<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c)
or Section 240.14a-12
ACCEL INTERNATIONAL CORPORATION
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(1)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
________________________________________________________________
2) Aggregate number of securities to which transaction applies:
________________________________________________________________
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on
which the filing fee is calculated and state how it was determined):
________________________________________________________________
4) Proposed maximum aggregate value of transaction:
$40,500,000
________________________________________________________________
5) Total fee paid:
$8,100
________________________________________________________________
[X] Fee paid previously by written preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid: ________________________________________
2) Form Schedule or Registration Statement No.: ___________________
3) Filing Party: __________________________________________________
4) Date Filed: ___________________________________________________
<PAGE> 2
ACCEL INTERNATIONAL CORPORATION
475 METRO PLACE NORTH, SUITE 100
DUBLIN, OHIO 43017
614-764-7000
December 18, 1997
Dear Stockholder:
On behalf of the Board of Directors, I cordially invite you to attend a
Special Meeting of Stockholders (the "Special Meeting") of ACCEL International
Corporation (the "Company"), to be held at 1:00 p.m., local time, on December
30, 1997, at Lane Executive Center Conference Room, Main Floor, 555 Metro Place
North, Dublin, Ohio. Formal notice of the Special Meeting was mailed on
December 5, 1997 to stockholders of record as of November 17, 1997. As provided
in such notice, the Company did not solicit proxies in connection therewith.
The Company's Board of Directors, however, is now soliciting proxies for use at
the Special Meeting and, accordingly, a Proxy Statement is attached hereto.
At the Special Meeting, you will be asked to approve and authorize (i) the
sale by the Company to Lyndon Insurance Group, Inc. and Lyndon Life Insurance
Company (collectively, "Lyndon") of all of the outstanding capital stock of the
Company's wholly owned subsidiaries, Acceleration Life Insurance Company,
Acceleration National Service Corporation and Dublin International Limited
(collectively, the "Target Corporations"), for the consideration and upon the
terms set forth in the Stock Acquisition Agreement dated October 20, 1997 by
and between the Company and Lyndon attached as Annex I to the accompanying
Proxy Statement (the "Stock Acquisition Agreement"), (ii) the sale by the
Company's wholly owned subsidiary, Acceleration National Insurance Company
("ANIC"), to Lyndon Property Insurance Company ("Lyndon Property"), of ANIC's
vehicle extended service contract business, for the consideration and upon the
terms set forth in the Asset Purchase Agreement dated October 20, 1997 among
Lyndon Property, the Company and ANIC attached as Annex II to the accompanying
Proxy Statement (the "Asset Purchase Agreement"), and (iii) certain
transactions related thereto (collectively, the "Transaction"). The Transaction
must be authorized by a resolution adopted by the holders of a majority of the
outstanding stock of the Company entitled to vote thereon. Stockholder
approval of the Transaction, however, is assured because all of the current
directors and executive officers of the Company, who together with their
affiliates may be deemed to be beneficial owners of a majority of the
outstanding stock of the Company entitled to vote thereon, have indicated that
they will vote in favor of the approval and authorization of the Transaction.
The Stock Acquisition Agreement and the Asset Purchase Agreement provide
that Lyndon and Lyndon Property shall initially pay the Company $40.5 million
in cash at the closing. Within 125 days after the closing, the purchase price
will be decreased by the amount, if any, by which the Target Corporations
combined GAAP stockholders' equity as of December 31, 1997 (the "Combined GAAP
Equity") is less than $31.6 million or, alternatively, in the event that the
Combined GAAP Equity is greater than $31.6 million, the purchase price will be
increased by the amount by which the Combined GAAP Equity exceeds $31.6
million. Accordingly, the exact amount of the consideration to be received by
the Company will not be known on the date of the Special Meeting. As of
September 30, 1997, the Combined GAAP Equity of the Target Corporations was
$32.185 million, which would result in a net purchase price of $41.085 million
in the event that the Combined GAAP Equity does not change.
The Company shall use a portion of the proceeds from the Transaction to
retire certain senior notes of the Company held by an unaffiliated company (the
"Senior Notes"). The Company will use the balance of the net proceeds to make a
capital contribution to ANIC, the Company's wholly-owned property and casualty
insurance subsidiary, and for general corporate purposes. Upon consummation of
the Transaction, the Company will cease to be engaged in the auto aftermarket
credit insurance and extended service contract businesses.
Your Board of Directors believes that the Transaction is in the best
interests of the Company and its stockholders because it will enable the
Company to retire its outstanding indebtedness under the Senior Notes and
<PAGE> 3
to use its remaining resources to seek to develop and expand its property and
casualty insurance business. The Board of Directors has unanimously approved
the Transaction and recommends that you vote FOR the proposal to approve and
authorize the Transaction. The Board's approval of the Transaction was based on
a number of factors described in the enclosed Proxy Statement, including the
opinion of CreditRe Corporation, an actuarial consulting firm engaged by the
Board, attached as Annex III to the accompanying Proxy Statement. The opinion
of CreditRe Corporation states that the consideration to be received by the
Company pursuant to the Stock Acquisition Agreement and the Asset Purchase
Agreement is fair and reasonable.
Details of the proposed Transaction and the other items of business
scheduled for the Special Meeting appear in the accompanying Proxy Statement.
Please give this material your careful attention.
Whether or not you plan to attend the Special Meeting, please complete,
sign and date the accompanying proxy card and return it in the enclosed prepaid
envelope. If you attend the Special Meeting, you may vote in person even if you
have previously returned your proxy card. Your prompt cooperation will be
greatly appreciated.
Sincerely yours,
/s/ Thomas H. Friedberg
Thomas H. Friedberg
Chairman of the Board,
President and Chief Executive Officer
<PAGE> 4
ACCEL INTERNATIONAL CORPORATION
475 METRO PLACE NORTH, SUITE 100
DUBLIN, OHIO 43017
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 30, 1997
FURNISHED BY THE BOARD OF DIRECTORS OF THE COMPANY
December 18, 1997
This proxy statement (the "Proxy Statement") is being furnished in
connection with the solicitation of proxies by the Board of Directors of ACCEL
International Corporation, a Delaware corporation (the "Company"), for use at a
special meeting of stockholders (the "Special Meeting") to be held on December
30, 1997, at Lane Executive Center Conference Room, Main Floor, 555 Metro Place
North, Dublin, Ohio, at 1:00 p.m., local time, and at any adjournments or
postponements thereof.
At the Special Meeting, the stockholders will be asked to consider and
vote upon the approval and authorization of (i) the sale by the Company to
Lyndon Insurance Group, Inc. and Lyndon Life Insurance Company (collectively,
"Lyndon") of all of the outstanding capital stock of the Company's wholly owned
subsidiaries, Acceleration Life Insurance Company ("ALIC"), Acceleration
National Service Corporation ("ANSC") and Dublin International Limited
("Dublin"), for the consideration and upon the terms set forth in the Stock
Acquisition Agreement dated October 20, 1997 by and between the Company and
Lyndon attached as Annex I hereto (the "Stock Acquisition Agreement"), (ii) the
sale by the Company's wholly owned subsidiary, Acceleration National Insurance
Company ("ANIC"), to Lyndon Property Insurance Company ("Lyndon Property"), of
ANIC's vehicle extended service contract business, for the consideration and
upon the terms set forth in the Asset Purchase Agreement dated October 20, 1997
among Lyndon Property, the Company and ANIC attached as Annex II hereto (the
"Asset Purchase Agreement"), and (iii) certain transactions related thereto
(collectively, the "Transaction").
The Transaction is subject to the approval of the holders of a majority of
the outstanding shares of Common Stock, $.10 par value, of the Company (the
"Common Stock"), entitled to vote thereon and to the satisfaction of certain
other conditions, including obtaining various regulatory approvals. Under
Delaware law, stockholders do not have dissenter's rights in connection with
the Transaction.
This Proxy Statement is first being mailed to stockholders on or about December
18, 1997.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
SUMMARY ............................................................... 1
Date, Time and Place of Special Meeting of Stockholders ........ 1
Record Date; Stockholders Entitled to Vote ..................... 1
Purpose of Special Meeting ..................................... 1
Vote Required .................................................. 1
Parties to the Transaction ..................................... 1
Terms of Transaction ........................................... 2
Use of Proceeds from Transaction ............................... 3
Operation of the Company After the Transaction ................. 3
Recommendation of the Board of Directors ....................... 3
Reasons for the Transaction .................................... 3
Opinion of Actuarial Consulting Firm ........................... 3
Federal Income Tax Consequences ................................ 4
Accounting Treatment ........................................... 4
No Dissenter's Rights .......................................... 4
Regulatory Approvals ........................................... 4
THE SPECIAL MEETING ................................................... 4
General ........................................................ 4
Matters to be Considered at the Special Meeting ................ 4
Voting at the Meeting; Record Date ............................. 4
THE TRANSACTION ....................................................... 5
Background of the Transaction .................................. 5
Reasons for the Transaction .................................... 8
Opinion of Actuarial Consulting Firm ........................... 9
Use of Proceeds ................................................ 10
Operations of the Company After the Transaction ................ 10
Federal Income Tax Consequences ................................ 11
Accounting Treatment ........................................... 12
THE STOCK ACQUISITION AGREEMENT ....................................... 12
Terms of the Stock Acquisition Agreement ....................... 12
Closing; Termination ........................................... 12
Representations and Warranties ................................. 13
Conduct of Business Prior to Closing ........................... 13
No "Shopping" Covenant; Break-up Fee ........................... 14
Covenants of Lyndon ............................................ 15
Employee Benefit Plans ......................................... 15
Conditions to Consummation of the Transactions Contemplated
by the Stock Acquisition Agreement ......................... 15
Survival of Representations and Warranties ..................... 16
Covenant Not to Compete ........................................ 16
Indemnification ................................................ 16
Tax Matters .................................................... 17
Amendment; Waiver............................................... 18
Expenses; Liquidated Damages ................................... 18
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ASSET PURCHASE AGREEMENT .............................................. 19
Purchase Price and Acquired Assets ............................. 19
Reinsurance Agreements and Liabilities Assumed ................. 19
Closing ........................................................ 19
Representations and Warranties ................................. 19
Additional Agreements of the Company, ANIC and Lyndon Property.. 20
Covenant Not to Compete ........................................ 20
Survival of Representations and Warranties ..................... 20
Indemnification ................................................ 21
Amendment; Waiver .............................................. 21
Expenses ....................................................... 21
REGULATORY APPROVALS REQUIRED ......................................... 21
Ohio Department of Insurance ................................... 21
Missouri Department of Insurance ............................... 21
HSR Act and Antitrust .......................................... 21
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION ................ 24
Introduction ................................................... 24
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ........ 30
Beneficial Ownership of Certain Beneficial Owners .............. 30
Beneficial Ownership of Management ............................. 32
INDEPENDENT AUDITORS .................................................. 32
STOCKHOLDER PROPOSALS ................................................. 33
ADDITIONAL INFORMATION REGARDING THE COMPANY .......................... 33
Business ....................................................... 33
Properties ..................................................... 38
Legal Proceedings .............................................. 39
Market for ACCEL's Common Stock and Related Stockholder Matters 39
Selected Financial Data ........................................ 40
Supplementary Financial Information ............................ 40
Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... 41
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ....................................... 53
Quantitative and Qualitative Disclosures about Market Risk ..... 53
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ............................ F-1
ANNEX I -- STOCK ACQUISITION AGREEMENT ...........................
ANNEX II -- ASSET PURCHASE AGREEMENT ..............................
ANNEX III -- OPINION OF CREDITRE CORPORATION .......................
</TABLE>
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SUMMARY
The following summary is not intended to be complete and is qualified in
its entirety by reference to the more detailed information contained elsewhere
in this Proxy Statement and the Annexes hereto in their entirety.
DATE, TIME AND PLACE OF SPECIAL MEETING OF STOCKHOLDERS
The Special Meeting of Stockholders of the Company will be held on
December 30, 1997, at 1:00 p.m., local time, at Lane Executive Center
Conference Room, Main Floor, 555 Metro Place North, Dublin, Ohio.
RECORD DATE; STOCKHOLDERS ENTITLED TO VOTE
Only holders of record of the Common Stock at the close of business on the
Record Date, November 17, 1997, will be entitled to notice of and to vote at
the Special Meeting. On the Record Date, there were 8,637,042 shares of Common
Stock outstanding, each of which will be entitled to one vote on each matter
properly submitted for vote to stockholders at the Special Meeting. See "THE
SPECIAL MEETING -- Voting at the Meeting; Record Date. "
PURPOSE OF SPECIAL MEETING
The purpose of the Special Meeting will be to consider and vote upon the
adoption of a resolution approving and authorizing the Transaction pursuant to
the terms of the Stock Acquisition Agreement and the Asset Purchase Agreement
(collectively, the "Agreements").
VOTE REQUIRED
A majority of the outstanding shares of Common Stock entitled to vote
thereon must vote in favor of the resolution approving and authorizing the
Agreements.
PARTIES TO THE TRANSACTION
The Company is an insurance holding company incorporated under the laws of
Delaware in June 1978. The Company is engaged through its operating
subsidiaries, Acceleration Life Insurance Company ("ALIC") and Acceleration
National Insurance Company ("ANIC"), in the sale and underwriting of selected
life and property/casualty insurance products. ALIC holds licenses to conduct
business in 40 states and the District of Columbia and ANIC holds licenses to
conduct business in 47 states and the District of Columbia. ALIC offers credit
life and credit accident and health insurance. ANIC offers commercial auto
insurance to operators of long haul trucks and charter buses and also offers a
program for vehicle extended service contracts as a complementary product to
the credit insurance products marketed by automobile dealerships. The
principal office of the Company is 475 Metro Place North, Suite 100, Dublin,
Ohio 43017 and its telephone number is (614) 764-7000. For a further
description of the business of the Company, see "ADDITIONAL INFORMATION
REGARDING THE COMPANY -- Business. "
Lyndon Property, Lyndon Insurance Group, Inc. and Lyndon Life Insurance
Company (collectively, the "Lyndon Group") are direct or indirect subsidiaries
of Frontier Insurance Group, Inc. ("Frontier"), which Frontier acquired on June
3, 1997. Frontier is an insurance holding company which, through its
subsidiaries, conducts business on an admitted and non-admitted basis as a
specialty property and casualty insurer. Frontier currently underwrites in
excess of 130 specialty insurance programs, including (i) malpractice insurance
for physicians, dentists, psychiatrists and chiropractors, (ii) general
liability, (iii) surety (performance bonds, bail bonds, customs bonds and
license and permit bonds), (iv) commercial earthquake, (v) workers'
compensation and (vi) other miscellaneous lines. Frontier's alternative risk
division underwrites excess workers' compensation and excess medical stop loss
coverages, and provides custom designed insurance programs through captive and
rent-a-captive facilities for both Frontier's
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workers' compensation and other insurance lines. At June 30, 1997, Frontier's
total assets were approximately $1.62 billion, its total investments were
approximately $1.06 billion and its total stockholders' equity was $295
million.
The Lyndon Group is based in St. Louis, Missouri and provides
credit-related and specialty insurance products for financial institutions and
specialty insurance markets through a variety of distribution channels,
including other companies, general agents, third-party administrators and joint
venture relationships, with the particular channel designed to fit the specific
product. Credit-related products include collateral protection, credit
property, involuntary unemployment insurance, auto physical damage, credit
life, and credit accident and health coverages. Specialty insurance products
include residual value, non-standard auto and mechanical breakdown. For the
year ended December 31, 1996, the Lyndon Group's revenues were $96.8 million
and its net income was $27.0 million. At June 30, 1997, the Lyndon Group's
total assets were $395.8 million and its total investments were $214.8 million.
TERMS OF TRANSACTION
The Company will sell to Lyndon all of the capital stock of each of ALIC,
ANSC and Dublin (collectively, the "Target Corporations") pursuant to the terms
of the Stock Acquisition Agreement, and the Company and ANIC will sell to
Lyndon Property ANIC's vehicle extended service contract business pursuant to
the terms of the Asset Purchase Agreement. Upon the closing of the Transaction
(the "Closing"), Lyndon Property will own ANIC's vehicle extended service
contract business and Lyndon will own the Target Corporations and all of their
respective assets, including all of the in-force credit premiums of ALIC (the
"In-Force Business") and all of the licenses to conduct business presently held
by ALIC in 40 states and the District of Columbia. The Agreements provide that
Lyndon and Lyndon Property shall pay the Company $40.5 million in cash at the
Closing for all of the capital stock of the Target Corporations and ANIC's
vehicle extended service contract business. The Stock Acquisition Agreement
provides that, prior to the Closing, the Target Corporations may elect to
declare and pay to the Company a special distribution (the "Special
Distribution") equal to the estimated amount by which the Target Corporations
combined stockholders' equity as of December 31, 1997, as determined in
accordance with GAAP, is expected to exceed $31.6 million. The estimated
amount of the Special Distribution will be based on the Target Corporations'
combined GAAP unaudited financial statements as of September 30, 1997. Within
125 days after the Closing, the amount of the Special Distribution will be
adjusted by the parties to reflect the actual combined stockholders' equity of
the Target Corporations based upon the combined GAAP audited financial
statements of the Target Corporations as of December 31, 1997 to be obtained by
the Company by March 16, 1998.
Because the combined GAAP stockholders' equity of the Target Corporations
was $32.185 million as of September 30, 1997 and is expected to remain
approximately the same as of December 31, 1997, the Company does not intend to
cause the Target Corporations to declare and pay a Special Distribution prior
to the Closing. As a result, within 125 days after the Closing, the initial
purchase price of $40.5 million which will be paid in cash at the Closing will
be decreased by the amount, if any, by which the combined GAAP stockholders'
equity of the Target Corporations as of December 31, 1997 is less than $31.6
million or, alternatively, in the event that the Target Corporations' combined
GAAP stockholders' equity as of December 31, 1997 is greater than $31.6
million, the purchase price will be increased by the amount by which the Target
Corporations' combined GAAP stockholders' equity as of December 31, 1997
exceeds $31.6 million. There is no limitation on the potential amount of such
adjustment. Accordingly, the exact amount of the consideration to be received
by the Company will not be known as of the date of the Special Meeting. The
combined GAAP stockholders' equity of $32.185 million would result in a net
purchase price of $41.085 million in the event that the combined GAAP
Stockholders' equity does not change.
The provisions of the Stock Acquisition Agreement include a no "shopping"
covenant which prohibits the Company from negotiating, soliciting or
encouraging transactions with other parties involving the sale of securities or
assets of Target Corporations, and from making available to any other person
information concerning the Target Corporations for such purposes, except to the
extent that the Company's Board of Directors determines in good faith, after
consulting with legal counsel, that the same is required in the exercise of the
Board of Director's fiduciary duties under applicable law. The Company will be
entitled to execute a definitive agreement with such a third party
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relating to the acquisition proposal of such third party and to terminate the
Stock Acquisition Agreement so long as the Company pays Lyndon a fee of
$750,000.
USE OF PROCEEDS FROM TRANSACTION
The Company will use the cash proceeds from the Transaction, which are
estimated to be approximately $40.5 million, to retire all of the outstanding
Senior Notes held by Lincoln National Life Insurance Company in the amount of
$15 million (the "Senior Notes") and to make a capital contribution to ANIC in
an amount necessary to increase its statutory capital and surplus (being
approximately $13.1 million (unaudited) at September 30, 1997) to at least $25
million. The Company will use the balance of the proceeds for general corporate
purposes.
OPERATION OF THE COMPANY AFTER
THE TRANSACTION
Following consummation of the Transaction, (i) the Company's stockholders
will remain stockholders of the Company, (ii) ANIC's vehicle extended service
contract business will be owned by Lyndon Property and all of the shares of
capital stock of each of the Target Corporations will be owned by Lyndon, (iii)
the Company will cease to be engaged in the auto aftermarket credit insurance
and extended service contract businesses, and (iv) ANIC will continue to be
owned by the Company. The Company intends to use its remaining resources to
seek to develop and expand the business of ANIC, which is the Company's
property and casualty insurance subsidiary.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has unanimously approved the
Transaction pursuant to the terms of the Agreements, believes that the
Transaction is in the best interests of the Company and its stockholders and
recommends that the stockholders vote FOR the approval and authorization of the
Transaction pursuant to the terms of the Agreements. See "THE TRANSACTION --
Background of the Transaction" and "-- Reasons for the Transaction. "
REASONS FOR THE TRANSACTION
The Board of Directors of the Company believes that the terms of the
Transaction are fair to, and in the best interests of, the Company and its
stockholders because, among other things, the Board believes that the
Transaction will (i) allow the Company to dispose of its Auto Aftermarket Group
at an attractive price in light of the historical financial performance and
business prospects of the Company's Auto Aftermarket Group, (ii) enable the
Company to eliminate its outstanding indebtedness under the Senior Notes, and
(iii) enable ANIC to expand its property and casualty insurance business, which
the Company believes has the potential to provide higher returns than the lines
of business to be sold pursuant to the Transaction. Accordingly, the Board
unanimously approved the Transaction and the Agreements and recommends that the
Company's stockholders vote in favor of the approval and authorization of the
Agreements. For a discussion of the factors considered by the Board in
reaching its decision with respect to the Transaction, see "THE TRANSACTION --
Reasons for the Transaction."
OPINION OF ACTUARIAL CONSULTING FIRM
On October 15, 1997, CreditRe Corporation delivered its written opinion to
the Company's Board of Directors that the aggregate purchase price of $40.5
million to be received by the Company pursuant to the Agreements is fair and
reasonable and equals or exceeds the value that other likely participants in
the marketplace would pay for the business and assets being sold. The full text
of the written opinion of CreditRe Corporation is attached to this Proxy
Statement as Annex III. Stockholders of the Company are urged to, and should,
read such opinion in its entirety. See "THE TRANSACTION -- Opinion of Actuarial
Consulting Firm."
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FEDERAL INCOME TAX CONSEQUENCES
The Company will recognize a taxable gain upon the consummation of the
Transaction but the stockholders will not recognize any gain or loss upon
consummation of the Transaction nor will such consummation result in any change
in the tax basis of the shares of Common Stock held by them.
ACCOUNTING TREATMENT
The sale of the Target Corporations will be treated by the Company as a
disposal of a segment of a business within the meaning of Accounting Principles
Board Opinion No. 30. Accordingly, upon approval of the Transaction by the
requisite vote of the Company's stockholders, the operating results of the
Company's auto aftermarket credit insurance business will be accounted for by
the Company as discontinued operations. The gain realized from the sale of the
vehicle extended service contract business will be recorded in the continuing
operations of the Company. See "THE TRANSACTION -- Accounting Treatment. "
NO DISSENTER'S RIGHTS
Under Delaware Law, a stockholder who does not vote his or her shares in
favor of the authorization of the Agreements is not entitled to any dissenters'
rights.
REGULATORY APPROVALS
The consummation of the Transaction is subject to prior approval by the
Ohio and Missouri Departments of Insurance and to the expiration or termination
of the relevant waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"). All such approvals have
either been obtained or are expected to be obtained prior to the Special
Meeting.
THE SPECIAL MEETING
GENERAL
This Proxy Statement is being furnished to the Company's stockholders in
connection with the solicitation of proxies by and on behalf of the Board of
Directors of Company to be voted at the Special Meeting to be held at Lane
Executive Center Conference Room, Main Floor, 555 Metro Place North, Dublin,
Ohio on December 30, 1997, at 10:00 a.m., local time, and any and all
adjournments or postponements thereof. This Proxy Statement and the
accompanying proxy are first being mailed to stockholders on or about December
18, 1997.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, the Company's stockholders will be asked to (i)
consider and vote upon the Transaction pursuant to the terms of the Agreements
and (ii) to act on such other matters as may properly come before the Special
Meeting or any adjournment or postponements thereof.
The Board has unanimously approved the Agreements and the Transaction and
recommends a vote FOR the approval and authorization of the Transaction
pursuant to the terms of the Agreements.
VOTING AT THE MEETING; RECORD DATE
The Board has fixed November 17, 1997 as the Record Date for the
determination of stockholders entitled to notice of and to vote at the Special
Meeting. Accordingly, only holders of record of Common Stock on the Record
Date will be entitled to notice of, and to vote at, the Special Meeting. As of
the Record Date, there were
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8,637,042 shares of Common Stock of the Company outstanding and entitled to
vote. Each holder of record of shares of Common Stock on the Record Date is
entitled to cast one vote per share, exercisable in person or by properly
executed proxy, on each matter properly submitted for the vote of the
stockholders at the Special Meeting. The presence, in person or by properly
executed proxy, of the holders of a majority of the outstanding Common Stock
entitled to vote at the Special Meeting is necessary to constitute a quorum at
the Special Meeting. Approval and authorization of the Transaction pursuant to
the terms of the Agreements will require the affirmative vote of the holders of
a majority of the outstanding shares of Common Stock.
As of October 31, 1997, directors and executive officers of the Company
and their affiliates may be deemed to be beneficial owners of approximately 52%
(or approximately 60% if the Borrowed Shares described in footnote 4 to the
table under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT -- Beneficial Ownership of Certain Beneficial Owners" are included)
of the outstanding Common Stock. Each of the current directors and executive
officers of the Company has indicated that the shares of Common Stock
beneficially owned by him will be voted in favor of the approval and
authorization of the Transaction pursuant to the terms of the Agreements.
Accordingly, stockholder approval of the Transaction is assured.
So far as the Company is aware, no matters other than those described in
this Proxy Statement will be presented to the meeting for action on the part of
the stockholders. However, the enclosed proxy gives discretionary authority in
the event any additional matters should be presented.
The cost of soliciting proxies will be borne by the Company. Officers,
directors and regular employees of the Company may communicate with
stockholders personally or by mail, telephone, telegram or otherwise for the
purpose of soliciting such proxies, but the Company will pay no additional
compensation for such solicitation. The Company and any authorized agent of the
Company will request brokers and other custodians, nominees and fiduciaries to
forward proxy soliciting material to the beneficial owners of shares held of
record by such persons and will reimburse the reasonable out-of-pocket expenses
in forwarding such material.
Any stockholder giving a proxy has the power to revoke it at any time
before it is voted by a later appointment received by the Secretary of the
Company or by giving notice of such revocation to the Secretary of the Company
in writing or in open meeting. All duly executed proxies received prior to the
meeting and not revoked will be voted at the meeting. The enclosed proxy
contains space in which the stockholder may insert instructions as to the way
the stockholder wishes his shares to be voted. When such proxy is properly
executed and returned, the shares it represents will be voted at the meeting as
directed. If no specification is indicated, the shares will be voted "For" the
proposal to approve and authorize the Transaction pursuant to the terms of the
Agreements.
Pursuant to applicable law, broker non-votes and abstaining votes will not
be counted in favor of the proposal to approve and authorize the Transaction
pursuant to the terms of the Agreements. Any stockholder who abstains from
voting on the proposal will in effect be voting against such proposal.
THE TRANSACTION
BACKGROUND OF THE TRANSACTION
In early 1995, the Company began to explore the possibility of selling its
Auto Aftermarket Group, which consists of the Company's auto aftermarket credit
insurance and extended service contract businesses, in order to permit the
Company to repay its outstanding bank loan. The Credit Agreement evidencing
such loan was renegotiated by the Company in February, 1995. As a part of such
renegotiations, the Credit Agreement was modified to require that the Company
pursue capital transactions with other companies or the sale of significant
operating assets that would permit the Company to repay the loan in full by
June 30, 1997.
In early 1995, the Company engaged The Advest Group, Inc. ("Advest") to
assist the Company in its efforts to sell its Auto Aftermarket Group. At such
time, Advest identified and contacted several potential purchasers of
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the Company's Auto Aftermarket Group. Such process, however, produced only one
interested buyer, Consumers Financial Corporation of Camp Hill, Pennsylvania
("Consumers"). On August 18, 1995, the Company and Consumers announced that
they had entered into a letter of intent for Consumers to acquire the in-force
credit insurance business of ALIC and to purchase all of the issued and
outstanding shares of ALIC from the Company. The proposed transaction did not
include the sale of the Company's vehicle extended service contract business.
The Company and Consumers, however, were unable to negotiate the terms of a
definitive agreement within the time period established by the letter of intent
and the proposed transaction was abandoned.
In connection with the proposed transaction with Consumers, the Company
engaged CreditRe Corporation to perform actuarial appraisals of its credit
insurance book of business as of December 31, 1994 and June 30, 1995. CreditRe
Corporation's analysis indicated that the purchase price offered by Consumers
would have resulted in a net loss in the range of $2 to $3 million to the
Company on a GAAP basis. The actuarial appraisals prepared by CreditRe
Corporation in connection with the Consumers transaction were utilized by
CreditRe Corporation in the preparation of its fairness opinion regarding the
Transaction. See " -- Opinion of Actuarial Consulting Firm."
In December, 1995, the Company retired the loan outstanding under the
aforementioned Credit Agreement with the proceeds from the Company's issuance
of Senior Notes totalling $16.5 million to an unaffiliated company. In
connection with the issuance of the Senior Notes, ALIC entered into a
reinsurance agreement with the purchaser of the Senior Notes to reinsure its
in-force credit business. Such transactions alleviated the immediate pressure
on the Company to sell its Auto Aftermarket Group.
Following the aborted Consumer's transaction and the issuance of the
Senior Notes, the Company abandoned its efforts to sell its Auto Aftermarket
Group because the Company believed that it would only be able to sell such
business at a loss on a GAAP basis and because the credit insurance market was
continuing to contract, thereby further decreasing the marketability of such
block of business. At such time, the Company determined that it was necessary
for it to substantially increase the critical mass of its credit insurance
business in order to be profitable because, although such business provided
attractive profit margins, the Company's credit insurance sales did not produce
sufficient income in relation to the associated overhead expenses. The
Company's attempts to acquire other blocks of credit insurance business,
however, were generally unsuccessful and the Company was advised by several
potential sellers that they were not interested in entering into any
transactions with a company with an A.M. Best Company ("A.M. Best") rating as
low as the Company's. The Company's efforts to increase its credit insurance
sales internally were also unsuccessful, in part, because financial
institutions were reluctant to offer the Company's products to their customers
because of the relatively small size of ALIC's statutory surplus and its A.M.
Best rating of only "B-" (Fair).
Thomas H. Friedberg, Chairman of the Board, President and Chief Executive
Officer of the Company, initially approached Walter Rhulen, Chief Executive
Officer of Frontier, in the spring of 1997 after Frontier had announced its
intention to acquire the insurance operations of Mercury Financial Group (the
"Mercury Transaction"). Mr. Friedberg's purpose in contacting Frontier was to
inquire as to whether or not Frontier would be interested in discussing the
possibility of the Company acquiring from Frontier the credit insurance
business of Lyndon Life Insurance Company, which business Frontier acquired in
the Mercury Transaction. Prior to the Mercury Transaction, the Company had
identified the credit insurance business of Mercury Financial Group as a
potentially attractive book of business. Accordingly, Mr. Friedberg had hoped
that Frontier would consider selling such business because, prior to the
Mercury Transaction, Frontier was principally a property and casualty insurance
company. In the course of these preliminary discussions with Frontier, Mr.
Rhulen, after being advised by Mr. Friedberg that he believed it was necessary
for the Company to increase the critical mass of its credit life insurance
business in order to continue to be successful, inquired of Mr. Friedberg
whether the Company would instead consider selling to Frontier the Company's
Auto Aftermarket Group. These initial discussions led to Frontier's proposal
to acquire the Company's entire Auto Aftermarket Group, which proposal was
first communicated to Mr. Friedberg in a letter dated July 8, 1997.
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After receiving the initial offer from Frontier to purchase the Company's
Auto Aftermarket Group, the Company did not attempt to solicit competing offers
from other parties and did not consider any possible strategic alternatives
because of the Company's belief, based upon its recent experiences in
connection with the aborted Consumers transaction and its efforts to acquire
additional blocks of credit insurance business, that the Transaction
represented the best opportunity available to the Company. In addition, the
Company did not receive any competing offers, except for an invitation to
discuss the potential sale of the Company's extended service contract business,
which invitation the Company declined to accept because of the Company's belief
that it could not sell its credit insurance business at an advantageous price
without its warranty business.
A special telephonic meeting of the Board of Directors of the Company,
which was attended by all of the Company's directors, was held on July 29, 1997
at the request of Mr. Friedberg for the sole purpose of presenting to the Board
of Directors the Transaction. At the meeting, Mr. Friedberg outlined for the
Board of Directors the general terms of the proposal which were set forth in
several letters between Mr. Friedberg and Peter H. Foley, Executive Vice
President of Frontier, dated various dates in July, 1997. Mr. Friedberg also
briefly discussed each of the factors set forth in this Proxy Statement under
"Reasons for the Transaction." At the meeting, the Board of Directors, by a
unanimous vote, authorized Mr. Friedberg to negotiate definitive agreements.
No other material matters were discussed at the meeting. Prior to the meeting,
Mr. Friedberg was the only officer or director of the Company involved in the
negotiations regarding the Transaction, which negotiations were conducted
substantially through the letters referred to above.
In Mr. Foley's letter dated July 8, 1997 to Mr. Friedberg, Frontier
initially offered to purchase the Company's Auto Aftermarket Group for $27
million payable in cash, subject to the condition, among others, that the
Target Corporations would pay a dividend to the Company prior to closing in the
range of $8 to $10 million, thereby leaving the Target Corporations with a
least $25 million in stockholders' equity on a GAAP basis.
Mr. Friedberg responded to Mr. Foley's July 8th letter in a letter dated
July 10, 1997 in which Mr. Friedberg generally consented to all of the
conditions of Mr. Foley's offer except for the amount of the proposed purchase
price. Mr. Friedberg explained in his letter that certain adjustments needed
to be made to the financial information previously provided by the Company to
Frontier in order to properly estimate the income generated by the continuing
operations of the businesses to be sold. Mr. Friedberg further noted that
Frontier's offer of $35 to $37 million (after taking into consideration the
proposed pre-closing dividend) was just slightly more than the book value of
the Target Corporations and, as a result, Frontier in effect would be paying
almost nothing for the Company's vehicle extended service contract business.
Mr. Friedberg concluded his letter by suggesting that Frontier increase its
offer based upon the revised financial information noted in his letter. In
response to such suggestion, Mr. Foley in his letter dated July 21, 1997
increased Frontier's offer to $40 million in cash.
Mr. Friedberg responded to Frontier's increased offer of $40 million in a
letter dated July 21, 1997. In this letter, Mr. Friedberg noted that
Frontier's revised offer of $40 million was slightly less than the price which
Mr. Friedberg believed the Company's Board of Directors would be willing to
accept. Mr. Friedberg proposed that Frontier increase its offer to $37.5
million in cash plus five annual payments of $1.5 million, which payments
together, when discounted at an annual interest rate of 9%, had a net present
value of approximately $43.3 million. In a letter dated July 28, 1997, Mr.
Foley responded to Mr. Friedberg's counteroffer by repeating Frontier's offer
of $40 million in cash with the added condition that the GAAP stockholders'
equity of ALIC would have to be not less than $30 million at the closing. Mr.
Friedberg's letter of even date therewith in response noted that the Company
believed that its Auto Aftermarket Group was worth $42 million, but suggested
that the Company might accept an offer of $40.5 million, the $500,000 increase
to Frontier's $40 million offer being necessary to offset the increased tax
expense which would be incurred by the Company as a result of the election
under Section 338(h)(10) of the Code required by Frontier as a condition of its
offer. See "THE STOCK ACQUISITION AGREEMENT -- Tax Matters." In a letter
dated July 29, 1997, Mr. Foley, in order to allow the negotiation process to
proceed forward, conceded to Mr. Friedberg's request to increase the purchase
price to $40.5 million. As a result of certain matters which came to
Frontier's attention during the performance of its due diligence, Frontier
requested a reduction
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in the purchase price, however, the parties ultimately agreed not to change the
purchase price, but to increase the required amount of the Target Corporation's
GAAP stockholders' equity at closing to $31.6 million.
Following the completion of Frontier's due diligence and the negotiation
of the terms of the Agreements between Mr. Friedberg and Mr. Foley, a second
special telephonic meeting of the Board of Directors of the Company was held on
October 22, 1997 in order to further consider the Transaction and the
Agreements. At this meeting, Mr. Friedberg summarized for the Board of
Directors the advice he had received from the Company's counsel concerning the
directors' fiduciary duties in connection with the Transaction. Mr. Friedberg
also outlined for the directors the material terms of the Agreements and
reviewed the conclusions set forth in the written opinion received by the
Company from CreditRe Corporation, which opinion was theretofore delivered to
each director. See "-- Opinion of Actuarial Consulting Firm." No other
written materials regarding the Transaction were presented to the directors at
or before the meeting. Finally, Mr. Friedberg briefly advised the Board of
Directors regarding the unaudited consolidated pro forma financial statements
of the Company which would be included in this Proxy Statement. After Mr.
Friedberg completed his presentation, the Board of Directors unanimously
approved the Transaction and authorized Mr. Friedberg to execute the Agreements
on behalf of the Company. No other material matters were discussed at the
meeting.
REASONS FOR THE TRANSACTION
The Board of Directors has determined that the terms of the Transaction
are fair to, and in the best interests of, the Company and its stockholders and
has recommended that the stockholders vote FOR approval and authorization of
the Transaction pursuant to the terms of the Agreements. In reaching its
determination to approve the Transaction, the Board of Directors considered
various factors. The material factors considered were:
(i) The desire of the Board of Directors to maximize the value of the
Company's Common Stock.
(ii) The determination by the Board of Directors that it is necessary for
the Company to either increase the critical mass of its credit life insurance
business in order to continue to be profitable or to sell such business, in
light of the fact that (a) although such business provides attractive profit
margins, the Company's credit insurance sales do not produce sufficient income
in relation to the associated overhead expenses, and (b) the sales of the
Company's Auto Aftermarket Group have been steadily declining. For example,
the Company's gross premiums, net of refunds, in each quarter during the period
from September 30, 1997 through June 30, 1997, declined by more than $1 million
in comparison to the same quarter of the prior year (except for one quarter in
which the decline was only approximately $800,000). In addition, as described
above under "Background of the Transaction," the Company's efforts to grow its
credit insurance business, both internally and through acquisitions, have been
unsuccessful, thereby making it desirable to sell such business. See "--
Background of the Transaction."
(iii) The belief by the Board of Directors and management of the Company
that the aggregate purchase price of $40.5 million, subject to adjustment, is
attractive in view of the historical financial performance and business
prospects of the Company's Auto Aftermarket Group. The aggregate consideration
to be received by the Company pursuant to the Agreements substantially exceeds
all previous offers received by the Company. Such consideration also compares
favorably with the prior actuarial appraisals of the Company's Auto Aftermarket
Group prepared by CreditRe Corporation in 1995. See "-- Background of the
Transaction." Such appraisals indicated that any likely sale price would
result in a loss to the Company on a GAAP basis, when in fact the Company
expects to realize a net gain after income taxes and direct expenses of
approximately $2.7 million on the Transaction. See "-- Accounting Treatment."
The Board of Directors analyzed the Transaction as a whole and did not consider
the allocation of the combined purchase price between the Target Corporations
and the Acquired Assets (as defined in the Asset Purchase Agreement). However,
the Board of Directors did consider, as a basis for supporting the fairness of
the aggregate purchase, the fact that such amount represents roughly the sum of
the book value of the Company's auto aftermarket credit insurance business plus
ten times the annual after-tax earnings of ANIC's vehicle extended service
contract business (including fee income).
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(iv) The determination by the Board of Directors that the Transaction is
consistent with the Company's plans to increase its revenues and profits from
ANIC's property and casualty insurance business, which the Company believes has
the potential to provide higher returns than the lines of business to be sold
pursuant to the Transaction. The Transaction will allow the Company to
eliminate its outstanding indebtedness under the Senior Notes and to increase
the statutory surplus of ANIC to a level which will enable ANIC to seek a
higher rating from A.M. Best than its current rating of "B" (Fair). The
Company's management believes that an increase in ANIC's A.M. Best rating
should permit ANIC to market its property and casualty products through a
larger group of quality agents and brokers which should enhance the ability of
the Company to grow such business. In addition, the Transaction will provide
the Company with approximately $5 million to $6 million of cash at the holding
company level and increase the Company's net book value per share, which the
Corporation's management believes will further enhance the Company's ability to
grow ANIC's property and casualty business through acquisitions and strategic
alliances. See "-- Use of Proceeds" and "Operations of the Company After the
Transaction."
(v) The opinion of CreditRe Corporation to the Company indicating that the
aggregate purchase price to be received by the Company pursuant to the
Agreements is fair and reasonable, exceeds CreditRe Corporation's estimated
value of $39.3 million, and equals or exceeds the value that other likely
participants in the marketplace would pay for the business and assets being
sold. In addition, the opinion of CreditRe Corporation states that the
Company's credit life and disability insurance business has little value in the
marketplace because it does not provide a competitive return and makes
reference to the fact that over 50 insurers have left the credit life and
disability industry since 1990, with no new entrants. The Board of Directors
did not specifically adopt the opinion of CreditRe Corporation, but agrees with
its conclusions in all material respects. See " -- Opinion of Actuarial
Consulting Firm."
In view of the variety of factors considered in connection with the
evaluation of the Transaction, the Board of Directors did not find it
practicable to and did not quantify or otherwise assign weights to the specific
factors considered in reaching its determination. In making its determination,
the Board of Directors also considered the risks and likelihood of achieving
the results discussed above.
OPINION OF ACTUARIAL CONSULTING FIRM
As described under "-- Background of the Transaction" and "-- Reasons for
the Transaction," the Company engaged CreditRe Corporation, an actuarial
consulting firm, to provide a fairness opinion in connection with the
Transaction. In this connection, on October 15, 1997, CreditRe Corporation
delivered its written opinion to the Company's Board of Directors that the
aggregate purchase price of $40.5 million to be received by the Company
pursuant to the Agreements was fair and reasonable and equals or exceeds the
value that other likely participants in the marketplace would pay for the
business and assets being sold. The written opinion of CreditRe Corporation
further states that, based solely on (i) the statutory accounting annual
financial statements of ALIC as of and for the year ended December 31, 1996,
(ii) the consolidated GAAP financial statements of the Company as of and for
the six months ended June 30, 1997 and (iii) the valuations performed by
CreditRe Corporation, the estimated market value of the Company's auto
aftermarket book of business was $39.3 million. CreditRe Corporation relied,
without independent verification, upon the accuracy and completeness of all of
the financial and other information reviewed by it for purposes of its opinion.
CreditRe Corporation was not requested to, and did not, prepare a current
actuarial appraisal. In the opinion of CreditRe Corporation, aside from the
book value of the assets of ALIC and the value of the state licenses held by
ALIC, most, if not all, of the value of such business relates to the Company's
extended service contract business because the Company's auto aftermarket
credit life and disability insurance businesses have little value in the
current marketplace. The full text of CreditRe Corporation's written opinion
is attached hereto as Annex III and is incorporated herein by reference. The
Company's stockholders are urged to, and should, read this opinion in its
entirety.
In connection with its opinion, CreditRe Corporation's analysis was
limited to a review of the following: (i) the actuarial appraisals previously
prepared by CreditRe Corporation as of December 31, 1994 and June 30, 1995 (the
"Prior Appraisals"); (ii) the results of the various consulting projects
CreditRe Corporation had previously undertaken for the Company subsequent to
the Prior Appraisals; (iii) the financial statements of the Company
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<PAGE> 16
referenced above; (iv) information relating to recent sales of credit related
insurance lines of business by other insurers; and (v) information concerning
the Company's overall loss experience during the periods covered by the Prior
Appraisals and periods subsequent thereto.
Because a current actuarial appraisal was not prepared, CreditRe's opinion
is based on more limited data and review than would be necessary to perform an
actuarial appraisal that conforms with Actuarial Standard of Practice No. 19.
CreditRe Corporation's Prior Appraisals, however, were prepared in conformity
with Actuarial Standard of Practice No. 19. The Prior Appraisals considered,
or developed an estimate of, (a) the book value of the Company, (b) the value
for the in force credit insurance business, (c) the value for the future
production of credit insurance business, (d) the value for the service contract
business and (d) the value of the state licenses. In connection with its
opinion, CreditRe Corporation developed relationships among such values, the
respective book values of the Company and its subsidiaries, and other factors.
For example, CreditRe Corporation computed the value of future production on
credit insurance as a percentage of the current year's production and computed
the value of the state licenses held by the Company based upon an average value
per state license. Based upon such information, CreditRe Corporation
determined that the prior relationships determined by it could properly be
applied to the current data because the composition of the Company's auto
aftermarket business and the general profitability thereof were consistent with
the periods covered by the Prior Appraisals.
After determining that the factors developed from the Prior Appraisals
continued to be appropriate, CreditRe Corporation applied such factors to
current data regarding the Company in order to estimate the value of the auto
aftermarket book of business as of June 30, 1997. CreditRe Corporation's total
estimated value for the auto aftermarket book of business can be broken down
into the following components: (i) the GAAP book value of the Company, which
represents 79% of the total estimated value of $39.3 million, (ii) the
estimated value of the in force credit insurance and future credit insurance,
which together represent only 7% of the total estimated value, and (iii) the
estimated value of the Company's extended service contract business and state
insurance licenses, which were determined to represent 14% of the total
estimated value. CreditRe Corporation computed the estimated value of in force
credit insurance based on a percentage of the Company's June 30, 1997 reserves
and the value of the Company's future credit insurance based on the Company's
1997 production. The prior value placed on the Company's extended service
contract business was judged to be a reasonable estimate of current value, and
the value of the state licenses was determined to be unchanged.
As described above, CreditRe Corporation's opinion to the Board of
Directors of the Company was one of many factors taken into consideration by
the Board of Directors of the Company in making its determination to approve
the Agreements. CreditRe Corporation did not participate in the determination
of the amount of consideration to be paid to the Company. The foregoing
summary sets forth all material analyses performed by CreditRe Corporation, but
is qualified by reference to the written opinion of CreditRe Corporation set
forth in Annex III hereto.
CreditRe Corporation, as part of its actuarial consulting business, is
continually engaged in the valuation of insurance companies that participate in
the sale of credit-related insurance products. The Company selected CreditRe
Corporation to render a fairness opinion because it is a nationally recognized
actuarial consulting firm specializing in credit-related insurance that has
substantial experience in transactions similar to the Transaction. In addition,
CreditRe Corporation had previously performed valuations of the Company's
automobile aftermarket business as of December 31, 1994 and June 30, 1995, and
therefore, already possessed significant information regarding the Company's
operations. Since 1990, in addition to rendering its opinion in connection with
the Transaction, CreditRe Corporation has performed certain consulting services
for the Company in connection with various matters for which the Company paid
CreditRe Corporation a total of $128,000.
On or about October 1, 1997, the Company engaged CreditRe Corporation to
undertake a study to enable it to render its opinion with respect to the
fairness of the consideration to be received by the Company in a possible sale
of its auto aftermarket business to the Lyndon Group. The Company agreed to pay
CreditRe Corporation
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consulting fees for its services in rendering such opinion at CreditRe
Corporation's standard hourly rates. The total amount of such fees was $9,700.
USE OF PROCEEDS
The Company will use the cash proceeds from the Transaction, which are
estimated to be approximately $40.5 million, to retire all of the outstanding
Senior Notes held by Lincoln National Life Insurance Company in the amount of
$15 million and to make a capital contribution to ANIC in an amount necessary
to increase its statutory capital and surplus (being approximately $13.1
million (unaudited) at September 30, 1997) to at least $25 million. The Company
will use the balance of the proceeds for general corporate purposes.
OPERATIONS OF THE COMPANY AFTER THE TRANSACTION
Following consummation of the Transaction, (i) the Company's stockholders
will remain stockholders of the Company, (ii) ANIC's vehicle extended service
contract business will be owned by Lyndon Property and all of the shares of
capital stock of each of the Target Corporations will be owned by Lyndon, (iii)
the Company will cease to be engaged in the auto aftermarket credit insurance
and extended service contract businesses, and (iv) ANIC will continue to be
owned by the Company. The Company intends to use its remaining resources to
seek to develop and expand the business of ANIC. ANIC is the Company's property
and casualty insurance subsidiary which holds licenses to conduct business in
47 states and the District of Columbia. In 1996, ANIC began offering commercial
automobile coverage to operators of long haul trucks and charter buses. This
program is marketed by an unaffiliated general agent with extensive experience
in this product line. In 1997, ANIC commenced new marketing initiatives for
certain products including a package policy for crane operators consisting of
general liability, inland marine and commercial auto coverages.
FEDERAL INCOME TAX CONSEQUENCES
The consummation of the Transaction will not be a taxable event for
federal income tax purposes for the stockholders of the Company. The following
is a summary of federal income tax consequences to the Company of consummation
of the Transaction.
Pursuant to the Stock Acquisition Agreement, upon consummation of the
Transaction, (i) the Company will sell all of the stock of each of the Target
Corporations to Lyndon and (ii) the Company will join with Lyndon in the filing
of an election under Section 338(g) and Section 338(h)(10) of the Internal
Revenue Code of 1986, as amended (the "Code"), and any comparable election
under state, local or foreign tax law, to the extent requested by Lyndon. As a
result of these elections, the Transaction will be deemed to be a sale of the
Company's assets for federal income tax purposes with the Company being deemed
to have sold its assets while still a member of the Company's "affiliated
group" (as defined in the Code). Accordingly, the economic burden of taxation
resulting from the deemed asset sale by the Company will be borne by the
Company. The Company expects to pay federal income taxes of approximately $5.25
million as a result of consummation of the Transaction. The amount of federal,
state and local taxes for which the Company will be liable as a result of the
elections under Sections 338(g) and 338(h)(10) of the Code (and any comparable
elections under state or local tax law) are anticipated to be higher than the
amount of taxes that would have been payable if the Company had sold all of the
stock of the Target Corporations without any such elections being made. The
payment of such additional taxes by the Company was considered by the parties
in their negotiations regarding the purchase price payable by Lyndon under the
Stock Acquisition Agreement.
The Company will recognize a taxable gain upon the consummation of the
Transaction but the stockholders will not recognize any gain or loss upon
consummation of the Transaction nor will such consummation result in any change
in the tax basis of the shares of Common Stock held by them.
