SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. 1)
Filed by the Registrant (X)
Filed by a Party other than
the Registrant ( )
Check the appropriate box:
(X) 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 Rule 14a-11(c) or Rule 14a-12
- ------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
Dixie National Corporation
- ------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
( ) $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2)
or Item 22 (a)(2) of Schedule 14A.
( ) $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
( ) Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
N/A
(2) Aggregate number of securities to which transaction applies:
N/A
(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):
Value is based on cash to be received and amount of debt to be canceled or
assumed.
(4) Proposed maximum aggregate value of transaction: $8,583,746
(5) Total fee paid: $1,717
(X) Fee paid previously with preliminary material
( ) Check box if any part of the fee is offset as provided by Exchange Rule 0-11
(a)(2) and identify the filing for which the offsetting fee was paid previously.
Identify the previous filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount previously paid: N/A
(2) Form, Schedule, or Registration Statement No.: N/A
(3) Filing Party: N/A
(4) Date Filed: N/A
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DIXIE NATIONAL CORPORATION
NOTICE OF 1995 ANNUAL MEETING OF SHAREHOLDERS
JULY 31, 1995
To The Shareholders:
Notice is hereby given that the 1995 Annual Meeting of the Shareholders of
Dixie National Corporation will be held in the Board Room, Dixie National Life
Insurance Company Building, 3760 Interstate 55 North, Jackson, Mississippi on
July 31, 1995 at 9:00 o'clock A.M., Central Time, for the following purposes:
1. To consider and act upon the recommendation of the Board of
Directors that the shareholders approve the sale of the
Corporation's 99.3% owned subsidiary, Dixie National Life
Insurance Company, to Standard Life Insurance Company of Indiana.
Shareholders have the right to assert dissenters' rights relative
to such sale.
2. To consider and act upon the recommendation of the Board of
Directors that the shareholders approve a new stock option plan
for key employees and directors of the Corporation.
3. To fix the number of and to elect the Board of Directors for the
ensuing year or until their successors are duly elected.
4. To consider and vote upon the ratification of the selection of
Horne CPA Group as independent auditors of the Company for the
year ending December 31, 1995.
5. To transact such other business as may properly come before the
meeting or any adjournment thereof.
July 14, 1995 is the record date for the determination of shareholders
entitled to vote at the Annual Meeting and to receive notice thereof. The stock
transfer books of the Corporation will not be closed.
PLEASE DATE AND SIGN THE ENCLOSED PROXY
NO POSTAGE NEED BE AFFIXED IF MAILED IN THE UNITED STATES
BY ORDER OF THE BOARD OF DIRECTORS
July 20, 1995 /s/Jerry M. Greer
Jerry M. Greer
SENIOR VICE PRESIDENT AND SECRETARY
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DIXIE NATIONAL CORPORATION
1995 ANNUAL MEETING OF SHAREHOLDERS
PROXY STATEMENT
TABLE OF CONTENTS
SOLICITATION 5
VOTING SECURITIES 5
OWNERSHIP OF VOTING SECURITIES BY CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners 6
Security Ownership of Management 7
PROPOSAL NO. 1 - SALE OF DIXIE NATIONAL LIFE
INSURANCE COMPANY
General 8
Background of Proposed Sale 9
Recommendation of Board of Directors; Reasons for Sale 12
Opinion of Corporation's Financial Advisor 13
Federal Income Tax Consequences 16
Employment Contracts 16
The Stock Purchase Agreement 16
Terms of the Sale 16
Certain Representations and Warranties 17
Conduct of Business Pending the Sale 18
Conditions to Consummation of the Sale 18
Fees and Expenses 18
Termination; Amendment; Governing Law 18
Vote Required for Approval 19
DISSENTERS' RIGHTS OF SHAREHOLDERS 19
General 19
Procedure for Exercise of Dissenter's Rights 20
Procedure if the Dissenters Are Dissatisfied with the Payment Offered 21
CONSEQUENCES OF NOT CLOSING THE STANDARD TRANSACTION 21
FUTURE BUSINESS PLANS 22
General 22
Basis for Consideration Paid Or To Be Paid For Investment in PMM 23
BUSINESS OF THE COMPANY 24
General 24
Statutory Surplus and Accounting 25
Capital Requirements of the Corporation 26
Products and Markets 26
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Sales Force and Employees 27
Competition 27
Investments 27
Reinsurance 28
Regulatory Factors 29
Investment in Marketable Equity Securities 31
Legal Proceedings 32
SELECTED FINANCIAL DATA 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 34
Liquidity and Capital Resources 34
General 34
Liquidity Requirements 34
Going Concern Considerations 35
Investment Portfolio Liquidity 36
Statutory Surplus 36
Results of Operations 37
PROFORMA FINANCIAL STATEMENTS 40
MARKET PRICES AND DIVIDENDS 40
PROPOSAL N0. 2 - 1995 STOCK OPTION PLAN 40
General 41
Administration 41
Options 42
Exercise of Options 42
Transferability 42
Termination or Amendment 42
Federal Income Tax Consequences 43
Incentive Stock Options 43
Non-Statutory Stock Options 44
Grants Under 1995 Plan 44
Vote Required for Approval 44
PROPOSAL NO. 3 - ELECTION OF DIRECTORS 45
Nominees and Directors 45
Executive Officers 49
Vote Required for Election 50
EXECUTIVE COMPENSATION AND OTHER INFORMATION 50
Compensation Committee Report on Executive Compensation 50
Base Salary 50
Bonus Plan 50
Stock Option Plan 51
Profit Sharing 401(k) Plan 51
Compensation Committee Members 51
Stock Price Performance Chart 52
Summary Compensation Table 52
Fiscal Year End Options 53
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DIRECTORS' COMPENSATION 53
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 53
PROPOSAL NO. 4 - RATIFICATION OF SELECTION OF
INDEPENDENT AUDITORS 54
SHAREHOLDER PROPOSALS 54
OTHER MATTERS 54
INDEX TO FINANCIAL STATEMENTS F-1
APPENDIX A STOCK PURCHASE AGREEMENT A-1
APPENDIX B ARTICLE 13 OF MISSISSIPPI
BUSINESS CORPORATION ACT B-1
APPENDIX C FAIRNESS OPINION OF MERCER CAPITAL C-1
APPENDIX D 1995 STOCK OPTION PLAN D-1
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PROXY STATEMENT
DIXIE NATIONAL CORPORATION
3760 Interstate 55 North
P.O. Box 22587
Jackson, Mississippi 39225-2587
SOLICITATION
Approximate Date of Mailing: July 20, 1995
The enclosed proxy is being solicited by the Board of Directors of Dixie
National Corporation ("Corporation") for use at the 1995 Annual Meeting of
Shareholders of the Corporation, to be held in the Board Room, Dixie National
Life Insurance Company Building, 3760 Interstate 55 North, Jackson, Mississippi,
at 9:00 o'clock A.M. on July 31, 1995, and any adjournment thereof. Shareholders
may revoke their proxy by written notice to the Corporation at any time prior to
the exercise thereof or by attending at the meeting and voting their shares in
person. The solicitation will be primarily by mail but may also be by telephone,
telegraph or oral communications by officers or regular employees. The cost of
soliciting proxies will be borne by the Corporation. The term "Company," as used
herein includes, collectively, the Corporation, its 99.3% subsidiary, Dixie
National Life Insurance Company ("Dixie Life"), and the Corporation's other
subsidiaries.
Shares represented by a properly executed and returned proxy card will be
voted at the 1995 Annual Meeting in accordance with the instructions indicated
thereon. If no instructions are indicated, the proxy will be voted FOR the sale
of Dixie Life, FOR approval of the new stock option plan, FOR the Board of
Directors to consist of nine members, FOR the election of the nine individuals
nominated by the Board of Directors to serve as directors of the Corporation and
FOR the ratification of the selection of Horne CPA Group as independent auditors
of the Company for the year ending December 31, 1995. See "Dissenters' Rights of
Shareholders" with respect to the effect of not indicating voting instructions
on the rights of dissenting shareholders.
VOTING SECURITIES
Abstentions and broker non-votes will be counted for purposes of
determining the presence or absence of a quorum for the transaction of business.
Abstentions are not considered as having voted for purposes of determining the
outcome of the election of directors, but are considered as a vote "against" any
other matter. Broker non-votes are not considered as having voted for purposes
of determining the outcome of a vote on any matter. In accordance with the
Company's By-Laws and the Mississippi Business Corporation Act, the Board will
appoint two inspectors of election. The inspectors will take charge of, and will
count, the votes and ballots cast at the Annual Meeting and will make a written
report on their determination.
Shareholders of record at the close of business on July 14, 1995 will be
entitled to notice of and to vote at the annual meeting. On July 14, 1995, there
were 10,494,973 shares of common voting stock ("Common Stock") of the
Corporation outstanding and entitled to vote. Each
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outstanding share of Common Stock is entitled to one vote per share on each
matter submitted to a vote at the meeting of shareholders except with respect to
the election of directors. Shareholders have cumulative voting rights in the
election of directors. Cumulative voting means that each shareholder will be
entitled to as many votes as the number of shares of Common Stock owned by such
shareholder multiplied by the number of directors to be elected and all such
votes may be cast for a single director or may be distributed among the director
nominees as the shareholder sees fit. To exercise cumulative voting rights by
proxy, a shareholder must clearly designate the number of votes the shareholder
wishes to cast for any given nominee.
OWNERSHIP OF VOTING SECURITIES BY CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth pertinent information as to the beneficial
ownership of the Corporation's Common Stock as of July 14, 1995, of persons
known by the Corporation to be holders of 5% or more of the outstanding Common
Stock. Information as to the number of shares beneficially owned has been
furnished by the persons named in the table.
Name and Address Shares
of Beneficial Beneficially Percent
Owner Owned of Class
- ----------------- ----------------- --------
American Capitol Insurance Company 1,000,144(1) 8.7%
10555 Richmond Avenue
Houston, Texas 77042
S. L. Reed, Jr. 636,286(2) 6.0%
107 Executive Center
Hilton Head Island, SC 29928
Robert B. Neal 533,768(3) 5.0%
c/o Dixie National Corporation
3760 Interstate 55 North
Jackson, Ms 39211
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(1) Includes 1,000,000 shares issuable upon conversion of the Corporation's 10%
Subordinated Convertible Callable Fixed Interest Rate Notes ("Convertible
Notes") due at the earliest of closing of the sale of Dixie Life, 90 days after
either party to the sale notifies the other that it cannot close the sale under
the terms of the Agreement governing the sale or December 27, 1995. The share
ownership of American Capitol Insurance Company is as shown in a Schedule 13D,
dated July 28, 1993, filed with the Securities and Exchange Commission under the
Securities Exchange Act of 1934. The Schedule 13D states that it is filed
jointly by American Capitol Insurance Company, Acap Corporation, Fortune
National Corporation, InsCap Corporation and William P.
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Guest, and that American Capitol Insurance Company, is a wholly-owned subsidiary
of Acap Corporation, which is 63% owned by Fortune National Corporation, which
is 60% owned by InsCap Corporation, which, in turn, is 40% owned by William P.
Guest. According to the Schedule 13D these companies are organized in Texas,
Delaware, Pennsylvania and Delaware, respectively.
(2) Includes shares held in the name of spouse, minor child or other relatives
or persons, as to some of which shares owner named has shared voting or
investment power, but as to which beneficial ownership is disclaimed. See table
immediately below.
(3) Includes shares issuable upon exercise of stock options and conversion of
Convertible Notes. See table immediately below.
Security Ownership of Management
The following table sets information as to the beneficial ownership of the
Corporation's Common Stock as of July 14, 1995, by each director, nominee,
executive officer named in the Summary Compensation Table and by all directors
and executive officers as a group.
Name Shares
of Beneficial Beneficially Percent
Owner Owned of Class
- ----------------- ----------------- --------
Marcia C. Cohen None N/A
T. H. Etheridge 216,827(1)(3) 2.0%
John E. Haggar 7,000(1) Less than 1%
Robert B. Neal 533,768(1)(2)(3) 5.0%
Dennis Nielsen 12,200(1) Less than 1%
Joe D. Pegram 28,043(1) Less than 1%
S. L. Reed, Jr. 636,286(3) 6.0%(3)
James G. Ricketts 5,000(1) Less than 1%
Herbert G. Rogers, III 107,128(1)(3) 1.0%
W. A. Taylor, Jr. 439,815(1)(2)(3) 4.2%
Monroe M. Wright None N/A
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Directors and
executive officers as
a group (13 persons) 2,533,856(4) 27.8%
- --------------------
(1) Includes shares issuable upon exercise of stock options as follows: T. H.
Etheridge - 5,000 shares; John E. Haggar - 5,000 shares; Robert B. Neal - 28,570
shares; Dennis Nielsen - 5,000 shares; Joe D. Pegram - 5,000 shares; James G.
Ricketts - 5,000 shares; Herbert G. Rogers - 5,000 shares; W. A. Taylor, Jr. -
5,000 shares. The options held by Messrs. Etheridge, Haggar, Nielsen, Pegram,
Ricketts, Rogers and Taylor have been granted under the stock option plan being
voted upon by the shareholders (Proposal No. 2) and are subject to approval of
that plan by the shareholders.
(2) Includes shares issuable upon conversion of Convertible Notes, as follows:
Robert B. Neal - 100,000 shares; W. A. Taylor, Jr. - 200,000 shares.
(3) Includes shares held in the name of spouse, minor child or other relatives
or persons, as to some of which shares the owner named has shared voting or
investment power, but as to which beneficial ownership is disclaimed, as
follows: T. H. Etheridge - 37,510 shares; Robert B. Neal - 1,368; S. L. Reed,
Jr. - 522,422 shares; Herbert G. Rogers, III - 27,479 shares; W. A Taylor, Jr. -
234,815 shares.
(4) Includes all shares issuable upon exercise of stock options and conversion
of Convertible Notes and shares held in the name of spouse, minor child or other
relatives or persons, as to which beneficial ownership is disclaimed.
PROPOSAL NO. 1 - SALE OF DIXIE NATIONAL LIFE INSURANCE COMPANY
General
On April 18, 1995, the Corporation and Dixie Life entered into an agreement
("Stock Purchase Agreement") with Standard Life Insurance Company of Indiana
("Standard") to sell to Standard all of the common capital stock of Dixie Life
owned by the Corporation. Dixie Life is 99.3% owned by the Corporation and
represents virtually all of the Company's assets and operations. This
transaction ("Standard Transaction"), if completed, provides for the
satisfaction of substantially all of the Corporation's debt, including a
$3,689,000 Term Loan, originally due March 31, 1995, held by Standard and
$1,720,000 of Convertible Notes originally due May 1, 1995. The due dates of
both of these obligations have been extended. The Corporation also will receive
up to $2,503,000 in cash. The final selling price is subject to an adjustment of
up to $200,000 based on the resolution of certain litigation.
The Standard Transaction, if completed, will result in a loss to the
Corporation of $4,635,000. This loss has been recorded in the first quarter of
1995. Following the consummation of the Standard Transaction, the Corporation
will have no ongoing operations, but it is actively considering the possible
acquisition or commencement of some other line of business. See "Future Business
Plans."
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Background Of Proposed Sale
Virtually all of the Corporation's unconsolidated revenues are represented
by its monthly management fee of $154,000 received from Dixie Life. This is
insufficient to cover the Corporation's operating expenses and service the
Corporation's total debt of $5,409,000 outstanding under the Term Loan and
Convertible Notes.
The ability of the Corporation to transfer funds, including its management
fee, from Dixie Life, is controlled to a very significant degree by statute.
Under Mississippi insurance law, the Corporation and Dixie Life are members of a
"holding company system." Generally, all transactions between members of a
holding company system must be "fair and reasonable." The Mississippi
Commissioner of Insurance ("Commissioner") has wide latitude in evaluating the
reasonableness of a transaction and its effect upon a Mississippi insurer, such
as Dixie Life. The Commissioner takes the position that a Mississippi insurance
company cannot make a loan to any of its shareholders, officers or directors.
Mississippi law limits the size of dividends or other distributions that may be
made by a Mississippi insurer to another member of its holding company system
without approval of the Commissioner. Among other things, the Mississippi
insurance laws and regulatory authority of the Commissioner are designed to
protect policyholders by assuring the financial solvency of insurance companies.
The interests of shareholders are secondary. Because of these considerations,
among other factors, the Corporation has been unable to transfer adequate funds
from Dixie Life in order to service the Corporation's debts, or at least a
portion thereof as part of an overall financing plan. See "Business of the
Corporation--Regulatory Factors."
In addition, the Company has experienced substantial operating losses since
December 31, 1992, aggregating $3,685,240 through March 31, 1995, before giving
effect to the recorded loss of $4,635,000 resulting from the Standard
Transaction.
The Company has found itself in the position of having to maintain the
statutory capital and surplus ("Statutory Surplus") of Dixie Life, while faced
with maturing debt that could not be satisfied from the Corporation's own funds
or from Dixie Life's resources. The Corporation has devoted significant effort
to strengthening the Statutory Surplus of Dixie Life and reducing the
Corporation's dependence upon the operations of Dixie Life and its ability to
transfer funds to the Corporation during this period. Management's effort
included the following:
(1) In May, 1993, the Board of Directors determined that the most probable
successful solution to the Corporation's liquidity needs was either a
merger with a stronger company or the sale of Dixie Life to another
company. The Planning and Oversight Committee was appointed to evaluate
options and seek an acceptable solution. Robert B. Neal, President of the
Corporation, has devoted virtually all of his time to seeking a solution
since May 1993. In this regard Mr. Neal contacted brokers who work in the
insurance industry, had discussions with possible merger candidates both in
and outside the insurance industry and contacted other professionals with
contacts in the insurance industry. Only a few of
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these contacts led to any meaningful discussions and none resulted in a
completed transaction. The obstacles encountered in completing a
transaction included, among others, the following:
(a) any transaction would require either satisfying the Term Loan or
the approval by the lender of some modification involving assumption
or substitution of debtor;
(b) any transaction would require the approval of the Commissioner;
(c) the existence of the Charter Contracts and the potential drain of
the dividend provision was a significant deterrent to many merger or
purchaser candidates;
(d) many potential merger or purchaser candidates were not experienced
in accident and health insurance in general and cancer insurance in
particular and this segment of Dixie Life's business represented more
than 60% of its statutory premium income;
(e) until March 1994, the ongoing SEC investigation was a deterrent to
many merger or purchaser candidates;
(f) Dixie Life's statutory results of operations was marginal and the
Corporation's GAAP results have reflected significant losses since
1992; and
(g) the restatement of the Corporation's financial statements in 1992
and 1993 concerned many merger or purchaser candidates.
(2) In July 1993, the Corporation and Medical Resource Companies of America
("MRA") reached an agreement in principle for the acquisition of the
Company by MRA through an exchange of shares of MRA for shares of the
Corporation. An Agreement and Plan of Reorganization was entered into by
the Corporation and MRA in August 1993, but was terminated by mutual
agreement in October 1993 because of unresolved issues that arose during
the pendency of the transaction.
These unresolved issues included the fact that the proposed acquisition
would have required the approval of the Corporation's lender, Trustmark
national Bank ("Trustmark"), and of the Commissioner. Based on discussions
with representatives of Trustmark, the Corporation concluded that
Trustmark's approval would be difficult to obtain. Further, the
Commissioner's office expressed reservations about approving a change in
control of the Company because officers of MRA had been associated with
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a company which owned an insurance company that failed. MRA had certain
unresolved concerns regarding the potential liability under certain
insurance contracts issued by Dixie Life in its early years, and the
frequency and magnitude of certain nonrecurring accounting adjustments that
the Company reported in its quarterly reports during 1993.
(3) In January 1994, the Corporation reached an agreement in principle to
merge with Standard's parent, Standard Management Corporation ("SMC"). In
June 1994, the parties signed a Merger Agreement which provided that the
Corporation would be acquired by SMC through an exchange of stock. In late
July 1994, the Merger Agreement was terminated by the Corporation because
of the SMC's failure to fulfill a material condition of the Merger
Agreement.
(4) During 1993 and 1994, the Corporation negotiated and completed the sale
of virtually all of Dixie Life's accident and health business, thereby
increasing Dixie Life's Statutory Surplus to a level which provided
financial strength to Dixie Life and might have supported a dividend to the
Corporation. However the proceeds of any such dividend would not have been
sufficient to satisfy the Corporation's debt.
(5) The Corporation entered into an agreement with Universal
Management Services, a Nevada corporation ("UMS"), as of October 27,
1994 ("UMS Agreement"). The UMS Agreement provided that UMS would use
its best efforts to assist the Corporation in locating potential
investors for its Common Stock in non-U.S. markets pursuant to
Regulation S of the Securities Act of 1933. On November 29, 1994, with
such assistance, the Corporation sold 2,000,000 shares of its Common
Stock for which it received 1,230,770 shares of Alanco Environmental
Resources, Inc. ("Alanco") common stock ("November Transaction").
Alanco is principally engaged in the manufacture and marketing of a
pollution control device sold in domestic and foreign markets. The
Alanco shares had an aggregate market value of $2,000,000 on November
29, 1994. The sale of the Alanco shares, or other marketable equity
securities owned by the Corporation, could provide some funds for debt
service. See "Future Business Plan" and "Business of the Corporation -
Investment in Marketable Equity Securities."
The UMS Agreement provided UMS the option to use its best efforts to
assist the Corporation in placing additional equity securities for
cash. Such placements could have provided a source of funds to repay a
portion of the Corporation's debt, but no such placements occurred.
See "Future Business Plans."
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(6) The Stock Purchase Agreement was entered into in April 1995.
Completion of the Standard Transaction would satisfy the Term Loan and
the Convertible Notes.
In November 1994, after the Corporation's July 1994 termination of the
Merger Agreement with SMC, Standard bought from Trustmark National Bank
("Trustmark"), the Corporation's $3,689,000 Term Loan owed to Trustmark. This
development eliminated the possibility of negotiating with Trustmark an
extension of the March 31, 1995 due date of the Term Loan. As a result, the
Corporation was faced with the prospect of the March 31, 1995 maturity of the
Term Loan with little apparent prospect for renegotiation of the terms with the
new holder of the underlying note.
Recommendation Of Board Of Directors; Reasons For Sale
As discussed above, in seeking a solution to the serious liquidity problems
facing the Corporation, the Corporation's Board considered a wide range of
alternatives, including the sale of the Corporation or Dixie Life, the merger of
the Corporation with another company, the sale of certain blocks of business or
other assets of Dixie Life or the issuance of debt or equity securities by the
Corporation or its subsidiaries. In analyzing the proposed Standard Transaction,
the Corporation's Board considered a number of factors, including, principally,
the following:
(1) Standard's purchase of the Term Loan eliminated any ability the
Corporation might have had to renegotiate the Term Loan at its
maturity with Trustmark, with which the Corporation has had a banking
relationship.
