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
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|X| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2)
|_| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
THE WESTERN SYSTEMS CORP.
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|X| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify previous filing by registration number,
or the form or schedule and the date of its filing.
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The Western Systems Corp.
c/o Janney Montgomery Scott Inc.
26 Broadway
New York, New York 10005
May , 1997
Dear Stockholder:
You are cordially invited to attend a Special Meeting in lieu of the Annual
Meeting of Stockholders (the "Special Meeting") of The Western Systems Corp.
(the "Company") to be held on _____________, June ___, 1997 at 10:00 a.m., local
time, at The India House, 1 Hanover Street, New York, New York 10004.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve the acquisition by the Company of the assets, business and
certain liabilities of American Country Insurance Company, a property and
casualty insurance company engaged, inter alia, in providing transportation
(taxicabs and limousines) and other specialty coverage, and its affiliated
premium finance company, American Country Financial Services Corp., for
$40,250,000, and the related financing by the Company through its sale of
approximately 24,000,000 shares of Common Stock for approximately $26,400,000
(approximately $1.10 per share), subject to adjustment, to three investors and
their affiliates, with each such investor group thereby receiving approximately
25% of the outstanding shares of Common Stock following the acquisition.
Although stockholder approval of this proposal is not legally required, the
Board of Directors determined it would be appropriate for stockholders to vote
on a matter so fundamental to the Company's future.
To have sufficient shares to complete the financing and otherwise to comply
with the terms of the financing, you will be asked to consider and approve a
Restated Certificate of Incorporation of the Company, which amends the
Certificate of Incorporation to, inter alia, increase the authorized shares of
Common Stock from 25,000,000 shares to 60,000,000 shares, change the Company's
name to "American Country Holdings Inc." and declassify the Company's Board of
Directors.
You will also be asked to elect a Board of six directors, three of whom are
designees of the three investor groups, provided the proposed acquisition and
the Restated Certificate of Incorporation are approved, and to ratify the
planned appointment of Ernst & Young LLP as the Company's independent auditors
for the year ending December 31, 1997.
You are urged to read carefully the accompanying Proxy Statement, which
provides important information with respect to the proposals, including the
Annual Report on Form 10-K, as amended, for the year ended December 31, 1996,
annexed thereto, which provides information with respect to the Company prior to
the sale of its franchise and operating assets. Whether or not you plan to
attend the Special Meeting, please complete, date and sign your proxy card and
promptly return it in the enclosed envelope. If you attend the Special Meeting,
you may vote in person even though you have previously returned a proxy.
Sincerely,
------------------
William J. Barrett
Acting Chief Executive Officer
<PAGE>
THE WESTERN SYSTEMS CORP.
c/o Janney Montgomery Scott Inc.
26 Broadway
New York, New York 10004
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
IN LIEU OF ANNUAL MEETING
To Be Held On June ___, 1997
----------------------
To the Stockholders of
THE WESTERN SYSTEMS CORP.
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders in Lieu of
Annual Meeting (the "Special Meeting") of The Western Systems Corp. (the
"Company") will be held on __________, June ___, 1997, at 10:00 a.m., local
time, at The India House, 1 Hanover Street, New York, New York 10004 for the
following purposes:
1. To approve the acquisition by the Company of the assets, business and
certain liabilities of American Country Insurance Company, a property
and casualty insurance company engaged, inter alia, in providing
transportation (taxicabs and limousines) and other specialty coverage,
and its affiliated premium finance company, American Country Financial
Services Corp., for $40,250,000, and the related financing by the
Company through its sale of approximately 24,000,000 shares of Common
Stock for approximately $26,400,000 (approximately $1.10 per share),
subject to adjustment, to three investors and their affiliates, with
each such investor group thereby receiving approximately 25% of the
outstanding shares of Common Stock following the acquisition.
2. To approve a Restated Certificate of Incorporation of the Company,
which amends the Certificate of Incorporation to, inter alia, increase
the authorized shares of Common Stock from 25,000,000 shares to
60,000,000 shares, decrease the par value of the Common Stock from $.60
to $.01 per share, change the Company's name to "American Country
Holdings Inc." and declassify the Company's Board of Directors.
3. To elect a board of six directors, provided that the proposed
acquisition and the Restated Certificate of Incorporation are approved.
4. To ratify the planned appointment of Ernst & Young LLP as the Company's
independent auditors for the year ending December 31, 1997.
5. To transact such other business as may properly come before the Meeting
or any adjournment or postponement thereof.
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Only holders of record of Common Stock at the close of business on May __,
1997, the Record Date for the Special Meeting, are entitled to notice of and to
vote at the Special Meeting.
A copy of the Company's Annual Report on Form 10-K, as amended, for the
year ended December 31, 1996, is included as Annex B to the attached Proxy
Statement in lieu of an Annual Report to stockholders.
By Order of the Board of Directors,
Ann C.W. Green
Secretary
New York, New York
May , 1997
STOCKHOLDERS WHO DO NOT EXPECT TO ATTEND THE SPECIAL MEETING
ARE REQUESTED TO DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED
PROXY IN THE ENCLOSED POSTAGE-PREPAID ENVELOPE.
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TABLE OF CONTENTS
Page
----
INTRODUCTION................................................................. 1
General........................................................... 1
Matters to be Considered at the Special Meeting................... 1
Voting at the Special Meeting..................................... 2
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................................. 3
PROPOSAL I - ACQUISITION OF AMERICAN COUNTRY................................. 6
Background........................................................ 6
Terms of the Proposed Acquisition................................. 7
Effects of Proposed Acquisition on Company's
Outstanding Warrants............................................ 9
Description of American Country................................... 9
Company Reports................................................... 9
Accounting Treatment.............................................. 10
Certain Federal Income Tax Consequences........................... 10
Recommendation of the Board of Directors.......................... 10
PROPOSAL II - APPROVAL OF AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION............................................... 12
Background........................................................ 12
Required Vote..................................................... 13
PROPOSAL III - ELECTION OF DIRECTORS......................................... 14
Meetings and Committees........................................... 16
Company Reports................................................... 16
PROPOSAL IV - RATIFICATION OF APPOINTMENT OF
INDEPENDENT AUDITORS....................................................... 17
STOCKHOLDER PROPOSALS........................................................ 17
OTHER MATTERS................................................................ 17
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AMERICAN COUNTRY INSURANCE COMPANY.......................................... 18
General.......................................................... 18
Insurance Lines.................................................. 18
Marketing........................................................ 21
Affiliated Operations............................................ 21
Product Pricing.................................................. 21
Loss and LAE Reserves............................................ 22
Investments...................................................... 23
Risk Management and Reinsurance.................................. 25
Information Systems.............................................. 26
Regulation....................................................... 26
Competition...................................................... 27
Employees........................................................ 27
Properties....................................................... 27
Management....................................................... 28
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION........................................ 31
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AMERICAN COUNTRY AND SUBSIDIARIES......................................... F-1
ANNEXES
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ANNEX A - ASSET PURCHASE AGREEMENT
ANNEX B - ANNUAL REPORT ON FORM 10-K, AS
AMENDED, FOR THE YEAR ENDED
DECEMBER 31, 1996
ANNEX C - QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED
MARCH 31, 1997
ANNEX D - FORM OF RESTATED CERTIFICATE
OF INCORPORATION
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<PAGE>
THE WESTERN SYSTEMS CORP.
c/o Janney Montgomery Scott Inc.
26 Broadway
New York, New York 10005
-----------------------
PROXY STATEMENT
-----------------------
Special Meeting of Stockholders in Lieu of Annual Meeting
To Be Held On June , 1997
-----------------------
INTRODUCTION
General
This Proxy Statement is being furnished to holders of Common Stock, par
value $.60 per share ("Common Stock"), of The Western Systems Corp., a Delaware
corporation (the "Company"), in connection with the solicitation of proxies by
the Board of Directors of the Company for use at the Special Meeting of
Stockholders in Lieu of Annual Meeting (the "Special Meeting") to be held on
_____________, June ___, 1997, at 10:00 a.m., local time, at The India House, 1
Hanover Square, New York, New York 10004. The Company has retained ________ at
an estimated cost of $__________, plus reimbursement of expenses, to assist in
its solicitation. This Proxy Statement and enclosed proxy card are being mailed
to the Company's stockholders on or about May _____, 1997.
Matters to be Considered at the Special Meeting
At the Special Meeting, the stockholders will be asked to consider and vote
upon the following proposals (the "Proposals"):
1. To approve the acquisition by the Company of the assets, business and
certain liabilities of American Country Insurance Company, a property
and casualty insurance company engaged, inter alia, in providing
transportation (taxi cabs and limousines) and other specialty
coverage, and its affiliated premium finance company, American Country
Financial Services Corp., for $40,250,000, including the related
financing by the Company through its sale of approximately 24,000,000
shares of Common Stock for approximately $26,400,000 (approximately
$1.10 per share), subject to adjustment, to three investors and their
affiliates, with each such investor group thereby receiving
approximately 25% of the outstanding shares of Common Stock following
the acquisition (the acquisition and related financing, collectively,
the "Proposed Acquisition").
2. To approve the Company's Restated Certificate of Incorporation, which
amends the Certificate of Incorporation to, inter alia, increase the
authorized shares of Common Stock from 25,000,000 shares to 60,000,000
shares, decrease the par value of the Common Stock from $.60 to $.01
per share, change the Company's
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name to "American Country Holdings Inc." and declassify the Board of
Directors (the "Restated Certificate of Incorporation").
3. To elect a board of six directors, provided the Proposed Acquisition
and the Restated Certificate of Incorporation are approved.
4. To ratify the planned appointment of Ernst & Young LLP as the
Company's independent auditors for the year ending December 31, 1997.
5. To transact such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.
The foregoing matters are more fully described in this Proxy Statement.
Voting at the Special Meeting
Only holders of record of Common Stock at the close of business on
________, May _____, 1997 (the "Record Date"), are entitled to notice of and to
vote at the Special Meeting, each such holder of record being entitled to one
vote per share on each matter to be considered at the Special Meeting. On the
Record Date, there were 7,903,421 shares of Common Stock issued and outstanding.
The presence, in person or by properly executed proxy, of the holders of a
majority of the outstanding shares of Common Stock entitled to vote at the
Special Meeting (3,951,711 shares of the 7,903,421 shares outstanding) is
necessary to constitute a quorum at the Special Meeting. All abstentions and
broker non-votes, if any, will be included as shares that are present and
entitled to vote for purposes of determining the presence of a quorum at the
Special Meeting.
The Board of Directors has determined to submit the Proposed Acquisition
for stockholder approval, although such approval is not legally required, and
has fixed the required vote for such approval as the affirmative vote of a
majority of the outstanding shares of Common Stock, the same vote as is legally
required for approval of the Restated Certificate of Incorporation. Accordingly,
the affirmative vote by the holders of 3,951,711 shares of the 7,903,421 shares
outstanding (a majority of the outstanding shares) is required to approve the
Proposed Acquisition and the Restated Certificate of Incorporation. The
affirmative vote of a majority of the shares of Common Stock present in person
or represented by proxy is required to ratify the planned appointment of Ernst &
Young LLP as the Company's independent auditors for the year ending December 31,
1997. The affirmative vote of a plurality of the shares of Common Stock is
required to elect the Board of six directors. In determining whether the
proposals have received the requisite number of affirmative votes, (i)
abstentions will be included as votes cast and will have the same effect as
votes AGAINST the Proposed Acquisition and the Restated Certificate of
Incorporation, and (ii) proxies for which a broker does not have discretionary
authority and has not received voting instructions from the beneficial owners
(so-called "broker non-votes"), if any, will not be counted and will have no
effect on the vote for the election of the Board or the appointment of the
independent auditors, but will have the effect of a vote AGAINST the Proposed
Acquisition and the Restated Certificate of Incorporation.
If the enclosed proxy card is properly executed and returned to the Company
prior to voting at the Special Meeting, the shares represented thereby will be
voted in accordance with
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the instructions marked thereon. In the absence of instructions, the shares will
be voted FOR the Proposals and at the discretion of the holders of the proxies
on any other matters that may properly come before the Special Meeting. At any
time prior to its exercise, a proxy may be revoked by the holder of Common Stock
granting it by delivering written notice of revocation or a duly executed proxy
bearing a later date to the Secretary of the Company at the address of the
Company set forth on the first page of this Proxy Statement or by attending the
Special Meeting and voting in person.
The executive offices of the Company are located c/o Janney Montgomery
Scott Inc., 26 Broadway, New York, New York 10005 and its telephone number is
(212) 510-0688. Upon consummation of the Proposed Acquisition, the Company's
executive offices will be moved to the offices of American Country Insurance
Company, located at 222 N. LaSalle Street, Chicago, Illinois 60601, telephone
number (312) 456-2000.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information as of the Record Date
with respect to the beneficial ownership of Common Stock by (i) each person
known to the Company to be the beneficial owner of five percent or more thereof,
(ii) each director of the Company, (iii) its Chief Executive Officer and (iv)
all executive officers and directors as a group. All persons identified below as
holding options and/or Common Stock purchase warrants (the "Warrants") are
deemed to be beneficial owners of shares of Common Stock subject to such options
or purchasable upon exercise of such Warrants by reason of their right to
acquire such shares within 60 days after the Record Date through the exercise of
such options and/or the Warrants.
Name and Address Shares Percentage
of Beneficial Owner (1) Beneficially Owned Of Class
----------------------- ----------------- --------
Stuart M. Pellman
c/o Transmedia Network Inc.
475 Sansome Street
San Francisco, California 94111............ 538,480(2) 6.2%
Herbert M. Gardner(3)............................ 447,254(4) 5.2%
William J. Barrett(3)............................ 691,008(5) 8.0%
MassMutual Corporate Investors 698,707(6) 8.1%
1295 State Street
Springfield, MA 01111......................
C. Scott Bartlett, Jr............................ 56,281(7) *
Howard Grafman................................... 144,762(8) 1.7%
Richard O. Starbird.............................. 110,997(9) 1.3%
Paulette W. Grafman.............................. 29,705(10) *
All Directors and Executive Officers
as a Group (7 persons)......................... 2,018,487(11) 23.4%
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* Less than 1%
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(1) All of such persons and entities have sole investment and voting power over
the shares listed as being beneficially owned by them.
(2) Includes (i) 287,500 shares subject to options and (ii) 132,646 shares
owned by an individual retirement account of which Mr. Pellman is the
beneficiary (including 8,823 shares underlying Warrants).
(3) Address is c/o Janney Montgomery Scott Inc., 26 Broadway, New York, New
York 10005.
(4) Includes (i) 6,000 shares underlying Warrants, (ii) 42,321 shares
beneficially owned by Mr. Gardner's spouse (including 7,352 shares
underlying Warrants), (iii) 8,333 shares owned by an individual retirement
account of which Mr. Gardner is the beneficiary, and (iv) 256,298 shares
owned by Mr. Gardner's qualified plan (including 22,058 shares underlying
Warrants). Mr. Gardner disclaims beneficial ownership of the shares
beneficially owned by the members of his family.
(5) Includes (i) 38,705 shares underlying Warrants, (ii) 137,860 shares
beneficially owned by Mr. Barrett's spouse (including 17,646 shares
underlying Warrants), and (iii) 405,597 shares owned by Mr. Barrett's
qualified plan (including 44,117 shares underlying Warrants). Mr. Barrett
disclaims beneficial ownership of the shares beneficially owned by the
members of his family.
(6) Based upon Amendment No. 1 dated June 5, 1995 to a Statement on Schedule
13G filed with the Commission by MassMutual Corporate Investors, MassMutual
Participation Partners and MassMutual Corporate Value Partners in which the
three entities indicate that they may be regarded as a group. MassMutual
Corporate Investors, MassMutual Participation Partners and MassMutual
Corporate Value Partners beneficially own 405,590, 54,000 and 56,000 shares
of Common Stock respectively. MassMutual Corporate Investors also holds
Warrants to purchase 183,117 shares of Common Stock, of which it may be
deemed the beneficial owner. The Boards of Directors of each of MassMutual
Corporate Investors, MassMutual Participation Partners and MassMutual
Corporate Value Partners have sole investment and voting power over the
respective securities of the Company held by each such entity. MassMutual
Corporate Investors and MassMutual Participation Partners are each
closed-end mutual funds whose shares are traded on the New York Stock
Exchange.
(7) Includes (i) 8,399 shares held jointly with Mr. Bartlett's spouse, (ii)
36,000 shares subject to options and (iii) 5,882 shares underlying Warrants
held jointly with Mr. Bartlett's spouse.
(8) Includes (i) 6,000 shares subject to options, (ii) 17,205 shares underlying
Warrants and (iii) 5,000 shares held by Radio First International, Inc., of
which Mr. Grafman is a principal stockholder. Does not include shares
reported as beneficially owned by Paulette W. Grafman.
(9) Includes (i) 16,000 shares subject to options, and (ii) 14,705 shares
underlying Warrants.
(10) Includes 4,705 shares underlying Warrants. Does not include shares reported
as beneficially owned by Howard Grafman.
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(11) Includes an aggregate of 345,500 shares subject to options and 370,315
shares underlying Warrants.
On the Record Date, the outstanding Common Stock was held by 393 registered
stockholders.
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PROPOSAL I - ACQUISITION OF AMERICAN COUNTRY
Background
On January 3, 1997, the Company sold its Transmedia Network franchise
covering the States of California, Oregon, Washington and parts of Nevada and
substantially all of its operating assets, other than cash and cash equivalents,
to its franchisor, Transmedia Network Inc. Following consummation of the sale,
the Company had no active business and its assets consisted principally of cash
and cash equivalents. In its proxy statement dated December 6, 1996 relating to
a special meeting of stockholders for the approval of the sale, the Company
stated it would endeavor to seek potential acquisitions and business
combinations. From December 6, 1996 to January 3, 1997, the closing price of the
Common Stock, as reported by The Nasdaq SmallCap Market, ranged from $.75 to
$1.00.
In mid-January 1997, William J. Barrett, the Company's Acting Chief
Executive Officer, was advised by Wilmer J. Thomas, Jr. and Martin L. Solomon
that the previously negotiated sale of American Country Insurance Company
("American Country") for $40,250,000 (American Country's approximate book value
at December 31, 1996) by the then owner of American Country would not be
completed. Messrs. Solomon and Thomas and/or trusts created by them had been
shareholders of the former corporate parent of American Country ("Old Parent")
see " - Potential Conflicts" below. Messrs. Solomon and Thomas further advised
Mr. Barrett that they believed American Country would be available for sale on
substantially the same terms and conditions as those of the uncompleted sale and
that they were considering making such purchase. Mr. Barrett indicated the
Company, which had approximately $8,800,000 net in cash, would be a good vehicle
for the acquisition. Thereafter, Mr. Barrett held discussions with Messrs.
Solomon and Thomas and they concluded it would be advisable to have insurance
expertise in the investor group. Mr. Barrett subsequently approached Frontier
Insurance Group, Inc. ("Frontier"), a publicly-held specialty property and
casualty insurance company, with respect to participating in the proposed
acquisition. Frontier indicated a willingness to proceed and, in subsequent
discussions, the parties decided that Frontier would acquire 25% of the
Company's Common Stock for $8,800,000 and Messrs. Solomon and Thomas would
acquire 50% of the Company's Common Stock for $17,600,000, at a price of $1.10
per share, approximately equal to the Company's per share net cash value at that
time. On January 16, 1997, on or about the date these discussions were
initiated, the closing price of the Common Stock, as reported by The Nasdaq
SmallCap Market, was $1.00 per share. Shortly before executing the Asset
Purchase Agreement (as defined herein), Messrs. Solomon and Thomas determined
they would each acquire 25% of the Company's Common Stock.
Mr. Solomon, on behalf of the prospective investors and the Company,
negotiated the initial terms of the acquisition with the sellers, which terms
were substantially identical to the terms and conditions of the stock purchase
agreement previously negotiated with the sellers by the prior prospective
purchaser. Subsequent negotiations were conducted jointly by the Company and the
prospective investors with the representatives of the sellers. To minimize
possible liabilities of the parent company for which American Country could be
responsible, the transaction was restructured to an acquisition of the assets,
business and certain liabilities of American Country and its affiliated premium
insurance company, American Country Financial Services Corp.
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Potential Conflicts
The shareholders of Old Parent had sold their stock in December 1996 for
cash and notes (the "Notes"), which Notes were to be paid upon the purchaser's
sale of American Country. As a result of certain conditions of the sale, the
stock of American Country currently is held by a newly organized corporation
("New Parent") whose shareholders formerly were shareholders of Old Parent.
Messrs. Solomon and Thomas each owns 22.5% of New Parent, which assumed the
obligations under the Notes. Messrs. Solomon and Thomas (and/or trusts created
by each of them) each holds Notes in the amount of approximately $9,028,000,
which will be repaid upon consummation of the Proposed Acquisition. In addition,
Messrs. Solomon and Thomas are directors of American Country and each received
consulting fees from American Country of approximately $9,200 per month through
February 28, 1997 and $25,000 per month since March 1, 1997, which fees will
terminate upon the closing of the Proposed Acquisition. Accordingly, Messrs.
Solomon and Thomas may be deemed to have a potential conflict of interest with
the Company with respect to the Proposed Acquisition.
Frontier is actively seeking acquisitions in the insurance industry and the
Company and the investors have expressly acknowledged that Frontier and its
designee to the Company's Board of Directors will have no duty or obligation to
give notice of any prospective acquisition or acquisition proposal to the
Company or the Board, but may pursue such acquisition on Frontier's own behalf.
Further, in the event Frontier (or Messrs. Solomon, Thomas, Barrett or Gardner)
originates an acquisition, Frontier (or the originating party) will be entitled
to a finder's fee. See "Terms of the Proposed Acquisition - Financing of
Purchase Price" and "Other Agreements" below.
Mr. David Markin, the Chairman of American Country, a principal shareholder
of New Parent, and a trustee or co-trustee of two charitable trusts holding
Notes in the aggregate principal amount of approximately $22,069,000, will enter
into a 24-month consulting agreement with the Company at $5,000 per month
commencing upon consummation of the Proposed Acquisition.
Terms of the Proposed Acquisition
General
Pursuant to an asset purchase agreement dated April 30, 1997, a copy of
which is attached as Annex A to this Proxy Statement (the "Asset Purchase
Agreement"), the Company has agreed, subject to the satisfaction of certain
conditions, to purchase all of the assets, and to assume certain liabilities, of
American Country, an Illinois corporation, and American Country Financial
Services Corp., an Illinois corporation and wholly-owned subsidiary of American
Country ("ACFS"), for an aggregate purchase price of $40,250,000 (American
Country's approximate book value at December 31, 1996). The purchase will be
made by two newly-organized subsidiaries of the Company, which will acquire the
assets of American Country and ACFS, respectively.
Material Terms of Asset Purchase Agreement
The closing of the Proposed Acquisition (the "Closing") will take place
following the satisfaction or waiver of all conditions specified in the Asset
Purchase Agreement, including approval from the Illinois Department of Insurance
and all other requisite regulatory authorities, approval by the Company's
stockholders of the Proposed Acquisition and the Restated Certificate of
Incorporation, and the Company subsidiary that acquires the assets and business
of American
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Country maintaining a rating of "A-" by A.M. Best Company, Inc. Following the
Closing, substantially all representations and warranties by all sellers
expire.
American Country and New Parent have agreed to certain non-competition
provisions with respect to the underwriting or marketing of commercial property
and casualty insurance. The two controlling persons of New Parent who are not
participating as investors in the Proposed Acquisition have entered into
non-competition agreements in connection with the signing of the Asset Purchase
Agreement.
