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. )
Filed by the Registrant (X)
Filed by a Party other than
the Registrant ( )
Check the appropriate box:
( ) Preliminary Proxy Statement ( ) Confidential for Use
of the Commission Only
(as permitted by Rule
14a-6(e)(2)
(X) Definitive Proxy Statement
( ) Definitive Additional Materials
( ) Soliciting Material Pursuant to 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).
(X) 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:
(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
<PAGE>
DIXIE NATIONAL CORPORATION
NOTICE OF 1995 ANNUAL MEETING OF SHAREHOLDERS
SEPTEMBER 19, 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 September 19, 1995 at 10:00 o'clock A.M., Central Daylight
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.
August 25, 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
September 5, 1995 /s/Jerry M. Greer
Jerry M. Greer
SENIOR VICE PRESIDENT AND SECRETARY
<PAGE>
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 17
Employment Contracts 17
The Restated Stock Purchase Agreement 17
Terms of the Sale 18
Certain Representations and Warranties 18
Conduct of Business Pending Sale 19
Conditions to Consummation of the Sale 19
Fees and Expenses 19
Termination; Amendment; Governing Law 19
Vote Required for Approval 20
DISSENTERS' RIGHTS OF SHAREHOLDERS
General 20
Procedure for Exercise of Dissenters' Rights 21
Procedure if the Dissenters Are Dissatisfied with the Payment Offered 22
CONSEQUENCES OF NOT CLOSING THE STANDARD TRANSACTION 23
FUTURE BUSINESS PLANS
General 23
Basis for Consideration Paid For Investment In PMM 25
BUSINESS OF THE COMPANY 25
General 26
Statutory Surplus and Accounting 27
Capital Requirements of the Corporation 28
Products and Markets 28
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Sales Force and Employees 28
Competition 29
Investments 29
Reinsurance 30
Regulatory Factors 31
Investment in Marketable Equity Securities 32
Legal Proceedings 33
SELECTED FINANCIAL DATA 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 36
Liquidity and Capital Resources 36
General 36
Liquidity Requirements 37
Going Concern Considerations 37
Investment Portfolio Liquidity 38
Statutory Surplus 39
Results of Operations 39
PROFORMA FINANCIAL STATEMENTS 42
MARKET PRICES AND DIVIDENDS 43
PROPOSAL N0. 2 - 1995 STOCK OPTION PLAN 44
General 44
Administration 45
Options 45
Exercise of Options 45
Transferability 46
Termination or Amendment 46
Federal Income Tax Consequences 46
Grants Under 1995 Plan 47
Vote Required for Approval 48
PROPOSAL NO. 3 - ELECTION OF DIRECTORS
Nominees and Directors 48
Executive Officers 52
Vote Required for Election 53
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Compensation Committee Report on Executive Compensation 53
Compensation Committee Members 54
Stock Price Performance Chart 55
Summary Compensation Table 55
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Fiscal Year End Options 56
DIRECTORS' COMPENSATION 56
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 57
PROPOSAL NO. 4 - RATIFICATION OF SELECTION OF
INDEPENDENT AUDITORS 57
SHAREHOLDER PROPOSALS 57
OTHER MATTERS 58
INDEX TO FINANCIAL STATEMENTS F-1
APPENDIX A SECOND RESTATED 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: September 5, 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 10:00 o'clock A.M. on September 19, 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
Shareholders of record at the close of business on August 25, 1995 will
be entitled to notice of and to vote at the annual meeting. On August 25,
1995, there were 10,494,973 shares of common voting stock ("Common Stock") of
the Corporation outstanding and entitled to vote. Each 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.
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The presence in person or by proxy of a majority of the outstanding
shares shall constitute a quorum for the transaction of business at the Annual
Meeting. Abstentions will be counted for purposes of determining the presence
or absence of a quorum. Abstentions are considered as a vote against any
matter other than the election of directors, as to which a shareholder may
vote for a nominee or withhold authority to vote. "Broker non-votes," which
occur when brokers are not permitted to exercise discretionary voting
authority for beneficial owners who have not provided any voting instructions,
are not counted for quorum purposes or any vote. To the extent that voting
instructions are provided to brokers as to any proposal, the shares will be
counted for purposes of determining a quorum and the outcome of the vote. The
Chairman of the Board of the Corporation 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.
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 August 25, 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) 10.6%
10555 Richmond Avenue
Houston, Texas 77042
S. L. Reed, Jr. 590,942(2) 7.0%
107 Executive Center
Hilton Head Island, SC 29928
Robert B. Neal 533,768(3) 6.2%
c/o Dixie National Corporation
3760 Interstate 55 North
Jackson, Ms 39211
W.A. Taylor, Jr. 439,815(2)(3) 5.0%
939 West Main
Louisville, MS 39339
- ------------------------
(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
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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.
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 forth information as to the beneficial ownership
of the Corporation's Common Stock as of August 25, 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%
James G. Ricketts 20,000(1) Less than 1%
Herbert G. Rogers, III 107,128(1)(3) 1.0%
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Name Shares
of Beneficial Beneficially Percent
Owner Owned of Class
- ----------------- ----------------- --------
W. A. Taylor, Jr. 439,815(1)(2)(3) 4.2%
Monroe M. Wright None N/A
Directors and
executive officers as
a group (13 persons) 2,619,520(4) 24.0%
(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; James G. Ricketts - 15,000 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 a Stock
Purchase 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. That agreement was restated by a
Second Restated Stock Purchase Agreement entered into as of August 30, 1995,
but effective as of April 18, 1995, among the Corporation, Dixie Life and
Standard ("Restated Stock Purchase Agreement").
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Dixie Life is 99.3% owned by the Corporation and represents virtually all
of the Company's assets and operations. The sale of the Corporation's interest
in Dixie Life to Standard ("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 would
receive $1,926,468 in cash at closing and up to $53,872 of collections after
June 30, 1995 on a specific receivable as of that date. See "The Restated
Stock Purchase Agreement - Terms of the Sale" for more detailed information
regarding the terms of the sale of Dixie Life.
The Standard Transaction, if completed, will result in a loss to the
Corporation. An estimated loss of $4,635,000 was recorded in the first quarter
of 1995. The estimated loss was revised to $3,677,000 by a credit of $958,000
in the second 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."
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 $4,929,911 through June 30, 1995, before
giving effect to the recorded
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estimated loss of $3,677,000 resulting from the Standard Transaction. The
Company's operating losses are continuing.
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 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 (discussed
below under "Business of the Corporation - Legal
Proceedings") 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, when it was settled, an ongoing SEC
investigation was a deterrent to many merger or purchaser
candidates;
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(f) Dixie Life's statutory results of operations were
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 a company which owned an insurance company
that failed. MRA had certain unresolved concerns regarding the
potential liability under the Charter 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
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("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."
(6) The Stock Purchase Agreement was entered into in April 1995
and was subsequently restated by the Restated Stock Purchase
Agreement. 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 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
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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
Restated 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 approved the Restated 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, the Corporation's 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
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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 due to various holders. Each of these
obligations is due at closing of the Standard Transaction. If
the Restated Stock Purchase Agreement is terminated by either
party, the Term Loan is due 180 days following cancellation and
the Convertible Notes are due 90 days following termination of
the Restated Stock Purchase Agreement by either party. In any
event, the Convertible Notes are due not later than 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.
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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.
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.
A settlement was reached on July 20, 1995, subject to the
approval of the Circuit Court of Montgomery County, Alabama.
The settlement would resolve significant questions related to
the Charter Contracts, as well as provide a court approved
means for calculating future dividend payments. The settlement
requires Dixie Life to pay a cash amount of $550,000 and to
provide additional coverage to holders of Charter Contracts,
the statutory reserves for which are $391,800. The estimated
total cost of settling the litigation, including attorney fees
and court and other costs, is $1,007,000. The $7,389,086
purchase price for Dixie Life arrived at under the Restated
Stock Purchase Agreement reflects earlier terms of the Stock
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Purchase Agreement providing that Standard would absorb the
first $600,000, and any excess over $1,000,000, of the costs
incurred in the settlement of the Charter Contract litigation,
with any amount between $600,000 and $1,000,000 to be borne
equally by the Corporation and Standard. The net effect of the
settlement, in terms of the Dixie Life purchase price, is that
the Corporation will bear no more than $200,000 of the costs
and Standard will absorb the balance of the amount of the
settlement. The portion absorbed by Standard effectively
represents an addition to the selling price of Dixie Life.
While the proposed settlement is potentially favorable to the
Corporation, the impending maturities of the Term Loan and
Convertible Notes and the provisions of the Restated Stock
Purchase Agreement severely limit the flexibility of the
Corporation in negotiating with other parties.
3. The Corporation has incurred substantial losses in 1994 and
1993 and these losses are continuing in 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 cautioned
that this valuation estimate could not be given excessive
weight, considering that efforts to sell the Corporation or
Dixie Life have been on going for so long and that there is
little time to identify and close an alternative transaction,
given the maturities of the Term Loan and the Convertible
Notes. Furthermore, the sale would be readily identified as
being of a distressed nature which would likely depress other
potential offers.
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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.
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, an option to purchase 5,000 shares
of SMC's common stock at a price not less than the market price on the date
the option is granted 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 Restated Stock Purchase Agreement
The following is a summary of the material provisions of the Restated
Stock Purchase Agreement and does not purport to be complete. The Restated
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 Restated Stock Purchase Agreement. Shareholders of the
Corporation are urged to read the Restated Stock Purchase Agreement.
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Terms of the Sale. The Restated Stock Purchase Agreement provides that
the Corporation will sell all 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 acquisition of the Dixie Life shares, Standard
will pay to the Corporation a purchase price (the "Purchase Price") equal to
$7,389,086, of which $1,926,468 is payable in cash. The balance of the
Purchase Price is payable by the cancellation of the Corporation's
indebtedness to Standard of $3,688,746 under the Term Loan, the assumption by
Standard of the Corporation's indebtedness of $1,720,000 under its Convertible
Notes, and the payment to the Corporation of up to $53,872 of collections
after June 30, 1995 on a specific receivable as of that date 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. If the building is sold by Vanguard or Vanguard is sold by the
Corporation prior to December 31, 1996, the payments under the lease will
terminate. 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, 1994 will be purchased from Dixie Life from
the Corporation. At June 30, 1995, such investments amounted to approximately
$525,000.
Certain Representations and Warranties. The Restated 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 Restated 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 Restated 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
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due in connection with the Restated Stock Purchase Agreement; (xvi) the
absence of any untrue statements of material fact or omission to state a
material fact in the Restated Stock Purchase Agreement or any certificate
furnished in connection with the Restated 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 Restated Stock
Purchase Agreement, between its effective date (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 Restated 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; the
Mississippi Insurance Department requires Dixie Life to post a liability in
excess of $1,010,000 relating to the settlement of the Charter Contracts law
suit or requires the additional deposit of assets in excess of $2,000,000
pending final conclusion and dismissal of that suit; Dixie Life's 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 Restated 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 Restated 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 Restated 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 October 16, 1995 by the Corporation or Standard if
closing has not occurred, provided such failure to close is not caused by a
breach of the Restated Stock Purchase Agreement by the terminating party.
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The Restated 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.
Vote Required for Approval
The members of the Corporation's and Dixie Life's Boards of Directors, in
the aggregate, directly own 1,717,702 shares, or 16.4% of the Common Stock
outstanding and intend to vote FOR the Standard Transaction. Family members of
the directors of the Corporation and Dixie Life own, in the aggregate, 971,708
shares, or 9.3% 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
(discussed below under "Future Business Plans") 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.
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 64.7% 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
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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.
As used in Article 13, the term "shareholder" includes the record
shareholder or the beneficial shareholders.
Procedure for Exercise of Dissenters' 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
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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, 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 Dissatisified with the Payment Offered
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.
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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 Restated Stock Purchase Agreement and, due in part to
the existence of the Stock Purchase Agreement, the Convertible Notes have also
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 will be
due 180 days after the Restated Stock Purchase Agreement is terminated. The
Convertible Notes will be due on the earlier of 90 days after the Restated
Stock Purchase Agreement is terminated or 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 of
approximately $4,000,000 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 Phoenix Medical Management, Inc. ("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
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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 test marketed by the
founders of PMM in Phoenix, Arizona and Lafayette, Louisiana over the course
of the past two 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"). The Board's action was based on its
understanding that PMM would open additional clinics in Lafayette and New
Orleans, Louisiana in June and September 1995, respectively.
In subsequent discussions, PMM informed the Corporation that plans for
the Lafayette and New Orleans clinics had been postponed indefinitely in favor
of development of additional clinics in Arizona and that the Phoenix clinic,
due in part to a delay in obtaining Medicare approval of the facility, was not
yet meeting anticipated revenue projections. As a result, in May 1995, the
Board instructed management to proceed with the acquisition of the 16%
interest and the 84% Option, but delay exercise of the 84% Option. In
fulfillment of this commitment, 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.
In anticipation of closing the Standard Transaction, the Corporation has
been actively examining several advanced technology and health care companies,
including PMM, for possible future acquisition. The negative impact of the 84%
Option on the Corporation's preliminary discussions with prospective
acquisition candidates, combined with the delayed Medicare approval of the
Phoenix clinic and the decision by PMM management to limit its initial
strategic focus to Arizona, caused the Corporation to reconsider the
advisability of retaining the 84% Option.
As a result, on July 14, 1995, the Corporation relinquished the 84%
Option. PMM shareholders retain the 100,000 shares of the Corporation's Common
Stock they received in exchange for 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 therewith.
John E. Haggar, who is a director of the Corporation, was Chief Financial
Officer and a director of UMS until June 1995. On June 1, 1995 Mr. Haggar
became an employee of Alanco and, in July 1995, became Alanco's treasurer.
Alanco owned 10% of PMM prior to the
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Corporation's acquisition of its 16% interest. In that acquisition, the
Corporation issued 200,000 shares of its Common Stock to Alanco in exchange
for shares of PMM owned by Alanco. James G. Ricketts, who also is a director
of the Corporation, is chairman of the board of directors of Alanco.
As discussed above, the Corporation is exploring 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. Immediately after the Standard Transaction is
completed, the Corporation will have no operating assets and over 40% of its
total assets, exclusive of cash items, will consist of "investment
securities'" as defined in the Investment Company Act of 1940 ("1940 Act").
The Corporation does not propose to engage in business as an "investment
company." However, the Corporation may become subject to regulation under the
1940 Act if it is unable to obtain sufficient operating assets or investments
in majority-owned subsidiaries (i.e., non-investment securities) within a
transition period provided for in Rules promulgated under the 1940 Act.
Basis for Consideration 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, 1995 the
Corporation acquired the 16% interest in PMM and the 84% Option, as 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. The Company had total revenues of $11,651,343 and a net loss of
$2,554,729 for the year ended December 31, 1994 and total revenues of
$2,867,373 and a net loss of $5,094,994 (including an estimated loss of
$3,677,000 on the proposed sale of Dixie Life) for the six months ended June
30, 1995. The Corporation's financial condition is dependent upon the
operations of Dixie Life, as well as on
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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:
<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>
26
<PAGE>
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 June 30, 1995, Dixie
Life's Statutory Surplus was approximately $4,558,000. 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.
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
$1,655,000 at June 30,
27
<PAGE>
1995. The amount of this credit will decrease in the amount of $165,000 each
calendar quarter. 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 December 31, 1994 Notes to Consolidated
Financial Statements.
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 had a sales force consisting, as of June 30, 1995, of
approximately 1,730 agents, 350 general agents, and 48 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 June 30, 1995, the Company had approximately 27 home office employees,
including officers.
28
<PAGE>
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:
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 December 31, 1994
Notes to Consolidated Financial statements.
29
<PAGE>
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 June 30, 1995, the reserve credit was $1,655,000 which will be reduced by
not more than $165,000 per quarter. It is anticipated that the Crown Agreement
will be terminated in approximately three years from December 31, 1994, when
all of the 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
30
<PAGE>
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 December 31, 1994 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 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
31
<PAGE>
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 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
32
<PAGE>
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:
(1) 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 90 days from the date of
cancellation of the agreement related to such sale;
(2) 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
(3) 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
Corporation.
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 discussed
under "Future Business Plans," on July 14, 1995, the Corporation relinquished
the 84% Option.
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 total 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.
33
<PAGE>
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 December
31, 1994 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.
On July 20, 1995, Dixie Life reached a settlement with the plaintiff
which provides, among other things:
1. For the purposes of settlement only, Dixie Life will not
object to certification of a class consisting of all owners of
Charter Contracts as of January 7, 1994.
2. For payment to the class of $550,000.
3. For issuance to each class member of additional paid up
insurance in the amount of 15% of the face amount of each
Charter Contract presently in force.
4. An agreed adjudication of the method of computing and
allocating dividends in the future on Charter Contracts.
5. That, in the event that more than 5% of the potential class
members elect not to participate in the litigation as members
of the class, the settlement agreement is null, void and of no
further effect.
The settlement is subject to approval by the Circuit Court of Montgomery
County, Alabama.
The net effect of the settlement in terms of the purchase price for Dixie
Life arrived at under the terms of the Restated Stock Purchase Agreement is
that the Corporation will bear no more than $200,000 of the costs incurred in
settling the litigation and Standard will absorb the balance. See "Proposal
No. 1 - Sale of Dixie National Life Insurance Company - Opinion of
Corporation's Financial Advisor."
There are no other material pending legal proceedings, other than routine
litigation incidental to the Company's business, to which the Company or any
of its subsidiaries is a party, or to which any of the Company's property is
subject.
34
<PAGE>
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 six months ended June 30, 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
six months ended June 30, 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 JUNE 30: 1995 1994
---- ----
Premiums $ 1,597,264 $ 7,969,323
Net Investment Income 1,233,352 1,073,821
Realized investment gains (losses) 36,757 (5,994)
------------- -------------
Total $ 2,867,373 $ 9,037,150
============= =============
LOSS BEFORE ESTIMATED LOSS ON SALE OF
SUBSIDIARY $ (1,417,994) $ (1,782,785)
============= =============
NET LOSS $ (5,094,994) $ (1,782,785)
============= =============
PER COMMON SHARE AMOUNTS
Primary and fully diluted
Loss before estimated loss on sale of
subsidiary $ (0.17) $ (0.28)
============= =============
Net income (loss) $ (0.61) $ (0.28)
============= =============
AT JUNE 30:
TOTAL ASSETS $ 42,239,033 $ 51,578,831
============= =============
NOTES PAYABLE
AND OTHER DEBT $ 6,068,365 $ 6,183,148
============= =============
35
<PAGE>
<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
============ ============ ============ ============ ============
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 Restated Stock Purchase Agreement will be consummated.
36
<PAGE>
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. In the six months ended June
30, 1995, Dixie Life's operations resulted in negative cash flows of $856,000.
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 June 30, 1995, 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 180 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 earliest of closing of the Standard
Transaction, 90 days after the Restated Stock Purchase Agreement is terminated
or 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. The Corporations also owes a bank
$50,000, with principal and interest payments of $1,389 due monthly until June
1998 when the remaining principal balance is due in full.
At June 30, 1995, Vanguard owed a bank approximately $478,000 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 Restated 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.
37
<PAGE>
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 180
days available to Corporation beyond such cancellation before
the Term Loan is due.
3. Satisfaction of the Convertible Notes through the sale of
the marketable equity securities owned by the Corporation or by
some other means.
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 June 30, 1995,
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 and June 30, 1995, 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 and 1995 than in 1993.
At December 31, 1994 and June 30, 1995, fixed maturity investments are
all classified as available for sale and are carried at market value. At
December 31, 1994, 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. At June 30, 1995, there is an unrealized market gain in Dixie Life's
fixed maturity portfolio. This gain is a component of the estimated loss of
the sale of Dixie Life at June 30, 1995 in the accompanying 1995 financial
statements.
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 was funded in
the first quarter of 1995. The Restated Stock
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Purchase Agreement requires that any investment under this program be
transferred to the Corporation at book value at closing and funded under this
program was ended. Such transfer would effectively reduce the cash portion of
the selling price to the Corporation. At June 30, 1995, the principal balance
of these lease receivables was $525,000.
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.
At June 30, 1995, Dixie Life's Statutory Surplus was $4,558,000. 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 $1,655,000 at June 30, 1995. The sales
of its in force accident and health insurance, generated significant statutory
profits.
Results of Operations
First Six Months of 1995 Compared To First Six Months of 1994. In the six
month period ended June 30, 1995, the Company incurred a net loss of
$5,095,000 ($.61 per share) compared to a net loss of $1,783,000 ($.28 per
share) in the comparable period of 1994. The 1995 loss included an estimated
loss of $3,677,000 ($.44 per share) from the proposed sale of Dixie Life
discussed in Note 9 to the 1995 Notes to 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 Restated
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 another line of 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.
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Total revenues decreased $6,170,000 in the six month period ended June
30, 1995 compared to the same period in 1994. Premiums for the period
decreased $6,372,000 in 1995, primarily as a result of the sale of Dixie
Life's accident and health business.
Benefits and expenses decreased $6,534,000 in the six month period ended
June 30, 1995 compared to the same period in 1994, primarily as a result of
the sales of Dixie Life's accident and health business.
In the six months ended June 30, 1995, benefits and claims to
policyholders decreased amortization of deferred policy acquisition costs
decreased $682,000 and commissions decreased $1,281,000 compared to the same
period in 1994. Each of these decreases was driven by the sales of Dixie
Life's accident and health business.
In June 1995, Dixie Life settled pending litigation regarding certain
policies previously issued and recorded a charge of $1,007,000 related to this
statement.
In 1994, the Corporation recognized a loss of $940,000 on the sale of
Dixie Life's accident and health business.
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 revenue 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
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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:
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.
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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 and 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 expense 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.
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.
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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 1 1 1/32 13/16 15/16
Third (through 3/4 15/16 1/2 5/8
August 31,
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. The closing bid price on August 31, 1995,
the most recent practicable date prior to the mailing of this Proxy Statement,
was $ 17/32. In view of the major change proposed in the Corporation's
business, the historical market prices set forth herein should not be
considered as representative of the market prices for the Corporation's Common
Stock that may be experienced following the closing of the Standard
Transaction. The market for the Corporation's Common Stock has generally been
illiquid, particularly for large blocks of shares. No representations can, of
course, be made as to future market prices or market liquidity.
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.
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The number of holders of record of common stock of the Corporation on
August 25, 1995 was 2,442.
PROPOSAL NO. 2 - 1995 STOCK OPTION PLAN
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 August 31, 1995, the aggregate market value of the
500,000 shares subject to the 1995 Plan is $265,625. 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".
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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 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.
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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
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
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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.
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.
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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.
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, 46, 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, 61, has been director since
1966. He is Chairman and Chief Executive Officer
of Choctaw Maid Farms, Inc. (a food processing
and marketing company), of
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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.
JOHN E. HAGGAR Mr. Haggar, 53, has been a director since
January 1995. On June 1, 1995 he became an
employee of Alanco and, in July 1995, became
Alanco's treasurer. 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, 55, 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, 59, has served as a director
since 1991. He is an attorney in Oxford,
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Mississippi. Mr. Pegram is a member of the Audit
and Compliance Committee and the 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. For the past five years he has
been a consultant in the field of criminal
justice, primarily corrections. He is President
and Chief Executive Officer of Technology
Systems International, Inc., 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
chairman of the board of directors 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, P.A., The Swift Agency, Inc., Rogers
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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 Morris Scrap
Metal, Inc., and Chairman of the Board of the
Gentry Furniture Corporation. He serves as
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.
51
<PAGE>
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 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.
52
<PAGE>
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.
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
Fixing the number of directors at nine requires a favorable vote of a
majority of those shares voting, in person or by proxy. The nine 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
53
<PAGE>
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 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.
54
<PAGE>
Stock Price Performance Chart
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG
DIXIE NATIONAL CORPORATION, STANDARD & POOR'S 500 INDEX
AND STANDARD & POOR'S INSURANCE INDEX
[GRAPHIC OMITTED - FOLLOWING TEXT IS SUBSTITUTED]
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
[END OF SUBSTITUTED TEXT]
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
55
<PAGE>
(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.
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."
56
<PAGE>
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 Restated 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
W.A. Taylor Director and 200,000(1)
5% Owner
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.
John E. Haggar, a director of the Corporation, was chief financial
officer and a director of UMS until June 1995 and became treasurer of Alanco
in July 1995. James G. Ricketts, also a director of the Corporation, is
chairman of the board of directors of Alanco. Certain transactions of the
Corporation with UMS and Alanco are described under "Proposal No. 1 - Sale of
Dixie National Life Insurance Company" and "Future Business Plans."
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.
57
<PAGE>
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 1994 Form 10-K Annual Report, 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. This Form
10-K constitutes the Corporation's 1994 Annual Report to Shareholders.
Please date and sign the enclosed proxy and return it to the Company
promptly.
September 5, 1995
JERRY M. GREER
SENIOR VICE PRESIDENT & SECRETARY
58
<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
Interim Financial Statements for 1995 and 1994
Unaudited Consolidated Balance Sheet as of June 30, 1995 F-25
Unaudited Consolidated Statements of Operations for the Six
Months Ended June 30, 1995 and 1994 F-26
Unaudited Consolidated Statements of Stockholders' Equity for
the Six Months Ended June 30, 1995 and 1994 F-27
Unaudited Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1995 and 1994 F-28
Unaudited Notes to Consolidated Financial Statements F-29
F-1
<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
F-2
<PAGE>
Note 9. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
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 3,014,248
-------------- --------------
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 (LOSS) BEFORE INCOME TAXES AND
ESTIMATED LOSS ON SALE OF SUBSIDIARY (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:
Estimated loss on sale of subsidiary
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
Increase (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
Decrease in policyholder funds on deposit 9,775 22,013 (27,340)
Depreciation 119,564 117,910 160,272
Other, net (47,771) (221,725) 110,103
------------ ----------- -----------
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 PERIOD $ 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
F-8
<PAGE>
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 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.
F-9
<PAGE>
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 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.
F-10
<PAGE>
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
F-11
<PAGE>
$1,985,000 related to this agreement which has the effect of increasing
statutory stockholders' equity by that amount.
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:
<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>
F-12
<PAGE>
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>
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>
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>
F-13
<PAGE>
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>
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-14
<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 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.
F-15
<PAGE>
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.
F-16
<PAGE>
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.
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.
F-17
<PAGE>
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:
<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>
F-18
<PAGE>
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 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,
F-19
<PAGE>
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.
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.
F-20
<PAGE>
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>
<CAPTION>
Life Annuity A&H Total
---- ------- --- -----
<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.
F-22
<PAGE>
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 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
F-23
<PAGE>
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-24
<PAGE>
CONSOLIDATED BALANCE SHEETS (Unaudited)
DIXIE NATIONAL CORPORATION
<TABLE>
<CAPTION>
June 30
1995
---------
<S> <C>
ASSETS
NON-LIFE
Marketable Investments
Marketable equity securities $ 2,000,000
Cash and cash equivalents 280,222
Other 126,200
------------
2,406,422
Investment in other equity securities 1,103,778
Property and equipment 434,039
------------
TOTAL NON-LIFE ASSETS 3,944,239
LIFE
Investments
Fixed Maturities, at market
Pledged under financing reinsurance treaty 14,305,436
Other 4,667,946
------------
18,973,382
Policy loans 3,071,380
Government guaranteed student loans, less allowance
for uncollectible loans of $464,603 at June 30,
1995 and December 31, 1994 5,470,065
Short-term investments 664,515
Equipment leases 525,037
Cash and cash equivalents
Pledged under financing reinsurance treaty 746,938
Other 2,475,981
------------
3,222,919
------------
TOTAL LIFE INVESTMENTS 31,927,298
Accounts receivable, less allowance for doubtful accounts
of $195,885 at June 30, 1995 and December 31, 1994 798,361
Accrued investment income 452,939
Deferred policy acquisition costs, net 6,464,089
Value of life insurance purchased, net 1,509,356
Property and equipment, less accumulated depreciation
of $687,905 at June 30, 1995 and $652,748 at
December 31, 1994 130,245
Other assets 835,982
Unallocated loss on sale of subsidiary (3,823,476)
------------
TOTAL LIFE ASSETS 38,294,794
------------
TOTAL ASSETS $42,239,033
============
LIABILITIES AND STOCKHOLDERS' EQUITY
NON-LIFE LIABILITIES
Notes payable and other debt $ 527,694
Accrued liabilities and expenses 3,236
------------
TOTAL NON-LIFE LIABILITIES 530,930
LIFE LIABILITIES
Policy liabilities
Future policy benefits 27,405,316
Other policy claims and benefits payable 256,557
Other policyholders' funds 1,739,574
------------
TOTAL POLICY LIABILITIES 29,401,447
Notes payable and other debt 5,540,671
Income taxes 139,865
Accrued liabilities and expenses 510,870
------------
TOTAL LIFE LIABILITIES 35,592,853
STOCKHOLDERS' EQUITY
Common Stock 10,494,973
Discount on Common Stock (996,222)
Retained earnings (deficit) (3,383,501)
Unrealized holding losses on investments available for sale -
------------
TOTAL STOCKHOLDERS' EQUITY 6,115,250
------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY $42,239,033
============
See accompanying notes to consolidated financial statements.