(2) The Term Loan is secured by a pledge of all of the shares of Dixie
Life capital stock owned by the Corporation. Accordingly, a default in
payment of the Term Loan on its stated maturity date of March 31, 1995
would have had a very material adverse impact on the Corporation's
shareholders.
(3) Standard agreed to cancel the Term Loan and assume payment of the
Corporation's Convertible Notes as part of the consideration for the sale
of Dixie Life and to extend the due date of the Term Loan. These provisions
are included in the Stock Purchase Agreement.
(4) The difficulties experienced by the Board of the Corporation in
its prior efforts to merge with other companies or sell the
Corporation or Dixie Life left the Board with no realistic
alternatives. In all the circumstances, the Board viewed the terms of
the Standard Transaction as fair and reasonable and in the best
interests of the Corporation and its shareholders.
After considering all of the above factors, among others, as well as the
opinion, discussed below, of the Corporation's financial advisor, the
Corporation's Board of Directors unanimously
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approved the Stock Purchase Agreement and recommends that the Corporation's
shareholders vote FOR the Standard Transaction.
In deciding whether to vote for or against the Standard Transaction, the
Corporation's stockholders should consider, among other factors, the financial
condition and operating prospects of the Corporation and the restrictions
involved in continuing to operate as a regulated insurance holding company. In
this regard, Corporation shareholders should consider the information under
"Consequences of Not Closing the Standard Transaction" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Opinion Of Corporation's Financial Advisor
Mercer Capital has rendered its opinion that the Standard Transaction is
fair to the shareholders of the Corporation from a financial point of view. The
opinion letter is attached hereto as Appendix C. Mercer Capital is a business
appraisal and financial advisory firm founded in 1982 and located in Memphis,
Tennessee. Mercer Capital has valued numerous companies engaged in financial
services including commercial banks, savings banks, insurance companies,
mortgage bankers, commercial finance companies and consumer finance companies.
Pursuant to the terms of an engagement letter dated March 13, 1995, the
Corporation has agreed to pay Mercer Capital, as financial advisor to the
Corporation, a fee estimated at $15,000 to $18,000. The Corporation has also
agreed to reimburse Mercer Capital for its reasonable out-of-pocket expenses,
including all reasonable fees and disbursements of counsel, and to indemnify
Mercer Capital and certain related persons against certain liabilities relating
to or arising out of its engagement.
As noted above under "Recommendation of the Board of Directors; Reasons for
Sale," the fairness opinion of Mercer Capital was one of the factors considered
by the Corporation's Board of Directors in determining to approve the Standard
Transaction.
Neither Mercer Capital, its shareholders, nor its employees had any
business relationship with the Corporation or any of its subsidiaries or
affiliates or with Standard or any of its subsidiaries or affiliates within the
past two years, except for this engagement and comparable previous engagements
to evaluate the previously proposed acquisitions of the Corporation discussed
above under "Background of Proposed Sale." No other business relationships are
contemplated at this time. No limitations were imposed by management or the
Board of Directors of the Corporation on the scope of the analysis or the
information to be reviewed.
In arriving at its opinion that the Standard Transaction is fair to the
Corporation's shareholders from a financial point of view, Mercer Capital
considered, among other factors, the following:
1. The Corporation has two pressing cash flow needs, consisting of the
$3,689,000 Term Loan due to Standard and $1,720,000 Convertible Notes
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due to various holders. Each of these obligations is due at closing of
the Standard Transaction or 90 days following cancellation of the
Stock Purchase Agreement by either party. In any event, the
Convertible Notes are due December 27, 1995. In this regard, Mercer
Capital considered
a. Virtually all of the Corporation's assets are pledged as
collateral to these obligations. The holder of the Term Loan has
a first security interest in the capital stock of Dixie Life
which the Corporation owns and second priority claim, subject to
a first mortgage securing the debt of Vanguard, in the building
owned by Vanguard. The holders of the Corporation's Convertible
Notes hold a second security interest in the capital stock of
Dixie Life and a substantial portion of the Corporation' holdings
in marketable equity securities are subject to an escrow
agreement securing the Convertible Notes.
b. The Corporation must fund these debt service needs from
dividends from Dixie Life, additional borrowings or refinancing
of the debt, or the sale of assets or by merging with another
company or securing new equity capital.
c. The Corporation's major asset and its only operating asset is
its investment in Dixie Life.
d. In its present financial condition, because of regulatory
constraints, Dixie Life could not pay a dividend sufficient to
service these debts when due.
e. If the Corporation failed to meet its debt service obligations
and the Corporation's creditors exercise their collateral rights
under the related debt instruments, the Corporation's assets
would be essentially depleted and its shareholders would be
severely harmed financially.
f. The Corporation has sought to raise additional capital or find
a suitable merger partner since early 1993. It successfully
completed the issuance of 2,000,000 shares of its Common Stock in
exchange for marketable equity securities with a market value of
$2,000,000 in November 1994 but all other efforts have been
unsuccessful. While other efforts are on going, none appear as
imminent or certain as the Standard Transaction.
g. Dixie Life has had to resort to the sale of blocks of its
accident and health business and enter into reinsurance
transactions which provided surplus relief in order to maintain
acceptable levels of statutory capital and surplus.
14
<PAGE>
2. Dixie Life is the defendant in litigation filed by the purchaser of
two Charter Contracts, alleging that Dixie Life did not pay dividends
on Charter Contracts in accordance with the terms of those contracts.
A rider to those contracts provides that Dixie Life will allocate 35%
of its statutory net income, as defined, for dividends to the holders
of Charter Contracts. Mercer Capital concluded that the presence of
these contracts has been a hindrance to the Corporation in its efforts
to merge with another company or sell Dixie Life.
3. The Corporation has incurred substantial losses in 1994 and 1993
and these losses continued in the first quarter of 1995.
4. The Corporation is not profitable at its current size and it does
not appear to have a means of growing without an infusion of capital.
5. The opinion of the Corporation's independent auditors has been
modified in 1994 and 1993 because of the existence of substantial
doubt about the Corporation's ability to continue as a going concern.
6. The market for the Corporation's Common Stock is generally
illiquid, particularly for large blocks of shares.
7. Mercer Capital, using a forecast of a run-off of Dixie Life's in
force insurance as of December 31, 1994 prepared by the Corporation,
developed a value of the block of business based on the expected cash
flows of that book of business discounted at 18%. They used that value
for the book of business to develop a proforma book value, after
consideration of taxes and future potential payments to holders of
Charter Contracts, assuming sale of the block of business and
retention of Dixie Life as a subsidiary. That resultant value was more
than the sales price of Dixie Life. Mercer Capital, however, cautioned
that this valuation did not take into account the cost of dealing with
the historical problems of the Charter Contracts and that the
valuation estimates could not be given excessive weight, considering
that efforts to sell the Corporation or Dixie Life have been on going
for so long.
8. Mercer Capital obtained certain information about other publicly
traded insurance companies but concluded that comparison of those
companies to the Corporation was not meaningful because of the
Corporation's recent operating history.
9. Mercer Capital searched for other transactions involving the sale
of controlling interest in a life insurance company for comparison to
the Standard Transaction but found no transactions they considered
comparable.
15
<PAGE>
Federal Income Tax Consequences
The Corporation does not expect any federal tax consequences from the
Standard Transaction.
Unless a shareholder perfects his dissenter's rights as discussed below,
there are no federal tax consequences to the shareholder arising from the
Standard Transaction. A shareholder who perfects his dissenter's rights will
recognize a capital gain or loss, if the Common Stock is a capital asset in the
hands of the dissenting shareholder, equal to the difference between his basis
in the Common Stock for which appraisal rights were sought and the amount of
cash received for such shares, exclusive of any interest. Such holders should
consult their own tax advisers.
Employment Contracts
Standard and Robert B. Neal, a director and President of the Corporation,
have agreed to enter into an employment agreement effective upon the closing of
the Standard Transaction. The terms, which have been agreed to in principle,
provide for Mr. Neal's employment as President of Dixie Life for a three year
period commencing with the closing of the transaction. Mr. Neal's compensation
will remain at the same level as his present annual salary of $125,269, and be
adjusted for cost of living increases. In addition, Mr. Neal will receive a $500
monthly automobile allowance, annual bonuses as determined by the Chairman of
the Board of Standard, and customary employee benefits.
It also is expected that Thomas F. Flowers, Jr., a Senior Vice President of
the Corporation, will enter into a business relationship with Standard related
to marketing. However, the nature and terms of Mr. Flower's arrangements are
indefinite at this time.
The Stock Purchase Agreement
The following is a summary of the material provisions of the Stock Purchase
Agreement and does not purport to be complete. The Stock Purchase Agreement is
attached as Appendix A to this Proxy Statement and is incorporated herein by
reference. This summary is qualified in its entirety by reference to the Stock
Purchase Agreement. Shareholders of the Corporation are urged to read the Stock
Purchase Agreement.
Terms of the Sale. The Stock Purchase Agreement provides that the
Corporation will sell 100% of its holdings in the common capital stock of Dixie
Life to Standard at closing of the Standard Transaction. Dixie Life will no
longer be a subsidiary of the Corporation after closing and the Corporation will
no longer have any insurance operations.
As consideration for its holdings in Dixie Life, the Corporation's
$3,689,000 indebtedness to Standard under the Term Loan will be canceled and
Standard will assume the Corporation's obligation, aggregating $1,720,000, under
its Convertible Notes and will pay the Corporation $3,000,000. In addition, the
Corporation will receive the first $175,000 Dixie Life collects on
16
<PAGE>
agent advances after closing. The purchase price will be reduced by the amount
by which Dixie Life's statutory capital and surplus, as defined, ("Defined
Statutory Surplus") falls below $6,410,000 at closing or increased by the amount
by which Defined Statutory Surplus exceeds $6,500,000 at closing. If the
Standard Transaction is closed in July 1995, under the terms of the Stock
Purchase Agreement the final selling price will be based on the June 30, 1995
statutory balance sheet of Dixie Life. At June 30, 1995, Defined Statutory
Surplus was $672,000 less than at December 31, 1994. As discussed below, the
purchase price may also be adjusted based on the resolution of certain
litigation involving life insurance policies previously issued by Dixie Life. In
addition, Dixie Life will continue to pay the Corporation's wholly-owned
subsidiary, Vanguard, Inc. ("Vanguard"), $15,000 per month through the December
31, 1996 expiration of a lease between Dixie Life and Vanguard. The lease covers
the building occupied by the Corporation and its subsidiaries, including Dixie
Life. Certain investments which have been made by Dixie Life since December 31,
1995 will be transferred to the Corporation at closing in lieu of cash. At March
31, 1995, such investments amounted to approximately $540,000.
As described in "Business of the Company--Legal Proceedings", Dixie Life is
defendant in a litigation involving certain Charter Contracts. The Stock
Purchase Agreement provides that, if a settlement agreement is reached in this
matter prior to closing, settlement costs up to $600,000 will be borne entirely
by Standard, settlement costs between $600,000 and $1,000,000 will be borne
equally by Standard and Dixie Life and settlement costs in excess of $1,000,000
will be borne by Standard.
Certain Representations and Warranties. The Stock Purchase Agreement
contains various representations and warranties of the Corporation and Standard
relating to, among other things, the following matters (which representations
and warranties are subject, in certain cases, to specified exceptions): (i) the
due organization, power and standing of, and similar corporate matters with
respect to each of the Corporation, Dixie Life and Standard; (ii) the
authorization, execution, delivery, performance and enforceability of the Stock
Purchase Agreement by the Corporation, Dixie Life and Standard and of the
transactions contemplated thereby; (iii) Dixie Life's capitalization; (iv) the
absence of any conflict with each of the Corporation's, Dixie Life's or
Standard's articles of incorporation, bylaws and agreements, and compliance with
applicable laws; (v) the receipt of any governmental or regulatory
authorizations, consents or approvals required to consummate the transaction;
(vi) the possession by Dixie Life of all valid licenses, franchises, permits,
registrations, approvals and authorizations relating to the conduct of its
businesses; (vii) the accuracy and completeness of Dixie Life's financial
statements, and its books and records; (viii) the determination and
qualification of Dixie Life's reserves; (ix) the absence of any litigation that
would have a material adverse effect on the business or condition of the
Corporation, Dixie Life or Standard, or their ability to perform their
respective obligations under the Stock Purchase Agreement; (x) the timely filing
of all regulatory reports and other documents required to be filed by Dixie Life
with regulatory authorities; (xi) the status of various Dixie Life employee
benefit plans and the absence of defaults thereunder; (xii) the absence of
certain changes or events relating to the financial condition, business or
results of operations of Dixie Life; (xiii) the status of various tax matters
relating to the Corporation or Dixie Life; (xiv) the status of certain assets of
Dixie Life; (xv) the absence of any brokerage, finder's or other fee due in
connection with the Stock Purchase Agreement; (xvi) the absence of any untrue
statements of
17
<PAGE>
material fact or omission to state a material fact in the Stock Purchase
Agreement or any certificate furnished in connection with the Stock Purchase
Agreement or transactions thereby contemplated; and (xvii) the existence of
material contracts and commitments of Dixie Life and the existence of no breach
or default under any such contracts.
Conduct of Business Pending Sale. Under the terms of the Stock Purchase
Agreement, between the date the Stock Purchase Agreement was executed (April 18,
1995) and closing of the Standard Transaction, Dixie Life will conduct its
business only in the ordinary course and consistent with past practices. Dixie
Life may not introduce new products until closing without the permission of
Standard.
Conditions to Consummation of the Sale. Standard and the Corporation are
not obligated to consummate the Standard Transaction under the Stock Purchase
Agreement if, among other conditions, there are pending or threatened actions
preventing or seeking to prevent such consummation or all required regulatory
approvals have not been obtained. Opinions of counsel requiring certain matters
are also required prior to closing.
Standard has filed an application with the Mississippi Insurance Department
to obtain approval of the change in control of Dixie Life that will result from
the Standard Transaction. The application is pending before the Commissioner and
it is anticipated that a hearing on the application will be held promptly after
the annual meeting, if the Standard Transaction is approved by the shareholders
of the Corporation.
Additionally, Standard is not obligated to close if, among other
conditions, there has been an adverse change in Dixie Life's business; its
officers and directors have not resigned or the Corporation's shareholders have
not approved the Standard Transaction. The termination, or assignment to
Standard, of the Corporation's current management agreement with Dixie Life also
is a condition to Standard's obligation to close the Standard Transaction.
Fees and Expenses. The Stock Purchase Agreement provides that the
Corporation and Standard shall each pay their own expenses in connection with
the Standard Transaction.
Termination; Amendment; Governing Law. The Stock Purchase Agreement may be
terminated prior to closing (a) by mutual consent of the Corporation and
Standard, (b) by either party if any of the covenants contained in the Stock
Purchase Agreement have not been satisfied, performed or complied with in any
material respect at or before closing and (c) at any time after August 1, 1995
by the Corporation or Standard if closing has not occurred, provided such
failure to close is not caused by a breach of the Stock Purchase Agreement by
the terminating party.
The Stock Purchase Agreement may be changed, waived, discharged or, except
as stated above, terminated only in writing signed by both the Corporation and
Standard and shall be construed in accordance with and governed by the laws of
the State of Indiana.
The members of the Corporation's and Dixie Life's Boards of Directors, in
the aggregate, directly own 1,712,388 shares, or 16.3% of the Common Stock
outstanding and intend to vote
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<PAGE>
FOR the Standard Transaction. Family members of the directors of the Corporation
and Dixie Life own, in the aggregate, 916,364 shares, or 8.7% of the Common
Stock, as to which such directors disclaim beneficial ownership. The Corporation
has been informed that the purchasers of the Common Stock in the November
Transaction and the PMM Transaction who, in the aggregate own 2,000,000 shares,
or 19.1%, and 2,100,000 shares, or 20.0%, respectively, of the Common Stock
outstanding intend to vote FOR the Standard Transaction.
Vote Required for Approval
Approval of the Standard Transaction requires the favorable vote of the
holders of a majority of the outstanding shares of Common Stock of the
Corporation. Accordingly, if the purchasers in the November Transaction, the PMM
Transaction and the family members of directors vote in favor of Proposal No. 1,
that vote, together with the votes of the members of the Corporation and Dixie
Life Boards, will constitute a 64.1% vote for Proposal No. 1, thereby assuring
the approval of the Standard Transaction.
The Board recommends that you vote FOR the proposed sale of Dixie Life.
DISSENTERS' RIGHTS OF SHAREHOLDERS
General
The following is a summary of Article 13 of the Mississippi Business
Corporation Act ("Article 13" and "Act" respectively) and the procedures for
shareholders dissenting from the sale by the Corporation of the capital stock of
Dixie Life which it owns and demanding dissenters' rights. This summary is
qualified in its entirety by reference to Article 13, which is reprinted in full
as Appendix B to this Proxy Statement. Appendix B should be reviewed carefully
by any shareholder who wishes to assert statutory dissenters' rights. FAILURE
STRICTLY TO COMPLY WITH THE PROCEDURES SET FORTH IN ARTICLE 13 WILL RESULT IN
THE LOSS OF DISSENTERS' RIGHTS.
Section 13.02 of Article 13 provides that a shareholder is entitled to
dissent from and obtain payment of the fair value of his shares of the
Corporation in the event of, among other things, the sale of substantially all
of the property of the Corporation other than in the ordinary course of business
when such sale requires shareholder's approval. The proposed sale by the
Corporation of all of the capital stock of Dixie Life which it owns constitutes
the sale of substantially all of the Corporation's assets and is not in the
Corporation's ordinary course of business. Section 12.02 of Article 12 of the
Act requires approval by the shareholders of the Corporation for the sale.
Accordingly, inasmuch as the conditions enumerated in Section 12.02 of
Article 12 and Section 13.02 of Article 13 of the Act are present, shareholders
of the Corporation have the statutory right to dissent under Article 13.
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<PAGE>
As used in Article 13, the term "shareholder" includes the record
shareholder or the beneficial shareholders.
Procedure for Exercise of Dissenter's Rights
Shareholders who wish to exercise dissenters' rights:
(i) must deliver to the Corporation, before the vote on Proposal No. 1 is
taken, written notice (the "Dissenter's Notice") of their intent to demand
payment for their shares if Proposal No. 1 is approved; and
(ii) must NOT vote their shares in favor of Proposal No. 1.
SHAREHOLDERS WHO DO NOT SATISFY THESE REQUIREMENTS ARE NOT ENTITLED TO
PAYMENT FOR SHARES UNDER ARTICLE 13.
Shareholders electing to exercise dissenters' rights under Article 13 must
NOT VOTE FOR approval of Proposal No. 1. Under Article 13, a vote against
approval of Proposal No. 1 is not required in order for a shareholder to
exercise dissenters' rights. HOWEVER, IF A SHAREHOLDER RETURNS A SIGNED PROXY
BUT DOES NOT SPECIFY A VOTE AGAINST APPROVAL OF PROPOSAL NO. 1 OR AN ELECTION TO
ABSTAIN, THE PROXY WILL BE VOTED FOR THE PROPOSAL WHICH WILL HAVE THE EFFECT OF
WAIVING THAT SHAREHOLDER'S DISSENTERS' RIGHTS.
If the Standard Transaction is consummated, the Corporation must send a
notice to that effect (the "Company Notice") no later than 10 days after the
closing date to all shareholders that have perfected their right to assert
dissenters' rights under Article 13.
Upon receipt of the Company Notice, dissenters must demand payment for
their shares by the date set forth in the Company Notice. A shareholder who
elects to exercise dissenters' rights must mail or deliver his or her written
demand to: Dixie National Corporation, 3760 I-55 North, Jackson, Mississippi
39211. The written demand for payment must comply with the provisions of Article
13 and must specify the shareholder's name and mailing address, the number of
shares of Corporation Common Stock owned, and state that the shareholder is
demanding payment of his or her shares. The shareholder must also certify that
the shareholder had beneficial ownership of the shares before the date set forth
in the Company Notice, which is April 10, 1995, the date of the first
announcement of the proposed sale to the news media. The shareholder must also
deposit his or her share certificates in accordance with the terms of the
Company Notice. Failure to make a payment demand or to deposit the share
certificates where required, each by the dates for such action set forth in the
Company Notice, shall forfeit the shareholder's right to receive payment for his
or her shares.
Upon receipt of a payment demand, the Corporation shall pay shareholders
who complied with Article 13 the amount the Corporation estimates to be fair
value of the shares submitted by such shareholder plus accrued interest. Certain
financial information concerning the Corporation,
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<PAGE>
its estimate of the value of the shares, an explanation of how interest was
calculated, and a statement of rights to demand payment along with a copy of
Article 13, must accompany such offer or payment.
PROCEDURE IF THE DISSENTERS ARE DISSATISFIED WITH THE PAYMENT
Dissenters may reject the Corporation's payment and demand in writing
payment of the fair value of their shares and interest due based on their own
estimate of the fair value of their shares and amount of interest due. To be
entitled to such rights, the dissenters must notify the Corporation of their
demand in writing within 30 days after the Corporation made payment for the
shares.
If a dissenter has rejected the Corporation's payment and demanded payment
of the fair value of the shares and interest due and the demand for payment
remains unsettled, the Corporation shall commence a judicial proceeding within
60 days after receiving the payment demand and petition an appropriate court, as
described in Article 13, to determine the fair value of the shares and accrued
interest. If the Corporation does not commence such action within the required
sixty (60) day period, it shall pay each dissenter whose demand remains
unsettled the amount demanded.
The court in an appraisal proceeding shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. Additionally, the court may assess fees of legal counsel
and of experts for the respective parties. The court shall assess the costs
against the Corporation, except that the court may assess costs against all or
some of the dissenters to the extent the court finds the dissenters acted
arbitrarily, vexatiously or not in good faith in demanding payment under Article
13, or the court may assess counsel fees against the dissenters who were
benefited.
THE ABOVE IS MERELY A SUMMARY OF ARTICLE 13 OF THE MISSISSIPPI BUSINESS
CORPORATION ACT. THIS SUMMARY IS QUALIFIED BY REFERENCE TO ARTICLE 13, WHICH IS
SET FORTH IN ITS ENTIRETY AS APPENDIX B TO THIS PROXY STATEMENT. SHAREHOLDERS
DESIRING TO EXERCISE DISSENTERS' RIGHTS SHOULD REFER TO THE FULL TEXT OF ARTICLE
13 AND SHOULD CONSULT COUNSEL SINCE FAILURE TO COMPLY STRICTLY WITH THE
PROVISIONS OF ARTICLE 13 WILL DEFEAT THEIR DISSENTERS' RIGHTS.
CONSEQUENCES OF NOT CLOSING THE STANDARD TRANSACTION
The Standard Transaction provides an immediate and complete solution to the
severe liquidity problems facing the Corporation, including the obligation to
satisfy the $3,689,000 owed Standard under the Term Loan and $1,720,000 owed to
the holders of the Corporation's Convertible Notes. The Term Loan was extended
as part of the Stock Purchase Agreement and, due in part to the existence of the
Stock Purchase Agreement, the Convertible Notes have also
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<PAGE>
been extended. The Term Loan will be canceled and the Convertible Notes will be
assumed by Standard at closing of the Standard Transaction.