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ACCOUNTING TREATMENT
The sale of the Target Corporations will be treated by the Company as a
disposal of a segment of business within the meaning of Accounting Principles
Board Opinion No. 30. Accordingly, upon approval of the Transaction by the
requisite vote of the Company's stockholders (see "THE SPECIAL MEETING --
Voting at the Meeting; Record Date"), the operating results of the Company's
auto aftermarket credit insurance business will be accounted for by the Company
as discontinued operations. The gain realized from the sale of the vehicle
extended service contract business will be recorded in the continuing
operations of the Company. See "UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL
STATEMENTS." The Company expects to record a net gain after income taxes and
direct expenses of approximately $2.7 million on the Transaction.
THE STOCK ACQUISITION AGREEMENT
The descriptions in this Proxy Statement of the terms of the Stock
Acquisition Agreement are summaries only and are qualified in their entirety by
reference to the Stock Acquisition Agreement which is attached as Annex I to
this Proxy Statement and is incorporated herein by reference. Terms which are
not otherwise defined in this summary have the meanings set forth in the Stock
Acquisition Agreement.
TERMS OF THE STOCK ACQUISITION AGREEMENT
Pursuant to the terms and conditions of the Stock Acquisition Agreement,
the Company will sell to Lyndon, for an aggregate purchase price, subject to
adjustment, of $30.2 million payable in cash upon the closing of the
transaction (the "Closing"), all of the capital stock of the Target
Corporations. Upon the Closing, Lyndon will own the Target Corporations and
all of their respective assets including all of ALIC's In-Force Business and
all of the licenses to conduct business presently held by ALIC in 40 states and
the District of Columbia. Within 125 days after the Closing, the initial
purchase price of $30.2 million which will be paid in cash at the Closing will
be decreased by the amount, if any, by which the combined GAAP stockholders'
equity of the Target Corporations as of December 31, 1997 is less than $31.6
million or, alternatively, in the event that the Target Corporations' combined
GAAP stockholders' equity as of December 31, 1997 is greater than $31.6
million, the purchase price will be increased by the amount by which the Target
Corporations' combined GAAP stockholders' equity as of December 31, 1997
exceeds $31.6 million. There is no limitation on the potential amount of such
adjustment. Accordingly, the exact amount of the consideration to be received
by the Company will not be known as of the date of the Special Meeting. As of
September 30, 1997, the combined GAAP stockholders' equity of the Target
Corporations was $32.185 million which would result in a net purchase price
under the Stock Acquisition Agreement of $30.785 million in the event that the
combined GAAP stockholders' equity does not change.
CLOSING; TERMINATION
The Stock Acquisition Agreement provides that the Closing shall occur
effective as of December 31, 1997 (the "Closing Date"). The actual Closing,
however, shall take place within five business days after the satisfaction or
waiver of the last condition to Closing, unless otherwise agreed by the
parties, and in no event later than March 31, 1998. See "-- Conditions to
Consummation of the Transactions Contemplated by the Stock Acquisition
Agreement."
If the actual Closing does not occur by March 31, 1998, either party may
terminate the Stock Acquisition Agreement, without liability or penalty. See
"-- Tax Matters" for a discussion of the parties' obligations to reimburse each
other for Taxes related to timing differences between the deemed Closing Date
and the actual Closing Date for tax purposes.
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REPRESENTATIONS AND WARRANTIES
The Stock Acquisition Agreement contains various customary representations
and warranties of the parties for transactions of this type. These include,
among other things, representations of the Company as to: (i) the organization
and good standing of each of the Target Corporations; (ii) the authority of
ALIC to transact business as an insurance company; (iii) the capitalization of
each of the Target Corporations; (iv) the nonexistence of any subsidiaries of
the Target Corporations; (v) the correctness and completeness of the articles
of incorporation, regulations, bylaws, stock transfer records, minute books and
corporate records of each of the Target Corporations delivered to Lyndon; (vi)
the obtainment of all consents, orders, licenses, approvals and exemptions and
the making of all governmental filings necessary for the Target Corporations'
consummation of the contemplated transactions; (vii) the non-contravention of
the performance of the Stock Acquisition Agreement with the articles of
incorporation, regulations, by-laws, material contracts and agreements of the
Target Corporations and with any material applicable laws, judgments, orders or
decrees; (viii) the accuracy of certain GAAP and SAP financial statements of
the Target Corporations; (ix) the ownership or lease of real and personal
property of the Target Corporations; (x) the intellectual property of the
Target Corporations; (xi) various tax matters relating to the Target
Corporations; (xii) compliance by the Target Corporations with material
applicable law; (xiii) the obtainment and holding by the Target Corporations of
all material permits and licenses necessary in the conduct of their respective
businesses; (xiv) the contracts, agreements and commitments of the Target
Corporations; (xv) certain pension plan and employee benefit matters of the
Target Corporations; (xvi) certain matters related to insurance policies owned
and maintained by the Target Corporations; (xvii) the accounts payable of the
Target Corporations; (xviii) the liabilities of the Target Corporations; (xix)
litigation involving or affecting the Target Corporations; (xx) matters
relating to the bank accounts, borrowing and payment guarantees of the Target
Corporations; (xxi) the premium sources of ALIC and ANSC; (xxii) the absence of
material adverse changes or events in the business of the Target Corporations;
(xxiii) matters related to the Target Corporations' employee relations; (xxiv)
matters related to transactions between the Company or any Target Corporation
and any of their respective Affiliates; (xxv) the absence of any brokers having
been retained by the Company in connection with the contemplated transactions;
(xxvi) the full and complete disclosure by the Company to Lyndon in connection
with the contemplated transactions; (xxvii) the employees of the Target
Corporations and their salaries and employment arrangements; (xxviii) the
authorization, execution and delivery of the Stock Acquisition Agreement by the
Company; and (xxviv) the Company's ownership of the capital stock of the Target
Corporations.
The representations and warranties by Lyndon to the Company include, among
other things, representations of Lyndon as to: (a) the organization and good
standing of Lyndon Life Insurance Company and Lyndon Insurance Group, Inc.; (b)
the authorization, execution and delivery of the Stock Acquisition Agreement by
Lyndon Life Insurance Company and Lyndon Insurance Group, Inc., and the
validity and enforceability thereof against such corporations; (c) Lyndon's
purchase of the Target Shares for the purpose of investment only; (d) the
noncontravention of the execution, delivery and performance of the Stock
Acquisition Agreement by Lyndon Life Insurance Company and Lyndon Insurance
Group, Inc. with their respective certificates of incorporation, by-laws,
material contracts and agreements and with any material laws, judgments, orders
or decrees; (e) the availability of funds sufficient to enable Lyndon to
consummate the proposed sale; (f) required governmental or other consents,
approvals or authorizations; (g) the absence of actions, proceedings or claims
likely to materially affect Lyndon's ability to consummate the proposed sale;
and (h) the absence of any brokerage, finder's or other fee or commission
incurred by Lyndon.
For additional information concerning representations and warranties, see
"-- Survival of Representations and Warranties."
CONDUCT OF BUSINESS PRIOR TO CLOSING
The Company has agreed that, during the period from the date of the Stock
Acquisition Agreement until the Closing Date, the Company shall cause each of
the Target Corporations to conduct its business in the ordinary course
consistent with past practice and to: (i) maintain adequate insurance; (ii)
preserve intact its business
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organization and employees; (iii) maintain satisfactory relationships with its
independent agents, reinsurers and other persons with which it has a business
relationship; (iv) maintain its books and records in its usual manner; (v) not
make any change in its financial reporting or accounting and reserving
practices or policies; and (vi) duly and timely file all filings, declarations,
reports or returns required to be filed with all government authorities and
promptly pay all taxes, assessments and governmental charges.
The Company has further agreed that, during such period prior to Closing,
none of the Target Corporations shall: (a) issue, sell or deliver, or agree to
issue, sell or deliver, any shares of its capital stock or any options or other
rights with respect thereto; (b) declare or pay any dividend (except for the
Special Distribution); (c) purchase, redeem or otherwise acquire any shares of
its capital stock; (d) make any change in any pension or employee benefit plan
or modify any employment agreements or arrangements; (e) incur or guarantee any
indebtedness for borrowed money; (f) make any capital expenditure or purchase
or lease any property in excess of $50,000; (g) dispose of or pledge any assets
or cancel any debts or claims except in the ordinary course of business; (h)
enter into any acquisitions, mergers or consolidations; (i) alter the manner of
keeping its books, accounts or records; (j) amend its articles of
incorporation, regulations or by-laws (except as otherwise contemplated in the
Stock Acquisition Agreement); (k) settle any claim, action, suit or proceeding
(other than the payment of insured claims in the ordinary course of business)
involving the payment or receipt by a Target Corporation of more than $25,000
individually, or $100,000 in the aggregate; (1) enter into any other
transaction or agreement outside of the ordinary and usual course of business;
or (m) agree or commit to do any of the foregoing.
In addition, the Company has agreed to: (i) afford Lyndon full access to
the offices, properties, books and records of the Company and each of the
Target Corporations and to furnish to Lyndon such financial and operating data
and other information relating to the Target Corporations as Lyndon may
reasonably request; (ii) promptly notify Lyndon of all material proposed
adjustments contained in any tax examination reports received by the Company;
(iii) promptly prepare, file and diligently pursue with the appropriate
governmental agencies all documentation required to consummate the transactions
contemplated by the Stock Acquisition Agreement; (iv) cause certain forms of
non-piracy agreements attached to the Stock Acquisition Agreement to be
distributed to all of the Target Corporations' employees for execution by such
employees; (v) use its reasonable best efforts to cause all of the conditions
to Lyndon's obligation to consummate the Transaction to be satisfied; (vi)
terminate (or, at the Company's election, employ), at the Company's expense,
any employees of the Target Corporations not designated by Lyndon prior to the
Closing for continued employment by Lyndon or one of the Target Corporations
following the Closing; and (viii) diligently work towards the completion of the
Year 2000 work and other clean-up work on the Credit Life System prior to
Closing and, thereafter, to continue such work until completion at the
Company's expense.
NO "SHOPPING" COVENANT; BREAK-UP FEE
Until the earlier of the Closing or the termination of the Stock
Acquisition Agreement, the Company has agreed not to: (i) sell or arrange for
the acquisition of any capital stock or any other security of, or the business
or all or any substantial portion of, the assets of any of the Target
Corporations; (ii) negotiate, solicit or encourage any proposals relating to
the disposition of the business or assets of any of the Target Corporations, to
the acquisition of securities of any of the Target Corporations, or to a merger
or combination of any of the Target Corporations with any other Person; or
(iii) make available to any other Person any information concerning any of the
Target Corporations for the purpose of disposing of all or any substantial
portion of the assets of any of the Target Corporations or any securities
thereof.
Notwithstanding the foregoing, the Company may furnish information to, and
participate in discussions or negotiations with, any third party who submits a
good faith, unsolicited purchase offer to acquire the Target Corporations, if
the Company's Board of Directors determines in good faith, after consulting
with legal counsel, that such furnishing of information and participation in
discussions are required in the exercise of the Board of Directors' fiduciary
duties under applicable law. The Company will be entitled to execute a
definitive agreement with such a third party relating to the acquisition
proposal of such third party and to terminate the Stock Acquisition Agreement
so long as the Company pays Lyndon a fee of $750,000.
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<PAGE> 21
COVENANTS OF LYNDON
Lyndon has agreed to: (i) keep confidential all information provided by
the Company and the Target Corporations to Lyndon and its agents; (ii) promptly
prepare and file all documents to obtain state regulatory approvals and use all
reasonable efforts to obtain such regulatory approvals as are necessary to
consummate the transactions contemplated by the Stock Acquisition Agreement;
and (iii) use its reasonable best efforts to cause all of the conditions to the
Company's obligation to consummate the transaction to be satisfied.
EMPLOYEE BENEFIT PLANS
The Company and Lyndon have each agreed to cooperate in causing such
actions to be taken as of the Closing Date as would result in the Target
Corporations to cease to be participating employers as of the Closing Date in
the Company's and its ERISA Affiliate's Employee Benefit Plans in accordance
with the requirements of ERISA. The Company and Lyndon have further agreed
that, except for the Target Corporations' post-Closing Date contributions (and
liabilities therefor) to such Employee Benefit Plans for the time periods
preceding the Closing Date, none of the Target Corporations shall thereafter be
responsible for making any contributions to, or have any other liability with
respect to, such Employee Benefit Plans.
CONDITIONS TO CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED BY THE STOCK
ACQUISITION AGREEMENT
The obligation of Lyndon to consummate the transactions contemplated by
the Stock Acquisition Agreement is subject to the satisfaction or waiver by
Lyndon of certain conditions, including, without limitation, the following:
(i) all representations and warranties of the Company shall be true and correct
in all material respects as of the Closing Date; (ii) the Company shall have
performed and complied with all of the covenants and agreements required to be
performed or complied with by the Company; (iii) as of the Closing, there shall
not be any pending or threatened suit, action, investigation, proceeding or
court order relating to the contemplated transactions; (iv) all governmental
authorities shall have consented to and approved the contemplated transactions
to the extent required by law; (v) all documents delivered and action taken
pursuant to the Stock Acquisition Agreement shall be reasonably satisfactory in
form and substance to Lyndon and its counsel; (vi) the ALIC, Dublin and ANSC
unaudited September 30, 1997 GAAP Financial Statements and the unaudited ALIC
September 30, 1997 SAP Financial Statements shall have been delivered to Lyndon
at least fifteen days prior to the Closing Date, and in no event later than
November 30, 1997; (vii) the Company's Board of Directors and stockholders
shall have approved the Agreements; (viii) all of the independent agents of the
Target Corporations shall have agreed to maintain their relationships with such
corporations following the Closing unless the Company notifies Lyndon of any
indication otherwise; (ix) Lyndon shall be satisfied with the results of its
due diligence review with respect to certain matters relating to Dublin and the
assets being purchased pursuant to the Asset Purchase Agreement, and the
unaudited September 30, 1997 GAAP Financial Statements of each of the Target
Corporations shall indicate no material adverse change in the results of
operations or financial condition of such companies taken as a whole from the
June 30, 1997 unaudited financial statements previously provided to Lyndon; (x)
the Company and the Target Corporations shall have conveyed to Lyndon all of
their rights to the servicemarks "Costguard" and "Loanguard" and shall have
granted to Lyndon a license to use the "Acceleration" name and logo in
connection with their respective businesses; (xi) the Target Corporation's
combined GAAP Equity shall be not less than $31.6 million at December 31, 1997;
(xii) all intercompany service agreements and tax sharing agreements between
any of the Target Corporations and the Company shall have been terminated;
(xiii) the Lincoln National Life Insurance Company treaty for reinsurance
policies with effective dates of December 31, 1995 and prior shall have been
terminated; (xiv) the articles of incorporation and regulations of ALIC shall
have been amended to eliminate the provisions requiring director share
ownership and Ohio residential requirements; (xv) the Company shall have
entered into a Systems Use Agreement with the Target Corporations pursuant to
which the Target Corporations shall be entitled to utilize the IBM AS 400
system of the Company as the Target Corporations' mainframe computer and
programming support; (xvi) the Lincoln National Life Insurance Company
Reinsurance Agreement with ALIC dated January 1, 1996, reinsuring policies with
effective dates of January 1, 1996 and thereafter, shall not have been
terminated; (xvii) ALIC shall have entered into a lease for the premises
located in Dublin, Ohio which it currently leases on terms comparable to its
current lease
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<PAGE> 22
for the remaining term of the current lease, in form and substance acceptable
to Lyndon; (xviii) the Company shall have assumed the obligations of ALIC and
ANSC to indemnify their respective officers; (xix) the Company shall have
agreed to provide continued cooperation after Closing on any litigation matters
relating to any of the Target Corporations; (xx) the waiting period applicable
under the HSR Act shall have expired or been terminated; and (xxi) the
transactions contemplated by the Asset Purchase Agreement shall have closed
concurrently with the transactions contemplated by the Stock Acquisition
Agreement. See "ASSET PURCHASE AGREEMENT."
The obligation of the Company to consummate the transactions contemplated
by the Stock Acquisition Agreement is subject to the satisfaction or waiver by
Lyndon of certain conditions, including, without limitation, the following: (i)
all representations and warranties of Lyndon shall be true and correct in all
material respects as of the Closing Date; (ii) Lyndon shall have performed and
complied with all of the covenants and agreements required to be performed or
complied with by Lyndon; (iii) as of the Closing, there shall not be any
pending or threatened suit, action, investigation, proceeding or court order
relating to the contemplated transactions; (iv) all governmental authorities
shall have consented to and approved the contemplated transactions to the
extent required by law; (v) all documents delivered and action taken pursuant
to the Stock Acquisition Agreement shall be reasonably satisfactory in form and
substance to the Company and its counsel; (vi) the waiting period applicable
under the HSR Act shall have expired or been terminated; and (vii) the
transactions contemplated by the Asset Purchase Agreement shall have closed
concurrently with the transactions contemplated by the Stock Acquisition
Agreement. See "ASSET PURCHASE AGREEMENT."
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
In general, the representations and warranties contained in the Stock
Acquisition Agreement shall survive the Closing until December 31, 1999.
However, Lyndon shall be permitted to make claims against the Company with
respect to Taxes until 60 days following the expiration of the applicable
statute of limitations (See "-- Tax Matters") and to assert claims based on
fraud, willful misrepresentation or with respect to certain representations and
warranties set forth in the agreement relating to the capitalization of the
Target Corporations and the Company's ownership of all of the Target Shares,
free and clear of all Liens, within one year after Lyndon learns of such fraud,
willful misrepresentation or breach.
COVENANT NOT TO COMPETE
The Company has agreed for a period of three years from the Closing Date
not to, and to cause each of its controlled affiliates not to, directly or
indirectly: (i) engage in activities or businesses which are substantially in
competition with the current business of the Target Corporations; or (ii)
perform any action, activity or course of conduct which is substantially
detrimental to the business or business reputation of the Target Corporations,
including soliciting, recruiting or hiring any employees of any of the Target
Corporations and soliciting or encouraging any employee of any of the Target
Corporations to leave the employment of any of the Target Corporations.
INDEMNIFICATION
The Company has agreed to indemnify and hold harmless Lyndon from and
against all losses, liabilities, damages, obligations, costs and expenses
("Damages") in excess of $100,000 incurred by Lyndon relating to or arising out
of the inaccuracy of any representation or warranty in the Stock Acquisition
Agreement by the Company or the breach of any covenant by the Company. The
Company will not be liable for any such indemnification unless the aggregate
amount of all Damages exceeds $100,000 and then only to the extent of any such
excess, except for indemnification against certain Damages with respect to
certain Taxes and related matters for which the Company shall indemnify and
hold harmless Lyndon and its affiliates (including the Target Corporations)
from liability from the first dollar or any such Damages to the full amount
thereof (except as reflected on the Combined Audited December 31, 1997 Balance
Sheet). See "-- Tax Matters." The Company's and ANIC's liability to indemnify
Lyndon and Lyndon Property under the Agreements is limited to a maximum amount
of $8 million, except that there is no limitation on indemnification for (i)
Taxes, (ii) breaches of certain representations and warranties relating to the
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capitalization of the Target Corporations and the Company's ownership of all of
the Target Shares, free and clear of all Liens, and (iii) actual fraud by the
Company or ANIC.
Lyndon has agreed to indemnify and hold harmless the Company from and
against any and all Damages incurred by the Company resulting from, relating to
or arising out of the inaccuracy of any representation or warranty in the Stock
Acquisition Agreement by Lyndon or the breach of any covenant contained therein
by Lyndon. In addition, Lyndon has agreed to indemnify and hold harmless, and
cause the Target Corporations to indemnify and hold harmless, the Company and
its affiliates with respect to certain Taxes and related matters. See "-- Tax
Matters." The liability of Lyndon to indemnify the Company under the Agreements
is limited to a maximum amount of $8 million.
TAX MATTERS
Lyndon has agreed to: (i) timely make an election under Section 338(g) of
the Code (and any comparable election under state or local tax law) with
respect to each of the Target Corporations; (ii) join with the Company in
timely making an election under Section 338(h)(10) of the Code (and any
comparable election under state or local tax law); and (iii) cooperate with the
Company in the completion and timely filing of such elections. Not later than
three months following the Closing Date, Lyndon shall prepare and deliver to
the Company a Price Allocation Schedule allocating the modified ADSP (as such
term is defined in Treasury Regulations Section 1.338(h)(10)-1) among the
assets of the Target Corporations in accordance with Treasury Regulations
promulgated under Section 338(h)(10)-1.
Any objection by the Company to the Price Allocation Schedule prepared by
Lyndon shall be raised within 60 business days after receipt by the Company of
the Price Allocation Schedule. If Lyndon and the Company are unable to resolve
any differences within 60 days thereafter, such dispute shall be resolved by
Ernst & Young LLP and KPMG Peat Marwick LLP. If such accounting firms are
unable to resolve any differences within 30 days thereafter, such dispute shall
be resolved by another national accounting firm selected by Ernst & Young LLP
and KPMG Peat Marwick LLP which has not performed any services for or received
any revenues from either of such parties or their respective affiliates within
the prior two years. Lyndon and the Company shall each pay one-half of the
costs, fees and expenses of said accounting firm.
The Company has agreed to timely prepare and file with the appropriate
authorities all tax returns of the Target Corporations that are required to be
filed for the tax periods ending prior to the Closing Date, and the Company has
agreed to pay all taxes due with respect to such tax returns. Lyndon has agreed
to timely prepare and file all other tax returns of the Target Corporations
that are required to be filed, and Lyndon will pay all taxes due with respect
to such tax returns. All transfers, documentary, sales, use, registration and
other such Taxes and related fees incurred in connection with the Stock
Acquisition Agreement and the transactions contemplated thereby shall be paid
by the Company. The Company and Lyndon will cooperate in timely making all
filings, returns, reports and forms as may be required to comply with the
provisions of applicable tax laws.
The parties have agreed that for all financial purposes the Closing shall
be deemed to occur on December 31, 1997, notwithstanding the actual Closing
Date. See "-- Closing; Termination." Accordingly, any profit or loss incurred
by the Target Corporations on or prior to December 31, 1997 shall remain for
the account of the Company and any profit or loss incurred by the Target
Corporations after such date shall be for the account of Lyndon. The parties
have agreed to reimburse each other for the amount of any Taxes actually paid
by the other party solely as a function of the timing difference of the deemed
Closing Date of December 31, 1997 and the actual Closing Date for tax purposes.
The Company has agreed to indemnify and hold harmless from liability
Lyndon and its affiliates for all Damages (except as reflected on the Combined
Audited December 31, 1997 Balance Sheet) incurred in connection with: (i) Taxes
of the Target Corporations for the Pre-Closing Tax Period; (ii) Taxes of the
Company or any other corporation which is or has been affiliated with the
Company; (iii) Taxes resulting from the Section 338(g) and
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<PAGE> 24
338(h)(10) elections contemplated by Section 12.1 of the Stock Acquisition
Agreement; (iv) Taxes with respect to any pre-closing period resulting from the
Target Corporations' ceasing to be included in the consolidated Federal income
tax return filed by the Company; (v) Taxes imposed on the Target Corporations
on or prior to the Closing Date; and (vi) reasonable legal fees and expenses
for any item attributable to any of the foregoing items. Notwithstanding the
foregoing, the Company shall not be obligated to indemnify and hold harmless
Lyndon and its affiliates from Taxes attributable to any action taken after the
Closing by Lyndon or its affiliates (a "Lyndon Tax Act") or attributable to a
breach by Lyndon of its obligations under the Stock Acquisition Agreement.
Lyndon has agreed to indemnify and hold harmless, and to cause the Target
Corporations to indemnify and hold harmless, the Company and its affiliates
from: (a) all liability for taxes of the Target Corporations for the period
after the Closing Date; (b) all liability for taxes attributable to a Lyndon
Tax Act or to a breach by Lyndon of its obligations under the Stock Acquisition
Agreement; and (c) all liability for reasonable legal fees and expenses
attributable to any of the foregoing items.
AMENDMENT; WAIVER
The Stock Acquisition Agreement may be amended at any time by written
agreement of the parties and the conditions to the consummation of the
contemplated transactions may be waived at any time by the party for whose
benefit they were created.
EXPENSES; LIQUIDATED DAMAGES
The Stock Acquisition Agreement provides that each of the parties shall
pay its own expenses incident to the preparation and execution of the Stock
Acquisition Agreement and the consummation of the transactions contemplated
thereby. However, if the Closing does not occur as a result of an intentional
material breach of a covenant of the Company which prevents satisfaction of a
Closing condition, then the Company shall pay Lyndon the sum of $650,000 as
liquidated damages.
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ASSET PURCHASE AGREEMENT
The descriptions in this Proxy Statement of the terms of the Asset
Purchase Agreement are summaries only and are qualified in their entirety by
reference to the Asset Purchase Agreement which is attached as Annex II to this
Proxy Statement and is incorporated herein by reference. Terms which are not
otherwise defined in this summary have the meanings set forth in the Asset
Purchase Agreement.
PURCHASE PRICE AND ACQUIRED ASSETS
Pursuant to the terms and conditions of the Asset Purchase Agreement, ANIC
will sell to Lyndon Property, for an aggregate purchase price of $10.3 million
payable in cash on the Closing Date, certain of the assets of ANIC which
comprise all of its vehicle extended service contract (or "warranty") book of
business (the "Acquired Assets"). The Acquired Assets will include: (i) all of
ANIC's rights to and interest in the expirations and renewals on all insurance
policies in force as of the Closing Date issued and insured by ANIC covering
extended service contract warranties (subject to all of the related
obligations) (the "Acquired Policies"); (ii) all expiration files, customer
account records and underwriting, claims and processing manuals related to the
Acquired Policies; (iii) all rights (subject to the related obligations), under
the contracts and commitments related to the Acquired Assets; (iv) all rights
to and interest in (subject to the related obligations with respect to) certain
computer hardware and any software used in ANIC's operation of its warranty
book of business; (v) certain furniture, fixtures and equipment; and (vi)
copies of all policy forms, rate filings related to such policy forms, and all
other regulatory filings related to the Acquired Policies.
REINSURANCE AGREEMENTS AND LIABILITIES ASSUMED
Pursuant to the Asset Purchase Agreement, Lyndon Property and ANIC will
enter into two reinsurance agreements pursuant to which ANIC will cede to
Lyndon Property and Lyndon Property will assume and reinsure the Acquired
Policies and all insurance policies issued after the Closing Date by Lyndon
Property in the name of ANIC or on ANIC's forms. Except to the extent set forth
in the Reinsurance Agreements, Lyndon Property will not be liable for any debt,
obligations or liability of ANIC relating to the Acquired Assets.
CLOSING
The Closing for the transactions contemplated by the Asset Purchase
Agreement will take place effective as of December 31, 1997, as long as the
Ohio Department of Insurance has approved the transactions contemplated by the
Asset Purchase Agreement. The Closing shall occur concurrently with, and shall
be conditional upon, the Closing of the transactions contemplated by the Stock
Acquisition Agreement.
REPRESENTATIONS AND WARRANTIES
The Asset Purchase Agreement includes representations of the Company and
ANIC as to: (i) the organization and good standing of ANIC and its
qualifications to do business as a foreign corporation; (ii) the authorization,
execution and delivery of the Asset Purchase Agreement by the Company and ANIC;
(iii) the absence of any consents, orders, licenses, approvals, authorizations,
exemptions, registrations, declarations or filings with any governmental
authority or person which are required to be obtained or made in connection
with the performance by the Company or ANIC of the Asset Purchase Agreement,
except for the approval of the Ohio Department of Insurance; (iv) ANIC's title
to the Acquired Assets; (v) the non-contravention of the consummation of the
transactions contemplated by the agreement with the articles of incorporation,
regulations, material contracts and agreements of ANIC and with any applicable
laws, judgments, orders or decrees; (vi) the absence of any violations by ANIC
of any applicable law, rule or regulation which could materially and adversely
affect the Acquired Assets; (vii) the obtainment by ANIC and continuing
validity of all Permits that are material or necessary with respect to ANIC's
operations of any of the Acquired Assets; (viii) material litigation involving
or affecting the Acquired Assets;
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<PAGE> 26
(ix) the employees of ANIC engaged in the operation of ANIC's warranty book of
business and their compensation and employment arrangements; (x) the absence of
any brokers having been retained by the Company or ANIC in connection with the
transaction; (xi) the sufficiency of the Acquired Assets, together with the
assets owned by the Target Corporations, for the conduct of ANIC's warranty
book of business by Lyndon Property and the conduct of the Target Corporations'
respective business; and (xii) the absence of any reason for the Company and
ANIC to believe that the Acquired Policies will be terminated before their
stated expiration dates, except in the ordinary course, or will not be renewed.
The representations and warranties by Lyndon Property to the Company and
ANIC include, among other things, representations of Lyndon Property as to: (a)
its organization and good standing; (b) the authorization, execution and
delivery of the Asset Purchase Agreement by Lyndon Property and the validity
and enforceability thereof against Lyndon Property; and (c) the
noncontravention of the execution, delivery and performance of the Asset
Purchase Agreement by Lyndon Property with its certificate of incorporation,
by-laws and agreements.
ADDITIONAL AGREEMENTS OF THE COMPANY, ANIC AND LYNDON PROPERTY
During the period from the date of the Asset Purchase Agreement until the
Closing Date, ANIC has agreed to carry on its warranty insurance business in
the usual, regular and ordinary course, and the Company has agreed to cause
ANIC to maintain in force its current stop loss reinsurance program, at Lyndon
Property's expense, after the Closing Date. In addition, ANIC has agreed to
complete prior to May 1, 1998 the following work related to its Cost Guard
Service Contract System: (i) the resolution of all "Year 2000" issues; (ii)
system clean up; (iii) construction of a redesigned rate system module and a
laser check system module; and (iv) an on-line claims update.
ANIC has granted Lyndon Property the right and authority to utilize ANIC's
forms and to place insurance policies in the name of ANIC in each of the states
in which ANIC is currently licensed to do business for a maximum of eighteen
months following the Closing Date ("New Business"). All such New Business
written by Lyndon Property utilizing ANIC's forms or issued in ANIC's name
shall be automatically reinsured by Lyndon Property under the Reinsurance
Agreements, and Lyndon Property shall indemnify ANIC and hold ANIC harmless
from and against all liability arising under such New Business. See "---
Reinsurance Agreements and Liabilities Assumed."
After the Closing, ANIC has agreed to provide Lyndon Property with
reasonable assistance in litigating claims arising under any Acquired Policies,
subject to the payment by Lyndon Property to ANIC of reasonable compensation
for any depositions or testimony given by ANIC personnel.
In the event that the Internal Revenue Service ("IRS") takes the position
that the Acquired Assets constitute a "trade or business" within the meaning of
Code Section 1060 and requires Lyndon Property and the Company to prepare and
file a Form 8594 with the IRS, Lyndon and the Company have agreed to cooperate
in determining the allocation of the Purchase Price among the Acquired Assets.
COVENANT NOT TO COMPETE
The Company and ANIC have agreed that, during the three year period
following the Closing Date, they each will not, without the prior written
consent of Lyndon Property, directly or indirectly, sell, underwrite, place or
write warranty insurance policies or solicit, accept or place for itself and/or
any other entity, any warranty insurance business from existing customers of
ANIC.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
In general, the representations and warranties contained in the Asset
Purchase Agreement shall survive the Closing for a period of two years.
However, each party shall be permitted to make claims against the other party
based on fraud or willful misrepresentation at any time within one year after
the party learns of such fraud or willful
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<PAGE> 27
misrepresentation. In addition, claims for indemnification under the agreement
shall survive the second anniversary of the Closing Date if prior to such date
the party seeking indemnification in good faith gives notice to the other party
of the specific inaccuracy or breach giving rise to such claim for
indemnification.
INDEMNIFICATION
The Company and ANIC each have agreed to indemnify, defend and hold
harmless Lyndon Property, its officers, directors, employees and agents from
and against all losses, fines, civil penalties, judgments, claims, damages,
liabilities or expenses (including reasonable attorneys' fees) of every kind in
excess of $100,000 in the aggregate (including any such damages incurred by
Lyndon under the Stock Acquisition Agreement) imposed upon, incurred or paid by
Lyndon Property by reason of the breach by the Company and ANIC of any
representation and warranty made by the Company and ANIC in the Asset Purchase
Agreement or, except as otherwise provided in the Reinsurance Agreements, any
losses under the Acquired Policies. The liability of the Company and ANIC to
indemnify Lyndon under the Asset Purchase Agreement is subject to the same $8
million limitation set forth in the Stock Acquisition Agreement. See "STOCK
ACQUISITION AGREEMENT -- Indemnification."
Lyndon Property has agreed to indemnify, defend and hold harmless the
Company and ANIC from and against all losses, fines, civil penalties,
judgments, claims, damages, liabilities or expenses (including reasonable
attorneys' fees) of every kind imposed upon, incurred or paid by the Company
and ANIC by reason of (i) the breach by Lyndon Property of any representation
and warranty made by it in the Asset Purchase Agreement or (ii) any claims made
against ANIC relating to the Acquired Policies or the New Business other than
for losses under the Acquired Policies (except as otherwise provided in the
Reinsurance Agreements) or arising out of or relating in any way to the conduct
of the warranty book of business being acquired by Lyndon Property on and after
the Closing Date. The liability of Lyndon Property to indemnify the Company
under the Agreements is limited to a maximum amount of $8 million.
Claims for indemnification under the Asset Purchase Agreement must be
asserted prior to the second anniversary of the Closing Date, except for claims
by Lyndon Property related to the breach by the Company and ANIC of their
representations and warranties concerning ANIC's title to the Acquired Assets.
See "-- Survival of Representations and Warranties."
AMENDMENT; WAIVER
The Asset Purchase Agreement may be amended at any time by written
agreement of the parties and the conditions to the consummation of the
contemplated transactions may be waived at any time by the party for whose
benefit they were created.
EXPENSES
The Asset Purchase Agreement provides that each of the parties shall pay
its own expenses incident to the preparation and execution of the Asset
Purchase Agreement and the consummation of the transactions contemplated
thereby.
REGULATORY APPROVALS REQUIRED
The Transaction is subject to the approval of the Ohio and Missouri
Departments of Insurance and to the expiration of or termination of the
applicable waiting period under the HSR Act. Certain aspects of the Transaction
will require notifications to, and filings with, certain authorities in certain
states in jurisdictions where ALIC currently operates.
-21-
<PAGE> 28
OHIO DEPARTMENT OF INSURANCE
As an Ohio chartered life insurance company, ALIC is subject to the
provisions of the Ohio Revised Code. Section 3901.321 of the Ohio Revised Code
provides that a person may acquire control of an Ohio insurance company only if
the acquisition of control is submitted to and receives advance approval from
the Ohio Superintendent of Insurance (the "Ohio Superintendent"). Section
3901.321(F)(1) provides that the Ohio Superintendent may disapprove any such
acquisition of control, after a public hearing, for any of the following
reasons: (i) after the change of control, the insurer would not be able to
satisfy the requirements for the issuance of a license to write the line or
lines of insurance for which it is presently licensed; (ii) the effect thereof
would be substantially to lessen competition in insurance in Ohio or tend to
create a monopoly therein; (iii) the financial condition of any acquiring party
is such as might jeopardize the financial stability of the insurer, or
prejudice the interests of its policyholders; (iv) the plans or proposals of
the acquiring party to make changes in the insurer's business or corporate
structure or management are unfair and unreasonable to policyholders of the
insurer and not in the public interest; (v) the competence, experience and
integrity of those persons who would control the operation of the insurer are
such that it would not be in the interest of policyholders of the insurer and
of the public to permit the acquisition of control; or (vi) the acquisition is
likely to be hazardous or prejudicial to the insurance-buying public.
Lyndon has submitted an application to the Ohio Superintendent seeking
approval of the Transaction. The application is pending before the Ohio
Superintendent and the Company expects to receive a formal order approving the
Transaction prior to the Special Meeting.
MISSOURI DEPARTMENT OF INSURANCE
As a Missouri chartered insurance company, Lyndon is subject to the
provisions of the Revised Statutes of the State of Missouri. Section 375.355 of
the Missouri Revised Statutes provides that a Missouri chartered insurance
company may acquire control of another insurance company only if the
acquisition of control is submitted to and receives advance approval from the
Missouri Director of Insurance (the "Missouri Director") after notice thereof
to the stockholders of the acquiring insurance company and a public hearing
thereon. Section 375.355 provides that the Missouri Director may disapprove any
such acquisition of control for any of the following reasons: (i) the interests
of the policyholders of the company are not protected; (ii) a reasonable
objection exists as to the acquisition; or (iii) the acquisition will tend to
substantially lessen competition or create a monopoly.
Lyndon has submitted an application to the Missouri Director seeking
approval of the Transaction. The application is pending before the Missouri
Director and a hearing was held on December 4, 1997. The Company expects to
receive a formal order approving the Transaction prior to the Special Meeting.
HSR ACT AND ANTITRUST
Under the HSR Act and the rules promulgated thereunder by the Federal
Trade Commission (the "FTC"), the Transaction may not be consummated until
notifications have been given and certain information has been furnished to the
FTC and the Antitrust Division of the Department of Justice (the "DOJ") and the
applicable waiting period has expired or been terminated. The Company and
Frontier filed notification and report forms under the HSR Act with the FTC and
the DOJ on October 31, 1997. The waiting period was terminated early by the FTC
and the DOJ effective as of November 18, 1997. At any time before or after
consummation of the Transaction, the FTC or the DOJ could take such action
under the antitrust laws as it deems necessary or desirable in the public
interest, including seeking to enjoin the consummation of the Transaction. At
any time before or after the Closing Date, and notwithstanding that the waiting
period under the HSR Act has expired, any state could take such action under
the antitrust laws as it deems necessary or desirable in the public interest.
Such action could include seeking to enjoin the consummation of the
Transaction. Private parties may also seek to take legal action under the
antitrust laws under certain circumstances.
-22-
<PAGE> 29
Based on information available to it, the Company believes that the
Transaction can be effected in compliance with Federal and state antitrust
laws. However, there can be no assurance that a challenge to the consummation
of the Transaction on antitrust grounds will not be made or that, if such a
challenge were made, the Company would prevail or would not be required to
accept certain adverse conditions in order to consummate the Transaction. The
expiration or termination of the HSR Act waiting period is a condition to the
closing of the Transaction. See "STOCK ACQUISITION AGREEMENT -- Conditions to
Consummation of the Transactions."
-23-
<PAGE> 30
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
INTRODUCTION
The following unaudited pro forma consolidated financial statements are
based on the Company's Consolidated Financial Statements. The unaudited pro
forma consolidated balance sheet is based on the September 30, 1997 unaudited
consolidated balance sheet of the Company, which is included elsewhere in this
Proxy Statement, and assumes that the Transaction was consummated on September
30, 1997. The unaudited pro forma consolidated statement of income for the nine
months ended September 30, 1997 is based on the unaudited consolidated
statement of income for the nine months ended September 30, 1997, which is
included elsewhere in this Proxy Statement, and assumes that the Transaction
was consummated on January 1, 1996. The unaudited pro forma consolidated
statement of income for the year ended December 31, 1996 is based on the
consolidated statement of income for the year ended December 31, 1996, which is
included elsewhere in this Proxy Statement, and assumes that the Transaction
was consummated on January 1, 1996. The unaudited pro forma consolidated
financial statements and related notes should be read in conjunction with the
Company's Consolidated Financial Statements and the notes thereto included
elsewhere in this Proxy Statement.
The unaudited pro forma consolidated financial statements of the Company
do not purport to represent what the consolidated financial position or results
of operations of the Company would have been if the Transaction had in fact
been consummated on such dates or at the beginning of such periods or to
project the financial position or results of operations for any future date or
period. The pro forma adjustments are based upon available information and upon
certain assumptions that the Company's management believes are reasonable under
the circumstances.
The Company has not provided pro forma income statements for 1994 and 1995
giving effect to the Transaction because the Company's management believes that
the companies and business being sold essentially represent the Company's
material lines of business and related operating results during those periods,
except for the charge to operations of $4.034 million in 1994 for the operating
losses related to and the write-off of the Company's investment in Randjill
Group Ltd, which was deconsolidated as of April 1, 1994 and adverse experience
related to discontinued property/casualty product lines of $3.025 million and
$2.45 million in 1994 and 1995, respectively. The remaining lines of business
in 1994 and 1995 were discontinued and were either not material to the
Company's operations or were reinsured by the Company to third parties.
The companies being sold pursuant to the Stock Acquisition Agreement will
be presented as discontinued operations in the Company's consolidated financial
statements as of December 31, 1997. See "The Transaction -- Accounting
Treatment." The financial results for these companies have not previously been
presented as discontinued operations. For the reasons described above, the
Company's management believes the following pro forma financial information,
when read in conjunction with the Company's historical financial statements
included herein, provides the same information in all material respects that
would otherwise be included in pro forma statements of income for this
discontinued business.
The business being sold pursuant to the Asset Purchase Agreement is a part
of the Property/Casualty segment (See Note J to the 1996 consolidated financial
statements included herein) and, as such, will not be treated as discontinued
operations in the Company's consolidated financial statements as of December
31, 1997.
In addition, the Company's management believes the following pro forma
financial information, when read in conjunction with the historical financial
statements included herein, provides the Stockholders with the most relevant
information concerning the effect of the Transaction. The presentation of
separate disaggregated financial statements of the companies and business being
sold would provide no substantive additional information that is not already
presented in the accompanying pro forma financial statements, the historical
financial statements and Note J to the 1996 audited consolidated financial
statements included herein.
-24-
<PAGE> 31
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
BALANCES
OF BUSINESSES PRO FORMA REF.
AS REPORTED BEING SOLD (A) ADJUSTMENTS NO. PRO FORMA
----------- -------------------- ----------- ---- ---------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
ASSETS
INVESTMENTS:
INVESTMENTS AVAILABLE FOR SALE
FIXED MATURITIES $ 49,796 $ 29,247 --- $20,549
EQUITY SECURITIES 6,126 6,126 --- ---
SHORT TERM INVESTMENTS 19,958 11,641 --- 8,317
OTHER INVESTED ASSETS 306 306 --- ---
------- ----------- ---------- ---------
76,186 47,320 --- 28,866
CASH 1,113 8,747 $(25,070) 1. 17,436
RECEIVABLES:
PREMIUMS IN PROCESS OF
TRANSMITTAL 10,355 1,941 --- 8,414
AMOUNTS DUE FROM REINSURERS,
LESS ALLOWANCE 28,362 17,508 --- 10,854
RECOVERABLE FEDERAL INCOME
TAXES 129 93 36 2. ---
----------- ----------- ---------- ---------
38,846 19,542 36 19,268
ACCRUED INVESTMENT INCOME 644 398 --- 246
PREPAID REINSURANCE PREMIUMS 19,448 12,076 --- 7,372
REINSURANCE PREMIUM DEPOSITS 26,710 26,710 --- ---
DEFERRED POLICY ACQUISITION
COSTS 30,362 27,784 --- 2,578
FURNITURE, FIXTURES, &
EQUIPMENT-NET 662 151 255 3. 256
LEASEHOLD IMPROVEMENTS 138 134 (50) 3. 54
OTHER ASSETS:
COST IN EXCESS OF EQUITY 657 --- 657 4. ---
FUNDS HELD UNDER REINSURANCE
TREATIES 6,036 6,036 --- ---
OTHER 729 435 26 3. 268
----------- ----------- ---------- ---------
7,422 6,471 683 268
----------- ----------- ---------- ---------
$201,531 $149,333 $(24,146) $76,344
=========== =========== ========== =========
</TABLE>
-25-
<PAGE> 32
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED BALANCE SHEETS--(CONTINUED)
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
BALANCES
OF BUSINESSES PRO FORMA REF.
AS REPORTED BEING SOLD (A) ADJUSTMENTS NO. PRO FORMA
----------- -------------- ----------- ---- ----------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C>
LIABILITIES & COMMON
STOCKHOLDERS' EQUITY
POLICY RESERVES AND LIABILITIES:
UNEARNED PREMIUM RESERVES $ 83,980 $ 70,616 --- $13,364
INSURANCE CLAIMS 26,884 14,117 --- 12,767
OTHER 5 5 --- ---
---------- ------------- ---------- ---------
110,869 84,738 --- 26,131
OTHER LIABILITIES:
FUNDS HELD UNDER REINSURANCE
AGREEMENTS 2,940 2,475 --- 465
DEFERRED REINSURANCE COMMISSIONS 14,537 13,046 --- 1,491
AMOUNTS DUE REINSURERS 12,625 5,359 --- 7,266
NOTES PAYABLE 15,000 --- $ 15,000 5. ---
COMMISSIONS PAYABLE 5,550 5,550 --- ---
ACCOUNTS PAYABLE & OTHER
LIABILITIES 2,655 1,352 93 3. 1,210
FEDERAL INCOME TAXES:
CURRENT --- --- (5,255) 2. 5,255
DEFERRED 4,089 5,213 (1,124) 2. ---
---------- ------------- ---------- ---------
57,396 32,995 8,714 15,687
---------- ------------- ---------- ---------
168,265 117,733 8,714 41,818
---------- ------------- ---------- ---------
COMMON STOCKHOLDERS' EQUITY:
COMMON STOCK 941 2,005 (2,005) 6. 941
ADDITIONAL PAID-IN CAPITAL 32,520 11,396 (11,396) 6. 32,520
TREASURY STOCK (6,599) --- --- (6,599)
RETAINED EARNINGS 6,435 18,305 (19,459) 7. 7,589
NET UNREALIZED DEPRECIATION ON
INVESTMENT SECURITIES (31) (106) --- 75
---------- ------------- ---------- ---------
33,266 31,600 (32,860) 34,526
---------- ------------- ---------- ---------
$201,531 $149,333 $(24,146) $76,344
========== ============= ========== =========
</TABLE>
-26-
<PAGE> 33
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
BALANCES
OF BUSINESSES PRO FORMA REF.
AS REPORTED BEING SOLD (A) ADJUSTMENTS NO. PRO FORMA
------------ -------------- ------------ ---- -----------
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C>
REVENUE
GROSS PREMIUMS WRITTEN $ 49,574 $27,787 --- $ 21,787
LESS REINSURANCE CEDED 16,255 4,898 --- 11,357
----------- ------------- ----------
NET PREMIUMS WRITTEN 33,319 22,889 --- 10,430
DECREASE (INCREASE) IN UNEARNED
PREMIUM RESERVES 1,700 4,261 --- (2,561)
----------- ------------- ----------- ----------
PREMIUMS EARNED 35,019 27,150 --- 7,869
NET INVESTMENT INCOME:
INTEREST AND DIVIDENDS 3,405 2,655 --- 750
REALIZED GAINS 81 (34) --- 115
SERVICE FEES ON EXTENDED SERVICE
CONTRACTS 2,339 2,339 --- ---
OTHER INCOME 231 44 --- 187
----------- ------------- ----------- ----------
41,075 32,154 --- 8,921
----------- ------------- ----------- ----------
BENEFITS AND EXPENSES:
POLICY BENEFITS 18,360 13,018 --- 5,342
COMMISSIONS AND SELLING EXPENSES 16,438 12,758 --- 3,680
REINSURANCE EXPENSE RECOVERY (4,043) (2,625) --- (1,418)
GENERAL AND ADMINISTRATIVE 6,050 2,954 $ 282 8. 2,814
TAXES, LICENSES AND FEES 1,570 683 14 8. 873
INTEREST 1,069 --- 1,069 9. ---
DECREASE (INCREASE) IN DEFERRED
POLICY ACQUISITION COSTS 584 2,013 --- (1,429)
----------- ------------- ----------- ----------
40,028 28,801 1,365 9,862
----------- ------------- ----------- ----------
OPERATING INCOME (LOSS)
BEFORE FEDERAL INCOME
TAXES 1,047 3,353 (1,365) (941)
FEDERAL INCOME TAXES:
CURRENT 604 623 (19) 2. ---
DEFERRED (589) (716) 127 2. ---
----------- ------------- ----------- ----------
15 (93) 108 ---
----------- ------------- ----------- ----------
OPERATING INCOME (LOSS) $ 1,032 $ 3,446 $(1,473) $ (941)
=========== ============= =========== ==========
OPERATING INCOME PER COMMON
SHARE $ 0.12 $ (0.11)
=========== ==========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 8,604,017 8,604,017
=========== ==========
</TABLE>
-27-
<PAGE> 34
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
BALANCES
OF BUSINESSES PRO FORMA REF.
AS REPORTED BEING SOLD (A) ADJUSTMENTS NO. PRO FORMA
------------ -------------- ------------ ----- ----------
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C>
REVENUE
GROSS PREMIUMS WRITTEN $ 58,412 $41,159 --- $ 17,253
LESS REINSURANCE CEDED 12,860 4,748 --- 8,112
----------- ------------- ----------- ---------
NET PREMIUMS WRITTEN 45,552 36,411 --- 9,141
DECREASE (INCREASE) IN UNEARNED
PREMIUM RESERVES 405 3,708 --- (3,303)
----------- ------------- ----------- ---------
PREMIUMS EARNED 45,957 40,119 --- 5,838
NET INVESTMENT INCOME:
INTEREST AND DIVIDENDS 4,416 3,448 --- 968
REALIZED GAINS 484 221 --- 263
SERVICE FEES ON EXTENDED SERVICE
CONTRACTS 2,450 2,450 --- ---
OTHER INCOME 4,513 62 --- 4,451
----------- ------------- ----------- ---------
57,820 46,300 --- 11,520
----------- ------------- ----------- ---------
BENEFITS AND EXPENSES:
POLICY BENEFITS 24,338 18,940 --- 5,398
COMMISSIONS AND SELLING EXPENSES 22,145 19,584 --- 2,561
REINSURANCE EXPENSE RECOVERY (2,670) (1,298) --- (1,372)
GENERAL AND ADMINISTRATIVE 7,486 3,912 $ 761 8. 2,813
TAXES, LICENSES AND FEES 1,880 879 88 8. 913
INTEREST 1,969 --- 1,563 9. 406
DECREASE (INCREASE) IN DEFERRED
POLICY ACQUISITION COSTS 893 1,725 --- (832)
----------- ------------- ----------- ---------
56,041 43,742 2,412 9,887
----------- ------------- ----------- ---------
OPERATING INCOME
BEFORE FEDERAL INCOME
TAXES 1,779 2,558 (2,412) 1,633
FEDERAL INCOME TAXES:
CURRENT 152 152 --- 2. ---
DEFERRED (346) (389) 43 2. ---
----------- ------------- ----------- ---------
(194) (237) 43 ---
----------- ------------- ----------- ---------
OPERATING INCOME $ 1,973 $ 2,795 $(2,455) $ 1,633
=========== ============= =========== =========
OPERATING INCOME PER COMMON
SHARE $ 0.34 $ 0.28
=========== =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 5,904,398 5,904,398
=========== =========
</TABLE>
-28-
<PAGE> 35
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL DATA
NOTE--PRO FORMA ADJUSTMENTS AND ADDITIONAL INFORMATION
BALANCE SHEET ADJUSTMENTS: September 30, 1997
(A) The "Balances of Businesses Being Sold" column represents the balances of
the Target Corporations and the Acquired Assets being sold.