</TABLE>
F-25
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
DIXIE NATIONAL CORPORATION
<TABLE>
<CAPTION>
Six Months
Ended June 30
---------------
1995 1994
---- ----
<S> <C> <C>
REVENUES
Premiums $ 1,597,264 $ 7,969,323
Net investment income 1,233,352 1,073,821
Realized investment gains 36,757 (5,994)
------------ ------------
TOTAL REVENUES 2,867,373 9,037,150
BENEFITS AND EXPENSES
Benefits and claims to policyholders 672,961 5,098,581
Amortization of deferred policy acquisition costs 468,313 1,150,641
Commissions, net 267,455 1,548,538
General expenses, net 1,353,100 1,507,214
Interest expense 293,460 172,752
Insurance taxes, licenses and fees 222,807 402,209
Provision for litigation settlement 1,007,271
Loss on sale of accident and health business 940,000
------------ ------------
TOTAL BENEFIT AND EXPENSES 4,285,367 10,819,935
------------ ------------
LOSS BEFORE INCOME TAXES AND
ESTIMATED LOSS ON SALE (1,417,994) (1,782,785)
Income tax benefit
------------ ------------
LOSS BEFORE ESTIMATED
LOSS ON SALE OF SUBSIDIARY (1,417,994) (1,782,785)
Estimated loss on sale of subsidiary (3,677,000)
------------ ------------
NET LOSS $(5,094,994) $(1,782,785)
============ ============
Primary and fully diluted
per share amounts:
Loss before estimated loss on sale of subsidiary $ (0.17) $ (0.28)
============ ============
Net loss $ (0.61) $ (0.28)
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
F-26
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
DIXIE NATIONAL CORPORATION
Six Months Ended June 30, 1995 and 1994
<TABLE>
<CAPTION>
Discount on Unrealized
Common Common Retained Holding
Stock 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 six months ended
June 30, 1995 (5,094,994) (5,094,994)
Shares issued for investment
in other equity securities 2,100,000 $ (996,222) 1,103,778
Recognition of unrealized holding
losses as realized through estimated
loss on sale of subsidiary 925,011 925,011
------------ ------------ ------------ ------------ ------------
BALANCE JUNE 30, 1995 $ 10,494,973 $ (996,222) $(3,383,501) $ -0- $ 6,115,250
============ ============ ============ ============ ============
Balance January 1, 1994 $ 6,394,973 $ -0- $ 4,266,272 $ -0- $10,661,245
Net loss for six months ended
June 30, 1994 (1,782,785) (1,782,785)
Recoginition of unrealized holding
losses as realized through estimated
loss on sale of subsidiary (563,962) (563,962)
------------ ------------ ------------ ------------ ------------
BALANCE JUNE 30, 1994 $ 6,394,973 $ -0- $ 2,483,487 $ (563,962) $ 8,314,498
============ ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
F-27
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
DIXIE NATIONAL CORPORATION
<TABLE>
<CAPTION>
Six Months
Ended June 30
---------------
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ (5,094,994) $ (1,782,785)
Adjustments to reconcile net income to net cash
provided by operating activities:
Estimated loss on sale of subsidiary 3,677,000
Loss on sale of accident and health business 940,000
Increase (decrease) in policy liabilities (133,487) 1,669,361
Amotization of deferred policy acquisition costs and
and value of life insurance purchased 468,313 1,150,641
Increase (decrease) in deferred income taxes (94,987) (598,176)
Increase (decrease) in accrued liabilities (165,355) (117,006)
Policy acquisition costs deferred (226,172) (1,139,473)
Decrease (increase) in accounts receivable (10,942) 490,938
Increase in policyowner funds on deposit 910,044 22,445
Depreciation 57,546 58,422
Other, net (16,193) (158,839)
------------- -------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES (629,227) 535,528
Cash flows from investing activities:
Proceeds from investments sold or matured:
Fixed maturities:
Maturities 1,044,469 725,000
Calls 4,000 558,858
Sales 242,000
Repayment of policy and student mortgage loans 871,057 868,831
Cost of investments acquired:
Fixed maturities (1,586,224) (5,566,898)
Equipment leases (525,037)
Policy and student loans (374,028) (326,971)
Temporary investments, net 4,069,632 2,620,423
Additions to property and equipment (37,136) (82,842)
Proceeds from sale of property and equipment ------------- -------------
NET CASH PROVIDED USED)
BY INVESTING ACTIVITIES 3,708,733 (1,203,599)
Cash flows from financing activities:
Payments on debt (35,474) (70,522)
------------- -------------
NET CASH USED BY
FINANCING ACTIVITIES (35,474) (70,522)
------------- -------------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS 3,044,032 (738,593)
Cash and cash equivalents - beginning of year 459,109 4,655,458
------------- -------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 3,503,141 $ 3,916,865
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for income taxes $ 127,279 $ 598,175
============= =============
Cash payments for interest $ 231,210 $ 302,235
============= =============
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Common Stock issued for investment in other equity securities $ 1,103,778
=============
See accompanying notes to consolidated financial statements.
</TABLE>
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
DIXIE NATIONAL CORPORATION
June 30, 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 June
30, 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 consisted 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 six months ended June 30, 1995 and 1994
is as follows:
1995 1994
------------ ------------
Statutory net income $ (738,498) $ (636,127)
Estimated loss on sale of subsidiary (3,677,000)
Deferral of acquisition costs 226,172 1,139,473
Amortization of acquisition costs (468,313) (1,150,641)
Differences in insurance policy
liabilities, excluding effect of
sale of block of business 1,054,700 161,245
Deferred income taxes (160,000)
Premium income (928,060) (32,554)
Investment income 68,017 11,693
Commissions (25,000)
Interest expense (293,460) (172,752)
General insurance expenses 351,368 238,033
Supplementary contracts (103,667) (76,735)
Other 421,018 (139,420)
Provision for litigation settlement (1,007,271)
GAAP Loss on sale of accident and
health business (940,000)
------------ ------------
GAAP Net Income (Loss) $(5,094,994) $(1,782,785)
============ ============
F-29
<PAGE>
A reconciliation of Dixie Life's statutory stockholders' equity to the
Company's Consolidated GAAP stockholders' equity at June 30, 1995 is as
follows:
Statutory Stockholders' Equity $ 4,558,029
Differences in insurance policy liabilities (325,682)
Deferred acquisition costs 6,464,089
Deferred income taxes (139,865)
Debt of parent company (5,936,440)
Asset Valuation Reserve 129,809
Value of life insurance purchased 1,509,356
Non-admitted assets 206,430
Common stock issued 3,073,778
Other 399,222
Unallocated loss on sale of subsidiary (3,823,476)
------------
GAAP Stockholders' Equity $ 6,115,250
============
Note 3--Investments
The Company's investments in fixed maturity securities available for sale
at June 30, 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 $ 9,764,593 $ 208,896 $ 87,209 $ 9,886,280
States, municipalities and political subdivisions 50,000 500 49,500
Special revenue 10,278 378 9,900
Public utilities 2,366,735 28,828 28,683 2,366,880
All other corporate 6,635,300 134,865 109,343 6,660,822
------------ ---------- ---------- ------------
$18,826,906 $ 372,589 $ 226,113 $18,973,382
============ ========== ========== ============
</TABLE>
Net investment income for the six months ended June 30, 1995 and 1994
consists of the following:
1995 1994
------------ ------------
Investment income
Fixed maturities $ 669,182 $ 571,145
Policy loans 97,864 92,568
Student loans 189,790 170,337
Interest on Accounts Receivable 29,857 107,169
Short-term investment 22,289 32,173
Other 224,370 100,429
------------ ------------
Net investment income $1,233,352 $1,073,821
============ ============
F-30
<PAGE>
Net realized investment gains for the six months ended June 30, 1995 and
1994 are summarized as follows:
1995 1994
------------ ------------
Realized gains $ 36,757 $ 1,422
Realized losses 7,416
------------ ------------
Net realized gains (losses) $ 36,757 $ (5,994)
============ ============
As consideration for extension of the Corporation's Convertible Notes
(Note 7), the Corporation pledged 804,445 shares of its Alanco stock with a
carrying value of $1,307,000 (market value of $1,935,000 at June 30, 1995)as
additional 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 June 30, 1995, market value of
the Alanco shares, based on the average closing bid and asked price, was
$2,331,000.
Note 4--Deferred Policy Acquisition Costs
An analysis of deferred policy acquisition costs for the six months ended
June 30, 1995 and 1994 follows:
1995 1994
------------ ------------
Balance at beginning of period $ 6,626,230 $19,759,110
Deferred during the period:
Commissions 180,034 882,255
Other Expenses 46,138 257,188
------------ ------------
Total Deferred 226,172 1,139,443
Deferred policy acquisition costs on
policies sold (3,724,168)
Estimated loss on A&H business sold (940,000)
Amortized during the period (388,313) (1,070,641)
------------ ------------
Balance at end of period $ 6,464,089 $15,163,744
============ ============
Note 5--Value of Life Insurance Purchased
An analysis of the value of life insurance purchased for the six months
ended June 30, 1995 and 1994 follows:
1995 1994
------------ ------------
Balance at beginning of period $ 1,589,356 $ 1,749,356
Amortized during the period (80,000) (80,000)
------------ ------------
Balance at end of the period $1,509,356 $1,669,356
============ ============
F-31
<PAGE>
Note 6--Property and Equipment
A summary of property and equipment at June 30, 1995 follows:
Home office property $ 795,038
Data Processing Equipment 818,149
Furniture, Equipment and Autos 491,143
------------
2,104,330
Less accumulated depreciation 1,540,046
------------
$ 564,284
============
Note 7--Notes Payable and Other Debt
The Company had the following notes payable at June 30, 1995:
NON-LIFE:
Note payable to a bank bearing interest at prime plus
1% (at June 30, 1995 the rate was 10%), payable in
monthly installments of $1,389 with the balance due
June 8, 1998 $ 50,000
Note payable to a bank bearing interest at prime
plus 3/4% (at June 30, 1995, the rate was 9.75%),
payable in monthly installments of $11,846 through
January 5, 2001; secured by home office property 477,694
------------
527,694
LIFE:
Note payable to an insurance company bearing interest
at 1% above prime (10% at June 30, 1995) 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
10% Convertible Notes due May 1, 1995 ("Convertible
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 131,925
------------
5,540,671
------------
$6,068,365
============
The Restated Stock Purchase Agreement with Standard Life Insurance
Company (Note 9) waives all financial covenants contained in the Term Loan
agreement.
F-32
<PAGE>
The Term Loan is due at closing of the sale of Dixie Life or 180 days
following cancellation of the Restated Stock Purchase Agreement by either
party. The Convertible Notes are due at the earliest of closing of the sale of
Dixie Life, 90 days following cancellation of the Restated Stock Purchase
Agreement or 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, each of which has expired. At
June 30, 1995, options granted under such plans 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.
Options for the purchase of 5,000 shares of Common Stock were granted
under the 1995 Stock Option Plan ("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.
Note 9--Proposed Sale of Dixie Life
On April 18, 1995, the Corporation and Dixie Life entered into the Stock
Purchase Agreement with Standard to sell to Standard all of the common capital
stock of Dixie Life owned by the Corporation. That agreement was restated by a
Second Restated Stock Purchase Agreement entered into as of August 30, 1995,
but effective as of April 18, 1995, among the Corporation, Dixie Life and
Standard.
Dixie Life is 99.3% owned by the Corporation and represents virtually all
of the Company's assets and operations. The 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 would receive $1,926,468 in cash at closing and up to $53,872
of collections after June 30, 1995 on a specific receivable of that date.
The proposed sale is scheduled to close in October 1995 and, if
completed, will result in a loss. An estimated loss of $3,677,000 ($.44 per
share) was recorded in the six months ended March 31, 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
F-33
<PAGE>
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 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.
Note 10--Sale of Common Stock
On April 20, 1995, the Corporation and UMS entered into an amended and
restated agreement effective as of March 24, 1995 ("Second Amended and
Restated UMS Agreement") which amended the UMS Agreement (Note 16 of the
Corporation's 1994 Notes to Consolidated Financial Statements). The Second
Amended and Restated UMS Agreement 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
Second Amended and Restated UMS Agreement, on June 29, 1995, the Corporation
issued 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 and 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. This option was relinquished by the
Corporation in July 1995.
Note 11--Settlement of Litigation
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.
(See Note 13 to the Corporation's 1994 Consolidated Financial Statements.)
On July 20, 1995, Dixie Life reached a settlement with the plaintiff
which provides, among other things:
1. For the purposes of settlement only, Dixie Life will not
object to certification of a class consisting of all owners of
Charter Contracts as of January 7, 1994.
2. For payment to the class of $550,000.
3. For issuance to each class member of additional paid up
insurance in the amount of 15% of the face amount of each
Charter Contract presently in force.
4. An agreed adjudication of the method of computing and
allocating dividends in the future on Charter Contracts.
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<PAGE>
5. That, in the event that more than 5% of the potential class
members elect not to participate in the litigation as members
of the class, the settlement agreement is null, void and of no
further effect.
The settlement is subject to approval by the Circuit Court of Montgomery
County, Alabama.
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<PAGE>
APPENDIX A
SECOND RESTATED
STOCK PURCHASE AGREEMENT
RESTATED AS OF AUGUST 30, 1995
EFFECTIVE AS OF APRIL 18, 1995
Among
STANDARD LIFE INSURANCE COMPANY OF INDIANA,
DIXIE NATIONAL LIFE INSURANCE COMPANY
and
DIXIE NATIONAL CORPORATION
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
DEFINITIONS........................................................1
1.1 Terms Defined..........................................1
1.2 Other Definitional Provisions..........................1
ARTICLE II
SALE OF SHARES AND CLOSING.........................................2
2.1 Purchase and Sale......................................2
2.2 Purchase Price.........................................2
2.3 Closing................................................2
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER...........................3
3.1 Organization...........................................3
3.2 Authority..............................................3
3.3 Capital Stock..........................................3
3.4 No Subsidiaries........................................4
3.5 No Conflicts or Violations.............................4
3.6 Books and Records......................................5
3.7 SAP Statements.........................................5
3.8 No Other Financial Statements..........................5
3.9 Reserves...............................................5
3.10 Absence of Changes.....................................6
3.11 No Undisclosed Liabilities.............................9
3.12 Taxes..................................................9
3.13 Litigation............................................12
3.14 Compliance With Laws..................................13
3.15 Benefit Plans, ERISA..................................14
3.16 Properties............................................16
3.17 Contracts.............................................17
3.18 Insurance Issued by the Company.......................19
3.19 Threats of Cancellation...............................20
3.20 Licenses and Permits..................................21
3.21 Operations Insurance..................................21
3.22 Intercompany Accounts.................................21
3.23 Bank Accounts.........................................22
3.24 Brokers...............................................22
3.25 Disclosure............................................22
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER.......................22
4.1 Organization..........................................22
4.2 Authority.............................................22
4.3 No Conflicts or Violations............................23
4.4 Litigation............................................23
4.5 Purchase for Investment...............................24
4.6 Brokers...............................................24
4.7 Disclosure............................................24
ARTICLE V
COVENANTS OF SELLER AND COMPANY...................................24
5.1 Regulatory Approvals..................................24
5.2 Investigation by the Purchaser........................25
5.3 No Negotiations, etc..................................25
5.4 Conduct of Business...................................26
5.5 Financial Statements and Reports......................27
5.6 Investments...........................................28
5.7 Employee Matters......................................28
5.8 No Charter Amendments.................................29
5.9 No Issuance of Securities.............................29
5.10 No Dividends..........................................29
5.11 No Disposal of Property...............................29
5.12 No Breach or Default..................................29
5.13 No Indebtedness.......................................29
5.14 No Acquisitions.......................................30
5.15 Intercompany Liabilities..............................30
5.16 Resignations of Officers and Directors................30
5.17 Tax Matters...........................................30
5.18 Dismissal of Pending Litigation.......................30
5.19 Disclosure Schedule...................................30
5.20 Shareholder Meeting...................................30
5.21 Notice and Cure.......................................30
5.22 Triennial Report......................................31
ARTICLE VI
COVENANTS OF PURCHASER............................................31
6.1 Regulatory Approvals..................................31
6.2 Home Office Lease.....................................31
6.3 Assignment of Certain Receivable from Central United
Life Insurance Company ...............................32
6.4 Notice and Cure.......................................32
6.5 Hart-Scott Filing.....................................32
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<PAGE>
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF PURCHASER............................32
7.1 Representations and Warranties........................32
7.2 Performance...........................................33
7.3 Certificates of Officer of Seller.....................33
7.4 No Injunction.........................................33
7.5 No Proceeding or Litigation...........................33
7.6 Consents, Authorizations, etc.........................34
7.7 No Adverse Change.....................................34
7.8 Opinion of Counsel....................................34
7.9 Resignation of Officers and Directors.................34
7.10 Shareholder Approval..................................34
7.11 Hart-Scott............................................34
7.12 Management Agreement..................................34
ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF SELLER...............................35
8.1 Representations and Warranties........................35
8.2 Performance...........................................35
8.3 Officer's Certificates................................35
8.4 No Injunction.........................................35
8.5 No Proceeding or Litigation...........................35
8.6 Consents, Authorizations, etc.........................36
8.7 Opinion of Counsel....................................36
ARTICLE IX
SURVIVAL OF PROVISIONS; REMEDIES..................................36
9.1 Survival..............................................36
9.2 Available Remedies....................................37
ARTICLE X
INDEMNIFICATION...................................................37
10.1 Tax Indemnification...................................37
10.2 Other Indemnification.................................38
10.3 Method of Asserting Claims............................39
10.4 After-Tax Damages.....................................41
10.5 Assignment of Indemnification.........................41
ARTICLE XI
WAIVER............................................................42
11.1 Senior Debt of Seller.................................42
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<PAGE>
ARTICLE XII
TERMINATION.......................................................42
12.1 Termination...........................................42
12.2 Effect of Termination.................................43
ARTICLE XIII
MISCELLANEOUS.....................................................43
13.1 Default and Arbitration...............................43
13.2 Notices...............................................44
13.3 Entire Agreement......................................45
13.4 Expenses..............................................45
13.5 Public Announcements..................................45
13.6 Confidentiality.......................................46
13.7 Further Assurances....................................46
13.8 Waiver................................................46
13.9 Amendment.............................................47
13.10 Counterparts..........................................47
13.11 No Third Party Beneficiary............................47
13.12 Governing Law.........................................47
13.13 Binding Effect........................................47
13.14 Assignment............................................47
13.15 Headings, etc.........................................47
13.16 Invalid Provisions....................................47
iv
<PAGE>
SECOND RESTATED
STOCK PURCHASE AGREEMENT
THIS SECOND RESTATED STOCK PURCHASE AGREEMENT ("Second Restated
Agreement") is made and entered into as of August 30, 1995, but effective as
of April 18, 1995, by and among Dixie National Corporation, a Mississippi
corporation (the "Seller"); Dixie National Life Insurance Company, a
Mississippi corporation (the "Company"); and Standard Life Insurance Company
of Indiana, an Indiana corporation (the "Purchaser").
W I T N E S S E T H:
WHEREAS, Seller is the beneficial owner of 1,489,904 shares of the
1,500,000 shares of authorized, issued and outstanding capital common stock
("Common Stock"), $1.00 par value per share ("the Shares") of the Company; and
WHEREAS, Seller desires to sell, and Purchaser desires to purchase from
Seller, all of the Shares of the Company owned by Seller;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
set forth in this Second Restated Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
1.1 Terms Defined. The capitalized terms used in this Second Restated
Agreement and not defined herein shall have the meanings specified in Exhibit
A.
1.2 Other Definitional Provisions. Unless the context otherwise requires,
(a) references in this Second Restated Agreement to the singular number shall
include the plural, and the plural number shall include the singular; (b)
words denoting gender shall include the masculine, feminine and neuter; (c)
the words "hereof," "herein" and "hereunder" and words of similar import refer
to this Second Restated Agreement as a whole and not to any particular
provision of this Second Restated Agreement, (d) unless otherwise specified,
all Article and Section references pertain to this Second Restated Agreement;
(e) the term "or" means "and/or"; and (f) the phrase "ordinary course of
business and consistent with past practice" refers to the business and
practice of the Seller or the Company, as the case may be.
<PAGE>
ARTICLE II
SALE OF SHARES AND CLOSING
2.1 Purchase and Sale. The Seller agrees to sell to the Purchaser and the
Purchaser agrees to purchase from the Seller the Shares at the Closing upon
the terms and subject to the conditions set forth in this Second Restated
Agreement.
2.2 Purchase Price. The purchase price (the "Purchase Price") for the
Shares payable at the Closing shall be equal to Seven Million Three Hundred
Eighty-Nine Thousand Eighty-Six Dollars ($7,389,086), of which One Million
Nine Hundred Twenty-Six Thousand Four Hundred Sixty-Eight Dollars ($1,926,468)
is payable by wire transfer in immediately available funds to such bank and
account as the Seller may specify by written notice received by the Purchaser
at least three (3) Business Days prior to the Closing Date.
The balance of the Purchase Price is payable at Closing as follows:
(a) Forgiveness and cancellation of Senior Debt of the Seller due
Buyer in the sum of Three Million Six Hundred Eighty-Eight Thousand
Seven Hundred Forty-Six and no/100 Dollars ($3,688,746);
(b) Payment of Dixie Convertible Subordinated Notes (the "Notes") in
the sum of One Million Seven Hundred Twenty Thousand and no/100
Dollars ($1,720,000); and
(c) At and after Closing, up to the sum of Fifty-Three Thousand
Eight Hundred Seventy-Two and no/100 Dollars ($53,872) if recovered
by the Company after June 30, 1995 with respect to its receivable
due from Central United Life Insurance Company at June 30, 1995.
2.3 Closing. The Closing of the transactions contemplated by this Second
Restated Agreement will take place at the offices of Brunini, Grantham, Grower
& Hewes, P.L.L.C., 248 East Capital Street, Suite 1400, Jackson, Mississippi,
39201, or at such other place as the Purchaser shall specify, at 10:00 a.m.,
local time, on or before October 6, 1995. At the Closing, the Seller will
deliver to the Purchaser such documents and instruments as the Purchaser may
reasonably request for the purpose of effectuating the purchase and sale of
the Shares and the transactions contemplated hereby, including, without
limitation, a certificate or certificates representing the Shares issued in
the name of the Purchaser, or accompanied by executed stock powers
transferring the Shares to the Purchaser. In addition, at closing, Seller will
purchase from the Company at book value the Company's entire investment in
Fry-Guy, Inc. equipment and leases and Cambria loans, and Seller will deliver
to Purchaser releases, waivers, terminations and similar documents reasonably
requested by Purchaser to release the Company from any liability or obligation
with respect to existing Fry-Guy, Inc. equipment and leases and from any
obligation to undertake future Fry-Guy, Inc. and Cambria Financings.
2
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
The Seller hereby represents and warrants to the Purchaser as follows:
3.1 Organization. Except as disclosed in Section 3.1 of the Disclosure
Schedule, Seller is a corporation duly organized, validly existing, and in
good standing under the laws of the State of Mississippi and has full
corporate power and authority to enter into this Second Restated Agreement and
to perform its obligations under this Second Restated Agreement. Except as
disclosed in Section 3.1 of the Disclosure Schedule, the Company is an
insurance company duly organized, validly existing, and in good standing under
the Laws of the State of Mississippi and is duly licensed, qualified, or
admitted to do business and is in good standing in all jurisdictions in which
the failure to be so licensed, qualified, or admitted and in good standing,
individually or in the aggregate with other such failures, has or may
reasonably be expected to have a material adverse effect on the validity or
enforceability of this Second Restated Agreement, on the ability of the
Company to perform its obligations under this Second Restated Agreement, or on
the Business or Condition of the Company. Section 3.1 of the Disclosure
Schedule contains a true and complete list of the states in which the Company
is licensed to write life and health insurance. The Seller has furnished to
the Purchaser true and complete copies of the articles of incorporation (as
certified by the appropriate governmental or regulatory authorities) and the
Bylaws of the Company, including all amendments thereto.
3.2 Authority. The Boards of Directors of the Seller and the Company,
respectively, have duly and validly approved this Second Restated Agreement
and the transactions contemplated hereby. The shareholders of the Seller must
approve the sale by Seller of the shares of the Company. Subject to and upon
the prior approval by the shareholders of the Seller, this Second Restated
Agreement constitutes a legal, valid, and binding obligation of the Seller and
the Company and is enforceable against the Seller and the Company in
accordance with its terms, except to the extent that (a) enforcement may be
limited by or subject to any bankruptcy, insolvency, reorganization,
moratorium, or similar Laws now or hereafter in effect relating to or limiting
creditors' rights generally and (b) the remedy of specific performance and
injunctive and other forms of equitable relief are subject to certain
equitable defenses and to the discretion of the court or other similar Person
before which any proceeding therefor may be brought.
3.3 Capital Stock. The authorized common capital stock of the Company
consists of 5,000,000 shares of common stock, $1.00 par value per share, of
which 1,500,000 shares are validly issued and outstanding, fully paid and
nonassessable, and 1,489,904 of which are owned beneficially and of record by
the Seller, free and clear of all Liens, except for Liens disclosed in Section
3.3 of the Disclosure Schedule. Except as disclosed in Section 3.3 of the
Disclosure Schedule, there are no outstanding securities, obligations, rights,
subscriptions, warrants, options, charter or founders insurance policies,
phantom stock rights, or (except for this Second Restated Agreement) other
Contracts of any kind that give any Person the right to (a) purchase or
otherwise receive or be issued any shares of capital stock of the Company (or
any interest therein) or any
3
<PAGE>
security or Liability of any kind convertible into or exchangeable for any
shares of capital stock of the Company (or any interest therein) or (b)
receive any benefits or rights similar to any rights enjoyed by or accruing to
a holder of the Common Stock, or any rights to participate in the equity,
income, or election of directors or officers of the Company.
3.4 No Subsidiaries. The Company does not control (whether directly or
indirectly, whether through the ownership of securities or by Contract or
proxy, and whether alone or in combination with others) any corporation,
partnership, business organization, or other similar Person.
3.5 No Conflicts or Violations. The execution and delivery of this Second
Restated Agreement by the Seller and the Company does not, and the performance
by the Seller and the Company of their respective obligations under this
Second Restated Agreement will not:
(a) subject to obtaining the approvals contemplated by Sections 5.1
and 6.1 hereof, violate any term or provisions of any Law or any writ,
judgment, decree, injunction, or similar order applicable to the Seller
or the Company;
(b) conflict with or result in a violation or breach of, or
constitute (with or without notice or lapse of time or both) a default
under, any of the terms, conditions, or provisions of the articles or
certificate of incorporation or Bylaws of the Seller or the Company;
(c) result in the creation or imposition of any Lien upon the
Seller, the Company or any of their respective Assets and Properties that
individually or in the aggregate with any other Liens has or may
reasonably be expected to have a material adverse effect on the validity
or enforceability of this Second Restated Agreement, on the ability of
the Seller or the Company to perform their respective obligations under
this Second Restated Agreement, or on the Business or Condition of the
Seller or the Company;
(d) conflict with or result in a violation or breach of, or
constitute (with or without notice or lapse of time or both) a default
under, or give to any Person any right of termination, cancellation,
acceleration, or modification in or with respect to, any Contract to
which the Seller or the Company is a party or by which any of their
respective Assets or Properties may be bound and as to which any such
conflicts, violations, breaches, defaults, or rights individually or in
the aggregate have or may reasonably be expected to have a material
adverse effect on the validity or enforceability of this Second Restated
Agreement, on the ability of the Seller or the Company to perform its
respective obligations under this Second Restated Agreement, or on the
Business or Condition of the Seller or the Company; or
(e) require the Seller or the Company to obtain any consent,
approval, or action of, or make any filing with or give any notice to,
any Person except: (i) as contemplated in Section 5.1 hereof; (ii) as
disclosed in Section 3.5(e) of the Disclosure Schedule; or
4
<PAGE>
(iii) those which the failure to obtain, make, or give individually or in
the aggregate with any other such failures has or may reasonably be
expected to have no material adverse effect on the validity or
enforceability of this Second Restated Agreement, on the ability of the
Seller or Company to perform its respective obligations under this Second
Restated Agreement, or on the Business or Condition of the Seller or the
Company.
3.6 Books and Records. Except as disclosed in Section 3.6 of the
Disclosure Schedule, the minute books and other similar records of the Company
contain a true and complete record, in all material respects, of all actions
taken at all meetings and by all written consents in lieu of meetings of the
stockholders, Board of Directors, and each committee thereof of the Company.
The Books and Records of the Company accurately reflect in all material
respects the Business or Condition of the Company, and have been maintained in
all material respects in accordance with good business and bookkeeping
practices.
3.7 SAP Statements. The Seller has previously delivered to the Purchaser
true and complete copies of the following SAP Statements:
(a) Annual Statements and audited SAP basis financial statements of
the Company for each of the years ended December 31, 1992, 1993, and 1994
(and the notes relating thereto, whether or not included therein).