If the Standard Transaction is not consummated, either for lack of
shareholder or regulatory approval or some other reason, the Term Loan and
Convertible Notes will be due 90 days after the Stock Purchase Agreement is
terminated. In any event, the Convertible Notes will be due not later than
December 27, 1995. The Corporation has no present prospects for satisfying these
debts except through the Standard Transaction.
The capital stock of Dixie Life serves as collateral under the Term Loan
and the holders of the Convertible Notes have a second security interest in such
stock. The building, which houses the offices of the Corporation and is owned by
Vanguard, is subject to a first mortgage to Trustmark. Vanguard has executed a
borrowed money certificate pledging its building as additional collateral to the
Term Loan. Finally, a substantial portion of the Corporation's holdings in
Alanco common stock are pledged as collateral to the Convertible Notes through
the instrument which extended their due date.
If the Standard Transaction is not consummated, and either Standard or the
holder's of the Convertible Notes exercise their rights against the collateral
they hold, the Corporation's shareholders would hold shares of a company with
virtually no assets.
FUTURE BUSINESS PLANS
General
Assuming that the Standard Transaction is consummated, the Corporation will
have no debt except a mortgage on its office building, current assets in excess
of $5,000,000 and no operations. At the present time, the Corporation does not
expect to reenter the life insurance business. In analyzing opportunities for a
new direction for the Corporation after the sale of Dixie Life, in consultation
with UMS, the Corporation considered taking part in the activities of PMM on a
regional basis.
PMM was formed in November 1993 to engage in the ownership and operation of
health care facilities specializing in pain care. Its primary business activity
is the development of a proprietary multi-state network of medical facilities
that specialize in the comprehensive treatment of patients seeking relief of
chronic pain. Each facility is or will be designed and equipped to accommodate a
multi-modality pain management, psychological and physical rehabilitation
program, as well as to accommodate other non-affiliated surgeons who perform
their own non-pain related surgical procedures at these facilities. PMM
currently operates one facility in Phoenix, Arizona, which opened in January
1995 and is finalizing plans for additional facilities in Arizona to be opened
by June 30, 1996.
The combination of all facets of pain management was successfully test
marketed by the founders of PMM in Phoenix, Arizona and Lafayette, Louisiana
over the course of the past two
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years. PMM was a development stage company until it opened its Phoenix facility.
Accordingly, PMM does not yet have a meaningful history of operations.
After review of the prospects for PMM and the efforts of its management in
developing PMM to the stage of opening its first clinic, in March 1995 the
Corporation's Board approved the acquisition of a 16% interest in PMM in
exchange for 2,000,000 shares of the Corporation's Common Stock and, in exchange
for 100,000 additional shares, an option to acquire the remaining 84% for
10,400,000 shares ("84% Option"). In April 1995, the Board approved exercising
the 84% Option as soon as the 16% interest and option were obtained. These Board
decisions were based on its understanding that PMM would open additional clinics
in Lafayette and New Orleans, Louisiana in June and September 1995,
respectively.
Through further discussions between PMM and the Corporation, the
Corporation learned that plans for the Lafayette and New Orleans clinics were
canceled and the Phoenix clinic was not meeting expected levels of activity. As
a result, in May 1995, the Board rescinded its authorization to exercise the 84%
Option but instructed management to proceed with the Corporation's commitment to
acquire the 16% interest and the 84% Option. On June 29, 1995 the Corporation
issued 2,000,000 common shares for the 16% interest in PMM and 100,000 common
shares for the 84% Option.
Activity at the Phoenix clinic has continued to fall below expectations,
due in part to the lack of Medicare approval of the facility until June 1995. As
a result, on July 14, 1995, the Corporation informed PMM that it would not
exercise the 84% Option. While the Corporation may in the future expand its
relationship with or acquire an additional interest in PMM, the Corporation has
made no decision nor formulated any plan or proposal to do so, and has not
reached any understanding or agreement in connection thereto.
John E. Haggar, who is a director of the Corporation, was Chief Financial
Officer and a director of UMS until June 1995. From June 1, 1995 Mr. Haggar
became an employee of Alanco and it is anticipated that he will become an
officer at the next meeting of Alanco's Board of Directors. Alanco owned 10% of
PMM prior to the Corporation's acquisition of its 16% interest. James G.
Ricketts, who also is a director of the Corporation, is a director of Alanco.
The Corporation is exploring other potential business opportunities and is
engaged in preliminary discussions with several other companies in which the
Corporation may acquire an equity and/or debt interest. Such discussions are in
their formative stages and no agreements have been reached in connection
therewith.
Basis for Consideration Paid Or To Be Paid For Investment in PMM
The amount of the consideration paid by the Corporation for the acquisition
of its interest in PMM, as described above, bears no relation to PMM's current
financial position or operations. In this connection, the Corporation and UMS,
on April 20, 1995, entered into an amended and restated agreement, effective as
of March 24, 1995 ("Second Amended and Restated UMS Agreement"), which provides
that UMS has the right to use its best efforts to assist the Corporation in
placing up to 12,500,000 additional shares of the Corporation's Common Stock in
non-U.S. markets, pursuant to Regulation S, or otherwise in private placements.
In that regard, on June 29, 1993 the Corporation acquired the 16% interest in
PMM and the 84% Option as
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described above. The terms of these transactions, including the number of shares
of Common Stock to issued by the Corporation for its interest in PMM, were
negotiated between the Corporation and PMM.
BUSINESS OF THE COMPANY
The Corporation was organized in 1966 as a Mississippi corporation and has
been primarily engaged in the life insurance business through its 99.3% owned
subsidiary, Dixie Life, a Mississippi corporation organized in 1965. Prior to
the sale, in two transactions completed in 1994, of all of its in force accident
and health business, most of Dixie Life's premium income was derived from
accident and health products.
Virtually all of the Company's consolidated revenues are represented by
premium income and net investment income generated in Dixie Life's insurance
operations. For the year ended December 31, 1994, the Company had total revenues
of $11,651,343 and a net loss of $2,554,729. The Corporation's financial
condition is dependent upon the operations of Dixie Life, as well as on Dixie
Life's ability to transfer funds to the Corporation to meet expenses, debt
service requirements and other financial needs of the Corporation. In that
regard, provisions of the Mississippi insurance law impose restrictions upon the
transfer of funds from an insurance company subsidiary, such as Dixie Life, to a
parent shareholder, such as the Corporation.
In any case, the operations of Dixie Life have not generated income of an
amount that would adequately meet the Corporation's debt service requirements,
even if some funds were allowed to be transferred to the Corporation for those
purposes.
All of the shares of Dixie Life owned by the Corporation are pledged as
collateral under the Term Loan, and the holders of the Convertible Notes also
have a security interest in those shares. In addition, the home office building
of the Corporation and Dixie Life which is owned by Vanguard, is pledged as
additional collateral for the Term Loan, and a substantial portion of the Alanco
shares owned by the Corporation also secure the Convertible Notes.
General
Dixie Life has traditionally offered various forms of life, health and
annuity insurance products, primarily designed for specialized insurance
markets. However, as noted above, Dixie Life sold virtually all of its accident
and health business in late 1993 and mid 1994. Consequently, from July 1994,
Dixie Life has only been marketing life insurance products, primarily in the
burial or final expense market. Dixie Life will continue its present marketing
program pending consummation of the Standard Transaction.
The following table sets forth information as to life insurance in force
and premium income (after giving effect to amounts ceded and assumed) from all
business of Dixie Life for the last five years:
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<PAGE>
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Life Insurance
in force (at
December 31) $224,782,000 $188,337,000 $330,440,000 $540,989,000 $389,589,000
Premium income:
Life $ 3,878,000 $ 4,935,000 $ 4,455,000 $ 4,466,000 $ 3,803,000
Accident and
Health 5,302,000 14,185,000 12,287,000 10,054,000 8,032,000
Annuity 336,000 379,000 437,000 627,000 623,000
------------ ------------ ------------ ------------ ------------
TOTAL $ 9,516,000 $ 19,499,000 $ 17,179,000 $ 15,147,000 $ 12,458,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Premium income from new business only for the last five years is shown in the
following table:
1994 1993 1992 1991 1990
Life $ 301,000 $ 1,068,000 $ 837,000 $ 942,000 $ 1,293,000
Accident and Health 1,530,000 4,012,000 4,184,000 3,857,000 2,685,000
Annuity 9,000
------------ ------------ ------------ ------------ ------------
TOTAL $ 1,831,000 $ 5,080,000 $ 5,021,000 $ 4,808,000 $ 3,978,000
</TABLE>
In 1993, a marketing director new to Dixie Life produced a significant
amount of new life business. In early 1994, this marketing director ceased
producing business for Dixie Life, significantly contributing to the decrease in
first year life premiums in 1994. The 1994 decrease in first year accident and
health premiums was caused by the sale of Dixie Life's accident and health
business.
Statutory Surplus and Accounting
An insurance company such as Dixie Life must maintain minimum levels of
Statutory Surplus, as required by the insurance laws and regulations of the
insurance company's state of domicile and the various other states in which it
operates. See "Insurance Company Regulation," below. At December 31, 1994, Dixie
Life's Statutory Surplus was approximately $6,280,000. The highest level of
Statutory Surplus required by the laws or regulations of any state in which
Dixie Life operates is $3,000,000.
Statutory accounting practices, as prescribed by the Mississippi Department
of Insurance, differ from generally accepted accounting principles in several
respects. The most significant of these differences is that statutory accounting
practices require that costs incurred in writing new insurance business be
expensed as paid, while generally accepted accounting principles require the
capitalization of such costs, which are then amortized over the expected life of
the insurance products sold. The principal such first year cost expensed in its
entirety is commissions, which are significantly greater in the first year
compared to renewal commissions. For example, on accident and health policies
the first year commission is typically 70% of premium while the renewal
commission is typically 20%. On life insurance policies the first year
commissions are as much as 105% of premiums while the renewal commission is
typically 10%. The excess of first year commissions over renewal commissions is
deferred under generally accepted accounting principles, as are other costs
associated with the issuance of a policy.
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Because the high first year costs associated with issuance of a policy are
expensed under statutory accounting practices, high levels of new business
create drains on statutory net income and therefore Statutory Surplus. Dixie
Life experienced increased levels of new business for several years through
1992, creating a strain on Statutory Surplus. However, primarily as a result of
the sale of Dixie Life's accident and health business and a 1993 agreement by
Dixie Life to cease writing new business in South Carolina the trend did not
continue in 1994 and 1993. In order to write an increasing amount of new
business while continuing to meet the statutory requirements of the states in
which it conducted its insurance operations, it has been necessary for Dixie
Life to utilize various forms of surplus relief.
The principal source of surplus relief since 1989 has been financial
reinsurance agreements, which for GAAP purposes are treated as financing
arrangements, but for statutory accounting purposes provide reserve credits
that, in equal amount, increase Statutory Surplus. Since September 1992, Dixie
Life has had a financial reinsurance agreement with Crown Life Insurance
Company, a Canadian corporation (Crown Agreement). Under the Crown Agreement,
Dixie Life was entitled to a credit to its statutory reserves of $1,985,000 at
December 31, 1994. The amount of this credit will decrease in the amount of
$165,000 each calendar quarter beginning in 1995. See "Reinsurance", below.
The sales of Dixie Life's accident and health business discussed above
increased Statutory Surplus by $5,322,000 and $2,125,000 in 1994 and 1993,
respectively.
Capital Requirements of the Corporation
As previously discussed under "Proposal No. 1 - Sale of Dixie National Life
Insurance Company", the Corporation has taken several steps to strengthen the
Statutory Surplus of Dixie Life and to find a solution to the significant
liquidity needs of the Corporation.
Products and Markets
Life insurance policies sold in the final expense, or burial, market
include fixed premium interest sensitive policies that provide for increasing
death benefits, as well as traditional whole life policies. These policies are
designed to cover expenses such as funeral, last illness, monument and cemetery
lot. The policies provide for a death benefit, generally not in excess of
$10,000, and a level premium payment. The products include a cash value which
may be borrowed by the policyholder.
Dixie Life's policies sold in other markets include interest sensitive and
traditional whole life policies and forms of term policies. The interest
sensitive and whole life policies include cash values which may be borrowed by
the policyholder. Dixie Life issues policies on both a participating and
non-participating basis. See Note 8 of Notes to Consolidated Financial
Statements.
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Dixie Life conducts insurance operations in 21 states, primarily in the
southeastern and southwestern United States, and the District of Columbia.
Sales Force and Employees
Dixie Life's insurance products are offered through a sales force
consisting, as of December 31, 1994, of approximately 1,760 agents, 375 general
agents, and 50 marketing directors, with whom Dixie Life has non-exclusive
contracts. Sales personnel are compensated on a commission basis and are
provided incentives for increased production. A relatively small number of Dixie
Life's marketing directors generate a significant amount of premium income and
the loss of one or more marketing directors could have an adverse economic
effect on the Company. In that regard, see "General," above, with respect to the
impact of the loss of a marketing director on 1994 new life insurance business.
At December 31, 1994, the Company had approximately 30 home office
employees, including officers. In connection with the sale of Dixie Life's
accident and health business, the home office staff was further reduced to 26 at
March 15, 1995. At December 31, 1993, such staff numbered approximately 50.
Competition
The life insurance industry is highly competitive. There are over 2,000
life insurance companies nationwide. Dixie Life's competitors consist of both
stock and mutual companies. Because the profits, if any, of mutual companies
accrue to the benefit of policyholders, such companies may have certain
competitive advantages. Dixie Life is a relatively small, essentially regional,
insurance company that competes with life insurance companies that are more
widely known, have far greater resources and offer a broader range of insurance
products. Dixie Life also competes with other regional insurance companies of a
more comparable size. These factors contribute to the competition encountered by
the Company in attracting the services of qualified sales agents and may result
in higher agent costs. Based on industry data, major life companies generally
pay smaller commissions than Dixie Life. Compared to the regional companies in
the market area it services, Dixie Life believes it pays similar commissions.
The Company expects this pattern to continue in the foreseeable future. Dixie
Life believes that its policies and rates, the services performed by its agents,
and its claims administration are generally competitive with those offered by
both stock and mutual companies in the jurisdictions in which it operates.
Investments
Dixie Life is required to invest its assets in accordance with applicable
provisions of the Mississippi insurance law. The following table shows the
composition of Dixie Life's invested assets at December 31, 1994 and 1993,
valued on a GAAP basis:
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<PAGE>
1994 1993
Carrying Percent of Carrying Percent of
Value Total Value Total
----------- ------- ----------- -------
Fixed maturities $17,332,660 54.7% $13,489,902 43.0%
Policy loans 3,060,185 9.7 3,025,981 9.6
Government
guaranteed student loans, net 5,978,288 18.9 7,159,975 22.9
Short-term investments 4,860,347 15.3 3,040,448 9.7
Cash and cash equivalents 459,109 1.4 4,655,458 14.8
----------- ------- ----------- -------
TOTAL $31,690,589 100.0% $31,371,764 100.0%
----------- ------- ----------- -------
----------- ------- ----------- -------
Dixie Life's fixed maturities consist of obligations issued by U.S.
Government agencies and authorities; states, municipalities and political
sub-divisions; public utilities; and other corporate issuers. As the table
shows, there was a substantial increase in fixed maturities and a substantial
decrease in cash and cash equivalents during 1994. In 1994, the Company
completed a plan begun in 1993 to realign the composition of its fixed
maturities and short-term investments to create a portfolio with an average life
of approximately 10 years. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 3 of Notes to
Consolidated Financial statements.
Reinsurance
Dixie Life reinsures substantial portions of its life insurance risks with
other carriers under its excess coverage reinsurance arrangements. Generally,
when the life coverage on any one individual exceeds $55,000, Dixie Life's
maximum retention on the insured is $50,000. The excess coverage is reinsured
under agreements Dixie Life has entered into with various reinsurers, other than
Crown.
In addition to its excess coverage reinsurance arrangements, Dixie Life,
pursuant to the Crown Agreement, has ceded to Crown 90% of the retained portion
of its traditional life and 90% of the retained part of its fixed premium excess
interest sensitive life policies in effect as of September 30, 1992. The face
amount of policies ceded as of the effective date was approximately
$255,455,000. The reinsurance effected under the Crown Agreement is on a
combination coinsurance and modified coinsurance basis. It is expected that the
coinsurance portion will decrease and the modified coinsurance portion will
increase over the term of the Crown Agreement.
As the amount of reinsurance on a coinsurance basis decreases under the
Crown Agreement the amount of the reserve credit available to Dixie Life is
reduced, with a corresponding reduction of Dixie Life Statutory Surplus. The
Crown Agreement provided Dixie Life with $4,500,000 of initial reserve credit.
At December 31, 1994, the reserve credit was $1,985,000 which will be reduced by
not more than $165,000 per quarter ($250,000 per quarter prior to an amendment
effective October 31, 1994). It is anticipated that the Crown Agreement will be
terminated in approximately three years from December 31, 1994, when all of the
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<PAGE>
coinsurance portion of the reinsurance is expected to be converted to modified
coinsurance, unless the agreement is further amended.
Dixie Life has placed assets in trust equal to 105% of the amount of the
reserves on the portion of the ceded block of business originally reinsured
under the Crown Agreement on a coinsurance basis. These assets, with a market
value of approximately $13,435,000 as of December 31, 1994, have been placed in
trust by Dixie Life with a bank.
Under the terms of the Crown Agreement, Dixie Life makes quarterly payments
to Crown which are generally equal to 1% of the reserve credit being provided
under the agreement for the next quarter. The Crown Agreement provides for
various premium and other payments to be made between Dixie Life and Crown.
These payments may offset each other, resulting in a netting of amounts due. No
net quarterly payment to Crown during the remaining life of the Crown Agreement
will exceed the payment made in the next preceding quarter.
Under all of Dixie Life's reinsurance arrangements, Dixie Life remains
liable under its policies to its policyholders, regardless of the ability of the
reinsurer to meet its obligation to Dixie Life.
Dixie Life has assumed reinsurance on a block of life insurance business
under the Servicemen's Group Life Insurance Program. However, this assumption
has virtually no effect on Dixie's earnings from year to year. This assumption
increased Dixie Life's total in force life insurance by approximately
$141,936,000 at December 31, 1994. Dixie does not have any plans to enter into
other assumption reinsurance agreements.
Additional information regarding Dixie's reinsurance policies and
activities is included in Notes 2 and 13 of Notes to Consolidated Financial
Statements.
Regulatory Factors
Dixie Life is subject to regulation and supervision by the insurance
departments of the jurisdictions in which it is licensed. These insurance
departments are charged with the responsibility to assure that insurance
companies maintain adequate capital and surplus, manage investments within
prescribed character and exposure limitations and comply with a variety of
operational standards. They also make periodic examinations of individual
companies and review annual reports on the financial condition of all companies
operating within their respective jurisdictions. Regulations cover many aspects
of the life insurance business, including accounting and financial reporting
procedures.
As a Mississippi domiciled insurer, Dixie Life is primarily subject to
regulation by the Mississippi Insurance Department. An annual statement must be
filed with the Insurance Department in each state in which Dixie Life is
qualified on or before March 1 of each year covering operations and reporting on
the financial condition of Dixie Life as of December 31 of the preceding year.
Periodically, the Mississippi Insurance Department examines the assets,
liabilities and reserves of Dixie Life and performs a full examination of its
operations. The
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<PAGE>
Mississippi Insurance Department's most recent complete examination of Dixie
Life was as of December 31, 1990.
In 1993, the Mississippi Insurance Department completed a targeted
examination as of September 30, 1993. In February 1995, the Department began a
complete examination as of December 31, 1994. The Department invites other
jurisdictions in which Dixie Life does business to participate in its
examinations, if they so desire. An examiner from Delaware, representing the
Eastern Region as set up by NAIC, is participating in the current examination.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed up to prescribed limits for policyholder losses incurred
as a result of insolvent companies that were doing business in the assessing
state. The amount of future assessments, if any, of Dixie Life under these laws
cannot be estimated. Most of these laws do provide, however, that an assessment
may be excused or deferred if it would threaten an insurer's own financial
strength. In addition, insurers are generally allowed a 100% credit for guaranty
assessments paid against future premium tax expense.
Under Mississippi law, the Corporation and Dixie Life are members of an
insurance holding company system. As members of an insurance holding company
system, transactions between the Corporation and Dixie Life are subject to
various statutory controls and limitations and may require approval and trigger
certain reporting requirements. In addition, Mississippi law provides that
certain transactions involving a domestic insurer and any person in its holding
company system shall not be entered into unless the insurer has notified the
Commissioner in writing of the insurer's intention to enter into such
transaction at least 30 days prior thereto, or such shorter period as the
Commissioner may permit, and that the Commissioner has not disapproved such
transaction within such period.
Generally, transactions within a holding company system must be fair and
reasonable; charges or fees for services rendered must be reasonable; accounting
for expenses incurred and for payments received must be allocated to the insurer
in conformity with customary insurance accounting practices consistently
applied; the books and records of the parties to all such transactions must
clearly and accurately disclose the nature and details of the transactions,
including accounting information necessary to support the reasonableness of the
charges or fees to the parties; and the insurer's surplus as regards
policyholders following any dividend or distribution to a shareholder affiliate
must be reasonable in relation to the insurer's outstanding liabilities and
adequate to meet its financial needs. Certain transactions are required to be
reported to the Commissioner.
Mississippi law prohibits the payment of an extraordinary dividend or any
other extraordinary distribution by an insurer to a shareholder until 30 days
after the Commissioner has received notice of the declaration thereof and has
not, within such period, disapproved such payment or has approved such payment
within the permitted period.
An extraordinary dividend or distribution is one which, together with all
other distributions or dividends within the preceding 12 months, exceeds the
lesser of (i) 10% of such
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<PAGE>
insurer's surplus as regards policyholders as of December 31st next preceding,
or (ii) net gains from operations of such insurer, not including realized
capital gains, for the twelve months ending December 31 next preceding. In such
computations, the insurer may carry forward net gain from operations from the
previous two calendar years that have not already been paid out as dividends.
Based upon Dixie Life's net gain from operations in 1994, Dixie Life may pay a
dividend of approximately $200,000 without the approval of the Commissioner.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include employee benefit regulation,
tax law changes affecting the taxation of insurance companies, the tax treatment
of insurance products, and the relative desirability of various personal
investment vehicles.
Investment in Marketable Equity Securities
Pursuant to the UMS Agreement, UMS assisted the Corporation in the November
Transaction involving the sale of 2,000,000 shares of the Corporation's Common
Stock for which the Corporation received 1,230,770 shares of Alanco common
stock. The purchasers in the November Transaction, as required by the UMS
Agreement, were required to maintain the value of the Alanco stock conveyed to
the Corporation at not less than $2,000,000 market value for an agreed period by
delivering, if required, additional shares of Alanco common stock to the
Corporation. In the event the market value exceeded the required $2,000,000, the
purchasers could purchase all, but not less than all, of the Alanco common stock
held by the Corporation for a purchase price of $2,000,000.
