<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:
[X] Revised Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-ll(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
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[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-ll(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 , 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, subsequently determined to
solicit 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, 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, (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, 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.
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 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.
<PAGE> 3
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 , 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 Centers 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 (the "Stock Acquisition Agreement")
by and between the Company and Lyndon attached as Annex I hereto, (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
(the "Asset Purchase Agreement") among Lyndon Property, the Company and ANIC
attached as Annex II hereto, 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 dissenters' rights in connection with the
Transaction.
This Proxy Statement is first being mailed to stockholders on or about
December , 1997.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION.................................................................................. 1
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.............................................................. 2
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............................................................... 3
ACCOUNTING TREATMENT.......................................................................... 3
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................................................................... 6
OPINION OF ACTUARIAL CONSULTING FIRM.......................................................... 7
USE OF PROCEEDS............................................................................... 8
OPERATIONS OF THE COMPANY AFTER THE TRANSACTION............................................... 8
FEDERAL INCOME TAX CONSEQUENCES............................................................... 8
ACCOUNTING TREATMENT.......................................................................... 9
THE STOCK ACQUISITION AGREEMENT........................................................................ 9
TERMS OF THE STOCK ACQUISITION AGREEMENT...................................................... 9
CLOSING; TERMINATION........................................................................... 9
REPRESENTATIONS AND WARRANTIES................................................................ 10
CONDUCT OF BUSINESS PRIOR TO CLOSING.......................................................... 11
NO "SHOPPING" COVENANT; BREAK-UP FEE.......................................................... 11
COVENANTS OF LYNDON........................................................................... 12
EMPLOYEE BENEFIT PLANS........................................................................ 12
CONDITIONS TO CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED BY THE STOCK ACQUISITION
AGREEMENT.....................................................................................12
SURVIVAL OF REPRESENTATIONS AND WARRANTIES.................................................... 13
COVENANT NOT TO COMPETE....................................................................... 13
INDEMNIFICATION............................................................................... 13
TAX MATTERS................................................................................... 14
AMENDMENT; WAIVER............................................................................. 15
EXPENSES; LIQUIDATED DAMAGES.................................................................. 15
</TABLE>
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<TABLE>
<S> <C>
ASSET PURCHASE AGREEMENT............................................................................... 15
PURCHASE PRICE AND ACQUIRED ASSETS............................................................ 15
REINSURANCE AGREEMENTS AND LIABILITIES ASSUMED................................................ 16
CLOSING....................................................................................... 16
REPRESENTATIONS AND WARRANTIES................................................................ 16
ADDITIONAL AGREEMENTS OF THE COMPANY, ANIC AND LYNDON PROPERTY................................ 16
COVENANT NOT TO COMPETE....................................................................... 17
SURVIVAL OF REPRESENTATIONS AND WARRANTIES.................................................... 17
INDEMNIFICATION............................................................................... 17
AMENDMENT; WAIVER............................................................................. 18
EXPENSES...................................................................................... 18
REGULATORY APPROVALS REQUIRED.......................................................................... 18
OHIO DEPARTMENT OF INSURANCE.................................................................. 18
MISSOURI DEPARTMENT OF INSURANCE.............................................................. 19
HSR ACT AND ANTITRUST......................................................................... 19
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION................................................. 19
INTRODUCTION.................................................................................. 19
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................................... 26
BENEFICIAL OWNERSHIP OF CERTAIN BENEFICIAL OWNERS............................................. 26
BENEFICIAL OWNERSHIP OF MANAGEMENT............................................................ 28
INDEPENDENT AUDITORS................................................................................... 29
STOCKHOLDER PROPOSALS.................................................................................. 29
ADDITIONAL INFORMATION REGARDING THE COMPANY........................................................... 29
BUSINESS...................................................................................... 29
PROPERTIES.................................................................................... 35
LEGAL PROCEEDINGS............................................................................. 35
MARKET FOR ACCEL'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS............................... 35
FINANCIAL STATEMENTS.......................................................................... 36
SELECTED FINANCIAL DATA....................................................................... 37
SUPPLEMENTARY FINANCIAL INFORMATION........................................................... 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......... 38
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.......... 39
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................... 39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS........................................................... F-1
</TABLE>
ANNEX I -- STOCK ACQUISITION AGREEMENT
ANNEX II -- ASSET PURCHASE AGREEMENT
ANNEX III -- OPINION OF CREDITRE CORPORATION
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<PAGE> 7
AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the Public Reference Section of the Commission, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at certain regional
offices of the Commission located at Suite 1400, Northwestern Atrium Center, 500
West Madison Street, Chicago, Illinois 60661 and at 7 World Trade Center, 13th
Floor, New York, New York 10048. Copies of such information can be obtained at
prescribed rates from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. Such material may also be accessed
electronically by means of the Commission's home page on the Internet
(http://www. sec. gov).