Except as disclosed in Section 3.7 of the Disclosure Schedule, each
such SAP Statement complied in all material respects with all applicable Laws
when so filed, and all material deficiencies known to Seller or Company with
respect to any such SAP Statement have been cured or corrected. Except for the
year 1992, which has subsequently been corrected, each such SAP Statement (and
the notes relating thereto, whether or not included therein), including,
without limitation, each balance sheet and each of the statements of
operations, capital and surplus account, and cash flow contained in the
respective SAP Statement, was prepared in accordance with SAP, is true and
complete in all material respects, and fairly presents the financial
condition, the Assets and Properties, and the Liabilities of the Company as of
the respective dates thereof and the results of operations and changes in
capital and surplus and in cash flow of the Company for and during the
respective periods covered thereby.
3.8 No Other Financial Statements. Except as disclosed in Section 3.8 of
the Disclosure Schedule and except for the financial statements described in
Section 3.7 (collectively, the "Financial Statements"), since June 30, 1995 no
other financial statements have been prepared by or with respect to the
Company (whether on a GAAP, SAP, or other basis).
3.9 Reserves. All reserves and other similar amounts with respect to
insurance and annuities as established or reflected in the SAP Statements of
the Company dated as of June 30, 1995 (including, without limitation, the
reserves and amounts reflected respectively on lines 1 through 11.3 of page 3
of the June 30, 1995 Quarterly Statement), subject to adjustments contained in
the draft of the Report of Triennial Examination as of December 31, 1994
promulgated by the Mississippi Department of Insurance, were determined in
accordance with generally accepted
5
<PAGE>
actuarial principles that are in accordance with those called for by the
provisions of the related insurance and annuity Contracts and in the related
reinsurance, coinsurance, and other similar Contracts of Company, and meet the
requirements of the insurance Laws of the State of Mississippi and states in
which such insurance and annuity Contracts were issued or delivered. All such
reserves and other similar amounts will be adequate (under generally accepted
actuarial principles consistently applied) to cover the total amount of all
reasonably anticipated matured and unmatured benefits, dividends, claims, and
other Liabilities of the Company under all insurance and annuity Contracts
under which the Company has or will have any Liability (including, without
limitation, any Liability arising under or as a result of any reinsurance,
coinsurance, or other similar Contract) on the respective dates of such SAP
Statements. The Company owns assets that qualify as legal reserve assets under
applicable insurance Laws in an amount at least equal to all such required
reserves and other similar amounts.
3.10 Absence of Changes. Except as disclosed in Section 3.10 of the
Disclosure Schedule or as specifically reflected in the June 30, 1995 SAP
Statement, or except for changes or developments relating to the conduct of
the business of the Company after the date of this Second Restated Agreement
in conformity with this Second Restated Agreement or the requests of the Pur
chaser, since June 30, 1995, and except as reflected in the draft of the
Report of Triennial Examination as of December 31, 1994 promulgated by the
Mississippi Department of Insurance there has not been, occurred, or arisen
any change in, or any event (including without limitation any damage,
destruction, or loss whether or not covered by insurance), condition, or state
of facts of any character that individually or in the aggregate has or may
reasonably be expected to have a material adverse effect on the Business or
Condition of the Company. Except as disclosed in Section 3.10 of the
Disclosure Schedule (with paragraph references corresponding to those set
forth below), or except as specifically reflected in the June 30, 1995 SAP
Statement, or except for changes or devel opments relating to the conduct of
the business of the Company after the date of this Second Restated Agreement
in conformity with this Second Restated Agreement or the requests of the
Purchaser, since December 1, 1994, the Company has operated only in the
ordinary course of business and consistent with past practice, and (without
limiting the generality of the foregoing) there has not been, occurred, or
arisen:
(a) any declaration, setting aside, or payment of any dividend or
other distribution in respect of the capital stock of the Company or any
direct or indirect redemption, purchase, or other acquisition by the
Company of any such stock or of any interest in or right to acquire any
such stock;
(b) any employment, deferred compensation, or other salary, wage, or
compensation Contract entered into between the Company and any of its
officers, directors, employees, agents, consultants, or similar
representatives, except for normal and customary Contracts with agents
and consultants in the ordinary course of business and consistent with
past practices; or any increase in the salary, wages, or other
compensation of any kind, whether current or deferred, of any officer,
director, employee, agent, consultant, or other similar representative of
the Company other than routine increases that were made in the ordinary
course of business and consistent with past practices and that did not
result in an
6
<PAGE>
increase of more than five percent (5%) of the respective salary, wages,
or compensation of any such Person; or any creation of any Benefit Plan
or any contribution to or amendment or modification of any Benefit Plan;
(c) any issuance, sale, or disposition by the Company of any
debenture, note, stock, or other security issued by the Company, or any
modification or amendment of any right of the holder of any outstanding
debenture, note, stock, or other security issued by the Company;
(d) any Lien created on or in any of the Assets and Properties of
the Company, or assumed by the Company with respect to any of such Assets
and Properties, which Lien relates to Liabilities individually or in the
aggregate exceeding $25,000 for the Company or which Lien individually or
in the aggregate with any other Liens has or may reasonably be expected
to have a material adverse effect on the Business or Condition of the
Company;
(e) any prepayment of any Liabilities individually or in the
aggregate exceeding $10,000;
(f) any Liability involving the borrowing of money by the Company;
(g) Except for entering into the Settlement Agreement described in
Section 3.13, hereof any Liability incurred by the Company in any
transaction (other than pursuant to any insurance or annuity Contract
entered into in the ordinary course of business and consistent with past
practice) not involving the borrowing of money, except such Liabilities
incurred by the Company, the result of which individually or in the
aggregate cannot reasonably be expected to have a material adverse effect
on the Business or Condition of the Company;
(h) any damage, destruction, or loss (whether or not covered by
insurance) affecting any of the Assets and Properties of the Company,
which damage, destruction, or loss individually exceeds $25,000 or the
result of which individually or in the aggregate has or may reasonably be
expected to have a material adverse effect on the Business or Condition
of the Company;
(i) any work stoppage, strike, slowdown, other labor difficulty, or
(to the best knowledge of the Seller or the Company) union organizational
campaign (in process or threatened) at or affecting the Company;
(j) any material change in any underwriting, actuarial, investment,
financial reporting, or accounting practices or policies followed by the
Company, or in any assumption underlying such a practices or policies, or
in any method of calculating any bad debt, contingency, or other reserve
for financial reporting purposes or for any other accounting purposes;
7
<PAGE>
(k) any payment, discharge, or satisfaction by the Company of any
Lien or Liability other than Liens or Liabilities that were paid,
discharged, or satisfied since December 31, 1994 in the ordinary course
of business and consistent with past practice, or were paid, discharged,
or satisfied as required under this Second Restated Agreement;
(l) any cancellation of any Liability owed to the Company by any
other Person;
(m) any write-off or write-down of, or any determination to write
off or down any of, the Assets and Properties of the Company or any
portion thereof, except for write-offs or write-downs that do not exceed
$10,000 individually or in the aggregate for the Company;
(n) any sale, transfer, or conveyance of any investments, or any
other Assets and Properties, of the Company with an individual book value
or with an aggregate book value in excess of $10,000, except as
contemplated in Section 5.7, and except in the ordinary course of
business and consistent with past practices;
(o) any amendment, termination, waiver, disposal, or lapse of, or
other failure to preserve, any license, permit, or other form of
authorization of the Company, the result of which individually or in the
aggregate has or may reasonably be expected to have a material adverse
effect on the Business or Condition of the Company;
(p) any transaction or arrangement under which the Company paid,
lent, or advanced any amount to or in respect of, or sold, transferred,
or leased any of its Assets and Properties or any service to, any officer
or director of the Seller or the Company (except for payments of salaries
and wages in the ordinary course of business and consistent with past
practice, and except for payments made pursuant to any Contract disclosed
in Section 3.10(b) or Section 3.17(a) of the Disclosure Schedule), or of
any Affiliate of the Seller, the Company, or of any such officer of
director; (ii) any business or other Person in which the Seller or the
Company, any such officer or director, or any such Affiliate has any
material interest, except for advances made to, or reimbursements of,
officers or directors of the Seller or the Company for travel and other
business expenses in reasonable amounts in the ordinary course of
business and consistent with past practice; or any Affiliate of the
Company pursuant to any Contract of the type described in Section
3.17(g);
(q) any material amendment of, or any failure to perform all of its
obligations under, or any default under, or any waiver of any right
under, or any termination (other than on the stated expiration date) of,
any Contract that involves or reasonably would involve the annual
expenditure or receipt by the Company of more than $25,000 or that
individually or in the aggregate is material to the Business or Condition
of the Company;
(r) Except as reflected in the draft of the Triennial Report as of
December 31, 1994 promulgated by the Mississippi Department of Insurance,
any decrease in the amount of, or any material change in the nature of,
the insurance or annuities in force of the
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Company or any material change in the amount or nature of the reserves,
liabilities or other similar amounts of the Company with respect to
insurance and annuity Contracts (including, without limitation, reserves
and other similar amounts of a type required to be reflected respectively
on lines 1 through 11.3 on page 3 of an Annual Statement of the Company);
(s) any amendment to the articles or certificate of incorporation or
Bylaws of the Company;
(t) any termination, amendment, or execution by the Company of any
reinsurance, coinsurance, or other similar Contract, as ceding or
assuming insurer;
(u) any expenditure or commitment for additions to property, plant,
equipment or other tangible or intangible capital assets of the Company,
except for any expenditure or commitment that does not exceed $10,000
individually or the result of which individually or in the aggregate does
not have and may not reasonably be expected to have a material adverse
effect on the Business or Condition of the Company;
(v) any amendment or introduction by the Company of any insurance or
annuity Contract other than in the ordinary course of business and
consistent with past practice; or
(w) any Contract to take any of the actions described in this
Section other than actions expressly permitted under this Section.
3.11 No Undisclosed Liabilities. Except to the extent specifically
reflected in the balance sheet included in the June 30, 1995 SAP Statement (or
in the notes relating thereto), or except as disclosed in Section 3.11 of the
Disclosure Schedule, there were no Liabilities (other than policyholder
benefits payable in the ordinary course of business and consistent with past
practices) against, relating to, or affecting the Company as of June 30, 1995
that individually or in the aggregate have or may reasonably be expected to
have a material adverse effect on the Business or Condition of the Company.
Except to the extent specifically reflected in the balance sheet included in
the June 30, 1995 SAP Statement (or in the notes relating thereto), or except
as disclosed in Section 3.11 of the Disclosure Schedule, since June 30, 1995,
and except for obligations recited in the Settlement Agreement described in
paragraph 3.13, the Company has not incurred any Liabilities (other than
policyholder benefits payable in the ordinary course of business and
consistent with past practice) that individually or in the aggregate have or
may reasonably be expected to have a material adverse effect on the Business
or Condition of the Company.
3.12 Taxes. Except as disclosed in Section 3.12 of the Disclosure
Schedule (with paragraph references corresponding to those set forth below):
(a) All Tax Returns required to be filed with respect to the Company
have been duly and timely filed, and all such Tax Returns are true and
complete in all material respects. The Company has duly and timely paid
all Taxes that are due, or claimed or asserted by any taxing authority to
be due, from the Company for the periods covered by such Tax Returns
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<PAGE>
or has duly provided for all such Taxes in the Books and Records of the
Company and in accordance with GAAP and SAP, including, without
limitation, in the Financial Statements. There are no Liens with respect
to Taxes (except for Liens with respect to real and personal property
Taxes not yet due) upon any of the Assets and Properties of the Company.
(b) With respect to any period for which Tax Returns have not yet
been filed, or for which Taxes are not yet due or owing, the Seller and
the Company have made due and sufficient current accruals for such Taxes
in their respective Books and Records and in accordance with SAP and
GAAP, and such current accruals through the Closing Date are duly and
fully provided for in the SAP and GAAP Financial Statements of the Seller
and the Company for the period then ended.
(c) The United States federal income Tax Returns of the Seller and
the Company and of each affiliated group (within the meaning of the Code)
of which the Seller and the Company are or have been members have not
been audited or examined by the IRS, and the statute of limitations for
all periods through the year 1988 has expired. The state, local, and
foreign income Tax Returns of the Seller and the Company and of each
affiliated or consolidated group of which the Seller and the Company are
or have been members have not been audited or examined, and all statutes
of limitation for all applicable state, local, and foreign taxable
periods through the respective years specified in Section 3.12(c) of the
Disclosure Statement have expired. There are no outstanding agreements,
waivers, or arrangements extending the statutory period of limitation
applicable to any claim for, or the period for the collection or
assessment of, Taxes due from the Seller or the Company for any taxable
period. The Seller has previously delivered to the Purchaser true and
complete copies of each of the United States federal, state, local, and
foreign income Tax Returns, for each of the last three taxable years,
filed by the Seller and the Company (insofar as such returns relate to
either the Seller or the Company) filed by any affiliated or consolidated
group of which the Seller or the Company was then a member.
(d) No audit or other proceeding by any court, governmental or
regulatory authority, or similar Person is pending or (to the knowledge
of the Seller) threatened with respect to any Taxes due from the Seller
or the Company or any Tax Return filed by or relating to the Seller or
the Company. To the best knowledge of the Seller, no assessment of Tax is
proposed against the Seller or the Company or any of their Assets and
Properties.
(e) No election under any of Sections 108, 168, 338, 441, 463, 472,
1017, 1033, or 4977 of the Code (or any predecessor provisions) has been
made or filed by or with respect to the Seller or the Company or any of
their Assets and Properties. No consent to the application of Section
341(f)(2) of the Code (or any predecessor provision) has been made or
filed by or with respect to the Seller or the Company or any of their
Assets and Properties. None of the Assets and Properties of the Seller or
the Company is an asset or property that the Purchaser or any of its
Affiliates is or will be required to treat as being owned by any other
Person pursuant to the provisions of Section 168(f)(8) of the Internal
Revenue Code of 1954, as amended and in effect immediately before the
enactment of the
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Tax Reform Act of 1986, or tax-exempt use property within the meaning of
Section 168(h)(1) of the Code. No closing agreement pursuant to Section
7121 of the Code (or any predecessor provision) or any similar provision
of any state, local, or foreign Law has been entered into by or with
respect to the Seller or the Company or any of their Assets and
Properties.
(f) Neither the Seller nor the Company has agreed to or is required
to make any adjustment pursuant to Section 481(a) of the Code (or any
predecessor provision) by reason of any change in any accounting method
of the Seller or the Company, and neither the Seller nor the Company has
any application pending with any taxing authority requesting permission
for any changes in any accounting method of the Seller or the Company. To
the best knowledge of the Seller the IRS has not proposed any such
adjustment or change in accounting method.
(g) Neither the Seller nor the Company has been or is in violation
(or with notice or lapse of time or both, would be in violation) of any
applicable Law relating to the payment or withholding of Taxes. The
Seller and the Company have duly and timely withheld from employee
salaries, wages, and other compensation and paid over to the appropriate
taxing authorities all amounts required to be so withheld and paid over
for all periods under all applicable Laws.
(h) Neither the Seller nor the Company is a party to, is bound by,
or has any obligation under, any Tax sharing Contract or similar
Contract; notwithstanding any dis closure contained in the Disclosure
Schedule, the Seller represents and warrants that, at the Closing,
neither the Seller nor the Company shall be a party to, be bound by or
have any obligation under, any Tax sharing Contract or similar Contract
or arrangement. The Company is not a foreign person within the meaning of
Section 1445(f)(3) of the Code.
(i) Neither the Seller nor the Company has made any direct,
indirect, or deemed distributions that have been or could be taxed under
Section 815 of the Code.
(j) All ceding commission expenses paid or accrued by the Company in
connection with any reinsurance arrangement or Contract or transaction
have been capitalized and amortized over the life or lives of such
reinsurance arrangement or Contract in accordance with the decision of
the United States Supreme Court in Colonial American Life Insurance
Company v. Commissioner of Internal Revenue, 109 S.Ct. 240 (1980).
(k) No material Liabilities have been proposed in connection with
any audit or other proceeding by any court, governmental or regulatory
authority, or similar Person with respect to any Taxes due from the
Seller or the Company or any Tax Return filed by or relating to the
Seller or the Company.
(l) Neither the Seller nor the Company is a party to any agreement,
contract, plan or arrangement that has resulted, or would result,
separately or in the aggregate, in the
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payment of any "excess parachute payments" within the meaning of Section
280G of the Code.
3.13 Litigation. Except as disclosed in Section 3.13 of the Disclosure
Schedule (with paragraph references corresponding to those set forth below):
(a) There are no actions, suits, investigations, or proceedings
pending, or (to the best knowledge of the Seller) threatened, against the
Seller or the Company or any of their Assets and Properties, at law or in
equity, in, before, or by any Person that individually or in the
aggregate have or may reasonably be expected to have a material adverse
effect on the validity or enforceability of this Second Restated
Agreement, on the ability of the Seller or the Company to perform its
respective obligations under this Second Restated Agreement, or on the
Business or Condition of the Seller or the Company.
(b) There are no actions, suits, investigations, or proceedings
pending, or (to the best knowledge of the Seller) threatened, against the
Seller or the Company or any of their respective Assets and Properties,
at law or in equity, in, before, or by any Person that individually
involve a claim or claims for any injunction or similar relief or for
Damages exceeding $25,000 or an unspecified amount of Damages.
(c) There are no writs, judgments, decrees, or similar orders of any
Person outstanding against the Seller or the Company that individually
exceed $10,000 or that individually or in the aggregate have or may
reasonably be expected to have a material adverse effect on the Business
or Condition of the Seller or the Company, and there are no injunctions
or similar orders of any Person outstanding against the Seller or the
Company.
(d) With the knowledge and concurrence of Purchaser, Seller has
settled subject only to approval of such settlement by the Circuit Court
of Montgomery County, Alabama and to no more than the permitted number of
the involved policyholders electing to "opt out", the case styled Becker
v. Dixie National Life Insurance Company . The terms of such settlement
are acceptable to Purchaser and are set forth in Second Restated Section
3.13 of the Disclosure Schedule.
The terms of the settlement call for the payment by the Company of the
sum of $550,000 in cash to Plaintiffs and the issuance of additional
coverage to the affected policyholders equal to 15% of their present
Charter Contracts and the payment of certain costs by the Company which
are not now determinable. Except as hereafter stated, the Purchase Price
set forth in Section 2.2 hereof, gives effect to the adjustments
resulting from the settlement of Becker v. Dixie National Life Insurance
Company as provided in original Stock Purchase Agreement among the
parties hereto executed on April 18, 1995.
For purposes of this Section 3.13(d), Costs of Settlement shall include
all fees and expenses and all costs incurred to effect the negotiation
and settlement of this litigation, including, but not limited to,
attorneys fees and expenses and the statutory liabilities required at the
time
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<PAGE>
of any replacement or additional policies are issued to policyholders as
part of the settlement.
The Purchase Price set forth in Section 2.2 hereof reflects the cash
payment to be made by the Company in the Settlement in the amount of
$550,000 and the reserves required to be established in relation to the
agreed increased coverage in the amount of $391,800, plus $59,200
estimated Costs of Settlement, for a total of $1,000,000. Any Costs of
Settlement over $1,000,000 shall be absorbed by Purchaser. Should the
estimated additional Costs of Settlement be less than $59,200, Purchaser
shall pay to Seller at or after Closing 50% of such adjusted Costs of
Settlement.
3.14 Compliance With Laws. To the best knowledge of the Seller and
Company and except as disclosed in Section 3.14 of the Disclosure Schedule,
the Company has not been or is not in violation (or with or without notice or
lapse of time or both, would be in violation) of any term or provision of any
Law or any writ, judgment, decree, injunction, or similar order applicable to
the Company or any of its Assets and Properties, the result of which violation
individually or violations in the aggregate has or may reasonably be expected
to have a material adverse effect on the Business or Condition of the Company.
Without limiting the generality of the foregoing:
(a) Since January 1, 1995, the Company has duly and validly filed or
caused to be so filed all reports, statements, documents, registrations,
filings, or submissions that were required by Law to be filed with any
Person and as to which the failure to so file, individually in the
aggregate with other such failures, has or may reasonably be expected to
have a material adverse effect on the Business or Condition of the
Company; all such filings complied with applicable Laws in all material
respects when filed and, no material deficiencies have been asserted by
any Person with respect to any such filings.
(b) The Seller has previously delivered to the Purchaser the reports
reflecting the results of the most recent financial examination of the
Company issued by the State of Mississippi and Seller has been generally
advised by the Mississippi Department of Insurance of the material
elements of the draft report of the Triennial Examination as of December
31, 1994. Except as disclosed in Section 3.14(b) of the Disclosure
Schedule, all material deficiencies or violations in such previously
issued reports have been resolved to the satisfaction of the State of
Mississippi.
(c) Except as disclosed in Section 3.14(c) of the Disclosure
Schedule, all outstanding insurance and annuity Contracts issued,
reinsured, or underwritten by the Company are, to the extent required
under applicable Laws, on forms approved by the insurance regulatory
authority of the jurisdiction where issued or have been filed with and
not objected to by such authority within the period provided for
objection.
(d) (1) Section 3.14(d) of the Disclosure Schedule contains a true
and complete list of each master or prototype (as well as any
individually designed) pension, profit sharing, defined benefit, Code
Section 401(k), and other retirement or employee benefit plan
13
<PAGE>
or Contract (including, but not limited to, simplified employee pension
plans, Code Section 403(a), (b) and (c) annuities, Keogh plans, and
individual retirement accounts and annuities) offered or sold by the
Company to, or maintained or sponsored for the benefit of any employees
of, any other Person, and each determination letter relating to the
creation or amendment of any such plan or Contract. Except as disclosed
in Section 3.14(d) of the Disclosure Schedule, each such plan or Contract
in all material respects conforms with, and has been offered, sold,
maintained, and sponsored in accordance with, all applicable Laws. Except
as disclosed in Section 3.14(d) of the Disclosure Schedule, the Company
is not a fiduciary with respect to any plan or Contract referenced in
this Section 3.14(d).
(2) The Company does not provide administrative or other
contractual services for any plan or Contract referenced in this Section
3.14(d), including, but not limited to, any third party administrative
services for an Employee Welfare Benefit Plan.
(3) To the extent that the Company maintains any collective or
commingled funds or accounts which restrict the Persons who may invest
therein to tax-exempt entities or qualified plans, each such fund or
account (of which a true and complete list and description is disclosed
in Section 3.14(d)(3) of the Disclosure Schedule) has been established,
maintained and operated in accordance with all applicable Laws, has
maintained its tax-exempt status and has no nonqualified plans or trusts
or other taxable entities investing in it.
(4) In addition to the representations and warranties contained
in Section 3.12, there are no claims pending, or (to the best knowledge
of the Seller or Company) threatened, against the Company or any of its
Assets and Properties, under any fiduciary liability insurance policy
issued by or to the Company that individually or in the aggregate has or
may reasonably be expected to have a material adverse effect on the
Business or Condition of the Company.
3.15 Benefit Plans, ERISA.
Except as disclosed in Section 3.15 of the Disclosure Schedule, the
Company has not had within the past six (6) years and does not currently
have any Benefit Plan or any commitment or obligation to create any
Benefit Plan.
(a) Neither the Seller, the Company, nor any of their respective
Affiliates has any Contract, plan, or commitment, whether legally binding
or not, to create any additional Benefit Plan or to modify or change any
existing Benefit Plan. Each contribution or other payment required to be
made or to be voluntarily made by each of the Seller and the Company on
or before December 31, 1994 with respect to any of the Benefit Plans has
been made.
(b) None of the Benefit Plans is or has been a multi-employer plan,
as that term is defined in Section 3(37) of ERISA. There has been no
transaction, action, or omission
14
<PAGE>
involving the Seller, the Company, any ERISA Affiliate, or (to the best
knowledge of the Seller) any fiduciary, trustee, or administrator of any
Benefit Plan, or any other Person dealing with any such Benefit Plan or
the related trust or funding vehicle, that in any manner violates or will
result in a violation (with or without notice or lapse of time or both)
of Sections 404 or 406 of ERISA or constitutes or will constitute (with
or without notice or lapse of time or both) a prohibited transaction (as
defined in Section 4975(c)(I) of the Code or Section 406 of ERISA) for
which there exists neither a statutory nor a regulatory exemption and
which could subject the Seller or the Company or any party in interest
(as defined in Section 3(14) of ERISA) to criminal or civil sanctions
under Section 501 or 502 of ERISA, or to Taxes under Code Section 4975,
or to any other Liability.
(c) There has been no reportable event (as defined in Section
4043(b) of ERISA) with respect to any Employee Pension Benefit Plan or
any Employee Welfare Benefit Plan for which notice to the PBGC has not
been waived by rule or regulation. Neither the Seller nor the Company,
nor any ERISA Affiliate has any Liability to the PBGC (other than any
Liability for insurance premiums not yet due to the PBGC), to any present
or former participant in or beneficiary of any Benefit Plan (or any
beneficiary of any such participant or beneficiary), or to any Employee
Pension Benefit Plan or any Employee Welfare Benefit Plan. No event,
fact, or circumstance has arisen or occurred that has resulted or may
reasonably be expected to result in any such Liability or a claim against
the Seller or the Company by the PBGC, by any present or former
participant in or any beneficiary of any Employee Pension Benefit Plan or
any Employee Welfare Benefit Plan (or any beneficiary of any such
participant or beneficiary), or by any such Benefit Plan. No filing has
been or will be made by the Seller, the Company, or any ERISA Affiliate,
and no proceeding has been commenced, for the complete or partial
termination of any Employee Pension Benefit Plan or any Employee Welfare
Benefit Plan, and no complete or partial termination of any such Benefit
Plan has occurred or, as a result of the execution or delivery of this
Second Restated Agreement or the consummation of the transactions
contemplated hereby, will occur.
(d) All amounts that each of the Seller and the Company is required
to pay by Law or under the terms of the Benefit Plans as a contribution
or other payment to or in respect of such Benefit Plans as of December
31, 1994 have been paid. The funding method used in connection with each
Benefit Plan that is or at any time has been subject to the funding
requirements of Title I, Subtitle B, Part 3 of ERISA, meets the
requirements of ERISA and the Code. No Benefit Plan subject to Title IV
of ERISA (or any trust established thereunder) has ever incurred any
accumulated funding deficiency (as defined in Section 302 of ERISA and
Section 412 of the Code), whether or not waived, as of the last day of
the most recent fiscal year of such Benefit Plan. With respect to any
period for which any contribution or other payment to or in respect of
any Benefit Plan is not yet due or owing, each of the Seller and the
Company has made due and sufficient current accruals for such
contributions and other payments in accordance with GAAP and SAP, and
such current accruals through the Closing will be duly and fully provided
for in the SAP Statement of the Company for the period then ended.
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<PAGE>
(e) Each Benefit Plan is and has been operated and administered in
all material respects in accordance with all applicable Laws, including,
without limitation, ERISA and the Code. Each of the Employee Pension
Benefit Plans and Employee Welfare Benefit Plans that is intended to be
qualified within the meaning of Section 401(a) of the Code is so
qualified and satisfies the requirements of Sections 401(a) and 501(a) of
the Code. There exists no fact, condition, or set of circumstances that
has or may reasonably be expected to have a material adverse effect on
the qualified status of any Employee Pension Benefit Plan or any Employee
Welfare Benefit Plan intended to be so qualified or the intended United
States federal income Tax treatment or consequences of any Employee
Pension Benefit Plan or any Employee Welfare Benefit Plan. None of the
Benefit Plans, or any related trust or funding vehicle, conducts or has
conducted any unrelated trade or business as that term is defined in
Section 513 of the Code. All necessary governmental approvals,
determinations, and notifications for all Employee Pension Benefit Plans
and all Employee Welfare Benefit Plans have been obtained.
(f) Any actuarial assumptions utilized by Seller or the Company in
connection with determining the funding of each Employee Pension Benefit
Plan (as set forth in the actuarial report for such Benefit Plan) are
reasonable in all material respects. The fair market value of the Assets
or Properties held under each Employee Pension Benefit Plan exceeds the
actuarially determined present value of all accrued benefits of such
Benefit Plan (whether or not vested) determined on an ongoing-Benefit
Plan basis.
(g) Except as disclosed in Section 3.15(g) of the Disclosure
Schedule, and except for claims by third parties for benefits owed to
participants or beneficiaries under the Benefit Plans, and except for
divorce proceedings, there are no pending or (to the best knowledge of
the Seller) threatened actions, suits, investigations, or other
proceedings by any present or former participant or beneficiary under any
Benefit Plan (or any beneficiary of any such participant or beneficiary)
involving any Benefit Plan or any rights or benefits under any Benefit
Plan or any rights or benefits under any Benefit Plan other than ordinary
and usual claims for benefits by participants or beneficiaries
thereunder. There is no writ, judgment, decree, injunction, or similar
order of any court, governmental or regulatory authority, or other
similar Person outstanding against or in favor of any Benefit Plan or any
fiduciary thereof.
3.16 Properties. Except as disclosed in Section 3.16 of the Disclosure
Schedule (with paragraph references corresponding to those set forth below):
(a) The Company has good and valid title to all debentures, notes,
stocks, securities, and other assets that are of a type required to be
disclosed in Schedules B through DB of its Annual Statement and that are
owned by it, free and clear of all Liens.