The UMS Agreement was subsequently amended, effective March 24, 1995, by
the Second Amended and Restated UMS Agreement, to provide, among other things,
for the following:
(A) the extension of the period during which the purchasers of the
Corporation's Common Stock in the November Transaction are required to maintain
a minimum market value of $2,000,000 from March 31, 1995 to the later of the
closing date of the sale of Dixie Life to Standard, or ninety days from the date
of cancellation of the agreement related to such sale;
(B) the substitution by the November Transaction purchasers of other common
stock for Alanco common stock so long as such substituted stock is currently
traded on NASDAQ, the American Stock Exchange or the New York Stock Exchange;
and
(C) the granting by the Corporation to UMS of an option to assist the
Corporation in acquiring shares of PMM by exchanging 2,000,000 shares of the
Common Stock of the Corporation for 16% of the outstanding shares of PMM and the
acquisition by the Corporation, in consideration for 100,000 shares of its
Common Stock, of an option to acquire the remaining 84% of the shares of PMM in
exchange for 10,400,000 shares of Common Stock of the
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Corporation. On July 14, 1995, the Company informed PMM that it would not
exercise its 84% option.
The Corporation consummated the acquisition of 16% of the shares of PMM on
June 29, 1995 in exchange for 2,000,000 shares of its Common Stock and obtained,
for 100,000 shares of its Common Stock, an option to acquire the remaining 84%
interest for 10,500,000 shares of its Common Stock.
As permitted by the UMS Agreement, as amended, the purchasers in the
November Transaction have substituted shares of common stock of Appletree
Companies, Inc. ("Appletree") in place of shares of Alanco. At June 30, 1995,
the Corporation owned 874,770 shares of Alanco and 500,000 shares of Appletree.
The market value of such stock at June 30, 1995 exceeded the required
$2,000,000.
Legal Proceedings
Dixie Life is a defendant in a suit filed on January 7, 1994, by David
William Becker, plaintiff, in the Circuit Court of Montgomery County, Alabama.
The suit alleges that Dixie Life has failed to properly pay dividends to
holders of its Charter Contract policies. As discussed in Note 13 of Notes to
Consolidated Financial Statements, these policies are participating policies
pursuant to which Dixie Life is obligated to apportion dividends to the holders
of such policies as a group and on a prorata basis, of not less than 35% of the
statutory net profits of Dixie Life, computed by a formula set forth in the
policy. The formula utilizes certain information contained in the annual
statement filed by Dixie Life with the Mississippi Department of Insurance, as
such report was constituted in 1966. The suit was filed as a class action on
behalf of the plaintiff and a class of persons allegedly similarly situated and
alleges the class consists of over 1,000 persons.
The suit seeks judgment in an undetermined amount for alleged underpayment
of dividends and an injunction requiring Dixie Life to pay appropriate dividends
in the future.
Dixie Life has paid a dividend to holders of the Charter Contract policies
in each year since the policies were issued. On a cumulative basis, the total
dividends paid to the holders of the Charter Contract policies since issuance
exceed 35% of the statutory net profits of Dixie Life for the same period as
defined by the policy.
Dixie Life filed an answer to the complaint on March 7, 1994 and intends to
vigorously defend the suit. Dixie Life believes serious questions exist as to
whether a class action is available relative to the plaintiff's claim, and the
identity of the class, if a class action is available. Dixie Life will oppose
the certification of any class and, alternatively, will seek to limit the class.
No class has yet been certified by the court. In the absence of a class, if
any, and its composition, if certified, Dixie Life has no reasonable basis upon
which to estimate its potential liability, if any.
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There are no other pending legal proceedings, expect for routine litigation
incidental to the Company's business, to which the Company or any of its
subsidiaries are a part, or to which any of the Company's property is subject.
SELECTED FINANCIAL DATA
The selected financial data for the Company set forth below as of and for
the years ended December 31, 1994, 1993, 1992, 1991 and 1990 were derived from
the audited consolidated financial statements of the Company. The unaudited
financial information as of and for the three months ended March 31, 1995 and
1994 were derived from the accounting records of the Corporation and its
subsidiaries and reflect, in the opinion of the Company, all adjustments,
consisting only of normal recurring items, which are necessary for a fair
presentation of financial position and results of operations on a basis
consistent with that of the audited financial statements. The results for the
three months ended March 31, 1995 are not necessarily indicative of results
expected for the full year. The selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and notes thereto, each included elsewhere herein.
FOR THE PERIOD ENDED
MARCH 31:
REVENUES
Premiums $ 810,697 $ 4,083,248
Net Investment Income 617,412 537,085
Realized investment
gains (losses) 36,757 11,594
------------ ------------
Total 1,464,866 4,631,927
------------ ------------
------------ ------------
NET INCOME (LOSS) (4,808,323) (909,329)
------------ ------------
------------ ------------
PER COMMON SHARE AMOUNTS
Primary and fully diluted
Net income (loss) $ (0.57) (0.14)
------------ ------------
------------ ------------
AT MARCH 31:
TOTAL ASSETS 40,487,880 52,868,860
------------ ------------
------------ ------------
NOTES PAYABLE
AND OTHER DEBT $ 6,058,506 $ 6,217,981
------------ ------------
------------ ------------
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
DECEMBER 31:
REVENUES
Premiums $ 9,516,157 $19,499,289 $17,178,510 $15,146,819 $12,457,781
Net Investment Income 2,133,635 2,005,075 2,157,848 2,410,940 2,545,802
Realized investment
gains (losses) 1,551 25,580 (24,494) 2,029 (29,818)
------------ ------------ ------------ ------------ ------------
Total $11,651,343 $21,529,944 $19,311,864 $17,559,788 $14,973,765
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
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NET INCOME (LOSS) $(2,554,779) $ (957,138) $ 848,984 $ 1,566,934 $ 2,495,775
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
PER COMMON SHARE AMOUNTS
Primary and fully diluted
Net income (loss) $ (.39) $ (.15) $ .13 $ .24 $ .39
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
AT DECEMBER 31:
TOTAL ASSETS $44,577,452 $56,255,734 $55,540,644 $54,240,107 $49,191,859
------------ ------------ ------------ ------------ ------------
NOTES PAYABLE ------------ ------------ ------------ ------------ ------------
AND OTHER DEBT $ 6,103,839 $ 6,253,670 $ 7,003,517 $ 7,520,447 $ 6,110,609
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with the Selected Financial
Data and the Consolidated Financial Statements and notes thereto appearing
elsewhere in this Proxy Statement.
Liquidity and Capital Resources
General. In 1994 and early 1995, the Corporation devoted significant effort
to strengthening the Statutory Surplus of Dixie Life and reducing the
Corporation's dependence upon the operations of Dixie Life and the ability of
Dixie Life to transfer funds to the Corporation. The following steps were taken
in 1994 and early 1995:
The sale of Dixie Life's accident and health business increased
Dixie Life's Statutory Surplus to a level so that Dixie Life is
not dependent upon the reserve credit provided by the Crown
Agreement to meet minimum levels of Statutory Surplus required by
any state in which it operates. The sale of that business also
allowed Dixie Life to accelerate the recapture of the Crown
reserve credit in 1994, further reducing the dependence on the
Crown Agreement.
The UMS Agreement generally provided a possible source of funds
to satisfy the Term Loan and Convertible Notes. The Alanco shares
acquired under the UMS Agreement in the November Transaction
provided a means of further securing the Convertible Notes upon
the extension of their original May 1, 1995 due date.
The Standard Transaction provides for the satisfaction of the
Term Loan and the Convertible Notes. There are no assurances the
transaction contemplated by the Stock Purchase Agreement will be
consummated.
Liquidity Requirements. Most of the operating liquidity requirements of the
Company arise from the insurance operations of Dixie Life and generally are met
through funds generated by Dixie Life's operations. Premium income and net
investment income provide funds that are used to pay claims to policyholders;
make policy loans; pay costs of obtaining new business, principally first year
commissions; and pay operating expenses. Dixie Life's operations generated
positive cash flow of approximately $778,000, $98,000 and $1,074,000 in 1994,
1993 and 1992, respectively.
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Dixie Life pays a monthly management fee of $154,000 to the Corporation.
Funds provided by the management fee are sufficient to pay operating and
interest expenses of the Corporation. Assuming the Standard Transaction closes,
the Corporation will no longer have this source of revenue, although it will
have eliminated its interest expense and its operating expenses will have been
significantly reduced.
The Corporation's most important liquidity need at this time is for debt
service. At December 31, 1994, the Corporation owed Standard approximately
$3,689,000 under a Term Loan. The Term Loan (originally due March 31, 1995) is
now due at closing of the Standard Transaction or 90 days after the cancellation
of the Standard Transaction by either party. Also, the Corporation's Convertible
Notes, in the amount of $1,720,000, (originally due May 1, 1995) are now due on
the new due date of the Term Loan but not later than December 27, 1995. Although
the Standard Transaction provides a means to satisfy the Term Loan and
Convertible Notes at closing, there are no assurances that the Standard
Transaction will be consummated. All of the shares of Dixie Life owned by the
Corporation are pledged to secure payment of the Term Loan and the Convertible
Notes.
At December 31, 1994, Vanguard owed a bank approximately $524,000 under a
mortgage loan secured by the home office building of Dixie Life which also
secures the Term Loan. Under a lease agreement, Dixie Life pays Vanguard rent
sufficient to cover the debt service under the mortgage.
The loan agreement covering the Term Loan contains three financial
covenants. A provision of the Stock Purchase Agreement waives each of those
covenants until the due date of the Term Loan. The terms of the Convertible
Notes provide that an event of default under the Term Loan, if not cured or
waived, is an event of default under the Convertible Notes.
Going Concern Considerations. The lack of assurance that the Standard
Transaction will be completed raises significant doubt about the Company's
ability to continue as a going concern. Completion of the Standard Transaction
together with an extension or timely repayment of the Convertible Notes would
remove such uncertainties.
Management's plans in this regard include the following:
1. Endeavor to complete the Standard Transaction, thereby
satisfying the Term Loan and the Convertible Notes.
2. In the event the Standard Transaction is canceled by either
party, searching for another purchaser of Dixie Life in the 90
days available to Corporation beyond such cancellation before the
Term Loan and Convertible Notes are due.
3. The sale of a portion of the marketable equity securities
owned by the Corporation is a possible source of repayment of at
least a portion of the Convertible Notes.
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<PAGE>
There are no assurances that any of these efforts will be successful.
Investment Portfolio Liquidity. Dixie Life's investment strategy emphasizes
investments of the highest quality. Accordingly, Dixie Life's policy has been to
invest in securities which are considered investment grade by various investor
services and the NAIC. Occasionally, securities will fall below investment grade
over the life of the securities. At December 31, 1994, Dixie Life's investment
in securities not of investment grade was less than 1% of total investments.
During 1994, the Dixie Life increased its investment in fixed maturities by
almost $5 million. The funding for this increase came from several sources,
including $778,000 from operations, $403,000 from net collections on agent
advances, $1,182,000 from net collections on student loans and $2,568,000 from a
reduction in cash and short term investments. Dixie Life has completed its
program, begun in 1993, to recast its investment portfolio into investments with
an average maturity of approximately 10 years. Management believes its
investment portfolio provides appropriate liquidity to meet the liabilities of
Dixie Life as such liabilities mature.
At December 31, 1994, the Company's investments are reported in accordance
with the provisions of Statement of Financial Accounting Standards No. 115 (FAS
115) which was issued by the Financial Accounting Standards Board in 1993 and
effective for 1994 financial statements. As a result the carrying basis for
investments is different in 1994 than in 1993.
At December 31, 1994, fixed maturity investments are all classified as
available for sale and are carried at market value. Unrealized market gains and
losses are reported as a separate component of stockholders' equity. Application
of FAS 115 resulted in a reduction of the Corporation's stockholders' equity of
$925,000 at December 31, 1994.
In 1995, Dixie Life's Board of Directors approved an investment of up to
$1,200,000 in five year equipment leases on food preparation equipment at a rate
of prime plus 4% fixed at closing. Approximately $540,000 has been funded thus
far in 1995. The Stock Purchase Agreement requires that any investment under
this program be transferred to the Corporation at book value at closing. Such
transfer would effectively reduce the cash portion of the selling price to the
Corporation.
Statutory Surplus. Minimum required levels of Statutory Surplus vary by
state and range from $600,000 to $3,000,000 in states where Dixie Life is
licensed. If an insurance company's Statutory Surplus falls below the statutory
minimum, that company could be subjected to severe restrictions in the states
where such minimum levels are not maintained. Thus any insurance company has a
continuing need to maintain required minimum Statutory Surplus levels.
The insurance departments of most of the states in which Dixie Life
operates, including its domicile state of Mississippi, have broad discretionary
powers to require higher levels of Statutory Surplus, or to impose restrictions
on operations, including fund transfers and new business sales, when such
restrictions are perceived by the departments as necessary or desirable to
maintain adequate amounts of Statutory Surplus.
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<PAGE>
At December 31, 1994, Dixie Life's Statutory Surplus was $6,280,000, well
in excess of the minimum requirement of any state. Prior to the 1994 sale of
its accident and health business, Dixie Life's Statutory Surplus was less than
$3,000,000. Further, in order to meet its Statutory Surplus requirements, Dixie
Life has, from time to time, depended upon forms of reinsurance agreements that
provide surplus relief through reserve credits that, for statutory accounting
purposes, increase Statutory Surplus in an amount equal to the reserve credit
taken. Dixie Life's principal reinsurance agreement provided a reserve credit of
$1,985,000 at December 31, 1994. The sales of its in force accident and health
insurance, generated significant statutory profits.
Results of Operations
First Three Months of 1995 Compared To First Three Months of 1994. In the
three month period ended March 31, 1995, the Company incurred a net loss of
$4,808,000 ($.57 per share) compared to a net loss of $909,000 ($.14 per share)
in the comparable period of 1994. The 1995 loss included an estimated loss of
$4,635,000 ($.55 per share) from the proposed sale of Dixie Life discussed in
Note 3 to the consolidated financial statements. The sale of Dixie Life
constitutes discontinuance of the life insurance business by the Corporation.
The loss on the sale is reported in a manner substantially the same as
discontinued operations. The Corporation continues to report insurance
operations in the same manner as prior to the measurement date of March 6, 1995,
the date of a letter of intent preceding the Stock Purchase Agreement Accounting
Principles Board Opinion No. 30 (APB 30) calls for reporting the operations of
discontinued operations as a single net amount in the statement of operations
but, in management's opinion, reducing virtually all of the Company's operations
to a single amount in the statement of operations would not be meaningful to
readers of the Corporation's financial statements. As discussed above, the
Corporation anticipates entry into the health care business. When the
Corporation enters some other line of business but no later than 1996, insurance
operations will be reported as discontinued operations in accordance with APB
30.
Total revenues decreased $3,167,000 in the three month period ended March
31, 1995 compared to the same period in 1994. Premiums for the period decreased
$3,273,000 in 1995, primarily as a result of the sale of Dixie Life's accident
and health business.
Benefits and expenses decreased $4,083,000 in the three month period ended
March 31, 1995 compared to the same period in 1994, primarily as a result of the
sales of Dixie Life's accident and health business.
Benefits and claims to policyholders decreased $2,248,000 in the three
month period ended March 31, 1995 compared to the same period in 1994.
Amortization of deferred policy acquisition costs decreased $1,115,000 in the
three month period ended March 31, 1995 compared to the same period in 1994.
Commissions decreased $605,000 in the three month period ended March 31 compared
to 1994. Each of these decreases was driven by the sales of Dixie Life's
accident and health business.
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The Corporation recognized no income tax benefit on the loss before income
taxes and estimated loss on sale of subsidiary because it is more likely than
not that the resultant deferred tax assets would not be realized.
Comparison of Three Years Ended December 31, 1994. The Company incurred a
net loss of $2,554,779 in 1994 compared to a net loss of $957,138 in 1993
reflecting a negative change of 167% in 1994 compared to 1993. The net loss in
1993 reflected a negative change of 213% compared to 1992 net income of
$848,984. On a per share basis the net loss for 1994 was $.39 compared to a net
loss of $.15 in 1993 and net income of $.13 in 1992.
Total revenues for 1994 were $11,651,000 compared to $21,530,000 in 1993
and $19,312,000 in 1992, reflecting a 46% decrease in 1994 and an 11% increase
in 1993.
Premium income in 1994 was $9,516,000, a 51% decrease from 1993 premiums of
$19,499,000. The 1993 level of premiums was 14% greater than 1992 premium income
of $17,179,000. The decrease in premiums in 1994 was driven primarily by the
sale of Dixie Life's accident and health business, which resulted in Dixie Life
having no accident and health premiums in the last half of 1994. The composition
of premium income in each of the three years was as follows:
Life and Accident
Year Annuity and Health Total
---- ----------- ----------- ------------
1994 $ 4,214,000 $ 5,302,000 $ 9,516,000
1993 5,314,000 14,185,000 19,499,000
1992 4,892,000 12,287,000 17,179,000
Net investment income was $2,134,000 in 1994 compared to $2,005,000 in 1993
and $2,158,000 in 1992, reflecting an increase of 6% in 1994 and a decrease of
7% in 1993. In 1994 and 1993, net investment income was favorably influenced by
a planned program to reinvest significant short term holdings in a portfolio
with an average life of 10 years. There was also a positive impact in 1994 from
rising interest rates. Several factors counteracted these positive factors.
First, in 1991 Dixie Life began reinvesting the proceeds of all calls,
maturities and sales in short term investments. This program continued
throughout 1992 and into the first quarter of 1993. This resulted in a
significant decrease in the yield on Dixie Life's investment portfolio. Second,
income on student loans has steadily decreased in absolute dollars, driven
partly by a reduction in the amount of loans outstanding and the fact that a
significant portion of the outstanding loans provide for floating interest rates
which have fallen over the periods being compared.
Total benefits and expenses were $14,236,000 in 1994, $22,700,000 in 1993
and $18,213,000 in 1992, reflecting a decrease of 37% in 1994 and an increase of
25% in 1993.
In 1994, every expense category experienced a significant decrease. The
decreases in benefits and claims to policyholders, amortization of deferred
policy acquisition costs and commissions largely resulted from the sale of Dixie
Life's accident and health business, The composition of these three categories
by segment were as follows:
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Life and Accident
Year Annuity and Health Total
---- ----------- ----------- ------------
Benefits and Claims to Policyholders:
- -------------------------------------
1994 $ 3,512,000 $3,061,000 $ 6,573,000
1993 4,046,000 8,528,000 12,574,000
1992 3,321,000 6,771,000 10,092,000
Amortization of Deferred Policy Acquisition Costs:
- --------------------------------------------------
1994 968,000 453,000 1,421,000
1993 1,526,000 980,000 2,506,000
1992 1,337,000 720,000 2,057,000
Commissions:
- ------------
1994 882,000 1,012,000 1,894,000
1993 367,000 3,142,000 3,509,000
1992 452,000 2,270,000 2,722,000
General expenses declined $323,000 in 1994 compared to 1993. Under the
terms of the 1994 sale of Dixie Life's accident and health business, Dixie Life
continued to administer the business which was sold through December 16, 1994
and received compensation from the purchaser of $671,000 which was credited to
general expense. Actual costs of such administration exceeded the compensation
received, accounting for the difference in the decrease and the compensation
received. The decreases in all recurring categories were offset by the
difference in the loss incurred on the sale of Dixie Life's accident and health
business in 1994 compared to 1993.
In 1993, total benefits and expenses increased $4,487,000 with an increase
in benefits and claims to policyholders comprising $2,481,000 of this increase,
or 55% of the total increase. This increase in benefits and claims to
policyholders was caused by an increase in claims paid of $1,895,117 and an
increase in accident and health reserves resulting from continued high levels of
claims. Dixie Life instituted rate increases on several of its accident and
health policies because of the higher levels of claims and it continually
monitored its claims experience and requested rate increases on its accident and
health products whenever claims experience warranted rate increases. The rate
increases which were approved generally were instituted in the latter part of
1993 or early 1994 and thus had little effect on operations for 1993.
Amortization of deferred policy acquisition costs and value of insurance
purchased increased $450,000 in 1993 as a result of a general increase in the
amount of insurance in force and a somewhat higher level of terminated policies
in 1993. Commission expenses increased $787,000 as a result of a relatively
higher renewal premium income on accident and health products which carry a
higher renewal commission structure. General expenses increased $437,000 in 1993
with $217,000 of this increase being caused by increased professional fees.
In 1994, a change in deferred taxes on policy liabilities, resulting from
an incorrect estimate of the tax basis policy benefits at December 31, 1993,
caused a $362,786 reduction of the 1994 tax benefit credited to operations.
Consequently the 1994 effective tax rate was less than 2%. Income tax benefit in
1993 was 18% of the loss before income taxes compared to income tax expense of
23% on income before income taxes in 1992 and 18% in 1991.
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PROFORMA FINANCIAL STATEMENTS
After the Standard Transaction is closed, the Corporation will have no
operations until such time as it acquires or starts a new line of business.
Accordingly, proforma presentation of historical financial statements giving
effect to the Standard Transaction is not included in this proxy statement
because such information would not be meaningful.
MARKET PRICES AND DIVIDENDS
The Corporation's Common Stock is traded in the over-the-counter market and
is quoted on the NASDAQ Market System under the symbol DNLC. The tables below
set forth the reported high and low bid and asked prices as reported by the
National Quotation Bureau, Inc. for the quarters indicated. This information
does not include retail markups, markdowns, or commissions and may not represent
actual transactions.
1995
High Low
Quarter Bid Asked Bid Asked
First 1 1 1/32 13/16 15/16
Second
Third (through
July , 1995)
1994
First 1 1 1/4 1 1 3/16
Second 15/16 1 1/16 13/16 15/16
Third 9/16 3/4 1/2 11/16
Fourth 3/4 7/8 1/2 5/8
1993
First 7/8 1 1/8 7/8 1 1/8
Second 13/16 1 1/16 13/16 1 1/16
Third 1 1/16 1 1/4 15/16 1 1/8
Fourth 13/16 1 11/16 7/8
The closing bid price for the Corporation's Common Stock on April 7, 1995,
the business day immediately preceding the public announcement of the Standard
Transaction, was $ .84 3/8.
No cash dividends have been paid on the Corporation's Common Stock since
1983 and the Corporation does not anticipate the payment of any such dividends
for the foreseeable future. The provisions of the Term loan prohibit the payment
of dividends by the Corporation.
The number of holders of record of common stock of the Corporation on July
14, 1995 was 2,444.
