855, $977,271 and
$632,374 were realized on investment sales for the years ended December 31,
1999, 1998 and 1997, respectively.
4. INVESTMENT IN AFFILIATE
During May 1997, the Company's board of directors approved a plan to divest,
through an initial public offering of common stock, the majority of its
ownership interest in INSpire, a publicly traded corporation which provides
outsourcing services and software and software services to the property and
casualty insurance industry (see Note 20).
In August 1997, INSpire made an initial public offering of common stock and
the Company sold 3,133,750 shares for $34,029,819. In March 1998, INSpire
made a secondary public offering of common stock, and the Company sold
695,000 shares for $20,443,950. The excess of the proceeds received from the
sale over the book value of the shares sold has been included in the
consolidated statement of operations for 1998 and 1997. The Company's
remaining 24% ownership interest in INSpire had a fair value in excess of $21
million at December 31, 1999. The calculated fair value is based on a closing
market quotation at December 31, 1999 and is not necessarily indicative of
the amount that could be realized upon sale.
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
Condensed financial information of INSpire as of December 31 and for the
years then ended is as follows (in thousands):
1999 1998
Balance Sheet Data:
Current assets $ 61,579 $ 76,983
Property and equipment 14,180 11,825
Other assets 56,270 44,000
--------- ---------
$ 132,029 $ 132,808
========= =========
Current liabilities $ 25,172 $ 8,597
Noncurrent liabilities 2,386 3,866
Shareholders' equity 104,471 120,345
--------- ---------
$ 132,029 $ 132,808
========= =========
Earnings data:
Revenue $ 140,558 $ 87,179
Operating income (loss) $ (25,427) $ 15,601
Net income (loss) $ (19,688) $ 11,570
The Company's share of the undistributed earnings (loss) of INSpire for the
year ended December 31, 1999 and 1998 was approximately ($3,912,517) and
$1,659,000, respectively.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has estimated the fair value of financial instruments as of
December 31, 1999 and 1998 using available market information and appropriate
valuation methodologies. However, considerable judgment is required to
interpret market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
the Company could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect
on fair value amounts.
The Company's financial instruments include: debt securities, equity
securities, other investments, cash and cash equivalents, premiums receivable
and unearned premiums.
The Company has estimated that the carrying amounts of debt, equity, and
other investment securities approximate fair value as all investments have
been classified as available-for-sale. Fair values are based on quoted market
prices or dealer quotes. The fair value and carrying value of the Company's
available for sale investments was $110,482,485 and $108,398,388 as of
December 31, 1999 and 1998, respectively. The Company has estimated that the
carrying amounts of cash and cash equivalents, premiums receivable and
unearned premiums are considered a reasonable estimate of their fair value
based on the short maturities of such instruments. The Company has estimated
that the carrying amount of the revolving credit facility approximates its
fair value because the debt bears interest at a variable rate based on LIBOR.
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
6. PREMIUMS RECEIVABLE
At December 31, 1999 and 1998, premiums receivable were composed of the
following:
1999 1998
Agents' balances $20,388,196 $16,549,642
Direct bill receivables 11,521,350 10,811,808
Premium notes receivable 120,535 125,000
----------- -----------
Subtotal 32,030,081 27,486,450
Allowance for doubtful accounts 450,000 450,000
----------- -----------
Totals $31,580,081 $27,036,450
=========== ===========
7. DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs ("DPAC") and the components of the change
in DPAC were as follows:
Years Ended December 31,
--------------------------------------------
1999 1998 1997
Balance, beginning of year $ 3,983,812 $ 5,872,320 $ 5,644,096
Change in balance:
Deferrals 32,019,084 33,458,788 33,596,000
Amortization 27,644,207 (33,917,415) (30,520,000)
Premium deficiency (1,429,881) (2,847,776)
------------ ------------ ------------
Net change 4,374,877 (1,888,508) 228,224
------------ ------------ ------------
Balance, end of year $ 8,358,689 $ 3,983,812 $ 5,872,320
============ ============ ============
8. PROPERTY AND EQUIPMENT
Property and equipment are carried at cost, less allowances for depreciation,
and consist of the following at December 31, 1999 and 1998:
1999 1998
Leasehold improvements $ 17,922 $ --
Furniture and equipment 13,865,823 9,440,111
Automobiles 93,691 105,162
----------- -----------
13,977,436 9,545,273
Accumulated depreciation 5,851,664 2,930,504
----------- -----------
Property and equipment, net $ 8,125,772 $ 6,614,769
=========== ===========
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
Depreciation expense was $2,180,447, $1,345,410 and $2,261,746 for 1999, 1998
and 1997, respectively. In November 1998, Mutual sold its office building for
$8 million (see Note 14).
9. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the reserve for losses and loss adjustment expenses is summarized
as follows (in thousands):
1999 1998 1997
Balance at January 1 $ 103,708 $ 81,431 $ 60,626
Less reinsurance receivables 47,680 33,310 29,417
--------- --------- ---------
Net balance at January 1 56,028 48,121 31,209
Reserves acquired in Phoenix
acquisition 24,017
Incurred related to:
Current year 83,102 71,385 72,894
Prior years (2,634) 6,576 12,815
--------- --------- ---------
Total incurred 80,468 77,961 85,709
--------- --------- ---------
Paid related to:
Current year 49,802 38,967 44,266
Prior years 31,337 31,087 24,531
--------- --------- ---------
Total paid 81,139 70,054 68,797
--------- --------- ---------
Net balance at December 31 79,374 56,028 48,121
Plus reinsurance receivables 43,379 47,680 33,310
--------- --------- ---------
Balance at December 31 $ 122,753 $ 103,708 $ 81,431
========= ========= =========
As a result of changes in estimates of insured events in prior years, the
provision of claims and claim adjustment expenses decreased by approximately
$1.5 million in 1999 and increased approximately $6.6 million in 1998 due
primarily to changes in anticipated losses on the commercial auto line of
business.
10. REINSURANCE
The Company limits the maximum net loss on any one incident by reinsuring
(ceding) certain levels of risks principally through excess- of-loss and
quota share agreements with other insurers or reinsurers, either on an
automatic basis under general reinsurance contracts or on an individual risk
basis. Reinsurance contracts do not relieve the Company from obligations to
its policyholders. In the event that the reinsuring companies are unable to
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
meet their obligations under reinsurance agreements significant losses to the
Company could occur. Management believes that all amounts currently due from
reinsurers are fully collectible.
Millers has an agreement with a general agency to write private passenger
auto business in the state of California. This business was 75% reinsured
with Vesta Fire Insurance Company for the period from January 1997 through
March 1997, 65% reinsured with Kemper Reinsurance Company ("Kemper") for the
period from April 1997 to March 1998 and 55% of this business was reinsured
with Kemper from April 1998 to March 1999. In April 1999, Millers stopped
reinsuring such business. During 1999, 1998 and 1997, the Company wrote
approximately $25 million, $38 million and $53 million, respectively, of
premiums under this agreement.