(b) The Company owns good and indefeasible title to, or has a valid
leasehold interest in, all real property used in the conduct of its
business, operations, or affairs or of
16
<PAGE>
a type required to be disclosed in Schedule A of the Company's Annual
Statement, free and clear of all Liens. All such real property, other
than raw land, is in good operating condition and repair and is suitable
for its current uses. No improvement on any such real property owned,
leased, or held by the Company encroaches upon any real property of any
other Person. The Company owns, leases, or has a valid right under
Contract to use adequate means of ingress and egress to, from, and over
all such real property.
(c) The Company owns good and indefeasible title to, or has a valid
leasehold interest in or has a valid right under Contract to use, all
tangible personal property that is used in the conduct of its business,
operations, or affairs, free and clear of all Liens. All such tangible
personal property is in good operating condition and repair and is
suitable for its current uses.
(d) The Company has, and at all times after the Closing will have,
the right to use, free and clear of any royalty or other payment
obligations, claims of infringement or alleged infringement, or other
Liens, all marks, names, trademarks, service marks, patents, patent
rights, assumed names, logos, trade secrets, copyrights, trade names, and
service marks that are used in the conduct of its business, operations,
or affairs (of which a true and complete list and description is
disclosed in Section 3.16(e) of the Disclosure Schedule), and all
computer software, programs, and similar systems owned by or licensed to
the Seller, the Company or any Affiliate of the Company or used in the
conduct of their business, operations, or affairs (of which a true and
complete list and description is disclosed in Section 3.16(e) of the
Disclosure Schedule). Neither the Seller nor the Company is in conflict
with or in violation or infringement of, nor has the Seller or the
Company received any notice of any conflict with or violation or
infringement of or any claimed conflict with, any asserted rights of any
other Person with respect to any intellectual property or any computer
software, programs, or similar systems, including, without limitation,
any of such items disclosed in Section 3.16(e) of the Disclosure
Schedule.
3.17 Contracts. Section 3.17 of the Disclosure Schedule (with paragraph
references corresponding to those set forth below) contains a true and
complete list of each of the following Contracts or other documents or
arrangements (true and complete copies, or, if none, written descriptions, of
which have been made available to the Purchaser, together with all amendments
thereto), to which the Company is a party or by which any of its Assets and
Properties is or may be bound:
(a) all employment, agency, consultation, or representation
Contracts or other Contracts of any type (including, without limitation,
loans or advances) with any present officer, director, employee, agent,
consultant, or other similar representative of the Company (or former
officer, director, employee, agent, consultant or similar representative
of the Company, if there exists any present or future liability with
respect to such Contract, whether now existing or contingent) (other than
Contracts with consultants and similar representatives who do not receive
compensation of $25,000 or more per year and other than employment or
agency Contracts, not containing terms which are unduly burdensome to the
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Company, with agents who do not receive compensation of $25,000 or more
per year), and the name, position, and rate of compensation of each such
Person and the expiration date of each such Contract, as well as all sick
leave, vacation, holiday, and other similar practices, procedures, and
policies of each of the Seller or the Company established or administered
other than as Benefit Plans;
(b) all Contracts with any Person containing any provision or
covenant limiting the ability of the Company to engage in any line of
business or to compete with or to obtain products of services from any
Person or limiting the ability of any Person to compete with or to
provide products or services to the Company;
(c) all partnership, joint venture, profit-sharing, or similar
Contracts with any Person (other than Benefit Plans);
(d) all Contracts relating to the borrowing of money by the Company
or to the direct or indirect guarantee by the Company of any obligation
for borrowed money in excess of $25,000 in the aggregate for the Company
or any of its Affiliates, or any other Liability in respect of
indebtedness of any other Person, including without limitation any
Contract relating to the maintenance of compensating balances that are
not terminable by the Company without penalty upon not more than sixty
(60) calendar days' notice, any line of credit or similar facility, the
payment for property, products, or services of any other Person even if
such property, products, or services are not conveyed, delivered, or
rendered, or the obligation to take-or-pay, keep-well, make-whole, or
maintain surplus or earnings levels or perform other financial ratios or
requirements; Section 3.17(d) of the Disclosure Schedule contains a true
and complete list of any requirements for consents or approvals of
creditors needed to consummate the transactions contemplated hereby;
(e) all leases or subleases of real property used in the Company's
business, operations, or affairs, and all other leases, subleases, or
rental or use Contracts for which the Company is liable;
(f) all Contracts relating to the future disposition or acquisition
of any investment in or security of any Person or of any interest in any
business enterprise (other than the disposition or acquisition of
investments in the ordinary course of business and consistent with past
practice);
(g) all Contracts or arrangements (including, without limitation,
those relating to the sharing or allocation of expenses, personnel,
services, or facilities) between or among the Seller or the Company and
any of their Affiliates or any other Person who is described in Section
3.10(p);
(h) all reinsurance, coinsurance, or other similar Contracts
indicating, with respect to each such Contract, the information required
to be disclosed in Schedule S of the Company's Annual Statement;
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(i) all outstanding proxies, powers of attorney, or similar
delegations of authority of the Company, except for powers of attorney
for the service of process pursuant to applicable insurance Laws, except
as incident to participation by the Company in the Insurance Guaranty
Fund of any State wherein the Company is required or elects to
participate in such fund.
(j) all Contracts for any product, service, equipment, facility, or
similar item (other than insurance and annuity Contracts issued,
reinsured, or underwritten by the Company and other than reinsurance,
coinsurance, and other similar Contracts) that by their respective terms
do not expire or terminate or are not terminable by the Company, without
penalty or other Liability, within six (6) months after December 31,
1994; and
(k) all other Contracts (other than insurance and annuity Contracts
issued, reinsured, or underwritten by the Company) that involve the
payment or potential payment pursuant to the terms of such Contracts, by
or to the Company of more than $10,000 individually or in the aggregate
or that are otherwise material to the Business or Condition of the
Company.
Each Contract disclosed or required to be disclosed in the Disclosure Schedule
pursuant to this Section is in full force and effect and constitutes a legal,
valid, and binding obligation of the Company and of each other Person that is
a party thereto in accordance with its terms; and neither the Company nor (to
the best knowledge of the Seller and the Company) any other party to such
Contract is in violation or breach of or default under any such Contract (or
with or without notice or lapse of time or both, would be in violation or
breach of or default under any such Contract). Except as disclosed in Section
3.17 of the Disclosure Schedule (with a specific reference to this sentence),
the Company is not a party to or bound by any Contract that was not entered
into in the ordinary course of business and consistent with past practice or
that has or may reasonably be expected to have, individually or in the
aggregate with any other Contracts, a material adverse effect on the Business
or Condition of the Company. The Company is not a party to or bound by any
collective bargaining or similar labor Contract.
3.18 Insurance Issued by the Company. Except as required by Law or except as
disclosed in Section 3.18 of the Disclosure Schedule (with paragraph
references corresponding to those set forth below):
(a) All insurance or annuity Contract benefits payable to the
Company by any other Person that is a party to or bound by any
reinsurance, coinsurance, or other similar Contract with the Company have
in all material respects been paid in accordance with the terms of the
insurance, annuity, and other Contracts under which they arose, except
for such benefits for which the Company reasonably believes there is a
reasonable basis to contest payment.
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(b) No outstanding insurance or annuity Contract issued, reinsured,
or underwritten by the Company entitles the holder thereof or any other
Person to receive dividends, distributions, or to share in the income of
the Company or receive any other benefits based on the revenues or
earnings of the Company or any other Person.
(c) The underwriting standards utilized and ratings applied by the
Company and (to the best knowledge of the Seller and the Company) by any
other Person that is a party to or bound by any reinsurance, coinsurance,
or other similar Contract with the Company conform in all material
respects to industry accepted practices and to the standards and ratings
required pursuant to the terms of the respective reinsurance,
coinsurance, or other similar Contracts.
(d) To the best knowledge of the Seller and the Company, all amounts
to which the Company is entitled under reinsurance, coinsurance, or other
similar Contracts (including without limitation amounts based on paid and
unpaid losses) are fully collectible.
(e) To the best knowledge of the Seller and the Company, each
insurance agent, at the time such agent wrote, sold, or produced business
for the Company, was duly licensed as an insurance agent (for the type of
business written, sold, or produced by such insurance agent) in the
particular jurisdiction in which such agent wrote, sold, or produced such
business for the Company.
(f) To the best knowledge of the Seller and the Company, no such
insurance agent violated (or with or without notice or lapse of time or
both, would have violated) any term or provision of any Law or any writ,
judgment, decree, injunction, or similar order applicable to the writing,
sale, or production of business for the Company.
(g) The tax treatment under the Code of all insurance, annuity or
investment policies, plans, or contracts; all financial products,
employee benefit plans, individual retirement accounts or annuities; or
any similar or related policy, contract, plan, or product, whether
individual, group, or otherwise, issued or sold by the Company is and at
all times has been the same or more favorable to the purchaser,
policyholder or intended beneficiaries thereof as the tax treatment under
the Code for which such contracts qualified or purported to qualify at
the time of its issuance or purchase. For purposes of this Section
3.18(g), the provisions of the Code relating to the tax treatment of such
contracts shall include, but not be limited to, Sections 72, 79, 89, 101,
104, 105, 106, 125, 130, 401, 402, 403, 404, 408, 412, 415, 419, 419A,
501, 505, 817, 818, 7702, and 7702A of the Code.
(h) There are no reinsurance, coinsurance, or other similar
Contracts under which the Company receives or has received surplus
relief.
3.19 Threats of Cancellation. Except as disclosed in Section 3.19 of the
Disclosure Schedule, since December 31, 1994 no policyholder, group of
policyholder Affiliates, or Persons writing, selling, or producing insurance
business that individually or in the aggregate accounted for
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five percent 5% or more of the premium or annuity income of the Company for
the year ended December 31, 1994, has terminated or (to the best knowledge of
the Seller or the Company) threatened to terminate its relationship with the
Company.
3.20 Licenses and Permits. Except as disclosed in Section 3.20 of the
Disclosure Schedule (with paragraph references corresponding to those set
forth below):
(a) The Company owns or validly holds, all licenses, franchises,
permits, approvals, authorizations, exemptions, classifications,
certificates, registrations, and similar documents or instruments that
are required for its business, operations, and affairs and that the
failure to so own or hold has or may reasonably be expected to have a
material adverse effect on its Business or Condition.
(b) All such licenses, franchises, permits, approvals,
authorizations, exemptions, classifications, certificates, registrations,
and similar documents or instruments are valid and in full force and
effect, and free of any restrictions imposed by any Person.
3.21 Operations Insurance. Section 3.21 of the Disclosure Schedule
contains a true and complete list and description of all liability, property,
workers compensation, directors and officers liability, and other similar
insurance Contracts that insure the business, operations, or affairs of the
Company or affect or relate to the ownership, use, or operations of any of the
Assets and Properties of the Company and that have been issued to the Company
or any of its Affiliates (including, without limitation, the names and
addresses of the insurers, the expiration dates thereof, and the annual
premiums and payment terms thereof) or that are held by the Company or by any
Affiliate of the Seller for the benefit of the Company following the Closing.
All such insurance is in full force and effect and (to the best knowledge of
the Seller and the Company) is with financially sound and reputable insurers
and, in light of the business, operations, and affairs of the Company, is in
amounts and provides coverage that are reasonable and customary for Persons in
similar businesses.
3.22 Intercompany Accounts. Except as reflected in the December 31, 1994
SAP Statement, or except as disclosed in Section 3.22 of the Disclosure
Schedule, there are no accounts between the Company and any of its Affiliates,
and neither the Seller nor any of its Affiliates provides or causes to be
provided to the Company any products, services, equipment, facilities, or
similar items that, individually or in the aggregate are or may reasonably be
expected to be material to the Business or Condition of the Company. Except as
disclosed in Section 3.22 of the Disclosure Schedule, since December 31, 1994
no such intercompany accounts in excess of $10,000 have been paid or received,
and all settlements of such intercompany accounts have been made, and all
allocations of such intercompany expenses have been applied, in the ordinary
course of business and consistent with past practice. All intercompany
accounts shall be written off prior to the Closing and, if constituting an
admitted asset, taken into account in calculating the Adjusted Capital and
Surplus of the Company.
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3.23 Bank Accounts. Section 3.23 of the Disclosure Schedule contains a
true and complete list of the names and locations of all banks, trust
companies, securities brokers, and other financial institutions at which the
Company has an account or safe deposit box or maintains a banking, custodial,
trading, or other similar relationship and a true and complete list and
description of each such account, box, and relationship, indicating in each
case the account number and the names of the officers, employees, agents, or
other similar representatives of the Company transacting business with respect
thereto.
3.24 Brokers. All negotiations relative to this Second Restated Agreement
and the transactions contemplated hereby have been carried out by the Seller
directly with the Purchaser, without the intervention of any Person on behalf
of the Seller in such manner as to give rise to any valid claim by any Person
against the Purchaser or the Seller for a finder's fee, brokerage commission,
or similar payment.
3.25 Disclosure. Neither this Second Restated Agreement nor any
certificate furnished by the Seller or the Company to the Purchaser in
connection with this Second Restated Agreement or the transactions
contemplated hereby contains any untrue statement of a material fact by the
Seller or the Company or omits to state a material fact by the Seller or the
Company necessary to make the statements herein or therein not misleading in
light of the circumstances in which they were made.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
The Purchaser hereby represents and warrants to the Seller as follows:
4.1 Organization. The Purchaser is a corporation duly organized, validly
existing, and in good standing under the Laws of the State of Indiana and has
full corporate power and authority to enter into this Second Restated
Agreement and to perform its obligations under this Second Restated Agreement.
The Purchaser is duly licensed, qualified, or admitted to do business and is
in good standing in all jurisdictions in which the failure to be so licensed,
qualified, or admitted and in good standing, individually or in the aggregate
with other such failure, has or may reasonably be expected to have a material
adverse effect on the validity or enforceability of this Second Restated
Agreement, on the ability of the Purchaser to perform its obligations under
this Second Restated Agreement or on the Business or Condition of the
Purchaser.
4.2 Authority. The Board of Directors of the Purchaser has duly and
validly approved this Second Restated Agreement and the transactions
contemplated hereby. The execution and delivery of this Second Restated
Agreement by the Purchaser and the performance by the Purchaser of its
obligations under this Second Restated Agreement have been duly and validly
authorized by all necessary corporate action on the part of the Purchaser.
This Second Restated Agreement constitutes a legal, valid, and binding
obligation of the Purchaser and is enforceable against the Purchaser in
accordance with its terms, except to the extent that enforcement may be
limited by or subject to any bankruptcy, insolvency, reorganization,
moratorium, or similar Laws now or hereafter
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in effect relating to or limiting creditors' rights generally and the remedy
of specific performance and injunctive and other forms of equitable relief are
subject to certain equitable defenses and to the discretion of the court or
other similar Person before which any proceeding therefor may be brought.
4.3 No Conflicts or Violations. The execution and delivery of this Second
Restated Agreement by the Purchaser do not, and the performance by the
Purchaser of its obligations under this Second Restated Agreement will not:
(a) subject to obtaining the approvals contemplated by Section 6.1
hereof, violate any term or provision of any Law or any writ, judgment,
decree, injunction, or similar order applicable to the Purchaser;
(b) conflict with or result in a violation or breach of, or
constitute (with or without notice or lapse of time or both) a default
under, any of the terms, conditions, or provisions of the articles of
incorporation or bylaws of the Purchaser;
(c) except as disclosed in writing to the Seller, result in the
creation or imposition of any Lien upon the Purchaser or any of its
Assets and Properties that individually or in the aggregate with any
other Liens has or may reasonably be expected to have a material adverse
effect on the validity or enforceability of this Second Restated
Agreement or on the ability of the Purchaser to perform its obligations
under this Second Restated Agreement;
(d) except as disclosed in writing to the Seller, conflict with or
result in a violation or breach of, or constitute (with or without notice
or lapse of time or both) a default under, or give to any person any
right of termination, cancellation, acceleration, or modification in or
with respect to, any Contract to which the Purchaser is a party or by
which any of its Assets and Properties may be bound and as to which any
such conflicts, violations, breaches, defaults, or rights individually or
in the aggregate have or may reasonably be expected to have a material
adverse effect on the validity or enforceability of this Second Restated
Agreement or on the ability of the Purchaser to perform its obligations
under this Second Restated Agreement; or
(e) require the Purchaser to obtain any consent, approval, or action
of, or make any filing with or give any notice to, any Person except as
contemplated in Section 6.1, as disclosed in writing to the Seller, or
those which the failure to obtain, make, or give individually or in the
aggregate with other such failures has or may reasonably be expected to
have no material adverse effect on the validity or enforceability of this
Second Restated Agreement or on the ability of the Purchaser to perform
its obligations under this Second Restated Agreement.
4.4 Litigation. There are no actions, suits, investigations, or
proceedings pending against the Purchaser, or (to the best knowledge of the
Purchaser) threatened against the Purchaser, at law or in equity, in, before,
or by any Person, that individually or in the aggregate have or may
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reasonably be expected to have a material adverse effect on the validity or
enforceability of this Second Restated Agreement, on the ability of the
Purchaser to perform its obligations under this Second Restated Agreement or
on the Business and Condition of the Purchaser.
4.5 Purchase for Investment. The Shares will be acquired by the Purchaser
for its own account for the purpose of investment. The Purchaser agrees that:
it will not offer, sell, pledge, hypothecate, or otherwise dispose of the
shares unless such offer, sale, pledge, hypothecation or other disposition is
(i) registered under the Securities Act of 1933 and any other applicable
securi ties laws, or (ii) in compliance with an opinion of counsel to the
Purchaser, delivered to the Seller and reasonably acceptable to it, to the
effect that such offer, sale, pledge, hypothecation or other disposition does
not violate the Securities Act of 1933 or such other securities laws; and the
certificate(s) representing the Shares shall bear a legend evidencing the
restrictions or transfer set forth in the foregoing clause (a).
4.6 Brokers. All negotiations relative to this Second Restated Agreement
and the transactions contemplated hereby have been carried out by the
Purchaser directly with the Seller, without the intervention of any Person on
behalf of the Purchaser in such manner as to give rise to any valid claim by
any Person against the Seller or the Purchaser for a finder's fee, brokerage
com mission, or similar payment.
4.7 Disclosure. Neither this Second Restated Agreement nor any
certificate furnished by the Purchaser to the Seller in connection with this
Second Restated Agreement or the transactions contemplated hereby contains any
untrue statement by the Purchaser of material fact or omits to state a
material fact by the Purchaser necessary to make the statements herein or
therein not misleading in light of the circumstances in which they were made.
ARTICLE V
COVENANTS OF SELLER AND COMPANY
The Seller and the Company covenant and agree with the Purchaser that, at
all times before the Closing, the Seller and the Company will comply with all
of the covenants and provisions of this Article V, except to the extent the
Purchaser may otherwise consent in writing or to the extent otherwise required
or permitted by this Second Restated Agreement.
5.1 Regulatory Approvals. The Seller and the Company will (a) take all
commercially reasonable steps necessary or desirable, and proceed diligently
and in good faith and use all commercially reasonable efforts to obtain, as
promptly as practicable, all approvals and consents required by the applicable
Contract of any holder of indebtedness of the Seller or the Company; (b) take
all commercially reasonable steps necessary or desirable, and proceed
diligently and in good faith and use all commercially reasonable efforts to
obtain, as promptly as practicable, all approvals, authorizations, and
clearances of governmental and regulatory authorities required of the Seller
or the Company to consummate the transactions contemplated hereby; (c) provide
such other information and communications to such governmental and regulatory
authorities as the
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Purchaser or such authorities may reasonably request; and (d) cooperate with
the Purchaser in obtaining, as promptly as practicable, all approvals,
authorizations, and clearances of governmental or regulatory authorities and
others required of the Purchaser to consummate the transactions contemplated
hereby, including, without limitation, any required approvals of the insurance
regulatory authorities in the State of Mississippi and the State of Indiana.
5.2 Investigation by the Purchaser. The Seller and the Company will
provide (a) the Purchaser, its lenders, and their respective counsel,
accountants, actuaries, and other representatives with full access, upon prior
notice and during normal business hours, to all facilities, officers,
employees, agents, accountants, actuaries, Assets and Properties, and Books
and Records of the Seller and the Company and will furnish the Purchaser and
such other Persons during such period with all such information and data
(including, without limitation, copies of Contracts, Benefit Plans, and other
Books and Records) concerning the business, operations, and affairs of the
Company as the Purchaser or any of such other Persons reasonably may request
and (b) the Pur chaser with timely notice of and full access to the minutes of
all meetings (and all actions by written consent in lieu thereof) of the board
of directors and stockholders of the Company involving matters which are not
in the ordinary course of business and consistent with past practice, except
such minutes of meetings as involve only matters related to the consummation
of the transactions contemplated herein.
5.3 No Negotiations, etc. The Seller and the Company will not take, and
will not permit any Affiliate of the Seller or the Company (or permit any
other Person acting for or on behalf of the Seller or the Company or any
Affiliate of the Seller or the Company) to take, directly or indirectly, any
action (a) to seek or encourage any offer or proposal from any Person to
acquire any shares of capital stock or any other securities of the Company or
any interest therein or Assets and Properties thereof or any interest therein;
(b) to merge, consolidate, or combine, or to permit any other Person to merge,
consolidate or combine, with the Company; (c) to liquidate, dissolve, or
reorganize the Company in any manner; (d) to acquire or transfer any Assets
and Properties of the Company or any interests therein, except as contemplated
by the terms of this Second Restated Agreement; (e) to reach any agreement or
understanding (whether or not such agreement or understanding is absolute,
revocable, contingent, or conditional) for, or otherwise to attempt to
consummate, any such acquisition, transfer, merger, consolidation,
combination, or reorganization; or (f) to furnish or cause to be furnished any
information with respect to the Company to any Person (other than the
Purchaser or the Mississippi Department of Insurance) that the Seller or the
Company or any Affiliate of the Seller or the Company (or any Person acting
for or on behalf of the Seller, the Company or any other Affiliate of the
Seller or the Company) knows or has reason to believe is in the process of
attempting or considering any such acquisition, transfer, merger,
consolidation, combination, liquidation, dissolution, or reorganization. If
the Seller, the Company or any other Affiliate of the Seller or the Company
receives from any Person (other than the Purchaser) any offer, proposal,
informational request, inquiry or contact that is subject to this Section, the
Seller will promptly advise such Person, by written notice, of the terms of
this Section and will promptly deliver a copy of such notice to the Purchaser
and advise the Purchaser fully concerning the identity of such Person, the
terms of any proposal or offer, or the nature of any informational request,
inquiry or contact which is made.
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5.4 Conduct of Business. The Company will conduct its business only in
the ordinary course and consistent with past practices. Without limiting the
generality of the foregoing:
(a) The Seller and the Company will use all commercially reasonable
efforts to (i) preserve intact the Company's present business
organization, reputation, and policyholder relations; (ii) keep available
the services of the Company's present officers, directors, employees,
agents, consultants, and other similar representatives; (iii) maintain
all licenses, qualifications, and authorizations of the Company to do
business in each jurisdiction in which it is so licensed, qualified, or
authorized; (iv) maintain in full force and effect all Contracts,
documents, and arrangements referred to in Section 3.17 hereof, (v)
maintain all Assets and Properties of the Company in good working order
and condition, ordinary wear and tear excepted and (vi) continue all
current marketing and selling activities relating to the business,
operations, or affairs of the Company, except the Company shall not issue
or commit to issue any insurance or annuity Contracts except (A) pursuant
to existing insurance or annuity Contract provisions or (B) insurance or
annuity contracts which have no impact on Adjusted Capital and Surplus.
(b) The Seller and the Company will cause the Books and Records of
the Company to be maintained in the usual manner and consistent with past
practices and will not permit a material change in any underwriting,
investment, actuarial, financial reporting, or accounting practices or
policies of the Company or in any assumption underlying such practices or
policies, or in any method of calculating any bad debt, contingency, or
other reserve for financial reporting purposes or for other accounting
purposes (including, without limitation, any practice, policy,
assumption, or method relating to or affecting the determination of the
Company's investment income, reserves or other similar amounts, or
operating ratios with respect to expenses, losses, or lapses).
(c) The Seller and the Company will: (i) properly prepare and duly
and timely file all reports and all Tax Returns required to be filed with
any governmental or regulatory authorities with respect to the business,
operations, or affairs of the Company; and (ii) duly and fully pay all
Taxes indicated by such Tax Returns or otherwise levied or assessed upon
the Company or any of its Assets and Properties, and withhold or collect
and pay to the proper taxing authorities or hold in separate bank
accounts for such payment all Taxes that the Company is required to so
withhold or collect and pay, unless such Taxes are being contested in
good faith and, if appropriate, reasonable reserves therefor have been
established and reflected in the Books and Records of the Company in
accordance with GAAP and SAP.
(d) The Company will: (i) cause all reserves and other similar
amounts with respect to insurance and annuity Contracts established or
reflected in the Company's Books and Records to be (A) established and
reflected on a basis consistent with those reserves and other similar
amounts and reserving methods followed by the Company at December 31,
1994 and (B) good, sufficient and adequate (under generally accepted
actuarial principles consistently applied) to cover the total amount of
all reasonably anticipated matured and
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unmatured benefits, dividends, losses, claims, expenses, and other
Liabilities of the Company under all insurance and annuity Contracts
pursuant to which the Company has or will have any Liability (including,
without limitation, any Liability arising under or as a result of any
reinsurance, coinsurance, or other similar Contract); and (ii) continue
to own assets that qualify as legal reserve assets under all applicable
insurance Laws in an amount at least equal to the required reserves of
the Company and other similar amounts.
(e) The Company will use all commercially reasonable efforts to
maintain in full force and effect until the Closing substantially the
same levels of coverage as the insurance afforded under the Contracts
listed in Section 3.21 of the Disclosure Schedule. Any and all benefits
under such Contracts paid or payable (whether before or after the
effective date of this Second Restated Agreement) with respect to the
business, operations, affairs, or Assets and Properties of the Company
will be paid to the Company.
(f) The Company will continue to comply, in all material respects,
with all Laws applicable to its business, operations, or affairs.
(g) (Not used.)
(h) The Company will not enter into any reinsurance Contracts
(whether as the ceding company or the assuming company).
(i) Purchaser shall be entitled to have a representative present at
the offices of Company from the date of execution of this Second Restated
Stock Purchase Agreement until Closing to monitor the business and
financial affairs of Company.
5.5 Financial Statements and Reports. (a) As promptly as practicable
after March 31, 1995, the Seller will deliver to the Purchaser a true and
complete copy of the SAP Statement filed by the Company for the quarter ended
March 31, 1995, and for each quarter thereafter until Closing, prepared in
accordance with SAP and which shall present fairly the financial condition,
the Assets and Properties, and the Liabilities of the Company as of the date
thereof and the results of operations, capital and surplus account, and cash
flow of the Company for and during each of the periods covered thereby.
(b) The Seller will deliver to Purchaser audited GAAP Financial
Statements for the Company for each of the years ended December 31, 1992,
1993 and 1994 (and the notes relating thereto), and unaudited financial
statements for the quarter ended March 31, 1995, and for each quarter
thereafter until Closing, prepared in accordance with GAAP which shall
present fairly the financial condition, the Assets and Properties, and
the Liabilities of the Company as of the date thereof and the results of
operations, capital and surplus account, and cash flow of the Company for
and during each of the periods covered thereby, within thirty (30) days
after Closing.
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5.6 Investments. The Company will invest its future cash flow, any cash
from matured and maturing investments, any cash proceeds from the sale of its
Assets and Properties, and any cash funds currently held by the Company, in
the ordinary course of its business and consistent with past practices to meet
the Company's reasonably anticipated current obligations. The Company will
take no actions unless approved in writing by the Purchaser to sell or
transfer any Assets and Properties other than in the ordinary course of
business.
5.7 Employee Matters.
(h) Except as may be required by Law or as disclosed in Section 5.8
of the Disclosure Schedule, or except for such representations, promises,
changes, alterations, or amendments that do not and will not result in
any Liability to the Company or the Purchaser, the Seller and the Company
will refrain from directly or indirectly:
(i) making any representation or promise, oral or written, to
any officer, director, employee, agent, consultant, or other similar
representative of the Company concerning any Benefit Plan;
(ii) making any change to, or amending in any way, the
Contracts, salaries, wages, or other compensation of any officer,
director, employee, agent, consultant, or other similar
representative of the Company whose annual compensation exceeds
$25,000, other than routine changes or amendments that (a) are made
in the ordinary course of business and consistent with past
practices, (b) do not and will not result in increases of more than
five percent (5%) in the salary, wages, or other compensation of any
such Person, and (c) do not and will not exceed, in the aggregate,
five percent (5%) of the total salaries, wages, and other
compensation of all employees of the Company;
(iii) adopting, entering into, amending, altering, or
terminating, partially or completely, any Benefit Plan;
(iv) adopting, entering into, amending, altering, or
terminating, partially or completely, any employment, agency,
consultation, or representation Contract that is, or had it been in
existence on the effective date of this Second Restated Agreement
would have been, required to be disclosed in Section 3.17(a) of the
Disclosure Schedule;
(v) approving any general or company-wide pay increases for
officers, directors, employees, agents, consultants, or other
similar representatives of the Company; or
(vi) entering into any Contract with any officer, director,
employee, agent, consultant, or other similar representative of the
Company that is not terminable
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by the Company, without penalty or other Liability, upon not more
than sixty (60) calendar days' notice.