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 Centers
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
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<PAGE> 8
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 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.
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.
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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) enable the Company to eliminate its outstanding
indebtedness under the Senior Notes, and (ii) 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."
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 Transaction 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. See "THE TRANSACTION -- Accounting Treatment. "
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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").
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 Centers 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 , 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 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.
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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
Agreement.
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
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. 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, which
consists of the Target Corporations and the Acquired Assets (as defined in the
Asset Purchase Agreement). 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.
A special telephonic meeting of the Board of Directors of the Company
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.
Following the completion of 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
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<PAGE> 12
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 and appraisal received by the Company from CreditRe
Corporation, which opinion and appraisal was theretofore delivered to each
director. See "-- Opinion of Financial Advisor." 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 and the directors
questioned him at length, the Board of Directors unanimously approved the
Transaction and authorized Mr. Friedberg to execute the Agreements on behalf of
the Company.
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 principal factors considered included:
(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 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 Company ("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 products
through a larger group of quality agents and brokers. 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.
(iii) The determination by the Board of Directors that the Transaction
is consistent with the Company's plans to increase its revenues and profits from
its property and casualty insurance business.
(iv) 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 successful or to sell such
business in light of the fact that the sales of the Company's Auto Aftermarket
Group have been steadily declining as a result of the size of ALIC's statutory
surplus and its A.M. Best rating of "B-" (Fair), which have adversely affected
ALIC's ability to market its credit insurance products through financial
institutions.
(v) The aggregate consideration to be received by the Company pursuant
to the Agreements substantially exceeds all other recent offers received by the
Company and represents roughly the sum of the book value of the Company's credit
business plus ten times the annual after-tax earnings of ANIC's vehicle extended
service contract business (including fee income). In addition, prior valuations
of the Company's Auto Aftermarket Group indicated that any likely sale price
would result in a loss of value to the Company.
(vi) The opinion and appraisal of CreditRe Corporation to the Company
indicates that the aggregate purchase price to be received by the Company
pursuant to the Agreements is fair and reasonable, exceeds CreditRe
Corporation's appraised 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. See " -- Opinion of
Financial Advisor."
(vii) The determination by the Board of Directors that the employees of
the Company's Auto Aftermarket Group would benefit by becoming part of a much
larger and financially stronger organization.
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<PAGE> 13
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 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 reviewed, among
other things: (i) the actuarial appraisals previously prepared by CreditRe
Corporation as of December 31, 1994 and June 30, 1995; (ii) the results of the
various consulting projects CreditRe Corporation had previously undertaken for
the Company subsequent to such appraisals; (iii) the financial statements of the
Company 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
CreditRe Corporation's prior actuarial valuations and periods subsequent
thereto. Based on the foregoing information, CreditRe Corporation determined
that there had not been a material change in the Company's overall loss
experience since the prior valuations. 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.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. In arriving
at its fairness determination, CreditRe Corporation considered the results of
certain analyses which were prepared solely for purposes of CreditRe
Corporation's providing its opinion to the Board of Directors of the Company as
to the fairness of the consideration to be received by the Company pursuant to
the Agreements. Such analyses do not purport to necessarily reflect the prices
at which businesses or securities actually may be sold. Because such analyses
are inherently subject to uncertainty, being based upon numerous factors or
events beyond the control of the parties or their respective advisors, none of
the Company, the Lyndon Group, the Target Corporations, CreditRe Corporation or
any other person assumes responsibility if future results are materially
different from those forecast.