The Asset Purchase Agreement may be terminated prior to the Closing by
mutual written consent of the parties, or by either the Company or the sellers
following the occurrence of certain conditions or events, including, inter alia,
the conditions to Closing not being satisfied or waived prior to August 31,
1997.
Financing of Purchase Price
Financing of the $40,250,000 purchase price will be provided by the
Company's net cash of approximately $8,800,000, approximately $26,400,000 from
the Company's sale of approximately 24,000,000 shares of Common Stock to the
three investor groups, and the balance from a loan by a commercial bank.
Frontier and Messrs. Solomon and Thomas (Frontier and Messrs. Solomon and
Thomas, each an "Investor" and, collectively, the "Investors") have entered into
an agreement with the Company dated April 30, 1997 (the "Investment Agreement")
pursuant to which each Investor has agreed to purchase a 25% equity interest in
the Company at a price equal to the net cash or cash equivalents of the Company
on the date of closing (the "Investment Closing Date"), after deducting any and
all liabilities incurred prior to the Investment Closing Date, other than with
respect to the transactions contemplated hereby. It is anticipated that
approximately 8,000,000 shares of Common Stock will be issued pursuant to the
Investment Agreement to each Investor for approximately $8,800,000, a price of
approximately $1.10 per share. The closing under the Investment Agreement is
subject, among other conditions, to (i) the approval by the Company's
stockholders of the Proposed Acquisition, including the sale of the Common Stock
to the Investors, and of the Restated Certificate of Incorporation increasing
the authorized number of shares of Common Stock to provide a sufficient number
for issuance to the Investors pursuant to the Investment Agreement and
eliminating the classified Board of Directors, (ii) the concurrent closing of
the transactions contemplated by the Asset Purchase Agreement, and (iii) the
election of the nominees set forth in this Proxy Statement as directors of the
Company. See "Proposal II - Approval of Restated Certificate of Incorporation"
and "Proposal III - Election of Directors." The Investment Agreement may be
terminated prior to the Investment Closing Date by mutual consent of all parties
or, with certain exceptions, by any party in the event the Investment Closing
Date does not occur by August 31, 1997.
In the event an individual Investor dies prior to the Investment Closing
Date, the surviving individual Investor will have a three-day option to acquire
all or a portion of the shares of Common Stock subscribed for by the deceased
Investor and, to the extent such option is not exercised in full, Frontier will
acquire all or the balance of such shares. In the event the surviving individual
Investor dies prior to the Investment Closing Date, Frontier will be substituted
for such deceased Investor and will thereby acquire the shares subscribed for by
both individual Investors, or approximately 75% of the Company's equity.
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Under the Investment Agreement, the parties expressly acknowledged that
Frontier is actively seeking acquisitions in the insurance industry and that
neither Frontier nor its designee to the Company's Board of Directors will have
any duty or obligation to present or give notice of any prospective acquisition
or acquisition proposal to the Company or the Board. Also, under the Investment
Agreement, the Investors have certain "piggyback" registration rights with
respect to their shares of Common Stock.
The Company has received a commitment letter from a commercial bank for a
revolving loan facility of up to $7,000,000 and is negotiating the definitive
loan documentation.
Other Agreements
Pursuant to an ancillary agreement, in the event an Investor, or William J.
Barrett or Herbert M. Gardner, nominees for directors of the Company, or any
investment banking firm or other entity with which any such party may then be
affiliated, originates a financing, merger, acquisition, or similar transaction,
the originating party will be entitled to a finder's fee based upon a percentage
of the consideration paid in the transaction, ranging from 5% of the first
$1,000,000 to 1% of any consideration paid in excess of $4,000,000. In addition,
a customary brokerage fee will be paid with respect to originating the
acquisition of a portfolio of insurance business.
Pursuant to an additional ancillary agreement, the Investors and Messrs.
Barrett and Gardner have agreed to use their best efforts to cause the Board of
Directors of the Company subsidiary acquiring the assets and business of
American Country to create an Executive Committee comprised of Messrs. Barrett,
Solomon and Peter H. Foley (Frontier's nominee), to review the business of the
subsidiary and take action with respect thereto to the extent consistent with
Illinois law. In addition, the Company and Frontier have agreed to structure a
fee arrangement to compensate Frontier for its services to the Company and its
subsidiary.
Effect of Proposed Acquisition on Company's Outstanding Warrants
Following consummation of the Proposed Acquisition, the exercise terms of
the Company's outstanding common stock purchase warrants (Nasdaq SmallCap:
WTSMW) which expire December 31, 1997, will be adjusted, pursuant to their
anti-dilution provisions, to entitle the holder of each warrant to purchase
approximately 2.1 shares at approximately $1.85 per share. Currently, each
warrant entitles the holder to purchase one share at $4.00 per share.
Description of American Country
A description of American Country, followed by pro forma financial
information of the Company and American Country, is set forth commencing on page
18 of this Proxy Statement. The audited consolidated financial statements of
American Country as at December 31, 1996 and for the three years then ended are
included herein commencing on page F-1.
Company Reports
Copies of the Company's Annual Report on Form 10-K, as amended, for the year
ended December 31, 1996 (the "10-K Report"), and the Company's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1997 (the "10-Q Report") are
attached as Annex B and Annex C, respectively, to this Proxy Statement. Any
statements therein are modified or superseded,
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<PAGE>
for purposes hereof, to the extent that a statement contained herein modifies
or supersedes such statement.
See "Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," Items 6 and 7, respectively, of
the 10-K Report, and the other information appearing therein, and the
information appearing in the 10-Q Report.
Accounting Treatment
For accounting purposes, the transaction is being treated as a reverse
acquisition. The financial statements of American Country will be reported at
historical value and the net assets of the Company will be reported at fair
value which is consistent with their book value.
Certain Federal Income Tax Consequences
The Company will not realize any gain or loss from the issuance of Common
Stock to the Investors in consideration for their respective payments under the
Investment Agreement.
The Company's adjusted basis in the assets being acquired (including
non-depreciable intangible assets) will be determined by allocating the total
consideration paid by the Company among such assets in accordance with
allocation rules prescribed by the Internal Revenue Code and the Treasury
Regulations thereunder. For these purposes, the total consideration paid will
include all liabilities of American Country and ACFS that are assumed by the
Company. The Company's holding period in such assets will commence on the date
of the Closing.
The Proposed Acquisition, including the financing contemplated by the
Investment Agreement, will not have any federal income tax consequences to the
Company's current stockholders.
Recommendation of the Board of Directors
In determining whether to approve the Proposed Acquisition and recommend
its approval by the Company's stockholders, the Board of Directors considered a
number of factors, including the following:
o American Country's history of earnings and that during each of the
three years ended December 31, 1996, the consolidated net income
(GAAP) of American Country and ACFS increased from $4,265,000 to
$4,969,000 to $5,025,000.
o That the $40,250,000 purchase price was substantially equivalent to
the consolidated book value in accordance with generally accepted
accounting principles ("GAAP") of American Country and ACFS at
December 31, 1996.
o The willingness of Frontier, a publicly-held specialty property and
casualty insurance company, to participate in the Proposed Acquisition
on a pro-rata basis and to assist in the due diligence and in the
on-going management of the Company and its business.
o The prospects for growth and additional acquisitions in the insurance
industry.
10
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The Company's Board of Directors also considered a variety of potentially
negative factors in its deliberations concerning the Proposed Acquisition,
including the following:
o Its limited familiarity with the operations of an insurance company.
o The potential conflicts of interest of the Investors.
o The cyclical nature of the insurance industry.
o American Country's consolidated net loss of $118,000 for the three
months ended March 31, 1997 which American Country's management has
advised was due principally to losses from severe weather conditions
in the Chicago area in February 1997 and certain adverse workers'
compensation claims.
In view of the foregoing and such other matters as it deemed relevant, the
Board did not consider it necessary to obtain a fairness opinion with respect to
the Proposed Acquisition and approved the Proposed Acquisition, the Asset
Purchase Agreement and the Investment Agreement as being in the best interest of
the Company's stockholders.
The foregoing discussion of the information and factors considered and
given weight by the Company's Board of Directors is not intended to be
exhaustive, but is believed to include the material factors considered by the
Board. In addition, in reaching the determination to approve the Proposed
Acquisition, in view of the wide variety of factors considered in connection
with its evaluation, the Company's Board did not find it practical to, and did
not, quantify or otherwise attempt to assign any relative or specific weights to
the foregoing factors, and individual directors may have given differing weights
to different factors.
ACCORDINGLY, THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR
APPROVAL OF THE PROPOSED ACQUISITION, WHICH INCLUDES APPROVAL OF THE SALE OF
APPROXIMATELY 24,000,000 SHARES OF COMMON STOCK TO THE INVESTORS FOR
APPROXIMATELY $26,400,000.
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PROPOSAL II - APPROVAL OF RESTATED CERTIFICATE OF INCORPORATION
Background
The Board of Directors has adopted, subject to stockholder approval, a
Restated Certificate of Incorporation, which amends the Company's Certificate of
Incorporation (the "Amendments") and restates the Certificate of Incorporation
in its entirety as amended to date, inclusive of the Amendments. Certain of the
Amendments are required to complete the financing for the Proposed Acquisition
and fulfill commitments under the Investment Agreement (increasing the
authorized number of shares of Common Stock and declassifying the Board) and the
balance, essentially, are "housekeeping" in nature. The Amendments are described
below and the form of the Restated Certificate of Incorporation is attached as
Appendix D to this Proxy Statement.
Increase in the Authorized Shares of Common Stock
The Company presently is authorized to issue 25,000,000 shares of Common
Stock, of a par value of $.60 per share. On the Record Date, there were
7,903,421 shares issued and outstanding and 768,117 shares reserved for issuance
(including the shares reserved for issuance upon conversion of warrants and
exercise of the stock options).
The Amendments increase the authorized number of shares of Common Stock
from 25,000,000 shares to 60,000,000 shares and reduce the par value from $.60
per share to $.01 per share. Such increase is required for the Company to have
sufficient shares to complete the sale of shares of Common Stock pursuant to the
Investment Agreement.
Change of Company's Name
The Amendments change the name of the Company from "The Western Systems
Corp." to "American Country Holdings Inc." to better reflect the Company's
business.
Declassification of the Board of Directors
The Certificate of Incorporation provides for the division of the Board of
Directors into three (3) classes, with the directors of each class having
staggered three-year terms following the initial classification.
The Amendments eliminate the division of the Board into classes and provide
for a one-year term for all directors. The declassification is required to
fulfill a condition of the Investment Agreement.
"Housekeeping" Amendments
The Amendments also effect the following "housekeeping" changes:
(1) Deletion of provisions relating to the specific nature of the Company's
business or purposes to be conducted, which are unnecessary;
(2) Deletion of provisions setting forth the names and addresses of the
Company's incorporators, which are unnecessary;
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<PAGE>
(3) Deletion of provisions relating to the perpetual existence of the
Company, which are unnecessary;
(4) Deletion of provisions relating to specified powers of the Board of
Directors, including such Board's ability to designate one or more committees of
such Board, which are unnecessary;
(5) Deletion of provisions relating to meetings of stockholders being held
and books of the Company being kept within or outside of the State of Delaware,
which are unnecessary;
(6) Deletion of provisions regarding the Company's reservation of its right
to amend, alter, change or repeal any provision contained in its Certificate of
Incorporation, which are unnecessary; and
(7) Revision of provisions relating to the elimination of personal
liability of directors and the indemnification of persons acting on behalf of
the Company in order to provide the directors with protection from personal
liability for their acts on behalf of the Company and provide indemnification to
those persons acting on behalf of the Company, to the fullest extent permitted
by the Delaware General Corporation Law.
Required Vote
Approval of the Restated Certificate of Incorporation, which amends and
restates the Company's Certificate of Incorporation, requires the affirmative
vote by the holders of a majority of the outstanding shares of Common Stock
(3,951,711 shares of the 7,903,421 shares outstanding). Unless marked to the
contrary, proxies received will be voted FOR approval of the Restated
Certificate of Incorporation.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR APPROVAL OF
THE RESTATED CERTIFICATE OF INCORPORATION.
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PROPOSAL III - ELECTION OF DIRECTORS
The Board of Directors currently consists of seven (7) directors and has
been classified into three classes. As a result of this classification of
directors, one class of directors is elected each year for a three-year term. If
the Restated Certificate of Incorporation is approved, the current directors
will resign effective upon the Company's filing of the Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware (the
"Effective Time"), following which, in accordance with the terms of the Restated
Certificate of Incorporation, the Board of Directors will no longer be
classified. The Company anticipates filing the Restated Certificate of
Incorporation as soon as practicable following stockholder approval.
At the Special Meeting, six (6) unclassified directors are to be elected
and to hold office commencing at the Effective Time and until the 1998 Annual
Meeting of Stockholders and their successors are duly elected and qualified. The
election of the six nominees is a condition to the closing under the Investment
Agreement. Peter H. Foley is a designee of Frontier, one of the Investors, and
Messrs. Martin L. Solomon and Wilmer J. Thomas, Jr., are the two other
Investors. In the event the Proposed Acquisition and Restated Certificate of
Incorporation are not approved, Messrs. Foley, Solomon and Thomas and Mr. Edwin
W. Elder, III will step down as nominees for directors, and the current
directors will remain in office until their successors are duly elected and
qualified.
Unless otherwise specifically directed by stockholders executing proxies,
it is intended that all proxies in the accompanying form received in time for
the Special Meeting will be voted at the Special Meeting FOR the election of the
six (6) nominees named below. In the event any nominee should become unavailable
for election for any presently unknown reason, it is intended that the proxies
will be voted for such substitute nominee as may be designated by the present
Board of Directors. If a quorum is present, a plurality vote of the total votes
cast by the holders of the Common Stock is required to elect the six (6)
directors.
Each nominee's name, age, office with the Company, if any, the year first
elected as a director, if currently a director, and certain biographical
information are set forth below:
Name Age Position
---- --- --------
William J. Barrett 57 Acting Chief Executive Officer,
Acting Assistant Treasurer and
Chairman of the Board
Herbert M. Gardner 57 Director
Martin L. Solomon 60 Director
Wilmer J. Thomas, Jr. 70 Director
Peter H. Foley 48 Director
Edwin W. Elder III 54 Director
William J. Barrett was elected Acting Chief Executive Officer of the
Company in January 1997, has served as a director of the Company since January
1992, as Assistant Treasurer of the Company since August 1992 and as Secretary
from August 1992 through January 1997. Mr. Barrett has been employed as a Senior
Vice President of Janney
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Montgomery Scott Inc., an investment banking firm, for more than five years.
Mr. Barrett is a director of the following publicly-held corporations: Supreme
Industries, Inc., a specialized truck body manufacturer; Fredericks of
Hollywood, Inc., an apparel marketing company; Shelter Components Corporation, a
supplier to the manufactured housing and recreation vehicle industries and a
manufacturer of bathroom products; TGC Industries, Inc., a provider of
geophysical services to the oil and gas industries; and Chase Packaging, a
manufacturer and distributor of specialized packaging, principally to the
agricultural industry.
Herbert M. Gardner has been a director since the Company's inception and
has been a Senior Vice President of Janney Montgomery Scott Inc., an investment
banking firm, for more than five years. He currently serves as Chairman of the
Board of Supreme Industries, Inc., a manufacturer of specialized truck bodies
and shuttle buses, and as a director of the following publicly held
corporations: Shelter Components Corporation, a supplier to the manufactured
housing and recreational vehicle industries; Nu Horizons Electronics Corp., an
electronic component distributor; Transmedia Network, Inc., a marketer of charge
cards offering discounts at participating restaurants and on certain other
products and services; TGC Industries, Inc., a provider of geophysical services
to the oil and gas industries; Hirsch International Corp., an importer of
computerized embroidery machines, developer of application software for such
machines and provider of other value added services to the embroidery industry;
and Chase Packaging, a manufacturer and distributor of specialized packaging
principally to the agricultural industry.
Martin L. Solomon is a private investor. From 1989 to 1996, Mr. Solomon was
a director and Vice Chairman of Great Dane Holdings Inc. ("Old Parent" - See
Proposal I - Acquisition of American Country - Background), formerly in the
businesses of manufacturing truck trailers and automobile stampings, leasing
taxis and, through American Country, property and casualty insurance. Mr.
Solomon is a director of the following publicly-held corporations: XTRA
Corporation, a transportation equipment leasing company, DLB Oil & Gas, Inc., an
oil exploration and production company, and Hexcel Corp., a manufacturer of
composites.
Wilmer J. Thomas, Jr. is a private investor and financial consultant. From
1989 to 1996, Mr. Thomas was a director and Vice Chairman of Great Dane
Holdings Inc. ("Old Parent" See Proposal I - Acquisition of American Country -
Background), formerly in the businesses of manufacturing truck trailers and
automobile stampings, leasing taxis and, through American Country, property and
casualty insurance. Mr. Thomas is a director of Moore Medical Corp., a publicly
held pharmaceutical and surgical supply company.
Peter H. Foley has been Executive Vice President of Frontier since October
1996, and from June 1995 to October 1996 served as a Vice President of Frontier.
Mr. Foley served as Vice President of Aegis Security Insurance Company from
September 1993 to June 1995, as Executive Vice President and co-founder of
Connecticut Surety Insurance Company from May 1993 to September 1993, and as
Senior Vice President of E.W. Blanch, Inc. from November 1991 to May 1993. Mr.
Foley has served in various executive officer positions in the insurance
industry for more than 22 years.
Edwin W. Elder III has been President and a director of American Country
since 1993. From 1985 to 1993, he served as Senior Vice President of Operations
for Employers' Health Insurance Company and IDS Property Casualty. Mr. Elder has
26 years of experience in the insurance industry and started his career with
State Farm Insurance Company after leaving the United States
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Army, where he attained the rank of Captain. He is a CPCU (Chartered Property &
Casualty Underwriter) and an FLMI (Fellow Life Management Institute).
-----------------
Mr. Foley is Frontier's designee to the Board of Directors. Pursuant to the
Investment Agreement, Mr. Foley expressly has no duty to give notice of any
prospective acquisition or acquisition proposal to the Company or the Board, and
may pursue such acquisition on Frontier's behalf. See "Proposal I - Acquisition
of American Country - Terms of the Proposed Acquisition."
Meetings and Committees of the Board of Directors
For the fiscal year ended December 31, 1996, there were four meetings of
the Board of Directors. In addition, members of the Board of Directors consulted
regularly with each other and from time to time acted by unanimous written
consent without a meeting. No director attended fewer than 75% of the aggregate
total number of meetings held by (i) the Board during the period in 1996 in
which he was a director and (ii) all committees of the Board in which he served
in 1996 during the period he served on such committees. The Board of Directors
does not presently have a standing audit or nominating committee, the customary
functions of such committees being performed by the entire Board of Directors.
The Compensation and Stock Option Committee, which during 1996 consisted of
William J. Barrett, C. Scott Bartlett, Jr., and Richard O. Starbird, makes
recommendations to the Board of Directors regarding compensation of executive
officers and administration of the Company's 1992 Stock Option Plan. It acted
two times by unanimous written consent without a meeting during 1996.
Company Reports
A copy of the Company's Annual Report on Form 10-K, as amended, for the
year ended December 31, 1996 (the "10-K Report") is attached as Annex B to this
Proxy Statement. Any statements contained therein are modified or superseded,
for purposes hereof, to the extent that a statement contained herein modifies or
supersedes such statement.
See "Market for the Registrant's Common Equity and Related Stockholder
Matters" and "Executive Compensation," Items 5 and 11, respectively, of the 10-K
Report, together with the other information appearing therein.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR EACH OF THE
SIX (6) NOMINEES TO SERVE AS MEMBERS OF THE BOARD OF DIRECTORS AFTER THE SPECIAL
MEETING.
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PROPOSAL IV - RATIFICATION OF APPOINTMENT OF
INDEPENDENT AUDITORS
Subject to ratification by the stockholders, the Board of Directors intends
to appoint Ernst & Young LLP, the independent auditors for American Country, as
independent auditors for the year ending December 31, 1997, replacing Lazar,
Levine and Company LLP, the Company's current independent auditors, effective
after the Closing of the Proposed Acquisition. The reports of Lazar, Levine and
Company LLP with respect to the Company's financial statements for its prior two
fiscal years did not contain an adverse opinion or a disclaimer of an opinion
and were not qualified or modified as to uncertainty, audit scope or accounting
principles. The Company had no disagreements with Lazar, Levine & Company LLP on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure, but in view of the Proposed Acquisition,
decided, upon the recommendation of its Board of Directors, it would be
advisable to retain Ernst & Young LLP, American Country's independent auditors,
as its independent auditors after the Closing of the Proposed Acquisition.
It is anticipated that a representative of Ernst & Young LLP will be
present at the Meeting to answer questions within such firm's field of
expertise.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE PLANNED
APPOINTMENT OF ERNST & YOUNG LLP AS INDEPENDENT AUDITORS FOR THE YEAR ENDING
DECEMBER 31, 1997.
STOCKHOLDER PROPOSALS
Any stockholder proposal to be considered for inclusion in the Company's
proxy soliciting material for the 1998 Annual Meeting of Stockholders must be
received by the Company at its principal office by December 31, 1997.
OTHER MATTERS
Management does not know of any matter to be brought before the Special
Meeting other than as described above. In the event any other matter properly
comes before the Special Meeting, the persons named in the accompanying form of
proxy have discretionary authority to vote on such matters.
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AMERICAN COUNTRY INSURANCE COMPANY
General
American Country is a property and casualty insurance company, domiciled in
the State of Illinois, underwriting and marketing commercial, specialty and
personal lines of insurance. commercial lines, principally workers'
compensation, multi-peril, and auto liability and physical damage, accounted for
approximately 46.8% of American Country's direct premiums written in 1996, and
the related policies were marketed, inter alia, to artisan contractors and
distributors, restaurants and transportation companies. Specialty lines,
principally liability and collision coverage for taxicabs and limousine
companies in the City of Chicago and surrounding suburbs, accounted for
approximately 39.1% of 1996 direct written premiums, and personal lines,
primarily auto and homeowners' policies, accounted for the balance. American
Country conducts business on an admitted basis in the States of Illinois,
Indiana, Michigan, Wisconsin and, effective June 1, 1997, Iowa, and conducts
business on a non-admitted basis as an excess and surplus lines carrier in 31
States.
American Country is a wholly-owned subsidiary of American Country Holding
Corp. ("New Parent"). ACFS, its wholly-owned subsidiary, operates principally as
a premium finance company. American Country is rated A- (Excellent) by A.M. Best
Company.
Insurance Lines
The following table sets forth the direct premiums written by principal
lines of business over the last three years and the respective percentages of
total premiums represented thereby for each of such years.
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<TABLE>
<CAPTION>
For the Year Ending December 31,
--------------------------------------------------------------
1994 1995 1996
------------------ ------------------- ------------------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
Personal Lines: ..............