5.8 No Charter Amendments. The Seller and the Company will not amend the
arti cles or certificate of incorporation or Bylaws of the Company and will
refrain from taking any action with respect to any such amendment.
5.9 No Issuance of Securities. The Seller and the Company will refrain
from authorizing or issuing, any shares of capital stock or other equity
securities of the Company, or from entering into any Contract or granting any
option, warrant, or right calling for the authorization or issuance of any
such shares or other equity securities, or creating or issuing any securities
directly or indirectly convertible into or exchangeable for any such shares or
other equity securities, or issuing any options, warrants, or rights to
purchase any such convertible securities.
5.10 No Dividends. Except for dividends and distributions declared after
the date of this Second Restated Agreement in conformity with this Second
Restated Agreement or which have been approved in writing by the Purchaser and
for which any required regulatory approvals have been received, the Company
will refrain from declaring, setting aside, or paying any dividend or other
distribution in respect of its capital stock and from directly or indirectly
redeeming, purchasing, or otherwise acquiring any of its capital stock or any
interest in or right to acquire any such stock.
5.11 No Disposal of Property. Except as set forth in Section 5.12 of the
Disclosure Schedule or as expressly provided in this Second Restated
Agreement, the Company will not (a) dispose of any of its Assets and
Properties or permit any of its Assets and Properties to be subjected to any
Liens, except to the extent any such disposition or any such Lien is made or
incurred in the ordinary course of the business and consistent with past
practices, (b) sell any material part of its insurance products, operations,
or business to any third party (other than sales of insurance products in the
ordinary course of business consistent with past practices pursuant to Section
5.5(a)), (c) enter into any contracts obligating the Company to administer the
insurance operations of any Person other than any Affiliate, (d) enter into
any Contracts permitting any Person other than any Affiliate of the Company to
administer the Company's insurance operations, or (e) enter into or assume any
Contract, if doing so could involve a loss, cost, expense or commitment in
excess of $10,000.
5.12 No Breach or Default. The Company will not violate or breach, and
will not take or fail to take any action that (with or without notice or lapse
of time or both) would constitute a violation, breach, or default in any way
under any term or provision of any Contract to which it is a party or by which
any of its Assets and Properties is or may be bound.
5.13 No Indebtedness. The Company will not create, incur, assume,
guarantee, or otherwise become liable for, and will not cancel, pay, agree to
cancel or pay, or otherwise provide for a complete or partial discharge in
advance of a scheduled payment date with respect to, any
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Liability, and will not waive any right to receive any direct or indirect
payment or other benefit under any Liability owing to it.
5.14 No Acquisitions. The Company will not (a) merge, consolidate, or
otherwise combine or agree to merge, consolidate, or otherwise combine with
any other Person, (b) acquire or agree to acquire blocks of business of, or
all or substantially all the Assets and Properties or capital stock or other
equity securities of any other Person, or (c) otherwise acquire or agree to
acquire control or ownership of any other Person.
5.15 Intercompany Liabilities. At least five Business Days before the
Closing, the Seller will deliver to the Purchaser a true and complete list and
description of all Liabilities between the Company and any Affiliate of the
Company to be outstanding on the Closing Date. The Company will not enter into
any Contract or, except as required by any Contract disclosed in Section
3.17(g) of the Disclosure Schedule, engage in any transaction with any of its
Affiliates.
5.16 Resignations of Officers and Directors. Seller and the Company will
cause the members of the Board of Directors and officers of the Company to
tender, effective at the Closing, their resignations from the Board of
Directors and offices then held by such officers in the Company.
5.17 Tax Matters. The Seller will refrain and will cause the Company to
refrain (a) from making, filing, or entering into (whether before or after the
Closing) any election, consent, or agreement described in Section 3.12(e) or
Section 3.12(f) with respect to the Company or any of its Assets and
Properties and (b) from amending or cancelling any reinsurance or coinsurance
Contract.
5.18 Dismissal of Pending Litigation. Seller will cause the counterclaim
filed in the action entitled "Standard Management Corporation v. Dixie
National Corporation", currently pending in the Marion County, Indiana
Superior Court as Cause No. 49D129410-CP-0107, to be dismissed with prejudice,
as soon as practical, and to release any claim to the principal sum of Two
Hundred Fifty Thousand Dollars ($250,000) plus accrued interest thereon.
Seller shall pay all attorneys fees incurred by Seller or Company in said
litigation. Purchaser will simultaneously dismiss the referenced action, with
prejudice.
5.19 Disclosure Schedule. The Seller shall deliver any Second Restated
Sections of the Disclosure Schedule to the Purchaser at the time of execution
of this Second Restated Agreement..
5.20 Shareholder Meeting. The Seller shall call a meeting of shareholders
of the Seller to be held on September 19, 1995 to secure shareholder approval
to the transactions described herein.
5.21 Notice and Cure. The Seller will notify the Purchaser promptly in
writing of, and contemporaneously will provide the Purchaser with true and
complete copies of any and all infor mation or documents relating to, and will
use all commercially reasonable efforts to cure before the
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Closing, any event, transaction, or circumstance occurring after the effective
date of this Second Restated Agreement that causes or will cause any covenant
or agreement of the Seller under this Second Restated Agreement to be
breached, or that renders or will render untrue any representation or warranty
of the Seller contained in this Second Restated Agreement as if the same were
made on or as of the date of such event, transaction, or circumstance. The
Seller also will use all commercially reasonable efforts to cure, before the
Closing, any violation or breach of any repre sentation, warranty, covenant,
or agreement made by it in this Second Restated Agreement, whether occurring
or arising before or after the effective date of this Second Restated
Agreement.
5.22 Triennial Report. The Seller shall promptly deliver all preliminary
and final reports of the financial examination of the Company issued by the
State of Mississippi for the three (3) year period ending December 31, 1994,
which report shall not require the Company to post a reserve in excess of
$1,010,000 relating to the settlement of Becker v. Dixie National Life
Insurance Company, nor shall the Mississippi Department of Insurance require
an additional deposit of assets by the Company in excess of $2,000,000 pending
final conclusion and dismissal of such suit, at which time such deposit shall
be released.
ARTICLE VI
COVENANTS OF PURCHASER
The Purchaser covenants and agrees with the Seller that, at all times
before the Closing and with respect to Sections 6.2 and 6.3, after Closing,
the Purchaser will comply with all covenants and provisions of this Article
VI, except to the extent the Seller may otherwise consent in writing or to the
extent otherwise required or permitted by this Second Restated Agreement.
6.1 Regulatory Approvals. The Purchaser will (a) take all commercially
reasonable steps necessary or desirable, including the filings required to be
made with the Departments of Insurance of the States of Mississippi and
Indiana which shall be made within thirty (30) days of the date hereof, and
proceed diligently and in good faith and use all commercially reasonable
efforts to obtain, as promptly as practicable, all approvals, authorizations,
and clearances of governmental and regulatory authorities required of the
Purchaser to consummate the transactions contemplated hereby; (b) provide such
other information and communications to such governmental and regulatory
authorities as the Seller or such authorities may reasonably request; and (c)
cooperate with the Seller in obtaining, as promptly as practicable, all
approvals, authorizations, and clearances of governmental or regulatory
authorities required of the Seller to consummate the transactions contemplated
hereby.
6.2 Home Office Lease. The Purchaser will cause the Company to comply
with the monthly payment obligations of that certain home office lease on
premises located at 3760 I-55 North, Jackson, Mississippi 39211 (the
"Premises"), through the earlier of the sale of the building by Vanguard,
Inc., the sale of Vanguard, Inc., or, in any event, December 31, 1996, with
the lessor, Vanguard, Inc., a wholly-owned subsidiary of the Seller, at the
rental rate of Fifteen Thousand Dollars ($15,000) per month. For the first
three months after Closing, Purchaser shall pay for
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routine maintenance, casualty insurance and ad valorem taxes not to exceed
$5,000.00 per month. The Purchaser will vacate the Premises within three (3)
months after Closing. During the remainder of the lease following Closing,
Seller may use and occupy all portions of the Premises not reserved for use of
the Company hereunder. During the three (3) month transitional period, the
Purchaser shall be entitled to use such furniture and equipment currently
located on the Premises for employees of the Company.
6.3 Assignment of Certain Receivable from Central United Life Insurance
Company. At and after Closing, the Purchaser will cause the Company to pay to
Seller up to the sum of $53,872 if recovered by the Company after June 30,
1995 with respect to its receivable due from Central United Life Insurance
Company at June 30, 1995. The Purchaser will cause the Company to take
commercially reasonable efforts to recover such receivable; however, the
decision to institute litigation shall be at the sole discretion of the
Purchaser. The Seller agrees to reasonably cooperate with the Purchaser in its
efforts to recover such receivable.
6.4 Notice and Cure. The Purchaser will notify the Seller promptly in
writing of, and contemporaneously will provide the Seller with true and
complete copies of any and all information or documents relating to, and will
use all commercially reasonable efforts to cure before the Closing, any event,
transaction, or circumstance occurring after the effective date of this Second
Restated Agreement that causes or will cause any covenant or agreement of the
Purchaser under this Second Restated Agreement to be breached, or that renders
or will render untrue any representation or warranty of the Purchaser
contained in this Second Restated Agreement as if the same were made on or as
of the date of such event, transaction, or circumstance. The Purchaser also
will use all commercially reasonable efforts to cure, before the Closing, any
violation or breach of any rep resentation, warranty, covenant, or agreement
made by it in this Second Restated Agreement, whether occurring or arising
before or after the effective date of this Second Restated Agreement.
6.5 Hart-Scott Filing. As soon as reasonably possible after the execution
of this Second Restated Agreement, but in any event not later than September
6, 1995, Purchaser will file in the form and manner required, all filings
required under the Hart-Scott-Rodino Antitrust Improvement Act of 1976 (15 USC
Section 18a) with the U.S. Department of Justice.
ARTICLE VII
CONDITIONS TO OBLIGATIONS OF PURCHASER
The obligations of the Purchaser hereunder are subject to the
fulfillment, at or before the Closing, of each of the following conditions
(all or any of which may be waived in whole or in part by the Purchaser).
7.1 Representations and Warranties. The representations and warranties
made by the Seller in this Second Restated Agreement and the statements of the
Seller contained in the Disclosure Schedule shall be true as of the effective
date of this Second Restated Agreement, the certifications given pursuant to
Section 5.6(c) shall be true as of the date given, and all of such
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representations, warranties, certifications and statements shall be true on
and as of the Closing Date as though such representations, warranties,
certifications and statements were made on and as of the Closing Date.
7.2 Performance. The Seller and the Company shall have performed and
complied with all agreements, covenants, obligations, and conditions required
by this Second Restated Agreement to be so performed or complied with by the
Seller and/or the Company at or before the Closing, including those
specifically referred to elsewhere in this Article VII.
7.3 Certificates of Officer of Seller. The Seller shall have delivered to
the Purchaser a certificate, dated the Closing Date in the form of Exhibit C
hereto and executed by the chief executive officer or chief financial officer
of the Seller, certifying (with respect to the Seller and, as appropriate, the
Company) as to the fulfillment of the conditions set forth in this Article
VII. In addition, the Seller shall have delivered to the Purchaser a
certificate, dated the Closing Date and executed by the secretary or any
assistant secretary of the Seller, certifying that the Seller has duly and
validly taken all corporate action necessary to authorize its execution and
delivery of this Second Restated Agreement and its performance of its
obligations under this Second Restated Agreement, and that the resolutions
(true and complete copies of which shall be attached to the certificate) of
the Board of Directors with respect to this Second Restated Agreement and the
transactions contemplated hereby have been duly and validly adopted and are in
full force and effect.
7.4 No Injunction. There shall not be in effect on the Closing Date any
writ, judgment, injunction, decree, or similar order of any court or similar
Person restraining, enjoining, or otherwise preventing consummation of any of
the transactions contemplated by this Second Restated Agreement.
7.5 No Proceeding or Litigation. There shall not be instituted, pending,
or (to the best knowledge of the Purchaser or the Seller) threatened any
action, suit, investigation, or other proceeding in, before, or by any court,
governmental or regulatory authority, or other Person to restrain, enjoin, or
otherwise prevent consummation of any of the transactions contemplated by this
Second Restated Agreement or to recover any Damages or obtain other relief as
a result of this Second Restated Agreement or any of the transactions
contemplated hereby or as a result of any Contract entered into in connection
with or as a condition precedent to the consummation hereof, which action,
suit, investigation, or other proceeding may, in the reasonable opinion of the
Purchaser, result in a decision, ruling, or finding that individually or in
the aggregate has or may reasonably be expected to have a material adverse
effect on the validity or enforceability of this Second Restated Agreement, on
the ability of the Seller, the Company or the Purchaser to perform its
respective obligations under this Second Restated Agreement, or on the
Business or Condition of the Purchaser or the Company. There shall not be in
effect on the Closing Date any voluntary or involuntary bankruptcy,
receivership, conservatorship, or similar proceeding with respect to the
Company or the Seller.
7.6 Consents, Authorizations, etc. All orders, consents, permits,
authorizations, approvals, and waivers of every Person disclosed pursuant to
Section 4.3 and necessary to permit
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the Purchaser to perform its obligations under this Second Restated Agreement
and to consummate the transactions contemplated hereby and to permit the
Purchaser to acquire the Shares pursuant to this Second Restated Agreement
(including, without limitation, any requisite action of the insurance
regulatory authorities in the State of Mississippi and the State of Indiana,
in each case without the abrogation or diminishment of the Company's authority
or license or the imposition of significant restrictions upon the transactions
contemplated hereby) shall have been obtained and shall be in full force and
effect, and the Seller and the Company shall have obtained all consents,
approvals, authorizations and clearances referred to in Section 5.1 and the
Purchaser shall have received evidence satisfactory to it of the receipt of
such consents, approvals, authorizations and clearances.
7.7 No Adverse Change. Except as disclosed in Section 3.10 of the
Disclosure Schedule or as specifically reflected in the December 31, 1994
Annual Statement of the Company (it being understood that no material adverse
trend has been so disclosed or reflected), or except for changes or
developments relating to the conduct of the Company's business after the
effective date of this Second Restated Agreement in conformity with the
requests of the Purchaser, since December 31, 1994 there shall not have been,
occurred, or arisen any change in, or any event (including, without
limitation, any damage, destruction, or loss whether or not covered by insur
ance), condition, or state of facts of any character that individually or in
the aggregate has or may reasonably be expected to have a material adverse
effect on the Business or Condition of the Company.
7.8 Opinion of Counsel. The Seller shall have delivered to the Purchaser
the opinion, dated the Closing Date, of Wells, Moore, Simmons & Neeld, counsel
to the Seller, to the effect set forth in Exhibit E hereto.
7.9 Resignation of Officers and Directors. The resignations of the
members of the Board of Directors and officers of the Company pursuant to
Section 5.17, effective as of the Closing Date, shall have been delivered to
the Purchaser on or before the Closing Date.
7.10 Shareholder Approval. The shareholders of the Seller shall have
approved the sale of the Shares of the Company in accordance with applicable
Laws and Seller's articles of incorporation and bylaws at a meeting to be held
on the date specified in Section 5.21 hereof.
7.11 Hart-Scott. Purchaser and Seller shall have made all filings
required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (15
USC ss.18a), and all waiting periods shall have passed without any action
having been taken by the Department of Justice or any other governmental
department.
7.12 Management Agreement. The current management agreement between the
Seller and the Company shall have been terminated and or, at Purchaser's
option, assigned from Seller to Purchaser.
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ARTICLE VIII
CONDITIONS TO OBLIGATIONS OF SELLER
The obligations of the Seller hereunder are subject to the fulfillment,
at or before the Closing, of each of the following conditions (all or any of
which may be waived in whole or in part by the Seller).
8.1 Representations and Warranties. The representations and warranties
made by the Purchaser in this Second Restated Agreement shall be true as of
the effective date of this Second Restated Agreement and shall be true on and
as of the Closing Date as though such representations and warranties were made
on and as of the Closing Date.
8.2 Performance. The Purchaser shall have performed and complied with all
agreements, covenants, obligations, and conditions required by this Second
Restated Agreement to be so performed or complied with by the Purchaser at or
before the Closing.
8.3 Officer's Certificates. The Purchaser shall have delivered to the
Seller a certificate, dated the Closing Date in the form of Exhibit E hereto
and executed by the chief executive officer or the chief financial officer of
the Purchaser, certifying with respect to the Purchaser as to the fulfillment
of the conditions set forth in this Article VIII. In addition, the Pur chaser
shall have delivered to the Seller a certificate, dated the Closing Date and
executed by the secretary or any assistant secretary of the Purchaser
certifying that the Purchaser has duly and validly taken all corporate action
necessary to authorize its execution and delivery of this Second Restated
Agreement and its performance of its obligations under this Second Restated
Agreement, including, without limitation, that Purchaser has taken all action
necessary to authorize the acquisition of the Shares, and that the resolutions
(true and complete copies of which shall be attached to the certificate) of
the Board of Directors of the Purchaser with respect to this Second Restated
Agreement and the transactions contemplated hereby have been duly and validly
adopted and are in full force and effect.
8.4 No Injunction. There shall not be in effect on the Closing Date any
writ, judgment, injunction, decree, or similar order of any court or similar
Person restraining, enjoining, or otherwise preventing consummation of any of
the transactions contemplated by this Second Restated Agreement.
8.5 No Proceeding or Litigation. There shall not be instituted, pending,
or (to the best knowledge of the Purchaser or of the Seller) threatened any
action, suit, investigation, or other proceeding in, before, or by any court,
governmental or regulatory authority, or other Person to restrain, enjoin, or
otherwise prevent consummation of any of the transactions contemplated by this
Second Restated Agreement or to recover any Damages or obtain other relief as
a result of this Second Restated Agreement or any of the transactions
contemplated hereby or as a result of any Contract entered into in connection
with or as a condition precedent to the consummation hereof, which action,
suit investigation, or other proceeding may, in the reasonable opinion of the
Seller,
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result in a decision, ruling, or finding that individually or in the aggregate
has or may reasonably be expected to have a material adverse effect on the
validity or enforceability of this Second Restated Agreement, on the ability
of the Purchaser or the Seller to perform its obligations under this Second
Restated Agreement or on the Business or Condition of the Seller.
8.6 Consents, Authorizations, etc. All orders, consents, permits,
authorizations, approvals, and waivers of every Person disclosed pursuant to
Section 3.5 and necessary to permit the Seller to perform its obligations
under this Second Restated Agreement and to consummate the transactions
contemplated hereby shall have been obtained and shall be in full force and
effect, and the Purchaser shall have obtained all consents, approvals,
authorizations and clearances referred to in Section 6.1 and the Seller shall
have received evidence satisfactory to it of the receipt of such consents,
approvals, authorizations and clearances.
8.7 Opinion of Counsel. The Purchaser shall have delivered to the Seller
the opinion, dated the Closing Date, of Brunini, Grantham, Grower & Hewes,
P.L.L.C., counsel to the Purchaser, to the effect set forth in Exhibit F
hereto.
ARTICLE IX
SURVIVAL OF PROVISIONS; REMEDIES
9.1 Survival. The representations, warranties, covenants, and agreements
respectively made by the Seller and the Purchaser in this Second Restated
Agreement, in the Disclosure Schedule, or in any certificate respectively
delivered by the Seller or the Purchaser pursuant to Section 7.3 or Section
8.3 will survive the Closing:
(a) until the expiration of all applicable statutes of limitations
(including all periods of extension, whether automatic or permissive) in
the case of the representations and warranties of the Seller respectively
set forth in Sections 3.1, 3.2, 3.3, 3.12, and 3.14 hereof, and in the
case of the indemnification agreements respectively set forth in Sections
10.1 and 10.2 hereof; and
(b) until the thirty-sixth (36th) month anniversary of the Closing
in the case of all other representations, warranties, covenants, and
agreements, except that covenants and agreements to be performed after
the Closing in accordance with their terms will survive until the last
period to which any such Tax benefit could be carried pursuant to the
Code, and each indemnification agreement as to litigation set forth in
clause (ii) or (iii) of Section 10.3(a) will survive until a final,
nonappealable judgment has been entered with respect to the last of such
litigation.
If a Claim Notice or an Indemnity Notice is given in accordance with Section
10.5 before expiration of the applicable time period referenced above, then
(notwithstanding such time period) the representation, warranty, covenant, or
agreement applicable to such claim shall survive until, but only for purposes
of, resolution of such claim.
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9.2 Available Remedies. Each party expressly agrees that, consistent
with its intention and agreement to be bound by the terms of this Second
Restated Agreement and to consummate the transactions contemplated hereby,
subject only to the performance or satisfaction of precedent conditions or of
precedent requirements imposed upon another party hereto, the remedy of
specific performance shall be available to a non-breaching and non-defaulting
party to enforce performance of this Second Restated Agreement by a breaching
or defaulting party, including, without limitation, to require the
consummation of the Closing on the Closing Date.
ARTICLE X
INDEMNIFICATION
10.1 Tax Indemnification.
(a) Subject to the provisions of Article IX hereof and this Section,
the Seller agrees to pay, and to indemnify the Purchaser and the Company
in respect of, and hold each of them harmless against, any and all
Damages for or in respect of Taxes actually incurred by, imposed upon, or
assessed against the Purchaser, the Seller, or the Company as a result of
or relating to any period ending on or before the Closing Date, save and
except for any increased tax liability for any period, or portion of a
period, prior to Closing that results from or is contributed to any
election (by action or inaction) of Purchaser.
(b) The Seller will notify the Purchaser, or (if applicable) the
Company will notify the Seller and the Purchaser, promptly of the
commencement of any claim, audit, examination, or other proposed change
or adjustment by any taxing authority concerning any Tax or other Damages
covered by Section 10.1(a) ("Tax Claim").
(c) The Seller will furnish the Purchaser, or (if applicable) the
Company will furnish the Seller and the Purchaser, promptly with copies
of all correspondence (including, without limitation, notices, requests,
explanations, determinations, schedules, charts, and lists) received from
any taxing authority in connection with any Tax Claim. The Seller will
have the right to approve in advance any correspondence sent to any
taxing authority by or on behalf of the Company with respect to any Tax
Claim to the extent such correspondence would adversely affect the
Seller's obligations under Section 10.1(a); provided, however, that the
Seller will be deemed to have approved any such correspondence to the
extent notice of its disapproval thereof is not delivered or mailed to
the Purchaser in accordance with Article XII hereof with reasonable
promptness, but in all events at least fourteen (14) calendar days before
the date on which payment of the Tax is due or, if earlier, at least
fourteen (14) calendar days before the date on which the ability of the
Company to defend against the Tax Claim is irrevocably prejudiced.
(d) At its option (following reasonable notice to and consultation
with the Purchaser), the Seller may contest any Tax Claim in any legally
permissible manner until such time as any payment for Taxes or other
Damages with respect to such Tax Claim is due
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or, upon the Seller's payment of such Taxes and other Damages, may sue
for a refund thereof where permitted by applicable Law. Except as
provided in the last sentence of this subsection, the Seller will control
all proceedings taken in connection with any such contest or refund suit,
and may pursue or forego any and all administrative appeals, proceedings,
hearings, and conferences with the taxing authority in respect of such
Tax Claim. The Company will take such lawful action in connection with
the contest or refund suit as the Seller may reasonably request in
writing from time to time, including, without limitation, the prosecution
of the contest or refund suit to a final determination, provided that (i)
the Seller requests such action with reasonable promptness, but in all
events at least fourteen (14) calendar days before the date on which
payment of the Taxes or other Damages are due or become final, or if
earlier, at least fourteen (14) calendar days before the date on which
the Company's ability to defend against the Tax Claim is irrevocably
prejudiced, (ii) a reasonable basis exists for such contest or refund
suit, and (iii) the Seller acknowledges (without any equivocation) its
obligations under this Section. Notwithstanding the foregoing provisions
of this Section 10.1(e), if such contest or refund suit has or may
reasonably be expected to have a material effect on the Liability of the
Company or the Purchaser for Taxes with respect to any period ending
after the Closing Date, then the Seller and the Purchaser will jointly
control any such contest or refund suit.
10.2 Other Indemnification.
(a) Subject to the provisions of Article IX and Section 10.4, the
Seller agrees to indemnify the Purchaser and the Company in respect of,
and hold each of them harmless against:
(i) any and all Damages (other than Damages that the Seller has
paid or is unequivocally liable to pay to the Purchaser or the
Company pursuant to Section 10.1) resulting from or relating to any
misrepresentation, breach of warranty, or nonfulfillment of or
failure to perform any covenant or agreement on the part of the
Seller made as a part of or contained in this Second Restated
Agreement, the Disclosure Schedule, or any certificate delivered by
or for the Seller pursuant to Section 7.3;
(ii) except as disclosed in Section 3.13 of the Disclosure
Schedule, any and all Damages resulting from or relating to any
action, suit, investigation, or proceeding pending against the
Company (whether as a defendant, counterclaim or third party
defendant, intervenor, or otherwise) on the Closing Date of this
Second Restated Agreement or arising at any time with respect to
matters occurring before the Closing, including, without limitation,
any action, suit, investigation or proceeding relating to any claims
arising under any insurance policies or Contracts assumed by Seller
from Company at any time on or prior to the Closing Date; and
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(iii) except as disclosed in Section 3.13 of the Disclosure
Schedule, any and all punitive, treble or other exemplary Damages
resulting from or relating to any claim (other than claims for such
actual policy benefits as are specified under insurance or annuity
Contracts issued, reinsured, or underwritten by the Company)
asserted in any action, suit, investigation, or proceeding against
the Company (whether as a defendant, counterclaim or third party
defendant, intervenor, or otherwise) pending on the Closing Date of
this Second Restated Agreement or arising at any time with respect
to matters occurring before the Closing.
(b) Subject to the provisions of Article IX and Section 10.4, the
Purchaser agrees to indemnify the Seller in respect of, and hold the
Seller harmless against, any and all Damages resulting from or relating
to any misrepresentation, breach of warranty, or nonfulfillment of or
failure to perform any covenant or agreement on the part of the Pur
chaser made as a part of or contained in this Second Restated Agreement
or any certificate delivered by or for the Purchaser pursuant to Section
8.3.
10.3 Method of Asserting Claims. All claims for indemnification by any
Indemnified Party under Section 10.2 will be asserted and resolved as follows:
(a) In the event any claim or demand for which an Indemnifying Party
would be liable for Damages to an Indemnified Party under Section 10.2 or
10.3 is asserted against or sought to be collected from such Indemnified
Party by a Person other than the Seller, the Purchaser, the Company, or
any Affiliate of the Seller or the Purchaser ("Third Party Claim"), the
Indemnified Party will deliver a Claim Notice with reasonable promptness
to the Indemnifying Party; provided, however, that except as set forth in
Section 10.4(d), no Claim Notice will be required with respect to any
action, suit, investigation, or proceeding that is in existence on the
Closing Date to which indemnification applies. If the Indemnified Party
fails to provide the Indemnifying Party with the Claim Notice required by
the preceding sentence at least 14 calendar days before the date on which
the Indemnifying Party's ability to defend against the Third Party Claim
is irrevocably prejudiced by the Indemnified Party's failure to provide
such Claim Notice, the Indemnifying Party will not be obligated to
indemnify the Indemnified Party with respect to such portion of the Third
Party Claim as to which the Indemnifying Party's ability to defend has
been prejudiced by such failure of the Indemnified Party. The
Indemnifying Party will notify the Indemnified Party with reasonable
promptness, but in all events at least 14 calendar days before the date
on which the Indemnified Party's ability to defend against the Third
Party Claim is irrevocably prejudiced ("Notice Period"), whether the
Indemnifying Party disputes the Liability of the Indemnifying Party to
the Indemnified Party hereunder with respect to such Third Party Claim
and whether the Indemnifying Party desires, at the sole cost and expense
of the Indemnifying Party, to defend the Indemnified Party against such
Third Party Claim.
(b) If the Indemnifying Party notifies the Indemnified Party within
the Notice Period that the Indemnifying Party (without any equivocation)
does not dispute its Liability
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to the Indemnified Party and that the Indemnifying Party desires to
defend the Indemnified Party with respect to the Third Party Claim
pursuant to this Article X, then the Indemnifying Party will have the
right to defend, at its sole cost and expense, such Third Party Claim by
all appropriate proceedings, which proceedings will be diligently
prosecuted by the Indemnifying Party to a final conclusion or will be
settled at the discretion of the Indemnifying Party (with the consent of
the Indemnified Party, which consent will not be withheld unreasonably).