1. Reflects the proceeds to be received by the Company from the Transaction,
before adjustment, of $40.5 million, less the repayment of the outstanding
principal balance of the Company's Senior Notes in the amount of $15
million and accrued interest thereon of $0.7 million, plus the net
settlement of intercompany amounts due from ALIC of $0.3 million.
2. Reflects adjustments necessary at the statutory tax rate for the pro
forma adjustments considering the net operating loss position of the
Company, after giving effect to the Transaction. The pre sale tax
balances relating to the Company have been eliminated to give effect to
the Transaction effective as of January 1, 1996. The Company's ability to
recognize tax assets for its non-life insurance operations, which have
significant operating loss carryforwards, has been eliminated as a result
of the sale of ALIC, the Company's life insurance subsidiary. In
addition, the Company's pro forma operating results exclude federal income
taxes because of operating loss carryforwards available to the Company.
For further information regarding federal income taxes and the Company's
operating loss carryforwards, see "Note G -- Federal Income Taxes" to the
Company's audited financial statements included elsewhere in this Proxy
Statement.
3. Represents the transfer of assets or liabilities, as applicable, between
the businesses being sold and retained by the Company as part of the
Transaction, in accordance with the terms of the Agreements.
4. Reflects elimination of the Company's cost in excess of equity for ALIC.
5. Reflects pay-off of notes payable which is required as a condition of the
Transaction.
6. Reflects restoring amounts eliminated in the "Balances of Businesses
Being Sold" to properly reflect consolidated equity amounts.
7. Reflects restoring the $18.3 million from the "Balances of Businesses
Being Sold" to properly reflect consolidated equity amounts, plus the net
gain after income taxes and direct expenses of $2.7 million from the
Transaction, less the write off of the Company's non-life insurance tax
assets of $1.2 million (see footnote 2) and other assets of $0.3 million.
INCOME STATEMENT ADJUSTMENTS: December 31, 1996 and September 30, 1997
8. Reflects elimination of income statement amounts which would have been
eliminated had the Transaction been effective as of January 1, 1996.
9. Reflects elimination of interest expense related to notes payable which
are required to be paid off as a condition of the Transaction.
COMMENTS: Although accounting rules related to Pro Forma Financials do not
allow for the inclusion of anticipated investment income, the Company estimates
that investment income of $654,000 and $522,000 would have been earned for the
twelve months ended December 31, 1996 and the nine months ended September 30,
1997, respectively, had this transaction taken place on January 1, 1996. The
estimated investment income calculation assumes the Company has approximately
$10.1 million available for investment (with an estimated yield of 6.5%) after
reflecting the Transaction.
-29-
<PAGE> 36
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as of October 31, 1997
(except as otherwise noted) with respect to stockholders known to the Company
to be the beneficial owners of more than five percent (5%) of the Company's
Common Stock:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
- ---------------- -------------------- --------
<S> <C> <C>
David T. Chase 3,672,148(1) 42.7%
D.T. Chase Enterprises, Inc.
One Commercial Plaza
Hartford, Connecticut 06103
Arnold L. Chase 1,167,824(2) 13.6%
D.T. Chase Enterprises, Inc.
One Commercial Plaza
Hartford, Connecticut 06103
The Darland Trust 1,167,824(3) 13.6%
P.O. Box 472
St. Peter's House, Le Bordage
Guernsey GYI6AY
Channel Islands
Rhoda L. Chase 2,000,000(4) 23.3%
c/o Chase Enterprises, Inc.
One Commercial Plaza
Hartford, Connecticut 06103
Insurance Holdings Limited Partnership 670,000(5) 7.8%
One Commercial Plaza
Hartford, Connecticut 06103
Spitzer Profit Sharing and 712,250(6) 8.3%
Savings Plan
150 East Bridge Street
Elyria, Ohio 44035
</TABLE>
- --------------------
(1) Includes 6,500 shares of Common Stock subject to immediately exercisable
options. According to a Schedule 13D filed with the Commission, Mr. David
T. Chase shares the power to dispose or to direct the disposition of
3,665,648 shares of Common Stock (the "Chase Family Shares") but does not
have the sole or shared power to vote or direct the vote of any Chase
Family Shares. Mr. Chase shares the power to dispose or direct the
disposition of (i) 1,330,000 Chase Family Shares beneficially owned by
Rhoda L. Chase, his wife, (ii) 1,167,824 Chase Family Shares beneficially
owned by Arnold L. Chase, his son, and (iii) 1,167,824 Chase Family Shares
beneficially owned by The Darland Trust (the "Trust"), a trust whose
beneficiaries are Cheryl A. Chase, his daughter and her children.
(2) According to a Schedule 13D filed with the Commission, Mr. Arnold L.
Chase shares the power to dispose or to direct the disposition of
1,167,824 Chase Family Shares with Mr. David T. Chase and has sole power
-30-
<PAGE> 37
to vote or direct the vote of such shares. Such shares are also
included in the above table in Mr. David T. Chase's Chase Family
Shares.
(3) According to a Schedule 13D filed with the Commission, the Trust shares
the power to dispose or to direct the disposition of 1,167,824 Chase
Family Shares with Mr. David T. Chase and has sole power to vote or direct
the vote of such shares. Such shares are also included in the above table
in Mr. David T. Chase's Chase Family Shares
(4) According to a Schedule 13D filed with the Commission, Rhoda L. Chase has
sole power to vote or to direct the vote of all such shares except to the
extent that she may be deemed to have temporarily transferred beneficial
ownership to Insurance Holdings Limited Partnership (the "Partnership") of
670,000 shares of Common Stock (the "Borrowed Shares," and, together with
the Chase Family Shares, the "Chase Shares"). In the aggregate, the Chase
Shares total 4,342,148 shares of Common Stock or approximately 50.4% of
the outstanding shares of Common Stock. The general partner of the
Partnership is Chase Insurance Corporation ("CIC"). David T. Chase is the
President and a Director of CIC, Arnold L. Chase is an Executive Vice
President and a Director of CIC and Cheryl A. Chase is an Executive Vice
President and a Director of CIC. Mrs. Chase shares the power to dispose or
to direct the disposition of 1,330,000 Chase Family Shares with Mr. David
T. Chase and has sole power to dispose or direct the disposition of the
Borrowed Shares except to the extent that Mrs. Chase may be deemed to have
temporarily transferred to the Partnership the sole power to dispose of
the Borrowed Shares. The 1,330,000 Chase Family Shares are also included
in the above table in Mr. David T. Chase's Chase Family Shares. David T.
Chase disclaims beneficial ownership of the Borrowed Shares.
(5) The Partnership may be deemed to beneficially own 670,000 Borrowed Shares
which it has borrowed from Rhoda L. Chase pursuant to a loan agreement.
The Borrowed Shares are included in Rhoda L. Chase's holdings in the above
table but are not included in David T. Chase's holdings in the above
table.
(6) Spitzer Profit Sharing and Savings Plan under agreement dated December
31, 1973, is an Employee Benefit Plan, Pension Fund subject to the
provisions of the Employee Retirement Income Security Act of 1974.
-31-
<PAGE> 38
BENEFICIAL OWNERSHIP OF MANAGEMENT
The following table sets forth certain information as of October 31, 1997,
with respect to the beneficial ownership by each director, each named executive
and by all of the directors and executive officers a group of the Common Stock
of the Company. Unless otherwise noted, the nature of beneficial ownership
consists of sole voting and dispositive power.
<TABLE>
<CAPTION>
AMOUNT OF PERCENT
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF CLASS
- ------------------------ ----------------------- --------
<S> <C> <C>
Robert Betagole 115,491(2) 1.3%
David T. Chase 3,672,148(3) 42.7%
Douglas J. Coats 55,190 *
Raymond H. Deck 241,287 2.8%
Richard Desich 34,350 *
Thomas H. Friedberg 265,158 3.1%
Kermit G. Hicks 63,314(4) *
Stephen M. Qua 38,358 *
John P. Redding --- ---
All Directors and Executive Officers
as a group (15 persons) 4,572,429(5) 52.5%
</TABLE>
- --------------------
(1) On October 31, 1997, there were 8,603,742 shares of the Company's Common
Stock issued and outstanding. Except as noted, includes shares owned by
spouse, minor children or certain other family members, or held as
custodian or trustee for the benefit of spouse or children, or owned by
corporations of which such person is an of fleer or principal stockholder,
over which shares such directors have sole or shared voting or investment
power. With respect to the non-employee Directors, includes an aggregate
of 27,500 shares held by the non-employee Directors as a group, which are
subject to immediately exercisable options.
(2) Includes 20,092 shares as to which Mr. Betagole disclaims beneficial
ownership.
(3) See the table under the caption "-- Beneficial Ownership of Certain
Beneficial Owners" and the footnotes thereto which explanations also apply
here.
(4) Includes 9,696 shares as to which Mr. Hicks claims beneficial ownership
on an indirect basis.
(5) This amount includes 107,500 shares which are subject to immediately
exercisable options and approximately 53,700 shares owned by officers in
their Acceleration Retirement Savings and Stock Ownership Plan accounts as
of June 30, 1997.
* Less than 1% of outstanding Common Stock.
INDEPENDENT AUDITORS
Representatives of KPMG Peat Marwick LLP are expected to be present at the
Special Meeting and will have an opportunity to make a statement if they desire
to do so and are also expected to be available to respond to appropriate
stockholder questions.
-32-
<PAGE> 39
STOCKHOLDER PROPOSALS
Stockholders wishing to submit proposals for the Company's 1998 Proxy
Statement may do so prior to December 22, 1997 by letter addressed to the
Company in care of the Secretary.
ADDITIONAL INFORMATION REGARDING THE COMPANY
The information set forth below is included in this Proxy Statement
pursuant to Item 14(b)(3)(1) of Schedule 14A of the Exchange Act. Such
information is derived substantially from the Company's Annual Report on Form
10-K for the year ended December 31, 1996 and the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997, except that certain
additional information necessary to update the prior information and certain
cross references to other parts of this Proxy Statement which discuss the
Transaction have been added.
BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
The Company is an insurance holding company incorporated in Delaware in
June 1978 as the successor to an Ohio corporation, formerly Acceleration
Corporation, organized in 1969. Unless the context requires otherwise, the
"Company" includes the Company and its subsidiaries. The Company is engaged in
the underwriting and sale of credit life and credit accident and health
insurance, extended service contracts and specialty casualty products.
Beginning in the first quarter of 1996, the Company began to offer commercial
auto coverages for long haul truckers and certain public transportation
vehicles ("charter buses") through a general agent ("GA").
In the second quarter, the Company began to offer commercial multi-peril
policies to auto dealers, but elected in the third quarter to exit this line of
business. The credit insurance and extended service contract products continue
to be offered to consumers, principally through automobile dealers, financial
institutions and other business entities. In 1990, the Company began offering
farm owners' multi-peril and ancillary inland marine coverages through a
network of selected agents. These coverages were discontinued in early 1995.
See "-- Narrative Description of Business" for further information. For a
discussion of the business of the Company which will remain following the
consummation of the Transaction, see "THE TRANSACTION -- Operations of the
Company After the Transaction."
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Through 1996, the Company operated predominately in two industry segments: life
and health and property and casualty insurance. See "Note J" in the Notes to
Consolidated Financial Statements.
NARRATIVE DESCRIPTION OF BUSINESS
GENERAL
The Company's life and health insurance segment primarily consists of
individual and group credit life and group credit accident and health
insurance, which is sold through automobile dealers and financial institutions.
The Company's property and casualty segment consists of extended service
contracts, sold primarily through automobile dealers, coverages for long haul
trucking and charter buses sold through a GA and the discontinued commercial
multi-peril, farm owners' multi-peril, ancillary inland marine and realtors
errors and omissions coverages ("REO").
Credit insurance and extended service contracts, which represent a
significant portion of the Company's business, are affected by automobile
sales. These premiums accounted for approximately 72.8% of the Company's gross
premiums written in 1996.
Premiums for the long haul trucking and charter bus line comprised 23.6%
of the Company's gross premiums written in 1996.
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The Company's principal subsidiary engaged in the life and health
insurance business is Acceleration Life Insurance Company ("ALIC"), which holds
licenses to conduct business in 40 states and the District of Columbia. Credit
life and credit accident and health insurance are the primary insurance
products written by ALIC. The Company's property and casualty business is
conducted through Acceleration National Insurance Company ("ANIC"). ANIC holds
licenses to conduct business in 47 states and the District of Columbia.
Acceleration National Service Corporation ("ANSC") administers the Company's
extended service contracts. The majority of the Company's direct premiums
written in 1996 was derived from sales in Ohio (37.9%), Virginia (12.7%),
Georgia (9.0%), West Virginia (4.7%), Indiana (6.4%) and Florida (4.5%). During
1995 and early 1996, both ALIC and ANIC were subject to a re-application rule
in the state of Michigan. The re-applications were denied. Therefore, as of
March 1996, ALIC and ANIC were no longer licensed in Michigan, and accordingly
discontinued writings in said state. The decision by the state of Michigan was
based on ALIC's and ANIC's experiences in several discontinued lines of
business. The results from these lines of business are now several years old.
Therefore, the companies, based on their positive 1996 results, intend to
re-apply to the state of Michigan in 1998.
CREDIT INSURANCE
The Company sells credit insurance primarily in connection with consumer
credit transactions, of which the most significant to the Company are
automobile purchases. Credit life insurance provides funds, in the event of the
insured's death, for payment of a specified loan or loans which are obligations
of the insured. Similarly, credit accident and health insurance provides for
payments on such loans during the term of the insured's disability. In most
cases, the entire premium is paid at the time the insurance is issued and such
insurance is designed to cover the risk of loss for the scheduled term of the
indebtedness. Most credit insurance is written on a decreasing term basis. The
policy benefit is initially the amount of the unpaid indebtedness and decreases
in amounts corresponding to the repayment schedule. The primary beneficiary
under credit insurance is the lender.
Substantially all of the Company's credit insurance is group insurance.
Group credit insurance policies are issued to master policyholders (typically
automobile dealers or financial institutions). The master policy of insurance
authorizes the master policyholder to issue certificates representing insurance
sold to its customers. Premiums collected from customers are remitted to the
Company net of commissions. The Company uses good health statements as part of
its underwriting measures, which inquire about the proposed insured's health at
the time the insurance is to be issued. Although medical examinations are not
required, the good health statement is intended to reduce the acceptance of
certain risks. The Company also uses additional health related questions on its
applications related to specific medical conditions. Because such conditions,
if experienced within the twelve months prior to the loan date, could be
expected to result in claims during the term of the loan, the applications are
denied. In addition to other sales and marketing services, the Company conducts
related training programs for finance and insurance managers, master
policyholders and their salespeople, independent agents and sales
representatives employed by the Company.
The Company reinsures substantial percentages of its credit accident and
health premiums on a written basis. This reinsurance provides statutory surplus
relief, thereby increasing the Company's capacity to write credit insurance. An
effect of this reinsurance is, however, to reduce the profit that the Company
might otherwise realize on its credit insurance business. The applicable
agreement contains an experience adjustment computation which results in the
ultimate cost of this reinsurance being a stated percentage related to the
surplus relief provided. Under such arrangements, a security fund is usually
maintained by the Company approximating the amount of ceded unearned premiums
less commissions retained, plus ceded insurance claims.
The Company has also entered into agreements to cede credit life and
credit accident and health insurance to reinsurance companies owned by certain
automobile dealers, financial institutions and agents. Under these arrangements
said entities and persons participate in the profits or losses of the insurance
sold through them, and the Company retains nominal percentages of the related
risk. These agreements generally provide that the Company receive a ceding fee
and be reimbursed for commissions and claims.
Approximately 58%, 76% and 73% of the Company's gross premiums written
during 1996, 1995 and 1994, respectively, were derived from its credit
insurance business. The credit insurance business decreased 19.4% in 1996
compared to 1995, decreased 3.6% in 1995 compared to 1994, and increased 4% in
1994 compared to 1993. The
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<PAGE> 41
decrease in 1996 relates to the termination of a joint marketing agreement
discussed below, the loss of two significant accounts and the Company's
withdrawal from the state of Michigan. The decrease in 1995 was primarily due
to the loss of a significant account. Automobile purchases continue to be the
most significant consumer credit transaction for which credit insurance is sold
by the Company. Automobile purchases have been and will continue to be
affected, directly and indirectly, by auto prices, interest rates, the
availability of consumer credit and general economic conditions.
The primary states in which the Company's credit insurance is sold are
Ohio, Virginia, Indiana and West Virginia. The Company markets its credit
insurance through both independent agents and its own direct sales
representatives. In 1987 the Company entered into a joint marketing arrangement
with Consumers Financial Corporation ("CFC") and transferred all of its
Pennsylvania credit insurance accounts to CFC's subsidiary, Consumers Life
Insurance Company. This business had previously been marketed by the Company's
employees. The joint venture also provided for marketing automobile extended
service contracts in Pennsylvania. The Company and CFC combined their efforts
to market these products to the automobile dealer accounts which both parties
had serviced in the past and to sign-up additional accounts.
By a Termination Agreement effective July 31, 1996, the Company and CFC
mutually terminated the joint venture between the parties. Under the agreement,
the Company was to receive a proportionate share of the proceeds received by
CFC from the sale of the business. By later amendment to the Termination
Agreement, the Company is to receive a payment of $500,000 at the completion of
a transaction to sell CFC to an unrelated organization. The special meeting of
CFC stockholders called to consider the transaction is set for March 25, 1997.
If the transaction is approved by CFC stockholders, the transaction will close
soon thereafter. A gain from the amended Termination Agreement has not been
recognized in the 1996 consolidated financial statements.
COMMERCIAL AUTOMOBILE LIABILITY
In 1996, the Company began offering coverage to operators of long haul
trucks and charter buses. This program is marketed by an unaffiliated GA
(Transportation Insurance Specialists) with extensive experience in this
product line. Commercial Auto has become one of the Company's primary product
lines with first year direct premiums written of $13,800,000 (see "Note E" in
the Notes to Consolidated Financial Statements).
NEW PROPERTY AND CASUALTY PRODUCTS
The Company has commenced new marketing initiatives in 1997 for products
including a package policy for crane operators consisting of general liability,
inland marine and commercial auto coverages; and an oil and gas liability
program. The target for the crane program is qualified operators who lease
cranes for specific projects. An independent administrator, The Crane
Institute, is being used to conduct loss control and underwriting survey work
in this specialized field. The Company expects slow controlled growth in this
product line with extensive underwriting reviews.
The oil and gas product is designed to be marketed to small or mid-sized
accounts. The program will insure the leasehold operators and contractors.
Limits provided will be $1 million per each occurrence subject to an annual
aggregate of $2 million. The GA has had extensive experience in this field.
EXTENDED SERVICE CONTRACTS
Extended service contracts are sold under the name "CostGuard" and cover
the cost of labor and certain parts for the repair of automobiles and
watercraft. The Company's product covers towing, rental car reimbursement and
other benefits during the entire contract term and enables a purchaser to
obtain from the selling dealer a service contract covering the cost (in excess
of a deductible amount where applicable) of repairs to covered parts subsequent
to the expiration of the applicable manufacturer's warranty. Extended service
contracts are primarily marketed through the same group of automobile dealers
who market the Company's credit insurance. The extended service contract
program is marketed on a net cost basis to the automobile dealer who is free to
establish the retail price for the contract. The net cost paid by the dealer
includes the premiums for a contractual liability policy provided the
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<PAGE> 42
dealer by ANIC, and administrative and marketing fees. In 1996, this program
accounted for approximately 32.7% of ANIC's gross premiums written.
OTHER INSURANCE PRODUCTS
In early 1990, the Company introduced its farm owners' multi-peril and
ancillary inland marine coverage products. Premiums written for these products
were $0, $97,000 and $8,460,000 in 1996, 1995 and 1994, respectively. The
Company elected to discontinue offering these lines and entered into an
agreement whereby the Company ceded 100% of the in-force business at December
31, 1994. Accordingly, any new business written after January 1, 1995 was
reinsured with an unaffiliated carrier. As of June 30, 1995, the Company
ceased writing this business.
INVESTMENT IN RANDJILL GROUP LTD. ("RGL") AND GALAXY INSURANCE COMPANY
("GALAXY")
In 1986 the Company acquired a 20% interest in RGL, a company related
through common ownership by a shareholder and director of the Company, and in
1991 acquired the remaining 80% interest. The total amount invested in RGL was
approximately $10.3 million. Due to significant losses incurred, and the
insolvency of RGL's operating subsidiary, Galaxy, a New York domiciled property
and casualty insurance company, the Company wrote off its investment in RGL
during the second quarter of 1994. For further information regarding RGL and
Galaxy see "Note K" in the Notes to Consolidated Financial Statements.
EMPLOYEES
As of December 31, 1996, the Company employed 97 full-time equivalent
employees compared to 78 as of December 31, 1995.
REINSURANCE WITH UNAFFILIATED INSURANCE COMPANIES
Reinsurance enables insurance companies to provide greater diversification
of risks and at the same time minimize risk exposure. The reinsurer reimburses
the Company for any claims on the reinsured portion of the risk. Although
reinsurance does not discharge the Company from primary liability to the
insured for the full amount of the insurance coverage, the industry and
regulatory practice is to exclude the reinsured portion of the risk from the
consolidated statements of operations.
The Company has an arrangement in place which covers a substantial portion
of its credit insurance business with an unaffiliated insurance company. The
effect of this agreement is that the Company ultimately retains a substantial
part of the insurance risk, the underwriting income or loss and the investment
income on net funds, with the reinsurers receiving a stated percentage of the
surplus relief provided. See "Note F" in the Notes to Consolidated Financial
Statements.
In 1993, the Company entered into reinsurance agreements with unaffiliated
reinsurers related to its discontinued health products. The effect of such
reinsurance arrangements was to transfer 100% of the related risk to the
reinsurers. Premiums ceded associated with these agreements and included in the
accompanying consolidated statements of operations amounted to $496,000,
$633,000 and $980,000 in 1996, 1995 and 1994, respectively
REINSURANCE WITH PRODUCER-OWNED REINSURANCE COMPANIES
Certain automobile dealers, financial institutions and insurance agencies,
which generate credit insurance premiums and are master policyholders of the
Company, have formed Producer-owned Reinsurance Companies owned either wholly
or in part, directly or indirectly, by such master policyholders to reinsure
credit life and disability business generated by them. These arrangements are
structured to provide Producer-owned Reinsurance Companies with underwriting
income and a portion of investment income on the premiums ceded in connection
with such reinsurance. In these transactions the Company's revenue is limited
to a ceding fee and a portion of the investment income.
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<PAGE> 43
As of December 31, 1996, $10,040,000 of credit life and disability
unearned premium reserves were ceded by the Company to Producer-owned
Reinsurance Companies. However, most of these Producer-owned Reinsurance
Companies are required to deposit cash and marketable securities in a custodial
account with an independent financial institution. The minimum balance in each
account is generally required to be equal to the policy and claim reserves
ceded to the Producer-owned Reinsurance Companies. In the event a
Producer-owned Reinsurance Company fails to fulfill its obligation, the Company
may withdraw funds from the Producer-owned Reinsurance Company's account as
reimbursement for premium refunds and claim disbursements. On all insurance
written by the Company and reinsured with Producer-owned Reinsurance Companies,
the Company remains liable in the event of the insolvency of the reinsurers. As
of December 31, 1996, the Company had ceded approximately $234,907,000 of
credit life insurance in-force to Producer-owned Reinsurance Companies. See
"Note F" in the Notes to Consolidated Financial Statements.
COMPETITION
The Company's business is extremely competitive as to both price and
service. In the credit insurance business, the Company's competitors include
other insurance companies, many of which are larger than the Company and have
greater resources. A significant competitive factor is the commission which may
be paid to licensed agents affiliated with master policyholders. The Company,
however, continues to compete by offering what it believes to be realistic
commissions and providing a high level of service including training,
consulting and related services to its master policyholders.
In the Costguard business, the Company competes with much larger and
established national and regional insurance companies and with automobile
manufacturers which provide service contracts to their dealers. The automobile
manufacturers have significantly greater resources than the Company and have
relationships with automobile dealers which extend beyond providing service
contracts. The principal competitive factors include price, profit potential,
type and quality of the products offered and the quality of service. Many of
the same master policyholders which sell the Company's credit insurance also
market its extended service contracts, and the termination of the relationship
in one segment could affect the Company's relationship in the other segment.
In the Commercial Auto business the Company also competes with larger
insurance companies and with companies whose industry ratings are at higher
levels than ANIC. The principal factors that enable the Company to compete are
the relationship with the general agent and the level of service provided to
accounts.
REGULATION
The Company is subject to regulation in the states in which it conducts
business. The extent of such regulation varies from state to state; but in
general, all states have statutory restrictions and a supervisory agency which
has broad discretionary administrative powers. Such regulation is designed
primarily to protect policyholders and relates to the licensing of insurers and
their agents, the approval of policy forms, the methods of computing reserves,
the form and content of financial reports and the type and concentration of
permitted investments. Ohio and other jurisdictions in which the Company
conducts business have enacted legislation providing for specific regulation of
the relationship between licensed insurers and affiliated members of a holding
company group. Such legislation generally (1) establishes requirements and
procedures relative to the approval or disapproval of mergers and other
acquisitions of control, (2) prescribes the filing of registration statements
by insurers which are members of the holding company group, (3) subjects the
holding company to reporting requirements, (4) establishes standards for
transactions between insurers and their holding companies and between members
of a holding company group and (5) controls the payment of extraordinary
dividends. The dividends which the Company may receive from both its life and
property and casualty insurance subsidiaries are subject to regulatory
requirements as to minimum capital and surplus. In addition to regulatory
considerations, management considers the overall financial strength of each
operating entity before dividends are paid to the Company. Additionally, the
amount of dividends the Company's primary life insurance subsidiary can pay is
subject to certain tax considerations.
In 1993, the National Association of Insurance Commissioners ("NAIC")
adopted the life and health and property and casualty Risk-Based Capital
("RBC") formulas. These model acts require every insurer to calculate its
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<PAGE> 44
total adjusted capital and RBC requirement, and provides for an insurance
commissioner to intervene if the insurer experiences financial difficulty.
These model acts became law in Ohio, the Company's insurance subsidiaries'
state of domicile, in March 1996. The formula includes components for asset
risk, liability risk, interest rate exposure, and other factors. Each of the
Company's insurance subsidiaries exceed all required RBC levels as of December
31, 1996.
The tax considerations related to the life insurance subsidiary restrict
the amount of dividends that can be paid without incurring a tax. As of
December 31, 1996, the Company's life insurance subsidiary could pay an
aggregate of $4,700,000 from shareholders' surplus without incurring a tax. As
of December 31, 1996, ALIC could pay a dividend of $1,543,315 to ACCEL in 1997
without approval of the Department of Insurance of the State of Ohio ("Ohio
Department"). ANIC would require Ohio Department approval to pay any dividend
to ACCEL during 1997.
For information regarding certain federal income tax limitations on
dividends, see "Note G" in the Notes to Consolidated Financial Statements.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
In 1982 the Company incorporated Dublin International Limited ("Dublin"),
an exempted Island of Nevis domiciled company. Dublin is a component in the
Company's relationship with Producer-owned reinsurance companies (see "Note F"
in the Notes to Consolidated Financial Statements).
In 1986 Acceleration Insurance Company, Ltd. ("AICL"), a wholly-owned
subsidiary organized by ACCEL and domiciled in the United Kingdom, received
approval from regulatory authorities to commence operations. From mid-1986
through 1992, AICL offered specialty casualty products in the United Kingdom.
During 1995, the Company redeemed most of its shares of AICL, which
resulted in proceeds approximating the Company's original investment in AICL.
The transaction was approved by the Department of Trade and Insurance (United
Kingdom). On February 7, 1996, the Company received the final proceeds for
redemption of its remaining shares, and AICL will exist only for as long as it
takes to recover any taxes that may be refunded to it.
The assets and results of operations of these subsidiaries for the year
ended December 31, 1996 are not significant to the Company's consolidated
financial statements. See "Note M" in the Notes to Consolidated Financial
Statements.
PROPERTIES
Since July 1981 the Company's executive offices have been located at 475
Metro Place North, Dublin, Ohio. The four-story office building had been owned
by ALIC and consisted of approximately 80,000 square feet of office space.
On March 21, 1996, the building was sold by ALIC to an unrelated party for
a price of $3.5 million. The Company realized a pre-tax gain of $170,000 on
this sale. The Company remains in the building and occupies approximately
16,000 square feet of home office space under a five-year lease at an annual
rental of approximately $264,000. In late 1995 the Company began renting
approximately 6,000 square feet of office space in Stafford, Texas, to house
its executive offices. The annual rental on the five-year lease approximates
$70,000.
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<PAGE> 45
LEGAL PROCEEDINGS
From time to time the Company is a party to litigation and arbitration
proceedings in the ordinary course of its business, none of which is expected
to have a material adverse effect on the Company.
MARKET FOR ACCEL'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
ACCEL's common stock is traded over-the-counter national market issues,
under the NASDAQ symbol ACLE.
The following table sets forth the quarterly range of over-the-counter
prices for ACCEL's stock during the last two years. These prices have been
adjusted for common stock dividends and do not include retail mark-up,
mark-down, or commissions and do not always necessarily represent actual
transactions.
<TABLE>
<CAPTION>
1996 High Low 1995 High Low
- ------------- ------ ------ ------------- ------ ------
<S> <C> <C> <C> <C> <C>
4th Quarter $3.750 $2.375 4th Quarter $3.875 $2.375
3rd Quarter 3.250 2.375 3rd Quarter 4.875 2.750
2nd Quarter 3.750 2.500 2nd Quarter 3.125 2.000
1st Quarter 3.875 2.375 1st Quarter 2.875 1.750
1997 High Low
- ------------- ------ ------
3rd Quarter $4.250 $3.000
2nd Quarter $3.125 $2.750
1st Quarter $3.250 $2.750
</TABLE>
The approximate number of holders of record of ACCEL's common stock ($.10
par value) as of January 31, 1997, was 657.
Dividends paid on common stock:
1996 - -0- per share
1995 - -0- per share
Restrictions on present or future ability to pay dividends:
The Senior Notes issued December 29, 1995 (See "Note D" in the Notes to
Consolidated Financial Statements) contain certain covenants which restrict the
payment of dividends to not more than 50% of the cumulative consolidated net
income for the period from January 1, 1996 to and including the date of making
the dividend payment.
Since June 1992, ACCEL's Board of Directors have suspended payment of cash
dividends on the common stock until the Company returns to a level of
profitability which will sustain such payments.
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SELECTED FINANCIAL DATA
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
1996** 1995** 1994** 1993** 1992
--------- --------- --------- --------- ---------
(Thousands of dollars, except per share data & ratios)
<S> <C> <C> <C> <C> <C>
Gross premiums written $ 58,412 $ 55,443 $ 60,504 $ 95,766 $122,101
Premiums ceded (12,860) (12,147) (12,495) (30,261) (45,116)
Net premiums written 45,552 43,296 48,009 65,505 76,985
Premiums earned 45,957 40,853 47,600 61,649 80,426
Net investment income:
Interest and dividends 4,416 6,488 6,678 8,397 11,831
Realized gains 484 455 808 1,336 701
Total revenue 57,820 50,475 57,519 74,810 96,043
Policy benefits 24,338 20,118 24,997 38,431 71,472
Income (loss) before taxes
and other items 1,779 (1,101) (4,905) (5,626) (25,075)
Cumulative effective of change in
accounting for income taxes -- -- -- -- (3,067)
Extraordinary item 131 -- -- -- --
Net income (loss) 2,104 (1,460) (5,238) (5,281) (22,124)
Per common share*:
Cumulative effect of change in
accounting for income taxes -- -- -- -- (.69)
Net income (loss) .36 (.33) (1.18) (1.19) (4.98)
Cash dividends -- -- -- -- .07
At end of year:
Invested assets 74,841 63,297 98,189 126,590 139,244
Total assets 189,308 183,507 179,948 236,181 204,209
Policy reserves
and liabilities 107,083 104,852 106,936 146,257 90,616
Notes payable 15,000 22,531 18,462 18,847 22,000
Redeemable preferred stock -- -- -- -- 73
Common stockholders' equity 31,641 20,560 15,366 28,583 32,361
Return on average common
stockholders' equity 8.06% (8.13)% (23.84)% (17.32)% (52.59)%
Book value per common share $ 3.68 $ 4.62 $ 3.46 $ 6.43 $ 7.28
</TABLE>
* Net income (loss) per common share is computed using the weighted average
number of common shares outstanding during the year after giving effect to
the preferred stock dividend requirement. The inclusion of common stock
equivalents (options) would not be dilutive.
** The 1996, 1995, 1994 and 1993 data reflects the adoption of the Financial
Accounting Standard Board's ("FASB") Statement No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts."
SUPPLEMENTARY FINANCIAL INFORMATION
Not applicable.
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<PAGE> 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OPERATING RESULTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
OPERATING RESULTS
The Company's income before income taxes and extraordinary item for 1996
was $1,779,000. This income was primarily the result of the recognition of
$4,291,085 of other income related to a legal settlement (see Discontinued
Realtors' Errors and Omissions Program under Certain Events). In 1996,
particularly in the first half, the Company continued to experience adverse
loss development on discontinued lines of business. Adverse development on
discontinued farm owners and related lines amounted to $800,000. The Company's
new Property and Casualty products, in particular Commercial Auto, had a
positive underwriting result in 1996. The premium earned on this line has been
continuing to grow.
The loss before income taxes for 1995 was $1,101,000. This loss was
primarily driven by three factors; the foremost factor was adverse loss
development on discontinued property and casualty products. The adverse
development aggregated $2,400,000 which included a $1,200,000 year end reserve
increase on the discontinued REO product. The adverse development was partially
offset by a $500,000 favorable development on the discontinued medical
business. The second factor was the incurrence of legal fees related to the REO
program litigation during 1995, including the Company's legal action against
the entities involved in the REO program. These actions caused the incurrence
of legal fees of $550,000 in 1995. Lastly, during 1995 the Company incurred
approximately $350,000 in severance expenses related to departed employees.
The loss before income taxes for 1994 was $4,905,000. A significant
portion of the 1994 loss was related to the write off of Galaxy ($3,829,000)
and Galaxy's first quarter loss ($205,000), for a total Galaxy loss of
$4,034,000. In addition, several discontinued property and casualty lines
continued to show adverse loss development in 1994, partially offset by
positive results from the credit and extended service contract product lines.
The Company made concerted efforts in the last three years to reduce
general and administrative expenses. General and administrative expenses have
decreased by 4.2% in 1996 compared to 1995 and by 16.3% in 1995 compared to
1994. These expense control initiatives have allowed the Company to concentrate
on its traditional profit producing lines of business (credit insurance and
extended service contracts) and to begin programs in selected Property &
Casualty lines in which the current management team has experience.
Table I on page 44 indicates changes in several key operating ratios for
the Company. The ratios in the table are consistent with the Company's premium
volume and product mix.
REVENUE
Gross premium writings for 1996 were $58.4 million compared to $55.4
million for 1995. The increase in 1996 was primarily the result of increases in
premium levels related to the new lines of business. See Table II on page 45.
Gross premium writings for 1995 were $55.4 million compared to $60.5
million for 1994. The decrease in 1995 was primarily the result of decreases in
premium levels related to discontinued lines of business. See Table II on page
45.
The Company has also experienced decreases in net investment income,
excluding realized gains, since 1993. The decrease in 1994 was primarily
attributable to a decrease in invested assets due to the run off of
discontinued lines of business. The 1995 decrease was caused by the level of
prevailing interest rates. Proceeds from the
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<PAGE> 48
Company's maturing investments were not able to be reinvested at rates
comparable to those on the maturing securities. The major portion of the
decrease in 1996 is attributable to a reinsurance treaty with an unaffiliated
party. Under the terms of this treaty, investment income credits related to
funds held are categorized as reinsurance expense recovery as opposed to
investment income.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows from operations have generally been adequate for
its current operating needs. Cash flows from operating activities in 1995 were
adversely impacted by the reinsurance transaction dated December 29, 1995
described in "Note F" in the Notes to Consolidated Financial Statements. The
Company's credit insurance policy terms and related liabilities are generally
limited to a four-year period during which the consumer makes payments on the
loan. The Company's liability on extended service contracts typically extends
for either one-year or five-year periods. The Company's long haul trucking and
charter bus business generally is written for a term of one year with the
casualty claim related liabilities extending beyond that period. The Company,
therefore, maintains liquidity in its investment portfolio to correspond with
the liabilities outstanding on its lines of business. At December 31, 1996, the
estimated duration of the Company's fixed income investment portfolio was 3.0
years while the estimated liability duration was approximately 3.5 years.
Currently, an interest rate change of 1% would impact the fair value of the
fixed maturity portfolio and stockholders' equity by a decline of approximately
$2 million if interest rates rose and an increase of approximately $2 million
if interest rates declined.
The Company's "available for sale" fixed maturity securities at December
31, 1996 include $16.5 million of mortgage-backed securities; $16.0 million of
collateralized mortgage obligation securities and $8.2 million of asset-backed
collateralized securities. The mortgage and asset-backed securities are subject
to risks associated with variable prepayments. As such, those securities may
have a different actual maturity and yield than planned at the time of
purchase. The degree to which a security is susceptible to either gains or
losses is influenced by the difference between its amortized cost and par
value, relative sensitivity of the underlying mortgages to prepayment risk in a
changing interest rate environment and relative priority of the securities in
the overall securitization.
The Company limits the extent of its risks on fixed maturity securities by
generally avoiding securities whose cost significantly exceeds par, by
purchasing securities which are backed by stable collateral, and by
concentrating on securities that are either planned amortization or sequential
pay classes. The collateralized mortgage obligations and asset backed
securities owned have primarily short to intermediate average lives. At
December 31, 1996, the Company did not have a significant amount of mortgage or
asset backed securities which had a significant risk of loss or principal.
There are negligible default risks on the mortgage and asset backed security
portfolios as a whole as the vast majority of the assets are either guaranteed
by U. S. government-sponsored entities or are supported in the securitization
structure by junior securities enabling the assets to achieve high investment
grade status. The Company's collateralized mortgage obligations and asset
backed securities are predominantly sequential pay with little or no exposure
to interest only obligations ("IOs") or inverse IOs.
Ohio domiciled insurance companies are subject to Ohio law which regulates
the ability of insurance companies to pay dividends. The regulation limits the
annual dividend or distribution of an insurer to the greater of (1) net income
of the previous year or (2) 10% of unassigned surplus as of the end of the
previous year. In addition, all dividends must come from earned surplus to
qualify as a non-extraordinary dividend. Amounts greater than this would be
considered extraordinary dividends and could not be paid without permission of
the Ohio Department. Based on this regulation, ALIC could pay a dividend of
$1,543,315 without Ohio Department approval to ACCEL in 1997 and ANIC would
require Ohio Department approval to pay any dividend to ACCEL during 1997.
The Company's cash flow projections for 1996 assumed that certain events
would take place in order to have sufficient cash to meet its debt service and
other requirements. One of these events included the liquidation of AICL, which
was concluded in the first quarter of 1996. The Company will monitor its
current and future debt service requirements to coincide with cash flow
availability. The Company has used a portion of the proceeds from a Rights
Offering and the payment from a judgment entered in its favor in a legal
proceeding (see Rights Offering and
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<PAGE> 49
Discontinued Realtor's Errors and Omissions Program under Certain Events) to
repay $4,296,000 in advances received in 1992 and 1993 from ACCEL's
subsidiaries. These outstanding advances were eliminated in consolidation.
On July 25, 1996, the Company commenced an offering of non-transferable
rights to stockholders of record as of June 18, 1996 (see Rights Offering under
Certain Events). The Rights Offering concluded on August 28, 1996 and generated
$3,261,780 in cash proceeds. A supplemental offering to employees, agents and
customers concluded on September 30, 1996 and generated $141,862 in cash
proceeds of which $113,355 had been received by the Company as of December 31,
1996. The cash proceeds from these offerings have been used to repay
intercompany advances ($2,647,000), for the redemption of Subordinated Notes
which were not tendered in the Rights Offering ($600,000) (see "Note D" in the
Notes to Consolidated Financial Statements), and for general corporate
purposes.
Also, under the provisions of the Rights Offering, the Company permitted
Chase Insurance Holdings Corporation ("CIHC") and its affiliates to tender the
principal amount of their Subordinated Notes (See "Note D" in the Notes to
Consolidated Financial Statements) for cancellation as consideration (in lieu
of cash) for the purchase of shares of common stock pursuant to the Rights
Offering. On August 23, 1996, CIHC and its affiliates tendered $5,619,046
principal amount of their Subordinated Notes plus an additional $83,759 of
accrued interest thereon under the terms of the Rights Offering. At the
conclusion of the offering, CIHC and its affiliate had reduced their holding of
Subordinated Notes to $0.
In a separate transaction, ACCEL retired $731,533 principal amount of
Subordinated Notes held by an unrelated third party for consideration of
$600,000. ACCEL recognized an extraordinary gain on this transaction of
$131,533. No federal income tax was recognized related to this gain due to the
current consolidated tax position of the Company. The result of the two
aforementioned transactions was to retire all outstanding Subordinated Notes.
On December 29, 1995, the Company issued new senior notes (the "Senior
Notes") totaling $16,500,000 at 9.50%, maturing on April 1, 2001. The proceeds
from these notes were used to retire the loan outstanding under an existing
credit agreement (see "Note D" in the Notes to Consolidated Financial
Statements) and to liquidate an intercompany loan between ACCEL and an
insurance company subsidiary. In addition, as of January 1, 1996, ALIC entered
into a reinsurance agreement with an unaffiliated company to reinsure its
in-force credit business. The Senior Notes are payable to the same unaffiliated
company which is a party to the reinsurance agreement dated January 1, 1996.
This agreement is structured such, that as future profits emerge on this block
of business, these profits are held by the reinsurance company, and ultimately
applied to pay interest on and to redeem the Senior Notes. Profits in excess of
the amount required to retire the Senior Notes are to be returned to ALIC. As
of December 31, 1996, $1,500,000 of the profits on this block of business were
released to ALIC in the form of the aforementioned Senior Notes issued by
ACCEL. This release resulted in a balance of $15,000,000 of Senior Notes
outstanding as of December 31, 1996.
ACCEL's Board of Directors approved an Employee Stock Ownership Plan
("ESOP") during 1989. In 1990, the ESOP entered into an agreement with ALIC to
borrow up to $1,000,000 for the purchase of ACCEL's common stock. Company
contributions into the ESOP have been used to pay down the loan from ALIC and
release shares into the participants' accounts as the Company's matching
contribution. The ESOP purchased 136,887 shares (adjusted for the 1990 5%
common stock dividend) under this loan agreement with ALIC at a cost of
$1,000,000. In addition to the shares purchased under the loan agreement, the
ESOP purchased 90,088 common shares at a cost of $603,000. The loan bears
interest at 10%.
At December 31, 1995, the loan had an unpaid balance of $525,239. The
market value of the underlying shares was $161,000. The Company revalued this
loan to market value as of December 31, 1995 to allow for the release of shares
to participants' accounts at an average price which more closely approximated
recent market values on the Company's common stock. The decrease in the loan in
1995 was reflected through a decrease in additional paid-in capital in the
accompanying consolidated balance sheets. The unpaid balance of the loan
($32,000 at December 31, 1996) has been reflected as a reduction in common
stockholders' equity in the accompanying consolidated balance sheets.
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<PAGE> 50
During 1996, 1995 and 1994, the Company incurred ESOP contribution
expenses of $187,000, $198,000 and $178,000, respectively.
The Company currently has three material lines of business that are in
run-off status: the REO line, the farm owner's multi-peril and ancillary inland
marine products and the auto dealers' commercial multi-peril line. Also, for
information regarding Galaxy, see "Note K" in the Notes to Consolidated
Financial Statements.
The estimates for policy reserves are continually under review and
adjusted as necessary as experience develops or new information becomes known;
such adjustments are included in current operations. These liabilities are
necessarily subject to the impact of future changes in claim severity,
frequency and other factors. Although considerable variability is inherent in
such estimates, based on recent evaluations management believes that the
current level of policy reserves will be adequate to cover anticipated claim
liabilities. Accordingly, the ultimate amounts required for settlement of
policy benefits may vary significantly from the amounts included in the
accompanying consolidated financial statements.
The Company has reviewed Financial Accounting Standards Board ("FASB")
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" which became effective in 1996, and has
determined this FASB statement will not impact the Company. The Company has
also reviewed FASB Statement No. 123, "Accounting for Stock-Based Compensation"
("FASB 123") which became effective in 1996. The Company has elected to
disclose the impact of FASB 123 in the Notes to the Consolidated Financial
Statements and not adopt the statement for financial statement reporting as
permitted by FASB 123. The Company has also reviewed FASB Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" which becomes effective in 1997, and does not expect this FASB
statement to have a material impact on the financial condition of the Company.
Although the cumulative effects of inflation on premium growth cannot be
fully determined, increases in the retail price of automobiles have generally
resulted in increased amounts being financed which constitute the basis of
premiums charged for credit insurance. Anticipated increases in automobile
repairs also provide the primary basis for increases in extended service
contract premium rates.
CERTAIN EVENTS
RIGHTS OFFERING: On July 25, 1996, the Company commenced a Rights
Offering to stockholders of record as of June 18, 1996. The non-transferable
subscription rights entitled stockholders of record to receive one right for
each share of stock held and each right entitled the holder thereof to purchase
one and one-half shares of the common stock of the Company at a subscription
price of $2.25 per share. The rights expired on August 28, 1996. No commission
or compensation was paid in connection with the Rights Offering. As part of the
Rights Offering, the Company permitted the outstanding Subordinated Notes held
by CIHC and its affiliates to be tendered for cancellation as consideration (in
lieu of cash) for the purchase of shares of common stock pursuant to the Rights
Offering.
A total of 3,984,260 shares were subscribed for under the Rights Offering.
Total consideration of $8,964,585 consisted of $5,702,805 in Subordinated Notes
and $3,261,780 in cash.
Subsequent to the Rights Offering, the Company commenced a Supplemental
Offering to employees, agents and customers which concluded on September 30,
1996. Shares were offered under this Supplemental Offering at $2.25 per share.
A total of 63,050 shares were subscribed for under this offering. No soliciting
fees or other compensation were paid in connection with such offering. The net
cash proceeds from these offerings have been used to repay intercompany
advances ($2,647,000), for the redemption of Subordinated Notes which were not
tendered in the Rights Offering ($600,000) and for general corporate purposes.
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<PAGE> 51
WRITE OFF OF INVESTMENT IN RGL AND GALAXY: During December 1986, ACCEL
invested $1,370,000 (a 20% interest) in RGL. Galaxy, a wholly owned subsidiary
of RGL, was writing commercial property insurance, property and casualty, and
assumed treaty reinsurance.
During the second quarter of 1991, the Company purchased 11,000 additional
common shares of RGL at a cost of $992,000. The additional investment
increased the Company's ownership to 31% at June 30, 1991. In July 1991, the
Company purchased the remaining 69% of RGL for cash and Subordinated Notes (see
"Note D" in the Notes to Consolidated Financial Statements) of $2.1 million and
$5.8 million, respectively. The purchase price included goodwill of $1.2
million, of which the outstanding balance was written off in 1993.
Members of CIHC held a 45% interest in RGL prior to the acquisition by
ACCEL.
For the three years ended December 31, 1993, RGL recorded losses and
Galaxy's underwriting results deteriorated, resulting in the New York
Department of Insurance ("New York Department") placing a moratorium on all new
business as of February 28, 1994. Due to significant loss development during
1994 on Galaxy's liability lines of business, the Company contracted with an
independent actuarial consultant to review the adequacy of Galaxy's loss and
LAE reserves as of June 30, 1994. The findings of this review indicated the
need for additional reserves which resulted in the statutory insolvency of
Galaxy at June 30, 1994. Statutory capital and surplus after the reserve
strengthening was a negative $2.3 million.
Due to the significance of the statutory loss and the loss of the
Company's control of Galaxy as a result of the insolvency, the Company wrote
off its investment in RGL ($3.8 million) during the second quarter of 1994. As
a result of this action, the consolidated results of operations for 1994
include a charge to operations of $3.8 million, representing the Company's net
investment in Galaxy as of April 1, 1994, in addition to operating losses of
$205,000 incurred during the first quarter. The Company wrote down its
investment in RGL to zero and deconsolidated RGL as of April 1, 1994.
Pursuant to an Order of Liquidation dated October 7, 1994, issued by the
Supreme Court of the State of New York, the Liquidation Bureau of the New York
Department took control of Galaxy on October 11, 1994.
CLAIMS ASSERTED BY LIQUIDATION BUREAU UNDER CERTIFICATES OF SURETYSHIP:
On October 7, 1994, the Liquidation Bureau of the New York Department (the
"Liquidation Bureau") took control of Galaxy pursuant to an order of
liquidation of the New York Supreme Court. Prior to the liquidation of Galaxy,
ANIC had issued certain certificates of suretyship ("Certificates") with
respect to certain Galaxy insurance policies each of which provided that ANIC
would assume the responsibilities of Galaxy under the specified policy if
Galaxy became insolvent or financially unable to meet its obligations on the
underlying policy, but only if certain conditions were met. In particular, the
Certificates provided that ANIC's assumption of liability was contingent upon
the insured's executing and delivering all agreements, assignments or evidences
of subrogation satisfactory to ANIC respecting payments made or liabilities
assumed.
During 1996, the Liquidation Bureau, acting on behalf of the New York
Property/Casualty Insurance Security Funds (the "Guaranty Fund"), informally
advised the Company that on behalf of the Guaranty Fund it intended to seek
indemnification or reimbursement from ANIC for claims paid by the Guaranty Fund
to Galaxy insureds on policies which may have been covered by the Certificates.