Auto ..................... $ 3,718 6.6% $ 5,442 8.7% $ 6,414 9.6%
Homeowners' .............. 688 1.2 885 2.9 3,007 4.5
------- ----- ------- ----- ------- -----
Total Personal Lines .. 4,406 7.8 7,327 11.6 9,421 14.1
Commercial Lines:
Workers' Compensation .... 16,553 29.3 17,004 27.1 15,821 23.7
Auto1 .................... 3,813 6.8 4,351 6.9 4,336 6.5
Multi-Peril .............. 7,997 14.2 8,216 13.1 9,008 13.5
Other Liability .......... 1,759 3.1 2,012 3.2 1,941 2.9
Fidelity & Surety ........ 243 0.4 97 0.2 (46) (0.1)
Fire ..................... 51 0.1 141 0.2 51 0.1
Allied Lines ............. 35 0.1 75 0.1 37 0.1
Inland Marine ............ 97 0.2 69 0.1 62 0.1
------- ----- ------- ----- ------- -----
Total Commercial Lines 30,548 54.2 31,965 50.9 31,210 46.8
Specialty Lines:
Yellow Cab Taxi Liability 10,542 18.7 10,347 16.5 10,635 16.0
Yellow Cab Affiliation
Liability .............. -- -- -- -- 78 0.1
Checker Taxi Association
Liability .............. 5,030 8.9 6,191 9.8 7,587 11.4
Independent Taxi Collision 1,770 3.1 1,870 3.0 1,952 2.9
Suburban Taxi Liability .. 1,774 3.1 2,602 4.1 3,679 5.6
Other City Taxi Liability. 56 0.1 607 1.0 671 1.0
Limousine Liability(1) ... 2,299 4.1 1,926 3.1 1,342 2.0
Other Taxi Physical
Damage(2) .............. -- -- 25 0.0 47 0.1
------- ----- ------- ----- ------- -----
Total Specialty Lines . 21,471 38.0 23,568 37.5 25,991 39.1
------- ----- ------- ----- ------- -----
Total Direct Premiums Written $56,425 100% $62,860 100% $66,622 100%
======= ===== ======= ===== ======= =====
</TABLE>
- --------
(1) Includes liability and physical damage.
(2) Includes suburban and city taxi physical damage.
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<PAGE>
Commercial
The following table sets forth the various commercial business risks,
categorized by business group, that American Country underwrites.
Business Services
Office Machine Repair
Copying and Duplicating
Printing
Mailing and addresses
Locksmiths
Commercial Real Estate
Shopping Centers
Industrial Parks
Office Buildings
Condominium Associations
Manufacturers
Food Processors
(Excluding alcoholic beverages)
Fabricated Metal Products
(Exclusive of auto and aircraft
applications)
Fabric Manufacturers
Paper Products
Plastics
Furniture, Fixtures and Ceramics
Construction
Artisan Contractors in the fields of:
Plumbing
Electrical
Concrete Flat Work
HVAC
Masonry
Wallboard
Carpentry
Office Buildout
Landscape
Painting
Siding
Exterior Work - not to exceed 2 stories
Wholesale/Retail/Distributors
New Building Materials Equipment and
Supplies
Hardware
Plumbing and Heating
Office Machines, Supplies, Paper
Food and Beverages
Home Furnishings/Contents
"Mainstreet" USA Businesses
Specialty
The specialty lines segment consists principally of liability and collision
coverage for taxicabs and limousine companies in the City of Chicago and
surrounding suburbs. Until December 1996, the specialty lines segment consisted
of Yellow Cab Company ("Yellow Cab") and other transportation risks. See " -
Affiliated Operations." Yellow Cab taxi liability, which accounted for $10.6
million of direct premiums written in 1996, declined as a percentage of total
direct premiums from 18.7% in 1994 to 16.0% in 1996. Other specialty line risks
include liability and physical damage coverage to independent medallion-owners
who are members of the Checker Taxi Association of Chicago (the "Checker Taxi
Association"). American Country has entered into long-term contracts with
Yellow Cab and the Checker Taxi Association to provide them with taxicab-related
coverages. Liability coverage is also provided to various taxi operators that
conduct business in either the City of Chicago or other communities throughout
Illinois, including the Korean American Association for its independent
medallion-owner members.
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Personal
American Country's personal lines business consists of both standard and
preferred risks and insures medium-value homes, automobiles and personal
property.
ACFS
ACFS operates principally as a premium finance company under the
regulations of the Illinois Department of Insurance, financing commercial and
personal insurance premiums and providing collateral loan financing to members
of the Checker Taxi Association. For the year ended December 31, 1996, ACFS
realized net income of $157,836, a 1.3% decrease from 1995.
Marketing
American Country relies on in-house personnel to produce Yellow Cab taxi
liability, Yellow Cab Affiliation liability, Checker Taxi Association liability
and independent taxi collision insurance policies, and independent agents to
market its other insurance products. All agents are required to achieve a
first-year quota of $200,000 of premiums written, increasing to $500,000 in the
early years of representation. American Country does not contract with agents
writing a predominance of non-standard or surplus line business.
As of December 31, 1996, American Country contracted with approximately 85
agents, a majority of whom worked exclusively in personal lines and most of whom
were located in Chicago and the surrounding suburbs. Until early 1994, American
Country's agents were located solely in the metropolitan Chicago area. At
present, American Country has five agents in the major downstate Illinois cities
of Peoria, Rockford, Springfield, Decatur and Champaign, four agents in Indiana
(Indianapolis, South Bend, Elkhart and Fort Wayne), and five agents in
Wisconsin.
Affiliated Operations
Prior to December 1996, American Country was affiliated with Yellow Cab,
for which American Country provided automobile liability, physical damage and
workers' compensation coverage on an "arm's-length" basis. American Country has
entered into a long-term contract with Yellow Cab to continue to provide Yellow
Cab such services. Yellow Cab is the largest taxicab fleet owner in Chicago,
leasing taxicab licenses and vehicles to independent taxi operators.
Product Pricing
American Country's insurance products are priced by its staff of 13
underwriters who are based in American Country's home office and are involved in
risk selection, pricing and renewal analysis. The underwriters use a
computerized pricing index which incorporates statistical
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<PAGE>
information provided by the Insurance Services Office for particular products
and the National Council on Compensation Insurance for workers' compensation
insurance products.
Loss and LAE Reserves
Significant periods of time may elapse between the occurrence of an insured
loss, the reporting of the loss to American Country and its payment of such
loss. To recognize liabilities for unpaid losses, American Country establishes
reserves, which are balance sheet liabilities representing estimates of the
amounts needed to pay claims and related expenses with respect to uninsured
events which have occurred, including those not yet reported ("IBNR").
All claims are investigated, supervised and adjusted by American Country's
claims department, which selects counsel and outside adjusting firms, if
required, and monitors each claim and approves any settlement. Claims are
assigned to independent adjusters only if it is geographically impractical to
service the claim from American Country's Chicago office or if the claim
requires specialized skills. American Country has an in-house law firm of 13
attorneys with a 16 person support staff to handle all aspects of defense
litigation. Automated systems enable American Country to pay valid claims within
two days of receiving a payment request from a client. American Country believes
claims management is critical to controlling the amount of paid losses.
American Country's claims adjusting personnel use the Hovinen Method to
project ultimate accident year loss reserves and to help evaluate underwriting
performance and set pricing rates. The Hovinen Method is a blend of two commonly
used methods: the Bornhuetter/Ferguson method and the loss development method.
The Bornhuetter/Ferguson method projects IBNR by combining a forecast of loss
ratios for each accident year with an actuarial analysis of historical loss
emergence by accident year. The loss development method models the patterns by
which losses have been reported over time (known as loss development triangles)
for each of American Country's classes of business, and extrapolates the current
value of losses reported to an ultimate expected value.
The reserves for losses and loss adjustment expenses ("LAE") are estimated
using loss evaluations and actuarial projections and represent estimates of the
ultimate net cost of all unpaid losses and LAE incurred through December 31 each
year. These estimates are subject to the effect of trends in claims severity and
frequency and are continually reviewed. As part of this process, historical data
are reviewed and consideration is given to the anticipated impact of various
factors, such as legal developments, changes in social attitudes, and economic
conditions, including the effects of inflation. As experience develops and other
data becomes available, these estimates are revised, as required, resulting in
increases or decreases in reserves for insured events of prior years. Future
adjustments, if any, will be reflected in the results of operations in the
period in which recognized.
The following table sets forth American Country's GAAP net loss and LAE
reserves by line of business at December 31, 1996. For GAAP and statutory
purposes, American Country's reserves are carried without any discount to
reflect the time value of money.
22
<PAGE>
Line of Business Case Basis IBNR Total % of Total
------------------ ---------- ------ ------- -----------
(Dollar amounts in thousands)
Commercial multiple peril ...... $10,746 $ 2,131 $12,877 $ 15.0%
Workers' compensation .......... 14,309 6,714 21,023 24.5
Private passenger auto liability 2,617 898 3,515 4.1
Commercial auto liability ...... 38,179 7,771 45,950 53.5
Surety ......................... 7 -- 7 --
All other ...................... 1,318 1,155 2,473 2.9
------- ------- ------- ------
Total Reserves ............ $67,176 $18,669 $85,845 100.0%
======= ======= ======= ======
American Country performs an independent comprehensive loss reserve review
annually, as well as a quarterly interim analysis that compares the actual and
expected reported losses in that quarter.
Investments
Funds, including reserve funds, are invested until required for American
Country's operations, subject to restrictions on permissible investments
established by applicable state insurance codes. American Country's investment
strategy is to maximize pre-tax return while generally limiting investments to
investment grade securities with high liquidity. In accordance with the
investment policies established by American Country's Board of Directors,
American Country has no investments in collateralized mortgage obligations or
derivative securities. Currently, American Country's investment portfolio is
being managed by American Country's Board of Directors.
The following table contains information concerning American Country's
investment portfolio at December 31, 1996.
Net
% Fair Investment
Cost(1) of Total Value Income
--------- --------- ---------- ---------
(Dollar amounts in thousands)
Cash ...................... $ 4,568 3.7% $ 4,568 $ 95
Short-term investment (STI) 5,300 4.3 5,300 300
Total cash and STI ...... $ 9,868 8.0 $ 9,868 395
Bonds ..................... $ 100,857 81.5 $102,149 $6,497
Preferred stocks .......... 7,176 5.8 7,307 545
Common stocks ............. 2,217 1.8 2,436 150
Subsidiary (ACFS) ......... 1,000 0.8 1,447 --
Mortgage loans &
collateral loans ........ 2,562 2.1 2,562 259
Expenses .................. (814)
--------- ----- -------- ------
Total .......... $ 123,680 100.0% $125,769 $7,032
========= ===== ======== ======
- --------
(1) Represents cost or amortized cost for fixed income securities.
23
<PAGE>
The following table sets forth a profile of American Country's fixed
maturity investment by rating as of December 31, 1996.
Amount
Reflected on
Moody's Rating Fair Value Balance Sheet % of Total
- ----------------- ------------- ---------------- ----------
(Dollar amounts in thousands)
Aaa, Aa, A ..... $ 98,266 $ 98,089 96.2%
Baa ............ 3,018 2,978 2.9
Ba ............. 396 396 0.4
B .............. 469 469 0.5
-------- -------- ----
Total $102,149 $101,932 100.0%
======== ======== =====
The following table sets forth the maturity profile of American Country's
fixed maturity investments at December 31, 1996.
Amount
Reflected on
Maturity Fair Value Balance Sheet % of Total
- ----------------- ------------- ---------------- ----------
(Dollar amounts in thousands)
Due in one year or less ........ $ 8,867 $ 8,850 8.7%
Due after one year to five years 40,255 40,138 39.4
Due after five years to 10 years 37,732 37,739 37.0
Due after 10 years ............. 5,295 15,205 14.9
-------- -------- -----
Total ............... $102,149 $101,932 100.0%
======== ======== =====
24
<PAGE>
The following table summarizes American Country's investment performance
for the six years 1991 through 1996.
Year Ended Average Net Investment Effective
December 31, Investment1 Income Yield3 Total Return
- ------------- ----------- ------------- ----------- ------------
(Dollar amounts in thousands)
1991 $ 85,150 $6,326 7.43% 7.28%
1992 93,233 6,121 6.56 6.57
1993 99,713 5,707 5.72 6.20
1994 101,709 5,504 5.41 5.50
1995 110,130 6,267 5.69 5.59
1996 123,40 7,032 5.70 5.87
-------- ---------------- ----- ----
Six-Year
Average 6.09% 6.17%
- ----------------------
(1) Average of the beginning and ending amounts of invested assets for the
period at book value, including cash, from 1991 to 1993. In 1994, in
accordance with the implementation of Financial Accounting Standards Board
115, the Company's investment portfolio is carried at fair value.
Accordingly, the average invested assets for 1994, 1995 and 1996 represent
the average fair value during the year.
(2) After investment expenses, excluding effect of realized capital gains and
losses.
(3) Net investment income for the period divided by the average investments for
the period.
Risk Management and Reinsurance
American Country seeks to maintain its risk exposure at appropriate levels
by setting maximum coverage limits by class and type of business and for each
client, and by purchasing reinsurance coverage. In order to manage its risk
exposure, American Country's current treaty for property and casualty coverage
provides for a maximum retention of $250,000 per program for a single
occurrence. As of December 31, 1996, American Country's three largest reinsurers
were Motors Insurance Company (rated A+ by A.M. Best), Security Insurance Co. of
Hartford (rated A by A.M. Best) and Kemper Reinsurance Company (rated A- by A.M.
Best), which had $2,374,000, $1,276,000 and $1,117,000, respectively, of
reinsurance recoverables.
Catastrophe protection is purchased for American Country's property
business providing coverage for an accumulation of losses from the same event.
American Country's current catastrophe program provides $8,000,000 of coverage
in excess of a $250,000 retention.
25
<PAGE>
Information Systems
American Country's information systems department is responsible for
American Country's investments in computers and management information systems.
The information systems department maintains a staff of four, which includes
programmers and operations personnel. The average information systems experience
for the staff is 10 years. American Country uses an IBM AS/400 system
architecture and software. American Country is on the WINS system and has
recently updated its rating system to ISI Systems, Inc.
Regulation
American Country is subject to regulation and supervision by the insurance
commissioners of the States of Illinois, Indiana, Michigan and Wisconsin. Such
regulation generally is designed to protect policyholders rather than investors
and relates to such matters as the standards of solvency which must be met and
maintained; the licensing of insurers and their agents; the nature of and
examination of the affairs of insurance companies, which includes periodic
market conduct examinations by the regulatory authorities; annual and other
reports, prepared on a statutory accounting basis, required to be filed on the
financial condition of insurers or for other purposes; establishment and
maintenance of reserves for unearned premiums and losses; and requirements
regarding numerous other matters. American Country must file all rates for
insurance directly underwritten with the applicable state insurance departments.
Reinsurance generally is not subject to rate regulation. Further, state
insurance statutes place limitations on the amount of dividends or other
distributions payable by insurance companies in order to protect their solvency.
The National Association of Insurance Commissioners ("NAIC") has
established eleven financial ratios to assist state insurance departments in
their oversight of the financial condition of insurance companies operating in
their respective states. The NAIC calculates these ratios based on information
submitted by insurers on an annual basis and shares the information with the
applicable state insurance departments. The ratios relate to leverage,
profitability, liquidity and loss reserve development.
In their ongoing effort to improve solvency regulation, the NAIC and
individual states have enacted certain laws and statutory-basis financial
statement reporting requirements. For example, NAIC rules require audited
statutory financial statements as well as actuarial certification of loss and
LAE reserves therein. Other activities are focused on greater disclosure of an
insurer's reliance on reinsurance, changes in its reinsurance programs and
accounting for certain overdue reinsurance. In addition, the NAIC has
implemented risk-based capital requirements for property and casualty insurance
companies commencing in 1995 (see below). These regulatory initiatives and the
over all focus on solvency may intensify the restructuring and consolidation of
the insurance industry. It is also possible that Congress may enact legislation
regulating the insurance industry. While the impact of these regulatory efforts
on American Country's operations cannot be quantified until enacted, American
Country believes it will be adequately positioned to compete in an environment
of more stringent regulation.
In 1994, the NAIC implemented a risk-based capital measurement formula to
be applied, commencing in 1995, to all property/casualty insurance companies,
which formula calculates a minimum required statutory net worth based on the
underwriting, investment, credit loss reserve and other business risks
applicable to the insurance company's operations. An insurance
26
<PAGE>
company that does not meet threshold risk-based capital measurement standards
could be required to reduce the scope of its operations and ultimately could
become subject to statutory receivership or other similar proceedings.
Competition
The property and casualty insurance business is highly competitive,
principally in terms of price and extent of overage. Many insurance carriers are
submitting applications for admission to the states in which American Country
markets its insurance coverage.
In response, American Country will continue to focus on marketing to
specialty niches including artisan contractors and upscale restaurants, areas in
which American Country's personnel have extensive experience. American Country
has the largest market share of property and casualty insurance coverage for the
taxicab market in the Chicago Metropolitan area. Competitors for taxicab
liability coverage in Chicago and the surrounding area include Merit Insurance
Company and Acceptance Insurance Company. American Country competes with CNA
Insurance Company, West Bend Insurance Company and Fremont Insurance Company for
workers' compensation.
Employees
American Country had 170 full-time employees as of December 31, 1996, nine
of whom are executive management. American Country is not a party to any
collective bargaining agreement and believes its relationship with its employees
to be good.
Properties
American Country leases (i) approximately 39,000 square feet of office
space in Chicago, Illinois under a lease expiring in May 2002 at a monthly
rental of approximately $63,100, subject to annual increases, (ii) 630 square
feet of space for a drive-in claim center under a lease expiring in July 1998 at
a monthly rental of approximately $1,000, and (iii) 7,125 square feet of storage
space, 6,000 square feet of which is under a lease expiring in February 2000 at
a monthly rental of $1,700, subject to annual increases, and the balance of
which is leased on a month-to-month basis at a monthly rental of $700.
27
<PAGE>
Management
The following table lists each director and each executive officer,
together with their respective age and office(s) held:
Name Age Position
- ----------------------------- -------- -------------------------------------
David R. Marken.............. 66 Chairman and Director
Edwin W. Elder III........... 54 President and Director
Daniel R. DeLeo.............. 50 Executive Vice President
and Director
Patrick Lynch................ 47 Vice President, Claims
Robert Silver................ 51 Vice President, Operations
James P. Byrne............... 55 Vice President, Controller
C. Doreen Smar............... 64 Treasurer
Linda E. Alanis.............. 37 Assistant Vice President,
Assistant Controller
Michael G. Francis........... 39 Assistant Vice President, Claims
Manager
Ronald J. Gold............... 55 Secretary
Howard T. Goffen............. 60 Managing Attorney, Jesmer &
Harris; Assistant Secretary
Alan R. Tessler.............. 60 Director
Martin L. Solomon............ 60 Director
Wilmer J. Thomas, Jr. ....... 70 Director
Wayne R. Hannah, Jr. ........ 65 Director
David R. Markin has served as Chairman of American Country since 1986 and
as a director of American Country and its predecessors since 1979. Mr. Markin
serves on the Board of Directors of the following publicly held corporations:
Jackpot Enterprises Inc., an operator of gaming machines; Enhance Financial
Services Group Inc., a reinsurance company; and Data Broadcasting Corporation, a
provider of market data services to the investor community. Mr. Markin received
a B.S. in Business Administration from Bradley University in Peoria, Illinois in
1953.
Edwin W. Elder III has been President and a Director of American Country
since 1993. Form 1985 to 1993, Mr. Elder served as Senior Vice President of
Operations for Employers Health Insurance Company and IDS Property Casualty. He
progressed to a number of positions from an Executive Director at USAA to
Assistant Vice President at Colonial Penn Insurance Group in Philadelphia. Mr.
Elder has 26 years of experience in the insurance industry and started his
career with State Farm after leaving the United States Army where he attained
the rank of Captain. He is a CPCU (Chartered Property & Casualty Underwriter)
and an FLMI (Fellow Life Management Institute). He received a B.S. in
Microbiology from Penn State University in 1965.
Daniel R. DeLeo has served as Executive Vice President since 1988 and
Director since 1994, having joined the Company in 1976, and has 24 years of
experience in the insurance industry. Mr. DeLeo previously served as Claims
Manager and Vice President, Claims. From 1973 to 1975, Mr. DeLeo was a Special
Agent for Insurance Crime Prevention investigating insurance fraud. From 1965 to
1967, Mr. DeLeo attended Eastern Illinois University and Southern Illinois
University.
Patrick Lynch has served American Country in various roles in the claims
department since 1982 and, since 1987, has served as Vice President, Claims. In
1979, Mr. Lynch was promoted to Supervisor at City Mutual Insurance Company and
later served as Claim Manager for Calumet Insurance Company. He has 20 years of
industry experience. Mr. Lynch received a B.A. in history from Northeastern
Illinois State University in 1971.
Robert Silver has served as Vice President, Operations since 1984, having
joined American Country 19 years ago, and has 31 years of experience in the
insurance industry. In 1982, Mr. Silver was responsible for the creation of the
underwriting and marketing departments at City Mutual Insurance Company. In
1977, he became an associate partner with the S&C Insurance Agency. In 1969, he
was the Claims Manager for the Chicago law firm of Van Dunzer,
28
<PAGE>
Gershon, Jordan & Petersen. From 1966 to 1969, Mr. Silver was a Claims
Supervisor with City Mutual Insurance Company.
James P. Byrne has served as Vice President, Controller since 1988, and has
35 years of experience in the insurance industry. From 1984 to 1988, Mr. Byrne
served as President and Treasurer of Fairlin Associates/Reliable Insurance
Company and, from 1971 to 1984, as Treasurer of State Security Insurance Company
in Chicago. Mr. Byrne is a member of the Society of Insurance Accountants and
Insurance Accounting and Systems Association, and is a licensed insurance
producer in the State of Illinois.
C. Doreen Smar has served as Treasurer since 1980 and previously served as
Assistant Treasurer of the predecessor company since 1975, having joined the
predecessor companies of American Country in 1955. She has 42 years of
experience int he insurance industry. Ms. Smar attended Walton School of
Commerce in Chicago, Illinois.
Linda E. Alanis has served as Assistant Vice President, Assistant
Controller since 1986, having joined American Country in 1983 as a Staff
Accountant and then as Accounting Supervisor and Accounting Manager prior to
serving in her present position.
Michael G. Francis has served as Assistant Vice President, Claims Manager,
since 1994, having served in various roles in American Country's claims
department since 1981. Mr. Francis received a BS in Business Administration from
Roosevelt University in 1986.
Ronald J. Gold has been Secretary of American Country since 1993, having
served previously as Assistant Secretary since 1991. Mr. Gold is an Associate
and Senior Attorney in the law firm of Jesmer and Harris where he has worked
since 1968. Mr. Gold received a law degree from the University of Illinois in
1965.
29
<PAGE>
Howard T. Goffen, Managing Attorney of Jessmer & Harris and Assistant
Secretary of American Country, has been with American Country since 1986, first
as an Associate and, in 1993, as a Partner. From 1983 to 1986, he was a partner
of the law firm Schey, Goffen & Associates based in Chicago. Mr. Goffen is a
member of the Illinois State Bar Association and the Chicago Bar Association. He
graduated from Loyola University in 1957 and from DePaul University School of
Law in 1960.
Allan R. Tessler has been a director or American Country since March 1986.
Mr. Tessler has served as Chairman of the Board of Great Dane Holdings Inc.
("Old Parent" - see proposal I - Approval of Proposed Acquisition - Background)
since 1989, and serves as Co-Chief Executive Officer and Co-Chairman of the
Board of Data Broadcasting Corporation, a publicly held provider of market data
services to the investor community, Chairman of the Board of Jackpot
Enterprises, Inc., a publicly held operator of gaming machines, and Chairman of
the Board and Chief Executive Officer of International Financial Group, Inc., a
merchant banking firm. Mr. Tessler also serves as a director of the following
additional publicly held corporations: The Limited, Inc., a manufacturer and
retailer of apparel; and Allis-Chalmers Corporation, a manufacturer of
miscellaneous fabricated textile products.