The Indemnifying party will have full control of such defense and
proceedings, including any compromise or settlement thereof; provided,
however, that the Indemnified Party may, at the sole cost and expense of
the Indemnifying Party, file during the Notice Period any motion, answer,
or other pleadings that the Indemnified Party may deem necessary or
appropriate to protect its interests or those of the Indemnifying Party
and not irrevocably prejudicial to the Indemnifying Party (it being
understood and agreed that, except as provided in Section 10.3(c), if an
Indemnified Party takes any such action that is irrevocably prejudicial
and conclusively causes a final adjudication that is materially adverse
to the Indemnifying Party, the Indemnifying Party will be relieved of its
obligations hereunder with respect to the portion of such Third Party
Claim prejudiced by the Indemni fied Party's action); and provided
further, that if requested by the Indemnifying Party, the Indemnified
Party agrees, at the sole cost and expense of the Indemnifying Party, to
cooperate with the Indemnifying Party and its counsel in contesting any
Third Party Claim that the Indemnifying Party elects to contest, or, if
appropriate and related to the Third Party Claim in question, in making
any counterclaim against the Person asserting the Third Party Claim, or
any cross-complaint against any Person (other than the Indemnified Party
or any of its Affiliates). The Indemnified Party may participate in, but
not control, any defense or settlement of any Third Party Claim
controlled by the Indemnifying Party pursuant to this Section 10.3(b),
and except as provided in the preceding sentence, the Indemnified Party
will bear its own costs and expenses with respect to such participation.
(c) If the Indemnifying Party fails to notify the Indemnified Party
within the Notice Period that the Indemnifying Party (without any
equivocation) does not dispute its Liability to the Indemnified Party and
that the Indemnifying Party desires to defend the Indemnified Party with
respect to the Third Party Claim pursuant to this Article X, or if the
Indemnifying Party gives such notice but fails diligently and promptly to
prosecute or settle the Third Party Claim, or if the Indemnifying Party
fails to give any notice whatsoever within the Notice Period, then the
Indemnified Party will have the right to defend, at the sole cost and
expense of the Indemnifying Party, the Third Party Claim by all
appropriate proceedings, which proceedings will be promptly and
vigorously prosecuted by the Indemnified Party to a final conclusion or
will be settled at the discretion of the Indemnified Party (with the
consent of the Indemnifying Party, which consent will not be withheld
unreasonably). The Indemnified Party will have full control of such
defense and proceedings, including any compromise or settlement thereof;
provided, however, that if requested by the Indemnified Party, the
Indemnifying Party agrees, at the sole cost and expense of the
Indemnifying Party, to cooperate with the Indemnified Party and its
counsel in contesting any Third Party Claim which the Indemnified Party
is contesting, or, if appropriate and related to the Third Party Claim in
question, in making any counterclaim
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against the Person asserting the Third Party Claim, or any
cross-complaint against any Person (other than the Indemnifying Party or
any of its Affiliates). Notwithstanding the foregoing provisions of this
Section 10.3(c), if the Indemnifying Party has timely notified the
Indemnified Party that the Indemnifying Party disputes its Liability to
the Indemnified Party and if such dispute is resolved in favor of the
Indemnifying Party by final, nonappealable order of a court of competent
jurisdiction, the Indemnifying Party will not be required to bear the
costs and expenses of the Indemnified Party's defense pursuant to this
Section 10.3(c) or of the Indemnifying Party's participation therein at
the Indemnified Party's request, and the Indemnified Party will reimburse
the Indemnifying Party in full for all costs and expenses incurred by the
Indemnifying Party in connection with such litigation. The Indemnifying
Party may participate in, but not control, any defense or settlement
controlled by the Indemnified Party pursuant to this Section 10.3(c), and
the Indemnifying Party will bear its own costs and expenses with respect
to such participation.
(d) At the Closing, the Seller will provide the Purchaser with the
notice required by Section 10.3(b) or 10.3(c) hereof with respect to each
action, suit, investigation, or proceeding that is described in clause
(ii) or (iii) of Section 10.2(a) hereof and is in existence on the
Closing Date to which indemnification applies.
10.4 After-Tax Damages. With respect to the indemnification agreements
set forth in this Article X, the Seller and the Purchaser agree that:
(a) the amount of any Tax refund actually received, and the amount
of any Tax reduction actually realized by any of the Seller, the
Purchaser, or the Company after the Closing as a result of Damages
(including without limitation Taxes) for which any indemnification
payment has been made or is then due by the Seller pursuant to Section
10.1, 10.2(a) hereof will be promptly paid to the Seller or offset
against Damages then owed by the Seller hereunder; and
(b) the amount of any Tax refund actually received, and the amount
of any Tax reduction actually realized, by the Seller after the Closing
as a result of Damages for which any indemnification payment has been
made or is then due by the Purchaser pursuant to Section 10.2(b) hereof
will be promptly paid to the Purchaser or offset against Damages then
owed by the Purchaser hereunder.
10.5 Assignment of Indemnification. Each of the Purchaser and the Company
may assign its rights to indemnification under this Article X to any direct or
indirect transferee or transferees of all the Shares, and each such transferee
shall have the same rights to indemnification under this Article X as the
Purchaser and the Company.
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ARTICLE XI
WAIVER
11.1 Senior Debt of Seller. Heretofore, Purchaser acquired from Trustmark
National Bank of Jackson, Mississippi, the Senior Debt of Seller. Such Senior
Debt is governed by the provisions of a certain loan agreement (the "Loan
Agreement") dated the 3rd day of May, 1993, between Trustmark National Bank
and Seller.
(a) In a Letter of Intent between the Purchaser and Seller executed
on or about March 6, 1995, Purchaser extended the maturity of the
aforesaid Senior Debt until the Closing or ninety (90) days following the
notification by either party hereto to the other of the impossibility of
Closing according to the terms hereof. Subsequently, Purchaser waived
until the maturity of the Senior Debt the provisions of Section
4.01(v)(a) of the Loan Agreement.
(b) Purchaser, for the consideration herein stated, herein confirms
the extension of the maturity of the aforesaid Senior Debt as set forth
in the Letter of Intent and further agrees, for such consideration, that
the 90 day period in the Letter of Intent and as set forth in paragraph
11.1(a) above is amended to be 180 days. Further, Purchaser confirms the
waiver of Section 4.01(v)(a) of the Loan Agreement and agrees to waive,
until the maturity of the Senior Debt, Sections 4.01(b), (c),
4.02(a)(solely as related to Seller), (d)(solely as related to Seller),
and (f)(solely as related to Seller).
(c) At Closing, Purchaser agrees that Seller shall be excused and
relieved of its obligation to pay interest on the Senior Debt for a
period of one half month.
ARTICLE XII
TERMINATION
12.1 Termination. This Second Restated Agreement may be terminated, and
the transactions contemplated hereby may be abandoned, upon notice by the
terminating party to the other party:
(a) at any time before the Closing, by mutual written agreement of
the Seller and the Purchaser; or
(b) at any time by the Seller if any of the covenants set forth in
Article VI shall have been breached or any of the conditions set forth in
Article VIII hereof shall not have been satisfied, performed, or complied
with, in any material respect, at or before the Closing Date and such
breach, non-satisfaction, non-performance, or non-compliance has not been
cured or eliminated within thirty (30) calendar days after notice thereof
has been given to the Purchaser, provided that at the time of such
termination the Seller has neither breached
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any of the covenants set forth in Article V nor failed to satisfy,
perform, or comply with any of the conditions set forth in Article VII
hereof, in any material respect; or
(c) at any time by the Purchaser if any of the covenants set forth
in Article V shall have been breached or any of the conditions set forth
in Article VII hereof shall not have been satisfied, performed, or
complied with, in any material respect, before the Closing Date and such
breach, non-satisfaction, non-performance or non-compliance has not been
cured or eliminated within thirty (30) days after notice thereof has been
given to the Seller, or if the Disclosure Schedule is not delivered to
the Purchaser within five (5) days after the date hereof, or if the
Disclosure Schedule or other information provided to the Purchaser dis
closes any change in, or event, trend, condition or state of facts of any
character that individually or in the aggregate has or may reasonably be
expected to have a material adverse effect on the Business or Condition
of the Company and such change, event, trend, condition or state of facts
has not been cured or eliminated within ten (10) days after notice
thereof has been given to the Seller, provided that at the time of such
termination the Purchaser has neither breached any of the covenants set
forth in Article VI nor failed to satisfy, perform, or comply with any of
the conditions set forth in Article VIII hereof, in any material respect;
or
(d) at any time after October 6, 1995, by the Seller or the
Purchaser, if the transactions contemplated by this Second Restated
Agreement have not been consummated on or before such date and such
failure to consummate is not caused by a breach of this Second Restated
Agreement (or any representation, warranty, covenant, or agreement
included herein) by the party electing to terminate pursuant to this
clause (d).
12.2 Effect of Termination. If this Second Restated Agreement is validly
terminated pursuant to Section 12.1, this Second Restated Agreement will
forthwith become null and void, and there will be no Liability on the part of
the Seller or the Purchaser (or any of their respective officers, directors,
employees, agents, consultants, or other representatives), except that the
provisions relating to confidentiality in Section 13.6 will continue to apply
following any such termination; provided, however, that, notwithstanding
anything in this Section to the contrary, no party electing to terminate this
Second Restated Agreement pursuant to Section 12.1 will be relieved of any
Liability for Damages that the electing party may have to the other party by
reason of the electing party's breach of this Second Restated Agreement (or
any representation, warranty, covenant, or agreement included herein).
ARTICLE XIII
MISCELLANEOUS
13.1 Default and Arbitration. (a) Default. If Purchaser believes there
has been a default with respect to one or more of the representations,
warranties, covenants or agreements of Seller or the Company in this Second
Restated Agreement, Purchaser shall send notice to Seller of such alleged
default (which notice shall describe the nature of such default, provide
appropriate
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documentation (where available), and, where clearly determinable from the
nature of the default, the amount of the related claim (including any
consequential or incidental damages) (a "Default Notice"). Thereupon, the
parties shall in good faith attempt to informally resolve such default and
agree upon the amount of such claim.
(b) Arbitration. In the event that the parties are unable to
informally resolve a matter which is the subject of a Default Notice under
this Section 13.1 within 45 days after receipt of the notice, either party,
upon written notice to the other, may elect to submit the matter to
arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association then in effect, except as otherwise provided
herein.
Arbitration shall be before a panel of three (3) neutral
arbitrators expert in the life insurance business. Within ten (10) days of
receipt of notice of an election of arbitration, each party shall select an
arbitrator and notify the other of such party's selection. Within ten (10)
days thereafter, the two arbitrators shall select a third arbitrator. If they
fail to select a third arbitrator, then the third arbitrator shall be
designated by the American Arbitration Association.
All Default Notice matters subject to arbitration under this
Section 13.1 shall take place in Indianapolis, Indiana. All awards shall be
made on the majority vote of the arbitrators. The non-prevailing party shall
pay all fees and expenses of such arbitration, as well as the reasonably and
actually incurred attorneys' fees of the prevailing party. If there is no
clear prevailing party, the arbitrators may award fees and expenses as they
deem just.
The award in the arbitration shall be final and binding on the
parties, and judgment may be entered in any court having competent
jurisdiction.
13.2 Notices. All notices and other communications under this Second
Restated Agreement must be in writing and will be deemed to have been duly
given if delivered, telecopied or mailed, by certified mail, return receipt
requested, first class postage prepaid, to the parties at the following
addresses:
If to the Seller, to:
Dixie National Corporation
3760 I-55 North
Jackson, Mississippi 39211
Attention: Robert B. Neal
Telecopy: (601)981-8076
With a copy to:
Wells, Moore Simmons & Neeld
1300 Deposit Guaranty Plaza
Jackson, Mississippi 39215-1970
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Attention: James H. Neeld, III, Esq.
Telecopy: (601)355-5850
If to the Purchaser, to:
Standard Life Insurance Company of Indiana
9100 Keystone Crossing, #600
Indianapolis, Indiana 46240
Attention: Edward T. Stahl, Executive Vice President
Telecopy: (317)574-6227
With a copy to:
Brunini, Grantham, Grower & Hewes, P.L.L.C.
1400 Trustmark Building
248 E. Capitol Street
Jackson, Mississippi 39201
Attention: Robert D. Drinkwater, Esq.
Telecopy: (601)960-6902
All notices and other communications required or permitted under this Second
Restated Agreement that are addressed as provided in this Article XII will, if
delivered personally, be deemed given upon delivery, will, if delivered by
telecopy, be deemed delivered when confirmed and will, if delivered by mail in
the manner described above, be deemed given on the third Business Day after
the day it is deposited in a regular depository of the United States mail. Any
party from time to time may change its address for the purpose of notices to
that party by giving a similar notice specifying a new address, but no such
notice will be deemed to have been given until it is actually received by the
party sought to be charged with the contents thereof.
13.3 Entire Agreement. Except for documents executed by the Seller and
the Purchaser pursuant hereto, this Second Restated Agreement supersedes all
prior discussions and agreements between the parties with respect to the
subject matter of this Second Restated Agreement, and this Second Restated
Agreement (including the exhibits thereto, the Disclosure Schedule, and other
Contracts and documents delivered in connection herewith) contains the sole
and entire agreement between the parties hereto with respect to the subject
matter hereof.
13.4 Expenses. Except as otherwise expressly provided in this Second
Restated Agreement (including, without limitation, as provided in Article X
and Section 12.2), each of the Seller and the Purchaser will pay its own costs
and expenses in connection with this Second Restated Agreement and the
transactions contemplated hereby.
13.5 Public Announcements. At all times at or before the Closing, the
Seller and the Purchaser will each consult with the other before issuing or
making any reports, statements, or releases to the public with respect to this
Second Restated Agreement or the transactions
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contemplated hereby and will use good faith efforts to agree on the text of a
joint public report, statement, or release or will use good faith efforts to
obtain the other party's approval of the text of any public report, statement,
or release to be made solely on behalf of a party. If the Seller and the
Purchaser are unable to agree on or approve any such public report, statement,
or release and such report, statement, or release is, in the opinion of legal
counsel to a party, required by Law or may be appropriate in order to
discharge such party's disclosure obligations, then such party may make or
issue the legally required report, statement, or release. Any such report,
statement, or release approved or permitted to be made pursuant to this
Section may be disclosed or otherwise provided by the Seller or the Purchaser
to any Person, including without limitation to any employee or customer of
either party hereto and to any governmental or regulatory authority.
13.6 Confidentiality. Each of the Seller and the Purchaser will hold, and
will cause its respective officers, directors, employees, agents, consultants,
and other representatives to hold, in strict confidence, unless compelled to
disclose by judicial or administrative process (including, without limitation,
in connection with obtaining the necessary approval of insurance regulatory
authorities) or by other requirements of Law, all confidential documents and
confidential information concerning the other party furnished to it by the
other party or such other party's officers, directors, employees, agents,
consultants, or representatives in connection with this Second Restated
Agreement or the transactions contemplated hereby, except to the extent that
such documents or information can be shown to have been (a) previously
lawfully known by the party receiving such documents or information, (b) in
the public domain through no fault of such receiving party, or (c) later
acquired by the receiving party from other sources not themselves bound by,
and in breach of, a confidentiality agreement. Neither the Seller nor the
Purchaser will disclose or otherwise provide any such confidential documents
or confidential information to any other Person, except to the Purchaser's
lenders and investors and to either party's respective auditors, actuaries,
attorneys, financial advisors, and other consultants and advisors who need
such documents or information in connection with this Second Restated
Agreement and except as required by the provisions of Sections 5.1 and 6.1.
13.7 Further Assurances. The Seller and the Purchaser agree that, from
time to time after the Closing, upon the reasonable request of the other, they
will cooperate and will cause their respective Affiliates to cooperate with
each other to effect the orderly transition of the business, operations, and
affairs of the Company. Without limiting the generality of the foregoing, the
Seller will give and will cause its Affiliates to give representatives of the
Purchaser reasonable access to all Books and Records of the Seller and its
Affiliates reasonably requested by the Purchaser in the preparation of any
post-Closing financial statements, reports, or Tax Returns.
13.8 Waiver. Any term or condition of this Second Restated Agreement may
be waived at any time by the party that is entitled to the benefit thereof.
Such waiver must be in writing and must be executed by the chief executive
officer or the chief operating officer of such party. A waiver on one occasion
will not be deemed to be a waiver of the same or any other breach on a future
occasion. All remedies, either under this Second Restated Agreement, or by Law
or otherwise afforded, will be cumulative and not alternative.
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13.9 Amendment. This Second Restated Agreement may be modified or amended
only by a writing duly executed by or on behalf of the Seller and the
Purchaser.
13.10 Counterparts. This Second Restated Agreement may be executed
simultaneously in any number of counterparts, each of which will be deemed an
original, but all of which will constitute one and the same instrument.
13.11 No Third Party Beneficiary. The terms and provisions of this Second
Restated Agreement are intended solely for the benefit of the Seller and the
Purchaser, and their respective successors or assigns, and it is not the
intention of the parties to confer third-party beneficiary rights upon any
other Person.
13.12 Governing Law. THIS SECOND RESTATED AGREEMENT WILL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF INDIANA (EXCLUSIVE
OF CONFLICTS OF LAW PRINCIPLES) AND WILL, TO THE MAXIMUM EXTENT PRACTICABLE,
BE DEEMED TO CALL FOR PERFORMANCE IN MARION COUNTY, INDIANA. COURTS WITHIN THE
STATE OF INDIANA SHALL HAVE JURISDICTION OVER ANY AND ALL DISPUTES BETWEEN THE
PARTIES HERETO, WHETHER IN LAW OR EQUITY, INCLUDING, WITHOUT LIMITATION, ANY
AND ALL DISPUTES ARISING OUT OF OR RELATING TO THIS SECOND RESTATED AGREEMENT.
THE PARTIES HEREBY CONSENT TO AND AGREE TO SUBMIT TO THE JURISDICTION OF SUCH
COURTS. VENUE IN ANY SUCH DISPUTE WHETHER IN FEDERAL OR STATE COURT SHALL BE
LAID IN MARION COUNTY, INDIANA.
13.13 Binding Effect. This Second Restated Agreement is binding upon and
will inure to the benefit of the parties and their respective successors and
assigns.
13.14 Assignment. Except as otherwise provided herein (including, without
limitation, as provided in Section 10.6), this Second Restated Agreement or
any right hereunder or part hereof may not be assigned by any party hereto
without the prior written consent of the other party hereto.
13.15 Headings, etc. The headings used in this Second Restated Agreement
have been inserted for convenience and do not constitute matter to be
construed or interpreted in connection with this Second Restated Agreement.
13.16 Invalid Provisions. If any provision of this Second Restated
Agreement is held to be illegal, invalid, or unenforceable under any present
or future Law, and if the rights or obligations of the Seller or the Purchaser
under this Second Restated Agreement will not be materi ally and adversely
affected thereby; (a) such provision will be fully severable; (b) this Second
Restated Agreement will be construed and enforced as if such illegal, invalid,
or unenforceable provision had never comprised a party hereof; (c) the
remaining provisions of this Second Restated Agreement will remain in full
force and effect and will not be affected by the illegal, invalid, or
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unenforceable provision or by its severance herefrom; and (d) in lieu of such
illegal, invalid, or unenforceable provision, there will be added
automatically as a part of this Second Restated Agreement a legal, valid, and
enforceable provision as similar in terms to such illegal, invalid, or
unenforceable provision as may be possible.
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IN WITNESS WHEREOF, this Second Restated Agreement has been duly executed
and delivered by the parties hereto, effective as of the date first written
above.
DIXIE NATIONAL CORPORATION
By:/s/ S. L. Reed, Jr.
----------------------
Name: S. L. Reed, Jr.
Title: Chairman and CEO
DIXIE NATIONAL LIFE INSURANCE COMPANY
By:/s/ Robert B. Neal
-----------------------
Name: Robert B. Neal
Title: Chairman and CEO
STANDARD LIFE INSURANCE COMPANY OF
INDIANA
By:/s/ Ronald D. Hunter
------------------------
Name: Ronald D. Hunter
Title: Chairman and CEO
49
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EXHIBIT A
DEFINITION OF TERMS
"Affiliate" shall mean any Person that directly, or indirectly through
one or more intermediaries, controls, is controlled by, or is under common
control with the Person specified.
"Agreement" shall mean this Second Restated Stock Purchase Agreement,
together with the exhibits and the Disclosure Schedule attached hereto, and
the Contracts and other documents to be executed and delivered respectively by
Seller and Company pursuant hereto.
"Annual Statement" shall mean any annual statement of the Company filed
with or submitted to the insurance regulatory authority in the State of
Mississippi on forms prescribed or permitted by such authority.
"Assets and Properties" shall mean all assets or properties of every
kind, nature, character, and description (whether real, personal, or mixed
whether tangible or intangible, whether absolute, accrued, contingent, fixed,
or otherwise, and wherever situated) as now operated, owned, or leased by a
specified Person, including without limitation cash, cash equivalents,
securities, accounts and notes receivable, real estate, equipment, furniture,
fixtures, insurance or annuities in force, goodwill, and going-concern value.
"AVR" shall mean the asset valuation reserve required to be established
and maintained by the Company at any particular date, calculated in accordance
with SAP.
"Benefit Plans" shall mean all Employee Pension Benefit Plans, all
Employee Welfare Benefit Plans, all stock bonus, stock ownership, stock
option, stock purchase, stock appreciation rights, phantom stock, and other
stock plans (whether qualified or nonqualified), and all other pension,
welfare, severance, retirement, bonus, deferred compensation, incentive
compensation, insurance (whether life, accident and health, or other and
whether key man, group, workers compensation, or other), profit sharing,
disability, thrift, day care, legal services, leave of absence, layoff, and
supplemental or excess benefit plans, and all other benefit Contracts,
arrangements, or procedures having the effect of a plan, in each case existing
on or before the Closing Date under which the Company is or may hereafter
become obligated in any manner (including without limitation obligations to
make contributions or other payments) and which cover some or all of the
present or former
A-1
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officers, directors, employees, agents, consultants, or other similar
representatives providing services to or for the Company; provided, however,
that such term shall not include (a) routine employment policies and
procedures developed and applied in the ordinary course of business and
consistent with past practice, including without limitation sick leave,
vacation, and holiday policies, and (b) directors and officers liability
insurance.
"Books and Records" shall mean all accounting, financial reporting, Tax,
business, marketing, corporate, and other files, documents, instruments,
papers, books, and records of a specified Person, including without limitation
financial statements, budgets, projections, ledgers, journals, deeds, titles,
policies, manuals, minute books, stock certificates and books, stock transfer
ledgers, Contracts, franchises, permits, agency lists, policyholder lists,
supplier lists, reports, computer files, retrieval programs, operating data or
plans, and environmental studies or plans.
"Business Day" shall mean a day other than Saturday, Sunday, or any day
on which the principal commercial banks located in the City of Indianapolis
are authorized or obligated to close under the Laws of the State of Indiana.
"Business or Condition" shall mean the organization, existence,
authority, capitalization, business, licenses, condition (financial or
otherwise), cash flow, management, sales force, solvency, prospects, SAP
results of operations, insurance or annuities in force, SAP capital and
surplus, MSVR, Liabilities, or Assets and Properties of a specified Person.
"Claim Notice" shall mean written notification of a Third Party Claim by
and Indemnified Party to an Indemnifying Party pursuant to Section 10.3(a),
enclosing a copy of all papers served, if any.
"Closing" shall mean the closing of the transactions contemplated by this
Agreement as provided in Section 2.4.
"Closing Adjusted Capital and Surplus" shall have the meaning ascribed to
in Section 2.3 hereof.
"Closing Date" shall mean the earlier of (a) the fifth Business Day next
following the satisfaction to all conditions to Seller's and Purchaser's
obligations, or (b) such other date as the Purchaser and Seller may mutually
agree upon in writing.
"Code" shall mean the Internal Revenue Code of 1986, as amended
(including without limitation any successor code), and the rules and
regulations promulgated thereunder.
"Common Stock" shall have the meaning ascribed to it in the preamble of
this Agreement.
A-2
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"Damages" shall mean any and all monetary damages, Liabilities, fines,
fees, penalties, interest obligations, deficiencies, losses, and expenses
(including without limitation punitive, treble, or other exemplary or extra
contractual damages, amounts paid in settlement, interest, court costs, costs
of investigation, fees and expenses of attorneys, accountants, actuaries, and
other experts, and other expenses of litigation or of any claim, default, or
assessment).
"Dixie Convertible Subordinated Notes" shall mean the outstanding
subordinated convertible notes dated May 1, 1993, issued by Seller.
"Disclosure Schedule" shall mean the bound record dated the effective
date of this Agreement, furnished by Seller to the Purchaser, and containing
all lists, descriptions, exceptions, and other information and materials as
are required to be included therein pursuant to this Agreement.
"Employee Pension Benefit Plan" shall mean each employee pension benefit
plan (whether or not insured), as defined in Section 3(2) of ERISA, which is
or was in existence on or before the Closing Date and to which the Company is
or may hereafter become obligated in any manner as an employer.
"Employee Welfare Benefit Plan" shall mean each employee welfare benefit
plan (whether or not insured), as defined in Section 3(1) of ERISA, which is
or was in existence on or before the Closing Date and to which the Company is
or may hereafter become obligated in any manner as an employer.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended (including without limitation any successor act), and the rules and
regulations promulgated thereunder.
"ERISA Affiliate" shall mean any Person under common control (as defined
in Section 414 of the Code) with the Company.
"GAAP" shall mean generally accepted accounting principles, consistently
applied throughout the specified period and in the immediately prior
comparable period.
"IMR" shall mean the interest maintenance reserve required to be
established and maintained by the Company at any particular date, calculated
in accordance with SAP.
"Indemnified Party" shall mean a Person claiming indemnification under
this Agreement.
"Indemnifying Party" shall mean a Person against whom claims of
indemnification are being asserted under this Agreement.
A-3
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"IRS" shall mean the United States Internal Revenue Service or any
successor agency.
"Laws" shall mean all laws, statutes, ordinances, regulations, and other
pronouncements having the effect of law in the United States of America, any
foreign country, or any domestic or foreign state, province, commonwealth,
city, country, municipality, territory, protectorate, possession, court,
tribunal, agency, government, department, commission, arbitrator, board,
bureau, or instrumentality thereof.
"Liabilities" shall mean all debts, obligations, and other liabilities of
a Person (whether absolute, accrued, contingent, fixed, or otherwise, or
whether due or to become due).
"Lien" shall mean any mortgage, pledge, assessment, security interest,
lease, sublease, lien, adverse claim, levy, charge, or other encumbrance of
any kind, or any conditional sale Contract, title retention Contract, or other
Contract to give or to refrain from giving any of the foregoing.
"Market Value" shall mean the value at which any Assets or Properties of
the Company would be sold in an arm's length transaction between a willing
seller and a willing purchaser, neither of whom was under any obligation to
sell or purchase such Assets or Properties. The Market Value of securities for
which quotes are available in The Wall Street Journal shall be determined by
reference to the Closing Bid price for such Assets and Properties as quoted in
the final edition of the Wall Street Journal on the Closing Date; and for
securities for which a quoted price is not available, by a securities firm of
recognized national standing mutually acceptable to the parties. In the event
the parties cannot agree upon the Market Value of any specific Assets or
Properties of the Company, such Assets and Properties shall be sold within
five (5) Business Days after the Closing Date, and the Market Value shall be
the amount realized upon the sale of such Assets and Properties.
"Non-Admitted Assets" shall mean any assets of the Company required to be
reported as "assets not admitted" on Exhibit 13 of any Annual Statement or
Quarterly Statement filed by the Company.
"Notice Period" shall have the meaning ascribed to it in Section 10.3(a).
"PBGC" shall mean the Pension Benefit Guaranty Corporation established
under ERISA.
"Prime Rate" shall mean the prime commercial interest rate as quoted by
Trustmark National Bank at its main offices as its prime rate as of the date
the principal liability accrued.
"Purchaser" shall have the meaning ascribed to it in the preamble of this
Agreement.
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"Quarterly Statement" shall mean any quarterly statement of the Company
filed with or submitted to the insurance regulatory authority in the State of
Mississippi on forms prescribed or permitted by such authority.
"SAP" shall mean the accounting practices required or permitted by the
National Association of Insurance Commissioners and the insurance regulatory
authority in the State of Mississippi, consistently applied throughout the
specified period and in the immediately prior comparable period.
"SAP Statements" shall mean the Annual Statements, Quarterly Statements,
and other financial statements and presentations of the Company prepared in
accordance with SAP and delivered to the Purchaser pursuant to this Agreement.
"Seller" shall have the meaning ascribed to it in the preamble of this
Agreement and shall include the Company, unless the context otherwise
requires.
"Senior Debt" shall mean that certain promissory note of Seller in favor
of Trustmark National Bank dated May 3, 1993 in the principal amount of Three
Million Six Hundred Eighty-Eight Thousand Seven Hundred Forty-Six Dollars and
34/100 ($3,688,746.34), which was sold to Purchaser on November 7, 1994.
"Shares" shall have the meaning ascribed to it in the preamble of this
Agreement.
"SMC" shall mean Standard Management Corporation.
"Taxes" shall mean all taxes, charges, fees, levies, or other similar
assessments or Liabilities, including without limitation income, gross
receipts, ad valorem, premium, excise, real property, personal property,
windfall profit, sales, use, transfer, licensing, withholding, employment,
payroll, Phase III, and franchise taxes imposed by the United States of
America or any state, local, or foreign government, or any subdivision agency,
or other similar Person of the United States or any such government; and such
term shall include any interest, fines, penalties, assessments, or additions
to tax resulting from, attributable to, or incurred in connection with any
such tax or any contest or dispute thereof.