The Liquidation Bureau has provided some information in response to the
Company's request for accounting data and other information with respect to the
Liquidation Bureau's analysis of the Guaranty Fund's right to indemnification;
however, the Company has not been able to evaluate or quantify the magnitude of
the potential claim, if any, for indemnification or reimbursement because the
Liquidation Bureau has never made a formal or informal claim for
indemnification or specific reimbursement or stated an estimate of the
potential amount thereof. The Company has taken the position that the Guaranty
Fund has no right to seek indemnification unless Galaxy insureds who hold
properly issued Certificates have executed assignments and evidences of
subrogation. Even if any Galaxy insureds properly made such a claim directly
to ANIC, the Company has been advised by its legal counsel that if ANIC paid
any such claim, it would
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<PAGE> 52
have the right, under assignment and subrogation agreements with its insureds,
to assert all rights that the insureds could have asserted to recover the loss
amounts from any other source, including the Guaranty Fund. In early 1997, the
Liquidation Bureau requested of Company' counsel the basis for the position
taken by the Company. A written analysis supporting Company's position was
subsequently issued to the Liquidation Bureau.
The Company intends to vigorously defend any claims for indemnification or
reimbursement made by the Liquidation Bureau, on behalf of the Guaranty Fund,
with respect to the Certificates. Although the Company is not in a position to
estimate the magnitude of the potential claims for indemnification or
reimbursement, it does not believe that the ultimate resolution of such claims
will have a material adverse effect on the financial condition or results of
operations of the Company.
DISCONTINUED REALTORS' ERRORS AND OMISSIONS PROGRAM: As a result of the
losses sustained in the REO program, and in particular, conduct discovered by
the Company after it assumed responsibility for claims processing and handling,
the Company filed suit in November 1991 against the non-affiliated marketing
organization and broker involved in the program.
The lawsuit sought to recover funds improperly withdrawn from the account
established for the payment of claims under the program; for damages due to
business expenses improperly charged against such funds; and for improper
administration of the program. ACCEL and ANIC entered into an arrangement
whereby ANIC's rights under the lawsuit were transferred to ACCEL in exchange
for a $4,000,000 collateral loan issued to ANIC which was recorded as a capital
contribution. The transaction and related agreements were approved by the Ohio
Department. The loan agreement and accompanying promissory note called for
interest at the 13 week Treasury Bill rate plus 100 basis points. The principal
of $4.000.000 was paid in full on December 29, 1995.
In late 1995, ACCEL was awarded $5,300,000 in damages related to this
litigation. Pursuant to settlements reached with all of the parties, ACCEL
received a total of $4,291,085 in 1996. With the approval of the Ohio
Department, the proceeds from the settlement were shared equally between ACCEL
and ANIC. The Company requested the sharing agreement due to the continuing
losses in the REO program realized by ANIC since 1991. The Company has recorded
the recovery as "Other income" in the accompanying consolidated statement of
operations for the year ended December 31, 1996.
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<PAGE> 53
TABLE I
Several key operating ratios of the Company are as follows:
<TABLE>
<CAPTION>
CONSOLIDATED RESULTS
--------------------------------------------
(Thousands of dollars, except ratios)
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Gross premiums written $ 58,412 $ 55,443 $ 60,504
========== ========== ==========
Net premiums earned $ 45,957 $ 40,853 $ 47,600
========== ========== ==========
RATIOS:
Policy benefits to net premiums earned 53.0% 49.2% 52.5%
Commissions and selling expenses and
general and administrative expenses
to gross premiums written 50.7% 57.0% 52.3%
Commissions and selling expenses,
reinsurance expense recovery
and change in deferred policy
acquisition costs to net premiums
earned 44.3% 49.3% 43.6%
Taxes, licenses and fees to gross
premiums written 3.2% 3.1% 3.1%
</TABLE>
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<PAGE> 54
TABLE II
Changes in Gross Premiums Written
Year Ended December 31
(Thousands of dollars, except ratios)
<TABLE>
<CAPTION>
1996 1995
vs. % vs. %
Gross Premiums Written 1996 1995 1994 1995 Change 1994 Change
<S> <C> <C> <C> <C> <C> <C> <C>
Continuing lines of business:
Credit $34,126 $42,338 $43,905 $(8,212) (19.4)% $(1,567) (3.6)%
Extended service contracts 8,375 7,777 8,221 598 7.7% (444) (5.4)%
Commercial auto 13,793 -- -- 13,793 N/A -- --
Other property/casualty lines 118 58 42 60 103.4% 16 38.1%
-------- -------- -------- --------- ----- --------- ------
Total continuing lines 56,412 50,173 52,168 6,239 12.4% (1,995) (3.8)%
-------- -------- -------- --------- ----- --------- ------
Discontinued lines of business:
Medical and miscellaneous
life and health 642 776 1,751 (134) (17.3)% (975) (55.7)%
Vendor's single interest (59) (798) (5,451) 739 92.6% 4,653 (85.4)%
Agriculture, REO and other
property & casualty 362 5,292 10,091 (4,930) (93.2)% (4,799) (47.6)%
Commercial multi-peril 1,055 -- -- 1,055 N/A -- --
Galaxy Insurance Company -- -- 1,945 -- -- (1,945) (100.0)%
-------- -------- -------- --------- ----- --------- ------
Total discontinued lines 2,000 5,270 8,336 (3,270) (62.0)% (3,066) (36.8)%
-------- -------- -------- --------- ----- --------- ------
Gross premiums written $58,412 $55,443 $60,504 $ 2,969 5.4% $(5,061) (8.4)%
======== ======== ======== ========= ===== ========= ======
</TABLE>
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<PAGE> 55
OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
OPERATING RESULTS
The income before federal income taxes and extraordinary item for the
three months ended September 30, 1997 was $404,000 compared to $374,000 for the
same period in 1996. The third quarter of 1996 benefitted from $1,400,000 in
other income representing a partial payment of a judgment rendered in favor of
the Company. This other income was partially offset by reserve strengthening
on runoff lines of business ($500,000), the write down of an investment
($150,000) and reserve strengthening of the Company's credit business. The
third quarter of 1997 experienced a greater contribution from the new
commercial auto line than the third quarter of 1996. Loss ratios on this block
of business were comparable between the periods, while net earned premium
increased from $1,707,000 in the third quarter of 1996 to $2,497,000 in the
third quarter of 1997.
OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
OPERATING RESULTS
The income before federal income taxes and extraordinary item for the nine
months ended September 30, 1997 was $1,047,000 compared to $426,000 for the
same period in 1996. The Company's three primary product lines: credit,
extended service contracts and commercial auto all produced positive
underwriting margins in the nine months of 1997. Loss ratios for those
products were at or below targeted levels. The Company's new Property and
Casualty programs continued their growth, producing $21,468,000 of annualized
premium in the nine months of 1997 compared to $14,300,000 in the nine months of
1996. These programs, primarily Commercial Auto, have now matured to the point
where they are generating a significant contribution to the Company's financial
results.
Net premium earned for the two periods being compared was little changed
with $34,739,000 in the first nine months of 1996 compared to $35,019,000 for
the comparable 1997 period. The net loss ratios were 52.14% for the first nine
months of 1996 compared to 52.43% for the comparable 1997 period.
The effect of the Company's three material lines of business that are in
runoff was as follows: Net incurred losses and LAE for the discontinued
Realtors E&O line of business for the nine months ended September 30, 1997 were
$250,000 in relation to zero earned premium. Total number of open claims at
September 30, 1997 was 13 carrying a reserve of $498,000. Net incurred losses
and LAE for the discontinued Agriculture lines of business at September 30,
1997 were $169,000. There were 28 open claims at September 30th carrying a net
reserve of $123,000. Net underwriting loss on the Auto Dealers program for the
period ended September 30, 1997 was $61,000. At September 30, 1997 there were
30 open claims on this line of business. Net reserve at September 30, 1997 was
$99,000. The net impact on the loss ratio and net income for these three
discontinued lines of business was immaterial.
A significant positive impact on 1997 earnings was the level of service
fees on extended service contracts which increased from $1,885,000 in the first
nine months of 1996 to $2,339,000 in the first nine months of 1997. This
increase is due to an overall increase in the fee levels as opposed to an
increase in contract volume.
Commissions and selling expenses as a percent of gross premiums written
decreased from 35.83% in the first nine months of 1996 to 33.16% for the first
nine months of 1997. This decrease is the result of the Commercial Auto
Business becoming a larger part of the product mix. Commercial Auto has
significantly lower acquisition costs than the Company's credit business.
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<PAGE> 56
Reinsurance expense recoveries were $1,963,000 for the period ended
September 30, 1996 and $4,043,000 for the comparable 1997 period. This change
is due to the reduction of a fixed charge associated with the reinsurance of
the Company's in force credit business.
The Company's general and administrative expenses have increased by
$741,000 or 13.95% in the first nine months of 1997 compared to the comparable
period in 1996. This increase in general and administrative expenses can be
primarily attributed to the following three expense categories: Salaries &
Wages increased by $564,000. The portion of the increase not related to normal
salary increases is due to an increase in the number of personnel related to
the new Property and Casualty product lines. Employee Welfare increased by
$176,000. This increase is the result of expenses associated with the
Company's 401K plan and additional group insurance expenses. Rent increased by
$173,000. This increase is the result of the sale of the Home Office building
in March of 1996 and the subsequent rental of office space.
REVENUE
Premium writings for the nine months of 1997 were $49.6 million compared
to $49.2 million for the nine months of 1996. Premiums written increased by
$1,072,000 for the extended service contract program and by $7,168,000 for the
new property and casualty programs. These increases were offset by a decrease
in credit premium written of $7,368,000. Of this decrease in credit premium,
approximately 63% is attributable to the termination of a joint marketing
agreement covering credit business written in the commonwealth of Pennsylvania
in July 1996. Another 9% is attributable to the Company's withdrawal from the
state of Michigan in March 1996. The remaining reduction is primarily
attributable to reduced premium volume in other states, primarily Indiana,
Kentucky and Ohio due to the loss of a significant account that operates in
those states. Premium volume in Virginia and West Virginia increased by 15%
and 73%, respectively. Although the mix of business written has changed,
earned premiums for the two periods are comparable.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows from operations have generally been adequate for
its current operating needs. The Company's credit insurance policy terms and
related liabilities are generally limited to a four-year period during which
the consumer makes payments on the loan. The Company's liability on extended
service contracts typically extends for either one-year or five-year periods.
The Company's long haul trucking and charter bus business generally is written
for a term of one year with the casualty claim related liabilities extending
beyond that period. The Company, therefore, maintains liquidity in its
investment portfolio to correspond with the liabilities outstanding on its
lines of business. At September 30, 1997, the estimated duration of the
Company's fixed income investment portfolio was 2.8 years while the estimated
liability duration was approximately 3.5 years. Currently, an interest rate
change of 1% would impact the fair value of the fixed maturity portfolio and
stockholders' equity by a decline of approximately $1.9 million if interest
rates rose and an increase of approximately $1.9 million if interest rates
declined.
The Company's "available for sale" fixed maturity portfolio at September
30, 1997 and 1996 includes mortgage-backed securities, collateralized mortgage
obligation securities and asset-backed collateralized securities. The mortgage
and asset backed securities are subject to risks associated with variable
prepayments. As such, those securities may have a different actual maturity and
yield than planned at the time of purchase. The degree to which a security is
susceptible to either gains or losses is influenced by the difference between
its amortized cost and par value, relative sensitivity of the underlying
mortgages to prepayment risk in a changing interest rate environment and
relative priority of the securities in the overall securitization.
The Company limits the extent of its risks on fixed maturity securities by
generally avoiding securities whose cost significantly exceeds par, by
purchasing securities which are backed by stable collateral, and by
concentrating on securities that are either planned amortization or sequential
pay classes. The collateralized mortgage obligations and asset backed
securities owned have primarily short to intermediate average lives. At
September 30, 1997, the
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<PAGE> 57
Company did not have a significant amount of mortgage or asset backed
securities which had a significant risk of loss or principal. There are
negligible default risks on the mortgage and asset backed security portfolios
as a whole as the vast majority of the assets are either guaranteed by U. S.
government-sponsored entities or are supported in the securitization structure
by junior securities enabling the assets to achieve high investment grade
status. The Company's collateralized mortgage obligations and asset backed
securities are predominantly sequential pay with little or no exposure to
interest only obligations ("IOs") or inverse IOs.
Ohio domiciled insurance companies are subject to Ohio law which regulates
the ability of insurance companies to pay dividends. The regulation limits the
annual dividend or distribution of an insurer to the greater of (1) net income
of the previous year or (2) 10% of unassigned surplus as of the end of the
previous year. In addition, all dividends must come from earned surplus to
qualify as a non-extraordinary dividend. Amounts greater than this would be
considered extraordinary dividends and could not be paid without permission of
the Ohio Department. Based on this regulation, ALIC could pay a dividend of
$1,543,315 without Ohio Department approval to ACCEL in 1997 and ANIC would
require Ohio Department approval to pay any dividend to ACCEL during 1997. On
May 8, 1997, ALIC paid a cash dividend to ACCEL in the amount of $1,500,000. On
September 30, 1997, ALIC, with the approval of the Ohio Department, paid a
dividend of $1,678,125 to ACCEL which consisted of an extraordinary portion of
$1,634,810 and an ordinary portion of $43,315 to ACCEL.
The Company will monitor its current and future debt service requirements
to coincide with cash flow availability. In 1996, the Company used a portion of
the proceeds from a Rights Offering and the payment from a judgment entered in
its favor in a legal proceeding (see Rights Offering and Discontinued Realtor's
Errors and Omissions Program under Certain Events for Operating Results for
Three Years Ended December 31, 1996) to repay $4,296,000 in advances received
in 1992 and 1993 from ACCEL's subsidiaries. These outstanding advances were
eliminated in consolidation.
On July 25, 1996, the Company commenced an offering of non-transferable
rights to stockholders of record as of June 18, 1996 (see Rights Offering under
Certain Events for Operating Results for Three Years Ended December 31, 1996).
The Rights Offering concluded on August 28, 1996 and generated $3,261,780 in
cash proceeds. A supplemental offering to employees, agents and customers
concluded on September 30, 1996 and generated $141,862 in cash proceeds of
which $113,355 had been received by the Company as of December 31, 1996.
The cash proceeds from these offerings have been used to repay
intercompany advances ($2,647,000), for the redemption of Subordinated Notes
which were not tendered in the Rights Offering ($600,000) (see "Note B" in the
Notes to Unaudited Consolidated Financial Statements), and for general
corporate purposes.
Also, under the provisions of the Rights Offering, the Company permitted
Chase Insurance Holdings Corporation ("CIHC") and its affiliates to tender the
principal amount of their Subordinated Notes (See "Note B" in the Notes to
Unaudited Consolidated Financial Statements) for cancellation as consideration
(in lieu of cash) for the purchase of shares of common stock pursuant to the
Rights Offering. On August 23, 1996, CIHC and its affiliates tendered
$5,619,046 principal amount of their Subordinated Notes plus an additional
$83,759 of accrued interest thereon under the terms of the Rights Offering. At
the conclusion of the offering, CIHC and its affiliate had reduced their
holding of Subordinated Notes to $0.
In a separate transaction, ACCEL retired $731,533 principal amount of
Subordinated Notes held by an unrelated third party for consideration of
$600,000. ACCEL recognized an extraordinary gain on this transaction of
$131,533 during the third quarter of 1996. No federal income tax was recognized
related to this gain due to the current consolidated tax position of the
Company. The result of the two aforementioned transactions was to retire all
outstanding Subordinated Notes.
On December 29, 1995, the Company issued new senior notes (the "Senior
Notes") totaling $16,500,000 at 9.50%, maturing on April 1, 2001. The proceeds
from these notes were used to retire the loan outstanding under an existing
credit agreement (see "Note B" in the Notes to Unaudited Consolidated Financial
Statements) and to liquidate
-51-
<PAGE> 58
an intercompany loan between ACCEL and an insurance company subsidiary. In
addition, as of January 1, 1996, ALIC entered into a reinsurance agreement with
an unaffiliated company to reinsure its in-force credit business. The Senior
Notes are payable to the same unaffiliated company which is a party to the
reinsurance agreement dated January 1, 1996. This agreement is structured such,
that as future profits emerge on this block of business, these profits are held
by the reinsurance company, and ultimately applied to pay interest on and to
redeem the Senior Notes. This is accomplished by the following transactions.
The reinsurance company distributes profits to ALIC as periodically agreed to
by the reinsurance company and ALIC. ALIC then, subject to Ohio Department
approval, dividends funds to ACCEL. ACCEL then uses these funds to redeem a
portion of the senior notes and the interest thereon. Profits in excess of the
amount required to retire the Senior Notes are to be returned to ALIC from the
reinsurer. As of December 31, 1996, $1,500,000 of the profits on this block of
business were released to ALIC in the form of the aforementioned Senior Notes
issued by ACCEL. This release resulted in a balance of $15,000,000 of Senior
Notes outstanding as of September 30, 1997 and December 31, 1996.
ACCEL's Board of Directors approved an Employee Stock Ownership Plan
("ESOP") during 1989. In 1990, the ESOP entered into an agreement with ALIC to
borrow up to $1,000,000 for the purchase of ACCEL's common stock. Company
contributions into the ESOP have been used to pay down the loan from ALIC and
release shares into the participants' accounts as the Company's matching
contribution. The ESOP purchased 136,887 shares (adjusted for the 1990 5%
common stock dividend) under this loan agreement with ALIC at a cost of
$1,000,000. In addition to the shares purchased under the loan agreement, the
ESOP purchased 90,088 common shares at a cost of $603,000. The loan bore
interest at 10%.
The unpaid balance of the loan has been reflected as a reduction in common
stockholders' equity in the accompanying unaudited consolidated balance sheets.
During the first quarter of 1997, ACCEL made the final payment and retired this
loan.
The Company currently has three material lines of business that are in
run-off status: the REO line, the farm owner's multiperil and ancillary inland
marine products and the auto dealers' commercial multi-peril line.
The estimates for policy reserves are continually under review and
adjusted as necessary as experience develops or new information becomes known;
such adjustments are included in current operations. These liabilities are
necessarily subject to the impact of future changes in claim severity,
frequency and other factors. Although considerable variability is inherent in
such estimates, based on recent evaluations management believes that the
current level of policy reserves will be adequate to cover anticipated claim
liabilities. Accordingly, the ultimate amounts required for settlement of
policy benefits may vary significantly from the amounts included in the
accompanying unaudited consolidated financial statements.
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 125 - Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS
125). SFAS 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. The
accounting and disclosure requirements of SFAS 125 are effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996 and is to be applied prospectively. Earlier or
retroactive application was not permitted. ACCEL adopted SFAS 125 in 1997 and
the impact on the unaudited consolidated financial statements was not material.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 - Earnings per Share (SFAS 128). SFAS 128 establishes
standards for computing and presenting earnings per share (EPS). The accounting
and disclosure requirements of SFAS 128 are effective for financial statements
issued for periods ending after December 15, 1997, including interim periods
and earlier adoption is not permitted. SFAS 128 also requires restatement of
all prior-period EPS data presented. ACCEL will adopt SFAS 128 in December 1997
and the impact on the unaudited consolidated financial statements is not
expected to be material.
-52-
<PAGE> 59
Although the cumulative effects of inflation on premium growth cannot be
fully determined, increases in the retail price of automobiles have generally
resulted in increased amounts being financed which constitute the basis of
premiums charged for credit insurance. Anticipated increases in automobile
repairs also provide the primary basis for increases in extended service
contract premium rates.
CERTAIN EVENTS
SALE OF AUTO AFTERMARKET PRODUCT GROUP: On August 13, 1997, ACCEL
announced it had reached an agreement in principle pursuant to which ACCEL
would sell its auto aftermarket product group along with the stock of its
Acceleration Life Insurance Company (ALIC) subsidiary and two other
subsidiaries to Frontier Insurance Group, Inc. On October 27, 1997, ACCEL
announced it had signed definitive agreements to sell its auto after-market
product group along with the stock of Acceleration Life Insurance Company,
Dublin International Limited and Acceleration National Service Corporation to
Frontier Insurance Group, Inc. for $40.5 million in cash. The transaction is
expected to close on or about December 31, 1997 and is subject to stockholder
approval and the receipt of applicable regulatory approvals. See "THE
TRANSACTION."
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not Applicable.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
-53-
<PAGE> 60
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AUDITED ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditor's Report..................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995..... F-3
Consolidated Statements of Operations for the Year Ended
December 31, 1996, 1995 and 1994.......................... F-5
Consolidated Statements of Common Stockholders' Equity for
the Three Years Ended December 31, 1996................... F-6
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1996, 1995 and 1994.......................... F-7
Notes to Consolidated Financial Statements....................... F-9
Schedule I - Summary of Investments - Other than
Investments in Related Parties............................ F-33
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996..................................... F-34
Unaudited Consolidated Statements of Operations for the Three
Months Ended September 30, 1997 and 1996 and the Nine
Months Ended September 30, 1997 and 1996.................. F-36
Unaudited Consolidated Statements of Common Stockholders' Equity
for the Nine Months Ended September 30, 1997 and the
Year Ended December 31, 1996.............................. F-37
Unaudited Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and 1996.................. F-38
Notes to Unaudited Consolidated Financial Statements............. F-39
</TABLE>
F-1
<PAGE> 61
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ACCEL International Corporation:
We have audited the consolidated financial statements of ACCEL
International Corporation and subsidiaries (the Company) as listed in the
accompanying index. In connection with our audits of the consolidated
financial statements, we also have audited the financial statement schedule
listed in the accompanying index. These consolidated financial statements and
the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of ACCEL International Corporation and subsidiaries as of December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles. Also in our opinion,
the related financial statement schedule when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Columbus, Ohio
March 14, 1997
F-2
<PAGE> 62
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
----------- -----------
(Thousands of dollars)
<S> <C> <C>
ASSETS
Investments--Notes B and F:
Investments available for sale, at fair value:
Fixed maturities (cost: 1996--$58,889,000;
1995--$53,427,000) $ 58,281 $ 53,204
Equity securities (cost: 1996--$5,514,000;
1995--$5,433,000) 5,511 5,451
Short-term investments
(cost: 1996--$10,670,000; 1995--$4,278,000) 10,703 4,278
Other invested assets at cost
(fair value: 1996--$346,000; 1995--$364,000) 346 364
----------- -----------
74,841 63,297
Cash 3,331 5,039
Receivables:
Premiums in process of transmittal--Note E, less
allowance (1996--$223,000; 1995--$154,000) 7,286 1,779
Amounts due from reinsurers--Note F,
less allowance (1996 and 1995--$125,000) 11,138 9,119
Recoverable federal income taxes--Note G 1,019 70
----------- -----------
19,443 10,968
Accrued investment income 652 557
Prepaid reinsurance premiums--Note F 15,036 14,895
Reinsurance premium deposits--Note F 42,615 51,634
Deferred policy acquisition costs 30,946 31,839
Equipment--at cost, less accumulated
depreciation (1996--$162,000; 1995--$564,000) 231 187
Leasehold improvements, less accumulated amortization
(1996--$26,000) 152 --
Property occupied by the Company--at cost, less
accumulated depreciation
(1995--$2,382,000) -- 3,167
Other assets:
Cost in excess of fair value of net assets of
subsidiaries at dates of acquisition ($4,448,000)
less accumulated amortization 716 822
Funds held under reinsurance agreements-Note F 406 829
Other 939 273
----------- -----------
2,061 1,924
----------- -----------
$189,308 $183,507
=========== ===========
</TABLE>
F-3
<PAGE> 63
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
----------- -----------
(Thousands of dollars)
<S> <C> <C>
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Policy Reserves and Liabilities:
Unearned premium reserves--Note F $ 81,820 $ 82,080
Insurance claims--Notes F and H 25,256 22,761
Other 7 11
---------- ----------
107,083 104,852
Other Liabilities:
Funds held under reinsurance agreements--Note F 2,920 3,072
Deferred reinsurance commissions--Note F 13,902 15,663
Amounts due reinsurers--Note F 6,133 4,442
Notes payable--Notes D and F 15,000 22,531
Commissions payable 5,163 5,010
Accounts payable and other liabilities 2,788 2,353
Deferred federal income taxes--Note G 4,678 5,024
---------- ----------
50,584 58,095
---------- ----------
157,667 162,947
---------- ----------
Commitments and Contingencies--Notes F and N
Redeemable Preferred Stock:
Authorized shares--1,000,000;
no issued or outstanding shares -- --
Common stockholders' equity--Notes C, D, G, I and P:
Common stock, $.10 par value
Authorized shares (1996--15,000,000;
1995--10,000,000)
Issued shares (1996--9,401,162;
1995--5,243,852) 940 524
Additional paid-in capital 32,507 23,702
Retained earnings 5,403 3,299
Less 797,420 treasury shares at cost (6,599) (6,599)
ESOP loan--Note L (32) (161)
Net unrealized depreciation on investment
securities--Note B (578) (205)
---------- ----------
Net common stockholders' equity 31,641 20,560
---------- ----------
$189,308 $183,507
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 64
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
--------------- --------------- ---------------
(Thousands of dollars, except per share data)
<S> <C> <C> <C>
REVENUE:
Gross premiums written--Notes E and F $ 58,412 $ 55,443 $ 60,504
Less reinsurance ceded--Note F 12,860 12,147 12,495
-------------- -------------- --------------
Net premiums written 45,552 43,296 48,009
Decrease (increase) in unearned premium reserves 405 (2,443) (409)
-------------- -------------- --------------
Premiums earned--Note F 45,957 40,853 47,600
Net investment income--Note B:
Interest and dividends 4,416 6,488 6,678
Realized gains 484 455 808
Service fees on extended service
contracts 2,450 2,137 2,063
Other income--Note 5 4,513 542 370
-------------- -------------- --------------
57,820 50,475 57,519
BENEFITS AND EXPENSES:
Policy benefits--Notes F and H 24,338 20,118 24,997
Commissions and selling expenses 22,145 23,780 22,296
Reinsurance expense recovery--Note F (2,670) (2,880) (3,611)
General and administrative 7,486 7,817 9,336
Taxes, licenses and fees 1,880 1,743 1,903
Interest--Note D 1,969 1,748 1,589
Decrease (increase) in deferred policy
acquisition costs 893 (750) 2,085
Write off of subsidiary--Note K -- -- 3,829
-------------- -------------- --------------
56,041 51,576 62,424
-------------- -------------- --------------
INCOME (LOSS) BEFORE FEDERAL INCOME
TAXES AND EXTRAORDINARY ITEM 1,779 (1,101) (4,905)
Federal income taxes--Note G:
Current expense 152 273 219
Deferred expense (benefit) (346) 86 114
-------------- -------------- --------------
(194) 359 333
-------------- -------------- --------------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM 1,973 (1,460) (5,238)
Extraordinary item--gain on
extinguishment of debt--Note D 131 -- --
-------------- -------------- --------------
NET INCOME (LOSS) $ 2,104 $ (1,460) $ (5,238)
============== ============== ==============
Per Common Share:
Net income (loss) before extraordinary item $ 0.34 $ (0.33) $ (1.18)
Extraordinary item .02 -- --
-------------- -------------- --------------
Net income (loss) $ 0.36 $ (0.33) $ (1.18)
============== ============== ==============
Weighted average number of common
shares outstanding 5,904,398 4,446,432 4,446,432
============== ============== ==============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 65
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
Three Years Ended December 31, 1996
(Thousands of dollars)
<TABLE>
<CAPTION>
ADDITIONAL COMMON STOCK
COMMON PAID-IN RETAINED HELD IN
STOCK CAPITAL EARNINGS TREASURY ESOP LOAN
----------- ----------- ---------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1993 $524 $24,066 $ 9,997 $(6,599) $(720)
Payments on ESOP loan -- -- -- -- 93
Change in net unrealized
depreciation on
investment securities -- -- -- -- --
Change in foreign currency
translation adjustment -- -- -- -- --
Net loss -- -- (5,238) -- --
------- --------- --------- -------- --------
Balances at December 31, 1994 524 24,066 4,759 (6,599) (627)
Payments on and write down
of ESOP loan--Note L -- (364) -- -- 466
Change in net unrealized
depreciation on
investment securities -- -- -- -- --
Change in foreign currency
translation adjustment -- -- -- -- --
Net loss -- -- (1,460) -- --
------- --------- --------- -------- --------
Balances at December 31, 1995 524 23,702 3,299 (6,599) (161)
Payments on ESOP loan -- -- -- -- 129
Change in net unrealized
depreciation on
investment securities -- -- -- -- --
Issuance of 110,000 shares of
Common Stock under
Common Stock Option Plan
(Note I) 11 223 -- -- --
Issuance of 4,047,310 shares of
Common Stock in conjunction
with the Rights Offering and
the Supplemental Offering 405 8,582 -- -- --
Net income -- -- 2,104 -- --
------- --------- --------- -------- --------
Balances at December 31, 1996 $940 $32,507 $ 5,403 $(6,599) $ (32)
======= ========= ========= ======== ========
</TABLE>
<TABLE>
<CAPTION>
NET UNREALIZED
APPRECIATION FOREIGN
DEPRECIATION) ON CURRENCY
INVESTMENT TRANSLATION
SECURITIES ADJUSTMENTS NET
----------------- -------------------- --------
<S> <C> <C> <C>
Balances at December 31, 1993 $ 1,496 $181 $28,583
Payments on ESOP loan -- -- 93
Change in net unrealized
depreciation on
investment securities (8,168) -- (8,168)
Change in foreign currency
translation adjustment -- 96 96
Net loss -- -- (5,238)
---------- -------- -------
Balances at December 31, 1994 (6,672) (85) 15,366
Payments on and write down
of ESOP loan--Note L -- -- 102
Change in net unrealized
depreciation on
investment securities 6,467 -- 6,467
Change in foreign currency
translation adjustment -- 85 85
Net loss -- -- (1,460)
---------- -------- -------
Balances at December 31, 1995 (205) -- 20,560
Payments on ESOP loan -- -- 129
Change in net unrealized
depreciation on
investment securities (373) -- (373)
Issuance of 110,000 shares of
Common Stock under
Common Stock Option Plan
(Note I) -- -- 234
Issuance of 4,047,310 shares of
Common Stock in conjunction
with the Rights Offering and
the Supplemental Offering -- -- 8,987
Net income -- -- 2,104
---------- -------- -------
Balances at December 31, 1996 $ (578) -- $31,641
=========== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 66
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
-------- --------- ---------
(Thousands of dollars)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) before extraordinary item $ 1,973 $ (1,460) $ (5,238)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Change in premiums receivable (5,576) 1,789 3,266
Change in accrued investment income (95) 250 191
Change in prepaid reinsurance
premiums (141) 3,812 9,208
Change in funds held under reinsurance
agreements 271 (292) (1,196)
Change in unearned premium reserves (260) (1,682) (7,449)
Change in insurance claim reserves 2,495 (398) (12,435)
Change in amounts due reinsurers
and amounts due from reinsurers (1,828) (3,310) 7,298
Change in other assets, other liabilities
and accrued income taxes (1,463) 1,683 (860)
Interest paid in kind 403 569 515
Accrual of discount on bonds (234) (461) (128)
Amortization of premium on bonds 101 172 116
Amortization of deferred policy
acquisition costs 20,290 20,743 24,414
Policy acquisition costs deferred (19,397) (21,493) (22,329)
Reinsurance commissions earned (33,645) (13,329) (12,763)
Reinsurance commissions received 31,884 11,162 11,708
Provision for depreciation and
amortization 286 412 528
Write off of subsidiary - - 3,829
Net realized gains on investments (484) (455) (808)
-------- --------- ---------
NET CASH USED IN OPERATING ACTIVITIES
BEFORE EXTRAORDINARY ITEM (5,420) (2,288) (2,133)
Extraordinary gain 131 - -
-------- --------- ---------
NET CASH USED IN OPERATING ACTIVITIES (5,289) (2,288) (2,133)
-------- --------- ---------
</TABLE>
(Continued)
F-7
<PAGE> 67
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
------- ------- -------
(Thousands of dollars)
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Sale of investments available for sale 16,219 49,159 38,103
Purchase of investments available for sale (27,665) (7,067) (35,574)
Sale of property occupied by the Company 3,298 - -
Other, net (337) (122) (59)
------- ------- -------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (8,485) 41,970 2,470
------- ------- -------
FINANCING ACTIVITIES:
Payment on ESOP loan 129 102 93
Repayment of notes payable (600) (13,000) -
Issuance of notes payable - 16,500 -
Debentures redeemed - - (900)
Issuance of Common Stock under Stock Option Plan 234 - -
Issuance of Common Stock under Rights Offering 3,284 - -
Change in reinsurance premium deposit 9,019 (39,289) (1,251)
------- ------- -------
NET CASH PROVIDED (USED IN) FINANCING ACTIVITIES 12,066 (35,687) (2,058)
------- ------- -------
NET INCREASE (DECREASE) IN CASH (1,708) 3,995 (1,721)
Cash at beginning of year 5,039 1,044 2,765
------- ------- -------
CASH AT END OF YEAR $ 3,331 $ 5,039 $ 1,044
======= ======= =======
Supplemental schedule of non-cash financing activities:
Cancellation of Subordinated Notes as consideration
for the purchase of Common Stock--Note D $ 5,703 - -
======= ======= =======
Transfer of note payable to subsidiary--Note D $ 1,500 - -
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 68
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying consolidated financial statements of
ACCEL International Corporation ("ACCEL") and subsidiaries (collectively
referred to herein as the "Company") have been prepared in accordance with
generally accepted accounting principles which, as to the insurance company
subsidiaries, differ in some respects from statutory accounting practices
prescribed or permitted by state insurance departments. The significant
accounting policies followed by the Company that materially affect financial
reporting are summarized below.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial
statements include the accounts of ACCEL and its wholly-owned subsidiaries,
except for Randjill Group Ltd. ("RGL") (see Note K). All significant
intercompany accounts and transactions have been eliminated in the consolidated
financial statements
DESCRIPTION OF BUSINESS: ACCEL is an insurance holding company incorporated in
Delaware in June 1978 as the successor to an Ohio corporation, formerly
Acceleration Corporation, organized in 1969. The Company has been engaged in
the sale and underwriting of credit life and credit accident and health
insurance, extended service contracts, commercial auto and other specialty
casualty products. The credit insurance and extended service contract products
continue to be offered to consumers, principally through automobile dealers,
financial institutions and other business entities. The specialty casualty
products are offered through general agents. The Company is subject to
competition from other insurers throughout the states in which it writes
business. The Company is also subject to regulation by the Insurance
Departments of states in which it is licensed, and undergoes periodic
examinations by those departments.
The following is a description of the most significant risks facing life and
health and property/casualty insurers and how the Company mitigates those
risks:
LEGAL/REGULATORY RISK is the risk that changes in the legal or regulatory
environment in which an insurer operates will create additional expenses not
anticipated by the insurer in pricing its products. That is, regulatory
initiatives, new legal theories or insurance company insolvencies through
guaranty fund assessments may create costs for the insurer beyond those
currently recorded in the consolidated financial statements. The Company
mitigates this risk by operating throughout the United States, thus reducing
its exposure to any single jurisdiction, and also by employing underwriting
and loss adjusting practices which identify and minimize the adverse impact
of this risk.
CREDIT RISK is the risk that issuers of securities owned by the Company will
default or that other parties, including reinsurers, which owe the Company
money, will not pay. The Company minimizes this risk by adhering to a
conservative investment strategy, by maintaining reinsurance and credit and
collection policies and by providing for any amounts deemed uncollectible.
INTEREST RATE RISK is the risk that interest rates will change and cause a
decrease in the value of an insurer's investments. The Company mitigates
this risk by attempting to match the maturity schedule of its assets with
the expected payouts of its liabilities. To the extent that liabilities come
due more quickly than assets mature, an insurer would have to borrow funds
or sell assets prior to maturity and potentially recognize a gain or loss.
F-9
<PAGE> 69
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
ACCOUNTING ESTIMATES: In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosures of contingent
assets and liabilities as of the date of the consolidated financial statements
and revenues and expenses for the reporting period. Actual results could differ
significantly from those estimates.
The most significant estimates include those used in determining deferred
policy acquisition costs and the liability for unearned premium reserves and
insurance claims. Although some variability is inherent in these estimates,
management believes the amounts provided are adequate. The estimates are
continually reviewed and adjusted as necessary. Such adjustments are generally
reflected in current operations.
INVESTMENTS: The Company classifies its fixed maturity and equity securities
as available for sale, therefore these securities are carried at fair value and
the unrealized appreciation or depreciation is reported as a separate component
of common stockholders' equity after giving effect to applicable income taxes.
Short-term investments, which include U. S. Treasury securities, commercial
paper and certificates of deposit are carried at fair value which approximates
cost.
Other invested assets are carried at cost which approximates fair value.
Realized gains and losses on the disposal of investments are determined by
specific identification and are included in the consolidated statements of
operations.
When an other than temporary decline in value is recognized, the specific
investment is carried at estimated realizable value and its original book value
is reduced to reflect such impairment of the investment. Such reductions in
book value are reflected in realized investment losses for the period in which
they were written down. For mortgage backed securities, when the present value
of estimated future cash flows discounted at a risk-free rate of return is less
than the cost basis of the investment, an impairment loss is recognized by
writing the investment down to its fair value.
FAIR VALUES OF FINANCIAL INSTRUMENTS: The fair value of a financial instrument
is the amount at which the financial instrument could be exchanged in a current
transaction between willing parties. In cases where quoted market prices are
not available, fair value is based on estimates using present value or other
valuation techniques.
These techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. Although fair value
estimates are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in the immediate settlement of the instruments. The disclosure
requirements related to financial instruments exclude certain assets and
liabilities. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
F-10
<PAGE> 70
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The tax ramifications of the related unrealized gains and losses may have a
significant effect on fair value estimates and have not been considered in the
estimates.
The carrying amounts reported in the consolidated balance sheets for cash,
short-term investments, accrued investment income, premiums in process of
transmittal, and amounts due from reinsurers approximate their fair value.
Fair value for fixed maturity, equity and asset and mortgage backed securities
are based on quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments at amortized value (see Note B).
The fair value of notes payable is estimated using discounted cash flow
analyses, based on ACCEL's current incremental borrowing rates for similar
types of borrowing arrangements (see Note G).
DEFERRED POLICY ACQUISITION COSTS: The costs (principally commissions and
certain expenses of policy issuance) of acquiring or renewing insurance
business, all of which vary with and are directly related to the production of
business, have been deferred. These deferred policy acquisition costs are
amortized in a manner related to the recognition of premiums earned.
Substantially all such deferred costs are amortized within a four-year period.
Anticipated investment income is considered in determining recoverability of
deferred costs.
EQUIPMENT AND DEPRECIATION: Equipment is carried at cost less accumulated
depreciation. Depreciation is provided using the straight-line method over an
estimated useful asset life of five years.
LEASEHOLD IMPROVEMENTS: Leasehold improvements are carried at cost less
accumulated amortization. Amortization is provided using the straight-line
method over the term of the five year lease.
PROPERTY OCCUPIED BY COMPANY: Home office property is carried at cost less
accumulated depreciation. Depreciation is provided using the straight-line
method over an estimated life of thirty-five years.
GOODWILL AMORTIZATION: Cost in excess of fair value of net assets of
subsidiaries at dates of acquisition is being amortized primarily over a
thirty-five year period. It is the Company's policy to account for goodwill at
the lower of amortized cost or fair value. On an ongoing basis, management
reviews the valuation and amortization of its goodwill.
PREMIUM INCOME RECOGNITION AND UNEARNED PREMIUM RESERVES: Unearned premium
reserves on credit life and credit accident and health insurance are calculated
primarily under the "Rule of 78's Method", which results in premium income
being recognized in decreasing proportions over the terms of the policies,
which approximates the pattern of policy benefits incurred.
Unearned premium reserves on the extended service contracts are based on the
historical emergence pattern of claims. The Company's primary liability on new
car contracts exists subsequent to the expiration of manufacturers' warranties.
This method results in premium being recognized in direct proportion to the
emergence of benefits on these contracts.
F-11
<PAGE> 71
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Unearned premium reserves on property and casualty products are calculated on
the pro rata method.
INSURANCE CLAIMS: The liabilities for insurance claims are determined using
statistical analyses and represent estimates of the ultimate net cost of all
reported and unreported claims that are unpaid at year end. Considerable
variability is inherent in such estimates and actual results will likely differ
from those estimates
FEDERAL INCOME TAXES: ACCEL and its subsidiaries file a consolidated federal
income tax return. The provision for income taxes is based on income for
financial reporting purposes, after permanent differences. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under this
method, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce the deferred tax
assets to the amounts expected to be realized.
REINSURANCE: Reinsurance premiums ceded and reinsurance recoveries on policy
benefits incurred are deducted from the respective income and expense accounts.
Assets and liabilities related to reinsurance ceded are reported on a gross
basis. Amounts related to reinsurance contracts, where it is not reasonably
possible for the reinsurer to realize a significant loss, are recorded based on
the deposit accounting method.
DEFERRED REINSURANCE COMMISSIONS: Commissions and ceding fees received in
connection with premiums ceded are deferred and amortized in a manner related
to the recognition of premiums earned. Substantially all such commissions and
ceding fees are amortized within a four-year period. Earned ceding fees,
commissions and experience refunds are reported as reinsurance expense
recoveries in the consolidated statements of operations.
STOCK OPTION PLANS: Prior to January 1, 1996, the Company accounted for its
stock option plans in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. On January 1, 1996, the Company adopted the Financial
Accounting Standards Board's (FASB) Statement No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, FASB No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in FASB No. 123
had been applied. The Company has elected to continue to apply the provisions
of APB Opinion No. 25 and provide the pro forma disclosure provisions of FASB
No. 123 (see Note I).
EARNINGS PER COMMON SHARE: Net income and net loss per common share are
computed using the weighted average number of common shares outstanding during
the period. The inclusion of common stock equivalents (options) would not be
dilutive.
F-12
<PAGE> 72
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
RECLASSIFICATIONS: Certain amounts in the 1995 and 1994 consolidated financial
statements have been reclassified to conform with the 1996 presentation.
NOTE B--INVESTMENTS
At December 31, 1996 and 1995, investments in cash and securities with a
carrying value of $10,056,000 and $9,108,000, respectively, were on deposit
with state insurance departments to satisfy regulatory requirements. Cash and
securities with a carrying value of $22,502,000 and $19,879,000 at December 31,
1996 and 1995, respectively, were on deposit as security funds in connection
with reinsurance treaties.
The change in net unrealized gains (losses) on fixed maturity and equity
securities is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
------- -------- -------
(Thousands of dollars)
<S> <C> <C> <C>
Securities available for sale:
Fixed maturities $(385) $6,417 $(8,054)
Equity securities (21) 50 (114)
Short-term investments 33 - -
------- -------- -------
$(373) $6,467 $(8,168)
======= ======== =======
</TABLE>
Realized gains (losses) on investments are summarized as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Securities available for sale:
Fixed maturities
Gross realized gains $ 158 $ 607 $194
Gross realized losses (150) (284) (35)
Equity securities:
Gross realized gains 307 106 148
Gross realized losses - - -
Other invested asset gains 169 26 501
----- ----- -----
$ 484 $ 455 $808
===== ===== =====
</TABLE>
F-13
<PAGE> 73
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B--INVESTMENTS--(CONTINUED)
The major sources of investment income are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
------- ------- -------
(Thousands of dollars)
<S> <C> <C> <C>
Fixed maturities $3,865 $5,669 $6,307
Equity securities 288 181 113
Short-term investments 440 927 333
Other 55 431 469
------- ------- -------
4,648 7,208 7,222
Investment expenses (232) (720) (544)
------- ------- -------
Net investment income $4,416 $6,488 $6,678
======= ======= =======
</TABLE>
The amortized cost and estimated fair value of fixed maturity securities by
category, all of which were available for sale, are as follows:
<TABLE>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
(Thousands of dollars)
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
U.S. Treasury and U.S. government
agency securities $13,120 $ 99 $ (26) $13,193
State and political subdivision
securities 940 20 - 960
Mortgage-backed securities 16,590 48 (638) 16,000
Collateralized mortgage obligations 15,972 101 (135) 15,938
Asset-backed securities 8,181 73 (160) 8,094
U.S. corporate securities 3,541 51 (38) 3,554
Redeemable preferred stocks 545 - (3) 542
--------- ---------- --------- --------
Total $58,889 $392 $(1,000) $58,281
========= ========== ========= ========
DECEMBER 31, 1995
U.S. Treasury and U.S. government
agency securities $ 9,310 $274 $ - $ 9,584
State and political subdivision
securities 1,255 35 - 1,290
Mortgage-backed securities 15,887 66 (104) 15,849
Collateralized mortgage obligations 11,587 53 (604) 11,036
Asset-backed securities 13,740 203 (206) 13,737
U.S. corporate securities 1,000 26 - 1,026
Redeemable preferred stocks 648 34 - 682
--------- ---------- --------- --------
Total $53,427 $691 $ (914) $53,204
========= ========== ========= ========
</TABLE>
F-14
<PAGE> 74
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B--INVESTMENTS--(CONTINUED)
The amortized cost and estimated fair value of fixed maturity securities, all
of which were available for sale, at December 31, 1996, by contractual
maturity, are summarized as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
MATURITY (Thousands of dollars)
Due in one year or less $ 4,972 $ 4,989
Due after one year through five years 7,446 7,522
Due after five years through ten years 4,288 4,308
Due after ten years 1,440 1,430
Mortgage-backed securities 16,590 16,000
Collateralized mortgage obligations 15,972 15,937
Asset-backed securities 8,181 8,095
----------- -----------
Total $58,889 $58,281
=========== ===========
</TABLE>
The expected maturities in the foregoing table will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without penalty. Mortgage-backed securities owned have an expected
weighted average maturity of over 10 years.
Proceeds from the sale of securities available-for-sale during 1996, 1995 and
1994 were $2,973,000, $18,456,000 and $3,467,000, respectively. Gross gains of
$408,000 ($444,000 in 1995 and $211,000 in 1994) and gross losses of $-0-
($25.000 in 1995 and $31,000 in 1994) were realized on those sales.
One asset-backed security held by the Company was written down by $150,000 and
$200,000 in 1996 and 1995, respectively. These write downs are included in
realized gains in the accompanying consolidated statements of operations.
NOTE C--STOCKHOLDERS' EQUITY AND TRANSFER LIMITATIONS
Generally, the net assets of the consolidated insurance subsidiaries available
for transfer to ACCEL are limited to the amounts that the insurance
subsidiaries' net assets, as determined in accordance with statutory accounting
practices, exceed minimum statutory capital and surplus requirements; however,
payments of such amounts as dividends from each insurance subsidiary are
currently subject to regulation by Ohio law. Based on this law, Acceleration
Life Insurance Company ("ALIC") could pay a dividend of $1,543,315 to ACCEL in
1997 without approval of the Department of Insurance of the State of Ohio
("Ohio Department"). Acceleration National Insurance Company ("ANIC") would
require Ohio Department approval to pay any dividend to ACCEL during 1997.
The statutory basis capital and surplus and net income (loss) of the insurance
subsidiaries included in the Company's consolidated financial statements, as
reported to insurance regulatory authorities, are summarized as follows:
<TABLE>
<CAPTION>
LIFE/ PROPERTY/
HEALTH CASUALTY
----------- -----------
(Thousands of dollars)
<S> <C> <C>
Statutory capital and surplus
at December 31:
1996 $15,122 $13,017
1995 13,010 10,037
Statutory net income (loss) for
year ended December 31:
1996 $ 1,543 $ 884
1995 (713) (2,574)
1994 1,165 (1,537)
</TABLE>
F-15
<PAGE> 75
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D--NOTES PAYABLE
In 1991, ACCEL issued $5,848,000 of subordinated notes (the "Subordinated
Notes"). The Subordinated Notes had a nine-year term with no principal payable
until maturity, and bear interest at 10.125% per annum. Effective June 30,
1992, ACCEL amended the notes to permit the issuance of additional notes for
the purpose of making interest payments, provided, however, that ACCEL may at
its option pay cash in lieu of issuing additional notes in any denomination of
less than $1,000. As a result, ACCEL issued additional notes totaling $403,000
and $569,000 for the 1996 and 1995 interest payments, respectively.
Of the Subordinated Notes described above, a significant portion were held by
Chase Insurance Holdings Corporation ("CIHC"), a company related through common
ownership by a stockholder and director of the Company.
On July 25, 1996, the Company commenced an offering of non-transferable rights
(the "Rights Offering") to stockholders of record as of June 18, 1996. Under
the provisions of the Rights Offering, the Company permitted CIHC and its
affiliate to tender the principal amount of their Subordinated Notes for
cancellation as consideration (in lieu of cash) for the purchase of shares of
common stock pursuant to the Rights Offering. On August 23, 1996, CIHC and its
affiliate tendered $5,619,046 principal amount of their Subordinated
Notes plus an additional $83,759 of accrued interest thereon under the terms of
the Rights Offering. At the conclusion of the offering, CIHC and its affiliate
had reduced their holding of Subordinated Notes to $0.
In a separate transaction, the Company retired $731,533 principal amount of
Subordinated Notes held by an unrelated third party for consideration of
$600,000. The Company recognized an extraordinary gain on this transaction of
$131,533. No federal income tax was recognized related to this gain due to the
current consolidated tax position of the Company.
The result of the two aforementioned transactions was to retire all outstanding
Subordinated Notes.
At December 31, 1994, the effective interest rate and outstanding loan balance
under a credit agreement (the "Credit Agreement") were 8.75% and $13,000,000,
respectively. On February 7, 1995 the Company renegotiated the terms of the
Credit Agreement. Under the amended Credit Agreement, the quarterly principal
payments scheduled to begin in 1995 were waived. Specific principal payments
totaling up to $1.5 million were due on June 30, 1995 and December 31, 1995.
The loan was to be payable in full on June 30, 1997
On December 29, 1995, the Company issued senior notes (the "Senior Notes")
totaling $16,500,000 at 9.50%, maturing on April 1, 2001. The proceeds from
these notes were used to retire the loan outstanding under the aforementioned
Credit Agreement and to liquidate an intercompany loan between ACCEL and an
insurance subsidiary. In addition, as of January 1, 1996, ALIC entered into a
reinsurance agreement with an unaffiliated company to reinsure the majority of
the in-force credit business. The Senior Notes are payable to the same
unaffiliated company which is a party to the reinsurance agreement dated
January 1, 1996. This agreement is structured such, that as future profits
emerge on this block of business, these profits are held by the reinsurance
company, and ultimately applied to pay interest on and to redeem the Senior
Notes. Profits in excess of the amount required to retire the Senior Notes are
to be returned to ALIC. As of December 31, 1996, $1,500,000 of the profits on
this block of business were released to ALIC in the form of the aforementioned
Senior Notes. This release resulted in a balance of $15,000,000 of Senior Notes
outstanding as of December 31, 1996. The fair value of these Senior Notes as of
December 31, 1996 was $8,100,000.