For the years ended December 31, 1999, 1998 and 1997, amounts assumed and
ceded under reinsurance agreements were as follows (in thousands):
December 31, 1999
------------------------------------------
Direct Assumed Ceded Net
Premiums written $114,440 $ 40,331 $(49,316) $105,455
Earned premium 131,657 35,045 (61,304) 105,398
Losses and loss adjustment
expenses incurred 99,203 26,626 (45,360) 80,469
December 31, 1998
------------------------------------------
Direct Assumed Ceded Net
Premiums written $144,620 $ 18,337 $(92,330) $ 70,627
Earned premium 159,174 16,679 (90,118) 85,735
Losses and loss adjustment
expenses incurred 140,260 16,397 (78,696) 77,961
December 31, 1997
------------------------------------------
Direct Assumed Ceded Net
Premiums written $187,519 $ 4,552 $(86,758) $105,313
Earned premium 170,840 2,517 (74,707) 98,650
Losses and loss adjustment
expenses incurred 130,239 1,849 (46,379) 85,709
The maximum amount of unearned premium which would have been due from or to
the Company if all of the Company's reinsurance had been canceled as of
December 31, 1999 and 1998 would be as follows:
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
1999 1998
Assumed unearned premium reserve payable $ 8,988,000 $ 3,574,000
Ceded unearned premium reserve receivable 11,817,000 21,762,000
The Company has unsecured reserves for loss and loss adjustment expenses,
unearned premiums ceded, and contingent commissions, which are significant in
relation to retained earnings, with the following reinsurers:
1999 1998
AXA Reassurances $10,861,000 $ 9,464,000
Chartwell Reinsurance Company 2,801,000 2,598,000
First Excess and Reinsurance Company 3,454,000 2,904,000
Hartford Fire Insurance Company 1,353,000 1,631,000
Instant Auto Insurance Company 2,541,000 --
Insurance Corporation of Hanover 2,788,000 6,986,000
Kemper Reinsurance Company 8,397,000 14,192,000
MIC Re Corporation 2,621,000 2,416,000
PMA Reinsurance Company 4,920,000 2,688,000
Reliance Insurance Company 1,960,000 1,075,000
St. Paul Fire & Marine Insurance Company 1,396,000 790,000
Swiss Reinsurance America Corporation 1,076,000 955,000
Toa-Re Insurance Company of America 1,059,000 281,000
Unionamerica Insurance Company Limited 1,099,000 273,000
Winterthur Reinsurance Corporation of 1,293,000 537,000
America
11. REVOLVING CREDIT FACILITY
Effective September 17, 1999, the Company entered into a revolving line of
credit agreement (the "Loan Agreement") with a bank which expires June 30,
2005. At December 31, 1999, the Company had advances of $20,000,000
outstanding under the Loan Agreement. Borrowings under the Loan Agreement
bear interest at a variable rate based on either the bank prime rate or LIBOR
as designated by the Company (8.6% at December 31, 1999). No amounts are
currently due under the Loan Agreement, however, borrowings under the Loan
Agreement are subject to a declining maximum amount which was $30,000,000 at
December 31, 1999. Future amounts available under the Loan Agreement are as
follows:
Present through June 30, 2001 $ 30,000,000
July 1, 2001 through June 30, 2002 26,000,000
July 1, 2002 through June 30, 2003 21,000,000
July 1, 2003 through June 30, 2004 15,000,000
July 1, 2004 through June 30, 2005 9,000,000
In February 2000, the Company made a principal payment to the bank in the
amount of $1,550,000.
At December 31, 1999, certain debt covenants were not met with respect to the
Loan Agreement. However, on ________, the Company obtained a waiver from the
bank stating _____________________.
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
The Company has other revolving line of credit facilities available for
borrowings of up to $14,000,000 with certain banks. Interest is payable
monthly at rates ranging from the interbank borrowing rate to bank prime
(5.92% at December 31, 1999). The Company had $3,600,000 and $900,000 of
outstanding borrowings on the line of credit at December 31, 1999 and 1998,
respectively, which were repaid in full on January 3, 2000 and January 4,
1999. These outstanding borrowings were included in other liabilities.
Total interest expense for the year ended December 31, 1999 was $673,418
while interest expense for 1998 and 1997 was not significant.