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. The foregoing summary does not purport to be a complete description
of the analysis performed by CreditRe Corporation and is qualified by reference
to the written opinion of CreditRe Corporation set forth in Annex III hereto.
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<PAGE> 14
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 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
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<PAGE> 15
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.
ACCOUNTING TREATMENT
The Transaction 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. See "UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS." The
Company expects to record a net gain 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 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. In addition to the cash consideration payable by Lyndon to the
Company, the Target Corporations may elect to declare and pay to the Company
prior to the Closing a Special Distribution equal to the estimated amount by
which their combined stockholders' equity as of December 31, 1997, as determined
in accordance with GAAP, exceeds $31.6 million. The estimated amount of the
Special Distribution will be based on the Target Corporation's 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.
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."
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<PAGE> 16
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.
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."
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<PAGE> 17
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 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
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<PAGE> 18
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 ale the Company pays Lyndon a fee of $750,000.
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
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<PAGE> 19
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 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
-13-
<PAGE> 20
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 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).
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
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<PAGE> 21
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 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.
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
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<PAGE> 22
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; (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
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<PAGE> 23
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 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
-17-
<PAGE> 24
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.
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.
-18-
<PAGE> 25
Lyndon has submitted an application to the Ohio Superintendent seeking
approval of the Transaction. The application is pending before the Ohio
Superintendent. While the Company has no reason to believe that the Ohio
Superintendent will not approve the Transaction, no assurances can be made with
respect thereto.
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. While the Company has no
reason to believe that the Missouri Director will not approve the Transaction,
no assurances can be made with respect thereto.
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.
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."
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
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<PAGE> 26
assumes that the Transaction was consummated on January 1, 1997. 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.
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<PAGE> 27
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ASSETS REF.
AS REPORTED ADJUSTMENTS NO. PRO FORMA
----------- ----------- --- ----------
(Thousands of dollars)
<S> <C> <C> <C> <C>
INVESTMENTS:
INVESTMENTS AVAILABLE FOR SALE
FIXED MATURITIES $ 49,796 $ 29,247 1. $ 20,549
EQUITY SECURITIES 6,126 6,126 1. --
SHORT TERM INVESTMENTS 19,958 11,641 1. 8,317
OTHER INVESTED ASSETS 306 306 1. --
--------- --------- ---------
76,186 47,320 28,866
CASH 1,113 (16,323) 2. 17,436
RECEIVABLES:
PREMIUMS IN PROCESS OF TRANSMITTAL 10,355 1,941 1. 8,414
AMOUNTS DUE FROM REINSURERS, LESS ALLOWANCE 28,362 17,508 1. 10,854
RECOVERABLE FEDERAL INCOME TAXES 129 129 5. --
--------- --------- ---------
38,846 19,578 19,266
ACCRUED INVESTMENT INCOME 644 398 1. 246
PREPAID REINSURANCE PREMIUMS 19,448 12,076 1. 7,372
REINSURANCE PREMIUM DEPOSITS 26,710 26,710 1. --
DEFERRED POLICY ACQUISITION COSTS 30,362 27,784 1. 2,578
FURNITURE, FIXTURES, & EQUIPMENT-NET 662 406 1. 256
LEASEHOLD IMPROVEMENTS 138 84 1. 54
OTHER ASSETS:
COST IN EXCESS OF EQUITY 657 657 3. --
FUNDS HELD UNDER REINSURANCE TREATIES 6,036 6,036 1. --
OTHER 729 461 1. 268
--------- --------- ---------
7,422 7,154 268
--------- --------- ---------
$ 201,531 $ 125,187 $76,344
========= ========= =========
</TABLE>
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<PAGE> 28
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED BALANCE SHEETS--(CONTINUED)
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
REF.