During 1996, 1995 and 1994, ACCEL paid interest on notes of $403,000,
$1,125,000 and $974,000, respectively.
F-16
<PAGE> 76
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E--BUSINESS CONCENTRATION
With first year premium written of $13,800,000 and gross earned premium of
$8,400,000, Commercial Auto has become a primary product line for the Company.
This program is marketed by a general agent located in Melbourne, Florida
Transportation Insurance Specialists (TIS). At year end 1996, the premium
receivable, net of commission, due from TIS was $5,200,000
NOTE F--REINSURANCE
The Company's reinsurance program includes an agreement covering certain of its
direct credit business, the reinsurance of other direct business ceded on a
quota share basis and direct business ceded to producer-owned reinsurance
companies.
The ceding of insurance through reinsurance agreements does not discharge the
primary liability of the original underwriter to the insured, but it is the
practice of insurers to treat risks that have been reinsured with other
companies, to the extent of the reinsurance, as though they were not risks for
which the original insurer is liable. Should the reinsurer not be able to meet
its obligations, those obligations are the ultimate responsibility of the
Company. Therefore, in financial statement presentation, premiums and policy
benefits are presented net of that portion of risks reinsured with other
companies.
DIRECT BUSINESS CEDED--CREDIT BUSINESS QUOTA SHARE: The Company has an
agreement in place which covers a substantial portion of its credit insurance
business. The agreement contains an experience adjustment computation that
results in the ultimate cost of this agreement being a stated percentage
related to the business covered by the agreement. The Company ultimately
retains a substantial part of the insurance risk, the underwriting income or
loss and the investment income on net funds.
The Company determined that deposit accounting is the appropriate method of
accounting for this agreement since it is not reasonably possible for the
reinsurer to realize a significant loss from the transaction. The consolidated
financial statements have been prepared on this basis.
The effect of this agreement is to increase statutory capital and surplus of
ALIC, a wholly owned subsidiary of ACCEL, by $14,416,000 and $14,512,000 as of
December 31, 1996 and 1995, respectively.
On January 1, 1996 the Company terminated its quota share reinsurance agreement
and elected to recapture the liabilities subject to the treaty. The liabilities
recaptured thereunder were then available for cession under the treaty
described below. The unearned premium reserves and claim liabilities recaptured
were $29,753,000 and $8,424,000, respectively.
Concurrent with this termination, the Company entered into a reinsurance
agreement with a different unaffiliated reinsurer (which is also the buyer of
the Senior Notes discussed in Note D) to reinsure a substantial portion of the
in-force credit life and accident and health insurance business, including the
amounts recaptured. This agreement is structured in such a way that as future
profits emerge on this block of business, a substantial portion of the
Company's share of the profits will be used over the next four to five years to
pay fees and interest to the reinsurer and redeem the new Senior Notes of
$16,500,000 (see Note D). In connection with this agreement, approximately
$40,000,000 of assets were transferred to the reinsurer on December 29, 1995,
as agreed to by all parties. The unearned premium reserves and liability for
insurance claims subject to cession under this treaty approximated $48,616,000
and $9,919,000, respectively, as of January 1, 1996.
Prior to December 31, 1995, a security fund had been maintained, primarily
comprised of fixed maturities, for the benefit of the reinsurer. Pursuant to
the termination of the agreement effective January 1, 1996, as discussed above,
certain investments were liquidated from the security fund on December 29,
1995. Proceeds from this liquidation, along with other funds, were transferred
on December 29, 1995 to the reinsurer who is party to the agreement dated
F-17
<PAGE> 77
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F--REINSURANCE--(CONTINUED)
January 1, 1996. These amounts are included in "Reinsurance Premium Deposits"
on the accompanying consolidated balance sheets as of December 31, 1996 and
1995.
DIRECT BUSINESS CEDED--OTHER QUOTA SHARE: The Company reinsures a portion of
its group life and health care insurance with several unaffiliated companies.
The effect of this reinsurance is to transfer the risk, the underwriting income
or loss, and the investment income related to the premiums ceded. In 1993, the
Company entered into reinsurance agreements with unaffiliated reinsurers
related to certain additional product lines. The effect of such reinsurance
arrangements is to transfer 100% of the related risk to the reinsurers.
Premiums ceded associated with these agreements and included in the
accompanying consolidated statements of operations amounted to $496,000,
$633,000 and $980,000 in 1996, 1995 and 1994, respectively.
DIRECT BUSINESS CEDED--TO PRODUCER-OWNED REINSURANCE COMPANIES: The Company
has agreements to cede certain credit life and credit accident and health
insurance to reinsurance companies owned by certain automobile dealers,
financial institutions or agents. Under these arrangements, the assuming
entities participate in the profits or losses of the insurance produced by
them, and the Company may retain a nominal percentage of the applicable
business. These treaties generally provide that the Company receives a ceding
fee and is reimbursed for certain commissions and claims.
Written premiums included in the accompanying consolidated statements of
operations that have been ceded, or which are subject to cession under all such
agreements, amounted to $5,669,000, $7,429,000 and $10,284,000 in 1996, 1995
and 1994, respectively.
OTHER REINSURANCE: Credit life and credit accident and health premiums assumed
by the Company relating to business written in Pennsylvania by an unaffiliated
carrier, amounted to $3,633,000, $6,308,000 and $7,640,000 in 1996, 1995 and
1994, respectively. Unearned premium reserves and the liability for insurance
claims at December 31, 1996 include $8,279,000 and $3,352,000, respectively
($10,904,000 and $3,243,000 at December 31, 1995, respectively), for risks
assumed under this agreement.
On July 31, 1996 this agreement was terminated. The obligations relating to the
in-force business shall remain in effect until such business expires.
As of December 31, 1992, the Company entered into a reinsurance agreement with
unaffiliated reinsurers whereby the Company cedes 100% of the premiums written
in connection with vendor's single interest insurance. In mid 1994, a
substantial part of the remaining in-force business was assumed by an
unaffiliated reinsurer, and resulted in a return of premiums. The VSI product
was forced-placed when the borrower could not demonstrate coverage for the
automobile that was securing the loan with the lending institution. Premiums
ceded under this agreement were $(63,000), $(858,000) and $(6,024,000) for
1996, 1995 and 1994, respectively. Policy benefit expense in 1996, 1995 and
1994, respectively, has been reduced by $83,000, $104,000 and $1,407,000 in
conjunction with these agreements.
The Company also entered into reinsurance agreements with several unaffiliated
reinsurers related to certain property and casualty lines of business written
by the Company. Unearned premium reserves and the liability for insurance
claims associated with these agreements at December 31, 1996 are $5,572,000 and
$5,820,000, respectively ($2,645,000 and $2,240,000 at December 31, 1995,
respectively).
The following data summarizes certain aspects of the Company's reinsurance
activity for 1996, 1995 and 1994.
F-18
<PAGE> 78
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F--REINSURANCE--(CONTINUED)
Premiums written and earned in 1996, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- -------------------- --------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
--------- --------- --------- --------- --------- ---------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Direct $ 54,779 $ 52,417 $ 49,135 $ 50,265 $ 52,864 $ 59,789
Assumed 3,633 6,259 6,308 6,864 7,640 7,004
Ceded (12,860) (12,719) (12,147) (16,276) (12,495) (19,193)
-------- -------- -------- -------- -------- --------
Net premiums $ 45,552 $ 45,957 $ 43,296 $ 40,853 $ 48,009 $ 47,600
======== ======== ======== ======== ======== ========
</TABLE>
Policy benefits incurred in 1996, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- ---------
(Thousands of dollars)
<S> <C> <C> <C>
Direct $27,602 $24,900 $ 31,567
Assumed 4,100 3,973 3,754
Ceded (7,364) (8,755) (10,324)
------- ------- --------
Net policy benefits $24,338 $20,118 $ 24,997
======= ======= ========
</TABLE>
F-19
<PAGE> 79
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G--FEDERAL INCOME TAXES
The Company files a consolidated income tax return with its subsidiaries,
including its life insurance subsidiary. For tax purposes, certain amounts have
been accumulated by the life insurance subsidiary in a memorandum tax account
designated as "policyholders' surplus" that will be taxed only when distributed
to shareholders. Policyholders' surplus on a tax basis was $4,489,000 at
December 31, 1996. Management considers the likelihood of distributions from
this account to be remote; therefore, no federal income tax has been provided
for such distributions in the accompanying consolidated financial statements.
As of December 31, 1996, approximately $4,700,000 could be distributed to
shareholders before a distribution would be designated as from the
policyholders' surplus account.
In 1996, 1995 and 1994, the Company paid $1,100,000, $410,000 and $140,000,
respectively, in federal income taxes.
Total income tax expense (benefit) differed from the amount computed by
applying the statutory federal income tax rate to income (loss) before taxes as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
-------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C>
Income tax (benefit at statutory rate $ 605 $(374) $(1,668)
Amortization of goodwill 36 36 36
Dividends-received deduction (64) (54) (38)
Special deductions of life insurance
subsidiaries (273) - (297)
Tax-exempt interest (14) (18) (21)
Valuation allowance (372) 761 (599)
Write off of subsidiary - - 1,302
Other, net (112) 8 1,618
------- ------- -------
Federal income tax expense (benefit) $(194) $ 359 $ 333
======= ======= =======
</TABLE>
F-20
<PAGE> 80
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE G--FEDERAL INCOME TAXES--(CONTINUED)
The tax effects of temporary differences that give rise to significant
components of the net deferred tax liability at December 31, 1996 and 1995 are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
----------- -----------
(Thousands of dollars)
<S> <C> <C>
Deferred Tax Liabilities: $10,400 $10,656
Deferred policy acquisition costs 2,233 2,621
-------- --------
Other 12,633 13,277
-------- --------
Deferred Tax Assets: 4,819 5,420
Deferred reinsurance commissions 994 1,766
Net operating loss carryforward 1,457 1,328
Insurance reserves 204 119
Unrealized losses on investments 1,900 1,757
Service contracts 277 -
Amount due reinsurers 228 95
-------- --------
Other 9,879 10,485
Total deferred tax assets (1,924) (2,232)
-------- --------
Valuation allowance 7,955 8,253
-------- --------
Net deferred tax assets $ 4,678 $ 5,024
======== ========
Net deferred tax liability
</TABLE>
The Company has determined the valuation allowance related to the deferred tax
assets based on its analysis of future deductible amounts. This analysis
included a schedule of the deductibility of non-life items against life company
taxable income pursuant to Section 801 of the Internal Revenue Code and a
determination of the realization of losses generated by available for sale
securities.
The Company recorded a valuation allowance of $3,638,000 and $2,484,000 as of
December 31, 1994 and January 1, 1994, respectively.
The Company has $2,923,000 of net operating losses that are available to reduce
future income taxes and will expire in 2010.
F-21
<PAGE> 81
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H--LIABILITY FOR INSURANCE CLAIMS
The following table provides a reconciliation of beginning and ending
liability balances for the Company's insurance claims for 1996, 1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------
(Thousands of dollars)
<S> <C> <C> <C>
Liability for insurance claims
at beginning of year $22,761 $23,159 $ 49,919
Less reinsurance recoverables (5,864) (5,423) (11,801)
------- -------- --------
Net balances at beginning of year 16,897 17,736 38,118
Policy benefits incurred:
Policy benefits incurred for
events of the current year 23,895 19,602 24,914
Policy benefits incurred for
events of prior years 443 516 83
------- -------- --------
Total policy benefits incurred 24,338 20,118 24,997
------- -------- --------
Galaxy unpaid losses and LAE at
date of write off (see Note K) - - 14,325
Payments:
Policy benefits for insured
events of the current year 13,307 10,860 20,556
Policy benefits for insured
events in prior years 8,896 10,097 10,498
------- -------- --------
Total payments 22,203 20,957 31,054
------- -------- --------
Net balances at end of year 17,759 16,897 17,736
Plus reinsurance recoverables 7,497 5,864 5,423
------- -------- --------
Liability for insurance claims
at end of year $25,256 $22,761 $ 23,159
======= ======== ========
</TABLE>
The table above reflects decreases in the liability for insurance claims
resulting from discontinued lines of business and the write off of Galaxy
Insurance Company ("Galaxy"), a wholly owned subsidiary of RGL (see Note K).
Increases in policy benefits incurred for events of prior years relate to
management's reevaluation of discontinued lines of business.
F-22
<PAGE> 82
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H--LIABILITY FOR INSURANCE CLAIMS--(CONTINUED)
In establishing the liability for insurance claims, management considers facts
currently known and the current state of the law and coverage litigation.
Liabilities are recognized for known claims (including the cost of related
litigation) when sufficient information has been developed to indicate the
involvement of a specific insurance policy, and management can reasonably
estimate its liability. In addition, liabilities have been established to cover
additional exposures on both known and unasserted claims. Estimates of the
liabilities are reviewed and updated continually.
NOTE I--COMMON STOCKS AND COMMON STOCK OPTIONS
In 1992, the Board of Directors voted to suspend payment of cash dividends on
the common stock until the Company returns to a level of profitability that
will sustain the payment of cash dividends.
ACCEL's Board of Directors approved an Employee Stock Ownership Plan ("ESOP")
during 1989. In 1990, the ESOP entered into an agreement with ALIC to borrow up
to $1,000,000 for the purchase of ACCEL's common stock. At December 31, 1996,
the unpaid balance on this loan was $32,000.
During November 1989, ACCEL's Board of Directors also approved a stock buy back
program to repurchase up to 1,000,000 common shares in the open market. ACCEL
has purchased 229,185 shares at a cost of $1,722,000 under this program. The
buy back program was funded from internally generated funds. No shares have
been purchased since 1992.
During 1982, ACCEL adopted a stock option plan (the "82 Plan") under which
shares of common stock were made available to eligible officers and key
personnel. Under the terms of the 82 Plan, the option price had to be at least
100% of the fair value at the date of grant, and, accordingly, there were no
charges to income resulting from grants. Options were granted at prices ranging
from $2.769 to $11.750 per share from April 1982 through April 1992. The
options become exercisable after one year of continuous employment in
installments of 50% at the end of the first and the second year from the date
of grant and expired ten years from the date of grant. A total of 300,000
(349,672 after giving effect to all subsequent stock dividends) shares had been
reserved for options under the 82 Plan.
Of the total options granted under the 82 Plan at December 31, 1996, only
18,524 remain exercisable. No additional shares may be granted under the 82
Plan.
During 1987, ACCEL adopted the 1987 Incentive Stock Option Plan (the "87
Plan"). The 87 Plan provided for incentive stock options with respect to a
maximum of 300,000 (347,287 after giving effect to all subsequent stock
dividends) shares of common stock of ACCEL prior to the expiration of the 87
Plan in April 1997. During June of 1991, ACCEL's Board of Directors and
shareholders approved the First Restatement of the 1987 Stock Incentive Plan
(the "Restated Plan"). The Restated Plan replaced the 87 Plan except as to
options granted and outstanding under the 87 Plan. The Restated Plan reserved
an additional 450,000 shares for key employees and 50,000 shares for
non-employee directors. Options could be granted prior to expiration of the
Restated Plan covering shares subject to lapsed or terminated options. Of the
total options outstanding under the Restated Plan, 235,254 were exercisable at
December 31, 1996. At December 31, 1996, no shares were reserved for future
grants.
During May 1995, two new Key Employees were granted stock options under ACCEL's
Restated Plan. Under the terms of their arrangement with ACCEL, both were
granted stock options for ACCEL's common stock in lieu of salary for their
first year of service. Options for 150,000 shares were granted at an option
price per share of $2.125, the fair value of ACCEL's common stock on the date
of grant. The options vest immediately and become exercisable one year
following the date of grant; however, they would become exercisable immediately
upon either (a) a change
F-23
<PAGE> 83
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I--COMMON STOCKS AND COMMON STOCK OPTIONS--(CONTINUED)
of control of ACCEL, or (b) an involuntary termination. The options would have
been forfeited if employment with ACCEL had been voluntarily terminated prior
to May 23, 1996. The options lapse five years from the effective date of grant.
At the end of their first year of service the status of these two key employees
was evaluated by the Compensation Committee and based on the value of their
services, began receiving compensation effective June 1, 1996. As part of their
compensation both were granted stock options pursuant to the 1996 Stock
Incentive Plan (the "96 Plan"). Options for 165,000 shares were granted at an
option price per share of $2.50, the fair value of ACCEL's common stock on the
date of grant. The terms are identical to the aforementioned options granted in
May 1995.
In June 1996, ACCEL stockholders approved the adoption of the 96 Plan. The 96
Plan provides for stock options, stock appreciation rights, restricted stock,
phantom stock and performance awards. No award may be granted after June 11,
2006, the expiration date of the 96 Plan. The total number of shares of common
stock available under the 96 Plan is 1,000,000 shares and up to 100,000 shares
may be issued pursuant to the exercise of outside directors' stock options.
Options granted to employees or independent agents of the Company under the 96
Plan will be priced at not less than 100% of the fair value of the common stock
on the date of grant and will become exercisable as to 25% of the shares
subject to the option upon completion of each full year of employment until
fully vested. Grants of options to outside directors under the 96 Plan will
also be priced at 100% of fair value on the date of grant but, in the absence
of any provisions in an option to the contrary, the options will become
exercisable as to 50% of the shares subject to the option upon completion of
each full year until vested. In substantially all other respects, the 96 Plan
contains provisions similar to the previous plans.
On August 28, 1996, the Board of Directors of the Company approved a resolution
to offer to all key employees holding options outstanding that were priced in
excess of the current market value the opportunity to receive "re-priced"
options. Such key employees were permitted to surrender, cancel and terminate
any or all outstanding options (whether vested or not) and receive options for
an equal number of shares under the 96 Plan at the then current price of $2.50
per share. The re-priced or "replacement" options would be newly granted
options and become exercisable in accordance with the vesting provisions of the
96 Plan. A total of 161,371 shares were surrendered by key employees as part of
the re-pricing opportunity and 4,500 shares were not surrendered. Including the
shares surrendered as a part of the re-pricing opportunity, options were
granted for a total of 420,371 shares to key employees and outside directors
under the 96 Plan.
F-24
<PAGE> 84
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I--COMMON STOCKS AND COMMON STOCK OPTIONS--(CONTINUED)
The following table summarizes activity under the respective plans.
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- --------------------- ---------------------
NUMBER WEIGHTED NUMBER WEIGHTED NUMBER WEIGHTED
OF SHARES AVG. PRICE OF SHARES AVG. PRICE OF SHARES AVG. PRICE
--------- ---------- --------- ---------- --------- ----------
THE 1996 PLAN
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year - - - - - -
Outstanding at
end of year 420,371 $2.514 - - - -
Exercisable - - - - - -
Granted 420,371 $2.514 - - - -
Exercised - - - - - -
Forfeited - - - - - -
Expired - - - - - -
THE RESTATED PLAN--EMPLOYEES
Outstanding at
beginning of year 500,569 $4.595 414,294 $6.571 406,440 $6.561
Outstanding at
end of year 191,881 $4.503 500,569 $4.622 414,294 $6.571
Exercisable 190,754 $4.507 419,819 $4.613 239,106 $7.439
Granted - - 241,500 $2.172 89,000 $4.500
Exercised 110,000 $2.125 - - - -
Forfeited 198,688* $6.050 155,225 $6.101 81,146 $4.248
Expired - - - - - -
THE RESTATED PLAN--NON EMPLOYEE DIRECTORS
Outstanding at
beginning of year 49,000 $5.860 40,000 $6.675 32,000 $7.219
Outstanding at
end of year 49,000 $5.860 49,000 $5.860 40,000 $6.675
Exercisable 44,500 $6.226 36,000 $6.806 28,000 $7.750
Granted - - 9,000 $2.236 8,000 $4.500
Exercised - - - - - -
Forfeited - - - - - -
Expired - - - - - -
</TABLE>
* Includes 161,371 shares that were surrendered under the repricing offer to
key employees.
F-25
<PAGE> 85
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I--COMMON STOCKS AND COMMON STOCK OPTIONS--(CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
--------------------- --------------------- ---------------------
NUMBER WEIGHTED NUMBER WEIGHTED NUMBER WEIGHTED
OF SHARES AVG. PRICE OF SHARES AVG. PRICE OF SHARES AVG. PRICE
--------- ---------- --------- ---------- --------- ----------
THE 1982 PLAN
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year 67,401 $7.686 111,985 $7.721 148,645 $7.941
Outstanding at
end of year 18,524 $6.486 67,401 $7.686 111,985 $7.721
Exercisable 18,524 $6.486 67,401 $7.686 111,985 $7.721
Granted - - - - - -
Exercised - - - - - -
Forfeited 8,209 $7.457 18,050 $8.158 - -
Expired 40,668 $8.278 26,534 $7.515 36,660 $8.613
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
RANGE OF WEIGHTED AVG.
EXERCISE # OUTSTANDING REMAINING WEIGHTED AVG. # EXERCISABLE WEIGHTED AVG.
PRICES AT 12/31/96 LIFE EXERCISE PRICES AT 12/31/96 EXERCISE PRICES
- -------- ------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$2 - $5 545,371 9.34 $2.496 119,374 $2.428
$5 - $10 134,404 1.66 $7.195 134,404 $7.195
</TABLE>
At December 31, 1996 and 1995, there were 579,629 and 0 additional shares
available for grant under the 1996 Plan and the Restated Plan, respectively.
The per share weighted-average fair value of stock options granted during 1996
and 1995 was $1.20 and $0.79 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: 1996 -
expected dividend yield 0%, risk-free interest rates ranging from 6.85% to
7.09% (based on the date of the grant), expected lives of 5 to 10 years (based
on the terms of the grant), and volatility of 25%; 1995 - expected dividend
yield 0%, risk-free interest rate 7.00%, expected lives of 5 to 10 years (based
on the terms of the grant), and volatility of 25%.
The Company applies APB Opinion No. 25 in accounting for these plans and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under FASB
No. 123, the Company's net income would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
------- ----------
<S> <C> <C> <C>
Net income (loss) As reported $2,104 $(1,460)
Pro forma 1,980 (1,580)
Net income (loss) per As reported $ .36 $ (.33)
common share Pro forma .34 (.36)
</TABLE>
F-26
<PAGE> 86
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I--COMMON STOCKS AND COMMON STOCK OPTIONS--(CONTINUED)
Pro forma net income reflects only options granted in 1996 and 1995. Therefore,
the full impact of calculating compensation cost for stock options under FASB
No. 123 is not reflected in the proforma net income amounts
presented above because compensation cost is reflected over the options'
vesting periods from one to four years and compensation cost for options
granted prior to January 1, 1995 is not considered.
NOTE J--SEGMENT INFORMATION
The Company operates primarily in the life/health and property/casualty
insurance industries. There are no intersegment sales.
The allocations of certain general expenses and investment income within
segments are based on a number of assumptions, and the reported operating
results would change if different methods were applied. Depreciation and
capital expenditures are not considered material.
Information relating to revenue, income (loss) before income taxes and
extraordinary item, and identifiable assets by segment are summarized as
follows (see Note K regarding 1994 Property/Casualty amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995 1994
-------- ---------- ---------
(Thousands of dollars)
<S> <C> <C> <C>
Revenue:
Life/Health $36,382 $38,878 $37,097
Property/Casualty (Note S) 19,289 11,454 20,185
Other (Note S) 2,149 143 237
------- --------- --------
Total $57,820 $50,475 $57,519
======= ========= ========
Income (loss) before income taxes and extraordinary item:
Life/Health $ 628 $ 3,055 $ 3,123
Property/Casualty 1,345 (2,236) (6,333)
Other (194) (1,920) (1,695)
------- --------- --------
Total $ 1,779 $(1,101) $(4,905)
======= ========= ========
</TABLE>
NOTE K--WRITE OFF OF INVESTMENT IN RANDJILL GROUP LTD. AND GALAXY INSURANCE
COMPANY
During December 1986, ACCEL invested $1,370,000 (a 20% interest) in RGL.
Galaxy, a wholly owned subsidiary of RGL, wrote commercial property insurance,
property and casualty, and assumed treaty reinsurance.
During the second quarter of 1991, the Company purchased 11,000 additional
common shares of RGL at a cost of $992,000.
The additional investment increased the Company's ownership to 31% at June 30,
1991. In July 1991, the Company purchased the remaining 69% of RGL for cash and
Subordinated Notes (see Note D) of $2.1 million and $5.8 million, respectively.
The purchase price included goodwill of $1.2 million of which the outstanding
balance was written off in 1993.
Members of CIHC held a 45% interest in RGL prior to the acquisition by ACCEL.
F-27
<PAGE> 87
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K--WRITE OFF OF INVESTMENT IN RANDJILL GROUP LTD. AND GALAXY INSURANCE
COMPANY--(CONTINUED)
For the three years ended December 31, 1993, RGL recorded losses and Galaxy's
underwriting results deteriorated, resulting in the New York Department of
Insurance ("New York Department") placing a moratorium on all new business as
of February 28, 1994. Due to significant loss development during 1994 on
Galaxy's liability lines of business, the Company contracted with an
independent actuarial consultant to review the adequacy of Galaxy's loss and
loss adjustment expense reserves as of June 30, 1994. The findings of this
review indicated the need for additional reserves which resulted in the
statutory insolvency of Galaxy at June 30, 1994. Statutory capital and surplus
after the reserve strengthening was a negative $2.3 million.
Due to the significance of the statutory loss and the loss of the Company's
control of Galaxy as a result of the insolvency, the Company wrote off its
investment in RGL ($3.8 million) during the second quarter of 1994. As a result
of this action, the consolidated results of operations for 1994 include a
charge to operations of $3.8 million, representing the Company's net investment
in Galaxy as of April 1, 1994, in addition to operating losses of $205,000
incurred during the first quarter. The Company wrote its investment in RGL to
zero and Reconsolidated RGL as of April 1, 1994.
Pursuant to an Order of Liquidation dated October 7, 1994, issued by the
Supreme Court of the State of New York, the Liquidation Bureau of the New York
Department (the " Liquidation Bureau") took control of Galaxy on October 11,
1994.
ANIC, a wholly owned subsidiary of ACCEL, in the normal course of business,
issued certain policy endorsements on Galaxy policies in 1992, some of which
had pending claims open at the time of liquidation (see Note N).
NOTE L--RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN
The Acceleration Retirement Savings Plan became effective in 1985. During 1989,
ACCEL's Board of Directors approved changes to this plan to include an ESOP and
concurrently changed the plan name to the "Acceleration Retirement Savings and
Stock Ownership Plan" ("Plan"). For 1996, 1995 and 1994 the Board authorized
contributions to the Plan at a level that would fund a 100% match of the first
6% of each participating employees' tax deferred contributions. The Company
incurred a contribution expense for 1996, 1995 and 1994 of $187,000, $198,000
and $178,000, respectively.
The Plan allows all employees who meet certain eligibility requirements and
choose to participate to defer a percentage of their salary and contribute to
the Plan on a tax deferred basis. The employee contributions to the Plan are
used to fund the savings element of the Plan. The Company contributions become
part of the Plan and are used to purchase shares of ACCEL's common stock in the
open market.
In 1990, the Plan entered into an agreement with ALIC to borrow up to
$1,000,000 for the purchase of ACCEL's common stock. The Plan purchased 136,887
shares (adjusted for the 1990 5% common stock dividend) under this loan
agreement with ALIC at a cost of $1,000,000. In addition to the shares
purchased under the loan agreement, the Plan has purchased 90,088 common shares
at a cost of $603,000. The loan, which bears interest at 10%, is being repaid
from Company contributions to the Plan.
At December 31, 1995, the loan had an unpaid balance of $525,000. The market
value of the underlying shares was $161,000. The Company revalued this loan to
market value as of December 31, 1995. This allowed the release of shares to
participants' accounts at an average price which more closely approximates
recent market values on the
F-28
<PAGE> 88
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L--RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN--(CONTINUED)
Company's stock. The decrease in the loan in 1995 has been reflected through a
decrease in additional paid-in capital in the accompanying consolidated balance
sheets. The unpaid balance of the loan ($32,000 and $161,000 at December 31,
1996 and 1995, respectively), has been reflected as a reduction in common
stockholders' equity in the accompanying consolidated balance sheets.
NOTE M--FOREIGN CURRENCY TRANSLATION AND OPERATING RESULTS
The financial statements of Acceleration Insurance Company, Ltd. ("AICL") were
translated into U. S. dollars using the British pound as the functional
currency. The balance sheets of AICL were translated into U. S. dollars using
exchange rates, as of the date of the consolidated financial statements.
The operating results of AICL were translated into U. S. dollars using the
average exchange rates in effect during the respective period. The consolidated
results of operations included $137,000 and $82,000 of pre-tax loss from AICL
for the years ended December 31, 1995 and 1994, respectively.
Included in foreign currency translation adjustments were unrealized exchange
gains of $85,000 in 1995.
During 1995, the Company redeemed most of its shares of AICL, which resulted in
proceeds approximating the Company's original investment in AICL. The
transaction was approved by the Department of Trade and Insurance (United
Kingdom). On February 7, 1996, the Company received the final proceeds for
redemption of its remaining shares, and AICL will exist only for as long as it
takes to recover any taxes that may be refunded to it.
F-29
<PAGE> 89
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N--COMMITMENTS AND CONTINGENCIES
Due to the nature of its operations, the Company is at all times subject to
pending and threatened legal actions that arise in the normal course of its
activities. In management's opinion, based on the advice of outside counsel,
the accompanying consolidated financial statements would not be materially
affected by the ultimate outcome of any legal proceedings or contingent
liabilities.
On October 7, 1994, the Liquidation Bureau took control of Galaxy pursuant to
an order of liquidation of the New York Supreme Court. Prior to the liquidation
of Galaxy, ANIC had issued certain certificates of suretyship ("Certificates")
with respect to certain Galaxy insurance policies each of which provided that
ANIC would assume the responsibilities of Galaxy under the specified policy if
Galaxy became insolvent or financially unable to meet its obligations on the
underlying policy, but only if certain conditions were met. In particular, the
Certificates provided that ANIC's assumption of liability was contingent upon
the insured's executing and delivering all agreements, assignments or evidences
of subrogation satisfactory to ANIC respecting payments made or liabilities
assumed.
In May 1996, the Liquidation Bureau, acting on behalf of the New York
Property/Casualty Insurance Security Funds (the "Guaranty Fund"), during a
meeting with Company representatives informally advised the Company that on
behalf of the Guaranty Fund it intended to seek indemnification or
reimbursement from ANIC for claims paid by the Guaranty Fund to Galaxy insureds
on policies which may have been covered by the Certificates. The Liquidation
Bureau has provided some information in response to the Company's request for
accounting data and other information with respect to the Liquidation Bureau's
analysis of the Guaranty Fund's right to indemnification; however, the Company
is not yet able to quantify the magnitude of the potential claim, if any, for
indemnification or reimbursement. The Company has taken the position that the
Guaranty Fund has no right to seek indemnification unless Galaxy insureds who
hold properly issued Certificates have executed assignments and evidences of
subrogation. Even if any Galaxy insured properly made such a claim directly to
ANIC, the Company has been advised by counsel that if ANIC paid any such claim,
it would have the right, under assignment and subrogation agreements with its
insureds, to assert all rights that the insureds could have asserted to recover
the loss amounts from any other source, including the Guaranty Fund.
The Company intends to fully investigate each claim which the Liquidation
Bureau, acting on behalf of the Guaranty Fund, formally asserts is entitled to
the benefits of a Certificate to determine whether such Certificate was
properly endorsed by ANIC and issued with proper authority and if so, whether
proper agreements, assignments and evidences of subrogation have been executed.
The Company intends to vigorously defend any claims for indemnification or
reimbursement made by the Liquidation Bureau, on behalf of the Guaranty Fund,
with respect to the Certificates. Although the Company is not in a position to
estimate the magnitude of the potential claims for indemnification or
reimbursement, it does not believe that the ultimate resolution of such claims
will have a material adverse effect on the financial condition or results of
operations of the Company.
F-30
<PAGE> 90
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The Company currently leases office space under two operating leases which
expire in 2000 and 2001. These leases are accounted for as operating leases.
Minimum rental commitments in effect at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR PAYABLE ANNUAL MINIMUM RENTALS
- ------------ ----------------------
<S> <C>
1997 $ 336,000
1998 338,000
1999 340,000
2000 322,000
2001 147,000
-----------
Total $1,483,000
===========
</TABLE>
The amount of rent charged to operations was $208,000, $16,800 and $28,700 in
1996, 1995 and 1994, respectively.
NOTE O--RELATED PARTY TRANSACTIONS
During 1995, the Company sold its investment in First International Bancorp, an
affiliate of CIHC, to entities associated with CIHC. The sales price was
$1,250,000; no gain or loss was realized on the disposition.
As more fully described in Note D, during 1996 the Company retired all of the
outstanding Subordinated Notes held by CIHC.
NOTE P--RISK BASED CAPITAL
In 1993, the National Association of Insurance Commissioners ("NAIC") adopted
the life and health and property and casualty Risk-Based Capital (RBC)
formulas. These model acts require every insurer to calculate its total
adjusted capital and RBC requirement, and provides for an insurance
commissioner to intervene if the insurer experiences financial difficulty.
These model acts became law in Ohio, the Company's insurance subsidiaries'
state of domicile, in March 1996. The formula includes components for asset
risk, liability risk, interest rate exposure. and other factors. Each of the
Company's insurance subsidiaries exceed all required RBC levels as of December
31, 1996.
F-31
<PAGE> 91
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE Q--QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)
Quarterly consolidated results of operations for 1996 and 1995 are summarized
as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
1996
----
Premiums written $16,697 $17,169 $15,288 $ 9,258
Premiums earned 10,065 11,498 13,176 11,218
Policy benefits 5,091 5,594 7,429 6,224
Net income 46 46 160 1,852
Net income per common share .01 .01 .03 .22
1995
----
Premiums written $13,247 $15,125 $15,297 $11,774
Premiums earned 9,787 9,833 10,321 10,912
Policy benefits 4,138 3,973 4,820 7,187
Net income (loss) 268 399 165 (2,292)
Net income (loss) per common share .06 .09 .04 (.52)
</TABLE>
The 1996 net income per common share amounts, in the aggregate, do not equal
the amount on the 1996 consolidated statement of operations due to the Rights
Offering (see Note D).
The first, second and third quarters of 1996 have been restated to be
consistent with the year end presentation relating to certain reinsurance
treaties. These treaties, which had been accounted for as reinsurance have been
presented using deposit accounting in the year end results. The restatement of
these quarterly amounts did not change net income or net income per common
share as previously reported.
NOTE R--PROPERTIES
Since July 1981 the Company's executive offices have been located at 475 Metro
Place North, Dublin, Ohio. The four-story office building had been owned by
ALIC, and consisted of approximately 80,000 square feet of office space.
On March 21, 1996, the building was sold by ALIC to an unrelated party for a
price of $3.5 million. The Company realized a pre-tax gain of $170,000 on this
sale. The Company will remain in the building and occupy approximately 16,000
square feet of home office space under a five-year lease at an annual rental of
approximately $264,000.
NOTE S--LITIGATION PROCEEDS
In 1996, ACCEL received a total of $4,291,085 in proceeds from a legal action
brought by the Company against a non-affiliated marketing organization. With
the approval of the Ohio Department the proceeds from the settlement were
shared equally between ACCEL and ANIC. These proceeds have been categorized as
other income in the accompanying 1996 consolidated statement of operations.
F-32
<PAGE> 92
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D
- ------------------------------------------------------------------------------------
AMOUNT AT
WHICH SHOWN
IN THE
FAIR BALANCE
TYPE OF INVESTMENT COST* VALUE SHEET
- ------------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C>
Available for sale securities:
Fixed maturities:
United States Government and govern-
ment agencies and authorities $13,120 $13,193 $13,193
States, municipalities and political
subdivisions 940 960 960
Mortgage and asset-backed securities 40,743 40,032 40,032
All other corporate bonds 3,541 3,554 3,554
Redeemable preferred stocks 545 542 542
------- ------- -------
Total 58,889 58,281 58,281
Equity securities:
Common stocks:
Industrial & Miscellaneous 5,514 5,511 5,511
Other long-term investments 346 346 346
Short-term investments 10,670 10,703 10,703
------- ------- -------
Total investments $75,419 $74,841 $74,841
======= ======= =======
</TABLE>
* Original cost of equity securities, adjusted for any permanent write
down, and, as to fixed maturities, original cost reduced by repayments and
adjusted for amortization of premiums or accrual of discounts.
See accompanying independent auditors' report.
F-33
<PAGE> 93
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
ASSETS (Thousands of dollars)
<S> <C> <C>
Investments:
Investments available for sale, at fair value:
Fixed maturities (cost: 1997--$49,862,000;
1996--$58,889,000) $ 49,796 $ 58,281
Equity securities (cost: 1997--$6,124,000;
1996--$5,514,000) 6,126 5,511
Short-term investments
(cost: 1997--$19,925,000; 1996--$10,670,000) 19,958 10,703
Other invested assets, at cost
(fair value: 1997--$306,000; 1996--$346,000) 306 346
-------- --------
76,186 74,841
Cash 1,113 3,331
Receivables:
Premiums in process of transmittal--less
allowance (1997--$258,000; 1996--$223,000) 10,355 7,286
Amounts due from reinsurers,
less allowance (1997 and 1996--$125,000) 28,362 11,138
Recoverable federal income taxes 129 1,019
-------- --------
38,846 19,443
Accrued investment income 644 652
Prepaid reinsurance premiums 19,448 15,036
Reinsurance premium deposits 26,710 42,615
Deferred policy acquisition costs 30,362 30,946
Equipment--at cost, less accumulated
depreciation (1997--$200,000; 1996--$162,000) 662 231
Leasehold improvements, less accumulated amortization
(1997--$40,000; 1996--$26,000) 138 152
Other assets:
Cost in excess of fair value of net assets of
subsidiaries at dates of acquisition ($4,448,000)
less accumulated amortization 657 716
Funds held under reinsurance agreements 6,036 406
Other 729 939
-------- --------
7,422 2,061
-------- --------
$201,531 $189,308
======== ========
</TABLE>
(Continued)
F-34
<PAGE> 94
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS--(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(Thousands of dollars)
<S> <C> <C>
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Policy reserves and liabilities:
Unearned premium reserves $ 83,980 $ 81,820
Insurance claims 26,884 25,256
Other 5 7
--------- --------
110,869 107,083
Other liabilities:
Funds held under reinsurance agreements 2,940 2,920
Deferred reinsurance commissions 14,537 13,902
Amounts due reinsurers 12,625 6,133
Notes payable 15,000 15,000
Commissions payable 5,550 5,163
Accounts payable and other liabilities 2,655 2,788
Federal income taxes:
Current -- --
Deferred 4,089 4,678
--------- --------
57,396 50,584
--------- --------
168,265 157,667
--------- --------
Commitments and Contingencies -- Note D
Redeemable preferred stock:
Authorized shares--1,000,000;
no issued or outstanding shares -- --
Common stockholders' equity:
Common stock, $.10 par value
Authorized shares (1997 and 1996--15,000,000)
Issued shares (1997--9,406,162; 1996--9,401,162) 941 940
Additional paid-in capital 32,520 32,507
Retained earnings 6,435 5,403
Less 797,420 treasury shares at cost (6,599) (6,599)
ESOP loan -- (32)
Net unrealized depreciation on investment
securities (31) (578)
-------- --------
33,266 31,641
-------- --------
$201,531 $189,308
======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
F-35
<PAGE> 95
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ----------- -----------
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
REVENUE:
Gross premiums written $ 17,029 $ 15,288 $ 49,574 $ 49,152
Less reinsurance ceded 6,117 3,185 16,255 12,439
---------- ---------- ---------- ----------
Net premiums written 10,912 12,103 33,319 36,713
Decrease (increase) in unearned
premium reserves 949 1,074 1,700 (1,974)
---------- ---------- ---------- ----------
Premiums earned 11,861 13,177 35,019 34,739
Net investment income:
Interest and dividends 1,074 1,218 3,405 3,277
Realized gains (losses) 16 (48) 81 227
Service fees on extended service
contracts 822 662 2,339 1,885
Other income 81 1,439 231 1,711
---------- ---------- ---------- ----------
13,854 16,448 41,075 41,839
---------- ---------- ---------- ----------
BENEFITS AND EXPENSES:
Policy benefits 6,118 7,429 18,360 18,114
Commissions and selling expenses 5,240 5,556 16,438 17,611
Reinsurance expense recovery (1,160) (344) (4,043) (1,963)
General and administrative 2,236 1,950 6,050 5,309
Taxes, licenses and fees 480 689 1,570 1,560
Interest 356 489 1,069 1,577
Decrease (increase) in deferred policy
acquisition costs 180 305 584 (795)
---------- ---------- ---------- ----------
13,450 16,074 40,028 41,413
---------- ---------- ---------- ----------
INCOME BEFORE FEDERAL INCOME
TAXES AND EXTRAORDINARY ITEM 404 374 1,047 426
Federal income taxes:
Current expense 118 582 604 1,095
Deferred benefit (143) (237) (589) (790)
---------- ---------- ---------- ----------
(25) 345 15 305
---------- ---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY
ITEM $ 429 29 1,032 121
Extraordinary item--gain on
extinguishment of debt--Note D -- 131 -- 131
---------- ---------- ---------- ----------
NET INCOME $ 429 $ 160 $ 1,032 $ 252
========== ========== ========== ==========
Per Common Share:
Net income $ 0.05 $ 0.03 $ 0.12 $ 0.05
========== ========== ========== ==========
Weighted average number of common
shares outstanding 8,604,557 6,029,561 8,604,017 4,998,048
========== ========== ========== ==========
</TABLE>
See notes to unaudited consolidated financial statements.
F-36
<PAGE> 96
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET
UNREALIZED
ADDITIONAL COMMON DEPRECIATION
COMMON PAID-IN RETAINED STOCK HELD IN ON INVESTMENT
STOCK CAPITAL EARNINGS TREASURY ESOP LOAN SECURITIES NET
---------- ---------- ----------- ------------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(Thousands of dollars)
Balances at December 31, 1995 $524 $23,702 $3,299 $(6,599) $(161) $(205) $20,560
Payments on ESOP loan - - - - 129 - 129
Change in net unrealized
depreciation on
investment securities - - - - - (373) (373)
Issuance of 110,000 shares of
Common Stock under
Common Stock Option Plan 11 223 - - - - 234
Issuance of 4,047,310 shares of
Common Stock in conjunction
with the Rights Offering and
the Supplemental Offering 405 8,582 - - - - 8,987
Net income - - 2,104 - - - 2,104
---------- ---------- ----------- ------------ ------------ ------------ --------
Balances at December 31, 1996 940 32,507 5,403 (6,599) (32) (578) 31,641
Payments on ESOP loan - - - - 32 - 32
Change in net unrealized
depreciation on
investment securities - - - - - 547 547
Issuance of 5,000 shares of
Common Stock under
Common Stock Option Plan 1 13 14
Net income - - 1,032 - - - 1,032
---------- ---------- ----------- ------------ ------------ ------------ --------
Balances at September 30, 1997 $941 $32,520 $6,435 $(6,599) $ - $ (31) $33,266
---------- ---------- ----------- ------------ ------------ ------------ --------
</TABLE>
See notes to unaudited consolidated financial statements.
F-37
<PAGE> 97
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
---------------- ----------------
(Thousands of Dollars)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,032 $ 121
Adjustments to reconcile net income to net
cash used in operating activities:
Change in premiums receivable (3,104) (8,667)
Change in accrued investment income 8 (22)
Change in prepaid reinsurance premiums (4,412) (2,157)
Change in funds held under reinsurance
agreements (5,610) (3,066)
Change in unearned premium reserves 2,160 5,365
Change in insurance claim reserves 1,628 1,052
Change in amounts due reinsurers
and amounts due from reinsurers (10,732) (21,088)
Change in other assets, other liabilities
and accrued income taxes 928 206
Interest paid in kind -- 403
Accrual of discount on bonds (175) (179)
Amortization of premium on bonds 80 77
Amortization of deferred policy acquisition
costs 15,190 15,537
Policy acquisition costs deferred (14,606) (16,330)
Reinsurance commissions earned (10,973) (16,846)
Reinsurance commissions received 11,608 19,688
Provision for depreciation and amortization 198 225
Net realized gains on investments (81) (227)
--------------- ---------------
NET CASH USED IN OPERATING ACTIVITIES
EXCLUDING EXTRAORDINARY ITEM (16,861) (25,908)
Extraordinary Item -- 131
--------------- ---------------
NET CASH USED IN OPERATING ACTIVITIES (16,861) (25,777)
INVESTING ACTIVITIES:
Sale of investments available for sale 23,605 9,566
Purchase of investments available for sale (24,357) (21,739)
Sale of property occupied by the Company -- 3,298
Other, net (556) (350)
--------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (1,308) (9,225)
FINANCING ACTIVITIES:
Payment on ESOP loan 32 112
Repayment of notes payable -- (731)
Issuance of Common Stock under Stock Option Plan 14 257
Issuance of Common Stock under Rights Offering -- 3,263
Change in reinsurance premium deposits 15,905 26,452
--------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 15,951 29,353
--------------- ---------------
NET DECREASE IN CASH (2,218) (5,649)
Cash at beginning of year 3,331 5,039
--------------- ---------------
CASH (OVERDRAFT) AT END OF PERIOD $ 1,113 $ (610)
=============== ===============
Supplemental schedule of non-cash financing activities:
cancellation of Subordinated Notes as consideration for
the purchase of Common Stock--Note B -- 5,703
=============== ===============
</TABLE>
See notes to unaudited consolidated financial statements.
F-38
<PAGE> 98
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying unaudited consolidated financial
statements of ACCEL International Corporation ("ACCEL") and subsidiaries
(collectively referred to herein as the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X which, as to the insurance company subsidiaries, differ in some respects
from statutory accounting practices prescribed or permitted by state insurance
departments. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for all
periods presented are not necessarily indicative of the results that may be
expected for the full year. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
PRINCIPLES OF CONSOLIDATION: The accompanying unaudited consolidated financial
statements include the accounts of ACCEL and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in the
unaudited consolidated financial statements.
DESCRIPTION OF BUSINESS: ACCEL is an insurance holding company incorporated in
Delaware in June 1978 as the successor to an Ohio corporation, formerly
Acceleration Corporation, organized in 1969. The Company has been engaged in
the sale and underwriting of credit life and credit accident and health
insurance, extended service contracts, commercial auto and other specialty
casualty products. The credit insurance and extended service contract products
continue to be offered to consumers, principally through automobile dealers,
financial institutions and other business entities. The specialty casualty
products are offered through general agents. The Company is subject to
competition from other insurers throughout the states in which it writes
business. The Company is also subject to regulation by the insurance
departments of states in which it is licensed, and undergoes periodic
examinations by those departments.
ACCOUNTING ESTIMATES: In preparing the unaudited consolidated financial
statements, management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosures of
contingent assets and liabilities as of the date of the unaudited consolidated
financial statements and revenues and expenses for the reporting period.
Actual results could differ significantly from those estimates.
The most significant estimates include those used in determining deferred
policy acquisition costs and the liability for unearned premium reserves and
insurance claims. Although some variability is inherent in these estimates,
management believes the amounts provided are adequate. The estimates are
continually reviewed and adjusted as necessary. Such adjustments are generally
reflected in current operations.
INVESTMENTS: The Company classifies its fixed maturity and equity securities
as available for sale, therefore these securities are carried at fair value and
the unrealized appreciation or depreciation is reported as a separate component
of common stockholders' equity after giving effect to applicable income taxes.
Short-term investments, which include U. S. Treasury securities, commercial
paper and certificates of deposit are carried at fair value which approximates
cost.
Other invested assets are carried at cost which approximates fair value.
Realized gains and losses on the disposal of investments are determined by
specific identification and are included in the unaudited consolidated
statements of operations.
F-39
<PAGE> 99
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
When an other than temporary decline in value is recognized, the specific
investment is carried at estimated realizable value and its original book value
is reduced to reflect such impairment of the investment. Such reductions in
book value are reflected in realized investment losses for the period in which
they were written down. For mortgage backed securities, when the present value
of estimated future cash flows discounted at a risk-free rate of return is less
than the cost basis of the investment, an impairment loss is recognized by
writing the investment down to its fair value.
DEFERRED POLICY ACQUISITION COSTS: The costs (principally commissions and
certain expenses of policy issuance) of acquiring or renewing insurance
business, all of which vary with and are directly related to the production of
business, have been deferred. These deferred policy acquisition costs are
amortized in a manner related to the recognition of premiums earned.
Substantially all such deferred costs are amortized within a four-year period.
Anticipated investment income is considered in determining recoverability of
deferred costs.
EQUIPMENT AND DEPRECIATION: Equipment is carried at cost less accumulated
depreciation. Depreciation is provided using the straight-line method over an
estimated useful asset life of five years.
LEASEHOLD IMPROVEMENTS: Leasehold improvements are carried at cost less
accumulated amortization. Amortization is provided using the straight-line
method over the term of the five year lease.
GOODWILL AMORTIZATION: Cost in excess of fair value of net assets of
subsidiaries at dates of acquisition is being amortized primarily over a
thirty-five year period. It is the Company's policy to account for goodwill at
the lower of amortized cost or fair value. On an ongoing basis, management
reviews the valuation and amortization of its goodwill.
PREMIUM INCOME RECOGNITION AND UNEARNED PREMIUM RESERVES: Unearned premium
reserves on credit life and credit accident and health insurance are calculated
primarily under the "Rule of 78's Method", which results in premium income
being recognized in decreasing proportions over the terms of the policies,
which approximates the pattern of policy benefits incurred.
Unearned premium reserves on the extended service contracts are based on the
historical emergence pattern of claims. The Company's primary liability on new
car contracts exists subsequent to the expiration of manufacturers' warranties.
This method results in premium being recognized in direct proportion to the
emergence of benefits on these contracts.
Unearned premium reserves on all other property and casualty products are
calculated on the pro rata method.