"Tax Claim" shall have the meaning ascribed to it in Section 10.1(b).
"Tax Returns" shall mean any report, return, or other information
required to be supplied to a taxing authority in connection with Taxes.
"Third Party Claim" shall have the meaning ascribed to it in Section
10.3(a).
"Work Papers" shall mean all summaries, calculations, compilations and
similar written documentation derived from the accounts of the Company and
used or prepared by accountants in the process of computing Adjusted Capital
and Surplus.
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EXHIBIT B
[NOT USED]
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EXHIBIT C
FORM OF CERTIFICATE OF OFFICER OF SELLER
At the Closing, the Seller shall deliver to the Purchaser a certificate,
dated the Closing Date, executed by the Chief Executive Officer or Chief
Financial Officer of the Seller, to the following effect:
Pursuant to the provisions of Section 7.3 of that certain Second Restated
Stock Purchase Agreement dated August 30, 1995, but effective as of April 18,
1995 (the "Agreement") by and among Dixie National Corporation (the "Seller"),
Dixie National Life Insurance Company (the "Company") and Standard Life
Insurance Company of Indiana (the "Purchaser"), and relating to the purchase
and sale of 1,489,904 shares of the common capital stock of the Company (the
"Stock") by the Seller to the Purchaser, I, the undersigned [Chief Executive
Officer/Chief Financial Officer] of the Seller do hereby certify to the
Purchaser as follows:
1. That I am the duly elected [Chief Executive Officer/Chief Financial
Officer] of the Seller, and in that capacity have the requisite power and
authority to execute and deliver this certificate on behalf of the Seller and,
as appropriate, the Company;
2. That the representations and warranties of the Seller and the Company
made in connection with the Agreement and contained in Article III thereof and
in the Disclosure Schedule attached to the Agreement and the certifications
given pursuant to Section 5.5(c) of the Agreement are true and correct as of
the date of this certificate as though made by the Seller and the Company on
and as of the date, whether or not they were untrue or incorrect prior to such
date;
3. That the Seller and the Company have each performed and complied with
all agreements, covenants, obligations and conditions required by the
Agreement to be so performed or complied with by the Seller and/or the Company
at or before the Closing, including those specifically referred to in Articles
V and VII of the Agreement; and
4. That all of the conditions to the obligations of the Purchaser to
purchase the Stock from the Seller set forth in Article VII of the Agreement
have fulfilled.
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EXHIBIT D
FORM OF SELLER'S COUNSEL'S OPINION
At the Closing, Seller shall deliver to Purchaser the opinion of its
counsel, Wells, Moore Simmons & Neeld, to the following effect:
1. The Seller is a corporation duly organized, validly existing and in
good standing under the laws of the State of Mississippi and has full
corporate power and authority to enter into the Agreement and perform its
obligations thereunder.
2. The Company is an insurance company duly organized, validly existing
and in good standing under the laws of the State of Mississippi, and is duly
licensed, qualified or admitted to do business and is in good standing in all
jurisdictions listed on Section 3.1 of the Disclosure Schedule, and has full
corporate power and authority to enter into the Agreement and perform its
obligations thereunder.
3. The execution and delivery of the Agreement by the Seller and the
Company and the performance of their respective obligations thereunder have
been duly and validly authorized by all necessary corporate action on the part
of the Seller and the Company, and the Agreement constitutes the legal, valid
and binding obligation of the Seller and the Company and is enforceable
against each of them in accordance with its terms, except to the extent that
(a) enforcement may be limited by or subject to any bankruptcy, insolvency,
reorganization, moratorium or other similar Laws now or hereafter in effect
relating to or limiting creditors' rights generally and (b) the remedy of
specific performance and injunctive and other forms of equitable relief are
subject to certain equitable defenses and to the discretion of the court or
other Person before which any such proceeding therefor may be brought.
4. The authorized capital stock of the Company is as set forth in Section
3.3 of the Agreement; all of such shares are validly issued and outstanding,
fully paid and nonassessable, and 1,489,904 of such shares are owned
beneficially and of record by the Seller, free and clear of all Liens, except
as may be disclosed in Section 3.3 of the Disclosure Schedule; and there are
no securities, obligations, rights, subscriptions, warrants, options, charter
or founders insurance policies, phantom stock rights, or Contracts of any kind
of the Company which are subject of any rights or options of the nature
described in Section 3.3 of the Agreement.
5. The execution and delivery of the Agreement by the Seller and the
Company does not, and the performance by the Seller and the Company of their
respective obligations under the agreement will not, subject to obtaining the
approvals contemplated by Sections 5.1 and 6.1 of the Agreement, (a) violate
any term or provisions of any Law or any writ, judgment, decree, injunction or
similar order applicable to the Seller or the Company; (b)
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conflict with or result in a violation or breach of, or constitute (with or
without notice or lapse of time or both) a default under, any of the terms,
conditions, or provisions of the articles or certificate of incorporation or
Bylaws of the Seller or the Company; (c) result in the creation or imposition
of any Lien upon the Seller, the Company, or any of their respective Assets
and Properties that individually or in the aggregate with any other Liens has
or may reasonably be expected to have a material adverse effect on the
validity or enforceability of the Agreement, on the ability of the Seller or
the Company to perform their respective obligations under the Agreement, or on
the Business or Condition of the Seller or the Company; of (d) conflict with
or result in a violation or breach of, or constitute (with or without notice
or lapse of time or both) a default under, or give to any Person any right of
termination, cancellation, acceleration, or modification in or with respect
to, any Contract to which the Seller or the Company is a party or by which any
of their respective Assets or Properties may be bound and as to which any such
conflicts, violations, breaches, defaults or rights individually or in the
aggregate have or may reasonably be expected to have a material adverse effect
on the validity or enforceability of the Agreement, on the ability of the
Seller or the Company to perform its respective obligations under the
Agreement, or on the Business or Condition of the Seller or the Company.
6. Any consent, approval, order or authorization of, or any waiting
period imposed by any regulatory authority under federal or state law,
including the laws of the State of Mississippi and the State of Indiana, which
require the Seller or the Company to obtain any consent, approval, or action
of, or make any filing with or give any notice to, any person except those
which the failure to obtain, make, or give individually or in the aggregate
with any other such failures has or may reasonably be expected to have no
material adverse effect on the validity or enforceability of the Agreement, or
in the Business or Condition of the Seller or the Company, in connection with
the execution and delivery of the Agreement and the performance by the Seller
and the Company of their respective obligations under the Agreement has been
obtained or, in the case of any such waiting period, has expired.
7. To such counsel's actual knowledge, except as disclosed in Section
3.13 of the Disclosure Schedule: (a) there are no actions, suits
investigations or proceedings pending or threatened against the Seller or the
Company or any of their respective Assets and properties, at law or in equity,
in, before, or by any Person that individually or in the aggregate have or may
reasonably be expected to have a material adverse effect on the validity or
enforceability of the Agreement, on the ability of the Seller or the Company
to perform their respective obligations under the Agreement, or on the
Business or Condition of the Seller or the Company; and (b) there are no
writs, judgments, decrees or similar orders of any Person restraining,
enjoining or otherwise preventing consummation of the transactions
contemplated by the Agreement.
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EXHIBIT E
FORM OF CERTIFICATE OF OFFICER OF PURCHASER
At the Closing, the Purchaser shall deliver to the Seller a certificate,
dated the Closing Date, executed by the Chief Executive Officer or Chief
Financial Officer of the Purchaser, to the following effect:
Pursuant to the provisions of Section 8.3 of that certain Second Restated
Stock Purchase Agreement dated August 30, 1995, but effective as of April 18,
1995 (the "Agreement") by and among Dixie National Corporation (the "Seller"),
Dixie National Life Insurance Company (the "Company") and Standard Life
Insurance Company of Indiana (the "Purchaser"), and relating to the purchase
and sale of 1,489,904 shares of the common capital stock of the Company (the
"Stock") by the Seller to the Purchaser, I, the undersigned [Chief Executive
Officer/Chief Financial Officer] of the Purchaser do hereby certify to the
Seller as follows:
1. That I am the duly elected [Chief Executive Officer/Chief Financial
Officer] of the Purchaser, and in that capacity have the requisite power and
authority to execute and deliver this certificate on behalf of the Purchaser;
2. That the representations and warranties of the Purchaser in connection
with the Agreement and contained in Article IV thereof are true and correct as
of the date of this certificate as though made by the Purchaser on and as of
the date, whether or not they were untrue or incorrect prior to such date;
3. That the Purchaser has performed and complied with all agreements,
covenants, obligations and conditions required by the Agreement to be so
performed or complied with by the Purchaser at or before the Closing,
including those specifically referred to in Articles VI and VIII of the
Agreement; and
4. That all of the conditions to the obligations of Seller to sell the
Stock to the Purchaser set forth in Article VIII of the Agreement have been
fulfilled.
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EXHIBIT F
FORM OF PURCHASER'S COUNSEL'S OPINION
At the Closing, Purchaser shall deliver to Seller the opinion of its
counsel, Brunini, Grantham, Grower and Hewes, P.L.L.C., to the following
effect:
1. The Purchaser is a life insurance company duly organized, validly
existing and in good standing under the laws of the State of Indiana and has
full corporate power and authority to enter into the Agreement and perform its
obligations thereunder.
2. The execution and delivery of the Agreement by the Purchaser and the
performance of its obligations thereunder have been duly and validly
authorized by all necessary corporate action on the part of the Purchaser, and
the Agreement constitutes the legal, valid, and binding obligation of the
Purchaser and is enforceable against the Purchaser in accordance with the
terms, except to the extent that (a) enforcement may be limited by or subject
to any bankruptcy, insolvency, reorganization, moratorium, or similar Laws now
or hereafter in effect relating to or limiting creditors' rights generally and
(b) the remedy of specific performance and injunctive and other forms of
equitable relief are subject to certain equitable defenses and to the
discretion of the court or other similar Person before which any such
proceeding therefor may be brought.
3. The execution and delivery of the Agreement by the Purchaser does not,
and the performance by the Purchaser of its obligations under the Agreement
will not, subject to obtaining the approvals contemplated by Sections 5.1 and
6.1 of the Agreement, (a) violate any term or provisions of any Law or any
writ, judgment, decree, injunction or similar order applicable to the
Purchaser; (b) conflict with or result in a violation or breach of, or
constitute (with or without notice or lapse of time or both) a default under,
any of the terms, conditions, or provisions of the articles or certificate of
incorporation or Bylaws of the Purchaser; (c) result in the creation or
imposition of any Lien upon the Purchaser or any of its Assets and Properties
that individually or in the aggregate with any other Liens has or may
reasonably be expected to have a material adverse effect on the validity or
enforceability of the Agreement or on the ability of the Purchaser to perform
its obligations thereunder; or (d) conflict with or result in a violation or
breach of, or constitute (with or without notice or lapse of time or both) a
default under, or give any Person any right of termination, cancellation,
acceleration, or modification in or with respect to, any Contract to which the
purchaser is a party or by which any of its Assets or Properties may be bound
and as to which any such conflicts, violations, breaches, defaults or rights
individually or in the aggregate have or may reasonably be expected to have a
material adverse effect on the validity or enforceability of the Agreement or
on the ability of the Purchaser to perform its obligations under the
Agreement.
F-1
<PAGE>
4. Any consent, approval, order or authorization of, or any waiting
period imposed by any regulatory authority under federal or state law,
including the laws of the State of Mississippi and the State of Indiana, which
require the Purchaser to obtain any consent, approval or action of, or make
any filing with or give any notice to, any Person except those which the
failure to obtain, make, or give individually or in the aggregate with any
other such failures has or may be expected to have no material adverse effect
on the validity or enforceability of the Agreement or on the ability of the
Purchaser to perform its obligations thereunder in connection with the
execution and delivery of the Agreement and the performance by the Purchaser
of its obligations thereunder has been obtained or, in the case of any such
waiting period, has expired.
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APPENDIX B
ARTICLE 13 OF MISSISSIPPI
BUSINESS CORPORATION ACT
Section 79-4-13.01. Definitions
In this article:
(1) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring
corporation by merger or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under Section 79-4-13.02 and who exercises that
right when and in the manner required by Sections 79-04-13.20
through 79-4-13.28.
(3) "Fair value," with respect to a dissenter's shares, means the
value of the shares immediately before the effectuation of the
corporate action to which the dissenter objects, excluding any
appreciation or depreciation in anticipation of the corporate action
unless exclusion would be inequitable.
(4) "Interest" means interest from the effective date of the
corporate action until the date of payment, at the average rate
currently paid by the corporation on its principal bank loans, or if
none, at a rate that is fair and equitable under all the
circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner
of shares to the extent of the rights granted by a nominee
certificate on file with a corporation.
(6) "Beneficial shareholder" means the person who is a beneficial
owner of shares held in a voting trust or by a nominee as the record
shareholder.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
Section 79-4-13.02. Right to dissent.
(a) A shareholder is entitled to dissent from, and obtain payment of the fair
value of his shares in the event of, any of the following corporate actions:
(1) Consummation of a plan of merger to which the corporation is a
party (i) if shareholder approval is required for the merger by
Section 79-4-11.03 of the articles of incorporation and the
shareholder is entitled to vote on the merger, or (ii) if the
corporation is a subsidiary that is merged with its parent under
Section 79-4-11.04;
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(2) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be
acquired, if the shareholder is entitled to vote on the plan;
(3) Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than in the usual and
regular course of business, if the share holder is entitled to vote
on the sale or exchange, including a sale in dissolution, but not
including a sale pursuant to court order or a sale for cash pursuant
to a plan by which all or substantially all of the net proceeds of
the sale will be distributed to the shareholders within one (1) year
after the date of sale;
(4) An amendment of the articles of incorporation that materially
and adversely affects rights in respect of a dissenter's shares
because it:
(i) Alters or abolishes a preferential right of the
shares;
(ii) Creates, alters or abolishes a right in respect of
redemption, including a provision respecting a sinking
fund for the redemption or repurchase, of the shares;
(iii) Alters or abolishes a preemptive right of the holder
of the shares to acquire shares or other securities;
(iv) Excludes or limits the rights of the shares to vote
on any matter, or to cumulate votes, other than a
limitation by dilution through issuance of shares or other
securities with similar voting rights; or
(v) Reduces the number of shares owned by the shareholder
to a fraction of a share if the fraction share so created
is to be acquired for cash under Section 79-4-6.04; or
(5) Any corporate action taken pursuant to s a shareholder vote to
the extent the articles of incorporation, by laws or a resolution of
the board of directors provides that voting or nonvoting
shareholders are entitled to dissent and obtain payment for their
shares.
(b) Nothing in subsection (a)(4) shall entitle a shareholder of a corporation
to dissent and obtain payment of his shares as a result of an amendment of the
articles of incorporation exclusively for the purpose of either (i) making
such corporation subject to application of the Mississippi Control Share Act,
or (ii) making such act inapplicable to a control share acquisition of such
corporation.
(c) A shareholder entitled to dissent and obtain payment for his shares under
this article may not challenge the corporate action creating his entitlement
unless the action is unlawful or fraudulent with respect to the shareholder of
the corporation.
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Section 79-4-13.03. Dissent by nominees and beneficial owners.
(a) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his name only if he dissents with respect to all
shares beneficially owned by any one person and notifies the corporation in
writing of the name and address of each person on whose behalf he asserts
dissenters' rights. The rights of a partial dissenter under this subsection
are determined as if the shares as to which he dissents and his other shares
were registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares held
on his behalf only if:
(1) He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial
shareholder asserts dissenters' rights; and
(2) He does so with respect to all shares of which he is the
beneficial shareholder or over which he has power to direct the
vote.
Section 79-4-13.20. Notice of dissenters' rights.
(a) If proposed corporate action creating dissenters' rights under Section
79-4-13.02 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert
dissenters' rights under this article and be accompanied by a copy of this
article.
(b) If corporate action creating dissenters' rights under Section 79-4-13.02
is taken without a vote or shareholders, the corporation shall notify in
writing all shareholders entitled to assert dissenters' rights that the action
was taken and send them the dissenters' notice described in Section
79-4-13.22.
Section 79-4-13.21. Notice of intent to demand payment.
(a) If proposed corporate action creating dissenters' rights under Section
79-4-13.02 is submitted to a vote at a shareholders' meeting, a shareholder
who wishes to assert dissenters' rights (1) must deliver to the corporation
before the vote is taken written notice of his intent to demand payment for
his shares if the proposed action is effectuated, and (2) must not vote his
shares in favor of the proposed action.
(b) A shareholder who does not satisfy the requirement of subsection (a) is
not entitled to payment for his shares under this article.
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Section 79-4-13.22 Dissenters' notice.
(a) If proposed corporate action creating dissenters' rights under Section
79-4-13.02 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of Section 79-4-13.21.
(b) The dissenters' notice must be sent no later than ten (10) days after the
corporate action was taken, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer
of the shares will be restricted after the payment demand is
received;
(3) Supply a form for demanding payment that includes the date of
the first announcement to news media or to shareholders of the terms
of the proposed corporate action and required that the person
asserting dissenters' rights certify whether or not he acquired
beneficial ownership of the shares before that date;
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty (30) nor more than
sixty (60) days after the date the subsection (a) notice is
delivered; and
(5) Be accompanied by a copy of this article.
Section 79-4-13.23. Duty to demand payment.
(a) A shareholder sent a dissenters' notice described in Section 79-4-13.22
must demand payment, certify whether he acquired beneficial ownership of the
shares before the date required to be set forth in the dissenter's notice
pursuant to Section 79-4-13.22(b)(3), and deposit his certificates in
accordance with the terms of the notice.
(b) The shareholder who demands payment and deposits his shares under
subsection (a) retains all other rights of a shareholder until these rights
are canceled or modified by the taking of the proposed corporate action.
(c) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice,
is not entitled to payment of his shares under this article.
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Section 79-4-13.24. Share restrictions.
(a) The Corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed corporate
action is taken or the restrictions released under Section 79-4-13.26.
(b) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a share holder until these rights are
canceled or modified by the taking of the proposed corporate action.
Section 79-4-13.25. Payment.
(a) Except as provided in Section 79-4-13.27, as soon as the proposed
corporate action is taken, or upon receipt of a payment demand, the
corporation shall pay each dissenter who complied with Section 79-4-13.23 the
amount the corporation estimates to be the fair value of his shares, plus
accrued interest.
(b) The payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen (16) months before the date of payment,
an income statement of r that year, a statement of changes in
shareholders' equity for that year, and the latest available interim
financial statements, if any;
(2) A statement of the corporation's estimates of the fair value of
the shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenters' right to demand payment under
Section 79-4-13.28; and
(5) A copy of this article.
Section 79-4-13.26. Failure to take action.
(a) If the corporation does not taken the proposed action within sixty (60)
days after the date set for demanding payment and depositing share
certificates, the corporation shall return the deposited certificates and
release the transfer restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under Section 79-4-13.22 and repeat the payment demand
procedure.
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Section 79-4-13.27. After-acquired shares.
(a) A corporation may elect to withhold payment required by Section 79-4-13.25
from a dissenter unless he was the beneficial owner of the shares before the
date set forth in the dissenters' notice as the date of the first announcement
to news media or to shareholders of the terms of the proposed corporate
action.
(b) To the extent the corporation elects to withhold payment under subsection
(a), after taking the proposed corporate action, it shall estimate the faire
value of the shares, plus accrued interest and shall pay this amount to each
dissenter who agrees to accept it in full satisfaction of his demand. The
corporation shall send with its offer a statement of its estimate of the fair
value of the shares, an explanation of how the interest was calculated and a
statement of the dissenter's right to demand payment under Section 79-4-13.28.
Section 79-4-13.28. Procedure if a shareholder dissatisfied with payment or
offer.
(a) A dissenter may notify the corporation in writing of his own estimate of
the fair value of his shares and amount of interest due, and demand payment of
his estimate (less any payment under Section 79-4-13.25), or reject the
corporation's offer under Section 79-4-13.27 and demand payment of the fair
value of his shares and interest due, if:
(1) The dissenter believes that the amount paid under Section
79-4-13.25 or offered under Section 79-4-13.27 is less than the fair
value of his shares or that the interest due is incorrectly
calculated;
(2) The corporation fails to make payment under Section 79-4-13.25
within sixty (60) days after the date set for demanding payment; or
(3) The corporation, having failed to take the proposed action, does
not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares within sixty (60) days
after the date set for demanding payment.
(b) A dissenter waives his right to demand payment under this section unless
he notifies the corporation of his demand in writing under subsection (a)
within thirty (30) days after the corporation made or offered payment for his
shares.
Section 79-4-13.30. Court action.
(a) If a demand for payment under Section 79-4-13.28 remains unsettled, the
corporation shall commence a proceeding within sixty (60) days after receiving
the payment demand and petition the court to determine the fair value of the
shares and accrued interest. If the corporation does not commence the
proceeding within the 60-day period, it shall pay each dissenter whose demand
remains unsettled the amount demanded.
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(b) The corporation shall commence the proceeding in the chancery court of the
county where a corporation's principal office (of, if none in this state, its
registered office) is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where the registered office of the domestic
corporation merged with or whose shares were acquired by the foreign
corporation was located.
(c) The corporation shall make all dissenters (whether or not residents of
this state) whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced under
subsection (b) is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend decision on the
question of fair value. The appraisers have the powers described in the order
appointing them, or in any amendment to it. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to judgment (1)
for the amount, if any, by which the court finds the fair value of his shares,
plus interest, exceeds the amount paid by the corporation, or (2) for the fair
value, plus accrued interest, of his after-acquired shares for which the
corporation elected to withhold payment under Section 79-4-13.27.
Section 79-4-13.31. Court costs and counsel fees.
(a) The court in an appraisal proceeding commenced under Section 79-4-13.30
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court
shall assess the costs against the corporation, except that the court may
assess costs against all or some of the dissenters, in the amounts the court
finds equitable, to the extent the court finds the dissenters acted
arbitrarily, vexatiously or not in good faith in demanding payment under
Section 79-4-13.28
(b) The court may also assess the fees and expenses of counsel and experts for
the respective parties, in amounts the courts finds equitable:
(1) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with
the requirements of Section 79-4-13.20 through 79-4-13.28; or
(2) Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees
and expenses are assessed acted arbitrarily, vexatiously or not in
good faith with respect to the rights provided by this article.
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(c) If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court
may award to these counsel reasonable fees to be paid out of the amounts
awarded the dissenters who were benefited.
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APPENDIX C
MERCER CAPITAL
5860 Ridgeway Center Parkway, Suite 410, Memphis, Tennessee 38120-4048
Phone: (901) 685-2120 Telecopier: (901) 685-2199
August 31, 1995
Board of Directors
c/o Mr. Robert B. Neal
President and Chief Executive Officer
Dixie National Corporation
3760 I-55 North
Jackson, Mississippi 39211
RE: Fairness Opinion Related to the Acquisition of Dixie National Life
Insurance Company by Standard Life Insurance Company of Indiana.
Dear Board Members:
Mercer Capital Management, Inc. ("Mercer Capital") was retained on March 13,
1995 by the Board of Directors of Dixie National Corporation ("Dixie", the
"Company", "the Seller" or "DNC"), Jackson, Mississippi, to provide its
opinion of the fairness from a financial point of view to Dixie's common
shareholders of the proposed acquisition of the Company's 1,489,904 shares of
(99.33% of the 1,500,000 outstanding) Dixie National Life Insurance Company
("DNLIC") by Standard Life Insurance Company of Indiana ("SLIC" or "the
Purchaser"), Indianapolis, Indiana, a subsidiary of Standard Management
Company ("SMC").
Mercer Capital is routinely engaged in the valuation of businesses in
connection with mergers and acquisitions, estate and gift tax compliance,
employee stock ownership plans, and a variety of corporate planning and
restructuring activities.
THE TRANSACTION
The Second Restated Stock Purchase Agreement (the "Restated Agreement") dated
August 30, 1995 effective as of April 18, 1995 among Dixie, DNLIC, and SLIC
includes, among other things, the following provisions:
* Dixie will receive an aggregate purchase price of $7,389,086 - $1,926,468
of which will be paid in cash at closing; the Term Loan of $3,688,746
owed by Dixie to SLIC will be canceled; Convertible Notes of $1,720,000
would be assumed by SLIC; and up to $53,872 of collections after June 30,
1995 on a specific receivable. Additional elements of consideration for
the shares of DNLIC are detailed below.
AMERICA'S BUSINESS VALUATION RESOURCE
<PAGE>
Board of Directors
August 31, 1995
Page 2
* DNLIC will also honor its home office lease with Vanguard, Inc. through
December 31, 1996 at the rate of $15,000 per month, unless the building
or Vanguard is sold at an earlier date. For the first three months after
closing, SLIC (or its subsidiaries) will pay for routine maintenance,
casualty ins urance, ad valorem taxes not to exceed $5,000 per month. It
is contemplated that SLIC will vacate the building within three months of
closing.
* SLIC has agreed to forgive one-half month's interest on the Term Loan,
which has an estimated value to Dixie of $15,000.
* Among other things, the Restated Agreement includes certain requirements,
some of which are a condition to closing:
1. The purchase price has been determined as of June 30, 1995 based
upon adjusted capital, among other factors. The original stock
purchase agreement contemplated a variable amount based upon
adjusted capital at closing. Since DNLIC is losing money and
expects to continue to do so, the Restated Agreement is favorable
to the shareholders of Dixie.
2. Prior to closing, SLIC and DNC will jointly pursue settlement of
the litigation styled as Becker v. Dixie National Life Insurance
Company. It is contemplated that the first $600,000 of settlement
costs shall be absorbed by the Purchaser. Any costs of settlement
greater than $600,000 but less than $1,000,000 will be borne
equally by the Purchaser and Seller. Any costs of settlement
greater than $1,000,000 will be borne by the Purchaser. If the
costs of settlement are less than $500,000, then the purchase price
shall be increased by 50% of the difference between the costs of
settlement and $500,000. The Seller will have no obligation for any
settlement costs after closing.
A proposed settlement was reached on the Charter Contract
litigation on July 20, 1995, subject to the approval of the Circuit
Court of Montgomery County, Alabama. The settlement would resolve
all significant questions related to the Charter Contracts, as well
as provide a court approved means for calculating future dividend
payments. The settlement requires DNLIC to pay a cash amount of
$550,000 and to provide additional coverage to holders of Charter
Contracts, the present value of which is $391,800. The estimated
total cost of settling the litigation including attorney fees,
court and other costs is $1,007,000. The purchase price set forth
in the Restated Agreement reflects the absorption by Dixie of
$200,000 of the cost of the settlement. The portion absorbed by
Standard effectively represents an addition to the selling price of
Dixie. While the proposed settlement is potent ially favorable to
Dixie, the impending maturities of the Term Loan and Convertible
Notes and the provisions of the Restated Agreement severely limit
the flexibility of the Company in negotiating with other parties.
<PAGE>
Board of Directors
August 31, 1995
Page 3
3. The Seller will purchase at book value at closing DNLIC's entire
investment in Fry-Guy, Inc. equipment and leases and Cambria loans
and release the Purchaser from any obligation to make future loans
or investments related to these activities.
REVIEW PROCEDURES
We have reviewed the documents listed in Exhibit 1. In conjunction with
previous negotiations between DNC and SMC we have visited with management of
Dixie in Jackson, Mississippi and management of SMC in Indianapolis, Indiana.
There have been numerous subsequent meetings with management of Dixie in
person and by telephone. These visits provided an important perspective on the
operations of the Company and DNLIC in order to gain greater insight into each
entity's historical and prospective financial performance.
Mercer Capital did not compile or audit the financial statements of DNC or
DNLIC, nor have we independently verified the information reviewed. We have
relied upon such information as being complete and accurate in all material
respects. We have not made an appraisal of the Company's assets, nor have we
determined the liquidation value of the Company's assets.
IMPORTANT CONSIDERATIONS OF THE TRANSACTION
The following factors were considered with respect to Dixie and Dixie National
Life Insurance Company:
* The historical financial condition and performance of the Company as
measured by Generally Accepted Accounting Principles ("GAAP") and
Dixie National Life Insurance Company as measured by Statutory
Accounting Principles ("SAP");
* Growth potential in the relevant markets;
* Historical dividend performance;
* Prior efforts to find a buyer for DNC or DNLIC or other sources of
financing;
* Statutory capital requirements;
* Potential effect on statutory capital of DNLIC of pending Charter
Contract litigation;
* Prospective financial performance and future cash flow needs of the
Company; and,
* Trading in the Company's stock including price and volume.
<PAGE>
Board of Directors
August 31, 1995
Page 4
The following factors regarding pricing and terms are considered relevant to
the transaction:
* Total consideration and terms received by Dixie for the shares of
DNLIC;
* Potential financial impact on Dixie and its shareholders if no
satisfactory resolution to the Company's debt service requirements can
be obtained;
* Potential value to be received by a shareholder of Dixie who dissents
from the transaction and receives fair value under Mississippi law;
* Review of the pricing of publicly traded insurance companies with
similar lines of business;
* Review of transactions involving the sale of controlling interests of
small insurance companies; and,
* Review of past efforts by management to find a buyer of Dixie or to
obtain new capital.