AS REPORTED ADJUSTMENTS NO. PRO FORMA
----------- ----------- ---- ---------
(Thousands of dollars)
<S> <C> <C> <C> <C>
LIABILITIES & COMMON STOCKHOLDERS'
EQUITY
POLICY RESERVES AND LIABILITIES:
UNEARNED PREMIUM RESERVES $ 83,980 $ 70,616 1. $ 13,364
INSURANCE CLAIMS 26,884 14,117 1. 12,767
OTHER 5 5 1. ---
---------- --------- --------
110,869 84,738 26,131
OTHER LIABILITIES:
FUNDS HELD UNDER REINSURANCE AGREEMENTS 2,940 2,475 1. 465
DEFERRED REINSURANCE COMMISSIONS 14,537 13,046 1. 1,491
AMOUNTS DUE REINSURERS 12,625 5,359 1. 7,266
NOTES PAYABLE 15,000 15,000 4. ---
COMMISSIONS PAYABLE 5,550 5,550 1. ---
ACCOUNTS PAYABLE & OTHER LIABILITIES 2,655 1,445 1. 1,210
FEDERAL INCOME TAXES:
CURRENT --- (5,255) 5. 5,255
DEFERRED 4,089 4,089 5. ---
---------- --------- --------
57,396 41,709 15,687
---------- --------- --------
168,265 126,447 41,818
---------- --------- --------
COMMON STOCKHOLDERS' EQUITY:
COMMON STOCK 941 --- 941
ADDITIONAL PAID-IN CAPITAL 32,520 --- 32,520
TREASURY STOCK (6,599) --- (6,599)
RETAINED EARNINGS 6,435 (1,154) 6. 7,589
NET UNREALIZED DEPRECIATION ON
INVESTMENT SECURITIES
(31) (106) 1. 75
---------- --------- --------
33,266 (1,260) 34,526
---------- --------- --------
$ 201,531 $ 125,187 $ 76,344
========== ========= ========
</TABLE>
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<PAGE> 29
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
REF.
AS REPORTED ADJUSTMENTS NO. PRO FORMA
----------- ----------- --- ---------
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
REVENUE
GROSS PREMIUMS WRITTEN $ 49,574 $ 27,787 7. $ 21,787
LESS REINSURANCE CEDED 16,255 4,898 7. 11,357
---------- --------- ---------
NET PREMIUMS WRITTEN 33,319 22,889 10,4230
DECREASE (INCREASE) IN UNEARNED PREMIUM
RESERVES 1,700 4,261 7. (2,561)
---------- --------- ---------
PREMIUMS EARNED 35,019 27,150 7,869
NET INVESTMENT INCOME:
INTEREST AND DIVIDENDS 3,405 2,655 7. 750
REALIZED GAINS 81 (34) 7. 115
SERVICE FEES ON EXTENDED SERVICE CONTRACTS 2,339 2,339 7. ---
OTHER INCOME 231 44 7. 187
----------- ----------- ---------
41,075 32,154 8,921
---------- ---------- ---------
BENEFITS AND EXPENSES:
POLICY BENEFITS 18,360 13,018 7. 5,342
COMMISSIONS AND SELLING EXPENSES 16,438 12,758 7. 3,680
REINSURANCE EXPENSE RECOVERY (4,043) (2,625) 7. (1,418)
GENERAL AND ADMINISTRATIVE 6,050 3,236 7. 2,814
TAXES, LICENSES AND FEES 1,570 697 7. 873
INTEREST 1,069 1,069 8. ---
DECREASE (INCREASE) IN DEFERRED POLICY
ACQUISITION COSTS 584 2,013 7. (1,429)
---------- --------- ---------
40,028 30,166 9,862
---------- --------- ---------
OPERATING INCOME (LOSS)
BEFORE FEDERAL INCOME TAXES 1,047 1,988 (941)
FEDERAL INCOME TAXES:
CURRENT 604 604 9. ---
DEFERRED (589) (589) 9. ---
---------- --------- ---------
15 15 ---
---------- --------- ---------
OPERATING INCOME (LOSS) $ 1,032 $ 1,973 $ (941)
========== ========= =========
OPERATING INCOME PER COMMON SHARE $ 0.12 $ (0.11)
========== =========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 8,604,017 8,604,017
========== =========
</TABLE>
-23-
<PAGE> 30
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
REF.