INSURANCE CLAIMS: The liabilities for insurance claims are determined using
statistical analyses and represent estimates of the ultimate net cost of all
reported and unreported claims that are unpaid at year end. Considerable
variability is inherent in such estimates and actual results will likely differ
from those estimates.
FEDERAL INCOME TAXES: ACCEL and its subsidiaries file a consolidated federal
income tax return. The provision for income taxes is based on income for
financial reporting purposes, after permanent differences. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under this
method, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce the deferred tax
assets to the amounts expected to be realized.
REINSURANCE: Reinsurance premiums ceded and reinsurance recoveries on policy
benefits incurred are deducted from the respective income and expense accounts.
Assets and liabilities related to reinsurance ceded are reported on a gross
basis. Amounts related to reinsurance contracts, where it is not reasonably
possible for the reinsurer to realize a significant loss, are recorded based on
the deposit accounting method.
F-40
<PAGE> 100
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE A--SIGNIFICANT POLICIES--(CONTINUED)
DEFERRED REINSURANCE COMMISSIONS: Commissions and ceding fees received in
connection with premiums ceded are deferred and amortized in a manner related
to the recognition of premiums earned. Substantially all such commissions and
ceding fees are amortized within a four-year period. Earned ceding fees,
commissions and experience refunds are reported as reinsurance expense
recoveries in the unaudited consolidated statements of operations.
STOCK OPTION PLANS: Prior to January 1, 1996, the Company accounted for its
stock option plans in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. On January 1, 1996, the Company adopted the Financial
Accounting Standards Board's (FASB) Statement No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, FASB No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income and pro
forma earnings per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in FASB No. 123
had been applied.
EARNINGS PER COMMON SHARE: Net income per common share is computed using the
weighted average number of common shares outstanding during the period. The
inclusion of common stock equivalents (options) would not be dilutive.
RECLASSIFICATIONS: Certain amounts in the 1996 unaudited consolidated
financial statements have been reclassified to conform with the 1997
presentation.
NOTE B--NOTES PAYABLE
In 1991, ACCEL issued $5,848,000 of subordinated notes (the "Subordinated
Notes"). The Subordinated Notes had a nine year term with no principal payable
until maturity, and bore interest at 10.125% per annum. Effective June 30,
1992, ACCEL amended the notes to permit the issuance of additional notes for
the purpose of making interest payments, provided, however, that ACCEL could at
its option pay cash in lieu of issuing additional notes in any denomination of
less than $1,000. As a result, ACCEL issued additional notes totaling $403,000
for the nine months ended September 30, 1996.
Of the Subordinated Notes described above, a significant portion were held by
Chase Insurance Holdings Corporation ("CIHC"), a company related through common
ownership by a stockholder and director of the Company.
On July 25, 1996, the Company commenced an offering of non-transferable rights
(the "Rights Offering") to stockholders of record as of June 18, 1996. Under
the provisions of the Rights Offering, the Company permitted CIHC and its
affiliate to tender the principal amount of their Subordinated Notes for
cancellation as consideration (in lieu of cash) for the purchase of shares of
common stock pursuant to the Rights Offering. On August 23, 1996, CIHC and its
affiliate tendered $5,619,046 principal amount of their Subordinated Notes plus
an additional $83,759 of accrued interest thereon under the terms of the Rights
Offering. At the conclusion of the offering, CIHC and its affiliate had reduced
their holding of Subordinated Notes to $0.
In a separate transaction, the Company retired $731,533 principal amount of
Subordinated Notes held by an unrelated third party for consideration of
$600,000. The Company recognized an extraordinary gain on this transaction of
$131,533 during the third quarter of 1996. No federal income tax was recognized
related to this gain due to the consolidated tax position of the Company.
The result of the two aforementioned transactions was to retire all outstanding
Subordinated Notes.
F-41
<PAGE> 101
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE B--NOTES PAYABLE--(CONTINUED)
On December 29, 1995, the Company issued senior notes (the "Senior Notes")
totaling $16,500,000 at 9.50%, maturing on April 1, 2001. The proceeds from
these notes were used to retire the loan outstanding under an existing credit
agreement and to liquidate an intercompany loan between ACCEL and an insurance
subsidiary. In addition, as of January 1, 1996, Acceleration Life Insurance
Company ("ALIC") entered into a reinsurance agreement with an unaffiliated
company to reinsure the majority of the in-force credit business. The Senior
Notes are payable to the same unaffiliated company which is a party to the
reinsurance agreement dated January 1, 1996. This agreement is structured such,
that as future profits emerge on this block of business, these profits are held
by the reinsurance company, and ultimately applied to pay interest on and to
redeem the Senior Notes. This is accomplished by the following transactions.
The reinsurance company distributes profits to ALIC as periodically agreed to
by the reinsurance company and ALIC. ALIC then, subject to the Department of
Insurance of the State of Ohio (Ohio Department) approval, dividends funds to
ACCEL. ACCEL then uses these funds to redeem a portion of the senior notes and
the interest thereon. Profits in excess of the amount required to retire the
Senior Notes are to be returned to ALIC from the reinsurer. As of December 31,
1996, $1,500,000 of the profits on this block of business were released to ALIC
in the form of the aforementioned Senior Notes. These Senior Notes were retired
on September 30, 1997. These transactions resulted in a balance of $15,000,000
of Senior Notes outstanding as of September 30, 1997 and December 31, 1996.
NOTE C--REINSURANCE
On January 1, 1996 the Company terminated its then existing quota share
reinsurance agreement and elected to recapture the liabilities subject to the
treaty. The liabilities recaptured thereunder were then available for cession
under the treaty described below. The unearned premium reserves and claim
liabilities recaptured were $29,753,000 and $8,424,000, respectively.
Concurrent with this termination, the Company entered into a reinsurance
agreement with a different unaffiliated reinsurer (which is also the buyer of
the Senior Notes discussed in Note B)to reinsure a substantial portion of the
in-force credit life and accident and health insurance business, including the
amounts recaptured. This agreement is structured in such a way that as future
profits emerge on this block of business, a substantial portion of the
Company's share of the profits will be used over the next four to five years to
pay fees and interest to the reinsurer and redeem the new Senior Notes of
$16,500,000 (see Note B). In connection with this agreement, approximately
$40,000,000 of assets were transferred to the reinsurer on December 29, 1995,
as agreed to by all parties. The unearned premium reserves and liability for
insurance claims subject to cession under this treaty approximated $48,616,000
and $9,919,000, respectively, as of January 1, 1996.
The Company also has an agreement in place which covers a substantial portion
of its credit insurance business produced in 1996 and 1997. This agreement
contains an experience adjustment computation that results in the ultimate cost
of this agreement being a stated percentage related to the business covered by
the agreement. The Company ultimately retains a substantial part of the
insurance risk, the underwriting income or loss and the investment income on
net funds.
The Company determined that deposit accounting is the appropriate method of
accounting for this agreement since it is not reasonably possible for the
reinsurer to realize a significant loss from the transaction. The unaudited
consolidated financial statements have been prepared on this basis.
F-42
<PAGE> 102
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE C--REINSURANCE--(CONTINUED)
The following data summarizes certain aspects of the Company's reinsurance
activity for the periods presented.
Premiums written and earned in 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
WRITTEN EARNED
--------------------------------------------------------------------------------------
PERIOD ENDED SEPTEMBER 30
NINE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED
1997 1996 1997 1996 1997 1996 1997 1996
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Direct $49,070 $45,214 $15,978 $13,930 $43,950 $38,922 $15,880 $13,775
Assumed 504 3,938 1,051 1,358 3,467 4,864 1,241 2,132
Ceded 16,255 12,439 6,117 3,185 12,398 9,047 5,260 2,730
--------- --------- --------- --------- --------- --------- --------- ---------
Net $33,319 $36,713 $10,912 $12,103 $35,019 $34,739 $11,861 $13,177
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
Policy benefits incurred in 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30 THREE MONTHS ENDED SEPTEMBER 30
-------------------------------- ----------------------------------
1997 1996 1997 1996
--------------- --------------- ---------------- ----------------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Direct $23,031 $15,125 $9,058 $6,321
Assumed 2,350 2,993 805 1,124
Ceded 7,021 4 3,745 16
--------------- --------------- ---------------- ----------------
Net policy benefits $18,360 $18,114 $6,118 $7,429
=============== =============== ================ ================
</TABLE>
NOTE D--COMMITMENTS AND CONTINGENCIES
In May 1996, the Liquidation Bureau of the New York Department ("Liquidation
Bureau"), acting on behalf of the New York Property/Casualty Insurance Security
Funds (the "Guaranty Fund"), during a meeting with Company representatives
informally advised the Company that on behalf of the Guaranty Fund it intended
to seek indemnification or reimbursement from Acceleration National Insurance
Company ("ANIC") for claims paid by the Guaranty Fund to Galaxy Insurance
Company ("Galaxy", a subsidiary of the Company), insureds on policies which may
have been covered by certificates of suretyship ("Certificates") which ANIC had
issued with respect to certain Galaxy insurance policies. The Liquidation
Bureau has provided some information in response to the Company's request for
accounting data and other information with respect to the Liquidation Bureau's
analysis of the Guaranty Fund's right to indemnification; however, the Company
is not yet able to quantify the magnitude of the potential claim, if any, for
indemnification or reimbursement. The Company has taken the position that the
Guaranty Fund has no right to seek indemnification unless Galaxy insureds who
hold properly issued Certificates have executed assignments and evidences of
subrogation in accordance with the terms of the Certificates. Even if any
Galaxy insured properly made such a claim directly to ANIC, the Company has
been advised by counsel that if ANIC paid any such claim, it would have the
right, under assignment and subrogation agreements with its insureds, to assert
all rights that the insureds could have asserted to recover the loss amounts
from any other source, including the Guaranty Fund.
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ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE D--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The Company intends to fully investigate each claim which the Liquidation
Bureau, acting on behalf of the Guaranty Fund, formally asserts is entitled to
the benefits of a Certificate to determine whether such Certificate was
properly endorsed by ANIC and issued with proper authority and if so, whether
proper agreements, assignments and evidences of subrogation have been executed.
The Company intends to vigorously defend any claims for indemnification or
reimbursement made by the Liquidation Bureau, on behalf of the Guaranty Fund,
with respect to the Certificates. Although the Company is not in a position to
estimate the magnitude of the potential claims for indemnification or
reimbursement, it does not believe that the ultimate resolution of such claims
will have a material adverse effect on the financial condition or results of
operations of the Company. In early 1997, the Liquidation Bureau requested of
the Company's counsel the basis for the position taken by the Company. A
written analysis supporting the Company's position was subsequently issued to
the Liquidation Bureau.
NOTE E--SALE OF AUTO AFTER-MARKET PRODUCT GROUP
On August 13, 1997, ACCEL announced it had reached an agreement in principle
pursuant to which ACCEL would sell its auto aftermarket product group along
with the stock of its Acceleration Life Insurance Company (ALIC) subsidiary and
two other subsidiaries to Frontier Insurance Group, Inc. On October 27, 1997,
ACCEL announced it had signed definitive agreements to sell its auto
after-market product group along with the stock of Acceleration Life Insurance
Company, Dublin International Limited and Acceleration National Service
Corporation to Frontier Insurance Group, Inc. for $40.5 million in cash. The
transaction is expected to close on or about December 31, 1997 and is subject
to stockholder approval and the receipt of applicable regulatory approvals.
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ANNEX I
STOCK ACQUISITION AGREEMENT
STOCK ACQUISITION AGREEMENT (the "Agreement") made as of this 20th day of
October, 1997 by and between Lyndon Life Insurance Company, a Missouri
corporation and Lyndon Insurance Group, Inc., a Missouri corporation, each with
offices at 645 Maryville Centre Drive, St. Louis, Missouri 63141 ( collectively
"Lyndon"), and Accel International Corporation, a Delaware corporation
("Accel") with its executive offices at 12603 S.W. Freeway, Suite 315, P.O. Box
1949, Stafford, Texas 77497-1949.
R E C I T A L S
WHEREAS, Accel is the owner of all of the issued and outstanding shares of
capital stock of (i) Acceleration Life Insurance Company ("ALIC"), (ii) Dublin
International Limited, ("Dublin"); and (iii) Acceleration National Service
Corporation ("ANSC") (collectively, the "Target Corporations"); and
WHEREAS, Lyndon is desirous of acquiring and Accel is desirous of selling
all of the issued and outstanding shares of the capital stock of each of the
Target Corporations (the "Target Shares") for a total purchase price of $30.2
million in cash;
NOW, THEREFORE, Lyndon and Accel agree as follows:
ARTICLE 1
PURCHASE AND SALE OF THE TARGET SHARES
1.1 Purchase and Sale of the Target Shares. Subject to the terms and
conditions of this Agreement and in reliance upon the representations,
warranties and covenants herein contained, on the date of closing specified in
Section 8.1 (the "Closing Date"), Accel hereby agrees to assign, transfer and
deliver to Lyndon Life Insurance Company all of the Shares of ALIC and to
assign, transfer and deliver to Lyndon Insurance Group, Inc., all of the shares
of Dublin and of ANSC, more specifically set forth on Schedule 1.1 hereto, and,
in exchange therefor, Lyndon hereby agrees to make a cash payment to Accel in
accordance with the terms set forth in Section 1.2 hereto.
1.2 Purchase Price. (a) At the Closing, Lyndon shall pay Accel the sum of
$30.2 Million Dollars (the "Purchase Price") for the Target Shares by wire
transfer of immediately available funds to a banking institution designated by
Accel.
(b) The parties hereto agree that the Purchase Price shall be allocated
among the Target Shares of each Target Corporation as follows: (i) the amount
of the Purchase Price allocated to the Dublin shares shall be equal to Dublin's
total shareholders' equity as of December 31, 1997, as determined in accordance
with GAAP; (ii) the amount of the Purchase Price allocated to the ANSC shares
shall be equal to ANSC's total shareholders' equity as of December 31, 1997, as
determined in accordance with GAAP; and (iii) the balance of the Purchase
Price shall be allocated to the ALIC shares. The foregoing allocation of the
Purchase Price among the Target Corporations' respective shares represents the
parties' best estimate of the relative fair market values of the Target
Corporations as of the Closing Date based upon the nature of their respective
assets and businesses.
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ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF ACCEL
Accel represents and warrants to Lyndon that:
2.1 Organization and Authority.
(a) ALIC is a corporation duly organized, validly existing and in good
standing under the laws of the State of Ohio, has all requisite corporate power
and authority to own, lease and operate its properties and carry on its
business as now conducted, is duly qualified and authorized to transact
business as an insurance company in the State of Ohio, and is qualified as a
foreign corporation in each jurisdiction where the failure to do so would have
a material adverse effect on its business as now conducted.
(b) Dublin is a corporation duly organized, validly existing and in good
standing under the laws of the Turks and Caicos Islands, has all requisite
corporate power and authority to own, lease and operate its properties and
carry on its business as now conducted and is qualified as a foreign
corporation in each jurisdiction where the failure to do so would have a
material adverse effect on its business as now conducted.
(c) ANSC is a corporation duly organized, validly existing and in good
standing under the laws of the State of Ohio, has all requisite corporate power
and authority to own, lease and operate its properties and carry on its
business as now conducted and is qualified as a foreign corporation in each
jurisdiction where the failure to do so would have a material adverse effect on
its business as now conducted.
2.2 Capitalization.
(a) The authorized capital stock of ALIC consists of 500 shares, of which
400 are issued and outstanding (the "ALIC Shares"). The ALIC Shares have been
duly authorized and are validly issued, fully paid and nonassessable constitute
the only shares of ALIC outstanding, are owned by Accel, and there are no
outstanding rights, subscriptions, warrants, calls, preemptive rights, options
or other agreements or commitments of any kind or character to purchase or
otherwise to acquire from ALIC any shares of its capital stock or any other
security, and no security or obligation of any kind convertible into the
capital stock or other security of ALIC exists in favor of any Person.
(b) The authorized capital stock of Dublin consists of 5,000 shares, of
which 5,000 are issued and outstanding (the "Dublin Shares"). The Dublin
Shares have been duly authorized, are validly issued, fully paid and
nonassessable, constitute the only shares of Dublin outstanding, are owned by
Accel and there are no outstanding rights, subscriptions, warrants, calls,
preemptive rights, options or other agreements or commitments of any kind or
character to purchase or otherwise to acquire from Dublin any shares of its
capital stock or any other security, and no security or obligation of any kind
convertible into the capital stock or other security of Dublin exists in favor
of any Person.
(c) The authorized capital stock of ANSC consists of 500 shares, of which
5 are issued and outstanding (the "ANSC Shares"). The ANSC Shares have been
duly authorized, are validly issued, fully paid and nonassessable, constitute
the only shares of ANSC outstanding, are owned by Accel and there are no
outstanding rights, subscriptions, warrants, calls, preemptive rights, options
or other agreements or commitments of any kind or character to purchase or
otherwise to acquire from ANSC any shares of its capital stock or any other
security, and no security or obligation of any kind convertible into the
capital stock or other security of ANSC exists in favor of any Person.
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2.3 No Subsidiaries.
(a)ALIC has no subsidiaries.
(b)Dublin has no subsidiaries.
(c)ANSC has no subsidiaries.
2.4 Articles of Incorporation, By-Laws, Corporate Records and Committees.
(a) The copies of the Articles of Incorporation and Code of Regulations of
ALIC attached as Schedule 2.4(a) are correct and complete. The stock transfer,
minute books and corporate records of ALIC which have been made available to
Lyndon are correct and complete and constitute the only written records and
minutes of the meetings, proceedings, and other actions of the shareholders and
the Board of Directors of ALIC from the date of its organization to the date
hereof.
(b) The copies of the Articles of Incorporation and By-Laws of Dublin
attached as Schedule 2.4(b) are correct and complete. The stock transfer,
minute books and corporate records of Dublin which have been made available to
Lyndon are correct and complete and constitute the only written records and
minutes of the meetings, proceedings, and other actions of the shareholders and
the Board of Directors of Dublin from the date of its organization to the date
hereof.
(c) The copies of the Articles of Incorporation and Code of Regulations of
ANSC attached as Schedule 2.4(c) are correct and complete. The stock transfer,
minute books and corporate records of ANSC which have been made available to
Lyndon are correct and complete and constitute the only written records and
minutes of the meetings, proceedings, and other actions of the shareholders and
the Board of Directors of ANSC from the date of its organization to the date
hereof.
2.5 Governmental Authorizations and Other Consents.
(a) Except as set forth on Schedule 2.5(a), no consent, order, license,
approval or authorization of, or exemption by, or registration or declaration
or filing with, any governmental authority, bureau or agency, and no consent or
approval of any other Person, is required to be obtained or made in connection
with the performance by Accel of this Agreement or the consummation of the
transactions relating to ALIC contemplated to be performed by them hereunder.
(b) Except as set forth on Schedule 2.5(b), no consent, order, license,
approval or authorization of, or exemption by, or registration or declaration
or filing with, any governmental authority, bureau or agency, and no consent or
approval of any other Person, is required to be obtained or made in connection
with the performance by Accel of this Agreement or the consummation of the
transactions relating to Dublin contemplated to be performed by them hereunder.
(c) Except as set forth on Schedule 2.5(c), no consent, order, license,
approval or authorization of, or exemption by, or registration or declaration
or filing with, any governmental authority, bureau or agency, and no consent or
approval of any other Person, is required to be obtained or made in connection
with the performance by Accel of this Agreement or the consummation of the
transactions relating to ANSC contemplated to be performed by them hereunder.
2.6 Non-Contravention. Except as set forth on Schedule 2.6, the
performance of this Agreement will not (i) violate any provision of the
Articles of Incorporation, Code of Regulations or By-Laws of any of the Target
Corporations; (ii) violate, conflict with or result in the breach or
termination of, or constitute an amendment to, or otherwise give any Person the
right to terminate, or constitute (or with notice or lapse of time or both
would
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constitute) a default (by way of substitution, novation or otherwise) under the
terms of, any material contract, mortgage, lease, bond, indenture, agreement,
franchise or other instrument or obligation to which any of the Target
Corporations is a party or by which any of the Target Corporations or any of
their respective assets or properties are bound or affected; (iii) result in
the creation of any lien, mortgage, claim, charge, security interest,
encumbrance, restriction or limitation (collectively, "Liens") upon any
material properties or assets of any of the Target Corporations pursuant to the
terms of any contract, mortgage, lease, bond, indenture, agreement, franchise
or other instrument or obligation; (iv) violate any judgment, order,
injunction, decree or award of any court, arbitrator, administrative agency or
governmental or regulatory body ("Governmental Order") against, or binding
upon, any of the Target Corporations or any of their securities, properties,
assets or business; (v) constitute a violation by any of the Target
Corporations of any material statute, law, rule or regulation of any
jurisdiction as such statute, law, rule or regulation relates to any of the
Target Corporations or to any of its securities, properties, assets or
business; or (vi) violate any Permit (as defined in Section 2.13(a).
2.7 Financial Statements.
(a) ALIC Financial Statements.
(i) ALIC GAAP Financial Statements. The unaudited balance sheet of ALIC
as at September 30, 1997 (the "ALIC September 30, 1997 GAAP Balance Sheet") and
the related unaudited statement of income for the nine months then ended
(together with the ALIC September 30, 1997 GAAP Balance Sheet, the "ALIC
September 30, 1997 GAAP Financial Statements"), to be delivered to Lyndon, will
be prepared in accordance with United States generally accepted accounting
principles ("GAAP") consistently applied and will be true and correct in all
material respects and present fairly the financial condition and the results of
operations of ALIC as at the respective dates and for the respective periods
covered thereby and shall show no material adverse change from the ALIC June
30, 1997 GAAP Financial Statements previously delivered to Lyndon.
(ii) ALIC Statutory Financial Statements. Prior to the Closing, there
will be delivered to Lyndon (i) the unaudited statutory balance sheets of ALIC
as at September 30, 1997 (the "ALIC September 30, 1997 Statutory Balance
Sheet") and the related unaudited statement of income for the nine months then
ended (together with the ALIC September 30, 1997 Statutory Balance Sheets, the
"ALIC September 30, 1997 Statutory Financial Statements") prepared in
accordance with statutory accounting principles ("SAP") and consistently
applied in conformity with the audited statutory financial statements,
certified as correct in all material respects by ALIC's chief financial officer
and (ii) the audited SAP balance sheets of ALIC as at December 31, 1994,
December 31, 1995 and December 31, 1996 and the related audited SAP statements
of income, changes in capital and surplus and cash flows for each of the years
then ended (the "ALIC Audited Statutory Financial Statements"), which statutory
financial statements are true and correct in all materials respects and present
fairly the admitted assets, liabilities, loss and loss adjustment reserves,
capital and surplus, and cash flows of ALIC as at the respective dates and for
the respective periods covered thereby in conformity with SAP consistently
applied and shall show no material adverse change from the ALIC June 30, 1997
SAP Financial Statements previously delivered to Lyndon.
(b) Dublin GAAP Financial Statements. The unaudited balance sheet of
Dublin as at September 30, 1997 (the "Dublin September 30, 1997 GAAP Balance
Sheets") and the related unaudited statement of income for the nine months then
ended (together with the Dublin September 30, 1997 GAAP Balance Sheet, the
Dublin September 30, 1997 GAAP Financial Statements") to be delivered to
Lyndon, will be prepared in accordance with GAAP consistently applied and will
be true and correct in all material respects and present fairly the financial
condition and the results of operations of Dublin as at the respective dates
and for the respective periods covered thereby and shall show no material
adverse change from the Dublin June 30, 1997 GAAP Financial Statements
previously delivered to Lyndon.
(c) ANSC GAAP Financial Statements. The unaudited balance sheets of ANSC
as at September 30, 1997 (the "ANSC September 30, 1997 GAAP Balance Sheets")
and the related unaudited statement
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of income for the nine months then ended (together with the ANSC September 30,
1997 GAAP Balance Sheet, the "ANSC September 30, 1997 GAAP Financial
Statements") to be delivered to Lyndon, will be prepared in accordance with
GAAP consistently applied and will be true and correct in all material respects
and present fairly the financial condition and the results of operations of
ANSC as at the respective dates and for the respective periods covered thereby
and shall show no material adverse change from the ANSC June 30, 1997 GAAP
Financial Statements previously delivered to Lyndon.
(d) Combined Audited GAAP Financial Statements. The combined audited
balance sheet of ALIC, Dublin and ANSC as at December 31, 1997 (the "Combined
Audited December 31, 1997 GAAP Balance Sheet") and the related audited
statement of income for the year then ended (together with the Combined Audited
December 31, 1997 GAAP Balance Sheet, the "Combined Audited GAAP Financial
Statements"), to be audited by KPMG Peat Marwick LLP, independent certified
public accountants, whose unqualified opinion shall be attached thereto, to be
delivered to Lyndon by March 16, 1998, will be prepared in accordance with GAAP
consistently applied and will be true and correct in all material respects and
present fairly the financial condition and the results of operations of the
combination of ALIC, Dublin and ANSC as at the respective dates and for the
respective periods covered thereby and shall show no material adverse change
from the unaudited September 30, 1997 Financial Statements of the Target
Corporations taken as a whole.
2.8 Tangible Property.
Except for accounts payable, general ledger, fixed asset accounting,
investment accounting and annual statement preparation software, there are no
significant assets which the Target Corporations use in their businesses (as
heretofore conducted) which are not either (i) owned by, or leased or licensed
to, one of Target Corporations and are being conveyed to Lyndon pursuant to
this Agreement; or (ii) owned by, or leased or licensed to, Acceleration
National Insurance Company ("ANIC") and are being conveyed to Lyndon Property
Insurance Company pursuant to the Asset Purchase Agreement between Lyndon
Property Insurance Company, Accel and ANIC of even date herewith in connection
with the sale of ANIC's warranty book of business (the "Asset Purchase
Agreement").
(a) ALIC has good and marketable title to all of the assets reflected on
its books and records and on the ALIC September 30, 1997 Statutory Balance
Sheet and on the ALIC September 30, 1997 GAAP Balance Sheet, free and clear of
all Liens, except for those assets leased by ALIC under leases listed on
Schedule 2.8(a). All furniture, fixtures and equipment owned or used by ALIC
(the "ALIC Fixed Assets") will be in substantially the same condition on the
Closing Date as existed on the date of this Agreement, reasonable wear and tear
excepted. SUCH REPRESENTATION IS ACCEL'S SOLE WARRANTY WITH RESPECT TO THE
ALIC FIXED ASSETS AND THE ALIC FIXED ASSETS ARE SOLD AS IS, WHERE IS, WITH ALL
FAULTS AND WITH NO WARRANTIES, EXCEPT THOSE EXPRESSLY STATED HEREIN, EXPRESS OR
IMPLIED, INCLUDING WITHOUT LIMITATION, ANY IMPLIED WARRANTY OF MERCHANTABILITY
OR FITNESS FOR A PARTICULAR PURPOSE, WHICH IMPLIED WARRANTIES ARE EXPRESSLY
EXCLUDED.
(b) Dublin has good and marketable title to all of the assets reflected on
its books and records and on the Dublin September 30, 1997 GAAP Balance Sheet,
free and clear of all Liens, except for those assets leased by Dublin under
leases listed on Schedule 2.8(b). All furniture, fixtures and equipment owned
or used by Dublin (the "Dublin Fixed Assets") will be in substantially the same
condition on the Closing Date as existed on the date of this Agreement,
reasonable wear and tear excepted. SUCH REPRESENTATION IS ACCEL'S SOLE
WARRANTY WITH RESPECT TO THE DUBLIN FIXED ASSETS AND THE DUBLIN FIXED ASSETS
ARE SOLD AS IS, WHERE IS, WITH ALL FAULTS AND WITH NO WARRANTIES, EXCEPT THOSE
EXPRESSLY STATED HEREIN, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, ANY
IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WHICH
IMPLIED WARRANTIES ARE EXPRESSLY EXCLUDED.
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(c) ANSC has good and marketable title to all of the assets reflected on
its books and records and on the ANSC September 30, 1997 GAAP Balance Sheet,
free and clear of all Liens, except for those assets leased by ANSC under
leases listed on Schedule 2.8(c). All furniture, fixtures and equipment owned
or used by ANSC (the "ANSC Fixed Assets") will be in substantially the same
condition on the Closing Date as existed on the date of this Agreement,
reasonable wear and tear excepted. SUCH REPRESENTATION IS ACCEL'S SOLE
WARRANTY WITH RESPECT TO THE ANSC FIXED ASSETS AND THE ANSC FIXED ASSETS ARE
SOLD AS IS, WHERE IS, WITH ALL FAULTS AND WITH NO WARRANTIES, EXCEPT THOSE
EXPRESSLY STATED HEREIN, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, ANY
IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WHICH
IMPLIED WARRANTIES ARE EXPRESSLY EXCLUDED.
2.9 Real Property and Leases.
(a) Schedule 2.9(a) sets forth a true and correct list of all leases,
subleases or other agreements under which ALIC is lessee or lessor of any real
property or has any interest in real property and, except as set forth in
Schedule 2.9(a), there are no rights or options held by ALIC, or any
contractual obligations on its part, to purchase or otherwise acquire
(including by way of lease or sublease) any interest in or use of any real
property, nor any rights or options granted by ALIC, or any contractual
obligations entered into by it, to sell or otherwise dispose of (including by
way of lease or sublease) any interest in or use of any real property. All
such leases, subleases and other agreements are in full force and effect and
constitute legal, valid and binding obligations of the respective parties
thereto, with no existing or claimed default or event of default, or event
which with notice or lapse of time or both would constitute a default or event
of default, by ALIC or, to the knowledge of the Accel, by any other party
thereto, which would materially and adversely affect ALIC, and grant the
leasehold estates or other interests they purport to grant with the right to
quiet possession. ALIC is not in material violation of any building, zoning,
health, safety, environmental or other law, rule or regulation and no notice
from any Person has been served upon ALIC claiming any such violation.
(b) Schedule 2.9(b) sets forth a true and correct list of all leases,
subleases or other agreements under which Dublin is lessee or lessor of any
real property or has any interest in real property and, except as set forth in
Schedule 2.9(b), there are no rights or options held by Dublin, or any
contractual obligations on its part, to purchase or otherwise acquire
(including by way of lease or sublease) any interest in or use of any real
property, nor any rights or options granted by Dublin, or any contractual
obligations entered into by it, to sell or otherwise dispose of (including by
way of lease or sublease) any interest in or use of any real property. All
such leases, subleases and other agreements are in full force and effect and
constitute legal, valid and binding obligations of the respective parties
thereto, with no existing or claimed default or event of default, or event
which with notice or lapse of time or both would constitute a default or event
of default, by Dublin or, to the knowledge of the Accel, by any other party
thereto, which would materially and adversely affect Dublin, and grant the
leasehold estates or other interests they purport to grant with the right to
quiet possession. Dublin is not in material violation of any building, zoning,
health, safety, environmental or other law, rule or regulation and no notice
from any Person has been served upon Dublin claiming any such violation.
(c) Schedule 2.9(c) sets forth a true and correct list of all leases,
subleases or other agreements under which ANSC is lessee or lessor of any real
property or has any interest in real property and, except as set forth in
Schedule 2.9(c), there are no rights or options held by ANSC, or any
contractual obligations on its part, to purchase or otherwise acquire
(including by way of lease or sublease) any interest in or use of any real
property, nor any rights or options granted by ANSC, or any contractual
obligations entered into by it, to sell or otherwise dispose of (including by
way of lease or sublease) any interest in or use of any real property. All
such leases, subleases and other agreements are in full force and effect and
constitute legal, valid and binding obligations of the respective parties
thereto, with no existing or claimed default or event of default, or event
which with notice or lapse of time or both would constitute a default or event
of default, by ANSC or, to the knowledge of the Accel, by any other party
thereto, which would materially and adversely affect ANSC, and grant the
leasehold estates or other interests they purport to grant with the right to
quiet possession. ANSC is not in material violation of any
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building, zoning, health, safety, environmental or other law, rule or
regulation and no notice from any Person has been served upon ANSC claiming any
such violation.
2.10 Intellectual Property.
(a) Schedule 2.10(a) sets forth all material trademarks, trade names,
trade secrets, patents, inventions, processes, copyrights, copyright rights or
other intellectual property rights (or applications therefor) used by ALIC in
connection with its business. Except as set forth in Schedule 2.10(a), ALIC
owns, or has the irrevocable right to use, all trademarks, trade names, trade
secrets, patents, inventions, processes, copyrights, copyright rights or other
intellectual property rights (or applications therefor) used in or necessary
for the conduct of ALIC's existing business as heretofore indicated, and the
consummation of the transactions contemplated hereby will not alter or impair
any such rights. Except as provided in Schedule 2.10(a), (i) no claims are
pending or, to Accel's knowledge, overtly threatened in writing by any person
respecting the use by ALIC of any such property rights (or applications
therefore) or challenging or questioning the validity or effectiveness of any
license or agreement relating to the same, (ii) to Accel's knowledge, there is
no valid basis for any such claim and (iii) to Accel's knowledge, use of such
trademarks, trade names, trade secrets, patents, inventions, processes,
copyrights, copyright rights or other intellectual property rights (or
applications therefor) does not infringe on the rights of any Person.
(b) Schedule 2.10(b) sets forth all material trademarks, trade names,
trade secrets, patents, inventions, processes, copyrights, copyright rights or
other intellectual property rights (or applications therefor) used by Dublin in
connection with its business. Except as set forth in Schedule 2.10(b), Dublin
owns, or has the irrevocable right to use, all trademarks, trade names, trade
secrets, patents, inventions, processes, copyrights, copyright rights or other
intellectual property rights (or applications therefor) used in or necessary
for the conduct of Dublin's existing business as heretofore indicated, and the
consummation of the transactions contemplated hereby will not alter or impair
any such rights. Except as provided in Schedule 2.10(b), (i) no claims are
pending or, to Accel's knowledge, overtly threatened in writing by any person
respecting the use by Dublin of any such property rights (or applications
therefore) or challenging or questioning the validity or effectiveness of any
license or agreement relating to the same, (ii) to Accel's knowledge, there is
no valid basis for any such claim and (iii) to Accel's knowledge, use of such
trademarks, trade names, trade secrets, patents, inventions, processes,
copyrights, copyright rights or other intellectual property rights (or
applications therefor) does not infringe on the rights of any Person.
(c) Schedule 2.10(c) sets forth all material trademarks, trade names,
trade secrets, patents, inventions, processes, copyrights, copyright rights or
other intellectual property rights (or applications therefor) used by ANSC in
connection with its business. Except as set forth in Schedule 2.10(c), ANSC
owns, or has the irrevocable right to use, all trademarks, trade names, trade
secrets, patents, inventions, processes, copyrights, copyright rights or other
intellectual property rights (or applications therefor) used in or necessary
for the conduct of ANSC's existing business as heretofore indicated, and the
consummation of the transactions contemplated hereby will not alter or impair
any such rights. Except as provided in Schedule 2.10(a), (i) no claims are
pending or, to Accel's knowledge, overtly threatened in writing by any person
respecting the use by ANSC of any such property rights (or applications
therefore) or challenging or questioning the validity or effectiveness of any
license or agreement relating to the same, (ii) to Accel's knowledge, there is
no valid basis for any such claim and (iii) to Accel's knowledge, use of such
trademarks, trade names, trade secrets, patents, inventions, processes,
copyrights, copyright rights or other intellectual property rights (or
applications therefor) does not infringe on the rights of any Person.
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2.11 Tax Matters.
(a) ALIC has timely filed all federal, state, county and local tax
returns, estimates and reports (collectively, "Returns") required to be filed
by it through the date hereof, copies of which have been delivered to Lyndon,
which Returns accurately reflect the taxes due for the periods indicated, and
ALIC has paid in full all income, gross receipts, value added, excise,
property, franchise, sales, use, employment, payroll and other taxes of any
kind whatsoever (collectively, "Taxes") shown to be due by such Returns, and
has accrued in accordance with GAAP liabilities for Taxes accrued through
September 30, 1997 which are reflected on its September 30, 1997 GAAP Balance
Sheet. Accel has no knowledge of any unassessed deficiency for Taxes proposed
or threatened against ALIC, and no taxing authority has raised any issue with
respect to ALIC which, if adversely determined, would result in a liability for
any Tax which has not been reserved against on its September 30, 1997 GAAP
Balance Sheet. No extensions with respect to the dates on which any Return was
or is due to be filed by ALIC nor any waivers or agreements by ALIC for the
extension of time for the assessment or payment of any Taxes are in force.
Except as set forth in Schedule 2.11, ALIC has not been during the last six
years for which tax returns have been filed, and currently is not being,
audited by any federal, state or local tax authority. ALIC life insurance
policies, if any, qualify as life insurance policy products under applicable
tax law.
(b) Dublin has timely filed all Returns required to be filed by it through
the date hereof, copies of which have been delivered to Lyndon, which Returns
accurately reflect the taxes due for the periods indicated, and Dublin has paid
in full all Taxes shown to be due by such Returns, and has accrued in
accordance with GAAP liabilities for Taxes accrued through September 30, 1997
which are reflected on its September 30, 1997 GAAP Balance Sheet. Accel has no
knowledge of any unassessed deficiency for Taxes proposed or threatened against
Dublin, and no taxing authority has raised any issue with respect to Dublin
which, if adversely determined, would result in a liability for any Tax which
has not been reserved against on its September 30, 1997 GAAP Balance Sheet. No
extensions with respect to the dates on which any Return was or is due to be
filed by Dublin nor any waivers or agreements by Dublin for the extension of
time for the assessment or payment of any Taxes are in force. Except as set
forth in Schedule 2.11, Dublin has not been during the last six years for which
tax returns have been filed, and currently is not being, audited by any
federal, state or local tax authority.
(c) ANSC has timely filed all Returns required to be filed by it through
the date hereof, copies of which have been delivered to Lyndon, which Returns
accurately reflect the taxes due for the periods indicated, and ANSC has paid
in full all Taxes shown to be due by such Returns, and has accrued in
accordance with GAAP liabilities for Taxes accrued through September 30, 1997
which are reflected on its September 30, 1997 GAAP Balance Sheet. Accel has no
knowledge of any unassessed deficiency for Taxes proposed or threatened against
ANSC, and no taxing authority has raised any issue with respect to ANSC which,
if adversely determined, would result in a liability for any Tax which has not
been reserved against on its September 30, 1997 GAAP Balance Sheet. No
extensions with respect to the dates on which any Return was or is due to be
filed by ANSC nor any waivers or agreements by ANSC for the extension of time
for the assessment or payment of any Taxes are in force. Except as set forth
in Schedule 2.11, ANSC has not been during the last six years for which tax
returns have been filed, and currently is not being, audited by any federal,
state or local tax authority.
2.12 Compliance with Laws. Except as set forth on Schedule 2.12, to
Accel's knowledge, none of the Target Corporations are in violation of any
applicable law, rule or regulation, the violation of which could materially and
adversely affect its assets, properties, liabilities, business, results of
operations, condition (financial or otherwise) or prospects, nor does Accel
know of the enactment, promulgation or adoption of any such law, rule or
regulation which is not yet effective.
2.13 Permits and Licenses.
(a) Except as set forth on Schedule 2.13(a), ALIC (including, without
limitation, its employees) has duly obtained and holds in full force and effect
all consents, authorizations, permits, licenses, orders
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or approvals of, and has made all declarations and filings with, all federal,
state or local governmental or regulatory bodies that are material or necessary
in the conduct of its business (collectively, the "Permits"); all the Permits
were duly obtained and are in full force and effect; no violations are or have
been recorded in respect of any such Permit and, to Accel's knowledge, no
proceeding is pending or threatened to revoke, deny or limit any such Permit.
(b) Except as set forth on Schedule 2.13(b), Dublin (including, without
limitation, its employees) has duly obtained and holds in full force and effect
all the necessary Permits; all the Permits were duly obtained and are in full
force and effect; no violations are or have been recorded in respect of any
such Permit and, to Accel's knowledge, no proceeding is pending or threatened
to revoke, deny or limit any such Permit.
(c) Except as set forth on Schedule 2.13(c), ANSC (including, without
limitation, its employees) has duly obtained and holds in full force and effect
necessary Permits; all the Permits were duly obtained and are in full force and
effect; no violations are or have been recorded in respect of any such Permit
and, to Accel's knowledge, no proceeding is pending or threatened to revoke,
deny or limit any such Permit.
2.14 Contracts and Agreements.
(a) Schedule 2.14(a) lists and briefly describes all written or oral
contracts, agreements, leases, mortgages and commitments to which ALIC is a
party or by which it may be bound involving in excess of $25,000 (other than
insurance policies issued by ALIC), including, without limitation, all
reinsurance agreements, insurance underwriting agreements, agency agreements,
brokerage agreements, management agreements, joint venture agreements, leases,
guarantees and indemnifications, employment and consulting agreements and
instruments of indebtedness (individually, an "ALIC Contract" and,
collectively, the "ALIC Contracts"), true and correct copies of which have been
made available to Lyndon. All ALIC Contracts constitute legal, valid and
binding obligations of ALIC and, to the knowledge of Accel, of the other
parties thereto, and are in full force and effect on the date hereof, and ALIC
has paid in full all amounts due thereunder which are due and payable and is
not in default under any such ALIC Contract nor, to the knowledge of Accel, is
any other party to any such ALIC Contract in default thereunder, nor, to the
knowledge of Accel, does any condition exist that with notice or lapse of time
or both would constitute a default or event of default thereunder by ALIC or,
to the knowledge of Accel, by any other Person. Except as set forth in
Schedule 2.5(a), no ALIC Contract requires the consent or approval of a third
party in connection with the performance by ALIC of this Agreement or the
transactions contemplated to be performed by it hereunder.
(b) Schedule 2.14(b) lists and briefly describes all written or oral
contracts, agreements, leases, mortgages and commitments to which Dublin is a
party or by which it may be bound involving in excess of $25,000 (other than
insurance policies issued by Dublin) including without limitation, reinsurance
agreements, insurance underwriting agreements, agency agreements, brokerage
agreements, management agreements, joint venture agreements, leases, guarantees
and indemnifications, employment and consulting agreements and instruments of
indebtedness (individually, a "Dublin Contract" and, collectively, "Dublin
Contracts"), true and correct copies of which have been made available to
Lyndon. All Dublin Contracts constitute legal, valid and binding obligations
of Dublin and, to the knowledge of Accel, of the other parties thereto, and are
in full force and effect on the date hereof, and Dublin has paid in full all
amounts due thereunder which are due and payable and is not in default under
any such Dublin Contract nor, to the knowledge of Accel, is any other party to
any such Dublin Contract in default thereunder, nor does any condition exist
that with notice or lapse of time or both would constitute a default or event
of default thereunder by Dublin or, to the knowledge of Accel, by any other
Person. Except as set forth in Schedule 2.5(b), no Dublin Contract requires
the consent or approval of a third party in connection with the performance by
Dublin of this Agreement or the transactions contemplated to be performed by it
hereunder.
(c) Schedule 2.14(c) lists and briefly describes all written or oral
contracts, agreements, leases, mortgages and commitments, to which ANSC is a
party or by which it may be bound involving in excess of $25,000, including,
without limitation, all insurance underwriting agreements, agency agreements,
brokerage agreements, management agreements, joint venture agreements, leases,
guarantees and indemnifications, employment
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and consulting agreements and instruments of indebtedness (individually, an
"ANSC Contract" and, collectively, "ANSC Contracts"), true and correct copies of
which have been made available to Lyndon. All ANSC Contracts constitute legal,
valid and binding obligations of ANSC and, to the best knowledge of Accel, of
the other parties thereto, and are in full force and effect on the date hereof,
and ANSC has paid in full all amounts due thereunder which are due and payable
and is not in default under any such ANSC Contract nor, to the knowledge of
Accel, is any other party to any such ANSC Contract in default thereunder, nor,
to the knowledge of Accel, does any condition exist that with notice or lapse of
time or both would constitute a default or event of default thereunder by ANSC
or, to the knowledge of Accel, by any other Person. Except as set forth in
Schedule 2.5(c), no ANSC Contract requires the consent or approval of a third
party in connection with the performance by ANSC of this Agreement or the
transactions contemplated to be performed by it hereunder.
2.15 Employee Benefits.
(a) (i) Except as set forth on Schedule 2.15(a), ALIC has no, and during
the previous five fiscal years has had no pension, retirement, savings,
disability, medical, dental or other health plans, retiree medical plans, life
insurance (including any individual life insurance policy as to which ALIC makes
premium payments whether or not ALIC is the owner, beneficiary or both of such
policy) or other death benefit plans, profit sharing, deferred compensation,
stock option, bonus or other incentive plans, vacation benefit plans, severance
plans, or other employee benefit plans or arrangements (whether written or
arising from custom), and ALIC has no employee pension benefit plan as defined
in Section 3(2) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or any employee welfare benefit plan as defined in Section
3(1) of ERISA, or any Multiemployer Plan as defined in Section 3(37) of ERISA.
(ii) ALIC has in all material respects complied with the requirements,
to the extent applicable, of the Consolidated Omnibus Budget Reconciliation Act
of 1985 ("COBRA") with respect to the continuation of employer-provided health
benefits following a "qualifying event" which would otherwise terminate such
benefits, as provided in Section 4980B of the Internal Revenue Code of 1986 (the
"Code"), as amended, and applicable regulations and Internal Revenue Service
rulings, notices and other pronouncements.
(b) (i) Except as set forth on Schedule 2.15(b), Dublin has no, and during
the previous five fiscal years has had no pension, retirement, savings,
disability, medical, dental or other health plans, retiree medical plans, life
insurance (including any individual life insurance policy as to which Dublin
makes premium payments whether or not Dublin is the owner, beneficiary or both
of such policy) or other death benefit plans, profit sharing, deferred
compensation, stock option, bonus or other incentive plans, vacation benefit
plans, severance plans, or other employee benefit plans or arrangements (whether
written or arising from custom), and Dublin has no, and during the previous five
fiscal years has had no employee pension benefit plan as defined in Section 3(2)
of ERISA, or any employee welfare benefit plan as defined in Section 3(1) of
ERISA or any Multiemployer Plan as defined in Section 3(37) of ERISA.
(ii) Dublin has in all material respects complied with the
requirements, to the extent applicable, of COBRA with respect to the
continuation of employer-provided health benefits following a "qualifying event"
which would otherwise terminate such benefits, as provided in Section 4980B of
the Code and applicable regulations and Internal Revenue Service rulings,
notices and other pronouncements.
(c) (i) Except as set forth on Schedule 2.15(c), ANSC has no, and during
the previous five fiscal years has had no pension, retirement, savings,
disability, medical, dental or other health plans, retiree medical plans, life
insurance (including any individual life insurance policy as to which ANSC makes
premium payments whether or not ANSC is the owner, beneficiary or both of such
policy) or other death benefit plans, profit sharing, deferred compensation,
stock option, bonus or other incentive plans, vacation benefit plans, severance
plans, or other employee benefit plans or arrangements (whether written or
arising from custom), and ANSC has no employee pension benefit plan as defined
in Section 3(2) of ERISA, or any employee welfare benefit plan as defined in
Section 3(1) of ERISA or any Multiemployer Plan as defined in Section 3(37) of
ERISA.
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(ii) ANSC has in all material respects complied with the requirements,
to the extent applicable, of COBRA with respect to the continuation of
employer-provided health benefits following a "qualifying event" which
would otherwise terminate such benefits, as provided in Section 4980B
of the Code and applicable regulations and Internal Revenue Service
rulings, notices and other pronouncements.
2.16 Insurance.
(a) Schedule 2.16(a) lists and provides a summary description of all
policies of property, theft, fire, liability, workers' compensation, title,
professional liability or life insurance or reinsurance or any other insurance
owned or maintained by ALIC or in which ALIC is a named insured or on which
ALIC is paying any premiums, other than with respect to reinsurance. Except as
set forth on Schedule 2.16(a), all such policies are in full force and effect
at the date hereof, and, to Accel's knowledge, each of the insured parties
thereunder is not in default with respect to any provision contained in any
such insurance policy nor failed to give any notice or present any claim
thereunder in due and timely fashion. Schedule 2.16(a) sets forth a summary of
the claims history for ALIC under such policies since January 1, 1994 and,
except as set forth on Schedule 2.16(a), there are no claims outstanding by
ALIC under any such policies.
(b) Schedule 2.16(b) lists and provides a summary description of all
policies of property, theft, fire, liability, workers' compensation, title,
professional liability or life insurance or reinsurance or any other insurance
owned or maintained by Dublin or in which Dublin is a named insured or on which
Dublin is paying any premiums, other than with respect to reinsurance. Except
as set forth on Schedule 2.16(b), all such policies are in full force and
effect at the date hereof, and, to Accel's knowledge, each of the insured
parties thereunder is not in default with respect to any provision contained in
any such insurance policy nor failed to give any notice or present any claim
thereunder in due and timely fashion. Schedule 2.16(b) sets forth a summary of
the claims history for Dublin under such policies since January 1, 1994 and,
except as set forth on Schedule 2.16(b ), there are no claims outstanding by
Dublin under any such policies.
(c) Schedule 2.16(c) lists and provides a summary description of all
policies of property, theft, fire, liability, workers' compensation, title,
professional liability or life insurance or reinsurance or any other insurance
owned or maintained by ANSC or in which ANSC is a named insured or on which
ANSC is paying any premiums, other than with respect to reinsurance. Except as
set forth on Schedule 2.16(c), all such policies are in full force and effect
at the date hereof, and, to Accel's knowledge, each of the insured parties
thereunder is not in default with respect to any provision contained in any
such insurance policy nor failed to give any notice or present any claim
thereunder in due and timely fashion. Schedule 2.16(c) sets forth a summary of
the claims history for ANSC under such policies since January 1, 1994 and,
except as set forth on Schedule 2.16(c), there are no claims outstanding by
ANSC under any such policies.
2.17 Accounts Payable.
(a) Except for accounts payable in the ordinary course of business and
except as set forth on Schedule 2.17(a), no accounts payable of ALIC have
arisen subsequent to September 30, 1997 that exceeds $25,000 for any one payee
or $100,000 in the aggregate, other than claims payable and premiums payable to
reinsurance companies.
(b) Except for accounts payable in the ordinary course of business and
except as set forth on Schedule 2.17(b), no accounts payable of Dublin have
arisen subsequent to September 30, 1997 that exceeds $25,000 for any one payee
or $100,000 in the aggregate, other than claims payable and premiums payable to
reinsurance companies.