CONCLUSION
Based upon our analysis of Dixie National Corporation, Dixie National Life
Insurance Company, and the pricing and terms of the transaction, it is our
opinion that the transaction is fair to the shareholders of Dixie from a
financial point of view.
Sincerely yours,
MERCER CAPITAL MANAGEMENT, INC.
Kenneth W. Patton, ASA
Executive Vice President
<PAGE>
EXHIBIT I
The following documents were reviewed in the preparation of this opinion.
1. Stock Purchase Agreement dated April 18, 1995 and the Second Restated
Stock Purchase Agreement dated August 30, l995;
2. Draft Proxy Statements dated June 2, 1995 and August 30, l995 for
annual meeting of shareholders;
3. Audited financial statements for Dixie National Corporation for the
fiscal years ended December 31, 1990-94 as prepared by DeMiller,
Denny, Word & Co. (1990-91) and the Home CPA Group (1992-94);
4. Forms 1O-K for Dixie National Corporation for the fiscal years ended
December 31, 1990-94;
5. Forms 8-K for Dixie National Corporation dated June 29, 1995, March 6,
1995, September 30, 1994, September 16, 1994, July 22, 1994, and June
7, 1994;
6. Forms 10-Q for Dixie National Corporation for the quarters ended March
31, 1994, June 30, 1994, September 30, 1994, March 31, 1995; and June
30, 1995;
7. Annual Statement of Dixie National Life Insurance Company as prepared
for the Insurance Department of the State of Mississippi for the
fiscal years ended December 31, 1990-94, the quarters ended March 31,
1995, and June 30, 1995;
8. Annual reports for Dixie National Corporation for the fiscal years
ended December 31, 1990-93: and,
9. Such other documents as were necessary to complete the opinion.
<PAGE>
APPENDIX D
DIXIE NATIONAL CORPORATION
1995 STOCK OPTION PLAN
ARTICLE I
DEFINITIONS
As used herein, terms have the meaning hereinafter set forth unless the
context should clearly indicate the contrary:
(a) "Board" shall mean the Board of Directors of the Company, or the
Executive Committee of such Board;
(b) "Business Days" shall mean for calculation purposes the days of the
week in which the New York Stock Exchange conducts and is open for regular
trading activity;
(c) "Committee" shall mean the Administrative Committee appointed by the
Board to oversee the administration of this Plan;
(d) "Company" shall mean Dixie National Corporation, a Mississippi
corporation;
(e) "Director" shall mean a member of the Board;
(f) "Fair market value" shall mean the average of the bid and asked price
at which the Stock is listed in the NASDAQ quotation system on the day an
Option is granted hereunder or, in the absence of any reported quote on such
day, the first preceding day on which there was such a quote available;
(g) "Grant" means the issuance of an Option hereunder to an Optionee
entitling such Optionee to acquire Stock on the terms and conditions set forth
in a Stock Option Agreement to be entered into with the Optionee;
<PAGE>
(h) "Incentive Stock Option" shall mean a compensatory Option provided to
an employee of the Company giving him or her the right to purchase Stock at a
predetermined price under a plan the meets certain Internal Revenue Code
requirements.
(i) "Key Employee" shall mean a Company employee who in the judgment of
the Committee has the ability to positively affect the profitability and
economic well-being of the Company.
(j) "Option" shall mean the right granted to an Optionee to acquire Stock
of the Company pursuant to the Plan;
(k) "Optionee" shall mean an employee of the Company or a non-employee
Director of the Company to whom a Grant hereunder has been made;
(l) "Plan" shall mean the Dixie National Corporation 1995 Stock Option
Plan, the terms of which are herein set forth;
(m) "Stock" shall mean the common stock of the Company or, in the event
the outstanding shares of stock are hereafter changed into or exchanged for
shares of a different stock or securities of the Company or some other
corporation, such other stock or securities;
(n) "Stock Option Agreement" shall mean the agreement between the Company
and an Optionee under which an Optionee may acquire Stock pursuant to the
Plan.
2
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ARTICLE II
THE PLAN
2.1. NAME.
The Plan shall be known as the "Dixie National Corporation 1995 Stock
Option Plan".
2.2. PURPOSE.
The purpose of the Plan is to advance the business and development of the
Company and its shareholders by affording to the Key Employees of the Company
and non-employee Directors of the Company the opportunity to acquire a
propriety interest in the Company by the grant of Options to such persons
under the terms herein set forth. By so doing, the Company seeks to motivate,
retain and attract highly competent, highly motivated personnel whose
judgment, initiative, leadership and continued efforts will contribute to the
success of the Company. The Options to be granted hereunder are either
"Incentive Stock Options" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, for certain Key Employees or non-statutory
Options made available to non-employee Directors. However, at no time will the
Plan be considered or operate as a "tandem" option plan or will any Key
Employee or non-employee Director be subjected to a tandem option provision.
2.3. EFFECTIVE DATE.
The Plan shall become effective upon its adoption by the Board of the
Company. Thereafter, the Plan shall be submitted to the shareholders of the
Company for approval within 12 months after the date said Plan is adopted by
the Board.
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<PAGE>
2.4 TERMINATION DATE.
The Plan shall terminate ten (10) years from the date the Plan is adopted
by the Board of the Company and at which such time any Options granted
hereunder shall be void and of no further force or effect.
ARTICLE III
PARTICIPANTS
Any Key Employee or non-employee Director of the Company shall be
eligible to be granted an Option under the Plan. The Committee shall adopt
criteria pursuant to which Options shall be granted. The Committee may grant
Options to any eligible Key Employee or non-employee Director in accordance
with such determinations as the Committee may, from time to time, in its sole
discretion make. A Director of the Company or of a subsidiary who is not also
an employee of the Company will not be eligible to receive an "Incentive Stock
Option" pursuant to the Plan. Non-employee Directors are only eligible for
non-statutory Options which do not qualify under Section 422 of the Internal
Revenue Code, as amended.
ARTICLE IV
ADMINISTRATION
4.1. DUTIES AND POWERS OF THE COMMITTEE.
The Plan shall be administered by the Committee. Subject to the express
provisions of the Plan, the Committee shall have the sole discretion and
authority to determine from among eligible persons those to whom and the time
or times at which Options may be granted and the number of shares of Stock to
be subject to each Option. Subject to the express provisions of the Plan, the
Committee shall also have complete authority to interpret the Plan, to
prescribe, amend and rescind
4
<PAGE>
rules and regulations related to it and to determine the details and
provisions of each Stock Option Agreement and to make all other determinations
necessary or advisable in the administration of the Plan.
4.2. RECORDS OF PROCEEDINGS.
The Committee shall maintain written minutes of its actions which shall
be maintained among the records of the Company.
4.3. MAJORITY.
A majority of the members of the Committee shall constitute a quorum and
any action taken by a majority present at such meeting at which a quorum is
present or any action taken without a meeting evidenced by a writing executed
by all members of the Committee shall constitute the action of the Committee.
4.4. COMPANY ASSISTANCE.
The Company shall supply full and timely information to the Committee in
all matters relating to eligible Optionees, their status, death, retirement,
disability and such other pertinent facts as the Committee may require. The
Company shall furnish the Committee with such clerical and other assistance as
is necessary in the performance of its duties. All expenses of the Committee
shall be paid by the Company.
4.5. COMPOSITION OF THE COMMITTEE.
The Committee shall consist of three (3) individuals appointed by the
Board from among its members. Appointment to the Committee shall be for a term
of one (1) year. Any individual designated and serving as a member of the
Committee shall be entitled to indemnification in relation
5
<PAGE>
to such service by the Company to the fullest extent called for or permitted
by Article XI of the Bylaws of the Company.
4.6 COMMITTEE AUTHORITY.
If the Committee deems it necessary or in the best interest of the
Company or its shareholders, the Committee may impose restrictions on the
subsequent transferability of Stock issued pursuant to Options to be granted
hereunder. In the event of the imposition of any such conditions, the Stock of
the Company to be issued pursuant to the exercise of an Option shall have any
such restrictions prominently displayed as a legend on such certificate.
ARTICLE V
SHARES OF STOCK SUBJECT TO THE PLAN
5.1. LIMITATION.
Subject to adjustment pursuant to the provisions of Section 5.3 hereof,
the number of shares of Stock which may be issued and sold hereunder shall not
exceed 500,000 shares, with 400,000 shares reserved for issuance to Key
Employees pursuant to their Incentive Stock Options and 100,000 shares
reserved for issuance to non-employee Directors pursuant to their
non-statutory Options. The Company shall take such action as necessary to
reserve the aforesaid number of shares for issuance pursuant to the Plan.
5.2. OPTIONS GRANTED UNDER THE PLAN.
Shares of Stock with respect to which an Option is granted hereunder, but
which lapses prior to exercise, shall be considered available for grant
hereunder. Therefore, if Options granted hereunder shall terminate for any
reason without being wholly exercised, new Options may be granted hereunder
covering the number of shares to which such terminated Options related.
6
<PAGE>
5.3. ANTI-DILUTION.
In the event the Stock subject to Options hereunder is changed into or
exchanged for a different number or kind of stock or other securities of the
Company or of another organization by reason of merger, consolidation or
reorganization, recapitalization, reclassification, combination of shares,
stock split or stock dividend;
(a) The aggregate number and kind of shares of Stock subject to
Options which may be granted hereunder shall be adjusted appropriately;
(b) Rights under outstanding Options granted hereunder, both as to
the number of subject shares and the Option price, shall be adjusted
appropriately;
(c) Where dissolution or liquidation of the Company or any merger of
consolidation in which the Company is not a surviving corporation is involved,
each outstanding Option shall terminate and the Optionee holding such Option
shall have the right immediately prior to such dissolution, liquidation,
merger or combination to exercise his Option, in whole or in part, to the
extent that it shall not have been exercised without regard to any installment
exercise provision.
The manner of application of the foregoing provision shall be determined
solely by the Committee and any such adjustment may provide for the
elimination of fractional share interests.
ARTICLE VI
6.1. OPTIONS.
Each Option granted hereunder shall be evidenced by minutes of a meeting
of or the written consent of the Committee and by a written Stock Option
Agreement dated as of the date of grant and executed by the Company and the
Optionee, which agreement shall set forth such terms and conditions as may be
determined by the Committee consistent with the Plan.
7
<PAGE>
6.2. PARTICIPATION, LIMITATIONS.
(a) Options qualifying as "incentive stock options" under Section 422 of
the Internal Revenue Code, as amended, may be granted from time to time to Key
Employees of the Company to purchase shares of the Company's Stock.
(1) The maximum number of shares for which an Option or Options may
be granted under the Plan to any one Key Employee shall be 100,000.
(b) Options defined as non-statutory Options which do not satisfy the
requisites of Section 422 of the Internal Revenue Code, as amended, may be
granted from time to time only to non-employee Directors of the Company to
purchase shares of the Company's Stock.
(1) The maximum number of shares for which an Option or Options may
be granted under the Plan to any one participating non-employee Director shall
be 10,000.
6.3. OPTION PRICE.
The per share Option price for the stock subject to each Option shall be
determined by the Committee, but the per share exercise price shall not be
less than the fair market value of the Stock on the date the Option is
granted.
6.4. OPTION PERIOD.
Each Option granted hereunder must be granted within five (5) years from
the effective date of the Plan. The period for the exercise of each Option
shall be determined by the Committee, but in no instance shall such period
exceed five (5) years from the date of grant of the Option. The Committee may
prescribe such period after grant of an Option which must expire before such
Option may be exercised and the Committee deems appropriate.
8
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6.5. OPTION EXERCISE.
(a) Options granted hereunder may not be exercised until and unless the
Optionee shall meet the conditions precedent established by the Committee for
the Key Employees and the non-employee Directors.
(b) Options may be exercised by Key Employees for whole shares only. Key
Employee Optionees may exercise 20% of their Options in each year on a
cumulative basis with any portion not exercised to be carried over for
exercise in subsequent years. Options shall be exercised by written notice of
intent to exercise the Option with respect to a specified number of shares
delivered to the Company at its principal office and payment in full to the
Company at said office of the amount of the Option price for the number of
shares with respect to which the Option(s) are then being exercised.
(c) Options may be exercised by participating non-employee Directors in
whole at any time, or in part from time to time with respect to whole shares,
and can be exercised to the full extent of his Option at any time after grant,
and shall be exercised by written notice of intent to exercise the Option with
respect to a specified number of shares delivered to its Company at its
principal office and payment in full to the Company at said office of the
amount of the Option price for the number of shares with respect to which the
Option(s) are then being exercised.
(d) No person to whom Options are granted hereunder shall receive
Options, first exercisable during any single calendar year, for Stock, the
fair market value of which (determined at the time of the grant of the
Options) exceeds $100,000.00.
(e) No Option may be exercised by any Optionee unless a registration
statement covering the Stock subject thereto has been filed with and declared
effective by the Securities and Exchange
9
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Commission and an appropriate registration or exemption therefrom, is in
effect or available in the state of residence of the exercising Optionee.
6.6. NON-TRANSFERABILITY OF OPTION.
No Option or any right relative thereto shall be transferred by an
Optionee otherwise than by will or by the laws of descent and distribution.
During the lifetime of an Optionee, the Option shall be exercisable only by
him or her.
6.7. EFFECT OF DEATH OR OTHER TERMINATION OF EMPLOYMENT OR DIRECTORSHIP.
(a) If the Key Employee's or non-employee Director's relationship with
the Company shall be terminated, with or without cause, or by the act of the
Key Employee or non-employee Director, the Optionee's right to exercise such
Options shall terminate and all rights thereunder shall cease ten (10)
Business Days after the date on which such person's association is terminated.
Provided however, that if the Optionee shall die or become permanently and
totally disabled while employed by or serving as a non-employee Director of
the Company, as solely determined by the Committee in accordance with its
policies, then either his or her personal representatives or a transferee
under the Optionee's will or pursuant to the laws of descent and distribution,
or the disabled Optionee may exercise the Option in full one (1) year from the
date of such death or disability. In the case of an Optionee's retirement in
accordance with the Company's established retirement policy, such Option shall
remain exercisable by the Optionee for three (3) months from the date of such
retirement. Anything in the Plan to the contrary notwithstanding, including
without limitation the provisions of Sections 2.4 and 6.4 hereof, the rights
of exercise set forth in this Section 6.7(a) shall apply and control.
10
<PAGE>
(b) No transfer of an Option by the Optionee by will or the laws of
descent and distribution shall be effective to bind the Company unless the
Company shall have been furnished with a written notice thereof and an
authenticated copy of the will and/or such other evidence as the Committee may
deem necessary to establish the validity of the transfer and the acceptance by
the transferee or transferees of the terms and conditions of such Option.
6.8. RIGHTS AS A SHAREHOLDER.
An Optionee or a transferee of an Option shall have no rights as a
shareholder of the Company with respect to any shares subject to any
unexercised Options.
6.9. REQUIRED FILINGS.
A Optionee to whom an Option is granted under the terms of the Plan is
required to file appropriate reports with the Internal Revenue Service. As a
condition of the receipt of an Option hereunder, Optionees shall agree to make
necessary filings with the Internal Revenue Service. The Committee shall
assist and cooperate with Optionees by providing the necessary information
required for compliance of this condition.
ARTICLE VII
STOCK CERTIFICATES
The Company shall not be required to issue or deliver any certificate for
shares of Stock purchased upon the exercise of any Option granted hereunder,
or any portion thereof, prior to the obtaining of any approval or clearance
from any federal or state governmental agency which the Committee shall, in
its sole discretion, determine to be necessary or advisable.
11
<PAGE>
ARTICLE VIII
TERMINATION, AMENDMENT, OR MODIFICATION OF THE PLAN
The Board may at any time, upon recommendation of the Committee,
terminate, and may at any time and from time to time and in any respect amend
or modify the Plan. Provided however, if the Plan has been submitted to and
approved by the shareholders of the Company no such action by the Board may be
taken without approval of the majority of the shareholders of the Company
which: (a) increases the total number of shares of Stock subject to the Plan,
except as contemplated in Section 5.3 hereof; (b) changes the manner of
determining the Option price; or (c) withdraws the administration of the Plan
from the Committee.
ARTICLE IX
9.1. EMPLOYMENT.
Nothing in the Plan or any Option granted hereunder or in any Stock
Option Agreement shall confer a upon non-employee Director receiving such
Option or Stock Option Agreement the status as an employee of the Company.
Further, nothing in the Plan or any Option granted hereunder shall in any
manner create in any Optionee the right to continue their relationship with
the Company or create any vested interest in such relationship, including
employment.
9.2. OTHER COMPENSATION PLANS.
The adoption of the Plan shall not effect any other stock option,
incentive, or other compensation plan in effect for the Company or any of its
subsidiaries, nor shall the Plan preclude the Company or any subsidiary
thereof from establishing any other forms of incentive or other compensation
for employees or non-employee Directors of the Company, or any subsidiary
thereof.
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9.3. PLAN EFFECT.
The Plan shall be binding upon the successors and assigns of the Company.
9.4. TENSE.
When used herein nouns in the singular shall include the plural.
9.5. HEADINGS OF SECTIONS ARE NOT PART OF THE PLAN.
Headings of articles and sections hereof are inserted for convenience and
reference and constitute no part of the Plan.
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<PAGE>
STOCK OPTION AGREEMENT
This Agreement is made this the ____ day of ________, 199___, between
DIXIE NATIONAL CORPORATION, a Mississippi corporation ("Dixie") and
______________________ ("Employee").
WHEREAS, Employee is employed by Dixie and is one of Dixie's Key
Employees. Dixie considers it desirable and in the best interest of Dixie and
its shareholders that Employee be given an inducement to acquire a proprietary
interest in Dixie and an added incentive to advance the interest of Dixie,
such inducement and incentive being in the form of an option (the "Option") to
purchase shares of the common stock of Dixie (the "Stock"), and
WHEREAS, the Option hereby granted is granted pursuant to the terms and
provisions of Dixie National Corporation 1995 Stock Option Plan adopted the
26th day of May, 1995, and
WHEREAS, any capitalized term not defined herein shall have the same
meaning as defined in the Dixie National Corporation 1995 Stock Option Plan,
and
NOW, THEREFORE, in consideration of the premises it is agreed as follows:
1. GRANT OF OPTION. Dixie hereby grants to Employee the right and Option
to acquire _____ shares of the Stock at a purchase price of $_________ per
share, such price being not less than the fair market value of the Stock as of
the date hereof. The Option hereby granted is to be exercised in the manner
and subject to the conditions hereinafter provided.
2. TIME OF EXERCISE OF OPTION. This Option may be exercised by Key
Employees for whole shares only. Key Employee Optionees may exercise 20% of
their Options in each year on a cumulative basis commencing on the ____ day of
_________, 199__, with any portion not exercised to be carried over for
exercise in subsequent years. The right of the
<PAGE>
Employee to exercise the Option hereby granted is conditioned upon the fact
that the Employee is an employee of Dixie or a subsidiary of Dixie as of the
time of the granting of this option and through and including the date of
exercise, except in the event of the death, disability or retirement of the
Employee as provided in Paragraph 4 hereof.
3. METHOD OF EXERCISE. This Option may be exercised by Employee giving
written notice to Dixie at its principal place of business accompanied by a
check in payment of the purchase price for the Stock as to which the Option is
being exercised. Dixie shall make prompt delivery of such Stock, provided that
if any law or regulation requires Dixie to take any action with respect to the
Stock as to which the Option is being exercised, the date of delivery of such
Stock shall be extended for the period necessary to take such action.
4. TERMINATION OF OPTION. Except as otherwise stated herein, the Option
hereby granted, to the extent not previously exercised, shall terminate ten
(10) business days after the date on which Employee's continuous employment by
Dixie is terminated, provided:
(a) That in the event of an Employee's death or permanent and total
disability while in the employ of Dixie, the disabled Employee or his or her
personal representatives may exercise this Option in full at any time within
one (1) year following the date of an Employee's disability or death; or
(b) Three (3) months after the date on which the Employee's
continuous employment with Dixie ceases due to the Employee's retirement from
Dixie in accordance with Dixie's established retirement policy.
The term "business days" shall mean for calculation purposes the days of
the week in which the New York Stock Exchange conducts and is open for regular
trading activity.
<PAGE>
5. LIMITATIONS. In accordance with the terms of Section 422 of the
Internal Revenue Code of 1986, as amended, the Option granted un.der this
agreement is limited so that the aggregate fair market value of the stock
which an Employee may first purchase hereunder in any calendar year does not
exceed $100,000.00 based on such fair market value as of the date of grant of
the Option.
6. RECLASSIFICATION, CONSOLIDATION OR MERGER. If and to the extent that
the number of issued common shares of Dixie shall be increased or reduced by a
change in par value, split-up, reclassification, distribution of a dividend
payable in shares, or by any similar occurrence, the number of shares subject
to this Option and the purchase price to be paid for such shares shall be
proportionately adjusted as provided in the Plan.
7. RIGHTS PRIOR TO EXERCISE OF OPTION. The Option hereby granted is
non-transferrable by Employee except as otherwise provided in Paragraph 4
hereof. During the lifetime of Employee, the Options hereby granted shall be
exercisable only by the Employee. Employee shall have no rights as a
shareholder in the shares of Stock purchasable pursuant to Options hereunder
until payment of the purchase price and delivery to the Employee of such
shares as herein provided.
8. APPROVAL BY SHAREHOLDERS. The granting of the Option as provided in
this Agreement is being made pursuant to a Stock Option Plan adopted by the
Board of Directors of Dixie on the 26th day of May, 1995. Such Plan was
approved by a majority the shareholders of Dixie on the ___ day of
____________, 1995. Such Stock Option Plan includes an aggregate of 500,000
shares of the common stock of Dixie which may be issued under options granted
<PAGE>
pursuant to the Plan. Employee is a member of the class of employees eligible
under the provisions of the Plan to receive such options.
9. RESTRICTED TRANSFERABILITY OF STOCK. Any sale or transfer of Stock
purchased pursuant to this Option must be made in accordance with applicable
federal and state securities laws.
10. BINDING EFFECT. This Agreement shall be binding upon the heirs,
executors, administrators and successors of the parties hereto.
IN WITNESS WHEREOF, the parties have hereto caused this Agreement to be
executed as first hereinabove set forth.
DIXIE NATIONAL CORPORATION
By:______________________
_________________________
EMPLOYEE
<PAGE>
STOCK OPTION AGREEMENT
This Agreement is made this the ____ day of ________, 199___, between
DIXIE NATIONAL CORPORATION, a Mississippi corporation ("Dixie") and
______________________ ("Director").
WHEREAS, Director is not employed by Dixie but is one of Dixie's
non-employee Directors. Dixie considers it desirable and in the best interest
of Dixie and its shareholders that Director be given an inducement to acquire
a proprietary interest in Dixie and an added incentive to advance the interest
of Dixie, such inducement and incentive being in the form of an option (the
"Option") to purchase shares of the common stock of Dixie (the "Stock"), and
WHEREAS, the Option hereby granted is granted pursuant to the terms and
provisions of Dixie National Corporation 1995 Stock Option Plan adopted the
26th day of May, 1995, and
WHEREAS, any capitalized term not defined herein shall have the same
meaning as defined in the Dixie National Corporation 1995 Stock Option Plan,
and
NOW, THEREFORE, in consideration of the premises it is agreed as follows:
1. GRANT OF OPTION. Dixie hereby grants to Director the right and Option
to acquire _____ shares of the Stock at a purchase price of $_________ per
share, such price being not less than the fair market value of the Stock as of
the date hereof. The Option hereby granted is to be exercised in the manner
and subject to the conditions hereinafter provided.
2. TIME OF EXERCISE OF OPTION. This Option may be exercised by Director
as to 100% of the shares subject to the Option hereby granted commencing on
the ____ day of _________, 199__. The right of the Director to exercise the
Option hereby granted is conditioned upon the fact that the Director is a
non-employee Director of Dixie or a subsidiary of Dixie as of
<PAGE>
the time of the granting of this Option and through and including the date of
exercise, except in the event of the death, disability or retirement of the
Director as provided in Paragraph 4 hereof.
3. METHOD OF EXERCISE. This Option may be exercised by Director giving
written notice to Dixie at its principal place of business accompanied by a
check in payment of the purchase price for the Stock as to which the Option is
being exercised. Dixie shall make prompt delivery of such Stock, provided that
if any law or regulation requires Dixie to take any action with respect to the
Stock as to which the Option is being exercised, the date of delivery of such
Stock shall be extended for the period necessary to take such action.
4. TERMINATION OF OPTION. Except as otherwise stated herein, the Option
hereby granted, to the extent not previously exercised, shall terminate upon
ten (10) business days after the date on which Director's continuous
association with Dixie is terminated, provided:
(a) That in the event of a Director's death or permanent and total
disability while associated with Dixie, the his or her personal
representatives or the disabled Director may exercise this Option in full as
to any of the shares subject hereto which Director could have exercised at the
time of his or her disability or death at any time within one (1) year
following the date of a Director's death or disability; or
(b) Three (3) months after the date on which the Director's
continuous association with Dixie ceases due to the Director's retirement from
the Dixie Board of Directors in accordance with Dixie's established retirement
policy.
The term "business days" shall mean for calculation purposes the days of
the week in which the New York Stock Exchange conducts and is open for regular
trading activity.
<PAGE>
5. RECLASSIFICATION, CONSOLIDATION OR MERGER. If and to the extent that
the number of issued common shares of Dixie shall be increased or reduced by a
change in par value, split-up, reclassification, distribution of a dividend
payable in shares, or by any similar occurrence, the number of shares subject
to this Option and the purchase price to be paid for such shares shall be
proportionately adjusted.
6. RIGHTS PRIOR TO EXERCISE OF OPTION. The Option hereby granted is
non-transferrable by Director except as otherwise provided in Paragraph 4
hereof. During the lifetime of Director, the Options hereby granted shall be
exercisable only by the Director. Director shall have no rights as a
shareholder in the shares of Stock purchasable pursuant to Options hereunder
until payment of the purchase price and delivery to the Director of such
shares as herein provided.
7. APPROVAL BY SHAREHOLDERS. The granting of the Option as provided in
this Agreement is being made pursuant to a Stock Option Plan adopted by the
Board of Directors of Dixie on the 26th day of May, 1995. Such Plan was
approved by a majority the shareholders of Dixie on the ___ day of
____________, 1995. Such Stock Option Plan includes an aggregate of 500,000
shares of the common stock of Dixie which may be issued under options granted
pursuant to the Plan. Director is a member of the class of non-employees
eligible under the provisions of the Plan to receive such options.
8. RESTRICTED TRANSFERABILITY OF STOCK. Any sale or transfer of the Stock
purchased pursuant to this Option must be in accordance with applicable
federal and state securities laws.
<PAGE>
9. BINDING EFFECT. This Agreement shall be binding upon the heirs,
executors, administrators and successors of the parties hereto.
IN WITNESS WHEREOF, the parties have hereto caused this Agreement to be
executed as first hereinabove set forth.
DIXIE NATIONAL CORPORATION
By:______________________
_________________________
DIRECTOR
<PAGE>
DIXIE NATIONAL CORPORATION
PROXY FOR 1995 ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER 19, 1995
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints: S. L. Reed, Jr., T. H. Etheridge, and Robert B. Neal, or any two
of them, with the power of substitution, as his/her proxy to appear and vote
all of the shares of Common Stock standing in the name of the undersigned, at
the 1995 annual meeting of shareholders of Dixie National Corporation to be
held in the Board Room, Dixie National Life insurance Company Building, 3760
Interstate 55 North, Jackson, Mississippi, on the 19th day of September, 1995,
at 10:00 o'clock A.M.., (C.T.) and at any and all adjournments thereof; and
the undersigned hereby instructs said attorneys to vote:
1. For ( ), against ( ) or abstain ( ) Proposal No. 1 Sale of Dixie
National Life Insurance Company.
2. For ( ), against ( ) or abstain ( ) Proposal No. 2 1995 Stock Option
Plan.
3. For ( ), against ( ) or abstain ( ) the Board of Directors for the
forthcoming year to be composed of 9 members.
4. For ( ), or to withhold such vote ( ), the election of nine (9)
Directors as nominated by the Board of Directors and named in the
proxy statement. TO WITHHOLD AUTHORITY TO VOTE FOR A PARTICULAR
NOMINEE, STRIKE THE NAME OR NAMES OF THE PERSON(S) FOR WHOM YOU WISH
AUTHORITY TO BE WITHHELD: Cohen, Etheridge, Haggar, Neal, Nielsen,
Pegram, Reed, Jr., Ricketts, Rogers III.
5. For ( ), against ( ), or abstain ( ), ratification of the
appointment of Horne CPA Group as independent auditors for the year
ending December 31, 1995.
THE SHARES REPRESENTED BY THE PROXY WILL BE VOTED AS SPECIFIED. IF NO CHOICE IS
SPECIFIED, THE PROXY WILL BE VOTED FOR PROPOSALS 1, 2, 3, 4 and 5.
The undersigned hereby acknowledges receipt of the PROXY STATEMENT dated
September 5, 1995.
- --------------------------------------
Shareholder Date
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY.