AS REPORTED ADJUSTMENTS NO. PRO FORMA
----------- ----------- --- ---------
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
REVENUE
GROSS PREMIUMS WRITTEN $ 58,412 $ 41,159 7. $ 17,253
LESS REINSURANCE CEDED 12,860 4,748 7. 8,112
--------- ---------- ---------
NET PREMIUMS WRITTEN 45,552 36,411 9,141
DECREASE (INCREASE) IN UNEARNED PREMIUM
RESERVES 405 3,708 7. (3,303)
--------- ---------- ---------
PREMIUMS EARNED 45,957 40,119 5,838
NET INVESTMENT INCOME:
INTEREST AND DIVIDENDS 4,416 3,448 7. 968
REALIZED GAINS 484 221 7. 263
SERVICE FEES ON EXTENDED SERVICE CONTRACTS 2,450 2,450 7. ---
OTHER INCOME 4,513 62 7. 4,451
--------- ---------- ---------
57,820 46,300 11,520
--------- ---------- ---------
BENEFITS AND EXPENSES:
POLICY BENEFITS 24,338 18,940 7. 5,398
COMMISSIONS AND SELLING EXPENSES 22,145 19,584 7. 2,561
REINSURANCE EXPENSE RECOVERY (2,670) (1,298) 7. (1,372)
GENERAL AND ADMINISTRATIVE 7,486 4,673 7. 2,813
TAXES, LICENSES AND FEES 1,880 967 7. 913
INTEREST 1,969 1,563 8. 406
DECREASE (INCREASE) IN DEFERRED POLICY
ACQUISITION COSTS 893 1,725 7. (832)
--------- ---------- ---------
56,041 46,154 9,887
--------- ---------- ---------
OPERATING INCOME BEFORE
FEDERAL INCOME TAXES 1,779 146 1,633
FEDERAL INCOME TAXES:
CURRENT 152 152 9. ---
DEFERRED (346) (346) 9. ---
--------- ---------- ---------
(194) 194) ---
--------- ---------- ---------
OPERATING INCOME $ 1,973 $ 340 $ 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>
-24-
<PAGE> 31
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL DATA
NOTE--PRO FORMA ADJUSTMENTS AND ADDITIONAL INFORMATION
BALANCE SHEET ADJUSTMENTS: September 30, 1997
1. Reflects elimination of balance sheet amounts related to ALIC, ANSC,
DIL and Costguard business being sold. In addition, accounts payable
and other liabilities include accruals for expenses related to the sale
transaction.
2. Reflects proceeds to be received from the sale ($40.5 million) less
repayment of ACCEL's outstanding notes payable and related interest,
settlement of intercompany amounts, and the elimination of balance
sheet amounts related to ALIC, ANSC, DIL and Costguard business being
sold.
3. Reflects elimination of ACCEL's cost in excess of equity for ALIC.
4. Reflects pay-off of notes payable which is required as a condition of
the sale.
5. Reflects adjustment necessary at the statutory tax rate for the pro
forma adjustments considering the net operating loss position of ACCEL
after giving effect to the sale and for the elimination of deferred tax
assets of ACCEL resulting from the sale.
6. Reflects proceeds to be received from the sale ($40.5 million) less the
combined equity of the sold subsidiaries being $31.6 million, cost in
excess of equity of $.7 million, related income taxes of $5.3 million,
elimination of deferred tax assets of $1.1 million. and other pro forma
adjustments directly related to the sale of the subsidiaries of $.6
million
INCOME STATEMENT ADJUSTMENTS: December 31, 1996 and September 30, 1997
7. Reflects elimination of income statement amounts related to the
subsidiaries and Costguard business being sold.
8. Reflects elimination of interest expense related to notes payable which
are required to be paid off as a condition of the sale.