Martin L. Solomon has been a director of American Country since March
1986. Mr. Solomon is a private investor. From 1989 to 1996, Mr. Solomon was a
director and Vice Chairman of Great Dane Holdings Inc. ("Old Parent" - See
Proposal I - Acquisition of American Country - Background), formerly in the
businesses of manufacturing truck trailers and automobile stampings, leasing
taxis and, through American Country, property and casualty insurance. Mr.
Solomon is a director of the following publicly-held corporations: XTRA
Corporation, a transportation equipment leasing company, DLB Oil & Gas, Inc., an
oil exploration and production company, and Hexcel Corp., a manufacturer of
composites.
Wilmer J. Thomas, Jr. has been a director of American Country since March
1986. Mr. Thomas is a private investor and financial consultant. From 1989 to
1996, Mr. Thomas was a director and Vice Chairman of Great Dane Holdings Inc.
("Old Parent" - See Proposal I - Acquisition of American Country - Background),
formerly in the businesses of manufacturing truck trailers and automobile
stampings, leasing taxis and, through American Country, property and casualty
insurance. Mr. Thomas is a director of Moore Medical Corp., a publicly held
pharmaceutical and surgical supply company.
Wayne R. Hannah, Jr. has been a director of American Country since April
1997. Mr. Hannah is an attorney and partner in the Chicago law firm,
Sonnenschein, Nath & Rosenthal, where he has been associated since 1973. Mr.
Hannah received a bachelor's degree from Illinois College in 1953 and a J.D.
from New York University School of Law in 1957.
30
<PAGE>
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma consolidated income statements for the three months
ended March 31, 1997 and for the year ended December 31, 1996 set forth in this
Proxy Statement give effect to the Company's sale on January 3, 1997 of its
Transmedia Network franchise and its acquisition of the assets of American
Country and ACFS as if they occurred as of January 1, 1997 and January 1, 1996,
respectively. The unaudited pro forma consolidated balance sheet at March 31,
1997 give effect to the following transactions as if they had occurred on March
31, 1997: (i) the sale by the Company on January 3, 1997 of its Transmedia
Network franchise; (ii) the acquisition of the assets, business and certain
liabilities of American Country and ACFS for $40,250,000; (iii) the sale by the
Company of 24,015,000 shares of its Common Stock for $26,400,000; (iv) the
reduction of the par value of the Common Stock from $.60 per share to $.01 per
share; and (v) the borrowing by the Company of $5,800,000. Additionally, the
unaudited pro forma consolidated financial statements reflect the Company's
acquisition of American Country as a reverse acquisition for accounting
purposes.
Unaudited pro forma financial data do not purport to be indicative of
either the future results of operations or the results of operations that would
have occurred if these transactions had been consummated on the indicated dates.
The pro forma adjustments are based on available information and certain
assumptions that the Company believes to be reasonable.
31
<PAGE>
Unaudited Pro forma Consolidated Balance Sheet
March 31, 1997
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Historical
Consolidated Historical
American Western Pro Forma Pro Forma Note
Country Systems Adjustments Consolidated Reference
------------ ------------ ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
Assets
------
Fixed maturities -
Available-for-sale $ 75,847 $ -- $ -- $75,847
Held to maturity 25,883 -- -- 25,833
Equity securities 9,079 -- -- 9,079
Other investments 2,511 -- -- 2,511
Cash 8,867 $9,559 (8,400) 10,026 1, 2, 3
Premiums and other receivables 26,796 -- -- 26,796
Reinsurance recoverable 11,884 -- -- 11,884
Deferred income taxes 3,586 -- (1,386) 2,200 4
Deferred policy acquisition costs 3,588 -- -- 3,588
Other assets 2,486 28 -- 2,874
-------- ------ ------- --------
Total assets 170,887 9,587 (9,786) 170,688
======== ======== ======== ========
Liabilities
-----------
Unpaid losses and loss adjustment expenses 88,120 -- -- 88,120
Unearned premiums 34,533 -- -- 34,533
Accrued expenses 3,703 -- -- 3,703
Income taxes payable -- 783 -- 783
Other liabilities 5,106 59 5,800 10,965 2
-------- ------ ------- --------
Total liabilities 131,462 842 5,800 138,104
-------- ------ ------- --------
Stockholder's Equity
--------------------
Common stock 2,500 4,742 (6,923) 319 1, 3, 5, 6
Additional paid in capital 5,542 12,809 18,351 1, 5, 6
Net unrealized investment gains 26 26
Retained earnings 36,899 (1,539) (21,472) 13,888 3, 4, 5
-------- ------ ------- --------
Total stockholders' equity 39,425 8,745 (15,586) 32,584
-------- ------ ------- --------
Total liabilities and stockholders' equity $170,887 $ 9,587 $(9,786) $170,688
======== ======== ======== ========
</TABLE>
See notes to unaudited pro forma consolidated financial statements.
32
<PAGE>
Unaudited Pro Forma Consolidated Income Statement
For the Year Ended December 31, 1996
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Historical
American Historical Western Adjusted
Country Western Systems Western Pro Forma Pro Forma Note
Consolidated Systems Adjustments(7) Systems Adjustments Consolidated Reference
------------ ---------- -------------- ------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Premiums earned $60,550 $ -- $ -- $ -- $ -- $60,550
Net sales -- 9,301 (9,301) -- -- --
Net investment income 7,032 -- -- -- -- 7,032
Net realized gains on investments 915 -- -- -- -- 915
Other income 219 -- -- -- -- 219
------ ----- ------- --- --- ------
Total revenue 68,716 9,301 (9,301) -- -- 68,716
Losses and expenses:
Losses and loss adjustment expenses 48,845 -- -- -- -- 48,845
Cost of goods sold -- 6,116 (6,116) -- -- --
Amortization of deferred policy
acquisition costs 8,993 -- -- -- -- 8,993
Insurance and general expenses 3,867 3,498 (3,183) 315 450 4,632 8
----- ----- ------- --- --- -----
Total losses and expenses 61,705 9,614 (9,299) 315 450 62,470
------ ----- ------- --- --- ------
Income (loss) from continuing
operations 7,011 (313) (2) (315) (450) 6,246
Provision for income taxes (credit) 1,986 (857) 747 (110) (158) 1,718 9
------ ----- ------- --- --- ------
Income (loss) from continuing $5,025 $544 $(749) $(205) $(292) $4,528
operations ====== ==== ====== ==== ====== ======
Income per share $0.07 $0.14
===== =====
Average common and common
equivalent shares outstanding 7,951 24,000 31,951
===== ====== ======
</TABLE>
See notes to unaudited pro forma consolidated financial statements.
33
<PAGE>
Unaudited Pro Forma Consolidated Income Statement
For the Three Months Ended March 31, 1997
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Historical
American Historical Western Adjusted
Country Western Systems Western Pro forma Pro forma Note
Consolidated Systems Adjustments(7) Systems Adjustments Consolidated Reference
------------ ---------- ----------- -------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Premiums earned $14,823 $ -- $ -- $ -- $ -- $14,823
Net sales -- 54 (54) -- -- --
Net investment income 1,977 114 (114) -- -- 1,977
Other income 100 -- -- -- -- 100
------ --- ---- ---- ---- ------
Total revenue 16,900 168 (168) -- -- 16,900
Losses and expenses:
Losses and loss adjustment expenses 13,526 -- -- -- -- 13,526
Cost of goods sold -- 36 (36) -- -- --
Amortization of deferred policy
acquisition costs 1,638 -- -- -- -- 1,638
Insurance and general expenses 2,213 108 (50) 58 112 2,383 10
------ --- ---- --- --- ------
Total losses and expenses 17,377 144 (86) 58 112 17,547
------ --- ---- --- --- ------
Income (loss) from continuing
operations (477) 24 (82) (58) (112) (647)
Provision for income taxes (credit) (359) 8 (28) (20) (39) (418) 9
------ --- ---- --- --- ------
Income from continuing operations ($118) $16 $(54) $(38) $(73) $(229)
====== === == === ====== =====
Income (loss) per share $0.00 $(0.01)
===== ======
Average common and common
equivalent shares outstanding 7,956 24,000 31,956
===== ====== ======
</TABLE>
See notes to unaudited pro forma consolidated financial statements.
34
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The pro forma consolidated financial statements reflect the Company's
acquisition of American Country as a reverse acquisition for accounting
purposes. As a result, the pro forma financial statements reflect the
transaction as if American Country acquired the Company and American Country
received a capital infusion from Frontier. The net assets of the Company are
recorded at fair value which is consistent with the book value of the Company
based on the nature of transaction and the financial statements of American
Country are the historical financial statements.
1. Reflects the issuance of 8,000,000 shares of Common Stock to Frontier at
$1.10 per share to partially fund the acquisition. Proceeds from the Common
Stock issuance were $8,800,000. (Cash was increased $8,800,000, common
stock was increased by $80,000 and additional paid-in capital was increased
by $8,720,000.)
2. Reflects additional bank debt of $5,800,000 at an annual interest rate of
7.75% to partially fund the reverse acquisition.
3. Reflects the redemption of certain former stockholders of American Country
($22,300,000) and expenses paid in connection with the transaction
($700,000). (Cash was decreased by $23,000,000, Common Stock was decreased
by $1,375,000 and retained earnings was decreased by $21,625,000.)
4. Reflects the change in deferred tax assets as a result of the transaction.
(Deferred tax assets were decreased $1,388,000 and retained earnings were
decreased $1,388,000.)
5. Reflects the reverse acquisition accounting treatment for the fair value of
the acquired net assets of the Company. The net assets of $8,745,000
equaled book value and were reclassified as an increase to paid-in capital.
(Common Stock decreased $4,742,000, retained earnings increased $1,539,000
and additional paid-in capital increased $3,203,000.)
6. Reflects the change in the par value of the common stock to $.01 per share
which resulted in a decrease in Common Stock of $886,000 and an increase in
additional paid-in capital of $886,000.
7. Reflects the effects of the Company's sale of its Transmedia franchise as
of January 1, 1996 (the operations of Transmedia were sold January 3, 1997)
and the proceeds from the sale which were utilized to fund the acquisition.
Accordingly, the pro forma consolidated financial statements do not include
the operations of Western Transmedia of the investment income related to
the proceeds from the sale of Western Transmedia.
8. Reflects interest expense associated with the bank debt obtained to
partially fund the reverse acquisition. Interest on the bank debt is
calculated using a 7.75% annual rate ($450,000).
9. Assumes a 35% current tax rate on pro forma adjustments.
10. Reflects interest expense associated with the bank debt obtained to
partially fund the reverse acquisition. Interest on the bank debt is
calculated using a 7.75% annual rate ($112,000).
35
<PAGE>
PROXY THE WESTERN SYSTEMS CORP.
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints William J. Barrett and Herbert M. Gardner
and each of them, proxies, each with the power of substitution, to vote the
shares of the undersigned at the Special Meeting of Stockholders of The Western
Systems Corp. (the "Company") on , 1997, and any adjournments and
postponements thereof, upon all matters as may properly come before the Special
Meeting. Without otherwise limiting the foregoing general authorization, the
proxies are instructed to vote as indicated herein.
Please complete, date and sign
on the reverse side and mail in the enclosed envelope.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR MATTERS (1), (2), (3) AND (4)
LISTED BELOW, TO COME BEFORE THE SPECIAL MEETING:
(1) To approve the acquisition of the assets, business and certain liabilities
of American Country Insurance Company and its affiliated premium financing
company, including related financing, as described in the accompanying
Proxy Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(2) To approve the Company's Restated Certificate of Incorporation as described
in the accompanying Proxy Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(3) To elect a board of six (6) directors.
Nominees: William J. Barrett
Herbert M. Gardner
Martin L. Solomon
Wilmer J. Thomas, Jr.
Peter H. Foley
Edwin W. Elder III
[ ] FOR [ ] WITHHELD
For, except against the following nominees:
--------------------------------------------------
(4) To ratify the appointment of Ernst & Young LLP as the independent auditors
for the year ending December 31, 1997.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(5) Upon any and all other business that may come before the Special Meeting.
Check here if you plan to attend the Special Meeting of Stockholders. [ ]
This proxy, which is solicited on behalf of the Board of Directors, will be
voted FOR the matters described in paragraphs (1), (2), (3) and (4) unless the
stockholder specifies otherwise, in which case it will be voted as specified.
SIGNATURE(S): DATE 1997
-------------------------------------------- ------------
Note: Executors, Administrators, Trustees, etc.
should give full title.
<PAGE>
AMERICAN COUNTRY INSURANCE COMPANY AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements:
Report of Independent Auditors .................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 ...................................... F-3
Consolidated Statements of Income for the years ended December 31, 1996, 1995, and 1994 ........... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995, and
1994 ............................................................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995, and 1994 ....... F-6
Notes to Consolidated Financial Statements ........................................................ F-7
-------------------
Unaudited Consolidated Financial Statements:
Introduction to Unaudited Consolidated Financial Statements ....................................... F-17
Unaudited Consolidated Balance Sheet as of March 31, 1997 ......................................... F-18
Unaudited Consolidated Statement of Income for the three months ended March 31, 1997 .............. F-19
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Country Insurance Company
We have audited the accompanying consolidated balance sheets of American
Country Insurance Company and subsidiary as of December 31, 1996 and 1995, and
the related consolidated statements of income, stockholder's equity, and cash
flows for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American Country
Insurance Company and subsidiary at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
March 7, 1997,
except as to Note 1, as to which the date is
May 1, 1997
F-2
<PAGE>
AMERICAN COUNTRY INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
----------------------
1996 1995
---------- ---------
Assets (In Thousands)
<S> <C> <C>
Investments (Note 3):
Available-for-sale:
Fixed maturities--At fair value (amortized cost:
1996--$71,961,000; 1995--$55,573,000) .............................. $ 73,025 $ 58,238
Equity securities--At fair value cost:
1996--$9,393,000; 1995--$11,131,000) ............................... 9,743 11,831
Fixed maturities held-to-maturity--At amortized cost (fair value:
1996--$27,895,000; 1995--$36,260,000) .............................. 27,677 35,446
Mortgage loans ....................................................... 2,500 2,984
Collateral loans ..................................................... 62 644
Short-term investments ............................................... 1,230 4,544
-------- --------
Total investments ................................................ 114,237 113,687
Cash ................................................................. 9,868 6,612
Premiums receivable (net of allowance:
1996--$155,000; 1995--$22,000) ...................................... 5,762 4,229
Reinsurance recoverable .............................................. 12,900 8,230
Accrued investment income ............................................ 1,917 1,867
Property and equipment ............................................... 694 891
Deferred income taxes ................................................ 3,319 1,823
Deferred policy acquisition costs .................................... 2,866 2,971
Other assets ..................................................... 227 317
-------- --------
$151,790 $140,627
======== ========
Liabilities and stockholder's equity
Liabilities:
Unpaid losses and loss adjustment expenses .......................... $ 90,965 $ 81,633
Unearned premiums ................................................... 13,243 12,969
Accrued expenses .................................................... 4,404 5,407
Income taxes payable ................................................ 365 79
Other liabilities ................................................... 2,376 472
-------- --------
Total liabilities ................................................ 111,353 100,560
Commitments and contingent liabilities (Notes 9, 10, and 11)
Stockholder's equity:
Common stock--$100 par value:
Authorized--100,000 shares
Issued and outstanding--25,000 shares .............................. 2,500 2,500
Additional paid-in capital .......................................... -- 621
Net unrealized investment gains ..................................... 919 2,187
Retained earnings ................................................... 37,018 34,759
-------- --------
Total stockholder's equity ....................................... 40,437 40,067
-------- --------
$151,790 $140,627
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
AMERICAN COUNTRY INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31
---------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
Revenues
Premiums earned (Note 4):
Nonaffiliates ........................... $ 49,251 $45,829 $36,167
Affiliates .............................. 11,299 11,080 12,145
Net investment income .................... 7,032 6,465 5,600
Net realized gains on investments ........ 915 222 282
Other income ............................. 219 150 107
-------- ------- -------
Total revenues ....................... 68,716 63,746 54,301
-------- ------- -------
Losses and expenses
Losses and loss adjustment expenses ...... 48,845 45,305 38,925
Amortization of deferred policy
acquisition costs ...................... 8,993 8,119 7,025
Insurance and general expenses ........... 3,867 3,066 2,614
-------- ------- -------
Total losses and expenses ............ 61,705 56,490 48,564
-------- ------- -------
Income before income taxes .............. 7,011 7,256 5,737
-------- ------- -------
Provision for income tax (Note 5):
Current ................................. 2,320 2,195 1,374
Deferred (credit) ....................... (334) 92 98
-------- ------- -------
1,986 2,287 1,472
-------- ------- -------
Net income .............................. $ 5,025 $ 4,969 $ 4,265
======== ======= =======
See notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN COUNTRY INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Net
Additional Unrealized Total
Common Paid-in Investment Retained Stockholder's
Stock Capital Gains (Losses) Earnings Equity
------ ---------- -------------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 ........................... $2,500 $ 621 $ 1,513 $31,525 $36,159
Net income ........................................... -- -- -- 4,265 4,265
Change in net unrealized investment gains ............ -- -- (3,573) -- (3,573)
Dividends to stockholder ............................. -- -- -- (3,000) (3,000)
------ ----- ------- ------- -------
Balance at December 31, 1994 ......................... 2,500 621 (2,060) 32,790 33,851
Net income ........................................... -- -- -- 4,969 4,969
Change in net unrealized investment gains ............ -- -- 4,247 -- 4,247
Dividends to stockholder ............................. -- -- -- (3,000) (3,000)
------ ----- ------- ------- -------
Balance at December 31, 1995 ......................... 2,500 621 2,187 34,759 40,067
Net income ........................................... -- -- -- 5,025 5,025
Change in net unrealized investment gains ............ -- -- (1,268) -- (1,268)
Dividends to stockholder ............................. -- -- -- (2,500) (2,500)
Pension liability, net of deferred taxes (Note 7) .... -- (621) -- (266) (887)
------ ----- ------- ------- -------
Balance at December 31, 1996 ......................... $2,500 $ -- $ 919 $37,018 $40,437
====== ===== ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN COUNTRY INSURANCE COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
------------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Operating activities
Net income ............................................. $ 5,025 $ 4,969 $ 4,265
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in receivables ................................ (6,203) 717 961
Change in reserve for unpaid losses and loss
adjustment expenses ................................ 9,332 8,424 (714)
Change in reserve for unearned premiums .............. 274 459 2,566
Change in other assets and liabilities ............... (440) (823) 2,237
Amortization of deferred policy acquisition costs .... 8,993 8,119 7,025
Deferred policy acquisition costs .................... (8,888) (8,831) (7,390)
Net realized gains on investments .................... (915) (222) (282)
Provision for depreciation ........................... 252 502 482
------- ------- -------
Net cash provided by operating activities ........... 7,430 13,314 9,150
------- ------- -------
Investing activities
Fixed maturities--Available-for-sale:
Purchases ............................................ (22,924) (24,211) (4,658)
Sales ................................................ 592 208 296
Maturities, calls, and prepayments ................... 5,965 1,338 1,791
Equity securities--Available-for-sale:
Purchases ............................................ (2,595) (1,817) (3,063)
Sales ................................................ 5,193 6,884 680
Fixed maturities--Held-to-maturity:
Purchases ............................................ (482) (3,388) (13,219)
Maturities, calls, and prepayments ................... 8,252 8,680 14,364
Net sales of short-term investments ................... 3,314 166 543
Sale or maturity of other investments ................. 1,066 1,706 (2,235)
Property and equipment and other ...................... (55) (380) (274)
------- ------- -------
Net cash used by investing activities ............... (1,674) (10,814) (5,775)
------- ------- -------
Financing activities
Dividends paid to stockholder ......................... (2,500) (3,000) (3,000)
------ ------ ------
Net cash used by financing activities ................. (2,500) (3,000) (3,000)
------ ------ ------
Net increase (decrease) in cash ....................... 3,256 (500) 375
Cash at beginning of year ............................. 6,612 7,112 6,737
------- ------- -------
Cash at end of year ................................... $ 9,868 $ 6,612 $ 7,112
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
AMERICAN COUNTRY INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Change in Ownership
Prior to January 1, 1995, American Country Insurance Company (American
Country) was a wholly owned (except for director's qualifying shares) subsidiary
of Checker Motors Co., L.P., a Delaware limited partnership. Effective January
1, 1995, Checker Motors Co., L.P. was liquidated, and all of its assets,
including the stock of American Country, were distributed to Checker Motors
Corporation (Checker Motors). Accordingly, American Country became a wholly
owned subsidiary of Checker Motors which is a wholly owned subsidiary of Great
Dane Holdings Inc. In November 1996, Checker Motors was renamed SCSM Holdings
Inc. (SCSM).
In December 1996, Great Dane Holdings Inc. was purchased by Stamford
Capital Group, an unaffiliated entity. The shares of American Country were not
included in this purchase. Pursuant to written authorization of the Illinois
Director of Insurance (the Director), the American Country shares were placed in
an escrow trust. Effective April 17, 1997, American Country's shares were
transferred to a newly formed corporation owned and wholly controlled by the
former shareholders of Great Dane Holdings Inc.
On May 1, 1997, the shareholders of American Country entered into an
agreement to sell the assets and liabilities of American Country and its wholly
owned subsidiary American Country Financial Services (ACFS) to Western Systems
Corporation for cash of approximately $40,250,000. The transaction is subject to
stockholder and regulatory approval. The transaction is expected to close in the
third quarter of 1997.
Nature of Operations
American Country is domiciled in Illinois and markets property and casualty
insurance coverages to the general public, primarily in Illinois. American
Country also provides automobile liability insurance and workers' compensation
insurance for Yellow Cab Company and automobile liability coverage for Checker
Taxi Association, Inc. (Checker Taxi). Yellow Cab Company was an affiliate of
American Country prior to December 1996. Included in premiums earned of
nonaffiliates is $7,590,000, $6,179,000, and $5,031,000 in 1996, 1995, and 1994,
respectively, related to Checker Taxi members.
ACFS is organized under the regulations of the Illinois Department of
Insurance and operates principally as a premium finance company.
2. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and include the
accounts and operations of American Country and its wholly owned financing
subsidiary, ACFS. All intercompany accounts and transactions have been
eliminated.
Use of Estimates
The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in the
financial statements and accompanying notes. Such estimates and assumptions
could change in the future as more information becomes known which could impact
the amounts reported and disclosed herein.
Premium Revenue
Premiums are earned pro rata over the terms of the policies. The reserve
for unearned premiums is determined on a monthly pro rata basis.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses (LAE) represent the estimated ultimate
net cost of all reported and unreported losses incurred through December 31. The
reserves for unpaid losses and LAE are estimated using individual case-basis
valuations and statistical analyses and are not discounted. Those estimates are
subject to the effects of trends in loss
F-7
<PAGE>
AMERICAN COUNTRY INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Significant Accounting Policies--(Continued)
severity and frequency. Although considerable variability is inherent in the
estimates of reserves for losses and LAE, management believes that the reserves
for losses and LAE are adequate. The estimates are continually reviewed and
adjusted as necessary as experience develops or new information becomes known;
such adjustments are included in current operations. Salvage and subrogation
recoveries are accrued when the related losses are incurred.