12. LOSSES TAXES
The Company files a consolidated income tax return with its eligible
subsidiary companies. Income tax expense (benefit) consists of the following
components for the years ended December 31:
1999 1998 1997
Current $ -- $ 186,705 $ 1,124,534
Deferred (5,873,428) 836,000 (535,000)
----------- ----------- -----------
Provision for income taxes
(benefit) $(5,873,428) $ 1,022,705 $ 589,534
=========== =========== ===========
The provision for losses taxes differed from the amounts computed by
multiplying the applicable U. S. statutory federal losses tax rate of
35% to pretax losses from continuing operations as a result of the
following differences:
1999 1998 1997
Computed tax expense (benefit)
at statutory rate $(6,084,298) $ 953,926 $ 657,000
Increase/(decrease) in tax
resulting from:
Recovery of minimum tax credit
carryforwards (308,000) (1,200,000)
Change in valuation allowance 308,000 1,200,000
Dividends received deduction (161,609) (194,744) (160,000)
Tax exempt interest (293) (7,000)
Other 372,479 263,816 99,534
----------- ----------- -----------
Provision for income taxes
(benefit) $(5,873,428) $ 1,022,705 $ 589,534
=========== =========== ===========
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
The tax effect of temporary differences are separately calculated and
recorded when such differences arise. A valuation allowance, reducing any
recognized deferred tax asset, is recorded if it is determined that it is
more likely than not that such deferred tax asset will not be realized. The
Company established a valuation allowance of $1,200,000 and increased the
valuation allowance by $308,000 at December 31, 1998 and December 31, 1999,
respectively, as it determined that it is more likely than not that the
Company will not utilize all its tax benefit carryforwards and realize the
tax benefit of its deferred tax assets. The benefit will be recognized when
management believes that it is more likely than not that the portion of the
deferred losses tax asset is realizable.
The sources of deferred losses tax expense (benefit) and their tax effects
were as follows (in thousands):
1999 1998 1997
Reserve for losses and loss
adjustment expenses $ 6,429 $(21,080) $ (8,322)
Tax credit and net operating loss
carryforwards (4,710) (1,200)
Deferred policy acquisition costs 1,583 (711) 80
Reinsurance receivables/payables (3,879) 21,476 4,198
Premiums receivable (4,328) 377 4,340
Property and equipment (499) 170 (128)
Change in valuation allowance 308 1,200
Other (777) 604 (703)
-------- -------- --------
Deferred income tax expense (benefit) $ (5,873) $ 836 $ (535)
======== ======== ========
The sources of these temporary differences and the estimated tax effect
(using the federal losses tax rate of 35%) of each are as follows (in
thousands):
1999 1998
Deferred tax assets:
Discounted losses and loss adjustment expense
reserves and unearned premiums $ 37,628 $ 44,057
Tax credit and net operating loss
carryforwards 6,710 2,000
Reinsurance payable 546 5,117
Unrealized holding losses on investments 3,440 904
Other deferred assets 377 87
Less valuation allowance (1,508) (1,200)
-------- --------
Total deferred tax assets 47,193 50,965
Deferred tax liabilities:
Deferred policy acquisition costs 2,926 1,344
Reinsurance receivables 32,183 40,633
Premiums receivable 389 4,717
Investments 1,042 615
Property and equipment 501 1,000
Other deferred tax liabilities 190 1,104
-------- --------
Total deferred tax liabilities 37,231 49,413
-------- --------
Net deferred tax asset $ 9,962 $ 1,552
======== ========
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
The Company has alternative minimum tax credit carryforwards of approximately
$2.3 million which have no expiration.
13. DIVIDEND RESTRICTIONS
Dividends from the insurance subsidiaries of the Company are regulated by the
state regulatory authorities of the states of which each subsidiary is
domiciled. The laws of such states generally restrict dividends from
insurance companies to certain statutorily approved limits. During 1999,
dividends from insurance subsidiaries to the Company without further
insurance department approval is limited to approximately $5,000,000.
The Company does not anticipate paying dividends to holders of its Common
Stock. In addition, the Loan Agreement places certain restrictions on the
dividends the Company can pay. Under the Loan Agreement, the Company may
not declare and pay cash dividends in any year in excess of the Company's
Net Income (as defined in the Loan Agreement) for the preceding year. The
Company, though, may pay dividends by issuing additional shares of Common
Stock.