PROPOSAL NO. 2 - 1995 STOCK OPTION PLAN
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The Board of Directors adopted the 1995 Stock Option Plan ("1995 Plan") on
May 26, 1995, subject to shareholder approval. The purpose of the 1995 Plan is
to advance the interests of the Corporation and its shareholders by affording
key employees and non-employee directors the opportunity to acquire a propriety
interest in the Corporation through the purchase of Common Stock under options.
By so doing, the Board seeks to motivate, retain and attract highly competent,
highly motivated individuals whose judgment, initiative, leadership and
continued efforts will contribute to the success of the Corporation.
The shareholders of the Corporation have previously approved similar stock
option plans, the 1982 Incentive Stock Option Plan and the 1988 Incentive Stock
Option Plan (together, "1982 and 1988 Plans"), both of which have expired so
that options thereunder may no longer be granted. Options granted under the 1982
and 1988 Plans with respect to an aggregate of 395,768 shares of Common Stock
currently are outstanding and held by three officers and directors of the
Corporations, and 192 sales agents of Dixie Life. These options are exercisable
for periods ending January 1999, at prices not less than the fair market value
of the Common Stock on the date of grant.
A copy of the 1995 Plan is attached as Appendix D to this Proxy Statement.
The principal features of the 1995 Plan are described below.
General
The 1995 Plan provides for the grant of options to acquire shares of Common
Stock to key employees and non-employee directors of the Corporation. A maximum
of 500,000 shares of Common Stock (subject to adjustments in the event of stock
splits, stock dividends and certain other events) may be issued under the 1995
Plan, of which 400,000 are reserved for key employees and 100,000 are reserved
for non-employee directors. Based on the closing bid price of the Common Stock
on NASDAQ on July 14, 1995, the aggregate market value of the 500,000 shares
subject to the 1995 Plan is $ 343,750. If any option terminates or expires
without having been exercised in full, the stock not purchased under such option
shall again be available for the purposes of the 1995 Plan. Each option must be
granted within five years from May 26, 1995, the date on which the 1995 Plan was
adopted by the Board of Directors. The 1995 Plan will terminate on May 25, 2005,
at which time any outstanding options shall be void and of no further effect.
The period for exercise of options may, however, be extended beyond the Plan
termination date in the circumstances described below under "Options".
Administration
The 1995 Plan is administered by an Administrative Committee of the Board
of Directors, which is comprised of the members of the Board's Personnel and
Compensation Committee. Subject to provisions of the 1995 Plan, the
Administrative Committee has the sole authority to determine those persons to
whom and the time or times at which options may be granted, and the number of
shares of Common Stock to be subject to each option. Also, the Administrative
Committee has complete authority to interpret the 1995 Plan, to prescribe, amend
and rescind rules and regulations related to it, and to determine the provisions
of each stock option
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agreement, consistent with the terms of the 1995 Plan, and to make all other
determinations necessary or advisable in the administration of the 1995 Plan.
Options
The options may be granted under the 1995 Plan as either incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended ("Code"), for key employees, or as non-statutory options to
non-employee directors. All options must be exercised within five years from the
date of grant; are to be exercised at the option price which may not be less
than the fair market value of the Common Stock at the time the option is
granted; are exercisable over such period and in such amounts as the
Administrative Committee may determine; subject to certain limitations of the
1995 Plan and are non-transferable except on death. The options terminate ten
days following termination of employment, with or without cause, or termination
of a non-employee director's relationship with the Corporation. However, in the
event of retirement the options expire three months from the date of retirement
and, in the case of death or permanent and total disability of an optionee, the
deceased or disabled optionee's representative or estate shall have the right to
exercise the option at any time within a period of one year following the
optionee's death or disability.
The maximum number of shares subject to options granted under the 1995 Plan
to any one employee is 100,000 and to any one non-employee director is 10,000.
No person to whom options are granted may receive options, first exercisable
during any single calendar year, for Common Stock, the fair market value of
which (determined at the time of the grant of the options) exceeds $100,000.
Exercise of Options
The options granted under the 1995 Plan are exercisable by the optionee
over such period of time and in such amounts as the Administrative Committee may
determine, but in no instance will the exercise period exceed five years from
the date of grant of the option. Key employees may exercise 20% of their options
in each year on a cumulative basis; any portion not exercised will be carried
over for exercise in subsequent years. Non-employee directors may exercise their
options, in whole or in part, at any time. The exercise of any option must be
accompanied by the full purchase price in cash at the time of exercise. The
exercise price may not be changed except by adjustment pursuant to the
anti-dilution provisions of the 1995 Plan.
Transferability
Options are not assignable or transferable except for the right of exercise
which passes to the estate or legal representative of a deceased optionee for a
period of one year following the optionee's death.
Termination or Amendment
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<PAGE>
The Board of Directors of the Corporation may at any time, upon
recommendation of the Administrative Committee, terminate the 1995 Plan, and
may, at any time and from time to time, amend or modify the 1995 Plan. No action
may be taken by the Board, without approval of a majority of the shareholders of
the Corporation, to: (a) increase the total number of shares of Common Stock
subject to the 1995 Plan, (b) change the manner of determining the option price,
or (c) withdraw the administration of the 1995 Plan from the Administrative
Committee. The anti-dilution provisions of the 1995 Plan are exceptions to the
restrictions on amendment or change.
Federal Income Tax Consequences
The principal federal income tax rules as they apply to the 1995 Plan are
summarized below.
Incentive Stock Options. Options granted to key employees will be treated
as "incentive stock options," the tax treatment of which is governed by Section
422 of the Code. If the requirements of Section 422 and the Regulations
thereunder are met, no regular income tax is imposed upon the employee when an
option is granted or exercised. The employee is not subject to regular income
tax until shares acquired by the exercise of the option are sold.
The first taxable event is the sale of shares acquired by exercise of the
option. At that time, if the employee meets the special holding period
requirements, the employee recognizes gain or loss equal to the difference
between the amount realized on the sale and the option exercise price. This gain
is treated as gain from the sale or exchange of a capital asset. However, if the
employee fails to satisfy the special holding period requirement, the employee
is treated as having compensation income when he or she disposes of the shares.
The amount of the compensation income is equal to the difference between the
fair market value of the stock at the time of exercise of the option and the
option exercise price. Any remaining gain is treated as gain from the sale or
exchange of a capital asset. If the stock acquired under an incentive stock
option declines in fair market value between exercise and sale, so that the
difference between the fair market value of the stock on exercise and the price
paid for the stock exceeds the gain recognized upon an early disposition of the
stock, the compensation income is limited to the amount of the gain on the
disposition.
To meet the holding period requirement, stock acquired under an incentive
stock option may not be disposed of before the later of (i) two years from the
date of the grant of the option, or (ii) one year from the date of the exercise
of the option. These periods are measured from the date on which all acts
necessary to grant or exercise the option, whichever is applicable, have been
completed. The date of grant is the date the Administrative Committee completes
action granting the option. The date of exercise is the date the Corporation
receives notice of exercise and payment for the shares.
The Corporation will be entitled to a deduction in an amount equal to any
ordinary income recognized by an optionee upon the grant or exercise of an
option.
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Non-Statutory Stock Options
With respect to non-employee directors, the options granted will be treated
as "non-statutory" options governed by Section 83 of the Code and the
Regulations thereunder.
Non-statutory options are subject to the provisions of Section 83 relating
to the transfer of property for services. If the option has a readily
ascertainable fair market value when it is granted, it is subject to tax under
Section 83 at the time of grant. If the option does not have a readily
ascertainable fair market value at the time of the grant, it will be subject to
tax under Section 83 when the shares of stock are transferred pursuant to the
exercise of the option.
Generally, the value of an option is not readily ascertainable unless the
option is actively traded on an established market. Since the options granted
under the 1995 Plan are not transferable, they will not have a readily
ascertainable fair market value and there should be no tax consequences to a
non-employee at the time the option is granted. Instead, the option will be
taxed when it is exercised. At that time, the fair market value of the shares
acquired, less any amount paid for the shares, will be included in the gross
income of the non-employee as compensation; and the Corporation will be entitled
to a deduction equal to the amount included in the non-employee's gross income.
Once compensation income is recognized, the non-employee is entitled to
increase his or her basis by the amount of income recognized. Thereafter, tax
treatment on the sale of the shares will be subject to the usual rules
respecting sales or exchanges of property. If the shares quality as capital
assets in the hands of the non-employee, the subsequent sale will be treated as
a sale or exchange of property subject to a capital gain or capital loss
treatment.
Grants Under 1995 Plan
Options for the purchase of 5,000 shares of Common Stock were granted under
the 1995 Plan upon its adoption on May 26, 1995 to each of the Corporation's
seven non-employee directors, and an option for 25,000 shares also was granted
to G. Thomas Reed, Senior Vice President of the Corporation. The options are
subject to approval of the 1995 Plan by the shareholders, and if approved, will
be exercisable at $ 25/32, the closing bid price on the last trade date (May 25,
1995), prior to the date of grant.
Vote Required for Approval
A favorable vote of a majority of the shares voted in person or by proxy,
is required to approve the 1995 Plan. The Board of Directors recommends that you
vote FOR approval of the 1995 Plan
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<PAGE>
PROPOSAL NO. 3 - ELECTION OF DIRECTORS
Nominees and Directors
Article III, Section 2 of the By-Laws of the Corporation provides that the
Board of Directors shall consist of not less than nine nor more than 25 members,
the number thereof to be determined at each annual meeting of shareholders. The
Board of Directors recommends that the Board of Directors of the Corporation for
the ensuing year consist of nine directors and further recommends the election
of the nominees listed below, each director to hold office until the next annual
meeting of the shareholders or until his successor shall be duly elected and
qualified. Shareholders may also nominate candidates for director at any meeting
of the shareholders at which directors are to be elected.
Each nominee except Ms. Cohen is a member of the present board and was
elected thereto by a vote of the shareholders at the 1994 annual meeting.
Management has no reason to believe that any substitute nominee or nominees will
be required.
The following table indicates the age, year first elected a director and
principal occupation or employment for the past five years of each nominee. In
addition, the table also indicates any committee of the Board of Directors of
the Corporation on which the nominee serves.
MARCIA C. COHEN Ms. Cohen, 45, is nominated to the Board for the
first time at this meeting. She is Vice
President, Corporation Development of Montgomery
General Hospital, Olney, Maryland. From 1989 to
1992, Ms. Cohen was co-owner and Executive Vice
President of Imaging and Surgery Centers of
America, Boston, Massachusetts. In 1992, the
owners of Imaging and Surgery Centers of America
sold the business and she was retired until
joining Montgomery General Hospital in 1994. She
serves as a member of the Board of Trustees of
Baltimore Medical Systems, Inc.
T. H. ETHERIDGE Mr. Etheridge, 60, has been director since 1966.
He is President and Chief Executive Officer of
Choctaw Maid Farms, Inc. (a food processing and
marketing company), of Carthage, Mississippi. In
addition, he is Chairman of the Board of Central
Industries and a director of Southern Hens, Inc.
He serves as a member of the Executive Committee.
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JOHN E. HAGGAR Mr. Haggar, 52, has been a director since January
1995. Since June 1, 1995 he has been an employee
of Alanco and it is anticipated that he will
become an officer at the next meeting of Alanco's
Board of Directors. From December 1, 1994 until
June 1, 1995, he was Chief Financial Officer of
UMS. Previously, Mr. Haggar was a sole
practitioner engaged in providing accounting
services to the general public. He is a member of
the American Institute of Certified Public
Accountants. Mr. Haggar serves as Chairman of the
Audit and Compliance Committee and a member of
the Finance and Business Strategy Committee. Mr.
Haggar was originally nominated and elected to
the Board pursuant a provision of the UMS
Agreement.
ROBERT B. NEAL Mr. Neal, 57, has been a director since 1970 and
was Chief Executive Officer from 1970 until
February 1995. He is President of the Corporation
and also Chairman of the Board of Directors,
President and Chief Executive Officer of Dixie
Life. He serves as a member of the Executive
Committee.
DENNIS NIELSEN Mr. Nielsen, 54, has been a director since
January 1995. Since March 1993, he has been self
employed as a business consultant offering
assistance to businesses on restructuring,
financing or assisting with possible mergers or
acquisitions. Previously he was owner of P&N,
Inc. and Hufburn Sales, Inc., both automobile
dealerships. He serves as a member of the Audit
and Compliance Committee and the Nominating and
Shareholder Relations Committee. Mr. Nielsen was
originally nominated and elected to the Board
pursuant a provision of the UMS Agreement.
JOE D. PEGRAM Mr. Pegram, 54, has served as a director since
1991. He is an attorney in Oxford, Mississippi.
Mr. Pegram is a member of the Audit and
Compliance Committee and the
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<PAGE>
Nominating and Shareholder Relations Committee.
S.L. REED, JR. Mr. Reed, 59, has been Chairman of the Board
since January 1995, Chief Executive Officer of
the Corporation since February 1995 and a
director since 1980. He is President of Reed
Enterprises, Inc., (an aquaculture and investment
company) of Belzoni, Mississippi. He is a
director of Delta Industries, Inc., Producers
Feed Co. and Venture SystemSource, Inc. Mr. Reed
serves as a member of the Executive Committee.
JAMES G. RICKETTS Dr. Ricketts, 56, has been a director since
January 1995. He is President and Chief Executive
Officer of International Corrections Corporation
of Scottsdale, Arizona, a corporation which he
founded in 1990 to develop and operate private
prisons and to act as an independent consultant
to corrections agencies throughout the United
States. Previously he served as Director of the
Arizona Department of Corrections, Executive
Director of the Colorado Department of
Corrections and Deputy Secretary to the Florida
Department of Corrections, as well as numerous
other positions in the corrections field. In
addition, he is a director of Alanco. Dr.
Ricketts serves as chairman of the Personnel and
Compensation Committee and a member of Finance
and Business Strategy Committee. He was
originally nominated and elected to the Board
pursuant a provision of the UMS Agreement.
HERBERT G. ROGERS, III Mr. Rogers, 52 previously served as a director
from April 6, 1990 to April 5, 1991. He has also
served as a director from April 3, 1992 to the
present. He is President of Rogers Agency, Inc.,
Rogers LP-Gas Company, Rogers Investments, Inc.,
Mississippi Realty, Inc. and Roell Realty Corp.
of New Albany, Mississippi. In addition, he is a
director of the Nashoba Bank and Chairman of the
Board of the Gentry Furniture Corporation. He
serves as
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Chairman of the Finance and Business Strategy
Committee and a member of the Personnel and
Compensation Committee.
- ---------------
All Committees are appointed by the Chairman of the Board and ratified by
the Board of Directors. The Corporation's 1994 annual shareholders' meeting was
not held until January 1995. Therefore, all committee assignments throughout
1994 were those made following the 1993 annual shareholders' meeting. The
committee assignments listed above are those made following the 1994 annual
shareholders' meeting. Committees of the Board of Directors throughout 1994
consisted of the following:
(1) Executive Committee - subject to statutory limitations, has concurrent
authority of the Board of Directors. During 1994, the Executive Committee of the
Corporation had eight meetings. All members who are nominees attended at least
75% of those meetings.
(2) Audit Committee - Reviews planning and results of the annual report of the
Corporation with independent auditors. During 1994, the Audit Committee had two
meetings. All members were present. This committee is now the Audit and
Compliance Committee.
(3) Compensation Committee - Reviews compensation for all Corporation officers.
During 1994, the Compensation Committee did not meet. This committee is now the
Personnel and Compensation Committee.
(4) Nominating Committee - Serves as nominating committee for Board of
Directors. The Nominating Committee will consider a nominee for the Board of
Directors recommended by a shareholder; however, the Corporation presently has
no established procedure for a recommendation process. During 1994, the
Nominating Committee did not meet. This committee is now the Nominating and
Shareholder Relations Committee.
(5) Planning and Oversight Committee - Charged with seeking an appropriate
solution to liquidity problems which the Corporation has faced since 1993.
During 1994, the Planning and Oversight Committee met 5 times and all members
were present at all meetings. This committee does not exist on the present Board
of Directors.
During the year 1994, the Board of Directors of the Corporation had eight
meetings. Each member of the Board who is a nominee to the Board of Directors
except Mr. Pegram attended at least 75% of the meetings.
An investigation of the Corporation by the Securities and Exchange
Commission ("SEC") was resolved by means of a settlement on March 9, 1994, when
the United States District Court for the District of Columbia entered final
judgments of permanent injunction against the Corporation, Robert B. Neal, a
director and President of the Corporation, and a former director and officer of
the Corporation, who were the defendants in a complaint filed by the SEC. The
SEC alleged that for the 1989, 1990, and 1991 fiscal years the Corporation
failed to disclose in its annual and quarterly reports certain reinsurance
treaties and affiliated intercompany transactions
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that materially affected the amount of Dixie Life's reported statutory capital
and surplus. The SEC also alleged that the Corporation materially understated
its reported net loss for 1989 and overstated its reported net income for 1990
and 1991 by failing to record an appropriate allowance for certain uncollectible
receivables, did not timely disclose a change in Dixie Life's investment policy
and failed to accurately record certain transactions in the Corporation's books
and records. The complaint also alleged that Mr. Neal and the other individual
defendant aided and abetted the foregoing violations and caused certain
accounting irregularities to occur in 1990.
Each defendant consented to the entry of a final judgment of permanent
injunction without admitting or denying the allegations contained in the SEC's
complaint. The final judgments enjoin the defendants from violating or aiding or
abetting future violations of Section 17(a) of the Securities Act of 1933 and
Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Securities
Exchange Act of 1934 ("Exchange Act") and rules 10b-5, 12b2-1, 12b-20, 13a-13
and 14a-9 under the Exchange Act. The final judgment entered against the
Corporation also includes an undertaking that the Corporation would retain a
qualified professional to review, report and make recommendations with respect
to the adequacy of the Corporation's system of internal accounting controls and
its methodology for calculating deferred acquisition costs associated with the
sale of insurance policies. The Corporation was also obligated to implement
steps reasonably recommended in the report and to advise the SEC of steps taken
in response to the report's recommendations. The Corporation has satisfied its
obligations pursuant to this undertaking.
The Second and Restated UMS Agreement provides that, at such time as the
Corporation has placed not less than 6,425,000 shares of Common Stock as a
direct result of the efforts of UMS thereunder, a sufficient number of the then
existing directors of the Corporation shall resign so that the investors
purchasing the aforesaid amount of Common Stock shall have the ability to elect
a majority of the Board of Directors of the Corporation. Under the insurance
laws of Mississippi, prior approval of a change of control of the Corporation
must be obtained from the Commissioner. This requirement results from the fact
that the Corporation and Dixie Life are members of an insurance "holding company
group" as that term is defined in the Mississippi insurance law. If the Standard
Transaction is consummated, approval by the Commissioner will not be required.
Executive Officers
The executive officers of the Corporation are: S. L. Reed, Jr., Chairman
and Chief Executive Officer; Robert B. Neal, President; T. F. Flowers, Jr.,
Senior Vice President; Jerry M. Greer, Senior Vice President and Secretary; G.
Thomas Reed, Senior Vice President and Monroe M. Wright, Senior Vice President,
Treasurer and Chief Financial Officer. Messrs. S. L. Reed, Jr., Neal, Flowers
and Greer have served continuously as executive officers with the Corporation
since February 1995, 1967, 1970 and 1970, respectively. Messrs. Flowers and
Greer, ages 57 and 52, respectively, also served as directors of the Corporation
until January 1995. The ages, positions with the Corporation and other
information concerning Messrs. S. L. Reed, Jr. and Neal are set forth under
"Nominees and Directors," above.
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G. Thomas Reed, 45, joined the Corporation in April 1995 and was elected an
executive officer on May 26, 1995. Prior to joining the Corporation, G. Thomas
Reed had a management consultant practice in 1991 and 1992 and from November
1994 until joining the Corporation. In 1993 and 1994 he was a Private Banking
Manager for First Union National Bank, and from 1988 until 1991, was
Administrative Vice President and Chief Operating Officer of Compudata Services,
Inc., a software development and service company.. Messrs. Reed are not related.
Mr. Wright, 54, has served in his positions with the Company since February
1993. He was a practicing certified public accountant for 24 years prior to
joining the Corporation and a shareholder in Horne CPA Group, a professional
association, from 1990 until February 1993. From 1987 to 1990, Mr. Wright was a
sole practitioner.
The Corporation's officers serve at the pleasure of the Board of Directors.
Vote Required for Election
A favorable vote of a majority of those shares voting, in person or by
proxy, is required to approve a Board of Directors consisting of nine directors.
The nominees receiving the highest number of votes shall be elected.
The Board recommends that you vote FOR a Board consisting of nine directors
and the election of each of the nine nominees to be directors of the
Corporation.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Compensation Committee Report on Executive Compensation
The Compensation Program. The Compensation Committee of the Board of
Directors is responsible for determining the compensation of the executive
officers of the Corporation. The committee endeavors to insure that the
compensation program for executive officers of the Corporation is effective in
obtaining and retaining key executives responsible for the success of the
Corporation. The compensation program has been designed to link a portion of the
executive's compensation directly to performance. The components of this program
such as stock options and bonuses may increase or decrease to reflect changes in
corporate or individual performance.
Base Salary
Base salaries for the executive officers are established at levels
considered appropriate in light of the duties and scope of responsibilities of
each officer's position. The committee reviews the base salaries of the
executive officers annually and adjusts them as warranted. The base salary of
the Chief Executive Officer (Robert B. Neal for all of 1994) is set after
consideration of operating performance of the Corporation and its financial
condition at the time of such consideration. There was no change in the Chief
Executive Officer's base salary for 1994.
Bonus Plan
50
<PAGE>
The Compensation Committee also has been responsible for establishing and
recommending to the Board of Directors a bonus formula which relates
compensation to profit goals. The formula used in prior years called for a bonus
pool to be established based upon pre-tax profit of the Company. The
Compensation Committee established a minimum acceptable return on stockholders'
equity, and the formula to establish the bonus pool required a minimum profit
before any bonus would be paid into the pool. The pool would increase as a
percent of profit with incremental increases in profits. Allocation of the bonus
pool, should one exist, would be made with respect to 80% of the pool on a
nondiscretionary basis and 20% of the pool on a discretionary basis by the
Compensation Committee. No formula was adopted and no bonuses were granted in
1994.
Stock Option Plan
The only long-term incentive compensation the executive officers have
received is stock options prior to 1994. Certain Executive Officers of the
Corporation have certain stock options as shown in the Security Ownership of
Management section of this statement. The plans under which these options were
granted expired prior to 1994. Thus in 1994, no executive officer or employee
received any stock options.
Profit Sharing 401(k) Plan
The Corporation maintains a qualified profit sharing 401 (k) plan for
employees, including officers. The Corporation matches employee contributions to
the extent provided in the plan. Contributions under the profit sharing portion
of the plan are made at the discretion of the Board of Directors. Such
contributions, if any, are allocated based upon a formula which includes
compensation and years of service. No discretionary contribution was made to the
plan in 1994. Under terms of the 401 (k) provision of the plan, Messrs. Neal,
Flowers, Greer and Wright received $2,505, $1,763, $1,574 and $1,000,
respectively, in matching contributions by the Corporation in 1994.