Reinsurance
Reinsurance premiums, losses, and LAE are accounted for on bases consistent
with those used in accounting for the original policies issued and the terms of
the reinsurance contracts. Premiums earned and losses incurred ceded to other
companies have been reported as a reduction of premium revenue and losses and
LAE. Commissions allowed by reinsurers on business ceded have been accounted for
as a reduction of the related policy acquisition costs. Reinsurance recoverables
are reported relating to the portion of reserves and paid losses and LAE that
are ceded to other companies.
Deferred Policy Acquisition Costs
Costs of acquiring new business, principally commissions and premium taxes,
are deferred and amortized as the related premium is earned.
Investments
Fixed maturities (bonds and redeemable preferred stocks) that American
Country has both the positive intent and ability to hold to maturity are carried
at amortized cost. Fixed maturities that American Country does not have the
positive intent and ability to hold to maturity and all equity securities
(common stocks and nonredeemable preferred stocks) are classified as
available-for-sale and are reported at fair value. Unrealized gains and
temporary unrealized losses on fixed maturities available for sale and equity
securities are excluded from income and are recorded directly to stockholder's
equity, net of related deferred income taxes.
Mortgage and collateral loans are carried at amortized cost. Short-term
investments are carried at cost, which approximates fair value, and include
investments with maturities of less than one year at the date of acquisition.
Net investment income consists primarily of interest and dividends less
expenses. Interest on fixed maturities and mortgage loans, adjusted for any
amortization of discount or premium, is recorded as income when earned and
includes adjustments resulting from anticipated prepayments of collateralized
mortgage obligations. Investment expenses are accrued as incurred. Realized
investment gains or losses are computed using specific costs of securities sold,
and include write-downs on investments having an other-than-temporary decline in
value.
Income Taxes
American Country's federal income tax return for 1996 will be consolidated
with Great Dane Holdings Inc. and subsidiaries for the year ending December 31,
1996 and for the period January 1, 1997 to April 16, 1997. American Country's
federal income tax return for 1995 was consolidated with Great Dane Holdings
Inc. and subsidiaries and was filed separately for 1994. Income tax expense is
computed on a separate company basis.
Deferred income tax has been provided for the effects of temporary
differences between financial reporting and tax bases of assets and liabilities
and has been measured using the enacted marginal tax rates and laws that are
currently in effect.
Property and Equipment
Property and equipment, primarily data processing equipment and leasehold
improvements, are reported at depreciated cost, with depreciation recorded on a
straight-line basis with lives of five years for data processing equipment and a
range of six to eleven years for leasehold improvements. Accumulated
depreciation amounted to $2,545,000 and $2,205,000 at December 31, 1996 and
1995, respectively.
F-8
<PAGE>
AMERICAN COUNTRY INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Significant Accounting Policies--(Continued)
Financial Instruments
Fair value for fixed maturity and equity securities is based on quoted
market prices or, if they are not actively traded, on estimated values obtained
from independent pricing services. Fair values of other financial instruments
approximate their carrying values.
3. Investments
The components of net investment income are as follows:
Year ended December 31
------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
Fixed maturities .............................. $ 6,496 $ 5,719 $ 4,953
Equity securities ............................. 695 768 886
Short-term investments ........................ 356 473 334
Other ......................................... 299 424 323
------- ------- -------
Gross investment income ....................... $ 7,846 $ 7,384 $ 6,496
Investment expenses ........................... (814) (919) (896)
------- ------- -------
Net investment income ...................... $ 7,032 $ 6,465 $ 5,600
======= ======= =======
Realized gains on investments are as follows:
Year ended December 31
------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
Fixed maturities:
Gross gains .................................. $ 61 $ 100 $ 290
Gross losses ................................. (7) (82) (15)
Equity securities:
Gross gains .................................. 991 560 7
Gross losses ................................. (130) (356) --
------- ------- -------
$ 915 $ 222 $ 282
======= ======= =======
The components of net unrealized gains (losses) are as follows:
Year ended December 31
------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
Fixed maturities available-for-sale .......... $ 1,064 $ 2,665 $(1,556)
Equity securities available-for-sale ......... 350 700 (1,699)
Deferred tax credit (charge) ................. (495) (1,178) 1,195
------- ------- -------
Net unrealized investment gains (losses) .. $ 919 $ 2,187 $(2,060)
======= ======= =======
The changes in net unrealized investment gains (losses) are as follows:
Year ended December 31
------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
Fixed maturities available-for-sale .......... $(1,601) $ 4,221 $(3,780)
Equity securities available-for-sale ......... (350) 2,399 (1,768)
Deferred tax credit (charge) ................. 683 (2,373) 1,975
------- ------- -------
Total ..................................... $(1,268) $ 4,247 $(3,573)
======= ======= =======
F-9
<PAGE>
AMERICAN COUNTRY INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Investments--(Continued)
The change in net unrealized investment gains (losses) on fixed maturities
held-to-maturity was $(596,000), $2,359,000, and $(3,314,000) for the years
ended December 31, 1996, 1995, and 1994, respectively.
The following is a summary of held-to-maturity securities and available-for-sale
securities:
Gross Unrealized
----------------
Amortized
Cost Gains Losses Fair Value
--------- ----- ------ ---------
(In Thousands)
December 31, 1996
Available-for-sale securities
Fixed maturities:
States and political subdivisions ... $19,501 $ 310 $ 37 $19,774
Foreign governments ................. 248 5 -- 253
Corporate and other ................. 52,212 1,234 448 52,998
------- ------ ---- -------
Total fixed maturities .............. 71,961 1,549 485 73,025
Equity securities .................... 9,393 568 218 9,743
------- ------ ---- -------
Total .............................. $81,354 $2,117 $703 $82,768
======= ====== ==== =======
Held-to-maturity securities
Fixed maturities:
U.S. government and agencies ........ $ 3,313 $ 124 $ 14 $ 3,423
States and political subdivisions ... 8,304 64 13 8,355
Corporate and other ................. 16,002 173 118 16,057
Mortgage-backed securities .......... 58 2 -- 60
------- ------ ---- -------
Total .............................. $27,677 $ 363 $145 $27,895
======= ====== ==== =======
December 31, 1995
Available-for-sale securities
Fixed maturities:
States and political subdivisions ... $13,345 $ 311 $ 11 $13,645
Corporate securities ................ 42,228 2,527 162 44,593
------- ------ ---- -------
Total fixed maturities .............. 55,573 2,838 173 58,238
Equity securities .................... 11,131 915 215 11,831
------- ------ ---- -------
Total .............................. $66,704 $3,753 $388 $70,069
======= ====== ==== =======
Held-to-maturity securities
Fixed maturities:
U.S. government and agencies ........ $ 3,310 $ 239 $ -- $ 3,549
States and political subdivisions ... 10,587 140 9 10,718
Corporate securities ................ 21,474 488 47 21,915
Mortgage-backed securities .......... 75 3 -- 78
------- ------ ---- -------
Total .............................. $35,446 $ 870 $ 56 $36,260
======= ====== ==== =======
The amortized cost and fair value of fixed maturities by contractual maturity at
December 31, 1996, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with our without call or prepayment penalties.
F-10
<PAGE>
AMERICAN COUNTRY INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Investments--(Continued)
Amortized Fair
Cost Value
--------- -------
(In Thousands)
Available-for-sale:
Due in one year or less .......................... $ 752 $ 755
Due after one year through five years ............ 24,522 24,756
Due after five years through ten years ........... 33,216 33,735
Due after ten years .............................. 13,471 13,779
------- -------
Total available-for-sale ........................ $71,961 $73,025
======= =======
Held-to-maturity:
Due in one year or less .......................... $ 6,866 $ 6,884
Due after one year through five years ............ 15,381 15,498
Due after five years through ten years ........... 4,004 3,997
Due after ten years .............................. 1,368 1,456
Mortgage-backed securities ....................... 58 60
------- -------
Total held-to-maturity .......................... $27,677 $27,895
======= =======
At December 31, 1996, investments in fixed maturities with an admitted asset
value of $2,553,000 were on deposit with state insurance departments to satisfy
regulatory requirements.
At December 31, 1995, American Country had $590,000 of non-income-producing
investments.
4. Reinsurance
Certain premiums and losses and LAE are assumed from, and ceded to, other
insurance companies under various reinsurance agreements. Those agreements
principally provide American Country with increased capacity to write larger
risks and to maintain its exposure to loss within its capital resources.
American Country's assumed and ceded reinsurance arrangements are
summarized as follows:
Year ended December 31
------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
Assumed reinsurance
Premiums written ............................ $ 1,206 $ 2,037 $ 1,210
Premiums earned ............................. 1,344 1,921 1,300
Losses and LAE .............................. 495 1,165 859
Losses and LAE reserves* .................... 2,769 3,332 3,137
Unearned premium reserves* .................. 286 424 307
Ceded reinsurance
Premiums written ............................ 7,067 7,354 6,983
Premiums earned ............................. 7,004 7,530 6,757
Losses and LAE .............................. 7,184 3,929 6,464
Losses and LAE reserves* .................... 11,515 7,051 6,716
Unearned premium reserves* .................. 797 733 909
*As of year-end.
American Country remains obligated for amounts reinsured in the event that
reinsurers do not meet their obligations.
F-11
<PAGE>
AMERICAN COUNTRY INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Federal Income Taxes
Reconciliation of the corporate federal income tax rate to American Country's
effective income tax rates are as follows:
Year ended December 31
------------------------------
1996 1995 1994
-------- -------- --------
Corporate federal income tax rate ............. 35% 35% 34%
Nontaxable investment income .................. (9) (8) (11)
State income taxes ............................ 5 4 3
Other ......................................... (3) -- --
--- --- ----
Effective income tax rate ..................... 28% 31% 26%
=== === ====
Significant components of American Country's deferred tax liabilities and assets
are as follows:
December 31
-----------------------
1996 1995
-------- --------
(In Thousands)
Deferred tax assets:
Insurance reserves ................................. $4,433 $4,073
Pension liability .................................. 478 --
Other--Net ......................................... 338 294
------ ------
Total deferred tax assets ......................... $5,249 $4,367
====== ======
Deferred tax liabilities:
Policy acquisition costs ........................... $1,003 $1,040
Unrealized investment gains ........................ 495 1,178
Other--Net ......................................... 432 326
------ ------
Total deferred tax liabilities .................... 1,930 2,544
------ ------
Net deferred tax assets ........................... $3,319 $1,823
====== ======
The nature of American Country's deferred tax assets and liabilities is such
that the reversal pattern for these temporary differences should generally
result in realization of American Country's deferred tax assets. Accordingly, no
valuation allowance is considered necessary.
Taxes paid amounted to $1,550,000, $1,796,000, and $1,200,000 for 1996, 1995,
and 1994, respectively.
F-12
<PAGE>
AMERICAN COUNTRY INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Losses and Loss Adjustment Expenses
The following table provides a reconciliation of the beginning and ending
reserve balances for losses and LAE:
Year ended December 31
------------------------------
1996 1995 1994
-------- -------- --------
(In Thousands)
Balance at January 1 ....................... $81,633 $73,209 $73,922
Less reinsurance recoverables ............. 7,051 6,716 9,652
------- ------- -------
Net balance at January 1 .................. $74,582 $66,493 $64,270
------- ------- -------
Add net incurred claims related to:
Current year .............................. $47,878 $48,382 $38,307
Prior years ............................... 967 (3,077) 618
------- ------- -------
Total net claims incurred ................ $48,845 $45,305 $38,925
------- ------- -------
Deduct net claims paid related to:
Current year ............................ $18,044 $14,709 $14,413
Prior years ............................. 25,933 22,507 22,289
------- ------- -------
Total net claims paid .................. $43,977 $37,216 $36,702
------- ------- -------
Net balance at December 31 ............... $79,450 $74,582 $66,493
Plus reinsurance recoverables ............ 11,515 7,051 6,716
------- ------- -------
Balance at December 31 ................... $90,965 $81,633 $73,209
======= ======= =======
7. Employee Benefits
Retirement Plan
Substantially all salaried employees of American Country who are at least 21
years of age are eligible to participate in a 401(k) retirement plan. Employees
may contribute from 1% to 15% of their eligible compensation to the plan.
American Country matches 25% of employee contributions up to a maximum of 8% of
eligible compensation. Total contributions by American Country to the plan were
$76,000, $73,000, and $40,000 in 1996, 1995, and 1994, respectively.
Pension Plan
Prior to December 4, 1996, substantially all salaried employees of American
Country were covered by a defined benefit pension plan sponsored by SCSM.
Benefits were based on the employee's length of service and wages and benefits,
as defined by the plan. SCSM's funding policy was generally to contribute
amounts required to maintain funding standards in accordance with the Employee
Retirement Income Security Act. Pension cost allocated to American Country
amounted to $265,000, $175,000, and $132,000 in 1996, 1995, and 1994,
respectively.
In connection with the change in ownership discussed in Note 1, the
SCSM-sponsored plan was split-up and a separate defined benefit pension plan
for American Country was established. Accordingly, effective December 4,
1996, substantially all salaried employees of American Country were covered
by a defined benefit pension plan sponsored by American Country. Benefits and
funding for the American Country-sponsored plan are consistent with the
SCSM-sponsored plan in which employees were previously participants. There
was no pension expense related to this new plan in 1996.
American Country recognized a net accrued pension liability of $1,365,000
representing the unfunded portion of the separate plan as a result of the
split-up of the SCSM pension plan. The net accrued pension liability also
resulted in a decrease of $887,000 in stockholder's equity and a deferred tax
asset of $478,000.
F-13
<PAGE>
AMERICAN COUNTRY INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Employee Benefits--(Continued)
The following table sets forth the funded status and amounts recognized in
the consolidated balance sheet as of December 31, 1996, for American
Country's defined benefit pension plan (in thousands):
Actuarial present value of benefit obligations:
Vested benefit obligation ............................................ $1,902
======
Accumulated benefit obligation ....................................... $2,208
======
Projected benefit obligation ......................................... $2,518
Plan assets (principally guaranteed investment contracts with
insurance companies contributed by SCSM) ........................ 1,247
------
Projected benefit obligation in excess of plan assets ............. $1,271
Unrecognized net gain ............................................. (23)
Unrecognized prior service cost ................................... (9)
Unrecognized net transition obligation ............................ 126
------
Pension liability at December 31, 1996 ............................ $1,365
======
The unrecognized net gain, prior service cost and transition obligation are
being amortized over a 15-year period. Other assumptions used in the calculation
of the actuarial present value of the projected benefit obligation at December
31, 1996, were as follows:
Assumed discount rate ............................................. 7.50%
Rate of compensation increase ..................................... 3.00
Expected long-term rate of return on plan assets .................. 9.00
Postretirement Benefits Other Than Pensions
In addition to the defined benefit plan and the 401(k) retirement plan,
substantially all salaried employees of American Country are covered by a
postretirement benefit plan. The plan is noncontributory and provides medical
and life insurance benefits for employees who retire after attaining age 62 with
25 years of service. The net periodic postretirement benefit cost was $73,000,
$76,000, and $53,000 during 1996, 1995, and 1994, respectively. The accumulated
postretirement benefit cost at December 31, 1996 and 1995 was $537,000, and
$486,000, respectively.
8. Stockholder's Equity
Statutory accounting practices prescribed or permitted for American Country
by regulatory authorities differ from generally accepted accounting principles.
American Country's statutory-basis capital and surplus was $34,080,000 and
$31,288,000 at December 31, 1996 and 1995, respectively, and American Country's
statutory-basis net income was $4,088,000, $3,905,000, and $3,770,000 for the
years ended December 31, 1996, 1995, and 1994, respectively.
Property/casualty insurance companies are subject to certain Risk-Based
Capital (RBC) requirements as specified by the National Association of
Insurance Commissioners. Under those requirements, the amount of statutory
capital and surplus maintained by a property/casualty insurance company is to
be determined based on the various risk factors. At December 31, 1996,
American Country exceeds the RBC requirements.
F-14
<PAGE>
AMERICAN COUNTRY INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Stockholder's Equity--(Continued)
The payment of dividends by American Country to its shareholder is limited
and cannot be made except from net earned profits of American Country. The
maximum amount of dividends that may be paid by American Country without
prior approval of the Illinois Insurance Department is subject to
restrictions relating to statutory surplus and net income. In 1997, American
Country cannot pay dividends without prior approval of the Illinois Insurance
Department.
9. Commitments
American Country leases office space and equipment under noncancelable
operating leases expiring in various years through 2002. Certain of those leases
provide for escalation based on increases in operating expenses and the Consumer
Price Index. Rent expense was $816,000, $821,000, and $731,000 in 1996, 1995,
and 1994, respectively.
At December 31, 1996, future rental commitments under those leases are as
follows (in thousands):
1997 ............................................................ $779
1998 ............................................................ 775
1999 ............................................................ 796
2000 ............................................................ 796
2001 ............................................................ 796
Thereafter ...................................................... 643
-------
$ 4,585
=======
10. Contingencies
American Country is named as defendant in various legal actions arising
principally from claims made under insurance policies and contracts. Those
actions are considered by American Country in estimating the reserves for losses
and LAE. American Country's management believes that the resolution of those
actions will not have a material adverse effect on American Country's financial
position or results of operations.
11. Concentration of Credit Risk
American Country has invested in a mortgage loan to CAC Properties Inc., for
property previously owned by Yellow Cab Company. This loan has an interest rate
of 7.5% payable quarterly with the balance payable principally in 1999. The
outstanding balance was $2,500,000 at December 31, 1996 and 1995, respectively.
In connection with the mortgage loan, American Country has a first-mortgage lien
on the property located in Chicago, Illinois.
F-15
<PAGE>
AMERICAN COUNTRY INSURANCE COMPANY AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
12. Fair Value of Financial Instruments
Accounting standards require the disclosure of fair values for certain
financial instruments. The fair value disclosures are not intended to encompass
the majority of claim liabilities, various other nonfinancial instruments or
other assets related to American Country's business. Accordingly, care should be
exercised in deriving conclusions about American Country's business or financial
condition based on the fair value disclosures. American Country does not have
any financial instruments held or issued for trading purposes. The carrying
value and fair value of certain of American Country's financial instruments are
as follows:
Year ended December 31
--------------------------------------------
1996 1995
-------------------- --------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Assets
Fixed maturities and equity securities
(Note 3) .............................. $110,445 $110,663 $105,515 $106,329
Mortgage loans on real estate ........... 2,500 2,500 2,984 2,984
Collateral loans ........................ 62 62 644 644
Cash, receivables, and short-term
investments ........................... 16,860 16,860 15,385 15,385
Accrued investment income ............... 1,917 1,917 1,867 1,867
Liabilities
Accrued expenses ........................ 4,404 4,404 5,407 5,407
</TABLE>
F-16
<PAGE>
AMERICAN COUNTRY INSURANCE COMPANY AND SUBSIDIARY
INTRODUCTION TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated balance sheet as of March 31, 1997 and the
unaudited consolidated statement of income for the three months then ended
contained in this Proxy Statement have been furnished by management of American
Country Insurance Company, and include all adjustments, consisting only of
normal recurring accruals, which management of American Country Insurance
Company have advised the Company are necessary for a fair presentation of such
financial information for the indicated period. The results of operations for
the three month period ended March 31, 1997 are not necessarily indicative of
results that may be expected for any interim period or for the full year.
F-17
<PAGE>
AMERICAN COUNTRY INSURANCE COMPANY AND SUBSIDIARY
UNAUDITED CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(In Thousands)
Assets
Investments:
Available-for-sale:
Fixed maturities--At fair value
(amortized cost: $74,845) ..................................... $ 75,847
Equity securities--At fair value
(amortized cost: $8,812) ...................................... 9,079
Fixed maturities held-to-maturity--At amortized cost
(fair value: $25,841) ......................................... 25,883
Mortgage Loans .................................................... 2,500
Collateral Loans .................................................. 10
Short-term investments ............................................ --
--------
Total investments ................................... 113,319
Cash .............................................................. 8,867
Premiums receivable (net of allowance: $169) ...................... 26,847
Reinsurance recoverable ........................................... 11,830
Accrued investment income ......................................... 1,805
Property and equipment ............................................ 682
Deferred income taxes ............................................. 3,586
Income taxes recoverable .......................................... 175
Deferred policy acquisition costs ................................. 3,588
--------
Other assets ........................................ 189
--------
$170,888
========
Liabilities and stockholder's equity
Liabilities:
Unpaid losses and loss adjustment expenses ........................ 91,122
Unearned premiums ................................................. 34,533
Accrued expenses .................................................. 3,701
Income taxes payable .............................................. --
Other liabilities ................................................. 2,107
--------
Total liabilities ................................... 131,463
Commitments and contingent liabilities
Stockholder's equity:
Common stock - $100 par value:
Authorized - 100,000 shares
Issued and outstanding - 25,000 shares .......................... 2,500
Additional paid-in capital ........................................ --
Net unrealized investment gains ................................... 26
Retained earnings ................................................. 36,899
--------
Total stockholder's equity .......................... $ 39,425
========
$170,888
F-18
<PAGE>
AMERICAN COUNTRY INSURANCE COMPANY AND SUBSIDIARY
UNAUDITED CONSOLIDATED STATEMENT OF INCOME
THREE MONTHS ENDED MARCH 31, 1997
(In Thousands)
Revenues:
Premiums earned:
Nonaffiliates .................................................... $ 14,823
Affiliates ....................................................... --
Net investment income .............................................. 1,977
Net realized gains on investments .................................. --
Other income ....................................................... 100
--------
Total revenues ..................................................... 16,900
Losses and expenses
Losses and loss adjustment expenses ................................ 13,526
Amortization of deferred policy acquisition costs .................. 1,638
Insurance and general expenses ..................................... 2,213
--------
Total losses and expenses ....................................... 17,377
Loss before income taxes ........................................ (477)
--------
Provision for income tax:
Current .......................................................... (572)
Deferred (credit) ................................................ 213
--------
(359)
--------
Net loss ......................................................... $(118)
========
F-19
<PAGE>
ANNEX A
ASSET PURCHASE AGREEMENT
BY AND AMONG
AMERICAN COUNTRY INSURANCE COMPANY,
AMERICAN COUNTRY FINANCIAL SERVICES CORP.,
AMERICAN COUNTRY HOLDING CORP.,
THE WESTERN SYSTEMS CORP.,
DAVID R. MARKIN,
MARTIN L. SOLOMON,
ALLAN R. TESSLER,
WILMER J. THOMAS, JR.,
DANIEL R. DeLEO,
EDWIN W. ELDER
AND
WAYNE R. HANNAH, JR.