14. STATUTORY FINANCIAL INFORMATION
Insurance subsidiaries of the Company are required to file statutory
financial statements with state insurance regulatory authorities. Accounting
principles used to prepare these statutory financial statements differ from
GAAP. Consolidated net losses and shareholders' equity on a statutory basis
for the insurance subsidiaries were as follows:
<TABLE>
<CAPTION>
Net Income (Loss) Shareholders' Equity
Year Ended December 31, at December 31,
---------------------------------------- ---------------------------
1999 1998 1997 1999 1998
<S> <C> <C> <C> <C> <C>
Insurance
subsidiaries $(15,707,280) $ 2,943,051 $ 918,408 $ 60,670,131 $125,314,219
</TABLE>
The insurance subsidiaries of the Company prepare their statutory financial
statements in accordance with accounting principles and practices prescribed
or permitted by the insurance departments of the states in which they are
domiciled. Prescribed statutory accounting practices include a variety of
publications of the NAIC, as well as state laws, regulations and general
administrative rules. Permitted statutory accounting practices encompass all
accounting practices not so prescribed.
15. RELATED PARTY TRANSACTIONS
The Company received policy and claims administration services, data
processing services and software services from INSpire under the terms of
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
various agreements. Total fees paid were approximately $25,998,000,
$26,366,000 and $18,864,000 in 1999, 1998 and 1997, respectively.
From July 1, 1995 through December 31, 1997, the Company had various
agreements with INSpire to provide management and administrative services.
Total fees earned by the Company in 1997 were approximately $1,290,000.
Effective January 1, 1998, a new agreement was entered into, whereby the
Company receives benefits administration services from INSpire for a monthly
fee of $15,000. Total fees paid under this contract were $180,000 in both
1999 and 1998.
There was a net payable to INSpire of approximately $5,738,000 and $2,466,000
at December 31, 1999 and 1998, respectively.
The Company utilizes an agency sales force that is provided by a company
associated with a member of the Board of Directors. In 1999, 1998 and 1997,
commissions of $68,121, $108,681 and $142,790, respectively, were paid to the
agency on premiums written of $468,057, $829,755 and $815,124, respectively.
At December 31, 1999 and 1998, no significant amounts were due from the
agency.
In November 1998, the Company sold its home office building to a third- party
controlled by a member of the Board of Directors for $8 million. The Company
recognized a gain of approximately $1.6 million on the sale. Additionally,
the Company entered into a one year lease agreement with the purchaser for a
portion of the building. Rental expense incurred under such agreement for
1999 and 1998 was $242,000 and $22,000, respectively. In November 1999, upon
expiration of the lease agreement, the Company relocated its home office.
In September 1999, the Company entered into an asset and employment transfer
agreement with INSpire, pursuant to which INSpire agreed to acquire from the
Company certain assets and employees used in the conduct of Phoenix's policy
and claims administration for a purchase price of $3,500,000. Such agreement
is pending necessary regulatory authority approval as of December 31, 1999.
16. EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution profit sharing plan whereby all
employees are eligible to participate on the first day of the quarter
following their employment date and are considered fully vested after five
years of service. Participants are permitted to contribute 1% to 15% (not to
exceed $10,000 in 1999 and 1998 and $9,500 in 1997) of their annual
compensation on a tax deferred basis and the Company will match 50% of the
first 6% contributed by the employee. Employer contributions were
approximately $62,000 in 1999, $85,000 in 1998 and $167,000 in 1997.
Substantially all of the Company's employees are covered by a qualified,
non-contributory defined benefit pension plan (the "Pension Plan") which
provides retirement, death and disability benefits for full-time employees
completing at least 1,000 hours of service during any 12-month period. The
funding policy is to contribute such amounts and at such times as required to
maintain the qualified status of the Plan. No contributions were made to the
Plan in 1999, 1998 or 1997.