Compensation Committee Members
The Corporation's Compensation Committee for 1994 was composed of the
following individuals:
Rubel L. Phillips, Chairman
Edgar L. McKenzie
S. L. Reed, Jr.
William A. Taylor, Jr.
Zach Taylor, Jr.
51
<PAGE>
Stock Price Performance Chart
1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ----
Dixie National Corporation $100.00 125.00 137.50 87.50 68.75 62.50
S&P 500 Index 100.00 96.90 126.42 136.05 149.76 151.74
S&P Insurance Index 100.00 81.66 117.70 157.93 159.93 132.68
Assumes $100 invested on December 31, 1989, in the Corporation's Common
Stock, the Standard and Poor's 500 Index, and the Standard and Poor's Life
Insurance Index. Total return assumes reinvestment of dividends.
Neither the foregoing Compensation Committee report or the material set
forth under the subcaption "Stock Price Performance Chart" shall be deemed to be
filed with the SEC for purposes of the Exchange Act, nor shall such report or
such material be deemed to be incorporated by reference in any past or
subsequent filing by the Corporation under the Exchange Act or the Securities
Act.
Summary Compensation Table
The following Summary Compensation Table sets forth, for each of the last
three years, information concerning the total compensation paid or awarded for
services rendered in all capacities to the Corporation and its subsidiaries to
the Corporation's Chief Executive Officer and the only other executive officer
whose total compensation exceeded $100,000 in 1994.
Name
and
Principal Annual Compensation All Other
Position Year Salary Bonus Compensation
- --------- ------ ---------- -------- ------------
Robert B. Neal 1994 $125,269 None $2,505(1)
President 1993 $125,269 None $2,575(1)
1992 $121,739 $3,477 $1,217(1)
Monroe M. Wright 1994 $100,000 None $1,000(1)
Senior Vice President 1993(2) 85,000 10,000 -0-
Treasurer and Chief
Financial Officer
- --------------------
(1) Includes the Corporation's contributions under its qualified profit sharing
plan for employees, including officers. Contributions to this plan are made
based upon (a) matching contributions under the Corporation's 401(k) plan and
(b) for discretionary contributions, a formula which includes compensation and
years of service. All contributions included above consisted of matching
contributions under the 401(k) plan.
(2) Commenced employment January 1993.
52
<PAGE>
In 1994 no stock options were granted to or exercised by Robert B. Neal or
Monroe M. Wright and Mr. Wright holds no unexercised options as of December 31,
1994. The following table sets forth information as of December 31, 1994
concerning the unexercised options held by Mr. Neal. None of the options held by
Mr. Neal were in-the-money at December 31, 1994. Options are in-the-money when
the fair market value of the underlying common stock exceeds the exercise price
of the option. The closing prices of the Corporation's common stock on December
31, 1994 were $.50 bid and $.625 asked per share.
Fiscal Year End Options
Number of Unexercisable Options Value of Unexercised
at December 31, 1994 In-the-Money Options
------------------------------- --------------------
Name Exercisable Unexercisable at December 31, 1994
- ---- ----------- ------------- --------------------
Robert B. Neal 28,570 0 $0
DIRECTORS' COMPENSATION
Directors who are also officers of the Corporation receive no additional
compensation for serving on the Corporation's Board or committees thereof. All
other directors are paid $550 for each board or committee meeting they attend.
As Chairman of the Board of Directors, Rubel L. Phillips was paid $17,000 in
1994. S. L. Reed, Jr. was paid $9,800 as Vice Chairman of the Board of
Directors. As a group, directors who were not officers were paid $63,700 during
the year 1994.
As part of a compensation program for members of the Corporation's Board of
Directors, in March 1995 the Board approved granting options to purchase 5,000
shares of the Corporation's Common Stock to each of the Corporation's
non-employee directors at such time as a new stock option plan was formally
adopted. The 1995 Plan being voted upon, as Proposal No. 2, was adopted by the
Board on May 26, 1995 and options were granted to each of the Directors on that
date, subject to shareholder approval of the plan. The options may be
exercisable at any time prior to their expiration five years from the grant
date. The option price is the market price at the grant date. See "Proposal No.
2 - 1995 Stock Option Plan."
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain executive officers, directors and/or holders of record or
beneficially of more than 5% of the Corporation's Common Stock hold more than
$60,000 of the Corporation's Convertible Notes. The Corporation expects to
satisfy the Convertible Notes pursuant to the terms of the Stock Purchase
Agreement or otherwise. The following table summarizes such holdings:
Amount of
Holder Relationship Holdings
- ------ ------------ ----------
American Capitol Insurance Company 5% Owner $1,000,000
Robert B. Neal Director, Executive 100,000
Officer and 5% Owner
53
<PAGE>
As discussed under "Proposal No. 2 - 1995 Stock Option Plan," each of the
seven non-employee directors of the Corporation on May 26, 1995 has been granted
an option for 5,000 shares of the Corporation's Common Stock, subject to
shareholder approval of Proposal No. 2.
PROPOSAL NO. 4 - RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS
The Board of Directors recommends that the shareholders of the Corporation
vote for the ratification of the appointment of Horne CPA Group as independent
auditors to examine the financial statements of the Corporation for the year
ending December 31, 1995. This firm has served as independent auditors of the
Corporation since 1992. A representative of Horne CPA Group will be at the
annual meeting, will have the opportunity to make a statement if he so desires
and will be available to respond to appropriate questions during the meeting. A
favorable vote of a majority of those shares voting, in person or by proxy, is
required for ratification of the selection of the independent auditors.
SHAREHOLDER PROPOSALS
Any shareholder desiring to have a proposal considered for inclusion in the
proxy statement to be distributed in connection with the Corporation's annual
meeting to be held in 1996 is requested to submit such proposal in writing to
the Corporation, Attention Corporate Secretary, no later than March 8, 1996.
OTHER MATTERS
The Management of the Corporation knows of no other matters which may come
before the meeting except for the approval of the minutes of the last annual
meeting of the shareholders.
Copies of the Corporation's Annual Report to Shareholders, containing the
Corporation's Form 10-K Annual Report for the year ended December 31, 1994,
which contains audited consolidated financial statements, of the Corporation as
of December 31, 1994 and 1993 and for each of the three years in the period
ended December 31, 1994, were mailed to shareholders on or about June 26, 1995.
Please date and sign the enclosed proxy and return it to the Company
promptly.
July 20, 1995 /s/Jerry M. Greer
JERRY M. GREER
SENIOR VICE PRESIDENT & SECRETARY
54
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
Years 1994, 1993 and 1992
Report of Independent Certified Public Accountant F-2
Consolidated Balance Sheets as of December 31, 1994 and 1993 F-4
Consolidated Statements of Operations for the Three Years Ended
December 31, 1994 F-5
Consolidated statements of Stockholders' Equity for the Three
Years Ended December 31, 1994 F-6
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1994 F-7
Notes to Consolidated Financial Statements F-8
First Quarter of 1995 and 1994
Unaudited Consolidated Balance Sheet as of March 31, 1995 F-24
Unaudited Consolidated Statements of Operations for the
Three Months Ended March 31, 1995 and 1994 F-25
Unaudited Consolidated Statements of Stockholders' Equity
for the Three Months Ended March 31, 1995 and 1994 F-26
Unaudited Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1995 and 1994 F-27
Unaudited Notes to Consolidated Financial Statements F-28
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To The Shareholders
Dixie National Corporation
Jackson, Mississippi
We have audited the accompanying consolidated balance sheets of Dixie National
Corporation and subsidiaries as of December 31, 1994 and 1993, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1994. These financial
statements are the responsibility of the Company's management. Our
responsibility is to report on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dixie National
Corporation and subsidiaries as of December 31, 1994 and 1993 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
the Corporation and subsidiaries will continue as a going concern. As discussed
in Note 9. to the consolidated financial statements, the Company does not have
available the resources to satisfy its short-term debt requirements. This raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to this matter are also described in Note 9. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
F-2
<PAGE>
HORNE CPA GROUP
Jackson, Mississippi
March 20, 1995, except for Note 1, as to which the date is April 12, 1995, and
Note 16, as to which the date is March 24, 1995.
F-3
<PAGE>
Consolidated Balance Sheets
Dixie National Corporation
December 31
-------------
1994 1993
------ ------
ASSETS
NON-LIFE
Investments
Common stock $ 2,000,000 $
Cash and cash equivalents 218,258 17,375
Other 26,200 26,200
-------------- ---------------
TOTAL NON-LIFE INVESTMENTS 2,244,458 43,575
Property and equipment 419,292 375,395
-------------- ---------------
TOTAL NON-LIFE ASSETS 2,663,750 418,970
LIFE
Investments
Fixed Maturities, at market:
Pledged under financing reinsurance
treaty 12,747,782 10,436,047
Other 4,584,878 3,053,855
-------------- ---------------
17,332,660 13,489,902
Policy loans 3,060,185 3,025,981
Government guaranteed student loans,
less allowance for uncollectible loans
of $464,603 at December 31, 1994 and
$504,981 at December 31, 1993 5,978,288 7,159,975
Short-term investments:
Pledged under financing reinsurance
treaty 687,000
Other 4,173,347 3,045,025
-------------- ---------------
4,860,347 3,014,248
Cash and cash equivalents:
Pledged under financing reinsurance
treaty 400 1,718,994
Other 240,451 2,919,089
-------------- ---------------
240,851 4,638,083
-------------- ---------------
TOTAL LIFE INVESTMENTS 31,472,331 31,328,189
Accounts receivable, less allowance for
doubtful accounts of $195,885 at
December 31, 1994 and $480,000 at
December 31, 1993 761,219 1,534,392
Accrued investment income 412,705 380,411
Deferred policy acquisition costs, net 6,626,230 19,759,110
Value of life insurance purchased, net 1,589,356 1,749,356
Property and equipment, less accumulated
depreciation of $652,748 and $582,143 at
December 31, 1994 and 1993 165,402 232,817
Other assets 886,459 852,489
-------------- ---------------
TOTAL LIFE ASSETS 41,913,702 55,836,764
-------------- ---------------
TOTAL ASSETS $ 44,577,452 $ 56,255,734
-------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
NON-LIFE LIABILITIES
Notes payable and other debt $ 524,304 $ 621,623
Accrued liabilities and expenses 3,475 3,012
-------------- ---------------
TOTAL NON-LIFE LIABILITIES 527,779 624,635
LIFE
Policy liabilities
Future policy benefits 27,538,803 34,904,591
Unearned premiums 746,720
Other policy claims and benefits payable 240,766 987,260
Other policyholders' funds 826,055 889,715
-------------- ---------------
TOTAL POLICY LIABILITIES 28,605,624 37,528,286
Notes payable and other debt 5,579,535 5,632,047
Income taxes 3,599 983,449
Accrued liabilities and expenses 679,460 826,072
-------------- ---------------
TOTAL LIFE LIABILITIES 34,868,218 44,969,854
STOCKHOLDERS' EQUITY
Common stock 8,394,973 6,394,973
Retained earnings 1,711,493 4,266,272
Unrealized holding losses on
investments available for sale (925,011)
-------------- ---------------
TOTAL STOCKHOLDERS' EQUITY 9,181,455 10,661,245
-------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 44,577,452 $ 56,255,734
-------------- ---------------
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
DIXIE NATIONAL CORPORATION
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums $ 9,516,157 $19,499,289 $17,178,510
Net investment income 2,133,635 2,005,075 2,157,848
Realized investment gains (losses) 1,551 25,580 (24,494)
----------- ------------ -----------
TOTAL REVENUES 11,651,343 21,529,944 19,311,864
BENEFITS AND EXPENSES
Benefits and claims to policyholders 6,573,216 12,573,809 10,092,459
Amortization of deferred policy acquisition costs and
value of insurance purchased 1,420,943 2,506,419 2,056,889
Commissions, net 1,893,838 3,509,301 2,722,167
General expenses, net 2,187,114 2,510,047 2,072,636
Interest expense 449,550 571,026 599,810
Insurance taxes, licenses and fees 514,579 705,170 669,113
Loss on sale of accident and health business 1,196,811 324,511
----------- ------------ -----------
TOTAL BENEFITS AND EXPENSES 14,236,051 22,700,283 18,213,074
----------- ------------ -----------
INCOME BEFORE INCOME TAXES (2,584,708) (1,170,339) 1,098,790
Income tax benefit (expense) 29,929 213,201 (249,806)
----------- ------------ -----------
NET INCOME (LOSS) $(2,554,779) $ (957,138) $ 848,984
=========== ============ ===========
Primary and fully diluted net income
(loss) per share $ (.39) $ (.15) $ .13
=========== ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
DIXIE NATIONAL CORPORATION
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
Unrealized
Common Retained Holding
Stock Earnings Losses Total
------ -------- ---------- -----
<S> <C> <C> <C> <C>
Balance January 1, 1992 $6,424,973 $4,380,050 $ $10,805,023
Net income for 1992 848,984 848,984
Common Stock purchased by subsidiary (30,000) (5,624) (35,624)
---------- ---------- --------- -----------
BALANCE DECEMBER 31, 1992 6,394,973 5,223,410 $11,618,383
Net loss for 1993 (957,138) (957,138)
---------- ---------- --------- -----------
BALANCE DECEMBER 31, 1993 6,394,973 4,266,272 10,661,245
Net loss for 1994 (2,554,779) (2,554,779)
Unrealized holding losses on investments available for
sale $(925,011) (925,011)
Common Stock issued 2,000,000 2,000,000
---------- ---------- --------- -----------
BALANCE DECEMBER 31, 1994 $8,394,973 $1,711,493 $(925,011) $ 9,181,455
========== ========== ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
DIXIE NATIONAL CORPORATION
<TABLE>
<CAPTION>
Year ended December 31,
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,554,779) $ (957,138) $ 848,984
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss on sale of accident and health business 1,196,811 324,511
Increase in policy liabilities 2,155,070 2,952,775 1,682,675
Amortization 1,420,943 2,506,419 2,056,889
Increase (decrease) in deferred income taxes (748,597) (278,991) 117,552
Decrease in accrued liabilities (149,625) (251,709) (270,205)
Policy acquisition costs deferred (1,285,902) (3,642,818) (4,118,793)
Decrease in accounts receivable 1,623,993 163,070 310,800
Depreciation 119,564 117,910 160,272
Other, net (37,996) (199,712) 82,763
------------ ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,739,482 734,317 870,937
Cash flows from investing activities: Proceeds from investments sold or matured:
Fixed maturities:
Maturities 2,326,044 14,500 151,000
Calls 890,845 2,472,358 2,405,817
Sales 224,500 3,418,054
Repayment of policy and student mortgage loans 2,099,864 1,976,751 1,578,475
Cost of investments acquired;
Fixed maturities (8,458,904) (9,038,606) (678,633)
Policy and student loans (952,404) (1,099,649) (1,027,537)
Temporary investments, net (1,819,899) 8,472,377 (6,567,829)
Additions to property and equipment (96,046) (20,557) (12,452)
Proceeds from sale of property and equipment 3,538 109,381
------------ ----------- -----------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES (5,786,000) 2,780,712 (623,724)
Cash flows from financing activities:
Proceeds from borrowing 1,515,000
Payments on debt (149,831) (2,264,847) (832,217)
------------ ----------- -----------
NET CASH USED BY
BY FINANCING ACTIVITIES (149,831) (749,847) (832,217)
------------ ----------- -----------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (4,196,349) 2,765,182 (585,004)
Cash and cash equivalents at beginning of year 4,655,458 1,890,276 2,475,280
------------ ----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 459,109 $ 4,655,458 $ 1,890,276
============ =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for income taxes $ 718,668 $ 5,824 $ 259,887
============ =========== ===========
Cash payments for interest $ 505,318 $ 552,459 $ 623,636
============ =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Lease obligation incurred for new data processing equipment $ 8,061 $ 315,287
=========== ===========
Notes issued in exchange for debentures $ 485,000
===========
Common Stock issued for equity securities of
nonaffiliated company $ 2,000,000
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DIXIE NATIONAL CORPORATION
DECEMBER 31, 1994
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying financial statements have been prepared
in conformity with generally accepted accounting principles ("GAAP").
Principles of Consolidation: The consolidated financial statements include the
financial statements of Dixie National Corporation (Corporation), its
wholly-owned subsidiaries and Dixie National Life Insurance Company (Dixie
Life), which is approximately 99% owned (collectively Company). The interests of
minority stockholders are not material. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Discontinued Operations: As discussed in Note 17, the Corporation has agreed to
sell Dixie Life to Standard Life Insurance Company of Indiana. This sale
constitutes discontinuance of the Company's life insurance business. In the
accompanying balance sheets, the Company's assets and liabilities have been
classified as "life" and "non-life" based on whether such assets and liabilities
will survive the sale of Dixie Life. The presentation in the accompanying
statements of operations has not been changed since virtually all of the
Company's operation is its life insurance business. Condensing the discontinued
operations to a single line, as suggested by Accounting Principles Board Opinion
No. 30 (APB No. 30), would not, in management's opinion, be meaningful to the
users of the Company's financial statements. As soon as the Corporation has
established another line of business, but no later than 1996, the Corporation
will report its discontinued life insurance operations in accordance with APB
No. 30.
Investments: At December 31, 1994, the Company's investments are reported in
accordance with the provisions of Statement of Financial Accounting Standards
No. 115 (FAS 115) which was issued by the Financial Accounting Standards Board
in 1993 and effective for 1994 financial statements. As a result the carrying
basis for investments is different in 1994 than in 1993.
At December 31, 1994, fixed maturity investments are all classified as available
for sale and are carried at market value. Unrealized market gains and losses are
reported as a separate component of stockholders' equity. Equity securities are
classified as trading, which, under the provisions of FAS 115, are reported at
market with unrealized market gains or losses being reflected in operations.
Because of the provisions of an agreement with Universal Management Services
(UMS) discussed in Notes 3 and 16, equity securities are reported at cost at
December 31, 1994. At December 31, 1993 fixed maturity investments were carried
at amortized cost.
Realized gains and losses on the disposition of fixed maturity investments are
determined on the specific identification basis and are reported in operations
when realized.
Policy loans are stated at the amounts loaned to policyholders and are
collateralized by assignment of the cash value of underlying policies. Student
loans are carried at cost less an allowance for uncollectible amounts.
Short-term investments will be held to maturity and are due in one year or less
and are carried at cost which approximates market.
Cash and Cash Equivalents: Cash and cash equivalents include cash in banks and
money-market investments which carry no withdrawal restrictions.
Recognition of Premium Revenue and Related Expenses: Premiums for traditional
life insurance contracts are reported as revenue over the premium-paying period
of the policy. Premiums for fixed premium interest sensitive products are added
to the policy account value and revenues for such products are recognized as
charges to the account value for mortality, administration and surrenders
(retrospective deposit method). Profits are also earned to the extent that
investment income exceeds policy requirements. The related benefits and expenses
are matched with revenues through the provision for future policy benefits and
the amortization of deferred acquisition costs in a manner which recognizes
profits as they are earned.
Future Policy Benefits: The liability for future policy benefits interest
sensitive products is represented by the policy account value. The liability for
future policy benefits for all other life and health products is provided on the
net level premium method based on estimated investment yields, mortality,
morbidity, persistency and
F-8
<PAGE>
other assumptions. Assumptions are based upon Dixie Life's experience and
industry experience, where appropriate, with provision for possible adverse
deviation. These estimates are periodically reviewed and compared with actual
experience. If it is determined future experience will probably differ
significantly from that previously assumed, the estimates are revised.
Deferred Acquisition Costs: The costs of acquiring new insurance business are
deferred. Such deferred costs consist principally of excess first year sales
commissions, as well as underwriting expenses and certain other expenses.
Deferred acquisition costs for other than interest sensitive products are
amortized with interest over an estimate of the premium- paying period of the
policies in a manner which charges each year's operations in proportion to the
receipt of premium income. For interest sensitive products, acquisition costs
are amortized with interest in proportion to estimated gross profits. The
assumptions used as to interest, withdrawals and mortality are consistent with
those used in computing the liability for future policy benefits and expenses.
If it is determined future experience will probably differ significantly from
that previously assumed, the estimates are revised.
Value of Life Insurance Purchased: Value of life insurance purchased is being
amortized over 12 years, the expected life of the income stream.
Property and Equipment: Property and equipment are stated at cost less
accumulated depreciation. Depreciation is computed by the straight-line method
over the estimated useful lives of these assets.
Income Taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and tax credit carryforwards and deferred tax liabilities are recognized
for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases.
Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for changes in tax laws and rates on the date of enactment.
Earnings Per Share: Earnings per share are based on the weighted average
number of common stock and common stock equivalents outstanding during the
year.
Reinsurance: Dixie Life cedes and assumes insurance risks with other companies.
Liabilities for future policy benefits, premiums and expenses are reported after
deduction of amounts relating to policy specific reinsurance ceded and addition
of amounts relating to policy specific reinsurance assumed.
Reclassification: Certain amounts in the 1993 and 1992 financial statements have
been reclassified to conform to 1994 presentation. These reclassifications had
no effect on amounts previously reported as stockholders' equity or net income.
NOTE 2--STATUTORY ACCOUNTING
Dixie Life is required to file statutory financial statements with state
insurance regulatory authorities. Accounting principles used to prepare these
statutory financial statements differ from GAAP.
The excess, if any, of Dixie Life's stockholders' equity on a GAAP basis over
that determined on a statutory basis is not available for distribution to Dixie
Life's stockholders. Mississippi law governing insurance companies further
restricts payment of dividends to the lessor of (1) the prior year statutory net
income plus
F-9
<PAGE>
the excess of statutory net income for the second and third preceding years over
distributions in the first and second preceding years or (2) 10% of statutory
stockholders' equity. Dixie Life can distribute approximately $200,000 in 1995
without approval of the Mississippi Department of Insurance. The Department can
grant permission for extraordinary dividends in excess of the limitations
imposed by law.