April 30, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
------
<S> <C> <C>
ARTICLE I TERMS OF PURCHASE AND SALE ....................................... 2
1.1 Sale of the Company's Assets ....................................... 2
1.2 Sale of ACFS Assets ................................................ 2
1.3 Assumption of Company Liabilities ................................. 2
1.4 Assumption of ACFS Liabilities .................................... 2
1.5 Deliveries ......................................................... 2
1.6 The Closing ...................................................... 3
1.7 Purchase Price and Payment ....................................... 3
1.8 Liabilities ...................................................... 3
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND ACFS, AND ACHC REGARDING THE COMPANY AND ACFS .................. 4
2.1 Organization ...................................................... 4
2.2 Financial Statements ............................................. 4
2.3 Absence of Certain Changes or Events .............................. 5
2.4 Title to Assets ................................................... 6
2.5 Proprietary Information .......................................... 6
2.6 Commitments ...................................................... 6
2.7 Litigation ......................................................... 7
2.8 Compliance with Laws ............................................. 7
2.9 Corporate Power and Authority; No Conflicts ........................ 7
2.10 Employee Benefit Plans ............................................. 8
2.11 Consents ......................................................... 10
2.12 Subsidiaries ...................................................... 10
2.13 Real Property; Leases ............................................. 10
2.14 Environmental Matters ............................................. 10
2.15 Undisclosed Liabilities .......................................... 11
2.16 Insurance Coverage ................................................ 11
2.17 Insurance Reports; Regulatory Filings .............................. 11
2.18 Labor Relations ................................................... 11
2.19 Reserves ......................................................... 11
2.20 Insurance Business ................................................ 12
2.21 Investments ...................................................... 13
2.22 Disclosure ......................................................... 13
2.23 Disclaimer ......................................................... 13
ARTICLE III REPRESENTATIONS AND WARRANTIES OF ACHC AND THE
FORMER SHAREHOLDERS ................................................ 13
3.1 Litigation ......................................................... 13
3.2 Power and Authority; No Conflict ................................. 14
3.3 [Intentionally omitted.] .......................................... 14
3.4 Disclosure ......................................................... 14
3.5 [Intentionally omitted.] .......................................... 14
3.6 Relationship of the Former Shareholders with Related Persons ...... 14
3.7 Title ............................................................ 14
3.8 Disclaimer ......................................................... 14
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE BUYERS
AND WESTERN ...................................................... 15
4.1 Organization ...................................................... 15
4.2 Corporate Power and Authority; No Conflicts ........................ 15
4.3 Consents ......................................................... 15
4.4 Availability of Funds ............................................. 15
4.5 Litigation ......................................................... 16
4.6 Vote Required ...................................................... 16
4.7 Western Vote ...................................................... 16
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE V COVENANTS OF THE COMPANY, ACFS, ACHC AND THE
FORMER SHAREHOLDERS ................................................ 16
5.1 Conduct of Business ................................................ 16
5.2 Access ............................................................ 17
5.3 Further Assurances ................................................ 18
5.4 Acquisition Proposals ............................................. 18
5.5 Advice of Changes ................................................ 18
5.6 Interim Financial Information .................................... 18
5.7 Termination of Affiliate Arrangements .............................. 18
5.8 Non-Competition Agreements ....................................... 18
5.9 Consents ......................................................... 18
5.10 Insurance Licenses ................................................ 18
ARTICLE VI COVENANTS OF THE BUYERS AND WESTERN .............................. 19
6.1 Books and Records; Personnel ....................................... 19
6.2 Assumed Liabilities ................................................ 19
6.3 Further Assurances ................................................ 19
6.4 Conduct Prior to Closing .......................................... 20
6.5 Insurance License and Permit Application; Form A Filing ............ 20
6.6 Western Corporate Action .......................................... 20
6.7 Formation of Sub 1 and Sub 2 ....................................... 20
ARTICLE VII ADDITIONAL COVENANTS ............................................. 20
7.1 Tax Matters ...................................................... 20
7.2 HSR Act Notification ............................................. 21
7.3 SEC Reports ...................................................... 22
7.4 Meeting of Stockholders .......................................... 22
7.5 Proxy Statement ................................................... 22
7.6 Best Efforts; Consents; Filings .................................... 22
7.7 Public Announcement ................................................ 22
7.8 Name ............................................................... 23
7.9 Non-Competition Covenant .......................................... 23
ARTICLE VIII CONDITIONS TO THE OBLIGATIONS OF THE BUYERS AND WESTERN ............ 24
8.1 Representations, Warranties and Covenants of the Company, ACFS, ACHC
and the Former Shareholders ....................................... 24
8.2 Litigation ......................................................... 24
8.3 Stockholder Approval; Third Party Consents ........................ 24
8.4 Governmental Consents ............................................. 24
8.5 Opinion of the Sellers= Counsel .................................... 24
8.6 No Material Adverse Change ....................................... 24
8.7 Best's Rating ...................................................... 24
8.8 Insurance Department Examination ................................. 24
8.9 Indemnification from Checker Motors Corporation .................. 25
8.10 Name ............................................................... 25
8.11 Assumption Agreements ............................................. 25
8.12 Section 1445 Certificate .......................................... 25
8.13 Payment of Amended and Restated Buyer Notes ........................ 25
ARTICLE IX CONDITIONS TO THE OBLIGATIONS OF THE SELLERS,
ACHC AND THE FORMER SHAREHOLDERS ................................. 25
9.1 Representations, Warranties and Covenants of the Buyer ............ 25
9.2 Litigation ......................................................... 25
9.3 [Intentionally omitted.] .......................................... 25
9.4 Governmental Consents ............................................. 25
9.5 Releases ......................................................... 26
9.6 Opinion of the Counsel to the Buyers and Western .................. 26
9.7 Assumption Agreements ............................................. 26
9.8 Stockholder Approval ............................................. 26
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE X COVENANTS RELATED TO EMPLOYMENT AND EMPLOYEE BENEFITS
ARRANGEMENTS ....................................... 26
10.1 Assumption of Pension Plan ........................ 26
10.2 Assumption of 401(k) Plan ........................... 26
10.3 Employment .......................................... 26
10.4 Indemnity .......................................... 26
10.5 Benefit Plans ....................................... 26
ARTICLE XI TERMINATION PRIOR TO CLOSING ........................ 27
11.1 Termination ....................................... 27
11.3 Effect of Termination .............................. 27
ARTICLE XII MISCELLANEOUS ....................................... 27
12.1 Survival .......................................... 27
12.2 Indemnification .................................... 28
12.3 Interpretive Provisions ........................... 29
12.4 Entire Agreement .................................... 29
12.5 Successors and Assigns .............................. 29
12.6 Headings .......................................... 29
12.7 Modification and Waiver ........................... 29
12.8 Broker's Fees ....................................... 29
12.9 Expenses .......................................... 30
12.10 Consulting Fees .................................... 30
12.11 Notices ............................................. 30
12.12 Governing Law ....................................... 32
12.13 Counterparts ....................................... 32
12.14 Certain Definitions ................................. 32
12.15 No Third Party Beneficiaries ........................ 37
</TABLE>
-iii-
<PAGE>
ASSET PURCHASE AGREEMENT
This Agreement, made and entered into as of April 30, 1997 (the
"Agreement"), by and among American Country Insurance Company, an Illinois
insurance company (the "Company"), American Country Financial Services Corp., an
Illinois corporation ("ACFS" and, together with the Company, the "Sellers" and
either of the Sellers individually, a "Seller"), American Country Holding Corp.,
a Delaware corporation ("ACHC"), The Western Systems Corp., a Delaware
corporation ("Western"), David R. Markin ("Markin"), Martin L. Solomon
("Solomon"), Allan R. Tessler ("Tessler"), Wilmer J. Thomas, Jr. ("Thomas"),
Daniel R. DeLeo ("DeLeo"), Edwin W. Elder ("Elder") and Wayne R. Hannah, Jr.
("Hannah" and, collectively with Markin, Solomon, Tessler, Thomas, DeLeo and
Elder, the "Former Shareholders"). The Sellers, ACHC, Sub 2 (defined below),
Western, the Former Shareholders and Sub 1 (defined below) are referred to
collectively herein as the "Parties."
W I T N E S S E T H :
WHEREAS, the Company is a wholly owned subsidiary of ACHC;
WHEREAS, ACFS is a wholly owned subsidiary of the Company;
WHEREAS, Western, through its wholly-owned subsidiaries, desires to
purchase and the Company desires to sell substantially all of the Company's
assets upon the terms and subject to the conditions set forth herein; and
WHEREAS, (i) prior to the closing of the purchase of the assets of the
Company, Western intends to form a wholly-owned subsidiary of Western, which,
upon its formation, is expected to be an Illinois company, and Western intends
to cause such subsidiary to become a party to this Agreement as a Buyer ("Sub 2"
or a "Buyer") and (ii) prior to the closing of the purchase of the assets of the
Company, Western intends to form another wholly-owned subsidiary of Western,
which, upon its formation, is expected to be an Illinois insurance company, and
Western intends to cause such subsidiary to become a party to this Agreement as
a Buyer ("Sub 1" or a "Buyer" and, together with Sub 2, the "Buyers" (it being
understood that, where appropriate, the term "Buyers" as used herein shall be
deemed to include Sub 2 and Sub 1, each upon its formation and execution by it
of a counterpart of this Agreement as contemplated by Section 6.7 hereof)).
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants and agreements contained herein, and upon the terms and subject to the
conditions hereinafter set forth, the Parties do hereby agree as follows
(Section 12.14 hereof sets forth the definitions of capitalized terms used
herein, or references the Sections in which such terms are defined):
1
<PAGE>
ARTICLE I
TERMS OF PURCHASE AND SALE
1.1 Sale of the Company's Assets.
(a) Company Assets to be Sold. On the Closing Date and subject to the terms
and conditions of this Agreement, the Company shall sell, convey, transfer,
assign and deliver to Sub 1, and Western shall cause Sub 1 to purchase from the
Company, all of the Company's right, title and interest in and to, the assets,
properties, rights and business of the Company of every type and description,
real, personal and mixed, tangible and intangible, wherever located and whether
or not reflected on the books and records of the Company, including, without
limitation, all assets, properties, rights and business of the Company, other
than the Company Excluded Assets, as the same may exist on the Closing Date
(collectively, the "Company Acquired Assets").
(b) Company Assets Excluded from Sale. Anything herein to the contrary
notwithstanding, the right, title and interest of the Company in and to the
assets of the Company listed on Exhibit 1.1(b) hereto (the "Company Excluded
Assets") shall not be purchased and sold hereunder, and the Company shall retain
all right, title and interest thereto.
1.2 Sale of ACFS Assets.
(a) On the Closing Date and subject to the terms and conditions of this
Agreement, ACFS shall sell, convey, transfer, assign and deliver to Sub 2 and
Western shall cause Sub 2 to purchase from ACFS, all of ACFS's right, title and
interest in and to the assets, properties, rights and business of ACFS of every
type and description, real, personal and mixed, tangible and intangible,
wherever located and whether or not reflected on the books and records of ACFS,
including, without limitation, all assets, properties, rights and business of
ACFS, other than the ACFS Excluded Assets, as the same may exist on the Closing
Date (collectively, the "ACFS Acquired Assets" and, together with the Company
Acquired Assets, the "Acquired Assets").
(b) ACFS Assets Excluded from Sale. Anything herein to the contrary
notwithstanding, the right, title and interest of ACFS in and to the assets of
ACFS listed on Exhibit 1.2(b) hereto (the "ACFS Excluded Assets" and, together
with the Company Excluded Assets, the "Excluded Assets") shall not be purchased
and sold hereunder, and ACFS shall retain all right, title and interest thereto.
1.3 Assumption of Company Liabilities.
(a) Company Liabilities to be Assumed. Upon the terms and subject to the
conditions of this Agreement, at the Closing, Western shall cause Sub 1 to
assume, and agree to pay, perform and discharge when due, any and all debts,
liabilities and obligations of the Company (whether fixed or contingent, matured
or unmatured, arising by law or by contract or otherwise, other than the Company
Excluded Liabilities (collectively, all such liabilities, other than the Company
Excluded Liabilities, the "Company Assumed Liabilities").
(b) Company Excluded Liabilities. Anything herein to the contrary
notwithstanding, Sub 1 shall not assume the liabilities of the Company that are
listed on Exhibit 1.3(b) hereto (collectively, the "Company Excluded
Liabilities").
1.4 Assumption of ACFS Liabilities.
(a) ACFS Liabilities to be Assumed. Upon the terms and subject to the
conditions of this Agreement, at the Closing, Western shall cause Sub 2 to
assume, and agree to pay, perform and discharge when due, any and all debts,
liabilities and obligations of ACFS (whether fixed or contingent, matured or
unmatured, arising by law or by contract or otherwise, other than the ACFS
Excluded Liabilities (collectively, all such liabilities, other than the ACFS
Excluded Liabilities, the "ACFS Assumed Liabilities" and, together with the
Company Assumed Liabilities, the "Assumed Liabilities").
(b) ACFS Excluded Liabilities. Anything herein to the contrary
notwithstanding, Sub 2 shall not assume the liabilities of ACFS that are listed
on Exhibit 1.4(b) hereto (collectively, the "ACFS Excluded Liabilities" and,
together with the Company Excluded Liabilities, the "Excluded Liabilities").
1.5 Deliveries. At the Closing, (i) the Company shall deliver to Sub 1 duly
executed instruments of transfer and assignment of the Company Acquired Assets
(including, without limitation, the Company Assignment
2
<PAGE>
Agreement) sufficient to vest in Sub 1 the interests in the Company Acquired
Assets being conveyed at the Closing in accordance with the terms of this
Agreement, (ii) ACFS shall deliver to Sub 2 duly executed instruments of
transfer and assignment of the ACFS Acquired Assets (including, without
limitation, the ACFS Assignment Agreement) sufficient to vest in Sub 2 the
interests in the ACFS Acquired Assets being conveyed at the Closing in
accordance with the terms of this Agreement, (iii) Western shall cause Sub 1 to
deliver to the Company duly executed instruments of assumption (including,
without limitation, the Reinsurance Assumption Agreement and the Company
Assumption Agreement) evidencing the assumption by Sub 1 of the Company Assumed
Liabilities and (iv) Western shall cause Sub 2 to deliver to ACFS duly executed
instruments of assumption (including, without limitation, the ACFS Assumption
Agreement) evidencing the assumption by Sub 2 of the ACFS Assumed Liabilities.
1.6 The Closing. The closing of the transactions contemplated hereby (the
"Closing") shall take place at the offices of Paul, Weiss, Rifkind, Wharton &
Garrison, 1285 Avenue of the Americas, New York, New York, commencing at 9:00
a.m., New York City time, on the date which is not later than five business days
after the satisfaction (or waiver) of each of the conditions to the Buyers' and
Western's obligations and the Sellers' and ACHC's obligations, as set forth in
Articles VIII and IX, respectively, or at such other time or place or on such
other date as may be mutually agreed to by the Parties in writing, subject to
Article XI hereof (the "Closing Date").
1.7 Purchase Price and Payment. The aggregate purchase price to be paid by the
Buyers for the Acquired Assets (the "Purchase Price") shall be an amount in cash
equal to $40,250,000. Payment of the Purchase Price shall be in U.S. dollars,
and shall be made, on the Closing Date, by wire transfer or delivery of other
immediately available funds to the respective accounts of each of the Sellers at
a bank or banks specified in advance in writing by each such Seller. Within six
months after the Closing, the Buyers shall deliver a schedule to the Sellers
allocating the sum of the Purchase Price and the Assumed Liabilities between the
Company and ACFS and among the Acquired Assets. To the extent the Buyers and the
Sellers agree upon the allocation made pursuant to the schedule prepared by the
Buyers under this Section 1.7, all Tax returns filed by or on behalf of the
Buyers and the Sellers shall be prepared consistently with such allocation and
the parties agree to prepare and file all Tax returns consistently with the
treatment of the transaction pursuant to this Agreement as a purchase and sale
of assets.
1.8 Liabilities.
(a) Each of the Buyers and Western understands and agrees that, from and
after the Closing, except for the Excluded Liabilities and except for any
obligations expressly incurred by the Sellers under this Agreement, neither of
the Sellers nor any of their Affiliates shall have any liability or
responsibility for any liability or obligation of or arising out of or relating
to any Seller (or any of its predecessors) or its assets or business (including,
in each case, as to Environmental Matters), of whatever kind or nature, whether
contingent or absolute, whether arising prior to, on or after, and whether
determined or indeterminable on the Closing Date, and whether or not
specifically referred to as the "Assumed Liabilities." In addition, from and
after the Closing, none of the Former Shareholders or their Affiliates (other
than the Sellers and ACHC) shall have any liability hereunder, including any
liability for the Excluded Liabilities or the obligations of the Sellers or ACHC
under this Agreement.
(b) Effective upon (and subject to the occurrence of) the Closing, Sub 1
shall pay or perform each Company Assumed Liability and Sub 2 shall pay or
perform each ACFS Assumed Liability (or reimburse the appropriate Seller
therefor) on the later of (i) the date on which such Assumed Liability is due or
is otherwise paid or performed in accordance with the Sellers' prior practices
or (ii) within five (5) days after the applicable Seller advises the applicable
Buyer of the amount thereof, provided that such Buyer may dispute such Assumed
Liability with the third party to whom such Assumed Liability is owed, in good
faith, by appropriate procedure after written notice to the applicable Seller of
its intent to do so and such Seller's consent thereto (which consent shall not
be unreasonably withheld or delayed). The grant to such Buyer of such right to
dispute shall not in any way affect the obligations of such Buyer to indemnify
the Sellers, ACHC and the Former Shareholders, pursuant to Section 12.2 hereof.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND ACFS, AND ACHC
REGARDING THE COMPANY AND ACFS
The Company, ACFS and ACHC represent and warrant to the Buyers and Western
as follows (for purposes of the following representations and warranties, where
appropriate, the defined term "Company" shall be deemed to include ACFS and any
matters set forth on any schedule relating to ACFS shall specifically refer to
ACFS):
2.1 Organization. Each of the Company and ACFS is a corporation duly organized,
validly existing and in good standing under laws of the jurisdiction of its
incorporation and has all requisite corporate power and authority to carry on
its business as it is now being conducted. Each of the Company and ACFS is duly
qualified to do business and is in good standing as a foreign corporation in all
jurisdictions where the nature of the property owned or leased by it, or the
nature of the business conducted by it, makes such qualification necessary and
the absence of such qualification would have a Material Adverse Effect.
2.2 Financial Statements.
(a) Statutory Financial Statements. The Company has delivered to Western
each of the following statutory financial statements (collectively, the
"Statutory Financial Statements"):
(i) audited statutory-basis balance sheets and the related statutory-basis
statements of income, changes in capital and surplus and cash flows as of and
for the fiscal years ended December 31, 1994, 1995 and 1996 (December 31,
1996 being the "Most Recent Fiscal Year End") of the Company;
(ii) if available, unaudited statutory-basis quarterly financial
statements of the Company (the annual or quarterly statutory financial
statements, as appropriate, dated as of and for the later of the Most Recent
Fiscal Year End and any quarter ending after December 31, 1996 being the
"Most Recent Statutory Financial Statements" and the date of such year end or
quarter end, as appropriate, being the "Most Recent Fiscal Month End"); and
(iii) the Statutory Financial Statements have been prepared in conformity
with accounting practices prescribed or permitted by the Illinois Insurance
Department. The variances between such practices and SAP and the effects on
the Statutory Financial Statements are described, in all material respects,
in the notes thereto. The information included in the notes to the Statutory
Financial Statements presents fairly, in all material respects, capital and
surplus and net income of the Company in conformity with SAP at and for the
periods covered thereby. The Statutory Financial Statements present fairly in
all material respects the financial position of the Company at and for the
periods covered thereby, and the results of its operations and its cash flows
for the years then ended, in conformity with accounting practices prescribed
or permitted by the Illinois Insurance Department; provided, however, that
the Most Recent Statutory Financial Statements, if as of and for a date after
the Most Recent Fiscal Year End, are subject to year-end adjustments in
accordance with the accounting principles prescribed by the Illinois
Insurance Department, but which will not result in any Material Adverse
Effect.
(b) GAAP Financial Statements. As soon as practicable and in no event later
than ten days after the date hereof, the Company will deliver to Western each of
the following financial statements (collectively, the "GAAP Financial
Statements" and, together with the Statutory Financial Statements, the
"Financial Statements"):
(i) audited GAAP statements of income, changes in capital and surplus and
cash flows as of and for the fiscal years ended December 31, 1994, 1995 and
1996 for the Company;
(ii) audited GAAP consolidated balance sheets as of and for the fiscal
years ended December 31, 1995 and 1996;
(iii) if available, unaudited GAAP quarterly financial statements of the
Company as of and for any quarter ended after December 31, 1996 (the annual
or quarterly GAAP financial statements, as appropriate, dated as of and for
the later of the Most Recent Fiscal Year End and any quarter ending after
December 31, 1996 being the "Most Recent Consolidated GAAP Financial
Statements");
(iv) unaudited GAAP quarterly financial statements of the Company for any
comparable quarterly period in 1996 for which 1997 GAAP quarterly financial
statements are provided (the "Comparable GAAP Statements"); and
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(v) the GAAP Financial Statements present fairly, in all material
respects, the financial position of the Company at and for the periods
covered thereby, and the related results of its operations and cash flows for
the years then ended, and the GAAP Financial Statements have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis, except that the Most Recent Consolidated GAAP Financial
Statements and the Comparable GAAP Statements, if any, are subject to
year-end adjustments in accordance with GAAP and lack footnotes and other
presentation items, but which will not result in any Material Adverse Effect.
2.3 Absence of Certain Changes or Events. Except as set forth in Section
2.3 of the Disclosure Schedule, the Most Recent Consolidated GAAP Financial
Statements or the Most Recent Statutory Financial Statements, since the Most
Recent Fiscal Year End, the Company and ACFS have conducted their businesses in
the Ordinary Course of Business, and neither the Company nor ACFS has:
(a) changed in any material respect the Company's reserves for losses,
claims and expenses, or its rates, actuarial assumptions, policy forms,
contractual arrangements, claims or procedures;
(b) suffered any damage, destruction or casualty loss (not covered by
insurance) to its physical properties which individually or in the aggregate
have had a Material Adverse Effect;
(c) incurred or discharged any obligation or liability or entered into any
other transaction except in the Ordinary Course of Business and except for
obligations, liabilities and transactions that do not individually or in the
aggregate have a Material Adverse Effect;
(d) suffered any material adverse change in its working capital, assets,
liabilities, operations or business or financial condition which individually or
in the aggregate have had a Material Adverse Effect;
(e) increased the rate or terms of compensation payable or to become
payable to its directors, officers or employees or increased the rate or terms
of any Business Benefit Plan covering any of its directors, officers or
employees, except in each case increases occurring in the Ordinary Course of
Business in accordance with its customary practices (including normal periodic
performance reviews and related compensation and benefit increases) or as
required by any pre-existing Commitment;
(f) created, permitted, suffered or assumed any Encumbrance on any of its
properties or assets, tangible or intangible, other than Permitted Exceptions;
(g) acquired or disposed of any assets or properties, or entered into any
agreement or other arrangement for such acquisition or disposition, except
acquisitions and dispositions in the Ordinary Course of Business;
(h) forgiven or canceled any debts or claims, or waived any rights, except
in the Ordinary Course of Business and except for forgiveness, cancellations and
waivers that do not individually or in the aggregate have a Material Adverse
Effect;
(i) changed in any material respect its accounting practices, policies or
principles, or changed its depreciation or amortization policies or rates
adopted by it other than changes which do not individually or in the aggregate
have a Material Adverse Effect or changes required by changes in GAAP, SAP or
applicable Insurance Laws, which do not individually or in the aggregate have a
Material Adverse Effect;
(j) entered into any employment agreement or adopted any Business Benefit
Plan other than those which do not individually or in the aggregate have a
Material Adverse Effect;
(k) (i) declared, set aside or paid any dividends or other distribution in
respect of the Stock of the Company, or shares of capital stock of, or other
equity interests in, ACFS or (ii) redeemed, purchased or otherwise acquired any
of the Company's securities or any of the securities of ACFS;
(l) transferred any asset, liability or obligations to or from any
Affiliate to the Company or ACFS or entered into any agreements with an
Affiliate;
(m) created, incurred, assumed, entered into or suffered to exist any
indebtedness for borrowed money or guaranteed any obligation of any Person; or
(n) agreed to take any action described in this Section 2.3.