9. Reflects adjustment necessary at the statutory tax rate for the pro
forma adjustments considering the net operating loss position of ACCEL
after giving effect to the sale and for the elimination of deferred tax
assets of ACCEL resulting from the sale.
COMMENTS: Although accounting rules related to Pro Forma Financials do not allow
for the inclusion of anticipated investment income, ACCEL 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 ACCEL has approximately $10.1 million
available for investment (with an estimated yield of 6.5%) after reflecting the
sale and related transactions.
-25-
<PAGE> 32
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
- ----------
<FN>
(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.
</TABLE>
-26-
<PAGE> 33
(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 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.
-27-
<PAGE> 34
BENEFICIAL OWNERSHIP OF MANAGEMENT
The following table sets forth certain information as of October 31,
1997, with respect to me 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 4,572,429(5) 52.5%
as a group (15 persons)
- ---------------
<FN>
(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 officer 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.
</TABLE>
-28-
<PAGE> 35
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.
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 presented substantially as it appeared in 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 in bold bracketed print.
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 farmowners' 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.
-29-
<PAGE> 36
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,
farmowners' 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.
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
-30-
<PAGE> 37
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 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).
-31-
<PAGE> 38
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 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 farmowners' 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
-32-
<PAGE> 39
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.
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.
-33-
<PAGE> 40
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 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.
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<PAGE> 41
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.
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 holders.
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<PAGE> 42
Dividends paid on common stock:
1996 - -O- per share
1995 - -O- 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.
FINANCIAL STATEMENTS
AUDITED ANNUAL FINANCIAL STATEMENTS
Included elsewhere in this Proxy Statement are the Company's audited
consolidated financial statements as of December 31, 1996 and 1995 and for the
three years ended December 31, 1996, and the notes thereto, and the related
independent auditors report, as the same were included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
UNAUDITED INTERIM FINANCIAL STATEMENTS
Included elsewhere in this Proxy Statement are the unaudited interim
consolidated financial statements of the Company, and the notes thereto, as the
same were included in the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
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<PAGE> 43
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
<FN>
* 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."
</TABLE>
SUPPLEMENTARY FINANCIAL INFORMATION
Not applicable.
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<PAGE> 44
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 Farmowners 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 10 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> 45
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 higher risk mortgage or asset
backed securities. 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.
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 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.
-39-
<PAGE> 46
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.
During 1996, 1995 and 1994, the Company incurred ESOP contribution
expenses of $187,000, $198,000 and $178,000, respectively.
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<PAGE> 47
The Company currently has three material lines of business that are in
run-off status: the REO line, the farmowner'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.
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.
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<PAGE> 48
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. 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 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.
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<PAGE> 49
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.
-43-
<PAGE> 50
- --------------------------------------------------------------------------------
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>
- --------------------------------------------------------------------------------
-44-
<PAGE> 51
<TABLE>
<CAPTION>
TABLE II
CHANGES IN GROSS PREMIUMS WRITTEN
YEAR ENDED DECEMBER 31
----------------------
(THOUSANDS OF DOLLARS, EXCEPT RATIOS)
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>
-45-
<PAGE> 52
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 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 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 these 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.
The Company's general and administrative expenses have increased by
$741,000 or 13.95% in 1997 compared to 1996. These expenses are being incurred
in order to prepare the Company to add additional product lines and to enhance
current offerings.
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. The decrease in
credit premium is attributable to the termination of a joint marketing agreement
covering credit business written in the commonwealth of Pennsylvania in July
1996 and the Company's withdrawal from the state of Michigan in November 1996.
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.
-46-
<PAGE> 53
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 Company did not have a significant amount of higher risk mortgage or asset
backed securities. 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.
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.
-47-
<PAGE> 54
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 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 farmowner'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
-48-
<PAGE> 55
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.
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.