A reconciliation of Dixie Life's statutory net income to the Company's
consolidated GAAP net income is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Statutory net income $ 260,165 $ 3,348 $ 96,003
Deferral of acquisition costs 1,285,902 3,642,818 4,118,793
Amortization of acquisition costs (1,420,943) (2,506,419) (2,056,889)
Differences in insurance policy
liabilities, excluding effect of
sale of block of business 1,775,875 55,079 180,501
Deferred income taxes 404,929 369,025 (188,503)
Premium income (1,077,138) (615,131) (802,747)
Investment income 21,240 66,421 (120,301)
Commissions (246,584) (178,458)
Interest expense (449,550) (571,026) (599,810)
General insurance expenses 663,558 420,741 658,719
Write off of agent advances 366,661 766,584
Supplementary contracts (131,073) (83,079) (214,998)
Other 265,182 190,596 (43,326)
STAT Bond write off of Vanguard
Debenture 2,000,000
GAAP Loss on sale of accident and health business (1,196,811) (324,511)
STAT gain on sale of accident and health business (5,322,776) (2,125,000)
----------- ----------- -----------
GAAP Net Income (Loss) $(2,554,779) $ (957,138) $ 848,984
=========== =========== ===========
</TABLE>
A reconciliation of Dixie Life's statutory stockholders' equity to the Company's
consolidated GAAP stockholders' equity is as follows:
<TABLE>
<CAPTION>
December 31
-----------
1994 1993
---- ----
<S> <C> <C>
Statutory Stockholders' Equity $ 6,280,400 $ 3,130,064
Differences in insurance policy liabilities (984,870) (7,850,857)
Deferred acquisition costs 6,626,230 19,759,110
Deferred income taxes 91,388 (1,083,861)
Debt of parent company (5,933,050) (6,030,369)
Asset Valuation Reserve 129,809 115,726
Value of life insurance purchased 1,589,356 1,749,356
Non-admitted assets 252,049 652,593
Common stock issued 2,000,000
Other (869,857) 219,483
----------- -----------
GAAP Stockholders' Equity $ 9,181,455 $10,661,245
=========== ===========
</TABLE>
At December 31, 1994 Dixie Life is a party to an indemnification reinsurance
agreement under which 90% of its retained life insurance in force at September
30, 1992 is reinsured. This transaction is accounted for as a financing
transaction in the accompanying financial statements. Dixie Life's statutory
financial statements include a reserve credit at December 31, 1994 of $1,985,000
related to this agreement which has the effect of increasing statutory
stockholders' equity by that amount.
F-10
<PAGE>
NOTE 3--INVESTMENTS
The Company's investments in fixed maturity securities available for sale are
summarized as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
December 31, 1994
U.S. Government agencies and authorities $ 8,966,030 $ $ 504,706 $ 8,461,324
States, municipalities and political subdivisions 511,461 6,115 505,346
Special revenue 10,278 878 9,400
Public utilities 2,041,142 23,637 121,159 1,943,620
All other corporate 6,960,013 33,432 580,475 6,412,970
----------- --------- ---------- -----------
$18,488,924 $ 57,069 $1,213,333 $17,332,660
=========== ========= ========== ===========
December 31, 1993
U.S. Government agencies and authorities $ 3,371,748 $ 24,245 $ 40,214 $ 3,355,779
States, municipalities and political subdivisions 537,695 4,877 498 542,074
Special revenue 56,719 3,592 60,311
Public utilities 1,936,724 83,405 17,649 2,002,480
All other corporate 7,587,016 112,698 29,554 7,670,160
----------- --------- ---------- -----------
$13,489,902 $ 228,817 $ 87,915 $13,630,804
=========== ========= ========== ===========
</TABLE>
Maturities of fixed maturity securities held for sale at December 31, 1994
follow:
F-11
<PAGE>
<TABLE>
<CAPTION>
Amortized Market
Cost Value
--------- ------
<S> <C> <C>
Due in one year or less $ 1,165,901 $ 1,173,628
Due after one year through five years 2,064,466 1,971,423
Due after five years through ten years 4,768,972 4,437,274
Due after ten years 10,489,585 9,750,335
----------- -----------
$18,488,924 $17,332,660
=========== ===========
</TABLE>
Fixed maturity and short-term investments with an approximate carrying amount of
$2,400,000 were pledged to various state insurance departments for policyowner
protection at December 31, 1994. At December 31, 1994, additional securities
with an approximate carrying amount of $13,435,000 were pledged under the
financing transaction reinsurance treaty (see Note 2).
Net investment income consists of the following:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Investment income
Fixed maturities $1,189,693 $ 745,534 $ 741,248
Policy loans 170,142 159,666 181,426
Student loans 398,719 538,027 659,379
Interest on Accounts Receivable 151,759 254,538 237,728
Short-term investment 145,919 260,591 311,059
Other 77,403 46,719 27,008
---------- ---------- ----------
Net investment income $2,133,635 $2,005,075 $2,157,848
========== ========== ==========
</TABLE>
Net realized investment gains (losses) for the year ended December 31 are
summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Realized gains $12,002 $29,448 $39,947
Realized losses 10,451 3,868 64,441
------- ------- --------
Net realized gains (losses) $ 1,551 $25,580 $(24,494)
======= ======= ========
</TABLE>
F-12
<PAGE>
In November 1994, the Corporation issued 2,000,000 shares of its Common Stock
and received as consideration 1,230,770 shares of Alanco Environmental
Resources, Inc. (Alanco) common stock with a market value at the date of the
transaction of $2,000,000. Under the terms of the UMS agreement discussed in
Note 16, any market appreciation until June 30, 1995 may not be realized because
the purchasers of the Corporation's Common Stock have the right to buy the
Alanco shares for cash equal to the value on the day of the November
Transaction. The purchasers have the obligation to cover any market
depreciation, as defined, which might have occurred as of June 30, 1995.
Therefore, the Alanco shares will be carried at cost until June 30, 1995. At
December 31, 1994, market value of the Alanco shares based on the average of the
closing bid and asked price, was $2,153,000.
NOTE 4--DEFERRED POLICY ACQUISITION COSTS
An analysis of deferred policy acquisition costs for the years ended December 31
follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $ 19,759,110 $18,787,222 $16,429,318
Deferred during the year:
Commissions 975,002 2,818,953 3,256,739
Other Expenses 310,900 823,865 862,054
------------ ----------- -----------
Total Deferred 1,285,902 3,642,818 4,118,793
Deferred policy acquisition costs on
policies sold (13,157,839) (324,511)
Amortized during the year (1,260,943) (2,346,419) (1,760,889)
------------ ----------- -----------
Balance at end of year $ 6,626,230 $19,759,110 $18,787,222
============ =========== ===========
</TABLE>
F-13
<PAGE>
NOTE 5--VALUE OF LIFE INSURANCE PURCHASED
An analysis of the value of life insurance purchased for the years ended
December 31 follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year 1,749,356 $1,909,356 $2,205,356
Amortized during the year (160,000) (160,000) (96,000)
Adjustment to comply with
FASB EITF 92-9 (200,000)
---------- ---------- ----------
Balance at end of year $1,589,356 $1,749,356 $1,909,356
========== ========== ===========
</TABLE>
Estimated annual amortization of the value of life insurance purchased is
approximately $160,000 in each of the next five years.
NOTE 6--PROPERTY AND EQUIPMENT
A summary of property and equipment at December 31 follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Home office property $ 795,038 $ 702,181
Data Processing Equipment 818,149 814,960
Furniture, Equipment and Autos 454,007 454,007
------------- -----------
2,067,194 1,971,148
Less accumulated depreciation 1,482,500 1,362,936
------------- -----------
$ 584,694 $ 608,212
============= ===========
</TABLE>
F-14
<PAGE>
NOTE 7--FUTURE POLICY BENEFIT RESERVES
A summary of the assumptions used in determining the liability for future policy
benefits at December 31, 1994 is as follows:
Life Insurance
Interest assumptions:
<TABLE>
<CAPTION>
Years of Issue Interest Rates
-------------- --------------
<S> <C>
1965-1982 8.5% graded to 4.5%
1983-1984 12.5% graded to 8.0%
1985-1991 9.0% graded to 6.0%
1992-1994 6.0% graded to 5.0%
</TABLE>
Mortality assumptions:
<TABLE>
<CAPTION>
Years of Issue Mortality Table
-------------- ---------------
<S> <C>
1965-1983 1955-60 Select and Ultimate Table
1983-1994 1965-70 Select and Ultimate Table
</TABLE>
Withdrawal assumptions:
Linton B or Linton C Lapse Tables
Termination assumptions:
Termination assumptions are based on Dixie Life's experience.
F-15
<PAGE>
NOTE 8--PARTICIPATING BUSINESS
Life insurance policies are issued on both a participating and non-participating
basis. The following summary presents the approximate percentages of
participating life business to total life business for the years indicated:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Life insurance in force 5% 5% 3%
Life premium income 9% 5% 3%
Total number of life policies 12% 11% 7%
</TABLE>
The amount of dividends to be apportioned to participating policies is
determined annually by the Board of Directors of Dixie Life. In the past, Dixie
Life sold participating life insurance through a policy known as the Charter
Contract as well as other participating policies. The Charter Contract policies
contain a participation endorsement whereby Dixie Life agreed to apportion
dividends to Charter Contract holders, as a group and on a pro rata basis, in an
amount which equals at least 35% of Dixie Life's statutory net profits computed
by a formula set forth in the policy. As discussed in Note 13, Dixie Life is
defendant in litigation alleging that Dixie Life failed to properly pay
dividends on its Charter Contract policies. As of December 31, 1994, Dixie
F-16
<PAGE>
Life had participating policies in force with a total face amount of
approximately $20,486,000 of which approximately $11,721,000 were Charter
Contract policies.
NOTE 9--NOTES PAYABLE AND OTHER DEBT
The Company has the following notes payable at December 31:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Non-Life:
Note payable to a bank bearing interest at prime
plus 3/4% (at December 31, 1994 and 1993, the
rate was 9.25%), payable in monthly
installments of $11,846 through January 5, 2001;
secured by home office property 524,304 621,623
Life:
Note payable to an insurance company (bank at
December 31, 1993) bearing interest at
1% above prime (9.5% at December 31, 1994)
payable interest only monthly through
February 1995, with original maturity March 31,
1995, collateralized by common stock of
Dixie Life (Term Loan) $3,688,746 $3,688,746
Convertible 10% notes due May 1, 1995 (Notes)
with interest payable semi-annually until
maturity, convertible to common stock on the
basis of one share for each $1 of Note
principal, collateralized by second security
interest in common stock of Dixie Life 1,720,000 1,720,000
Obligation under capital lease 170,789 223,301
---------- ----------
5,579,535 5,632,047
---------- ----------
$6,103,839 $6,253,670
========== ==========
</TABLE>
In 1993, the Company replaced an existing note payable to a bank collateralized
by common stock of Dixie Life with the Term Loan. In November 1994, the bank
sold the Term Loan to Standard Life Insurance Company of Indiana. As discussed
in Note 17, the terms of the proposed sale of Dixie Life effectively extend the
due date of the Term Loan to closing of the sale or 90 days after any
cancellation thereof.
The Term Loan agreement contains three covenants as follows:
The Company must maintain consolidated tangible net worth, as defined,
of not less than $9,000,000. At December 31, 1994, consolidated
tangible net worth was $8,487,818.
The Company must maintain a ratio of total liabilities to consolidated
tangible net worth of not more than 4.5 to 1. At December 31, 1994,
this ratio was 4.17 to 1.
The Company must cause Dixie Life to maintain statutory capital and
surplus of not less than $3,500,000. At December 31, 1994, Dixie Life's
statutory capital and surplus was $6,280,400.
An unwaived or uncured event of default under the term loan is an event of
default under the Notes. Standard Life Insurance Company of Indiana has waived
all defaults pending completion of the sale of Dixie Life and for 90 days after
any cancellation thereof.
Notes in the aggregate amount of $550,000 are held or controlled by officers and
directors of the Company.
F-17
<PAGE>
As discussed above at December 31, 1994, the Corporation owed a subsidiary of
Standard Management Corporation approximately $3,689,000 under a Term Loan
originally due March 31, 1995. The Term Loan is now due at closing of the SMC
Transaction or 90 days after the SMC Transaction in the event it is canceled by
either party. Also, the Corporation's 10% Convertible Notes, in the amount of
$1,720,000, are due May 1, 1995. Although the SMC Transaction provides a means
to satisfy the Convertible Notes at closing, such notes are due before the
anticipated closing date and there are no assurances that the Corporation will
be able to extend such notes beyond their May 1, 1995 maturity, or effect any
alternative accommodations. However, management is exploring several options and
believes that the Convertible Notes will be satisfied or extended at their due
date. All of the shares of Dixie Life owned by the Corporation were pledged to
secure payment of the Term Loan and the Convertible Notes.
The lack of assurance that the SMC Transaction will be completed raises
significant doubt about the Company's ability to continue as a going concern.
Completion of the SMC Transaction together with an extension or timely repayment
of the Convertible Notes would remove such uncertainties.
Management's plans in this regard include the following:
1. Endeavor to complete the SMC Transaction, which contemplates
cancellation of the Term Loan. The SMC Transaction would also enable
the Corporation to satisfy the Convertible Notes, assuming their due
date is extended.
2. Seek to extend or secure an alternative means of paying the
Convertible Notes. Liquidation of a portion of the Alanco shares is a
possible source of repayment of at least a portion of the Convertible
Notes.
3. In the event the SMC Transaction is canceled by either party,
searching for another purchaser of Dixie Life in the 90 days available
to it beyond such cancellation before the Term Loan is due.
There are no assurances that any of these efforts will be successful.
Aggregate maturities of notes payable and the present value of net minimum lease
payments at December 31, 1994, are as follows:
<TABLE>
<S> <C>
1995 $5,572,519
1996 180,252
1997 142,110
1998 127,413
1999 81,545
----------
$6,103,839
==========
</TABLE>
NOTE 10--INCOME TAXES
The Company and its subsidiaries file a life-nonlife consolidated federal income
tax return. The Internal Revenue Code contains several provisions which affect
the consolidated tax provision, including a special deduction for small life
insurance companies amounting to 60% of taxable income and limitations on the
amount of nonlife taxable losses which can be used to reduce life insurance
taxable income.
The accompanying balance sheet includes a liability for income taxes payable
consisting of the following at December 31:
F-18
<PAGE>
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Income taxes payable:
Currently payable $ 32,000 $600,000
Net deferred (28,401) 383,449
---------- --------
$ 3,599 $983,449
========== ========
</TABLE>
Net deferred tax liabilities (assets) consists of the following components as of
December 31:
<TABLE>
<CAPTION>
1994 1993
---- ----
<S> <C> <C>
Deferred tax liabilities:
Deferred acquisition costs $597,100 $2,192,100
Other Items 69,500 127,061
-------- ----------
666,600 2,319,161
Deferred tax assets:
Policy liabilities 48,700 1,262,712
Financing reinsurance 337,500 540,000
FAS 115 adjustment 196,500
Provisions for uncollectible
receivables 112,301 133,000
-------- ----------
695,001 1,935,712
-------- ----------
NET LIABILITY (ASSET) $(28,401) $ 383,449
======== ==========
</TABLE>
Income tax (expense) benefit for the year ended December is summarized as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Current $(381,900) $(155,000) $ (73,390)
Deferred 411,849 368,201 (176,412)
--------- --------- ---------
$ 29,929 $ 213,201 $(249,806)
========= ========= =========
</TABLE>
The Company's effective income tax expense differs from the expense determined
by applying the 34% statutory federal income tax rate to income before income
taxes as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Expected tax benefit (expense)
at statutory federal income tax rate $ 878,800 $ 398,000 $(373,589)
Special deductions (583,085) (199,000) 197,838
Alternative Minimum Tax 97,000 47,000 (33,870)
Change in deferred taxes on policy liabilities (362,786)
Other (32,799) (40,185)
--------- --------- ---------
Total income tax benefit (expense) $ 29,929 $ 213,201 $(249,806)
========= ========= =========
</TABLE>
In 1994, a change in deferred taxes on policy liabilities, resulting from an
incorrect estimate of the tax basis policy benefits at December 31, 1993, caused
a $362,786 reduction of the 1994 tax benefit credited to operations.
Prior to 1984, a portion of taxable income was excluded from current taxation
and accumulated in a special tax return memorandum account. The December 31,
1983 balance of approximately $876,600 is frozen and will be taxed only if
distributed or if it exceeds certain prescribed limits. Deferred income taxes
have not been provided on this balance since the Company does not intend to take
action nor does it expect events to occur that would cause tax to be payable on
that amount.
NOTE 11-SALE OF BLOCK OF BUSINESS
Dixie Life has sold virtually all of its in force accident and health insurance
business to unaffiliated insurance companies in two transactions. Both
transactions were closed in 1994 although the first was effective December 31,
1993.
In the first transaction, Dixie Life sold all of its in force cancer insurance
in South Carolina for $2,125,000, resulting in a statutory gain equal to the
selling price in 1993. Under generally accepted accounting
F-19
<PAGE>
principles, the transaction was not recorded until closing in February 1994 but
the Company did record the loss incurred ($324,000) under GAAP in 1993.
In 1994, Dixie Life sold virtually all of its remaining accident and health for
$5,322,000 in a transaction effective July 1, 1994, again resulting in a
statutory gain equal to the selling price. The Company incurred a GAAP loss of
approximately $1,197,000 on this sale.
Together, these sales resulted in a reduction of deferred policy acquisition
costs and policy liabilities of $12,980,000 and $11,084,000, respectively, in
1994.
NOTE 12--INCENTIVE STOCK OPTION PLANS
Options to purchase common stock of the Company have been granted under two
incentive stock option plans. One of those plans expired in 1992 and the other
in 1993. At December 31, 1994, options to purchase 481,737 shares were
outstanding, including 23,179 at $1.16; 92,061 at $1.23; 87,816 at $1.69; 16,991
at $1.77; 34,496 at $1.41; 62,790 at $1.13; 45,161 at $1.38, 48,548 at $1.50 and
70,695 at $1.00.
NOTE 13--CONTINGENCIES
Reinsurance: Dixie Life reinsures a portion of its insurance risk which is in
excess of its retention limits on its life insurance policies. The retention
limit for life insurance policies is generally $50,000. Dixie Life would be
liable for the reinsured risks ceded to reinsuring other companies to the extent
such reinsuring companies are unable to meet their obligations. At December 31,
1994, Dixie Life's possible obligation under excess coverage life insurance
risks ceded to other companies was approximately $53,883,000.
Dixie Life also has assumed reinsurance under the Servicemen's Group Life
Insurance Program totaling approximately $141,936,000 at December 31, 1994.
Geographic Concentration of Business: Dixie Life is qualified to sell insurance
in 21 states and the District of Columbia. Most of its 1994 business is in Texas
(21%), Mississippi (18%), Georgia (12%), Louisiana (10%), and Kansas (8%). Loss
of the business in any of these states could have a material
adverse affect on the future operations of Dixie Life.
Litigation: Dixie Life is a Defendant in a suit filed in January, 1994 in the
Circuit Court of Montgomery County, Alabama.
The suit alleges that Dixie Life has failed to properly pay dividends to holders
of its Charter Contract policies. These policies are participating policies
pursuant to which Dixie Life is obligated to apportion dividends to the holders
of such policies, as a group and on a prorata basis, of not less than 35% of the
statutory net profits of Dixie Life computed by a formula set forth in the
policy. The formula utilizes certain information contained in the annual report
filed by Dixie Life with the Mississippi Department of Insurance, as such report
was constituted in 1966. The suit seeks to establish a class consisting of the
plaintiff and a group of persons allegedly similarly situated and alleges the
class consists of over 1,000 persons. No class has yet been certified.
The suit seeks judgment in an undetermined amount for alleged underpayment of
dividends and an injunction requiring Dixie Life to pay appropriate dividends in
the future.
F-20
<PAGE>
Dixie Life has paid a dividend to holders of the Charter Contract policies in
each year since the policies were issued. On a cumulative basis, the total
dividends paid to the holders of the Charter Contract policies since issuance
exceed 35% of the net profits of Dixie Life as defined by the policies for the
same period.
As of February 17, 1994, a total of 76 Charter Contract policies are held by
residents of the state of Alabama. In all states at December 31, 1993, a total
of 1,421 Charter Contract policies are currently outstanding, of which 324 are
in premium paying status.
Dixie Life intends to vigorously defend the suit.
No discovery has yet taken place and no class has yet been certified by the
court. In the absence of a class, if any, and its composition, if certified,
Dixie Life has no reasonable basis upon which to estimate its potential
liability, if any.
The Company also is involved in ordinary, routine litigation incidental to its
business. Management and counsel are of the opinion that the ultimate resolution
of these matters will not have a material adverse effect on the Company.
Concentration of Credit Risk: At December 31, 1994 and 1993, the Company had
funds on deposit with a federally insured bank in excess of $100,000 federal
deposit insurance coverage limits.
NOTE 14--PROFIT SHARING PLAN
The Company has a profit sharing plan which covers substantially all employees
who meet length of service provisions contained in the Plan. Prior to 1992, the
plan provided for Company defined contributions based on earnings before income
taxes and realized investment gains. In 1992, the Plan was amended to allow
employee contributions as provided under Section 401(k) of the Internal Revenue
Code. The Company matches 50% of employee contributions up to 4% of compensation
and, at the discretion of the Board of Directors, may make additional
contributions. Contributions to the Plan charged to expense were approximately
$13,000, $18,000 and $7,000 in 1994, 1993, and 1992, respectively.
NOTE 15--BUSINESS SEGMENT INFORMATION
The Company, through Dixie Life, has engaged in the following lines of insurance
business: life insurance, individual annuities, and accident and health
insurance (A&H). From July 1, 1994, as discussed in Note 11, the Company is no
longer engaged in the accident and health line of insurance business. Investment
income and certain general expenses have been allocated through the utilization
of assumptions, estimates and formulas. Such allocations have been made on a
basis considered reasonable under the circumstances; however, it should be
understood that other acceptable methods of allocation might produce different
results. Financial information by product grouping is as follows:
<TABLE>
<CAPTION>
Life Annuity A&H Total
---- ------- --- -----
<S> <C> <C> <C> <C>
1994
- ----
Revenues $5,360,344 $ 839,747 $ 5,451,252 $11,651,343
Benefits and expenses 5,719,795 487,326 6,779,282 12,986,403
---------- ----------- ----------- -----------
Operating profit $ (359,451) $ 352,421 $(1,328,030) $(1,335,060)
=========== =========== ===========
Unallocated general corporate expenses 1,249,648
-----------
Loss before income taxes $(2,584,708)
===========
</TABLE>
F-21
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
1993
- ----
Revenues $6,201,285 $ 861,206 $14,467,453 $21,529,944
Benefits and expenses 5,983,893 664,191 14,701,116 21,349,200
---------- ----------- ----------- -----------
Operating profit $ 217,392 $ 197,015 $ (233,663) $ 180,744
========== =========== ===========
Unallocated general corporate expenses 1,351,083
-----------
Income before income taxes $(1,170,339)
===========
1992
- ----
Revenues $5,817,395 $ 1,003,056 $12,491,413 $19,311,864
Benefits & expenses 4,330,999 2,094,313 10,454,699 16,880,011
---------- ----------- ----------- -----------
Operating profit $1,486,396 $(1,091,257) $ 2,036,714 $ 2,431,853
========== =========== ===========
Unallocated general corporate expenses 1,333,063
-----------
Income before income taxes $ 1,098,790
===========
</TABLE>
NOTE 16--SALE OF COMMON STOCK
The Corporation entered into an agreement with Universal Management Services, a
Nevada corporation (UMS), as of October 27, 1994 (UMS Agreement). The UMS
Agreement provides that UMS will use its best efforts to assist the Corporation
in locating potential investors for its Common Stock in non-U.S. markets
pursuant to Regulation S of the Securities Act of 1933.