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2.4 Title to Assets. The Company and ACFS have good and marketable title to
all of the Company Acquired Assets and ACFS Acquired Assets, respectively, free
and clear of all Encumbrances, except (a) as set forth in Section 2.4 of the
Disclosure Schedule, (b) liens for taxes not yet due and payable or due but not
delinquent or being contested in good faith by appropriate proceedings and (c)
Encumbrances which individually or in the aggregate do not have a Material
Adverse Effect (the matters set forth in the foregoing clauses (a), (b) and (c)
being referred to herein as the "Permitted Exceptions"). Except for the Excluded
Assets, the Company Acquired Assets and ACFS Acquired Assets include all rights,
properties and other assets necessary to permit the Company and ACFS,
respectively, to conduct their businesses in substantially the same manner as
has been heretofore conducted (it being understood that no representation or
warranty is being made as to the effect that not including the Excluded Assets
will or may have on the Company or ACFS, respectively, or their respective
business). The instruments of transfer to be executed and delivered by the
Sellers in connection with the transactions contemplated by this Agreement are
valid and binding obligations of each of the Sellers and are sufficient to
transfer to the applicable Buyer all rights, title and interest of the Sellers
in and to the Acquired Assets.
2.5 Proprietary Information. Neither the Company nor ACFS owns or uses any
United States or foreign trademarks, trade names, service marks, patents or
copyrights, and there are no applications pending therefor; nor does either have
any royalty, commission, licensing or other agreement with respect thereto. To
the Company's knowledge, neither the Company nor ACFS has interfered with,
infringed upon, misappropriated, or violated any material patent, copyright,
tradename or trademark right of any third party in any material respect, and
neither the Company nor ACFS has received any charge, complaint, claim, demand,
or notice alleging any such interference, infringement, misappropriation, or
violation.
2.6 Commitments. Section 2.6 of the Disclosure Schedule sets forth a list,
as of the date hereof, of each of the following written or oral agreements,
arrangements or commitments (including any and all amendments thereto) to which
the Company or ACFS is a party or by which the Company or ACFS is bound
(collectively, the "Commitments"):
(a) all reinsurance, retrocession, coinsurance or other similar
commitments, agreements or arrangements;
(b) any agreement (or group of related agreements) for the lease of
personal property to or from any Person providing for lease payments in excess
of $50,000 per annum in any one case;
(c) any agreement (or group of related agreements) for the purchase or sale
of supplies, products, or other personal property, or for the furnishing or
receipt of services, the performance of which will extend over a period of more
than one year or involve consideration in excess of $50,000 in any one case;
(d) any agreement concerning a partnership or joint venture or which
otherwise entitles any Person to share in the profits, revenues or cash flows of
the Company or ACFS or which requires any payments or other distributions based
thereon;
(e) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed an Encumbrance
on any of its assets, tangible or intangible, in excess of $50,000 in any one
case or $200,000 in the aggregate;
(f) any material agreement concerning confidentiality;
(g) any material sales agency or distributorship agreements;
(h) any agreements between the Company and ACFS or any of their respective
Affiliates;
(i) any material brokerage and finder's agreements;
(j) agreements and commitments for capital expenditures in excess of
$50,000 for any single project or $200,000 in the aggregate;
(k) any material employment, consulting, severance or agency agreement;
(l) any agreement under which it has advanced or loaned any amount to any
of its directors, officers and employees other than the advancement of expenses
in the Ordinary Course of Business;
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(m) other agreements, arrangements or commitments which are material to the
business or financial condition of the Company or ACFS;
(n) any power of attorney granted by the Company or ACFS to a third party;
(o) any agreement with any director, officer, shareholder or Affiliate or
other organization in which such Person, or anyone related to such Person, has a
direct or indirect financial interest;
(p) any agreement containing covenants limiting its freedom to compete in
any line of business or in any geographic area; and
(q) any agreement with, or undertaking or commitments to any governmental
or regulatory authority.
The Company and ACFS previously have delivered to Western a correct and
complete copy of each such written Commitment. Except as set forth in Section
2.6 of the Disclosure Schedule, neither the Company nor ACFS has knowledge of
any pending or threatened bankruptcy, insolvency or similar proceeding with
respect to any party to such agreements and no event has occurred which (with or
without notice, lapse of time or the happening or occurrence of any other event)
would constitute a default thereunder by the Company or ACFS or, to the
Company's knowledge, any other party thereto. Except as set forth on Section 2.6
of the Disclosure Schedule, to the knowledge of the Company, all of the
contracts, agreements and arrangements referred to, or required to be referred
to, in the Disclosure Schedule are valid and binding and are in full force and
effect and are enforceable in accordance with their terms.
2.7 Litigation. Except as set forth in Section 2.7 of the Disclosure Schedule,
there is no action, counterclaim, suit, hearing, investigation or proceeding of,
in or before any court, governmental authority or administrative agency of any
federal, state, local or foreign jurisdiction or before any arbitrator or other
forum for dispute resolution ("Litigation") pending or, to the Company's
knowledge, threatened against the Company or ACFS, or to which any of them is a
named party (i) with respect to which there is a reasonable likelihood of a
determination which would have a Material Adverse Effect or (ii) which seeks to
enjoin or obtain damages in respect of the consummation of the transactions
contemplated hereby. Except as set forth in the Disclosure Schedule or the
Financial Statements or the Regulatory Filings filed prior to the date of this
Agreement (including, without limitation, all documents referenced therein),
neither the Company nor ACFS is currently under review by the Illinois Insurance
Department, any other insurance department or agency or any other governmental
authority or subject to any outstanding orders, rulings, injunctions, judgments,
charges or decrees that have a Material Adverse Effect.
2.8 Compliance with Laws. Except as set forth in Section 2.8 of the Disclosure
Schedule, the Company and ACFS are in compliance with all applicable laws, rules
and regulations of federal, state, local and foreign governments (and all
agencies thereof) currently in effect, except where the failure to comply
therewith would not have a Material Adverse Effect. The Company and ACFS have
all permits, licenses, Insurance Licenses, and authorizations of governmental or
regulatory authorities (collectively, the "Permits") necessary or required for
the conduct of their businesses as presently conducted, except where the absence
thereof does not individually or in the aggregate have a Material Adverse
Effect. Section 2.8 of the Disclosure Schedule sets forth each Insurance License
and other Permit which the Company or ACFS possesses. There is no Litigation
pending or, to the Company's knowledge, threatened, seeking the revocation,
cancellation or suspension or any adverse modification, of any such Permits with
respect to which there is a reasonable likelihood of a determination which would
have a Material Adverse Effect. No event has occurred with respect to any
Insurance License which permits, or after notice or lapse of time (or both)
would permit, revocation or termination of any Insurance License, or would
result in any other impairment of the rights of the holder thereof, and no
terminations thereof have been threatened. Except as set forth in Section 2.8 of
the Disclosure Schedule, neither the Company nor ACFS has received any notice of
any violations or other deficiencies, which notice has been issued or which
deficiencies have been alleged to exist by any insurance department or other
official of any state, including those states in which the Company is licensed,
which violations or deficiencies have not been fully and completely remedied,
cured or otherwise satisfied as of the date hereof.
2.9 Corporate Power and Authority; No Conflicts. Each of the Company and ACFS
has the right, power and authority to execute, deliver and perform this
Agreement and to consummate the transactions contemplated hereby. The execution,
delivery and performance by each of the Company and ACFS of this Agreement and
the consummation by each of the Company and ACFS of the transactions
contemplated hereby have been duly
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authorized by all necessary corporate action on the part of each of the Company
and ACFS. This Agreement has been duly and validly executed and delivered by
each of the Company and ACFS and constitutes the valid and binding obligation of
each of the Company and ACFS, enforceable against each of them in accordance
with its terms. The execution, delivery and performance by each of the Company
and ACFS of this Agreement and the consummation by each of the Company and ACFS
of the transactions contemplated hereby will not, with or without the giving of
notice or the lapse of time, or both, (i) violate any provision of law, rule or
regulation to which the Company or ACFS is subject, (ii) violate any order,
judgment or decree applicable to the Company or ACFS or (iii) violate any
provision of the Certificate of Incorporation or the By-laws of the Company or
ACFS; except, in each case, for violations, breaches or defaults which in the
aggregate would not materially hinder or impair the consummation of the
transactions contemplated hereby.
2.10 Employee Benefit Plans.
(a) Section 2.10 of the Disclosure Schedule lists all material Business
Benefit Plans. True and complete copies thereof, as amended, including either
the original plan or the most recent restatement and all subsequent amendments
(other than any Multiemployer Plans), have previously been delivered to Western.
Except as set forth in Section 2.10 of the Disclosure Schedule, with respect to
each material Business Benefit Plan other than any Multiemployer Plan, true and
complete copies of the following have been delivered to Western:
(i) any related ERISA summary plan description or other summary of plan
provisions distributed to participants or beneficiaries for such plan;
(ii) the most recent determination letter, if any, received from the IRS
regarding such plan;
(iii) any pending applications, filings, or notices with respect thereto
with the IRS, PBGC or DOL;
(iv) the financial statements and annual reports on the Form 5500 series
for such plan for the last two years;
(v) the latest actuarial valuation, if any, for such plan;
(vi) each trust agreement, insurance contract or document setting forth
any other funding arrangement, if any, with respect to such plan;
(vii) each opinion or ruling from the IRS, DOL, or PBGC concerning such
plan in the prior 12 months; and
(viii) each Registration Statement, amendment thereto and prospectus
relating thereto filed with the SEC or furnished to participants in
connection with such plan.
(b) Except as set forth in Section 2.10 of the Disclosure Schedule, each of
the Business Benefit Plans intended to qualify under Section 401(a) of the Code
has received a favorable determination letter from the IRS to the effect that it
is qualified under Section 401(a) of the Code, and has never received notice or
determination by any governmental agency that it is not so qualified.
(c) Except as set forth in Section 2.10 of the Disclosure Schedule, to the
knowledge of ACHC and the Former Shareholders, the Business Benefit Plans (other
than any Multiemployer Plans, with respect to which the Company makes no
representations) sponsored or maintained by the Business have been maintained
and operated in material compliance accordance with their terms and all
provisions of applicable law.
(d) Except as set forth in Section 2.10 of the Disclosure Schedule, neither
the Company nor ACFS has participated in or contributed to any Multiemployer
Plan nor to the knowledge of ACHC and the Sellers does any of them have any
other liability, including any potential withdrawal liability, with respect to
any Multiemployer Plan, and none of them has incurred any current or potential
withdrawal liability as a result of a complete or partial withdrawal (or
potential partial withdrawal) from any such Multiemployer Plan by the Business
or by any member of the controlled or affiliated group of the Sellers, ACHC or
the Former Shareholders.
(e) Funding Matters.
(1) Except as set forth in Section 2.10 of the Disclosure Statement, no
liability to the PBGC has been incurred with respect to the Business
Benefit Plans. All premiums due and payable to the PBGC with respect to
the Business Benefit Plans have been paid in a timely manner. As of the
date of this
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Agreement, the PBGC has not instituted proceedings to terminate any of
the Business Benefit Plans. To the Sellers' knowledge, no event has
occurred and there exists no condition or set of circumstances which
would reasonably be expected to result in the involuntary termination of
any of the Business Benefit Plans by the PBGC pursuant to Section 4042 of
ERISA.
(2) Except as set forth in Section 2.10 of the Disclosure Schedule, the
current present value of all projected benefit obligations under each of
the Business Benefit Plans which is subject to Title IV of ERISA did not,
as of its latest valuation date, exceed the then current value of the
Business Plan Assets attributable to such benefit liabilities, based upon
reasonable actuarial assumptions currently used for such Business Benefit
Plan. In addition, except as set forth in the Disclosure Schedule, each
of the Business Benefit Plans which is subject to Title IV of ERISA is
fully funded on a termination basis such that the net fair market value
of the assets equals or exceeds the present value of the accrued benefits
under such Business Benefit Plan. The representation made in the
preceding sentence is based upon the reasonable actuarial assumptions
currently used for such Business Benefit Plan with such modifications as
are required by the PBGC for determining benefits on a termination basis.
(3) Except as set forth in Section 2.10 of the Disclosure Schedule, no
accumulated funding deficiency (as defined in Section 302(a)(2) of ERISA)
whether or not waived and regardless of the reason arising, exists with
respect to any Business Benefit Plan.
(4) Prior to the date of this Agreement or before the Closing Date, to
the knowledge of ACHC and the Sellers, no action has or will be taken,
the effect of which would reasonably be expected to subject the Business
or any member of the controlled or affiliated group of the Business to
any increased annual liability or withdrawal liability as a result of a
plan reorganization.
(5) Except as set forth in Section 2.10 of the Disclosure Schedule, none
of the Business Benefit Plans has been terminated or partially terminated
within the past 5 years, no contributions to any such Business Benefit
Plans been discontinued (within the meaning of Section 411 of the Code),
and there have been no events within the past 5 years which would
reasonably be expected to constitute grounds for such a termination,
partial termination or discontinuance of contributions. There has been no
withdrawal of a substantial employer (as described in Section 4063 of
ERISA) from any of the Business Benefit Plans.
(6) Except as set forth in the Disclosure Schedule, no member of the
controlled or affiliated group of the Sellers has withdrawn from any
Multiemployer Plan within the past 5 years.
(f) For the past 5 years, to the knowledge of ACHC and the Sellers, Summary
Plan Descriptions and all other returns, reports, registration statements,
prospectuses, documents, statements and communications which are required to
have been filed, published or disseminated under ERISA or other federal law and
the other rules and regulations promulgated by the DOL under ERISA and the
Treasury Department or by the SEC with respect to the Business Benefit Plans
have been so filed, published or disseminated.
(g) To the knowledge of ACHC and the Sellers, except as set forth in
Section 2.10 of the Disclosure Schedule:
(1) Neither the Business, any Business Benefit Plan, any trust or
arrangement created under any of them, nor any trustee who is an
Employee, fiduciary who is an Employee, custodian who is an Employee, or
administrator who is an Employee of the Business and a fiduciary of any
Business Benefit Plans has engaged in any "prohibited transaction" (as
such term is defined in ERISA to or the Code) which would reasonably be
expected to subject any of the foregoing persons or entities or any
person or entity dealing with them to any material tax, penalty, or other
material cost or material liability of any kind; and
(2) No Reportable Event (other than a Reportable Event for which the
statutory notice requirements have been waived by regulation) has
occurred with respect to any Business Benefit Plan.
(h) Other than claims for benefits arising in the ordinary course of the
administration or operation of the Business Benefit Plans, no claims,
investigations, litigation, or arbitrations are pending or threatened against
any Business Benefit Plan or against the Business with regard to any Business
Benefit Plan, any trust or arrangement created under or as a part of any
Business Benefit Plan, any trustee, fiduciary, custodian, administrator or other
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person or entity holding or controlling assets of any Business Benefit Plan and
to the knowledge of ACHC and the Sellers, no circumstance exists that would
reasonably be expected to give rise to any such claim or claims exist.
(i) Except as set forth in the Disclosure Schedule, the execution or
performance of the transactions contemplated by this Agreement are not
reasonably expected to create, accelerate or increase any obligations under any
Business Benefit Plan, including any obligation to make a payment that would be
nondeductible under Section 280G of the Code or any other Code provisions.
2.11 Consents. Except for (i) those Commitments indicated by a double or single
asterisk on Section 2.6 of the Disclosure Schedule and (ii) the Commitment
listed on Exhibit 8.3 hereof, no consent, approval or authorization of, or
exemption by, or filing with, any governmental authority (other than applicable
requirements, if any, pursuant to the HSR Act, Required Insurance Filings, and
Required Insurance Approvals) or any other Person is required in connection with
the execution, delivery and performance by the Company or ACFS of this Agreement
or the taking of any other action contemplated hereby, excluding, however,
consents, approvals, authorizations, exemptions and filings, if any, which any
Buyer or Western or any other Person is required to obtain or make or instances
where the failure to obtain such consents, approvals or authorizations, or to
make such filings or notifications, would not, either individually or in the
aggregate, prevent the Company or ACFS from performing its respective
obligations under this Agreement.
2.12 Subsidiaries. Other than ACFS, there is no corporation or other Person
with respect to which the Company or ACFS either (a) owns on the date hereof or
will own, directly or indirectly, on the Closing Date a majority of the common
stock or other equity interest of or (b) has the power to vote or direct the
voting of sufficient securities to elect a majority of the directors thereof.
Neither the Company nor ACFS controls any corporation, partnership, trust, or
other business association which is not a subsidiary of the Company or ACFS.
2.13 Real Property; Leases.
(a) Neither the Company nor ACFS owns any real property.
(b) Section 2.13 of the Disclosure Schedule sets forth all real property
leased or subleased to either the Company or ACFS or which the Company or ACFS
have agreed to purchase or lease (the "Leased Property"). The Company and ACFS
have delivered to Western correct and complete copies of the leases, subleases
and other applicable agreements for each Leased Property. With respect to each
such Leased Property:
(i) there are no material disputes, oral agreements, or forbearance
programs in effect as to the lease or sublease;
(ii) neither the Company nor ACFS has assigned, transferred, conveyed,
mortgaged, deeded in trust, or Encumbered any interest in the leasehold or
subleasehold;
(iii) all Leased Properties have received all approvals of Governmental
Entities (including Permits) required in connection with the operation
thereof;
(iv) except for Permitted Exceptions, no Leased Property is subject to any
governmental decree or order (or threatened or proposed order known to the
Company) to be sold or taken by public authority or any rights of way,
building use restrictions, exceptions, variances, reservations or limitations
of any nature whatsoever which would have a Material Adverse Effect; and
(v) The plants, structures and equipment owned or leased by the Company
and ACFS are structurally sound with no known material defects, are in good
and safe operating condition and repair and are adequate for the uses to
which they are being put.
2.14 Environmental Matters. To the Company's knowledge, except as set forth in
Section 2.14 of the Disclosure Schedule or the Financial Statements filed prior
to the date of this Agreement:
(a) Each of the Company and ACFS (i) has complied in all material respects
with the Environmental, Health and Safety Laws and (ii) has obtained all Permits
which are required under the Environmental, Health and Safety Laws for its
operation and each such entity has been in substantial compliance with all terms
and conditions of such Permits;
(b) No Hazardous Substance has been discharged into the environment by the
Company or ACFS or on or from the premises of the Company or ACFS by any Person
which is required by the Environmental, Health and Safety Laws to be remediated
by or at the expense of the Company or ACFS;
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(c) There are no past, pending or threatened Environmental Claims asserted
against the Company or ACFS; and
(d) There are not now and there have never been any underground storage
tanks located at, on or under the Leased Property.
2.15 Undisclosed Liabilities. Except as reflected and adequately reserved
against in the Most Recent Statutory Financial Statements or disclosed in
Section 2.15 of the Disclosure Schedule, or as contemplated by this Agreement,
neither the Company nor ACFS has any debts, liabilities or obligations of any
nature (whether known or unknown, absolute or contingent), except (a) any debts,
liabilities or obligations incurred after the date of the Most Recent Statutory
Balance Sheet in the Ordinary Course of Business which shall in no event exceed
$100,000 in the aggregate, and (b) reserves as described in Section 2.19.
2.16 Insurance Coverage. Section 2.16 of the Disclosure Schedule contains a
list, as of the date hereof of all material insurance policies maintained by or
for the benefit of the Company and ACFS (the "Insurance Policies"). The Company
and ACFS have made available to Western copies complete and correct in all
material respects of all of the Insurance Policies together with all riders and
other written amendments thereto. The Insurance Policies are in full force and
effect, and all premiums due thereon have, to date, been paid. The Company and
ACFS have complied with the terms and provisions of the Insurance Policies
except where the failure to comply does not individually or in the aggregate
have a Material Adverse Effect.
2.17 Insurance Reports; Regulatory Filings.
(a) Section 2.17 of the Disclosure Schedule sets forth a list of all
reports of examination issued by the insurance authorities of each state in
which the Company and ACFS have filed Statutory Financial Statements since
December 31, 1991 (the "Insurance Reports"). Except as indicated in such
Statutory Financial Statements, Insurance Reports, other Regulatory filings or
on Section 2.17 of the Disclosure Schedule:
(i) no deficiencies have been asserted to the Company or ACFS by any such
regulatory authority with respect to such Statutory Financial Statements and
Insurance Reports;
(ii) since December 31, 1991, no fine or penalty has been imposed on the
Company or ACFS by any insurance regulatory authority or any court or other
governmental authority; and
(iii) no deposits have been made by the Company or ACFS with any insurance
regulatory authority which were not shown in the Statutory Financial
Statements or the most recent Statutory Financial Statements for any
quarterly period ending after December 31, 1996.
(b) Section 2.17 of the Disclosure Schedule sets forth a list of all
reports, statements, documents, registrations, filings, including, without
limitation, all rate and form filings, submissions, or applications required by
any applicable Insurance Laws to be filed regularly by the Company or ACFS
during any year (collectively, the "Regulatory Filings"). The Company and ACFS
have properly made the Regulatory Filings with the appropriate insurance
regulatory authority or any other authority with which such Regulatory Filings
must be filed or submitted, and the Regulatory Filings comply with all
applicable Insurance Laws. No material deficiencies have been asserted by any
such regulatory authority with respect to the Regulatory Filings. Since January
1, 1991, there have been no material disputes or controversies with or
investigations undertaken by any such regulatory authorities, except as set
forth in Section 2.17 of the Disclosure Schedule. Any disputes or controversies
with or undertaken by any such regulatory authorities have been resolved without
a Material Adverse Effect on the Company or ACFS or are currently being
contested or resolved by the Company or ACFS in good faith and in accordance
with any Insurance Laws.
2.18 Labor Relations. There is no collective bargaining agreement or other
labor contract covering employees of the Company or ACFS, and no union or other
labor organization is seeking to organize, or to be recognized as a collective
bargaining unit of employees of the Company or ACFS or for any similar purpose.
2.19 Reserves. The aggregate actuarial reserves and other actuarial amounts
held in respect of Assumed Liabilities with respect to Insurance Contracts of
the Company as established or reflected in the Most Recent Statutory Financial
Statements:
(a) (i) were determined in accordance with generally accepted actuarial
standards consistently applied, (ii) were fairly stated in accordance with said
actuarial principles and (iii) were based on actuarial assumptions that are in
accordance with industry standards and applicable Insurance Laws;
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(b) meet in all material respects the requirements of the Insurance Laws of
all jurisdictions in which the Company is licensed; and
(c) are adequate (under generally accepted actuarial standards consistently
applied) to cover the total amount of all reasonably anticipated matured and
unmatured claims, benefits or Assumed Liabilities of the Company under all
outstanding Insurance Contracts pursuant to which the Company has any liability.
For purposes of this clause (c), (i) the adequacy of reserves shall be
determined only on the basis of facts and circumstances known or anticipated or
which reasonably should have been known or anticipated (based on procedures
consistently applied, in accordance with industry standards and applicable
Insurance Laws by the Company in connection with assessing the adequacy of
reserves from time to time) by the Company as of the date hereof and (ii) the
fact that reserves covered by any such representation may be subsequently
adjusted at times and under circumstances consistent with the Company's ordinary
practice of periodically reassessing the adequacy of its reserves shall not be
used, in any manner whatsoever, to support any claim regarding the accuracy of
such representation; provided, however, that such adjustments do not result in a
Material Adverse Effect.