-49-
<PAGE> 56
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AUDITED ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------
<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 Years Ended
December 31, 1996, 1995 and 1994......................................................................F-5
Consolidated Statements of Common Stockholders' Equity for
the Years Ended December 31, 1996.....................................................................F-6
Consolidated Statements of Cash Flows for the Years 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-27
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------
Unaudited Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996.................................................................................F-28
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-30
Unaudited Consolidated Statements of Common Stockholders' Equity
for the Nine Months Ended September 30, 1997 and the
Year Ended December 31, 1996..........................................................................F-31
Unaudited Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and 1996..............................................................F-32
Notes to Unaudited Consolidated Financial Statements...........................................................F-33
</TABLE>
F-1
<PAGE> 57
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ACCEL International Corporation:
We have audited the consolidated financial statement of ACCEL
International Corporation and subsidiaries (the Company) as listed in the
accompanying index. In connection with our audits on the consolidated financial
statements, we also have audited the financial statement schedule as 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 operation 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, present fairly, in all
material respects, the information set forth therein.
KPMG Peat Marwick LLP
Columbus, Ohio
March 14, 1997
F-2
<PAGE> 58
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
ASSETS (Thousands of dollars)
<S> <C> <C>
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> 59
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
(Thousands of dollars)
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
<S> <C> <C>
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
========== =========
See notes to consolidated financial statements.
</TABLE>
F-4
<PAGE> 60
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)
REVENUE:
<S> <C> <C> <C>
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> 61
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
Three Years Ended December 31, 1996
(Thousands of dollars)
<TABLE>
<CAPTION>
NET UNREALIZED
APPRECIATION FOREIGN
ADDITIONAL COMMON (DEPRECIATION) CURRENCY
COMMON PAID-IN RETAINED STOCK HELD IN ON INVESTMENT TRANSLATION
STOCK CAPITAL EARNINGS TREASURY ESOP LOAN SECURITIES ADJUSTMENTS NET
------- --------- ---------- --------- ----------- ------------ ----------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 $ 524 $ 24,066 $ 9,997 $ (6,599) $ (720) $ 1,496 $ 181 $ 28,583
Payments on ESOP loan -- -- -- -- 93 -- -- 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) -- -- -- -- (5,238)
-------- -------- -------- -------- -------- -------- -------- --------
Balances at December 31, 1994 524 24,066 4,759 (6,599) (627) (6,672) (85) 15,366
Payments on and write down
of ESOP loan--Note L -- (364) -- -- 466 -- -- 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) -- -- -- -- (1,460)
-------- -------- -------- -------- -------- -------- -------- --------
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
(Note I) 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
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 62
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 (141) 3,812 9,208
premiums
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 (1,828) (3,310) 7,298
reinsurers
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 20,290 20,743 24,414
costs
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 286 412 528
amortization
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)
-------- -------- --------
(Continued)
</TABLE>
F-7
<PAGE> 63
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> 64
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.
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.
F-9
<PAGE> 65
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
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.
F-10
<PAGE> 66
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
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.
F-11
<PAGE> 67
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
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)
======= ======= =======
Realized gains (losses) on investments are summarized as follows:
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-12
<PAGE> 68
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
<CAPTION>
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 $ 9,310 $ 274 $ -- $ 9,584
agency securities
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>
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
------- -------
MATURITY (Thousands of dollars)
- --------
<S> <C> <C>
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>
F-13
<PAGE> 69
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE B--INVESTMENTS--(CONTINUED)
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)
Statutory capital and surplus
at December 31:
<S> <C> <C> <C>
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>
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.
F-14
<PAGE> 70
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE D--NOTES PAYABLE--(CONTINUED)
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.
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.
F-15
<PAGE> 71
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE F--REINSURANCE--(CONTINUED)
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 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.
F-16
<PAGE> 72
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE F--REINSURANCE--(CONTINUED)
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.
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>
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.
F-17
<PAGE> 73
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE G--FEDERAL INCOME TAXES--(CONTINUED)
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>
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-18
<PAGE> 74
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
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 $ 22,761 $ 23,159 $ 49,919
at beginning of year
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.
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 unassorted claims. Estimates of the
liabilities are reviewed and updated continually.
F-19
<PAGE> 75
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
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 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.