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
The following tables reconcile the beginning and ending balances of the
benefit obligation and the plan assets for the years ended December 31, 1999
and 1998:
1999 1998
Change in benefit obligation
Benefit obligation at beginning of
year $ 10,040,552 $ 10,072,417
Service cost 102,431 136,746
Interest cost 665,907 665,110
Actuarial (gain) loss (818,957) 181,245
Benefits paid (887,202) (1,014,966)
------------ ------------
Benefit obligation at end of year $ 9,102,731 $ 10,040,552
============ ============
Change in plan assets
Fair value of plan assets at beginning
of year $ 14,193,174 $ 11,832,685
Actual return on plan assets 2,536,905 3,375,455
Benefits paid (887,202) (1,014,966)
------------ ------------
Fair value of plan assets at end of
year $ 15,842,877 $ 14,193,174
============ ============
The following table sets forth the funded status of the plan, the amount not
recognized in the financial statements, and the recognized pension asset
(liability) as of December 31, 1999 and 1998:
1999 1998
Funded status $ 6,740,146 $ 4,152,622
Unrecognized net transition asset 547,880 604,189
Unrecognized net actuarial gain (6,014,534) (3,945,301)
Unrecognized prior service cost (791,316) (866,422)
----------- -----------
Prepaid (accrued) pension benefit (cost) $ 482,176 $ (54,912)
=========== ===========
The components of net periodic pension cost (benefit) for the year ending
December 31 are as follows:
1999 1998 1997
Service cost for benefits earned
during the period $ 102,431 $ 136,746 $ 302,705
Interest cost on projected
benefit obligation 665,907 665,110 659,985
Expected return on plan assets (1,104,954) (914,508) (771,940)
Amortization of unrecognized net
obligation and prior service
cost (200,472) (43,107) (19,941)
----------- ----------- -----------
Net periodic pension cost
(benefit) $ (537,088) $ (155,759) $ 170,809
=========== =========== ===========
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
The weighted average discount rate used in determining the actuarial present
value of the benefit obligations was 7.75% in 1999 and 6.75% in 1998 and
1997. The assumed rate of increase in future compensation levels used was 5%
in each year. The expected long-term rate of return on assets used was 8% for
each year.
17. SHAREHOLDERS' EQUITY
Common Stock - The holders of common stock will be entitled to vote as a
separate class and will be entitled to one vote for each share on all matters
voted upon by shareholders, except for the election of directors, and do not
have cumulative voting rights. The holders of common stock, Series A
Preferred Stock and other capital stock vote together as a single class to
elect the members of the Board of Directors. Subject to the rights of holders
of any outstanding shares of Preferred Stock, the holders of the common stock
will be entitled to such dividends as may be declared at the discretion of
the Board of Directors.
For the period from April 21, 1999 to April 21, 2002, in the event the
Company proposes to raise capital by the sale of common stock for cash in a
stock offering, the Company will conduct a one time subscription offering
pursuant to which the Company shall issue subscription rights to each common
stockholder to purchase shares of common stock in such stock offering.
For the period from April 21, 1999 to the earlier of (i) April 21, 2002 or
(ii) the effective date of an initial public offering, transfer of all or any
part of a common shareholder's shares, either directly or indirectly, or any
right or interest therein, is subject to the following restrictions: If a
common shareholder receives an offer to transfer any or all of the shares
then owned by the shareholder, the shareholder must offer in writing such
shares to the Company at the same price and on substantially the same terms
as contained in the offer. The Company has 35 days from the date of receipt
of written notice of the offer from the shareholder to accept such offer. If
the Company proposes to accept such offer, the Company shall inform the
shareholder in writing of its acceptance and the current book value per share
of the shares. The shareholder will then have seven days after receiving the
Company's written notice of acceptance to notify the Company whether the
shareholder elects to sell the shares to the Company. If the shareholder
elects not to sell the shares to the Company, the shareholder shall be deemed
to have withdrawn the shares from the offer. If the Company fails to accept
such offer within such 35-day period, the shareholder shall have 60 days to
consummate such transfer pursuant to the terms of the offer. If after 60 days
the shareholder has not consummated the transfer pursuant to the terms of the
offer, the Company's right of first refusal will again be in effect with
respect to all of such shareholder's shares.