(c) Except for accounts payable in the ordinary course of business and
except as set forth on Schedule 2.17(c), no accounts payable of ANSC have
arisen subsequent to September 30, 1997 that exceeds $25,000
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for any one payee or $100,000 in the aggregate, other than claims payable and
premiums payable to reinsurance companies.
2.18 Liabilities.
(a) There are no material liabilities or obligations of ALIC, either
accrued, absolute, contingent or otherwise, whether or not of a kind required
by GAAP to be set forth on a financial statement ("Liabilities"), except (a)
those accrued, reflected or otherwise provided for on the ALIC September 30,
1997 Statutory Balance Sheet and the ALIC September 30, 1997 GAAP Balance
Sheet, (b) those incurred in the ordinary course of ALIC's business since
September 30, 1997, consistent with past practices, and which in the aggregate
do not exceed $100,000 and (c) those listed on Schedule 2.18(a).
(b) There are no material Liabilities of Dublin, except (a) those accrued,
reflected or otherwise provided for on the Dublin September 30, 1997 GAAP
Balance Sheet, (b) those incurred in the ordinary course of Dublin's business
since September 30, 1997, consistent with past practices, and which in the
aggregate do not exceed $100,000 and (c) those listed on Schedule 2.18(b).
(c) There are no material Liabilities of ANSC, except (a) those accrued,
reflected or otherwise provided for on the ANSC September 30, 1997 GAAP Balance
Sheet, (b) those incurred in the ordinary course of ANSC's business since
September 30, 1997, consistent with past practices, and which in the aggregate
do not exceed $100,000 and (c) those listed on Schedule 2.18(c).
2.19 Actions and Proceedings.
(a) Except as provided on Schedule 2.19(a), there are no claims, actions,
suits, arbitrations, proceedings, investigations or inquiries, whether at law
or in equity and whether or not before any court, private body or group,
governmental department, commission, board, agency or instrumentality
(collectively, "Actions"), pending or, to the knowledge of Accel, threatened
against, involving or affecting ALIC or any of its assets, whether or not fully
or partially covered by insurance (other than in the ordinary course of ALIC's
business with respect to claims under policies of insurance issued by ALIC,
which, in the judgment of Accel, have been adequately reserved in the
aggregate) or which would give rise to any right of indemnification by any
Person from ALIC, and there are no outstanding orders, writs, injunctions,
awards, sentences or decrees of any court, private body or group, governmental
department, commission, board, agency or instrumentality against, involving or
affecting ALIC.
(b) Except as provided on Schedule 2.19(b), there are no Actions, pending
or, to the knowledge of Accel, threatened against, involving or affecting
Dublin or any of its assets, whether or not fully or partially covered by
insurance (other than in the ordinary course of Dublin's business with respect
to claims under policies of insurance issued by Dublin, which, in the judgment
of Accel, have been adequately reserved in the aggregate) or which would give
rise to any right of indemnification by any Person from Dublin, and there are
no outstanding orders, writs, injunctions, awards, sentences or decrees of any
court, private body or group, governmental department, commission, board,
agency or instrumentality against, involving or affecting Dublin.
(c) Except as provided on Schedule 2.19(c), there are no Actions, pending
or, to the knowledge of Accel, threatened against, involving or affecting ANSC
or any of its assets, whether or not fully or partially covered by insurance or
which would give rise to any right of indemnification by any Person from ANSC,
and there are no outstanding orders, writs, injunctions, awards, sentences or
decrees of any court, private body or group, governmental department,
commission, board, agency or instrumentality against, involving or affecting
ANSC.
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2.20 Bank Accounts, Guarantees and Powers.
(a) Schedule 2.20(a) sets forth (i) a list of all accounts, borrowing
resolutions and deposit boxes maintained by ALIC at any bank or other financial
institution and the names of the persons authorized to effect transactions in
such accounts, to borrow pursuant to such resolutions and with access to such
boxes; (ii) all agreements or commitments of ALIC guaranteeing the payment of
money or the performance of other contracts by any third persons; and (iii) the
names of all persons, firms, associations, corporations, or business
organizations holding general or special powers of attorney from ALIC, together
with a summary of the terms thereof.
(b) Schedule 2.20(b) sets forth (i) a list of all accounts, borrowing
resolutions and deposit boxes maintained by Dublin at any bank or other
financial institution and the names of the persons authorized to effect
transactions in such accounts, to borrow pursuant to such resolutions and with
access to such boxes; (ii) all agreements or commitments of Dublin guaranteeing
the payment of money or the performance of other contracts by any third
persons; and (iii) the names of all persons, firms, associations, corporations,
or business organizations holding general or special powers of attorney from
Dublin, together with a summary of the terms thereof.
(c) Schedule 2.20(c) sets forth (i) a list of all accounts, borrowing
resolutions and deposit boxes maintained by ANSC at any bank or other financial
institution and the names of the persons authorized to effect transactions in
such accounts, to borrow pursuant to such resolutions and with access to such
boxes; (ii) all agreements or commitments of ANSC guaranteeing the payment of
money or the performance of other contracts by any third persons; and (iii) the
names of all persons, firms, associations, corporations, or business
organizations holding general or special powers of attorney from ANSC, together
with a summary of the terms thereof.
2.21 Sources of Premiums.
(a) Schedule 2.21(a) sets forth a computer print-out of ALIC's accounts
sequentially listed by volume generated during the period from January 1, 1996
through September 30, 1997. Accel has no knowledge that any such account
intends to terminate or not renew or otherwise modify its relationship with
ALIC, provided, however, that Lyndon acknowledges that accounts routinely are
added and terminated in the regular course of ALIC's business.
(b) Schedule 2.21(b) sets forth a computer print-out of ANSC's accounts
sequentially listed by volume generated during the period from January 1, 1996
through September 30, 1997. Accel has no knowledge that any such account
intends to terminate or not renew or otherwise modify its relationship with
ANSC, provided, however, that Lyndon acknowledges that accounts routinely are
added and terminated in the regular course of ANSC's business.
2.22 Absence of Changes. Except as set forth in Schedule 2.22, since
September 30, 1997, each of the Target Corporations has carried on its business
in the ordinary course, and there has not been:
(i) any material adverse change in its
business condition (financial or otherwise), results
of operations or liabilities;
(ii) any pending or, to Accel's knowledge,
threatened amendment, modification, or termination
of any agreement, license or permit which is
material to its business;
(iii) any disposition or acquisition of any
of its assets or properties other than in the
ordinary course which exceed $50,000 in the
aggregate;
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(iv) any damage, destruction or other casualty
loss (whether or not covered by insurance)
materially adversely affecting or that could
reasonably be expected to materially adversely
affect its business or assets;
(v) any increase in the compensation of any
of its employees other than in the ordinary course
of business consistent with past practice; or
(vi) except in the ordinary course, the
incurrence of any obligation or liability (whether
matured, unmatured, absolute, accrued, contingent or
otherwise) which exceed $50,000 in the aggregate.
2.23 Employee Relations. None of the Target Corporations has at any time
during the last five years had, or, to the knowledge of Accel, is there now
threatened, a strike, picket, work stoppage, work slowdown, or other material
labor dispute, and Accel has no knowledge of any Target Corporation's
employee's proposed resignation whose annual salary exceeds $25,000.
2.24 Affiliated Transactions. For purposes of this Section, an
"Affiliate" means any shareholder or any employee, officer or director of Accel
or any of the Target Corporations or any spouse or family member (including
in-laws) of, or any corporation or other entity "controlled by" (as such term
is defined in Rule 405 of the General Rules and Regulations under the
Securities Act of 1993, as amended (the "Securities Act")), any such persons or
in which any such person has an equity or ownership interest exceeding five
percent.
(a) Except as specifically set forth (including dollar amounts) on
Schedule 2.24, as of the date hereof, no Affiliate is indebted to, or is a
creditor of, Accel or any of the Target Corporations.
(b) During the past three (3) years, except as set forth on Schedule 2.24,
Accel has not, directly or indirectly, purchased, leased from or otherwise
acquired any property or obtained any services from, or sold, leased to or
otherwise disposed of any property or furnished any services to, or otherwise
dealt with, any Affiliate nor is Accel or any of the Target Corporations a
party to any contract, agreement, license, commitment or other arrangement,
written or oral, express or implied, with an Affiliate except as disclosed on
such schedule.
2.25 Brokers' Fees. There is no broker, finder or other intermediary
retained by Accel who might be entitled to a fee or commission in connection
with the transactions contemplated hereby.
2.26 Full Disclosure. All documents, schedules and other materials
delivered or made available by or on behalf of Accel in connection with any of
the Target Corporations to Lyndon in connection with this Agreement and the
transactions contemplated hereby are true and complete in all material
respects. The information furnished by or on behalf of Accel to Lyndon in
connection with this Agreement and the transactions contemplated hereby does
not, in light of the circumstances under which the statements contained in the
information so furnished were made, contain any untrue statement of a material
fact or omit to state any material fact necessary to make the statements
contained therein not false or misleading.
2.27 Employee Compensation. Schedule 2.27 lists all employees of ALIC,
Dublin and ANSC (other than employees who are expected to continue to be
employed by Accel or ANIC following the Closing) setting forth their respective
salaries, whether they are employed under contract or at will, and the
expiration date of each contract.
2.28 Authority of Accel. Accel has the right, power and authority to
enter into and perform its obligations under this Agreement and to consummate
the transactions contemplated hereby to be performed by Accel. The execution
and delivery of this Agreement by Accel, the performance by Accel of its
obligations hereunder and the consummation by Accel of the transactions
contemplated hereby have been duly authorized by all requisite corporate action
on the part of Accel other than approval by its stockholders. This Agreement
has been
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duly executed and delivered by Accel and (assuming due authorization, execution
and delivery by Lyndon) upon receipt of the requisite approval by its
stockholders, and the necessary approvals by governmental authorities, bureaus
and agencies, this Agreement will constitute a legal, valid and binding
obligation of Accel enforceable against Accel in accordance with its terms
except as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting rights of creditors of
insurance companies, rights of creditors generally or by general principles of
equity.
2.29 Title to Target Shares. Accel owns of record and beneficially, all
of the Target Shares, free and clear of all Liens and, upon delivery to Lyndon
of the certificates evidencing such Target Shares duly endorsed for transfer to
Lyndon, Lyndon will acquire good, valid, indefeasible and marketable title
thereto, free and clear of any and all liens.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF LYNDON
Lyndon represents and warrants to Accel that:
3.1 Organization. Lyndon Life Insurance Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Missouri and Lyndon Insurance Group, Inc. is a corporation duly organized,
validly existing and in good standing under the laws of the State of Missouri.
Each such corporation has all requisite corporate power and authority to enter
into this Agreement, to own, lease and operate its properties, to carry on its
business as now being conducted and to consummate the transactions contemplated
hereby, and is duly qualified and licensed as a foreign corporation to transact
business and is in good standing in each jurisdiction in which it is required
to be so qualified or authorized.
3.2 Authority. This Agreement has been duly authorized, executed and
delivered by Lyndon and is a valid and binding agreement of Lyndon enforceable
against Lyndon in accordance with its terms, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting rights of creditors of insurance companies, rights of
creditors generally, or by general principles of equity.
3.3 Investment Purposes. Lyndon is acquiring the Target Shares for its
own account solely for the purpose of investment within the contemplation of
the Securities Act and not with a view to any distribution thereof. Lyndon is
aware and understands that the Target Shares have not been registered under the
Securities Act or under the securities laws of any state, that any transfer of
the Target Shares by Lyndon shall be restricted under the provisions of such
act and such state laws, and that the certificates representing the Target
Shares will bear legends to such effect. Lyndon possesses such knowledge and
experience in financial and business matters generally and with respect to the
businesses of the Target Corporations so as to enable it to evaluate the risks
and merits of its purchase of the Target Shares.
3.4 No Breach or Conflict. The authorization, execution, delivery and
performance of this Agreement by Lyndon will not (a) violate any provision of
its certificate of incorporation, by-laws or other organizational documents,
(b) violate, conflict with or result in the breach or termination of, or
otherwise give any Person the right to terminate, any agreement to which it is
a party, or (c) conflict with or violate any statute, law, rule or regulation
or Governmental Order applicable to Lyndon which would have a material adverse
effect on the ability of Lyndon to consummate the transactions contemplated by
this Agreement.
3.5 Ability to Perform. Lyndon has, and will continue to have at the time
of Closing, adequate cash resources or financing commitments from third parties
to enable Lyndon to pay the Purchase Price at Closing.
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3.6 Governmental and Other Authorizations; Notices and Consents. (a) The
execution, delivery and performance of this Agreement by Lyndon do not and will
not require any consent, approval, authorization or other order of, action by,
filing with, or notification to, any governmental authority, bureau or agency
or any other third party except (a) as required by the insurance laws of the
State of Ohio, the State of Missouri and any other state in which Accel, Lyndon
or the Target Corporations are doing business, (b) the notification
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HSR Act") and (c) as set forth in Schedule 2.5(a), (b) and (c).
(b) Lyndon does not have knowledge of any facts or circumstances
pertaining to Lyndon or its affiliates which are reasonably likely to prevent
the parties hereto from obtaining the governmental consents and approvals
contemplated by Sections 2.5 and 3.6.
3.7 Litigation. Except as disclosed in a writing given to Accel by Lyndon
on a date prior to the execution of this Agreement, no claim, action,
proceeding or investigation is pending or, to the best knowledge of Lyndon
after due inquiry, threatened, which seeks to delay or prevent the consummation
of, or which could reasonably be expected to materially adversely affect
Lyndon's ability to consummate, or which could otherwise affect the legality,
validity or enforceability of, the transactions contemplated by this Agreement.
3.8 Brokers' Fees. There is no broker, finder or other intermediary
retained by Lyndon or any of its affiliates who might be entitled to a fee or
commission in connection with the transactions contemplated hereby.
ARTICLE 4
CONDUCT PENDING CLOSING
From the date hereof and until the Closing Date, except as otherwise
provided by this Agreement or as agreed by Lyndon in writing, Accel hereby
covenants and agrees that it shall comply and it shall cause ALIC, Dublin and
ANSC to comply with each of the following covenants:
4.1 Conduct of the Business. ALIC, Dublin and ANSC shall each, consistent
with past practice, conduct its business in the ordinary course, maintain
adequate insurance, preserve intact its business organization and employees,
maintain satisfactory relationships with its independent agents, reinsurers and
others having business relationships with it, maintain its books and records in
its usual manner and not make any change in its financial reporting, or
accounting practices or policies unless required by GAAP or SAP, or in its
reserving practices or policies.
4.2 Certain Prohibited Activities. Neither ALIC, Dublin nor ANSC shall
(i) issue, sell or deliver, or agree or take any steps towards an agreement to
issue, sell or deliver, any shares of its capital stock or any other security
(whether authorized and unissued or held in treasury), or grant or issue, or
agree to grant or issue, any subscription, option, warrant or other right
calling for the issue, sale or delivery thereof; (ii) except as permitted by
Section 4.11 hereof, declare or pay any dividend or distribution on any shares
of its capital stock; (iii) purchase, redeem or otherwise acquire any shares of
its capital stock; (iv) make any change in any pension or employee benefit plan
or arrangement, or any collective bargaining agreement, or enter into, amend,
modify or terminate any arrangement or agreement with any officer, director,
employee, independent contractor, representative or agent thereof; (v) create,
incur, assume or guarantee any indebtedness for borrowed money; (vi) make any
capital expenditure, or purchase, lease or license any real or personal
property which exceed $50,000 in the aggregate; (vii) sell or otherwise dispose
of or pledge any of its assets (tangible or intangible) or cancel any debts or
claims (including, without limitation, accounts receivable) owing to it, except
in the ordinary course of business which does not otherwise violate this
Agreement; (viii) merge or consolidate with any other Person or acquire control
of all or any substantial portion of the assets of any other Person or take any
steps incident to, or in furtherance of, merging or consolidating with or
acquiring control of all or any substantial portion of the assets of any other
Person, whether
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by entering into an agreement providing therefor or otherwise; (ix) make or
cause to be made any alteration in the manner of keeping its books, accounts or
records or in the accounting practices and principles therein and theretofore
reflected, including its reserving practices and policies, except as required
by law or changes in the Insurance Law of each applicable state; (x) effect or
agree to any change in its Articles of Incorporation, Code of Regulations or
By-Laws (except with respect to ALIC as described in Section 7.1(r)); (xi)
settle or agree to settle any claim, action, suit or proceeding (other than the
payment of insured claims in the ordinary course of business) involving the
payment or receipt by the applicable corporation of more than $25,000,
individually, or $100,000, in the aggregate; (xii) enter into any other
transaction or agreement which is not in the ordinary and usual course of
business; or (xiii) agree or commit to do any of the foregoing.
4.3 Reports; Taxes; Etc. ALIC, Dublin and ANSC shall each duly and timely
file, or cause to be duly and timely filed, all filings, declarations, reports
or returns required to be filed with federal, state and local authorities and
pay, when due all federal and state, foreign and local taxes, assessments and
governmental charges lawfully levied or assessed.
4.4 Access to Information. Accel, ALIC, Dublin and ANSC shall each afford
Lyndon, its counsel, financial advisors, auditors and other authorized
representatives full access, upon reasonable prior notice and during normal
business hours and subject to reasonable supervision by Accel and its agents,
to the offices, properties, books and records of each of ALIC, Dublin and ANSC
and to each of ALIC, Dublin and ANSC employees, agents and independent
accountants (provided that Lyndon shall use reasonable efforts to minimize any
disruption to the business of Accel and the Target Corporations), and shall
furnish to Lyndon, its counsel, financial advisors, auditors and other
authorized representatives such financial and operating data and other
information relating to each of ALIC, Dublin and ANSC as may reasonably be
requested, and shall instruct its employees, counsel and financial advisors to
cooperate with Lyndon in its investigation of each of ALIC, Dublin and ANSC.
4.5 Further Assurances. Each of Accel, ALIC, Dublin and ANSC shall do or
cause to be done such further acts and things and deliver or cause to be
delivered to Lyndon such additional assignments, agreements, powers and
instruments as Lyndon may reasonably require or deem reasonably advisable to
carry into effect the purposes of this Agreement or the other agreements to be
entered into in connection with the transactions contemplated hereby or to
better assure and confirm the rights, powers and remedies of Lyndon hereunder
and thereunder.
4.6 Tax Adjustments. Each of ALIC, Dublin and ANSC shall promptly notify
Lyndon of all proposed adjustments contained in examination reports received by
the Company from the Internal Revenue Service or any state, local or foreign
tax authority to any Return relating to adjustment for tax years prior to and
including the Closing Date which could materially adversely affect each of
ALIC, Dublin or ANSC or Lyndon and shall provide to Lyndon and its
representatives such information and records as they may reasonably request
with respect to such adjustments. Lyndon shall have the right to require and
to participate in, and to pay its own expenses relating to, the contest of all
such proposed adjustments which might adversely affect Lyndon by the creation
of adverse precedent or otherwise.
4.7 No "Shopping". Each of Accel, ALIC, Dublin and ANSC, shall not, except
as permitted below, (i) sell or arrange for the acquisition of any capital
stock or any other security of, or the business or all or any substantial
portion of the assets of, each of ALIC, Dublin and ANSC, (ii) negotiate,
solicit or encourage, or authorize any Person to solicit from any other Person,
any proposals relating to the disposition of the business or assets of each of
ALIC, Dublin and ANSC or the acquisition of securities of each of ALIC, Dublin
and ANSC or a merger or combination of each of ALIC, Dublin and ANSC with any
Person other than Lyndon or an affiliate of Frontier Insurance Group, Inc., or
(iii) make available, or permit to be made available, any information
concerning each of ALIC, Dublin and ANSC to any Person for the purpose of
effecting or causing, or assisting with, a disposition of all or any
substantial portion of the assets of each of ALIC, Dublin and ANSC, or any of
the securities of each of ALIC, Dublin and ANSC (other than to Lyndon).
Notwithstanding anything to the contrary contained in this Section 4.7 or in
any other provision of this Agreement, Accel, its Board of Directors and its
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officers, representatives and agents may furnish information to, and
participate in discussions or negotiations with, a third party (the "Third
Party") who submits any good faith purchase offer which was not directly or
indirectly solicited after the date of this Agreement by Accel, the Target
Companies or any of their respective affiliates to acquire the capital stock,
business or assets of the Target Companies pursuant to a merger, consolidation
or other business combination, sale of shares of capital stock or similar
transaction, if Accel's Board of Directors determines in good faith, after
consulting with legal counsel, that such furnishing of information and
participation in discussions are required in the exercise of the Board of
Directors' fiduciary duties under applicable law. Accel shall promptly advise
Lyndon when it determines that it will have negotiations with a Third Party,
including providing Lyndon such information concerning the Third Party as shall
not be inconsistent with the terms of any agreement with the Third Party with
respect to the subject of discussions or negotiations. To the extent this
Agreement has not otherwise been terminated, Accel shall be entitled to execute
a definitive agreement with a Third Party relating to the acquisition proposal
of such Third Party and to terminate this Agreement so long as Accel pays
Lyndon a fee of $750,000.
4.8 Governmental Notification and Approvals. Each of ALIC, Dublin and
ANSC shall promptly prepare, file and diligently pursue with the appropriate
governmental agencies all documentation and information required by law or
requested by each such agency to be filed by each of ALIC, Dublin and ANSC to
permit the consummation of the transactions contemplated hereby, including any
filings required to be made or documentation and further information requested
under the insurance laws of Ohio.
4.9 Regulatory Matters. Each of ALIC, Dublin and ANSC shall prepare and
file promptly, with Lyndon's cooperation, all applications and notices to
obtain all state regulatory approvals required to be obtained by ALIC, Dublin
and ANSC and shall use all reasonable efforts to process such applications and
notices and obtain the requisite consents necessary to consummate the
transactions contemplated hereby.
4.10 Cause Conditions to be Satisfied. Accel will use its reasonable best
efforts to cause all of the conditions described in Section 7.1 of the
Agreement to be satisfied.
4.11 Special Distribution
(i) Prior to Closing, the Target Corporations shall declare and pay their
shareholders, as they shall determine (in the exercise of their reasonable
judgment), a special distribution (the "Special Distribution") equal to the
estimated amount (the "Estimated GAAP Surplus Amount") by which the Target
Corporations' Combined GAAP Equity (as defined below) as of the Closing Date is
expected to exceed $31.6 million. The term "Target Corporations' Combined GAAP
Equity" shall mean the total stockholders' equity of each of the Target
Corporations as determined in accordance with GAAP, consistent with past
practices, as of December 31, 1997. Accel shall base the amount of such
Special Distribution on the combined September 30, 1997 unaudited balance
sheets of the Target Companies (without giving effect to the Special
Distribution) and a written statement, certified by the President and Chief
Financial Officer of Accel, setting forth that the Estimated GAAP Surplus
Amount has been determined in accordance with the provisions of this Section
4.11 and setting forth the components of the Special Distribution and stating
that the Special Distribution is equal to the Estimated GAAP Surplus Amount.
There shall be no goodwill or other intangible assets reflected in the Target
Corporations' Combined GAAP Equity.
(ii) Accel shall, by March 31, 1997, obtain from KPMG Peat Marwick LLP and
provide to Lyndon an audited balance sheet (the "Closing Date Balance Sheet")
as of December 31, 1997 for the Target Corporations (giving effect to the
Special Distribution) and a written statement of such firm setting forth the
Target Corporations' Combined GAAP Equity as of December 31, 1997 as set forth
on the Closing Date Balance Sheet (the "Target Corporations' Combined GAAP
Equity"). The Closing Date Balance Sheet shall be based on GAAP and accounting
practices consistent with the Combined Audited GAAP Financial Statements (as
defined in Section 2.7(d)).
(iii) If the Target Corporations' Combined GAAP Equity exceeds $31.6
million, the Purchase Price shall be increased by, and Lyndon shall pay Accel
125 days after the Closing Date, an amount equal to the
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amount by which the Target Corporations' Combined GAAP Equity exceeds $31.6
million, by wire transfer to a bank account designated in writing by Accel, in
immediately available funds. If the Target Corporations' Combined GAAP Equity
is less than $31.6 million, the Purchase Price shall be decreased by, and Accel
shall pay Lyndon 125 days after the Closing Date, an amount equal to the
difference between $31.6 million and the Target Corporations' Combined GAAP
Equity, by wire transfer to a bank account designated in writing by Lyndon, in
immediately available funds.
4.12 Non-Piracy Agreements. Accel shall cause the non-piracy agreements
attached hereto as Exhibit A to be distributed to all employees of the Target
Companies for execution by such employees.
4.13 Employee List. Four weeks prior to the Closing Date, Lyndon will
forward a list to Accel setting forth the employees of the Target Corporations
that will continue to be employed by Lyndon or one of the Target Corporations
following the Closing. Accel shall either terminate or employ any employees of
the Target Corporations that are not included on the aforementioned list at
Accel's sole discretion and expense.
4.14 Credit Life System. Accel shall diligently work towards the
completion of the Year 2000 work and other clean-up work on the Credit Life
System (the "Credit Life Work") prior to Closing, and shall continue the Credit
Life Work until it is completed, at Accel's expense, after the Closing. Such
work shall be completed prior to May 1, 1998. Any costs incurred by Lyndon in
causing such work to be completed after May 1, 1998 shall be reimbursed by
Accel within fifteen (15) days of Lyndon's invoice therefor, and shall not be
limited by the "indemnity basket" described in Section 11.1.
ARTICLE 5
COVENANTS OF LYNDON
Lyndon hereby covenants and agrees that:
5.1 Confidentiality. Lyndon shall, and shall cause its employees,
officers, directors, accountants, attorneys, agents and affiliates to: (i)
treat as confidential all information provided by Accel or any Target
Corporation to Lyndon or its agents with respect to Accel or any Target
Corporation, including, without limitation, information concerning their
respective assets, properties, liabilities, employees, customers, agents,
businesses, contracts, agreements, results of operations, conditions (financial
or otherwise), prospects, business plans, etc., which are not otherwise
publicly available (the "Confidential Information"); (ii) not disclose any
Confidential Information to any Person or use, permit or assist any Person in
using any Confidential Information, except to the extent necessary as a benefit
to Lyndon in the performance of its due diligence in connection with the
transactions contemplated by this Agreement, and not for any other purpose; and
(iii) in the event that the transactions contemplated hereby are not
consummated for any reason whatsoever, promptly deliver to Accel all
Confidential Information and promptly deliver or destroy all analyses,
compilations, studies or other documents or records prepared by Lyndon or its
employees, officers, directors, accountants, attorneys, agents and affiliates
using Confidential Information without retaining any copies thereof. Upon
destruction of the aforementioned analyses, compilations, studies or other
documents, Lyndon agrees to give Accel a written certification signed by its
President to the effect that to the best of his knowledge such destruction has
been accomplished and is complete. It is understood and agreed that money
damages will not be a sufficient remedy for any breach of this Section 5.1 and
that Accel shall be entitled to specific performance and injunctive or other
equitable relief as a remedy for any breach of this Section 5.1. In the event
of litigation relating to this Section 5.1, if a court of competent
jurisdiction determines in a final nonappealable order that Lyndon has breached
this Section 5.1, then Lyndon shall be liable and pay to Accel the reasonable
legal fees Accel has incurred in connection with such litigation, including any
appeal therefrom, and otherwise, Accel shall be liable and pay to Lyndon the
reasonable legal fees Lyndon has incurred in defending any such litigation,
including any appeal therefrom.
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5.2 Regulatory Matters. Lyndon, with Accel's cooperation will promptly
prepare and file all applications, notices, consents and other documents
necessary or advisable to obtain all state regulatory approvals, promptly file
all supplements or amendments thereto, and use all reasonable efforts to obtain
such regulatory approvals, as promptly as practicable, necessary to consummate
the transactions contemplated hereby.
5.3 Cause Conditions to be Satisfied. Lyndon will use its reasonable best
efforts to cause all of the conditions described in Section 7.2 of the
Agreement to be satisfied.
ARTICLE 6
COVENANTS OF ACCEL AND LYNDON
Accel hereby covenants and agrees to use reasonable efforts fulfill the
following covenants, and shall cause ALIC, Dublin and ANSC to fulfill the
following in covenants, and Lyndon hereby covenants and agrees to use
reasonable efforts fulfill the following covenants:
6.1 Necessary Assurances. To take, or cause to be taken, all actions and
to do, or cause to be done, all things reasonably necessary or desirable under
applicable laws and regulations to consummate the transactions contemplated by
this Agreement expeditiously, including executing and delivering such further
documents, certificates, applications and agreements as may be reasonably
necessary or desirable.
6.2 Filings and Consents. To cooperate (i) with respect to any filing
with any governmental body, agency, official or authority required in
connection with this Agreement or the consummation of the transactions
contemplated hereby and (ii) with respect to any actions, consents, approvals
or waivers required to be obtained from parties to any material contracts in
connection with this Agreement or the consummation of the transactions
contemplated hereby.
6.3 Employee Benefit Plans. As of the Closing Date, Accel and Lyndon
each agree to cooperate in causing such actions to be taken as would result in
ALIC, Dublin, and ANSC ceasing to be participating employers as of the Closing
Date in Accel's and its ERISA Affiliates' Employee Benefit Plans in accordance
with the requirements of ERISA. Accel and Lyndon further agree that, except
for ALIC, Dublin and ANSC post-Closing Date contributions (and liabilities
therefor) to such Employee Benefit Plans for the time periods preceding the
Closing Date, neither ALIC, Dublin, nor ANSC shall thereafter be responsible
for making any contributions to, or have any other liability with respect to,
such Employee Benefit Plans. As used herein, the term "Employee Benefit Plan"
means any (a) deferred compensation or retirement bonus, stock option or
similar plan or arrangement, (b) defined contribution retirement plan or
arrangement which is an Employee Pension Benefit Plan, (c) defined benefit
retirement plan or arrangement which is an Employee Pension Benefit Plan, (d)
any Multiemployer Plan, or (e) Employee Welfare Plan; "ERISA Affiliate" means
each entity which is treated as a single employer with a party for purposes of
Code "414; "Employee Pension Benefit Plan" has the meaning set forth in ERISA
"3(2), but excludes a Multiemployer Plan; "Employee Welfare Benefit Plan" has
the meaning set forth in ERISA "3(1); and "Multiemployer Plan" has the meaning
set forth in ERISA "3(37).
ARTICLE 7
CONDITIONS TO CLOSING
7.1 Conditions to Obligations of Lyndon. The obligations of Lyndon
hereunder are conditioned upon the following:
(a) All warranties and representations of Accel contained in this
Agreement or in any Schedule or instrument delivered hereunder or otherwise
made in connection with the transactions contemplated
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hereby shall be true and correct in all material respects, on and as of the
Closing Date, with the same force and effect as if made on and as of the
Closing Date.
(b) Accel shall have performed and complied in all material respects with
all of the covenants and agreements required by or pursuant to this Agreement,
and any Schedule or instrument delivered hereunder, to be performed or complied
with by Accel on or prior to the Closing Date.
(c) No suit, action, investigation or proceeding before or by any federal
or state court or governmental or regulatory authority shall have been
commenced, and no suit, action or proceeding by any governmental or regulatory
authority shall have been threatened, against Accel or Lyndon seeking to
restrain, prevent or modify the transactions contemplated hereby or seeking
material damages in connection with any of such transactions and no order of
any court or administrative agency to restrain, prohibit or nullify the
consummation of the transactions contemplated herein shall be outstanding as of
the Closing Date.
(d) All governmental authorities (including, without limitation, the Ohio
Department of Insurance) having jurisdiction, to the extent required by law,
shall have consented to or approved the consummation of the transactions
contemplated by this Agreement.
(e) All documents delivered and action taken pursuant hereto shall be
reasonably satisfactory in form and substance to Lyndon and its counsel.
(f) The ALIC, Dublin and ANSC September 30, 1997 GAAP Financial Statements
and the ALIC September 30, 1997 SAP Financial Statements shall have been
delivered to Lyndon at least fifteen days prior to the Closing Date, and in no
event later than November 30, 1997.
(g) The Board of Directors of Accel, ALIC, Dublin and ANSC shall have
approved the transactions contemplated by this Agreement and the stockholders
of Accel shall have approved the sale of the Target Shares and ANIC assets
contemplated by this Agreement and the Asset Purchase Agreement.
(h) [Not Used].
(i) All of the independent agents of each of ALIC and ANSC shall have
agreed to maintain their relationships with each applicable entity following
the Closing Date unless notice has been given by Accel to Lyndon of any
indication otherwise. Lyndon acknowledges that independent agencies are
routinely added and terminated in the regular course of each of ALIC's and
ANSC's businesses.
(j) Lyndon shall have been satisfied with the results of its due diligence
review of Dublin and of the assets to be purchased from ANIC, and that the
September 30, 1997 GAAP Financial Statements of each of ALIC, Dublin and ANSC
shall indicate no material adverse change in the results of operations or
financial condition of such companies taken as a whole from the June 30, 1997
unaudited financial statements previously provided to Lyndon.
(k) Each of Accel, ALIC, Dublin and ANSC shall have made any and all
filings required by applicable law or regulation to be made with any and all
governmental authorities and state insurance departments in connection with the
consummation of the transactions contemplated herein, including the
notification required by the HSR Act and any requested or supplementary filings
thereto in such manner and at such places as are specified in the HSR Act and
the applicable rules and regulations thereunder, and any other notifications
to, or filings with, regulatory authorities.
(l) Accel and the Target Corporations shall have conveyed to Lyndon all
the right, title and interest they each possess to use the servicemarks
"Costguard" and "Loanguard" pursuant to two Assignments of Federal Mark
Registration substantially in forms of Exhibit B hereto and have licensed to
Lyndon the right to use
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the servicemarks ACCELERATION, the Inverted "V" Design, and ACCELERATION and
the Inverted "V" Design heretofore used in connection with the businesses of
each of the Target Corporations to Lyndon pursuant to a License Agreement,
substantially in the form of Exhibit C hereto.
(m) Accel shall have made a timely election under Section 338(h)(10) of
the Code, if required to be made prior to Closing.
(n) [Not Used]
(o) The Target Corporations' Combined GAAP Equity shall be not less than
Thirty One Million Six Hundred Thousand Dollars ($31,600,000) as of December
31, 1997 in accordance with the provisions of Section 4.11 hereof.
(p) Any and all intercompany service agreements and tax-sharing agreements
between any of Accel, ALIC, Dublin, and ANSC shall have been terminated.
(q) The Lincoln National Treaty for insurance policies with effective
dates of December 31, 1995 and prior, shall have been terminated.
(r) The ALIC Articles of Incorporation and Code of Regulations shall have
been amended to eliminate the provisions requiring director share ownership and
Ohio residential requirements.
(s) Accel shall have entered into a Systems Use Agreement with the Target
Corporations pursuant to which the Target Corporations shall be entitled to
utilize the IBM AS 400 system of Accel as the Target Corporations' mainframe
computer and programming support, at commercially reasonable rates to be agreed
upon by Lyndon and Accel.
(t) The Light Pen system, including all relevant documentation, shall have
been delivered to Lyndon or one of the Target Corporations, as directed by
Lyndon.
(u) The Lincoln National Reinsurance Agreement with ALIC dated January 1,
1996, reinsuring policies with effective dates of January 1, 1996 and
thereafter, shall not have been terminated.
(v) Accel shall have delivered to Lyndon the Normalized Line of Business
Results Report for the nine months ended September 30, 1997, prepared on a
basis consistent with the Normalized Line of Business Results Report previously
delivered to Lyndon, which shall show no material adverse change from the
results reported as of June 30, 1997.
(w) Accel shall have caused ALIC to enter into a lease for the premises it
currently leases on terms comparable to its current lease for the remaining
term of the current lease, in form and substance reasonably acceptable to
Lyndon and its counsel.
(x) [Not Used].
(y) Any ALIC and ANSC obligations to indemnify their respective officers
shall have been expressly assumed by Accel on or before the Closing Date for
actions occurring prior to the Closing Date.
(z) Accel shall have agreed to provide continued cooperation after Closing
on any litigation matters relating to any of the Target Corporations.
(aa) Lyndon shall have received at the Closing the opinion of Nicholas Z.
Alexander, Esq., Senior Vice President and General Counsel for Accel, dated as
of the Closing Date, in form and substance
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reasonably satisfactory to counsel for Lyndon, to the effect that (a) ALIC is a
corporation duly organized, validly existing and in good standing under the
laws of Ohio and is duly qualified to do business and is in good standing in
each jurisdiction in which the ownership of its properties or the conduct of
its business makes such qualification necessary, Dublin is a corporation duly
organized, validly existing and in good standing under the laws of the Turks
and Caicos Islands and is duly qualified to do business and is in good standing
in each jurisdiction in which the ownership of its properties or the conduct of
its business makes such qualification necessary, and ANSC is a corporation duly
organized, validly existing and in good standing under the laws of Ohio and is
duly qualified to do business and is in good standing in each jurisdiction in
which the ownership of its properties or the conduct of its business makes such
qualification necessary; (b) the authorized capital stock of ALIC consists of
500 shares, of which 400 are issued and outstanding, the authorized capital
stock of Dublin consists of 5,000 shares, of which 5,000 are issued and
outstanding and the authorized capital of ANSC consists of 500 shares, of which
5 are authorized and outstanding; (c) all of the issued and outstanding shares
of capital stock of ALIC, Dublin and ANSC are owned by Accel; (d) Accel has all
the requisite corporate power and authority to enter into and perform this
Agreement; (e) this Agreement has been duly authorized, executed and delivered
by Accel, and is a valid and binding obligation of Accel, and each document
attached hereto as an Exhibit has been duly authorized, executed and delivered
by Accel or each of the Target Corporations, as applicable, and each such
agreement is a valid and binding obligation of Accel, subject to general
principles of equity and applicable bankruptcy, reorganization, insolvency,
moratorium or similar laws affecting the enforcement of creditors rights
generally from time to time in effect; (f) the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby do not
and will not as of the Closing Date (i) violate any judicial or administrative
order, judgement or decree entered against Accel or any of the Target
Corporations, (ii) conflict with any judgment or decree entered against Accel
or any of the Target Corporations, or (iii) conflict with, result in a breach
of, constitute a default under or accelerate or permit the acceleration of the
performance required by any material mortgage, indenture, loan agreement, other
debt instrument or any other material instrument or agreement known to such
counsel to which any of Accel or any of the Target Corporations is a party or
to which any of its assets is subject; (g) to such counsel's knowledge there
are no pending legal proceedings to which any of Accel or any of the Target
Corporations is a party or of which property of Accel or any of the Target
Corporations is subject and, insofar as is known to such counsel, no such
proceeding is threatened. In rendering such opinion, such counsel may
reasonably rely on certificates of officers of Accel opinions of other counsel
and such other evidence as he may deem necessary or desirable, provided that
counsel for Accel shall state that such certificates and opinions are
satisfactory in form and substance for such purpose.
(bb) The HSR Act waiting period shall have expired or been terminated.
(cc) The transactions contemplated by the Asset Purchase Agreement shall
have closed concurrently with the closing of the transactions contemplated by
this Agreement.
7.2 Conditions to Obligations of Accel. The obligations of Accel
hereunder are conditioned upon the following:
(a) All warranties and representations of Lyndon contained in this
Agreement shall be true and correct in all material respects on and as of the
Closing Date with the same force and effect as if made on and as of the Closing
Date.
(b) Lyndon shall have performed and complied with all of the covenants and
agreements required by or pursuant to this Agreement, and any Schedule or
instrument delivered hereunder, to be performed or complied with by Lyndon on
or prior to the Closing Date.
(c) No suit, action, investigation or proceeding before or by any federal
or state court or governmental or regulatory authority shall have been
commenced, and no suit, action or proceeding by any governmental or regulatory
authority shall have been threatened, against Accel or Lyndon seeking to
restrain, prevent or modify the transactions contemplated hereby or seeking
material damages in connection with any of such
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transactions and no order of any court or administrative agency to restrain,
prohibit, or nullify the consummation of the transactions contemplated herein
shall be outstanding as of the Closing Date.
(d) All governmental authorities (including without limitation the
Missouri Department of Insurance and the Ohio Department of Insurance) having
jurisdiction, to the extent required by law, shall have consented to or
approved the consummation of the transactions contemplated by this Agreement
and by the Asset Purchase Agreement.
(e) All documents delivered and action taken pursuant hereto and pursuant
to the Asset Purchase Agreement shall be reasonably satisfactory in form and
substance to Accel, and its counsel.
(f) Accel shall have received at the Closing the opinion of Epstein Becker
& Green, P.C., counsel to Lyndon, dated as of the Closing Date, in form and
substance reasonably satisfactory to counsel for Accel, to the effect that (a)
Lyndon is duly authorized to enter into and perform this Agreement and (b) this
Agreement has been duly authorized, executed and delivered by Lyndon, and is a
valid and binding obligation of Lyndon, and each agreement attached hereto as
an Exhibit has been duly authorized, executed and delivered by Lyndon, and each
such agreement is a valid and binding obligation of Lyndon enforceable against
Lyndon in accordance with its terms, subject to general principles of equity
and applicable bankruptcy, reorganization, insolvency, moratorium or similar
laws affecting the enforcement of the rights of creditors of insurance
companies or creditors rights generally from time to time in effect.
(g) The HSR Act waiting period shall have expired or been terminated.
(h) The transactions contemplated by the Asset Purchase Agreement shall
have closed concurrently with the closing of the transactions contemplated by
this Agreement.
(i) Lyndon shall have made any and all filings required by applicable law
to be made with any and all governmental authorities and state insurance
departments in connection with the consummation of the transactions
contemplated herein, including the notification required by the HSR Act and any
requested or supplementary filings thereto in such manner and at such places as
are specified in the HSR Act and the applicable rules and regulations
thereunder, and any other notifications to, or filings with, regulatory
authorities.
ARTICLE 8
CLOSING
8.1 Closing Date. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place effective as of December 31, 1997
(the "Closing Date") at the offices of Epstein Becker & Green, P.C., 250 Park
Avenue, New York, New York 10177-0077. The actual Closing shall take place
within five (5) business days after the satisfaction or waiver of the last
condition to Closing, unless otherwise agreed by the parties, and in no event
later than March 31, 1998. If Closing shall not have occurred by March 31,
1998, then either party may terminate this Agreement by written notice to the
other, without liability or penalty.
8.2 Deliveries by Accel. At the Closing, Accel shall deliver to Lyndon
the following:
(a) Certificates representing the Target Shares, duly endorsed for
transfer to Lyndon or its designee.
(b) The minute book, stock book and stock ledger of each of ALIC, Dublin
and ANSC.
(c) A copy of the Articles of Incorporation of each of ALIC and ANSC
certified as of a date not more than fourteen (14) days prior to the Date of
Closing by the Secretary of State of the State of Ohio and of
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the Articles of Incorporation of Dublin certified by the appropriate government
official of the Turks and Caicos Islands as of a date not more than thirty (30)
days prior to the Closing Date.
(d) Good standing certificates, (i) dated as of a date not more than
fourteen (14) days prior to the Closing Date, as to the corporate existence and
good standing of ALIC and ANSC certified by the Secretary of State of the State
of Ohio for ALIC and ANSC; (ii) dated not more than thirty (30) days prior to
the Closing Date certified by the appropriate government official of the Turks
and Caicos Islands for Dublin; (iii) as to each of ALIC, Dublin and ANSC's
authorization to conduct business as a foreign corporation in good standing
certified by the appropriate authorities of each applicable jurisdiction if
any; and (iv) as to ALIC, the existing insurance licenses or certificates of
authority issued by the department of insurance of each jurisdiction in which
ALIC is authorized to transact business as an insurance company.
(e) The written resignations of the directors and officers of each of
ALIC, Dublin and ANSC as requested by Lyndon.
(f) The License Agreement and Servicemark Assignments referred to in
Section 7.1(l), executed by Accel.
(g) Systems Use Agreement executed by Accel and the Target Corporations.
(h) The opinion of Nicholas Z. Alexander, General Counsel of Accel.
8.3 Deliveries by Lyndon. At the Closing, Lyndon shall deliver to Accel the
following:
(a) The Purchase Price by wire transfer of immediately available funds.
(b) The opinion of Epstein Becker & Green, P.C., counsel to Lyndon.
(c) A true and complete copy, certified by the Secretary or an Assistant
Secretary of Lyndon, of the resolutions duly and validly adopted by the Board
of Directors of Lyndon evidencing its authorization of the execution and
delivery of this Agreement and the other agreements to be executed by Lyndon as
contemplated hereby and the consummation of the transactions contemplated
hereby.
(d) A certificate of the Secretary or an Assistant Secretary of Lyndon
certifying the names and signatures of the officers of Lyndon authorized to
sign this Agreement and the other documents to be delivered hereunder.
(e) The License Agreement and Servicemark Assignments referred to in
Section 7.1(l), executed by Lyndon.
ARTICLE 9
CERTAIN COVENANTS
9.1 Cooperation and Records Retention. Lyndon shall cause each of ALIC,
Dublin and ANSC to retain, following the Closing Date and until the applicable
statutes of limitations (including any extensions) have expired, copies of all
Returns, supporting work schedules, and other records or information that may
be relevant to such Returns for all tax periods or portions thereof ending
before or including the Closing Date hereof and shall not destroy or otherwise
dispose of any such records without first providing Accel with a reasonable
opportunity to review and copy the same. In the event of any audit or
examination by the Internal Revenue Service or other taxing authority or any
judicial or administrative proceedings with respect to the tax liability of
each of ALIC,
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Dublin and ANSC for a period that includes the date hereof or any prior date,
Lyndon or Accel, as the case may be, shall notify the other promptly thereof
and each shall provide the other with such assistance as may reasonably be
requested, any records or other information that may be relevant thereto and
copies of any final determination thereof.
9.2 Financial Accounting Matters. Accel shall provide Lyndon with access
to Accel's general ledger and accounts payable system for a reasonable
transition period, not to exceed nine months, following the Closing for the
purpose of allowing Lyndon to maintain the Target Companies' financial records
in an orderly fashion. Lyndon shall provide Accel and its auditors with access
to all books and records of the Target Companies for the purpose of allowing
Accel to prepare the Combined Audited GAAP Financial Statements and the Closing
Date Balance Sheet.
9.3 Non-Competition. For a period of three years from the Closing Date,
Accel and its subsidiaries shall not, and shall cause each of its controlled
affiliates not to, directly or indirectly (i) engage in activities or
businesses which are substantially in competition with the current business of
the Target Corporations; or (ii) perform any action, activity, or course of
conduct which is substantially detrimental to the business or business
reputation of the Target Corporations, including (A) soliciting, recruiting or
hiring any employees of any of the Target Corporations or persons who have
worked for any of the Target Corporations (except as contemplated by this
Agreement) and (B) soliciting or encouraging any employee of any of the Target
Corporations to leave the employment of any of the Target Corporations;
provided, however, that nothing herein shall prohibit Accel (or any subsidiary
or affiliate) from owning not more than 1% of the stock or other securities of
any such corporation, which securities are publicly traded over-the-counter or
on a national securities exchange, provided neither Accel nor any subsidiary or
affiliate directly or indirectly renders any services or engage in any
activities of any kind for or on behalf of the issuer of such securities or any
affiliate thereof. Lyndon may proceed against Accel and/or any such subsidiary
or affiliate for breach of this covenant by injunction in addition to any other
claim for relief Lyndon may have in law or in equity.
9.4 Use of Former Employees. Lyndon shall make employees of the Target
Corporations available to assist Accel by providing historical information and
data and other information required by Accel to complete financial statements
and other reports and to perform other accounting and reporting functions.
9.5 Delivery of Year-End Financial Statements. Lyndon shall cause the
employees of the Target Corporations to prepare the financial statements of
ALIC, Dublin and ANSC on a GAAP basis for the year ended December 31, 1997 and
the SAP financial statements for ALIC for the year ended December 31, 1997, at
its expense, and to make all the SAP financial statements available for Accel's
review on or before February 18, 1997 and the GAAP financial statements on or
before March 4, 1997.
ARTICLE 10
SURVIVAL
10.1 Survival. All representations and warranties made in this Agreement
shall survive the delivery of this Agreement until December 31, 1999, except,
however, that (i) claims with respect to Taxes may be made by Lyndon until
sixty (60) days following the expiration of the applicable statute of
limitations and (ii) claims based on fraud, willful misrepresentation or with
respect to the representations and warranties set forth in Sections 2.2 and
2.29 may, in each case, be asserted at any time within one year after Lyndon
learns of such fraud, willful misrepresentation or breach.
ARTICLE 11
INDEMNIFICATION
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11.1 Indemnification.
(a) Indemnification by Accel.
(i) Accel hereby agrees to indemnify and hold harmless Lyndon from and
against any and all losses, liabilities, damages, obligations, costs and
expenses, including, without limitation, amounts paid in settlement and
reasonable costs and expenses of investigating, preparing to defend and
defending any claim, action, suit, proceeding, inquiry or investigation in
respect thereof (such losses, liabilities, damages, obligations, costs and
expenses as hereinabove set forth, collectively, "Damages") in excess of
$100,000 incurred by Lyndon resulting from, relating to, or arising out of the
inaccuracy of any representation or warranty herein by ALIC, Dublin, ANSC or
Accel or the breach of any covenant herein by ALIC, Dublin, ANSC or Accel;
provided, however, that notwithstanding any provision of this Agreement to the
contrary, the aggregate indemnification obligations and liability of Accel and
ANIC under this Section 11.1(a)(i) and under Section 7.1 of the Asset Purchase
Agreement shall in no event exceed $8 million, and Accel shall have no
obligation whatsoever to further indemnify Lyndon, its affiliates or any other
Person after and in the event that Accel has paid a total of $8 million to
Lyndon or any other Person pursuant to this Section 11.1(a)(i) and/or Section
7.1 of the Asset Purchase Agreement. There shall be no limitation on
indemnification for (i) tax liabilities set forth in Section 11.1(a)(ii), (ii)
breach of the warranties of title set forth in Sections 2.2 and 2.29, or (iii)
actual fraud by Accel or ANIC.