Under the UMS Agreement, UMS has the right to assist the Corporation in placing
up to 6,425,000 shares, subject to completion of various steps set forth in the
Agreement. The first step was completed on November 29, 1994, with the
Corporation issuing 2,000,000 shares of its Common Stock for which it received
1,230,770 shares of Alanco Environmental Resources, Inc. (Alanco) common stock
(November Transaction). The Alanco shares had an aggregate market value of
$2,000,000 on November 29, 1994.
Under the UMS Agreement, UMS has the right to assist the Corporation in placing,
on a best efforts basis, by June 30, 1995, up to 12,500,000 additional shares of
the Corporation's Common Stock. Under the terms of the UMS Agreement, the
Corporation expects to:
1. Issue 2,000,000 shares of its Common Stock in exchange for 16% of
the outstanding common shares of Phoenix Medical Management, Inc.
(PMM), an Arizona corporation.
2. Issue, if the acquisition of the 16% interest is completed, 100,000
of its Common Stock for an option to acquire the remaining 84% of the
common shares of PMM for 10,400,000 shares of the Corporation's Common
Stock.
3. Purchase from PMM three specialized health care facilities for
approximately $700,000 in cash. The funds for this transaction are
expected to be obtained through the placement, with the assistance of
UMS, but outside the UMS Agreement, of approximately 700,000 shares of
the Corporation's Common Stock under Regulation S.
In view of covenants contained in the Term Loan Agreement, the aquisition of
shares of PMM by the Corporation will require certain waivers from SMC, which
the Corporation will seek to obtain. However, there is no assurance that such
waivers will be obtained, in which case the Corporation will be obliged to
reassess the proposed PMM transaction. There are no assurances that any further
transactions contemplated by the UMS Agreement will be completed. UMS's rights
under the UMS Agreement will expire June 30, 1995.
If at least 6,425,000 shares are placed with UMS's assistance, the UMS Agreement
provides that the purchasers will be entitled to designate a majority of the
Corporation's Board of Directors. This right would be facilitated by the
resignation of a sufficient number of directors whose tenure as director
predates the UMS Agreement so that designees of the new investors could be
appointed until the next annual meeting of
F-22
<PAGE>
the Corporation's stockholders. The UMS Agreement contained three other
undertakings of the Corporation which were accomplished at the 1994 annual
meeting of the Corporation's stockholders held January 24, 1995. These were (a)
reduction of the Corporation's Board of Directors from 15 members to 9 members;
(b) election to the Corporation's Board of Directors of three representatives of
the parties who purchased the Corporation's Common Stock in the November
Transaction; and (c) an increase in the number of authorized shares of the
Corporation's Common Stock from 10,000,000 to 50,000,000.
NOTE 17--PENDING SALE OF DIXIE LIFE
On March 6, 1995, the Corporation entered into a Letter of Intent with SMC to
sell to SMC all of the capital stock of Dixie Life which the Corporation owns.
Dixie Life represents 94% of the consolidated assets and substantially all of
the consolidated operations of the Corporation.
At closing SMC will cancel the Term Loan obligation, assume the Corporation's
indebtedness of $1,720,000 under the Convertible Notes due May 1, 1995, pay the
Corporation $2,500,000 in cash and issue to the Corporation SMC common shares
equal to $500,000 valued at the average trading price of SMC's shares for the
five days prior to closing. The Corporation will also receive the first $175,000
of agent advances that Dixie Life collects after closing. These payments
constitute a selling price of at least $8,408,746 and up to $8,583,746 if agent
advances equal at least $175,000 at closing and at least $175,000 is collected.
Agent advances, net of allowance for doubtful accounts at December 31, 1994,
were approximately $270,000. The selling price will be adjusted by the change in
Dixie Life's capital and surplus and asset valuation reserve between December
31, 1994 and closing. In addition, Dixie Life will continue to pay $15,000 per
month rent to Vanguard, Inc., a wholly-owned subsidiary of the Corporation,
through the December 31, 1996 expiration of an existing lease on the office
building occupied by the Corporation and Dixie Life.
Except as to the extension of the due date of the Term Loan, a prohibition
against the Corporation negotiating with other parties and certain other
customary provisions, the Letter of Intent is not binding and is subject to a
Definitive Purchase Agreement which the parties intend to sign before April 1,
1995. The Definitive Purchase Agreement will contain usual and customary
conditions, including, among others, the receipt of all required regulatory
approvals and approval of the transaction by the shareholders of the Corporation
at a meeting to be held on or before August 1, 1995. There is no assurance that
the SMC Transaction will be consummated.
In the first quarter of 1994, the Corporation reached an agreement in principle
for the acquisition of the Corporation by SMC in a tax-free merger. A definitive
Merger Agreement among the Corporation, SMC and an SMC affiliate was executed
June 8, 1994. On August 1, 1994, the Corporation terminated the Merger Agreement
as a result of SMC's failure to meet certain conditions of the Merger Agreement.
On November 7, 1994, Standard Life Insurance Company of Indiana, a subsidiary of
SMC, purchased the Term Loan from the bank which previously held the note.
F-23
<PAGE>
Unaudited Consolidated Balance Sheet
Dixie National Corporation
March 31, 1995
ASSETS
NON-LIFE
Investments
Common stock $ 2,000,000
Cash and cash equivalents 388,343
Other 26,200
------------
TOTAL NON-LIFE INVESTMENTS 2,414,543
Property and equipment 409,526
------------
TOTAL NON-LIFE ASSETS 2,824,069
LIFE
Investments
Fixed Maturities, at market:
Pledged under financing reinsurance
treaty 12,676,304
Other 4,970,990
Policy loans 3,063,394
Government guaranteed student loans,
less allowance for uncollectible
loans of $464,603 at March 31, 1995 5,741,268
Short-term investments 563,057
Equipment leases 531,567
Cash and cash equivalents:
Pledged under financing reinsurance
treaty 1,075,982
Other 2,801,791
------------
TOTAL LIFE INVESTMENTS 31,424,353
Accounts receivable, less allowance for
doubtful accounts of $195,885 at March 31, 1995 821,967
Accrued investment income 470,413
Deferred policy acquisition costs, net 6,573,528
Value of life insurance purchased, net 1,549,356
Property and equipment, less accumulated
depreciation of $670,326 at March 31, 1995 147,823
Other assets 837,684
Unallocated loss on sale of subsidiary (4,161,313)
------------
TOTAL LIFE ASSETS 37,663,811
------------
TOTAL ASSETS $40,487,880
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
NON-LIFE LIABILITIES
Notes payable and other debt $ 500,940
Accrued liabilities and expenses 3,500
------------
TOTAL NON-LIFE LIABILITIES 504,440
LIFE
Policy liabilities
Future policy benefits 27,481,172
Other policy claims and benefits payable 311,519
Other policyholders' funds 827,955
------------
TOTAL POLICY LIABILITIES 28,620,646
Notes payable and other debt 5,557,566
Income taxes 21,443
Accrued liabilities and expenses 485,642
------------
TOTAL LIFE LIABILITIES 34,685,297
STOCKHOLDERS' EQUITY
Common stock 8,394,973
Retained-earnings deficit (3,096,830)
Unrealized holding losses on investments available for sale
------------
TOTAL STOCKHOLDERS' EQUITY 5,298,143
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $40,487,880
------------
See accompanying notes to consolidated financial statements.
F-24
<PAGE>
Unaudited Consolidated Statement of Operations
Dixie National Corporation
Three Months
Ended March 31
----------------
1995 1994
------ ------
REVENUES
Premiums $ 810,697 $ 4,083,248
Net investment income 617,412 537,085
Realized investment gains (losses) 36,757 11,594
-------------- ---------------
TOTAL REVENUES 1,464,866 4,631,927
BENEFITS AND EXPENSES
Benefits and claims to policyholders 392,703 2,640,373
Amortization of deferred policy acquisition
costs and value of insurance purchased 225,728 1,340,259
Commissions, net 132,014 736,646
General expenses, net 659,220 644,957
Interest expense 145,776 118,288
Insurance taxes, licenses and fees 82,748 240,733
Loss on sale of accident and health business
-------------- ---------------
TOTAL BENEFITS AND EXPENSES 1,638,189 5,721,256
-------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES AND
ESTIMATED LOSS ON SALE OF SUBSIDIARY (173,323) (1,089,329)
Income tax benefit (expense) 0 180,000
-------------- ---------------
LOSS BEFORE ESTIMATED
LOSS ON SALE OF SUBSIDIARY (173,323) (909,329)
Estimated loss on sale of subsidiary (4,635,000)
-------------- ---------------
NET INCOME (LOSS) $ (4,808,323) $ (909,329)
-------------- ---------------
Primary and fully diluted net income
(loss) per share $ (0.57) $ (0.14)
-------------- ---------------
See accompanying notes to consolidated financial statements.
F-25
<PAGE>
Unaudited Consolidated Statement of Stockholders' Equity
Dixie National Corporation
Three Months Ended March 31, 1995
<TABLE>
<CAPTION>
Unrealized
Common Retained Holding
Stock Earnings Losses Total
<S> <C> <C> <C> <C> <C>
Balance January 1, 1995 $ 8,394,973 $ 1,711,493 $ (925,011) $ 9,181,455
Net loss for three months ended March 31, 1995 (4,808,323) (4,808,323)
Recoginition of unrealized holding losses as
realized through estimated loss on sale of subsidiary 925,011 925,011
------------ ------------ ----------- ------------
BALANCE MARCH 31, 1995 (UNAUDITED) $ 8,394,973 $ (3,096,830) $ -0- $ 5,298,143
------------ ------------- ----------- ------------
See accompanying notes to consolidated financial statements
</TABLE>
F-26
<PAGE>
Unaudited Consolidated Statements of Cash Flows
Dixie National Corporation
Three Months
Ended March 31
----------------------
1995 1994
----------------------
Cash flows from operating activities:
Net income $ (4,808,323) $ (909,329)
Adjustments to reconcile net income to net
cash provided by operating activities:
Estimated loss on sale of subsidiary 4,635,000
Loss on sale of accident and health business
Increase in policy liabilities (57,631) 879,564
Amotization of deferred policy acquisition
costs and and value of life insurance
purchased 225,728 1,340,259
Increase (decrease) in deferred income taxes (94,987) (100,000)
Increase (decrease) in accrued liabilities (190,318) 16,165
Policy acquisition costs deferred (133,026) (597,316)
Decrease in accounts receivable (34,548) (426,102)
Decrease in policyowner funds on deposit (1,575) 55,641
Depreciation 27,345 29,081
Other, net 21,867 (48,179)
-------------- --------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES (410,468) 239,784
Cash flows from investing activities:
Proceeds from investments sold or matured:
Fixed maturities:
Maturities 523,163 346,708
Calls 33,000 18,301
Sales 242,000
Repayment of policy and student loans 402,801 489,214
Cost of investments acquired:
Fixed maturities (508,689) (2,235,087)
Equipment leases (531,567)
Policy and student loans (168,990) (253,673)
Temporary investments, net 4,271,090 (34,347)
Additions to property and equipment (19,693)
-------------- --------------
NET CASH PROVIDED (USED)
BY INVESTING ACTIVITIES 4,262,808 (1,688,577)
Cash flows from financing activities:
Proceeds from borrowing
Payments on debt (45,333) (35,689)
-------------- --------------
NET CASH USED BY
FINANCING ACTIVITIES (45,333) (35,689)
-------------- --------------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS 3,807,007 (1,484,482)
Cash and cash equivalents - beginning of year 459,109 4,655,458
-------------- --------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 4,266,116 $ 3,170,976
-------------- --------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for income taxes $ 127,040 $ 600,000
------------- --------------
Cash payments for interest $ 39,356 $ 52,678
------------- --------------
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
Notes To Unaudited Consolidated Financial Statements
Dixie National Corporation
March 31, 1995
Note 1--Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the detail and
disclosures required by generally accepted accounting principles for complete
financial statements. Operating results for the three month period ended March
31, 1995 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1995. More detailed information is contained in the
Notes to Consolidated Financial Statements.
All adjustments which, in the opinion of management, are necessary for a
fair presentation of such financial statements are included and consist only of
normal recurring adjustments.
Note 2--Statutory Accounting
A reconciliation of Dixie Life's statutory net income to the Company's
consolidated GAAP net income for the three months ended March 31, 1995 and 1994
is as follows:
Three Months Ended March 31
1995 1994
----------- -----------
Statutory net income $ (285,123) $ (353,487)
Estimated loss on sale of subsidiary (4,635,000)
Deferral of acquisition costs 133,026 597,316
Amortization of acquisition costs (225,728) (1,340,259)
Differences in insurance policy
liabilities, excluding effect of
sale of block of business 456,335 (81,614)
Deferred income taxes 0 100,000
Premium income (437,261) 250,196
Investment income 57,354 6,411
Commissions 0 (25,000)
Interest expense (145,776) (118,288)
General insurance expenses
Write off of agent advances 199,600 211,852
Supplementary contracts (57,027) (75,442)
Other 131,277 (81,014)
----------- -----------
GAAP Net (Loss) $(4,808,323) $ (909,329)
----------- -----------
----------- -----------
F-28
<PAGE>
A reconciliation of Dixie Life's statutory stockholders' equity to the
Company's Consolidated GAAP stockholders' equity at March 31, 1995 is as
follows:
March 31
1995
--------
Statutory Stockholders' Equity $ 5,962,197
Differences in insurance policy liabilities (733,358)
Deferred acquisition costs 6,573,528
Deferred income taxes (21,443)
Debt of parent company (5,909,686)
Asset Valuation Reserve 129,809
Value of life insurance purchased 1,549,256
Non-admitted assets 292,751
Common stock issued 1,979,720
Other (363,418)
Unallocated loss on sale of subsidiary (4,161,313)
------------
GAAP Stockholders' Equity $ 5,298,143
Note 3--Investments
The Company's investments in fixed maturity securities available for sale
at March 31, 1995 are summarized as follows:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Government agencies and authorities $ 9,407,327 $ 54,289 $270,213 $ 9,191,403
States, municipalities and political subdivisions 50,000 0 1,500 48,500
Special revenue 10,278 0 378 9,900
Public utilities 2,044,337 8,897 50,634 2,002,600
All other corporate 6,727,461 56,838 389,408 6,394,891
------------ --------- -------- ------------
$18,239,403 $120,024 $712,133 $17,647,294
</TABLE>
Net investment income for the three months ended March 31, 1995 and 1994
consists of the following:
1995 1994
----------- -----------
Investment income
Fixed maturities $341,661 $262,324
Policy loans 46,002 45,736
Student loans 103,056 62,934
Interest on Accounts Receivable 15,056 65,914
Short-term investment 46,252 33,256
Other 65,385 66,921
----------- -----------
Net investment income $617,412 $537,085
F-29
<PAGE>
Net realized investment gains for the three months ended March 31, 1995 and
1994 are summarized as follows:
1995 1994
----------- ------------
Realized gains $36,757 $11,594
Realized losses 0 0
----------- ------------
Net realized gains (losses) $36,757 $11,594
Subsequent to March 31, 1995, as consideration for extention of the
Corporation's Convertible Notes (Note 7), the Corporation pledged 762,106 shares
of its Alanco stock with a carrying value of $1,238,000 as addtional collateral
to the Convertible Notes.
The obligation of the purchasers of the Corporation's Common Stock in the
November Transaction (Notes 3 and 16 of the Corporation's 1994 Consolidated
Financial Statements) to cover any market depreciation, as defined, has been
extended to the maturity of the Term Loan. At March 31, 1995, market value of
the Alanco shares, based on the average closing bid and asked price, was
$ 1.625.
Note 4--Deferred Policy Acquisition Costs
An analysis of deferred policy acquisition costs for the three months ended
March 31, 1995 and 1994 follows:
1995 1994
----------- ------------
Balance at beginning of period $6,626,230 $19,759,110
Deferred during the period:
Commissions 108,071 464,173
Other Expenses 24,955 133,143
Total Deferred 133,026 597,316
Deferred policy acquisition costs on
policies sold (3,035,144)
Amortized during the period (185,728) (1,300,259)
----------- ------------
Balance at end of period $6,573,528 $16,021,023
----------- ------------
----------- ------------
Note 5--Value of Life Insurance Purchased
An analysis of the market of life insurance purchased for the three months
ended March 31, 1995 and 1994 follows:
1995 1994
----------- ------------
Balance at beginning of period $1,589,356 $1,749,356
Amortized during the period (40,000) (40,000)
----------- ------------
Balance at end of the period $1,549,356 $1,709,356
----------- ------------
----------- ------------
Note 6--Property and Equipment
A summary of property and equpment at March 31, 1995 follows:
Home office property $ 795,038
Data Processing Equipment 818,149
Furniture, Equipment and Autos 454,007
-----------
$2,067,194
Less accumulated depreciation 1,509,845
-----------
$ 557,349
-----------
-----------
F-30
<PAGE>
Note 7--Notes Payable and Other Debt
The Company has the following notes payable at March 31, 1995:
NON-LIFE:
Note payable to a bank bearing interest at prime
plus 3/4% (at December 31, 1994 and 1993, the
rate was 9.25%), payable in monthly
installments of $11,846 through January 5,
2001; secured by home office property $ 500,940
LIFE:
Note payable to an insurance company (bank at
December 31, 1993) bearing interest at 1% above
prime (9.5% at December 31, 1994) payable
interest only monthly through February 1995,
with original maturity March 31, 1995,
collateralized by common stock of Dixie Life
(Term Loan) 3,688,746
Convertible 10% notes due May 1, 1995 (Notes) with
interest payable semi-annually until maturity,
convertible to common stock on the basis of one
share for each $1 of Note principal,
collateralized by second security interest in
common stock of Dixie Life 1,720,000
Obligation under capital lease 148,820
-----------
Non-life 500,940
-----------
$6,058,506
The Stock Purchase Agreement with Standard Life Insurance Company (Note 9)
waives all financial covenants contained in the Term Loan agreement.
Subsequent to March 31, 1995, the Convertible Notes were extended to the
Term Loan maturity but no later than December 27, 1995.
Note 8--Incentive Stock Option Plans
Options to purchase common stock of the Corporation previously have been
granted under two incentive stock option plans. Both of these plans have
expired. At March 31, 1995, options to purchase 395,768 shares were outstanding,
including (at per share exercise prices): 92,061 at $1.23; 87,816 at $1.69;
16,991 at $1.77; 34,496 at $1.41; 45,161 at $1.38; 48,548 at $1.50 and 70,695 at
$1.00.
As part of a compensation program for members of the Corporation's Board of
Directors, the Board approved granting options to purchase 5,000 shares of the
Corporation's Common Stock to each of the Corporation's nine directors at such
time as a stock option plan has been formally adopted. It is expected that such
a plan will be adopted in May 1995. The options will be exercisable at any time
prior to their expiration five years from the grant date.
F-31
<PAGE>
Note 9--Proposed Sale of Dixie Life
On April 18, 1995, the Corporation entered into a Stock Purchase Agreement
with Standard Life Insurance Company of Indiana (Standard) to sell to Standard
all of the capital stock of Dixie Life which the Corporation owns (Standard
Transaction). The Stock Purchase Agreement implements a Letter of Intent between
Standard's parent, Standard Management Corporation, and the Corporation dated
March 6, 1995. Dixie Life represents 94% of the consolidated assets and
substantially all of the consolidated operations of the Corporation.
At closing Standard will cancel the Corporation's $3,689,000 Term Loan
obligation, assume indebtedness of $1,720,000 under Convertible Notes of the
Corporation and pay the Corporation $3,000,000 in cash. The Corporation will
also receive the first $175,000 of agent advances that Dixie Life collects after
closing. The selling price will be adjusted by the change in Dixie Life's
capital and surplus and asset valuation reserve between December 31, 1994 and
closing. At March 31, 1995, statutory capital and surplus and asset valuation
reserve was $318,200 less than at December 31, 1994. It is expected that there
will be little change from the March 31, 1995 level prior to closing. Certain
other adjustments may be made based on the resolution of pending litigation to
which Dixie Life is a party. In addition, Dixie Life will continue to pay
$15,000 per month rent to Vanguard, Inc. (Vanguard), a wholly-owned subsidiary
of the Corporation, through the December 31, 1996, expiration of an existing
lease on the office building occupied by the Corporation and Dixie Life.
The proposed sale, if completed, will result in a loss of $4,635,000 ($.55
per share) which has been recorded in the first quarter of 1995. The sale of
Dixie Life constitutes discontinuance of the life insurance business by the
Corporation. The loss on the sale is reported in a manner substantially the same
as discontinued operations. The Corporation continues to report insurance
operations in the same manner as prior to the measurement date of March 6, 1995.
Accounting Principles Board Opinion No. 30 (APB 30) calls for reporting the
operations of discontinued operations as a single net amount in the statement of
operations but, in management's opinion, reducing virtually all of the
Corporation's operations to a single amount in the statement of operations would
not be meaningful to readers of the Corporation's financial statements. The
Corporation anticipates entry into the health care business or some other line
of business in 1995. When the Corporation enters another line of business, but
no later than 1996, insurance operations will be reported as discontinued
operations in accordance with APB 30.
The Stock Purchase Agreement confirms an extension, included in the Letter
of Intent, of the due date of the Term Loan to the latter of closing or 90 days
after either party informs the other that the transaction cannot be closed under
its terms. Certain covenants contained in the Term Loan agreement are waived by
the Stock Purchase Agreement, including all financial covenants and certain
covenants restricting the Corporation from entering into certain transactions.
The Stock Purchase Agreement also contains usual and customary conditions,
including, among others, the receipt of all required regulatory approvals and
approval of the transaction by the shareholders of the Corporation at a meeting
to be held on or before August 1, 1995. The Stock Purchase Agreement may be
terminated by either party after August 1, 1995, provided the terminating party
has not breached the Stock Purchase Agreement.
F-32
<PAGE>
Note 10--Sale of Common Stock
The Corporation entered into an agreement with Universal Management
Services, a Nevada corporation (UMS), as of October 27, 1994 (UMS Agreement).
The Corporation and UMS, on April 20, 1995, entered into an amended and restated
agreement effective as of March 24, 1995 (Second Amended and Restated UMS
Agreement) which provides that UMS has the right to use its best efforts to
assist the Corporation in placing up to 12,500,000 additional shares of the
Corporation's Common Stock in non-U.S. markets, pursuant to Regulation S, or
otherwise in private placements. In connection with the UMS Agreement, the
Corporation expects to issue 2,000,000 shares of its Common Stock in exchange
for 16% of the outstanding common shares of Phoenix Medical Management, Inc.
(PMM), an Arizona corporation. If the acquisition of the 16% interest is
completed, the Corporation plans to issue 100,000 of its Common Stock for an
option to acquire the remaining 84% of the common shares of PMM for 10,400,000
additional shares of the Corporation's Common Stock.
F-33