Series A Preferred Stock - On April 21, 1999, the Board of Directors
authorized 200,000 shares of Series A Preferred Stock. The holder of the
Series A Preferred Stock will be entitled to one vote for each share and to
vote as a separate class on all matters voted upon by shareholders including,
but not limited to, a merger, consolidation, sale of all or substantially all
of the assets of the Company or any reclassification, stock split, or stock
dividend respecting the capital stock of the Company or any amendment to the
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
Articles of Incorporation of the Company. The holder of the Series A
Preferred Stock will vote together as a single class with the holders of the
common stock and other capital stock with respect to the election of the
members of the Board of Directors of the Company.
The holder of the Series A Preferred Stock shall be entitled to receive the
same per share amount of all cash and noncash dividends distributable to each
holder of common stock. The right of the holder of the Series A Preferred
Stock to receive dividend distributions declared by the Company shall be
senior to the right of the holders of Series B Preferred Stock (as defined
below) and of the holders of common stock to receive such dividend
distributions. The holder may, at any time, elect to convert any share of
Series A Preferred Stock held by it into one share of common stock. In the
event of the voluntary or involuntary liquidation, dissolution or winding up
of the Company, the holder shall be entitled to a payment of the greater or
$0.10 per share of Series A Preferred Stock or the liquidation distribution
attributable to the common stock, after payment or provision for the payment
of debts but before any distribution of assets to the holders of Series B
Preferred Stock or to the holders of common stock. Shares of Series A
Preferred Stock are not subject to any redemption provisions.
Series B Preferred Stock - On April 21, 1999, the Board of Directors
authorized 300,000 shares of Series B Preferred Stock, par value $1.00 per
share ("Series B Preferred Stock"), in connection with the adoption of the
Rights Agreement authorization and declaration of a dividend distribution of
one right ("Right") for each outstanding share of common stock under the
Rights Agreement. Each Right represents the right to purchase one
one-hundredth of a share of Series B Preferred Stock at a price of $31,
subject to adjustment. Each holder of Series B Preferred Stock will be
entitled to 100 votes for each share on all matters voted upon by the
shareholders, except as provided in the Articles of Incorporation of the
Company. Each share of Series B Preferred Stock will be entitled to a minimum
preferential quarterly dividend payment of the greater of: (i) $1.00 per
share or (ii) 100 times the dividend declared per share of common stock. Upon
any voluntary or involuntary liquidation, dissolution or winding up of the
Company, no distribution may be made to holders of common stock (or other
shares of capital stock ranking junior to Series B Preferred Stock) unless
the holders of Series B Preferred Stock have received an amount per share
equal to the greater of: (i) $100 per share, plus accrued and unpaid
dividends, or (ii) an aggregate amount per share equal to 100 times the
aggregate amount to be distributed per share to holders of common stock.
Shares of Series B Preferred Stock will not be subject to any redemption
provisions.
18. EMPLOYEE AND DIRECTOR STOCK OPTION PLAN
In April 1999, the Board of Directors adopted the Millers American Group,
Inc. 1999 Stock Option Plan (the "Stock Option Plan"). A total of 3,000,000
shares of common stock have been reserved for grants of incentive and
nonqualified options pursuant to the Stock Option Plan. Stock options are
issuable only to eligible officers, directors and employees. Options granted
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
will have six year terms and vest over a period of immediately to two years
of continued employment or service to the Company.
The fair market value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model using a risk-free interest rate
of 5.5% and an expected life of six years. No volatility factors of the
expected market price of the Company's common stock have been involved
because the Company was a private Company through the date of grant of all
options.