(ii) Accel shall indemnify Lyndon and its affiliates (including the Target
Corporations) and each of their respective officers, directors, employees,
stockholders, agents and representatives and hold them harmless from all
liability (except as reflected on the Closing Date Balance Sheet) (i) for Taxes
of the Target Corporations for the taxable periods ending on or before the
Closing Date and the portion ending on the Closing Date of any taxable period
that includes (but does not end on) such day (the "Pre-Closing Tax Period"),
(ii) for Taxes of Accel or any other corporation (as a result of Treasury
Regulation " 1.1502-6(a) or otherwise) which is or has been affiliated with
Accel, (iii) for Taxes resulting from the Section 338(g) and 338(h)(10)
elections (or any comparable elections under state or local Taxes) contemplated
by Section 12.1 of this Agreement, (iv) for Taxes with respect to any
pre-Closing period resulting from the Target Corporations ceasing to be
included in the consolidated Federal income Tax return filed by Accel
including, without limitation, any Taxes attributable to the restoration of a
"deferred intercompany transaction" within the meaning of Treasury Regulations
Section 1.1502.13(a)(2) and the recognition of excess loss accounts, (v) for
Taxes imposed on the Target Corporations or any transaction contemplated by
this Agreement to be performed by Accel or the Target Corporations on or prior
to the Closing Date, including but not limited to the Section 338(h)(10)
election and the Special Distribution, and (vi) for reasonable legal fees and
expenses for any item attributable to any item in clause (i), (ii), (iii), (iv)
or (v) above. Notwithstanding the foregoing, Accel shall not indemnify and
hold harmless Lyndon and its affiliates, and each of their respective officers,
directors, employees and agents, from any liability for Taxes attributable to
any action taken after the Closing by Lyndon, any of its affiliates, and each
of their respective officers, directors, employees and agents, (other than any
such action expressly required by applicable law or by this Agreement) (a
"Lyndon Tax Act") or attributable to a breach by Lyndon of its obligations
under this Agreement.
Lyndon shall, and shall cause the Target Corporations to, indemnify Accel
and its affiliates and each of their respective officers, directors, employees,
stockholders, agents and representatives and hold them harmless from (i) all
liability for Taxes of the Target Corporations for any taxable period ending
after the Closing Date (except to the extent such taxable period began before
the Closing Date, in which case Lyndon's indemnity will cover only that portion
of any such Taxes that are not for the Pre-Closing Tax Period), (ii) all
liability for Taxes attributable to a Lyndon Tax Act or to a breach by Lyndon
of its obligations under this Agreement, and (iii) all liability for reasonable
legal fees and expenses attributable to any item in clause (i) or (ii) above.
In the case of any taxable period that includes (but does not end on) the
Closing Date (a "Straddle Period"):
(i) real, personal and intangible property Taxes ("Property
Taxes") of the Target Corporations for the Pre-Closing Tax Period
shall be equal to the amount of such property Taxes
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for the entire Straddle Period multiplied by a fraction, the
numerator of which is the number of days during the Straddle Period
that are in the Pre-Closing Tax Period and the denominator of which
is the number of days in the Straddle Period; and
(ii) the Taxes of the Target Corporations (other than Property
Taxes) for the Pre-Closing Tax Period shall be computed as if such
taxable period ended as of the close of business on the Closing
Date.
(b) Indemnification by Lyndon. Lyndon hereby agrees to indemnify and hold
harmless Accel from and against any and all Damages including, without
limitation, amounts paid in settlement and reasonable costs and expenses of
investigating, preparing to defend and defending any claim, action, suit,
proceeding, inquiry or investigation in respect thereof incurred by Accel
resulting from, relating to, or arising out of the inaccuracy of any
representation or warranty herein by Lyndon or the breach of any covenant
contained herein by Lyndon; provided, however, that the aggregate
indemnification obligations and liability of Lyndon to Accel for Damages shall
in no event exceed $8 million.
(c) Procedure. If any action, suit, proceeding or claim shall be brought
against the party to be indemnified by any third party, which action, suit,
proceeding or claim, if determined adversely to the interest of the party to be
indemnified and which would entitle the party to be indemnified to indemnity
pursuant to this Section 11.1(a)(i), the party to be indemnified shall promptly
notify the indemnifying party of the same in writing and, if the indemnifying
party so elects, the indemnifying party shall assume the defense thereof,
including the employment of counsel satisfactory to the party to be indemnified
and the payment of all reasonable costs and expenses in respect thereof. The
party to be indemnified shall have the right to employ counsel separate from
any counsel employed by the indemnifying party in any action, suit, proceeding
or claim and to control (or, if the party to be indemnified has elected to
allow the indemnifying party to assume the defense thereof, participate in) the
defense thereof and the fees and expenses of such counsel employed by the party
to be indemnified shall be at the expense of the party to be indemnified. The
indemnifying party shall not be liable for any settlement of any such action,
suit, proceeding or claim effected without his or its written consent (which
shall not be unreasonably withheld), but if settled with the written consent of
the indemnifying party, or if there shall be a final judgment for plaintiff in
any such action, the indemnifying party agrees to indemnify and hold harmless
the party to be indemnified from and against any loss, liability, obligation,
damage, cost or expense by reason of such settlement or judgment.
(d) Procedures Relating to Indemnification of Tax Claims. If a claim
shall be made by any taxing authority, which, if successful, might result in an
indemnity payment to Lyndon, one of its affiliates or any of their respective
officers, directors, employees, stockholders, agents or representatives
pursuant to Section 11.1(a)(ii), Buyer shall notify Accel in writing of such
claim (a "Tax Claim"). If notice of a Tax Claim is not given to Accel within a
sufficient period of time to allow Accel to effectively contest such Tax Claim,
or in reasonable detail to apprise Accel of the nature of the Tax Claim, Accel
shall not be liable to Lyndon, any of its affiliates or any of their respective
officers, directors employees, stockholders, agents or representatives to the
extent that Accel's position is actually prejudiced as a result thereof.
With respect to any Tax Claim (other than a Tax Claim relating solely to
Taxes of any Target Corporation for a Straddle Period), Accel shall control all
proceedings taken in connection with such Tax Claim (including selection of
counsel) and, without limiting the foregoing, may in its sole discretion pursue
or forego any and all administrative appeals, proceedings hearings and
conferences with any taxing authority with respect thereto, and may, in its
sole discretion, either pay the Tax claimed and sue for a refund where
applicable law permits such refund suits or contest the Tax Claim in any
permissible manner. However, Lyndon can participate in any such Tax Claim at
its own expense. Accel cannot enter any settlement or compromise which affects
the post-closing period without Lyndon's consent, which will not be
unreasonably withheld. Accel and Lyndon shall jointly control all proceedings
taken in connection with any Tax Claim relating solely to Taxes of any Target
Corporation for a Straddle Period.
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In no case shall Lyndon, any of the Target Corporations or any of their
respective officers, directors, employees, stockholders, agents or
representatives settle or otherwise compromise any Tax Claim without Accel's
prior written consent, which will not be unreasonably withheld. Neither party
shall settle a Tax Claim relating solely to Taxes of any Target Corporations
for a Straddle Period without the other party's prior written consent.
11.2 Access. In the event that Lyndon delivers to Accel notice of a claim
for indemnification, Lyndon shall provide reasonable access to the books and
records of ALIC, Dublin and ANSC (and of Lyndon in the event Lyndon has
possession of the requisite books and records) with respect to any matters
giving rise to such claim.
ARTICLE 12
TAX MATTERS
12.1 Tax Election. Lyndon shall (i) timely make an election under Section
338(g) of the Code (and any comparable election under state or local Tax law)
with respect to each of the Target Corporations, (ii) join Accel in timely
making an election under Section 338(h)(10) of the Code (and any comparable
election under state or local Tax law) with respect thereto and (iii) cooperate
with Accel in the completion and timely filing of such elections in accordance
with the provisions of Temporary Regulation " 1.338(h)(10) (or any comparable
provisions of state or local Tax law) or any successor provision. Such
cooperation shall include, but not be limited to (a) the determination of the
fair market value of the assets of the Target Corporations, and the calculation
of the adjusted gross-up basis, within the meaning of Treasury Regulation
Section 1.338(b)-1; (b) the allocation of the deemed purchase price among the
acquired assets in accordance with all applicable rules and regulations under
Section 338 of the Code; and (c) the preparation and timely filing of all tax
returns, including all forms or schedules necessary or appropriate to the
Section 338(h)(10) election. No later than three months following the Closing
Date, Lyndon shall prepare and deliver to Accel a schedule (the "Price
Allocation Schedule") allocating the modified ADSP (as such term is defined in
Treasury Regulations Section 1.338(h)(10)-1) among the assets of the Target
Corporations in accordance with Treasury Regulations promulgated under Section
338(h)(10). Any objection by Accel to the Price Allocation Schedule prepared
by Lyndon shall be raised within 60 business days after receipt by Accel of the
Price Allocation Schedule. If Lyndon and Accel are unable to resolve any
differences within 60 business days thereafter, such dispute shall be resolved
by Ernst & Young LLP and KPMG Peat Marwick LLP. If such accounting firms are
unable to resolve any differences within 30 days thereafter, such dispute shall
be resolved by another national accounting firm selected by Ernst & Young LLP
and KPMG Peat Marwick LLP which has not performed any services for or received
any revenues from Lyndon, Accel or their respective affiliates within the two
years prior to the Closing Date or thereafter. If necessary, a revised Price
Allocation Schedule consistent with the determination made by Ernst & Young LLP
and KPMG Peat Marwick LLP or by the other national accounting firm selected by
them, if any, shall be prepared by Lyndon as soon as possible thereafter and
shall, subject to Accel's reasonable approval thereof, be binding on both
parties. In all events, the Price Allocation Schedule shall be finally
prepared and agreed upon prior to eight months from the Closing Date. Lyndon
shall pay the costs, fees and expenses of Ernst & Young LLP. Accel shall pay
the costs, fees and expenses of KPMG Peat Marwick LLP, and Lyndon and Accel
shall each pay one-half of the costs, fees and expenses of any third accounting
firm selected by such two accounting firms pursuant to this Section 12.1. The
Price Allocation Schedule shall be binding (except to the extent items
reflected thereon are adjusted pursuant to an examination by the Internal
Revenue Service) on the parties hereto, and Accel and Lyndon agree to act in
accordance with such Schedule in the preparation, filing and audit of any Tax
Return.
12.2 Preparation of Returns. For any taxable period of any of the Target
Corporations that includes (but does not end on) the Closing Date, Lyndon shall
timely prepare and file with the appropriate authorities all Returns required
to be filed and shall pay all Taxes due with respect to such Returns, provided
that Accel shall reimburse Lyndon (in accordance with the procedures set forth
in Section 11.1(a)(ii)) for any amount owed by Accel pursuant to Section
11.1(a)(ii) with respect to the taxable periods covered by such Returns. For
any taxable period of any of the Target Corporations that ends on or before the
Closing Date (including the final return that reflects
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the 338(h)(10) election), Accel shall timely prepare and file with the
appropriate authorities all Returns required to be filed and shall pay all
Taxes due with respect to such Returns. If an Accel Return is required to be
filed by a Target Corporation, Accel shall deliver such return to Lyndon within
10 days of its due date and Lyndon shall cause such Accel Return to be timely
filed; provided, however, that Lyndon shall not assume any liability with
respect to the content of any such Accel Return. Lyndon and Accel agree to
cause the Target Corporations to file all Returns for the period including the
Closing Date on the basis that the relevant taxable period ended as of the
close of business on the Closing Date, unless the relevant taxing authority
will not accept a return, report or form filed on that basis.
12.3 Cooperation. Accel and each of the Target Corporations and Lyndon
shall reasonably cooperate, and shall cause their respective affiliates,
officers, employees, agents, auditors and representatives reasonably to
cooperate, in preparing and filing all Returns relating to Taxes, including
maintaining and making available to each other all records necessary in
connection with Taxes. Lyndon and Accel recognize that Accel and its
affiliates will need access, from time to time, after the Closing Date, to
certain accounting and Tax records and information held by the Target
Corporations to the extent such records and information pertain to events
occurring prior to the Closing Date, and that Lyndon and the Target
Corporations may need access, from time to time, after the Closing Date, to
certain accounting and Tax records and information held by Accel to the extent
such records and information pertain to events occurring prior to the Closing
Date; therefore, Lyndon agrees, and agrees to cause each of the Target
Corporations (i) to use its best efforts to properly retain and maintain such
records until such time as Accel agrees that such retention and maintenance is
no longer necessary, and (ii) to allow Accel and its agents and representatives
(and agents or representatives or any of its affiliates), at times and dates
mutually acceptable to the parties to inspect, review and make copies of such
records as Accel may deem necessary or appropriate from time to time, such
activities to be conducted during normal business hours and at Accel's expense;
and Accel agrees (i) to use its best efforts to properly retain and maintain
its records until such time as Lyndon agrees that such retention and
maintenance is no longer necessary, and (ii) to allow Lyndon, the Target
Corporations and their respective agents and representatives (and agents or
representatives of any of their respective affiliates), at times and dates
mutually acceptable to the parties, to inspect, review and make copies of such
records as Lyndon may deem necessary or appropriate from time to time, such
activities to be conducted during normal business hours and at Lyndon's
expense.
12.4 Refunds or Credits. Any refunds or credits of Taxes of any of the
Target Corporations for any taxable period ending on or before the Closing Date
shall be for the account of Accel unless such refunds or credits are reflected
on the Combined Closing Date Balance Sheet. Any refunds or credits of Taxes of
any of the Target Corporations for any taxable period beginning after the
Closing Date shall be for the account of Lyndon. Any refunds or credits of
Taxes of any of the Target Corporations for any Straddle Period shall be
equitably apportioned between Accel and Lyndon. Lyndon shall, if Accel so
requests and at Accel's expense, cause any of the Target Corporations to file
for and obtain any refunds or credits to which Accel is entitled under this
Section 12.4. Lyndon shall permit Accel to control the prosecution of any such
refund claim and, where deemed appropriate by Accel, shall cause the each of
the Target Corporations to authorize by appropriate powers of attorney such
persons as Accel shall designate to represent such Target Corporation with
respect to such refund claim. Lyndon shall cause each of the Target
Corporations to forward to Accel any such credit within 10 days after the
credit is allowed or applied against other Tax liability; provided, however,
that any such amounts payable to Accel shall be (i) net of any future tax cost
to Lyndon or any Target Corporation attributable to the turnaround of a
temporary difference created or changed by the refund claim and such turnaround
occurs in any period which begins after the Closing Date, and (ii) net of any
Tax cost or benefit to Lyndon or such Target Corporation, as the case may be,
attributable to the receipt of such refund and/or the payment of such amounts
to Accel. Accel and Lyndon shall treat any payments under the preceding
sentence that Accel shall receive pursuant to this Section 12.4 as an
adjustment to the Purchase Price, unless a final determination (which shall
include the execution of a Form 870-AD or successor form) with respect to
Lyndon or any of its affiliates causes any such payment not to be treated as an
adjustment to the Purchase Price for United States Federal Income Tax purposes.
Notwithstanding the foregoing, the control of the prosecution of a claim for
refund of Taxes paid pursuant to a deficiency assessed subsequent to the
Closing Date as a result of an audit shall be governed by the provisions of
Section 12.5.
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12.5 Internal Revenue Service Examinations. Accel shall be responsible
for filing any amended, consolidated, combined or unitary Returns for taxable
years ending on or prior to the Closing Date which are required as a result of
examination adjustments made by the Internal Revenue Service or by the
applicable state, local or foreign taxing authorities for such taxable years as
finally determined. For those jurisdictions in which separate Tax returns are
filed by any of the Target Corporations, any required amended returns resulting
from such examination adjustments, as finally determined, shall be prepared by
Accel and furnished to such Target Corporation, as the case may be, for
approval (which approval shall not be unreasonably withheld), signature and
filing at least 30 days prior to the due date for filing such returns.
12.6 Other Taxes. All transfer, documentary, sales, use, registration and
other such Taxes (including all applicable real estate transfer or gains Taxes)
and related fees (including any penalties, interest and additions to Tax)
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by Accel, and Accel and Lyndon shall cooperate in timely
making all filings, returns, reports and forms as may be required to comply
with the provisions of such Tax laws.
12.7 No Extraordinary Transactions. Accel shall deliver to Lyndon at the
Closing a certificate in form and substance satisfactory to Lyndon, duly
executed and acknowledged, certifying any facts that would exempt the
transactions contemplated hereby from withholding pursuant to the provisions of
the Foreign Investment in Real Property Tax Act.
12.8 Tax Conduct; Sharing Agreement. (a) Until the Closing Date, Accel
shall cause each of the Target Corporations to conduct its business in the
ordinary course in substantially the same manner as presently conducted and on
the Closing Date shall not permit any of the Target Corporations to effect any
extraordinary transactions (other than any such transactions expressly required
by applicable law or by this Agreement) that could result in Tax liability to
any of the Target Corporations in excess of Tax liability associated with the
conduct of its business in the ordinary course.
(b) Accel shall cause the provisions of any Tax sharing agreement between
Accel and any of its affiliates (other than the Target Corporations), on the
one hand, and any of the Target Corporations, on the other hand, to be
terminated on or before the Closing Date.
12.9 Tax Reimbursement if Closing Occurs After December 31, 1997.
The parties agree and acknowledge that the actual Closing may not occur on
December 31, 1997, despite the parties' mutual intention to do so. The parties
agree that for all financial purposes, the Closing shall be deemed to have
occurred on December 31, 1997, notwithstanding the actual closing date, and
accordingly, any profit or loss incurred by the Target Companies on or prior to
December 31, 1997 shall remain for the account of Accel (subject to the GAAP
Equity requirements of Section 7.1(o)) and any profit or loss incurred by the
Target Companies after December 31, 1997 shall be for the account of Lyndon.
The parties further agree and acknowledge that the Internal Revenue Service
will only recognize the actual closing date for federal tax purposes, and that
accordingly, either party may be required to pay additional Taxes on income not
actually received by it. The parties agree to reimburse each other for the
amount of any Taxes actually paid by the other party solely as a function of
the timing difference of the deemed Closing Date of December 31, 1997 and the
actual closing date for tax purposes.
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ARTICLE 13
MISCELLANEOUS PROVISIONS
13.1 Amendment and Modification. This Agreement may be amended, modified
and supplemented only by a writing signed by Lyndon and Accel.
13.2 Waiver of Compliance. Any failure of Lyndon or Accel to comply with
any obligation, covenant, agreement or condition herein contained may be
expressly waived, in writing only, by (i) Lyndon in the case of any failure of
Accel or (ii) Accel in the case of any failure of Lyndon. Such waiver shall be
effective only in the specific instance and for the specific purpose for which
made or given.
13.3 Expenses. Accel and Lyndon shall each pay their own respective
expenses incurred in connection with this Agreement or any transaction
contemplated by this Agreement. The foregoing shall not be construed as
limiting any other rights which any party may have as a result of
misrepresentation of or breach by any other party. Accel shall pay all fees
and expenses of KPMG Peat Marwick in connection with their preparation of the
Combined Audited GAAP Financial Statements and the Closing Date Balance Sheet.
Further, if the transactions contemplated hereby shall not close due to an
intentional material breach of any covenant of Accel hereunder which prevents
satisfaction of a closing condition, then Accel shall pay Lyndon the sum of
$650,000 as liquidated damages.
13.4 Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered by hand, or when mailed by certified or
registered mail (return receipt requested), postage prepaid or when delivered
by fax (evidenced by confirmation of successful transmission), as follows:
A. If to Lyndon:
Lyndon Life Insurance Company
645 Maryville Center Drive
St. Louis, Missouri 63141
Fax # (314) 275-5255
Attn: Mr. Roland G. Anderson, President
With a copy to:
Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York 10177
Fax # (212) 661-0989
Attn: Sidney Todres, Esq.
or to such other person or place as Lyndon shall designate by notice in the
manner provided in this Section 13.4;
B. If to Accel:
Accel International Corporation
12603 SW Freeway, Suite 315
P.O. Box 1949
Stafford, Texas 77497-1949
Fax # 281-565-8011
Attn: Thomas H. Friedberg
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With copies to:
Accel International Corporation
475 Metro Place North
Dublin, Ohio 43017
Attn: Nicholas Z. Alexander, Esq.
and
Squire, Sanders & Dempsey LLP
1300 Huntington Center
41 South High Street
Columbus, Ohio 43215
Attn: Fred A. Summer, Esq.
13.5 Assignment. This Agreement shall be binding upon and inure to the
benefit of Lyndon and Accel and their respective successors and assigns, but
neither this Agreement nor any of the rights, interests and obligations
hereunder shall be assigned by Lyndon or Accel prior to Closing without the
prior written consent of the other party.
13.6 Third Parties. This Agreement is not intended to and shall not be
construed to give any Person other than the parties hereto any interest or
rights (including, without limitation, any third party beneficiary rights) with
respect to or in connection with any agreement or provision contained herein or
contemplated hereby.
13.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without regard to principles
of conflicts of laws.
13.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
13.9 Headings. The headings of the sections, schedules and articles of
this Agreement are inserted for the sake of convenience only and shall not
constitute a part hereof.
13.10 Entire Agreement. This Agreement, including the schedules and
exhibits, contains the entire understanding of the parties in respect of the
subject matter contained herein and therein and there are no other terms or
conditions, representations or warranties, written or oral, express or implied,
except as set forth herein.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
LYNDON LIFE INSURANCE COMPANY
By: /s/ Peter H. Foley
------------------------------------
Peter H. Foley, Authorized Signatory
LYNDON INSURANCE GROUP, INC.
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By: /s/ Peter H. Foley
------------------------------------
Peter H. Foley, Authorized Signatory
ACCEL INTERNATIONAL CORPORATION
By: /s/ Thomas H. Friedberg
-------------------------------------
Thomas H. Friedberg, President
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ANNEX II
ASSET PURCHASE AGREEMENT
by and between
LYNDON PROPERTY INSURANCE COMPANY
and
ACCEL INTERNATIONAL CORPORATION
and
ACCELERATION NATIONAL INSURANCE COMPANY
Dated: As of October 20, 1997
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ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (the "Agreement") is made and entered into
as of the 20th day of October, 1997, by and between LYNDON PROPERTY INSURANCE
COMPANY, a Missouri corporation, with offices at 645 Maryville Centre Drive,
St. Louis, Missouri 63141 ("Lyndon") and ACCEL INTERNATIONAL CORPORATION, a
Delaware corporation ("Accel"), with its executive offices at 12603 S.W.
Freeway, Suite 315, P.O. Box 1949, Stafford, Texas 77497-1949, and ACCELERATION
NATIONAL INSURANCE COMPANY ("ANIC"), an Ohio corporation, with offices at 475
Metro Place North, Suite 100, Dublin, Ohio 43017-0701.
R E C I T A L
WHEREAS, Lyndon is desirous of purchasing and ANIC is desirous of selling
certain of ANIC's assets comprising all of ANIC's warranty book of business
upon the terms and conditions hereinafter set forth; and
WHEREAS, contemporaneously with the closing of the transactions
contemplated by this Agreement, Lyndon and ANIC shall enter into two
reinsurance agreements, substantially in the forms attached hereto as Exhibits
A-1 and A-2 (the "Reinsurance Agreements") respecting the transfer of the loss
reserves portfolio and the transfer of unearned premium reserves and new
business losses, respectively; and
WHEREAS, Accel is the owner of all of the issued and outstanding shares of
capital stock of ANIC;
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NOW, THEREFORE, Lyndon, Accel and ANIC hereby agree as follows:
ARTICLE I
ASSETS BEING SOLD
1.1 Assets Being Sold. ANIC hereby agrees to sell, convey, transfer,
assign and deliver to Lyndon or an entity designated by Lyndon and Lyndon
hereby agrees to purchase (or cause its designee to purchase) from ANIC the
following assets comprising ANIC's warranty (extended service contracts) book
of business (collectively, the "Acquired Assets"):
(a) All of ANIC's rights to and interest in the expirations and
renewals on all insurance policies in force as of the close of business
on the closing date as determined under Article IV hereof (the "Closing
Date") issued and insured by ANIC covering extended service contract
warranties, including, but not limited to, automobiles, boats,
motorcycles, and recreational vehicles during the covered periods,
including all rights to complete processing and to bill and/or receive
premiums, commissions or other revenues whether as additional, contingent
or bonus commissions or otherwise with respect thereto (the "Acquired
Policies"), subject to all of the related obligations under the Acquired
Policies other than ANIC's obligations as the issuer and insurer thereof,
but excluding the Fuller-Stolle book of business (and the reserves
related thereto);
(b) all expiration files, customer account records and underwriting,
claims and processing manuals relating to the Acquired Policies;
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(c) all rights, subject to the related obligations, under the
contracts and commitments, whether written or oral, relating to the
Acquired Assets, all of which contracts and commitments are listed on
Schedule 1.1(c);
(d) all rights to and interest in, subject to the related
obligations with respect to, all computer hardware and software listed on
Schedule 1.1(d);
(e) all furniture, fixtures and equipment listed on Schedule 1.1(e);
and
(f) copies of all policy forms, rate filings related to such policy
forms, and all other regulatory filings relating to the Acquired
Policies.
1.2 Assets Excluded from Sale. Only the Acquired Assets as described in
Section 1.1 are being sold and purchased pursuant to this Agreement.
1.3 No Liabilities Assumed. Except to the extent set forth in the
Reinsurance Agreements, Lyndon shall not be liable for any debt, obligation or
liability of ANIC of any kind whatsoever, relating to the Acquired Assets,
whether known or unknown, absolute or contingent, unless expressly assumed by
Lyndon under the Reinsurance Agreements, including, but not limited to:
(a) any local, state or federal income, excise, property, sales,
franchise or payroll tax liability of ANIC incurred prior to the Closing
Date or incurred in respect of events occurring prior to the Closing
Date;
(b) any claims, causes of action or obligations, wherever asserted,
that relate to or are in any way connected with the employment or claimed
employment of any person by ANIC arising from events occurring on or
before the Closing Date,
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or relating to services rendered to or for the benefit of ANIC by any
employee or agent of ANIC through the Closing Date, including without
limitation any attorneys' fees and collection agency fees for in-force or
expired claims or any person otherwise employed or engaged in ANIC's
operation of its warranty book of business;
(c) any severance pay claim by any employee of ANIC arising under
any severance pay plan, agreement or program of ANIC, or otherwise, by
reason of the consummation of the transactions contemplated hereby;
(d) any pension, health, welfare or similar liability to or on
account of employees or former employees of ANIC for any periods of
employment on or prior to the Closing Date; and
(e) any liability for errors or omissions of ANIC prior to the
Closing Date.
1.4 Purchase Price. The purchase price payable by Lyndon in full
consideration for the Acquired Assets shall be Ten Million Three Hundred
Thousand ($10,300,000), payable on the Closing Date by wire transfer or by
certified or official bank check payable to the order of ANIC, as directed by
Accel.
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ARTICLE II
REPRESENTATIONS AND
WARRANTIES OF ACCEL AND ANIC
Accel and ANIC jointly and severally represent and warrant to Lyndon that:
2.1 Organization. ANIC is a corporation duly organized, validly existing
and in good standing under the laws of the State of Ohio with full power and
authority to own its properties and carry on its business as now being
conducted. ANIC is duly qualified to do business as a foreign corporation in
all jurisdictions where the failure to qualify would have a material adverse
effect on any of the Acquired Assets.
2.2 Authorization. The execution and delivery of this Agreement by Accel
and ANIC and the consummation of the transactions contemplated hereby have been
authorized and approved by all requisite corporate action of each of Accel and
ANIC and this Agreement and all instruments being delivered by each of Accel
and ANIC hereunder represent legal, valid and binding obligations of each of
Accel and ANIC enforceable against each of Accel and ANIC in accordance with
their respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
rights of creditors of insurance companies, rights of creditors generally, or
by general principles of equity.
2.3 No Consent. No consent, order, license, approval or authorization or
exemption by, or registration or declaration or filing with, any governmental
authority, bureau or agency, and no consent or approval of any other person,
corporation, partnership, trust, incorporated or unincorporated association,
joint venture, joint stock company, government (or any agency or political
subdivision thereof) or other entity of any kind
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("Person"), is required to be obtained or made in connection with the
performance by Accel or ANIC of this Agreement or the consummation of the
transactions contemplated to be preformed by it hereunder, except for the
approval of the Ohio Department of Insurance.
2.4 Title to Acquired Assets. ANIC has good and marketable title to the
Acquired Assets, free and clear of any adverse claims, mortgages, liens or
other burdens or encumbrances, except the related obligations of ANIC with
respect to the contracts being assigned, and the instruments of transfer to be
executed and delivered by ANIC at Closing will be valid and binding obligations
of ANIC and will be sufficient to transfer to Lyndon all right, title and
interest of ANIC in and to the Acquired Assets.
2.5 No Breach. The consummation of the transactions contemplated by this
Agreement will not (i) contravene any provision of the Articles of
Incorporation or Code of Regulations of ANIC, (ii) violate, conflict with or
result in a material breach or the termination of, or constitute an amendment
to, or otherwise give any Person the right to terminate, or constitute (or with
notice or lapse of time or both would constitute) a default (by way of
substitution, novation or otherwise) under the terms of, any material contract,
mortgage, lease, bond, indenture, agreement, franchise or other instrument or
obligation relating to the Acquired Assets to which ANIC is a party or by which
ANIC or any of the Acquired Assets are bound or affected; (iii) result in the
creation of any lien, mortgage, claim, charge, security interest, encumbrance,
restriction or limitation (collectively, "Liens") upon any of the Acquired
Assets pursuant to the terms of any contract, mortgage, lease, bond, indenture,
agreement, franchise or other instrument or obligation; (iv) violate any
judgment, order, injunction, decree or award of any court, arbitrator,
administrative agency
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or governmental or regulatory body against, or binding upon, ANIC or any of the
Acquired Assets in any material respect; (v) constitute a violation by ANIC of
any statute, law, rule or regulation of any jurisdiction as such statute, law,
rule or regulation relates to the Acquired Policies or to any of the Acquired
Assets in any material respect; or (vi) violate any Permit (as defined in
Section 2.7) in any material respect.
2.6 Compliance with Laws. ANIC is not in violation of any applicable law,
rule or regulation, the violation of which could materially and adversely
affect the Acquired Assets.
2.7 Permits. ANIC has duly obtained and holds in full force and effect
all consents, authorizations, permits, licenses, orders or approvals of, and
has made all declarations and filings with, all federal, state or local
governmental or regulatory bodies that are material or necessary with respect
to ANIC's operation of any of the Acquired Assets (collectively, the
"Permits"); all the Permits were duly obtained and are in full force and
effect; no violations are or have been recorded in respect of any such Permit
and no proceeding is pending or, to the knowledge of Accel or ANIC, threatened
to revoke, deny or limit any such Permit.
2.8 Actions and Proceedings. Except as provided on Schedule 2.8, there
are no claims, actions, suits, arbitrations, proceedings, investigations or
inquiries, whether at law or in equity and whether or not before any court,
private body or group, governmental department, commission, board, agency or
instrumentality (collectively, "Actions"), pending or, to the knowledge of
Accel or ANIC, threatened against, involving or affecting the Acquired Assets
(other than claims arising under the Acquired Policies), whether or not fully
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or partially covered by insurance, or which would give rise to any right of
indemnification by any Person with respect to the Acquired Assets, and there
are no outstanding orders, writs, injunctions, awards, sentences or decrees of
any court, private body or group, governmental department, commission, board,
agency or instrumentality against, involving or affecting the Acquired Assets.
None of the Actions listed on Schedule 2.8, individually or in the aggregate,
will have a material adverse effect with respect to the Acquired Assets, and
there are no circumstances, nor any events which have occurred which Accel or
ANIC believes will result in an Action against or affecting the Acquired
Assets, other than claims filed under the Acquired Policies in the ordinary
course of business.
2.9 Employee Relations. An accurate listing of all of the employees
engaged in the operation of ANIC's warranty book of business, together with
their respective compensation and accrued vacation time, has previously been
delivered by ANIC to Lyndon, all of which employees are employed under oral
contracts terminable at will. ANIC has not at any time during the last five
years had, nor to the knowledge of Accel and ANIC is there now threatened, a
strike, picket, work stoppage, work slowdown, or other material labor dispute,
and Accel and ANIC have no knowledge of the threatened resignation of any
employee engaged in conducting or operating ANIC's warranty book of business.
2.10 No Brokers. Neither Accel nor ANIC has employed any broker or finder
or incurred any liability for any brokerage fees, commissions or finders' fees
in connection with the transactions contemplated hereby for which Lyndon may be
responsible.
2.11 Assets Necessary to Conduct Business. In Accel and ANIC's best
judgment, neither Accel or ANIC has any reason to believe that following
consummation of the
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transactions contemplated by this Agreement and the concurrent consummation of
the transactions contemplated by the Stock Acquisition Agreement of even date
herewith between Lyndon Insurance Group, Inc., Lyndon Life Insurance Company
and Accel (the "Stock Acquisition Agreement"), the Acquired Assets, together
with the assets then owned by the Target Corporations (as defined in the Stock
Acquisition Agreement) will not constitute all material assets and properties
(other than employees) necessary for Lyndon to conduct, consistent with prior
practices, the warranty book of business conducted by ANIC prior to
consummation of this Agreement, and also, all the material assets necessary for
ANIC, Dublin and ANSC to conduct their respective businesses, consistent with
prior practices.
2.12 Policies of Insurance. Accel and ANIC have no reason to believe that
the Acquired Policies will be terminated before their stated expiration dates,
except in the ordinary course, consistent with prior practices, or will not be
renewed in the ordinary course upon their expiration, consistent with prior
practices.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF LYNDON
Lyndon represents and warrants to Accel and ANIC that:
3.1 Organization. Lyndon is a corporation duly organized, validly
existing and in good standing under the laws of the State of Missouri with full
power and authority to own, lease and operate its properties and to carry on
its business as now conducted.
3.2 Authority. The execution and delivery of this Agreement by Lyndon and
the consummation of the transactions contemplated hereby have been authorized
and approved
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by all requisite corporate action and this Agreement and all instruments being
delivered by Lyndon hereunder represent the legal, valid and binding agreements
of Lyndon enforceable against it in accordance with their respect terms.
3.3 No Breach. The authorization, execution, delivery and performance of
this Agreement by Lyndon will not violate any provision of its certificate of
incorporation or by-laws or any agreement to which it is a party.
ARTICLE IV
DELIVERIES
4.1 Closing. The Closing shall take place effective as of December 31,
1997, as long as the Ohio Department of Insurance has approved the transactions
contemplated by this Agreement, at such time and place as shall be agreed upon
between the parties. The Closing shall occur concurrently with, and shall be
conditional upon, the closing of the transactions contemplated by the Stock
Acquisition Agreement.
4.2 Deliveries to Buyer at Closing. At the Closing, ANIC shall deliver to
Lyndon:
(a) A warranty bill of sale conveying, assigning and transferring
to Lyndon the Acquired Assets, executed by ANIC.
(b) A copy of the consent of the Ohio Department of Insurance with
respect to the Reinsurance Agreements or evidence of the expiration
of the applicable deemer period.
(c) An executed copy of each Reinsurance Agreement.
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(d) An officer's certificate executed by the President of Accel and
the Chief Financial Officer of ANIC certifying that the representations
and warranties contained in Article II are true and correct in all
material respects on the Closing Date as if made on such date.
(e) A list of the Acquired Policies on a computer disk containing
the same.
4.3 Deliveries by Lyndon at Closing. At the Closing, Lyndon shall deliver
the following to ANIC:
(a) The sum of $10,300,000 by wire transfer of federal funds or certified
or official bank check payable to the order of ANIC.
(b) An executed copy of each Reinsurance Agreement.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Restrictive Covenant. In order to insure to Lyndon the benefits of
its purchase of the Acquired Assets, including the goodwill of the Acquired
Assets, Accel and ANIC each hereby agree that through the third anniversary of
the Closing Date, Accel and ANIC each will not, without the prior written
consent of Lyndon, directly or indirectly, sell, underwrite, place or write
warranty insurance policies or solicit, accept or place for itself and/or any
other entity, any warranty insurance business from existing customers of ANIC,
provided, however, that nothing herein shall prohibit Accel and ANIC from
owning not more than 1% of the stock or other securities of any such
corporation, which securities are publicly traded over-the-counter or on a
national securities exchange, provided neither Accel nor ANIC directly or
indirectly renders any services or engage in any activities of any kind for or
on
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behalf of the issuer of such securities or any affiliate thereof. Lyndon may
proceed against both Accel and ANIC for breach of this covenant by injunction
in addition to any other claim for relief Lyndon may have in law or in equity.
5.2 Use of Name and Forms. ANIC hereby grants Lyndon full right and
authority to utilize ANIC's forms and to place contractual liability insurance
policies in connection with extended service contracts in the name of ANIC in
each of the states in which ANIC is currently licensed to do business for a
maximum period of eighteen (18) months from the Closing Date ("New Business").
All New Business written by Lyndon utilizing ANIC's forms or issued in ANIC's
name shall be automatically reinsured by Lyndon under the Reinsurance
Agreements, and Lyndon shall indemnify ANIC and hold ANIC harmless from and
against all liability, however arising, under the New Business written by
Lyndon on ANIC's forms or issued in ANIC's name and Lyndon shall retain all
premiums related thereto, except as provided by the applicable Reinsurance
Agreement. ANIC will assist Lyndon in the filing of policy forms, rates and
other regulatory matters, as reasonably requested by Lyndon.
5.3 Ordinary Course. During the period from the date of this Agreement
and continuing until the Closing Date, ANIC shall carry on its warranty
insurance business in the usual, regular and ordinary course consistent with
prior practices, including, without limitation, the continued writing of
warranty insurance policies, the collection of premiums therefor, and the
continued payment of claims for losses on outstanding warranty insurance
policies.
5.4 Post-Closing Litigation Assistance. ANIC will provide Lyndon with
reasonable assistance in litigating claims arising under any Acquired Policies
after the Closing. Such
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assistance may consist of, without limitation, access to ANIC's books and
records and/or personnel. Lyndon shall provide reasonable compensation to ANIC
if any ANIC personnel are required to give depositions or testify in court in
relation thereto.
5.5 Cost Guard Service Contract System. Accel will cause ANIC to complete
the following tasks, at ANIC's expense, for the Cost Guard Service Contract
System: (i) the resolution of all "Year 2000" issues, (ii) system clean up,
(iii) construction of a redesigned rate system module and a laser check system
module and (iv) an on-line claims update. Such work shall be completed prior
to May 1, 1998. Any costs incurred by Lyndon in causing such work to be
completed after May 1, 1998 shall be reimbursed by Accel within fifteen (15)
days of Lyndon's invoice therefor, and shall not be limited by the "indemnity
basket" described in Section 7.1.
5.6 Stop-Loss Reinsurance. Accel will cause ANIC to maintain in force
ANIC's current stop-loss reinsurance program, at Lyndon's expense, until
otherwise advised by Lyndon.
5.7 Tax Matters. The parties are in agreement that the Assets do not
constitute a "trade or business" within the meaning of Internal Revenue Code
Section 1060. Nevertheless, the parties acknowledge the possibility that the
Internal Revenue Service may take a contrary position and require Lyndon and
Accel to prepare and file a Form 8594 with the IRS. In such event, the parties
agree that they will cooperate in determining the allocation of the Purchase
Price to the various acquired Assets and will utilize such agreed-upon asset
values in filing their respective federal tax returns.
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ARTICLE VI
SURVIVAL
6.1 Survival. All representations and warranties made in this Agreement
and in any schedule, certificate or instrument delivered in connection with the
Agreement, shall survive the delivery of this Agreement for a period of two
years after the date hereof, except, however, that (i) claims based on fraud or
willful misrepresentation may be asserted at any time within one year after the
party learns of such fraud or willful misrepresentation and (ii) any
representation or warranty in respect of which indemnity may be sought under
Article VII that would otherwise terminate two years after the date hereof
shall survive the second anniversary of the date hereof if notice, given in
good faith, of the specific inaccuracy or breach thereof giving rise to such
indemnity shall have been given to the party against whom such indemnity may be
sought prior to the second anniversary of the date hereof.
ARTICLE VII
INDEMNIFICATION
7.1 Indemnification.
(a) Accel and ANIC each hereby agree to indemnify defend and hold harmless
Lyndon, its officers, directors, employees and agents from and against all
losses, fines, civil penalties, judgments, claims, damages, liabilities or
expenses (including reasonable attorneys' fees) of every kind imposed upon,
incurred or paid by Lyndon by reason of the breach by Accel or ANIC of any
representation and warranty made by Accel or ANIC in this Agreement or, except
as otherwise provided in the Reinsurance Agreements,
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any losses under the Acquired Policies, in excess of $100,000 in the aggregate
(including any such damages incurred by Lyndon under the Stock Acquisition
Agreement); provided, however, that notwithstanding any provision of this
Agreement to the contrary, the aggregate indemnification obligations and
liability of Accel and ANIC under this Section 7.1 and under Section 11.1(a)(i)
of the Stock Acquisition Agreement shall in no event exceed $8 million, and
Accel and ANIC shall have no obligation whatsoever to further indemnify Lyndon,
its affiliates or any other Person after and in the event that Accel and ANIC
on a combined basis have paid a total of $8 million to Lyndon or any other
Person pursuant to this Section 7.1 and/or Section 11.1(a)(i) of the Stock
Acquisition Agreement.
(b) Lyndon hereby agrees to indemnify, defend and hold harmless Accel and
ANIC from and against all losses, fines, civil penalties, judgments, claims,
damages, liabilities or expenses (including reasonable attorneys' fees) of
every kind imposed upon, incurred or paid by Accel and ANIC by reason of (i)
the breach by Lyndon of any representation and warranty made by it in this
Agreement or (ii) any claims made against ANIC relating to the Acquired
Policies or the New Business other than for losses under the Acquired Policies
(except as otherwise provided in the Reinsurance Agreements) or arising out of
or relating in any way to the conduct of the warranty book of business being
acquired by Lyndon on and after the Closing Date hereof; provided, however,
that the aggregate indemnification obligations and liability of Lyndon to Accel
for damages under this Section 7.1 and under Section 11.1(b) of the Stock
Acquisition Agreement shall in no event exceed $8 million.
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(c) Each party hereto shall promptly notify the other party in writing of
any claim made on such party by any third party in respect of a liability,
obligation or other matter which is the subject of the foregoing indemnity
agreement, and the party obligated hereunder to indemnify the party giving such
notice shall have, at its election, the right to compromise or defend any such
claim through counsel of its choosing.
(d) Claims for indemnification under this Article VII (other than with
respect to a breach of the representations or warranties contained in Section
2.4) must be asserted prior to the second anniversary of the date hereof,
except as otherwise provided in clauses (i) and (ii) of Section 6.1.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
8.1 Amendment and Modification. This Agreement may be amended, modified
and supplemented only by a writing signed by Lyndon, Accel and ANIC.
8.2 Waiver of Compliance. Any failure of Lyndon or Accel or ANIC to
comply with any obligation, covenant, agreement or condition herein contained
may be expressly waived, in writing only, by (i) Lyndon in the case of any
failure of ANIC or Accel (ii) Accel, in the case of any failure of Lyndon.
Such waiver shall be effective only in the specific instance and for the
specific purpose for which made or given.
8.3 Expenses. Each party will pay its own expenses incurred in connection
with this Agreement or any auction contemplated by this Agreement. The
foregoing shall not be construed as limiting any other rights which any party
may have as a result of misrepresentation of or breach by any other party.
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8.4 Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to have
been duly given when delivered by hand or when mailed by certified or
registered mail (return receipt requested), postage prepaid, or when delivered
by fax (evidenced by confirmation of successful transmission), as follows:
A. If to Lyndon:
Lyndon Property Insurance Company
645 Maryville Centre
St. Louis, Missouri 63141
Fax # (314) 275-5255
Attn: Roland G. Anderson, President
With a copy to:
Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York 10177-0077
Fax # (212) 661-0989
Attn: Sidney Todres, Esq.
or to such other person or place as Lyndon shall designate by notice in manner
provided in this Section 8.4;
B. If to Accel and ANIC:
Accel International Corporation
12603 SW Freeway, Suite 315
P.O. Box 1949
Stafford, Texas 77477-1949
Attn: Thomas H. Friedberg
With a copies to:
Accel International Corporation
475 Metro Place North
Dublin, Ohio 43017
Fax # (614) 764-7198
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Attn: Nicholas Z. Alexander, Esq.
and
Squire, Sanders & Dempsey, LLP
1300 Huntington Center
31 South High Street
Fax # (614) 365-2499
Attn: Fred A. Summer, Esq.
or to such other person as Accel or ANIC shall designate by notice in the
manner provided in this Section 8.4.
8.5 Assignment. This Agreement shall be binding upon and inure to the
benefit of Lyndon, Accel and ANIC and their respective successors and assigns,
but neither this Agreement nor any of the rights, interests and obligations
hereunder shall be assigned by Lyndon or Accel or ANIC without the prior
written consent of the other parties.
8.6 Third Parties. This Agreement is not intended to and shall not be
construed to give any person other than the parties hereto any interest or
rights (including, without limitation, any third party beneficiary rights) with
respect to or in connection with any agreement or provision contained herein or
contemplated hereby.
8.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without regard to principles
of conflicts of laws.
8.8 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
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8.9 Headings. The headings of the sections, schedules and articles of
this Agreement are inserted for the sake of convenience only and shall not
constitute a part hereof.
8.10 Entire Agreement. This Agreement, including the schedules and
exhibits, contains the entire understanding of the parties in respect of the
subject matter contained herein and therein and there are no other terms or
conditions, representations or warranties, written or oral, express or implied,
except as set forth herein.
8.11 Further Assurances. Accel and ANIC each agree to execute and deliver
such documents, instruments or certificates as Lyndon may reasonably request
from time to time in order to vest in Lyndon title to the Acquired Assets.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the date first above written.
LYNDON PROPERTY INSURANCE COMPANY
By: /s/ Peter H. Foley
-------------------------------------
Peter H. Foley, Authorized Signatory
ACCEL INTERNATIONAL CORPORATION
By: /s/ Thomas H. Friedberg
------------------------------------
Thomas H. Friedberg, President
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ACCELERATION NATIONAL
INSURANCE COMPANY
By: /s/ Thomas H. Friedberg
------------------------------------
Thomas H. Friedberg, Chairman & CEO
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ANNEX III
________________________________________________________________________________
CREDITRE CORPORATION
________________________________________________________________________________
4107 Greenway Court * Colleyville, Texas 76034 (817) 788-8121 Fax (817) 788-8123
October 15, 1997
Mr. Thomas Friedberg
ACCEL international Corporation
12603 SW Frwy Ste 315
P O Box 1949
Stafford, TX 77477-1949
Dear Tom,
You have requested my opinion on the purchase price of $40.5 million for
Acceleration Life Insurance Company (ALIC), Acceleration National Service
Corporation (ANSC), Dublin International Limited (Dublin), the rights to the
credit life and disability insurance business, and the rights to the service
contract business.
Based solely on the ALIC Statutory Annual Statement of December 31, 1996, the
GAAP financials as of June 30, 1997 as provided, and the valuations we have
performed in the past, I would place a market value on the block at $39.3
million.
The market value is based on:
GAAP book values from the June 30, 1997 financial statements
Future GAAP profits on in force life, disability and service contract
business
Value of future production of the life and disability business
Value of future production of service contract business
Value of ALIC state licenses
Given my knowledge of the credit insurance and service contract marketplace,
this value is representative of the value that is available in the marketplace.
Aside from the GAAP book values and the value of state licenses, most, if not
all, of the value comes from the service contract business. At 1996 ALIC
expense levels, the sum of the (future GAAP profits) plus (value of future
production) on the credit life and disability business is negative. Credit life
and disability insurance business has little value in the current marketplace,
since the return on equity available in the marketplace is not competitive with
other industries. Over 50 insurers have left the credit life and disability
industry in the 1990s with no new entrants. The service contract business has
remained financially health and viable during this period.
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In my opinion, the Frontier price of $40.5 is fair and reasonable, and it
places a value on the entities that equals or exceeds the value that the other
likely participants in this marketplace would pay for the block.
Please call me if you have questions about this document.
Sincerely,
/s/ Gary Fagg
Gary Fagg, FSA, MAAA
Consulting Actuary
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================================================================================
ACCEL INTERNATIONAL CORPORATION PROXY
SPECIAL MEETING OF STOCKHOLDERS
DECEMBER 30, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Thomas H. Friedberg and Nicholas Z.
Alexander, and each of them, Proxies, with power of substitution to each,
for and in the name of the undersigned, to vote, as designated below, all
the shares of Common Stock of ACCEL International Corporation, a Delaware
corporation (the "Company"), held of record by the undersigned as of
November 17, 1997 at the Special Meeting of Stockholders to be held on
December 30, 1997 or any adjournment thereof.
1. To consider and vote upon the approval and authorization of (i) the
sale of all of the outstanding capital stock of Acceleration Life
Insurance Company, Acceleration National Service Corporation and Dublin
International Limited by the Company to Lyndon Insurance Group, Inc. and
Lyndon Life Insurance Company pursuant to the Stock Acquisition Agreement
dated October 20, 1997 attached as Annex I to the accompanying Proxy
Statement (the "Stock Acquisition Agreement"), (ii) the sale of the
vehicle extended service contract business of the Company's wholly owned
subsidiary, Acceleration National Insurance Company, by the Company to
Lyndon Property Insurance Company pursuant to the Asset Purchase Agreement
dated October 20, 1997 attached as Annex II to the accompanying Proxy
Statement (the "Asset Purchase Agreement"), and (iii) certain transactions
related thereto (collectively, the "Transaction").
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. In their discretion, the Proxies are authorized to vote upon such
other business as may properly come before the meeting or any adjournment
thereof.
(Please See Reverse Side)
<PAGE> 162
================================================================================
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER
DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE,
THIS PROXY WILL BE VOTED FOR THE APPROVAL OF THE STOCK ACQUISITION
AGREEMENT, THE ASSET PURCHASE AGREEMENT AND THE TRANSACTION AND ACCORDING
TO THE JUDGMENT OF THE PROXIES WITH RESPECT TO SUCH OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF.
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of Stockholders dated December 5, 1997 and the Proxy Statement
dated December 18, 1997. Please sign exactly as name appears hereon. When
shares are held by joint tenants, both should sign.
Date: , 1997 -------------------------------
(Signature)
-------------------------------
(Signature)
(When signing as attorney,
executor, administrator,
trustee or guardian, please
give full title as such. If a
corporation, please sign in
full corporate name by
President or other authorized
officer. If a partnership,
please sign in partnership name
by authorized person.)
Please mark, sign, date and return this Proxy promptly using the enclosed
envelope.