F-20
<PAGE> 76
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE I--COMMON STOCKS AND COMMON STOCK OPTIONS--(CONTINUED)
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.
The following table summarizes activity under the respective plans.
<TABLE>
<CAPTION>
The 1996 Plan
- -------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Options granted 420,371 -- --
Average option price per share 2,514 -- --
Options lapsed -- -- --
Options exercised -- -- --
Average exercise price -- -- --
The Restated Plan-Employees
- ---------------------------
1996 1995 1994
------- ------- -------
Options granted -- 231,500 89,000
Average option price per share -- $ 2.125 $ 4.500
Options lapsed 45,526 25,000 118,759
Options exercised 110,000 -- --
Average exercised price 2,125 -- --
The Restated Plan-Non Employee Directors
- ----------------------------------------
1996 1995 1994
------- ------- -------
Options granted -- 9,000 8,000
Average option price per share -- $ 2.236 $ 4.500
Options lapsed -- -- --
Options exercised -- -- --
Average exercised price -- -- --
</TABLE>
F-21
<PAGE> 77
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE I COMMON STOCKS AND COMMON STOCK OPTIONS--(CONTINUED)
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), and expected lives of 5 to 10 years (based on
the terms of the grant); 1995 - expected dividend yield 0%, risk-free interest
rate 7.00%, and expected lives of 5 to 10 years (based on the terms of the
grant).
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>
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>
F-22
<PAGE> 78
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE J-SEGMENT INFORMATION--(CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
-------- -------- --------
(Thousands of dollars)
Identifiable assets:
<S> <C> <C> <C>
Life/Health $138,723 $144,164 $139,262
Property/Casualty 49,840 38,997 40,428
Other 745 366 258
-------- --------- ---------
Total $189,308 $183,507 $179,948
======== ======== ========
</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.
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.
F-23
<PAGE> 79
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE L--RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN--(CONTINUED)
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 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.
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.
F-24
<PAGE> 80
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE N--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
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.
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> <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-25
<PAGE> 81
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
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)
1996
----
<S> <C> <C> <C> <C>
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-26
<PAGE> 82
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
government 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-27
<PAGE> 83
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
======== ========
(Continued)
</TABLE>
F-28
<PAGE> 84
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS--(CONTINUED)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
(Thousands of dollars)
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
<S> <C> <C>
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
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-29
<PAGE> 85
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-30
<PAGE> 86
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 ESOP on investment
Stock Capital Earnings Treasury Loan Securities Net
------- --------- ---------- ---------- ----- ------------ ----
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
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-31
<PAGE> 87
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-32
<PAGE> 88
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-33
<PAGE> 89
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-34
<PAGE> 90
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE 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-35
<PAGE> 91
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.
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<PAGE> 92
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.
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.
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<PAGE> 93
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
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.
F-38
<PAGE> 94
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.
2.3 NO SUBSIDIARIES.
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<PAGE> 96
(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
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
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<PAGE> 97
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 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
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<PAGE> 98
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.
(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
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<PAGE> 99
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 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.
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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.
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
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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 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
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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 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
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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.
(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.
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(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 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
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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.
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
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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;
(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 LOYEE 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
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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 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.
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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.
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
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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 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.
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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
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.
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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 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
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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.
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.
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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 ss.414; "Employee Pension Benefit Plan" has the meaning set forth in ERISA
ss.3(2), but excludes a Multiemployer Plan; "Employee Welfare Benefit Plan" has
the meaning set forth in ERISA ss.3(1); and "Multiemployer Plan" has the meaning
set forth in ERISA ss.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 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
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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 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]
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(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 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
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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.
(ab) The HSR Act waiting period shall have expired or been
terminated.
(ac) 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 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.
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(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 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.
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(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, 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.
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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
---------------
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
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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 Section 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 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
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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.
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.
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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 ss. 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 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
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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.
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
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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.
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.
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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
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.
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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.
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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<PAGE> 144
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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<PAGE> 148
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> 151
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 and the Proxy Statement dated December
12, 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.