The following table summarizes the stock option activity under the Stock
Option Plan for the year ended December 31, 1999:
Exercise
Numer Price
of Shares per Share
Options granted on April 21, 1999 21,872 $ 721.49
Options forfeited 6,529 721.49
---------
Options outstanding at December 31, 1999 15,343
=========
Options exercisable at December 31, 1999 5,062
=========
Options available for grant at December 31, 1999 2,978,128
=========
The weighted average fair value of options granted during the year ended
December 31, 1999 was $171.65 per share.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB No. 25"), and related interpretations in
accounting for the Stock Option Plan, and, accordingly, no compensation
expense has been recognized. Had the Company implemented Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123"),the Company's compensation expense would have
increased by approximately $3.8 million and the Company's net loss after
Conversion and loss per common share after Conversion (basic and dilutive),
net of tax effects, would have been approximately $13.3 million and $129.23,
respectively, for the year ended December 31, 1999.
19. EMPLOYEE STOCK PURCHASE PLAN
In April 1999, the Board of Directors adopted the Employee Stock Ownership
Plan and Trust ("ESOP"). In April 1999, the ESOP purchased 675 shares of
Series A Preferred Stock of the Company for $499,500.
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
The purchase of shares was funded by a loan of $499,500 from Millers
Insurance and other subsidiaries of the Company to the ESOP. In return,
Millers received a note receivable, which was recorded as a reduction of
stockholders' equity. Such shares of Series A Preferred Stock were pledged by
the ESOP as collateral on the loan. The principal amount of the loan will be
due and payable in five annual installments of $100,000 on April 20 of each
of the years 2000 through 2004.
20. COMMITMENTS AND CONTINGENCIES
In the normal course of its operations, the Company has been named as
defendant in various legal actions, some of which are substantial in amount,
seeking payments for denied claims, and other punitive damages. Management
believes the ultimate liability, if any, resulting from the disposition of
these claims, will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
On December 3, 1999, a shareholder class action lawsuit was filed in
the United States District Court for the Northern District of Texas on
behalf of all purchasers of the Company's common stock during the
period between January 28, 1998 and October 14, 1999 (Southland
Securities Corporation et. al v. INSpire Insurance Solutions, Inc. et.
al. (7-99CV-243-R)). The named defendants include INSpire, certain
officers and directors of INSpire, and Millers Insurance. The
complaint alleges violations under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder
by making false and misleading statements and failing to disclose
material facts necessary in order to make the statements made, in light
of the circumstances under which they were made, no misleading. The
plaintiff seeks monetary damages and interest. Two additional
shareholder class actions lawsuits, nearly identical to the one
described above, have been filed against the same defendants in the
United States District Court for the Northern District of Texas: Larry
Altobell and Lawrence J. Miller et. al. v. INSpire Insurance Solutions,
Inc. et. al. (7-99CV-248-R) filed on December 16, 1999, and Stacy B.
and Rhonda K. Lofton et. al. v. INSpire Insurance Solutions, Inc. et.
al. (7-00CV-001-R) filed on January 3, 2000. Millers Insurance intends
to defend these suits vigorously in all aspects. However, the ultimate
outcome of this matter cannot presently be determined.
Through the pledge of a $1,700,000 certificate of deposit during 1995, the
Company guaranteed a bank loan of an unrelated third party. The pledge
expires in July 2000.
In April 1998, the Company pledged its 34.2% ownership in an equity basis
investee to a bank as collateral for investee's revolving line of credit
facility. This pledge was released in 1999.
The Company leases certain office space and equipment under operating leases
for periods ranging from one to ten years. Rental expense on operating leases
amounted to approximately $373,000 for the year ended December 31, 1999.
<PAGE>
PRELIMINARY DRAFT - INCOMPLETE - SUBJECT TO AMENDMENT
Rental expense was insignificant for the years ended December 31, 1998 and
1997. These leases generally contain optional renewal provisions for one or
more periods. Future annual minimum lease payments for each of the next five
years and in the aggregate are:
2000 $ 420,874
2001 458,832
2002 458,832
2003 458,832
2004 476,490
Thereafter 2,223,666
-----------
$ 4,497,526
===========