2.20 Insurance Business.
(a) All Insurance Contracts issued by the Company and now in force are, to
the extent required under applicable Law, on forms approved by applicable
insurance regulatory authorities in the jurisdictions where issued or have been
filed with and not objected to by such authorities within the period provided
for objection. All Insurance Contracts are consistent with all rate and form
regulatory filings currently in effect for the Company in each jurisdiction in
which the Company is licensed to write such Insurance Contracts. Subject to the
Buyers and Western obtaining any appropriate Insurance Licenses and all
necessary Permits and entering into the appropriate Reinsurance Assumption
Agreement, the transactions contemplated by this Agreement will not (i) affect
the validity of any Insurance Contract issued by the Company or (ii) render any
admissible assets of the Company inadmissible under the applicable Insurance
Laws of any applicable jurisdiction or the regulations promulgated thereunder.
(b) Except as set forth in Section 2.20 of the Disclosure Schedule or the
Statutory Financial Statements filed by the Company prior to the date of this
Agreement, the Company is in compliance with all capital and surplus
requirements of the state of Illinois and every other state in which the Company
is licensed to write insurance.
(c) Except as set forth in Section 2.20 of the Disclosure Schedule or the
Statutory Financial Statements or the Regulatory Filings filed by the Company
prior to the date of this Agreement, there is no judgment, order, Law or
regulation or other instrument binding on the Company or ACFS or either of their
assets or properties which has or would reasonably be expected to have the
effect of prohibiting or materially restricting any business practice of or the
conduct of business by the Company or ACFS as presently conducted or which has
any other Material Adverse Effect.
(d) Except as set forth in Section 2.20 of the Disclosure Schedule, all
benefits payable by the Company under Insurance Contracts have in all material
respects been paid (or provision for payment thereof has been made) in
accordance with the terms of the Insurance Contracts under which they arose and
the Company's claims manual, such payments were not delinquent and were paid (or
will be paid) without fines or penalties, except for such benefits for which the
Company reasonably believes there is a reasonable basis to contest payment and
is currently contesting payment in a diligent and continuous manner.
(e) Except as set forth in Section 2.20 of the Disclosure Schedule, since
the date of the Most Recent Statutory Financial Statements, all amounts
recoverable under reinsurance, coinsurance or other similar Contracts
(including, without limitation, amounts based on paid and unpaid Losses) are
fully collectible, except such as to which noncollectibility would not,
individually or in the aggregate, have a Material Adverse Effect.
(f) Section 2.20 of the Disclosure Schedule lists each insurance agent or
broker authorized to write, sell or produce business for the Company. Except as
set forth in the Disclosure Schedule:
(i) Each insurance agent or broker, at the time such agent or broker
wrote, sold or produced business for the Company, was duly licensed as an
insurance agent or broker for the type of business written, sold or produced
by such insurance agent or broker in the particular jurisdiction in which
such agent or broker wrote, sold or produced such business for the Company,
except for such failures to be so licensed as would not, individually or in
the aggregate, have a Material Adverse Effect;
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(ii) No insurance agent or broker violated any term or provision of any
Law, judgment, order or decree by writing, selling or producing such business
for the Company, except for such violations as would not, individually or in
the aggregate, have a Material Adverse Effect; and
(iii) Each insurance agent or broker has promptly remitted to the Company
all amounts required in accordance with any agreement, arrangement or
contract between such insurance agent or broker and the Company, except for
such failures to remit which do not, individually or in the aggregate, have a
Material Adverse Effect.
(g) All of the Investment Assets of each of the Company and ACFS included
in its Most Recent Statutory Financial Statements as admitted assets comply in
all material respects with the requirements for qualification as admitted assets
under the investment provisions of the Insurance Laws of the State of Illinois
and the applicable Insurance Laws of each of the other jurisdictions in which
the Company or ACFS possesses an Insurance License. None of the Investment
Assets of the Company and ACFS fail to qualify or are not permitted investments
under the investment provisions of the Insurance Laws of the State of Illinois
and the applicable Insurance Laws of each of the other jurisdictions in which
the Company or ACFS possess an Insurance License.
(h) Neither the Company nor ACFS is required to maintain nor does either
maintain any statutory deposits in any states in which it is licensed to engage
in the insurance business, except in the amounts, and with respect to the
states, set forth in Section 2.20 of the Disclosure Schedule or the Statutory
Financial Statements. All of such deposits are maintained in amounts and in all
other material respects, in accordance with applicable Insurance Laws.
2.21 Investments. Section 2.21 of the Disclosure Schedule sets forth a schedule
of the Company's Investment Assets as of March 31, 1997. Except as set forth
therein and except for the stock of ACFS, neither the Company nor ACFS owns any
capital stock or other securities or has any other investment in any Person.
2.22 Disclosure. No representations, warranties, assurances or statements by
the Company, ACFS or ACHC in this Agreement and no statement contained in any
document (including the Financial Statements and the Disclosure Schedule),
certificates or other writings furnished or to be furnished by the Company, ACFS
or ACHC (or caused to be furnished by the Company, ACFS or ACHC) to any Buyer or
Western or any of their representatives pursuant to the provisions hereof
contains or will contain any untrue statement of material fact, or omits or will
omit to state any fact necessary, in light of the circumstances under which it
was made, in order to make the statements herein or therein not misleading.
2.23 Disclaimer. EXCEPT AS SPECIFICALLY SET FORTH IN THIS AGREEMENT AND IN THE
ANCILLARY DOCUMENTS, ACHC, THE COMPANY AND ACFS MAKE NO REPRESENTATION OR
WARRANTY, EXPRESS OR IMPLIED, AND THE ASSETS AND BUSINESS OF THE COMPANY AND
ACFS BEING SOLD TO THE BUYERS AT THE CLOSING ARE TO BE CONVEYED HEREUNDER "AS IS
WHERE IS" ON THE CLOSING DATE, AND IN THEIR THEN PRESENT CONDITION, AND THE
BUYERS AND WESTERN SHALL RELY UPON THEIR OWN EXAMINATION THEREOF. IN ANY EVENT,
ACHC, THE COMPANY AND ACFS MAKE NO WARRANTY OF MERCHANTABILITY, SUITABILITY OR
FITNESS FOR A PARTICULAR PURPOSE, OR QUALITY, WITH RESPECT TO ANY OF THE
TANGIBLE ASSETS BEING SO SOLD, OR AS TO THE CONDITION OR WORKMANSHIP THEREOF, OR
THE ABSENCE OF ANY DEFECTS THEREIN, WHETHER LATENT OR PATENT.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF
ACHC AND THE FORMER SHAREHOLDERS
ACHC represents and warrants to the Buyers and Western and, solely with
respect to the representations and warranties contained in Section 3.6 and
solely with respect to himself, each of the Former Shareholders represents and
warrants, as follows:
3.1 Litigation. There is no Litigation pending, or to ACHC's knowledge,
threatened, involving the Company, ACFS or the Acquired Assets or which seeks to
enjoin or obtain damages in respect of the transactions contemplated hereby.
Neither ACHC nor any of its Affiliates is subject to any outstanding orders,
rulings, judgments or decrees which would impair the ability of ACHC to perform
its obligations hereunder.
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3.2 Power and Authority; No Conflict. ACHC is a corporation duly organized,
validly existing in good standing under the laws of the State of Delaware, and
has all requisite corporate power and authority to execute, deliver and perform
this Agreement and to consummate the transactions contemplated hereby. The
execution, delivery, and performance by ACHC of this Agreement and the
consummation by ACHC of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of ACHC. This Agreement
has been duly and validly executed and delivered by ACHC and constitutes the
valid and binding obligation of ACHC, enforceable against it in accordance with
its terms. The execution, delivery and performance by ACHC of this Agreement and
the consummation by ACHC of the transactions contemplated hereby, will not, with
or without the giving of notice or the lapse of time, or both, (i) violate any
provision of law, rule or regulation to which ACHC is subject, (ii) violate any
order, judgment or decree applicable to ACHC, (iii) violate any provision of the
Certificate of Incorporation or By-laws of ACHC or (iv) result in any breach of
or constitute a default under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the creation of any
Encumbrance on any of the properties or assets of ACHC or any of its Affiliates
(other than the Company or ACFS) pursuant to any note, bond, mortgage,
indenture, contract, agreement, lease, Permit, franchise or other instrument or
obligation to which ACHC is a party or by which ACHC or any of their properties
(other than the Company or ACFS) is bound or affected; except, in each case, for
violations which in the aggregate would not materially hinder or impair the
consummation of the transactions contemplated hereby.
3.3 [Intentionally omitted.]
3.4 Disclosure. No representations, warranties, assurances or statements by
ACHC or the Former Shareholders in this Agreement and no statement contained in
any document, certificate or other writing furnished by ACHC or the Former
Shareholders (or caused to be furnished by ACHC or the Former Shareholders) to
any Buyer or Western or any of their representatives pursuant to the provisions
hereof contains or will contain any untrue statement of a material fact, or
omits or will omit to state any fact necessary, in light of the circumstances
under which it was made, in order to make the statements herein or therein not
misleading.
3.5 [Intentionally omitted.]
3.6 Relationship of the Former Shareholders with Related Persons. Except as set
forth in Section 3.6 of the Disclosure Schedule, none of the Former Shareholders
or their respective Affiliates or, to their knowledge, their relatives (in each
case, excluding ACHC) owns or has any other interest, directly or indirectly, in
any corporation, joint venture, partnership, limited liability company or other
entity or association that (i) competes with the Company or ACFS, (ii) sells or
purchases, or has in the past 12 months sold or purchased, products or services
to or from the Company or ACFS, (iii) leases, or has in the past 12 months
leased, real or personal property to or from the Company or ACFS or (iv)
otherwise does business with the Company or ACFS, except for ownership of less
than five percent (5%) of the outstanding capital stock of any company that is
publicly traded on any exchange or in the over-the-counter market.
3.7 Title. ACHC holds of record and owns beneficially 24,990.5 of the 25,000
outstanding shares of the Company, free and clear of any restrictions on
transfer (other than restrictions under the Automatic Repurchase and Pledge
Agreement, the Securities Act, applicable Insurance Laws, and state securities
laws), taxes, Encumbrances, options, warrants, purchase rights, contracts,
commitments, equities, claims, and demands.
3.8 Disclaimer. EXCEPT AS SPECIFICALLY SET FORTH IN THIS AGREEMENT AND THE
ANCILLARY DOCUMENTS, NEITHER ACHC NOR ANY OF THE FORMER SHAREHOLDERS MAKES ANY
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AND THE ASSETS AND BUSINESS OF
THE COMPANY AND ACFS BEING SOLD TO THE BUYERS AT THE CLOSING ARE TO BE CONVEYED
HEREUNDER "AS IS WHERE IS" ON THE CLOSING DATE, AND IN THEIR THEN PRESENT
CONDITION, AND THE BUYERS AND WESTERN SHALL RELY UPON THEIR OWN EXAMINATION
THEREOF. IN ANY EVENT, ACHC AND THE FORMER SHAREHOLDERS MAKE NO WARRANTY OF
MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE, OR QUALITY,
WITH RESPECT TO ANY OF THE TANGIBLE ASSETS BEING SO SOLD, OR AS TO THE CONDITION
OR WORKMANSHIP THEREOF, OR THE ABSENCE OF ANY DEFECTS THEREIN, WHETHER LATENT OR
PATENT.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
THE BUYERS AND WESTERN
Each Buyer and Western hereby represents and warrants to the Sellers as
follows (for purposes of the following representations and warranties, where
appropriate, the defined term "Buyers" shall be deemed to include Sub 2 and Sub
1, each upon its formation, and any representation and warranty made by a Buyer
shall be deemed to be made by such Buyer as of the date of its execution of a
counterpart of this Agreement as contemplated by Section 6.7 hereof):
4.1 Organization. Each of the Buyers and Western is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, and has all requisite corporate power and
authority to execute, deliver and perform this Agreement and to consummate the
transactions contemplated hereby, except for the (i) Required Insurance
Approvals and (ii) in the case of Western, Stockholder Approval. Each of the
Buyers and Western has all requisite corporate power and authority to own, lease
and operate its properties and to carry on its business as is now being
conducted, and each is duly qualified and in good standing to do business in
each jurisdiction in which the character of its properties owned or leased or
the nature of the business conducted by it makes such qualification necessary,
other than where the failure to be so organized, validly existing and in good
standing, or to have such power and authority, as the case may be, would not
have a material adverse effect on the transactions contemplated hereby.
4.2 Corporate Power and Authority; No Conflicts. The execution, delivery and
performance by each Buyer and Western of this Agreement and the consummation by
each Buyer and Western of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of each Buyer and
Western, except, in the case of Western, for Stockholder Approval. This
Agreement has been duly and validly executed and delivered by each Buyer and
Western and, in the case of Western, subject to the receipt of Stockholder
Approval, constitutes the valid and binding obligation of each of them,
enforceable against each of them in accordance with its terms. Subject to
obtaining the consents and approvals referred to in Section 4.3 hereof, or on
Exhibit 4.3 hereto and, in the case of Western, Stockholder Approval, the
execution, delivery and performance by each Buyer and Western of this Agreement
and the consummation by each Buyer and Western of the transactions contemplated
hereby will not, with or without the giving of notice or the lapse of time, or
both, (i) subject to obtaining the Required Insurance Approvals and any
approvals required under the HSR Act and, in the case of Western, Stockholder
Approval, violate any provision of law, rule or regulation to which any Buyer or
Western is subject, (ii) violate any order, judgment or decree applicable to any
Buyer or Western, (iii) subject in the case of Western to Stockholder Approval,
violate any provision of the organizational documents of any Buyer or Western,
(iv) result in any breach of or constitute a default under, or give to others
any rights of termination, amendment, acceleration or cancellation of, or result
in the creation of any Encumbrance on any of the properties or assets of any
Buyer or Western or any of their respective Affiliates pursuant to any, note,
bond, mortgage, indenture, contract, agreement, lease, Permit, franchise or
other instrument or obligation to which any Buyer or Western is a party or by
which any Buyer or Western or any of their respective properties are bound or
affected; except, in each case, for violations which in the aggregate would not
materially hinder or impair the consummation of the transactions contemplated
hereby. The Sellers have been provided with true and correct copies of the
charter and by-laws of Western.
4.3 Consents. Except as set forth in Exhibit 4.3 hereto, no consent, approval
or authorization of, or exemption by, or filing with, any governmental authority
(other than applicable requirements, if any, pursuant to the HSR Act, the
Securities Exchange Act, Required Insurance Filings and Required Insurance
Approvals) or any other Person (other than Stockholder Approval) is required in
connection with the execution, delivery and performance by the Buyers or Western
of this Agreement, or the taking of any other action contemplated hereby,
excluding, however, consents, approvals, authorizations, exemptions and filings,
if any, which the Sellers or ACHC or any other Person are required to obtain or
make or instances where the failure to obtain such consents, approvals or
authorizations, or to make such filings or notifications, would not, either
individually or in the aggregate, prevent the Buyers or Western from performing
its respective obligations under this Agreement.
4.4 Availability of Funds. Western has written commitments from financial
institutions to provide an aggregate of $7.0 million in connection with the
transactions contemplated herein, subject to the execution of definitive
financing agreements and the fulfillment of the conditions precedent thereunder.
Each Buyer and/or Western, as appropriate, will have, on the Closing Date,
funds, which, together with the funds of the other Buyer and/or Western, as
appropriate, are sufficient to consummate the transactions contemplated by this
Agreement.
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4.5 Litigation. There is no Litigation pending or, to knowledge of any Buyer or
Western, threatened against any Buyer or Western or any of their respective
Affiliates (i) with respect to which there is a reasonable likelihood of a
determination which would have a material adverse effect on the ability of any
Buyer or Western to perform its respective obligations under this Agreement, or
(ii) which seeks to enjoin or obtain damages in respect of the consummation of
the transactions contemplated hereby. No Buyer or Western or any of their
respective Affiliates is subject to any outstanding orders, rulings, judgments
or decrees which would have a material adverse effect on the ability of any
Buyer or Western to perform its respective obligations under this Agreement.
4.6 Vote Required. The affirmative vote of the holders of a majority of the
outstanding shares of common stock of Western is the only vote of the holders of
any class or series of Western capital stock necessary to consummate the
transactions contemplated by this Agreement.
4.7 Western Vote. Western represents that its officers and directors who own
Western common stock will vote in favor of all such matters as may be necessary
to effectuate the transactions contemplated by this Agreement, including,
without limitation, voting in favor of increasing Western's authorized shares of
common stock.
ARTICLE V
COVENANTS OF THE COMPANY, ACFS,
ACHC AND THE FORMER SHAREHOLDERS
Each of the Company, ACFS, ACHC and, solely with respect to the covenants
contained in Sections 5.4, 5.5 and 5.7 and solely with respect to himself, each
of the Former Shareholders hereby covenants and agrees with the Buyers and
Western as follows:
5.1 Conduct of Business. Except as may be otherwise contemplated by this
Agreement or set forth in Section 5.1 of the Disclosure Schedule, or except as
the Buyers or Western may otherwise consent to in writing (which consent shall
not be unreasonably withheld), from the date hereof and prior to the Closing,
(a) the Company and ACFS will:
(i) in all material respects, operate only in the Ordinary Course of
Business; provided, however that (x) payment of the federal income taxes
shown as due on the Tax Statement prepared pursuant to Section 7.1(c) hereof
for the period from January 1, 1997 through the Closing Date shall not be
considered as operating Outside of the Ordinary Course of Business and (y)
the payment or prepayment of state and local income taxes and franchise taxes
based on net income for the period beginning on January 1, 1997 and ending on
the Closing Date solely in those jurisdictions in which the Company or ACFS
does not file such tax returns on a combined, consolidated or unitary basis
with any other Person shall not be considered as operating Outside of the
Ordinary Course of Business, other than the payment or prepayment of any such
taxes relating to the sale of assets by the Sellers pursuant to this
Agreement or incurred as a result of an election made pursuant to Section
338(h)(10) of the Code in connection with the sale of the shares of the
Company pursuant to the Assignment Agreement;
(ii) use reasonable efforts to preserve intact their respective business
organizations;
(iii) maintain their respective properties and equipment in sufficient
operating condition and repair to enable them to operate their businesses in
all material respects in the manner in which such businesses are currently
operated, except for damages by reason of fire, flood, earthquake or other
acts of God;
(iv) continue all material existing Insurance Policies (or comparable
insurance) of or relating to the Company and ACFS in full force and effect;
(v) use reasonable efforts to preserve their relationships with their
employees, policyholders, insureds, agents, brokers, suppliers, and others
having material business relationships with them such that their respective
businesses will not be materially impaired; and
(vi) take all such reasonable actions as may be necessary to maintain,
preserve, renew and keep in force all licenses and permits of the Company
relating to the insurance business, including, without limitation, making all
Regulatory Filings or other filings and reports.
(b) the Company and ACFS will not, and ACHC will not permit the Company or
ACFS to:
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(i) take or omit to take any action, the effect of which would reasonably
be expected to cause any of the representations or warranties set forth in
Article II or Article III to be inaccurate as of the Closing Date or prevent
the Company, ACFS or ACHC from complying with any obligation contained in
this Agreement;
(ii) make, or propose to make, any change in its underwriting, investment
and other insurance practices which would cause a Material Adverse Effect;
(iii) declare, set aside, or pay any dividend or make any distribution
with respect to its capital stock, or make any loan to ACHC or to any Former
Shareholder, or redeem, purchase, or otherwise acquire any of its capital
stock or any other distribution from the Company to ACHC or any Former
Shareholder or to any other person or entity;
(iv) issue, sell or repurchase any capital stock of the Company or ACFS or
otherwise effect or agree to effect any change in the debt or equity
capitalization of the Company or ACFS or take any action which would affect
the current ownership by ACHC of the equity of the Company, or the Company's
ownership of the equity of ACFS;
(v) amend its certificate of incorporation or By-Laws or other
organizational documents or change the financial or tax accounting methods or
practices followed by the Company or ACFS, except as may be required by
changes in GAAP, SAP or applicable Insurance Laws;
(vi) license, sell, transfer, lease, pledge or otherwise dispose of or
encumber any of its tangible or intangible assets, except in each case in the
Ordinary Course of Business;
(vii) cancel or forgive any indebtedness or incur any indebtedness for
borrowed money or guarantee any such indebtedness or guarantee, endorse or
otherwise become responsible for the obligations of others, or make loans or
advances other than in the Ordinary Course of Business;
(viii) enter into any new transaction between ACHC or any Former
Shareholder, or any of their respective Affiliates or relatives, on the one
hand, and the Company or ACFS or any director, officer or employee of the
Company or ACFS, on the other hand; provided, however, that the Company may
enter into a consulting agreement as of the Closing Date with Markin
providing for the terms set forth in Item 6 of Section 2.3 of the Disclosure
Schedule and otherwise in such form as Western and Markin mutually shall
agree;
(ix) enter into any material contract or agreement or any amendment to, or
release any third party from its obligations under, any material contract,
agreement or instrument; grant or pay any increases in salary or benefits
(other than regularly scheduled increases in the Ordinary Course of Business
consistent with past practice); or adopt or amend any collective bargaining
agreement or Business Benefit Plans;
(x) make any capital expenditure in excess of $50,000 in any one case or
$200,000 in the aggregate;
(xi) materially reduce, or make any material change in the overall quality
or maturity characteristics of, the Investment Assets reflected in Section
2.22 of the Disclosure Schedule;
(xii) purchase, or enter into any agreement or arrangement for, any
Investment Asset, except for purchases, agreements or arrangements for
Investment Assets with a National Association of Insurance Commissioners
rating of "1", or except as otherwise approved by the Buyers, which approval
shall not be unreasonably withheld;
(xiii) dispose of, destroy or cause to be disposed of or destroyed any of
the books and records of the Company or ACFS; or
(xiv) authorize any of the foregoing, or enter into any contract,
agreement, commitment or arrangement to do any of the foregoing.
5.2 Access. From the date hereof and prior to the Closing, the Company, ACFS
and ACHC shall provide the Buyers and Western with such information as the
Buyers and Western may from time to time reasonably request with respect to the
Company and ACFS and the transactions contemplated by this Agreement, and shall
provide the Buyers and Western and their representatives reasonable access
during regular business hours and upon reasonable notice to the properties,
books and records of the Company and ACFS as the Buyers and Western may from
time to time reasonably request. Any disclosure whatsoever during such
investigation by the Buyers and
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Western shall not constitute an enlargement of or additional representations or
warranties of ACHC, the Company or ACFS beyond those specifically set forth in
this Agreement. All such information and access shall be subject to the terms
and conditions of the letter agreement dated February 10, 1997 (the
"Confidentiality Agreement").
5.3 Further Assurances. At any time or from time to time after the Closing,
ACHC, the Company and ACFS shall, at the request of the Buyers and Western and
at the expense of the Buyers and Western, execute and deliver any further
instruments or documents and take all such further action, as the Buyers or
Western may reasonably request in order to (i) vest in Sub 1 title to and
possession of the Company Acquired Assets, (ii) vest in Sub 2 title to and
possession of the ACFS Acquired Assets, (iii) perfect and record, if necessary,
the sale, transfer, assignment, conveyance and delivery to the applicable Buyer
of the applicable Acquired Assets, and (iv) otherwise evidence the consummation
of the transactions contemplated hereby.
5.4 Acquisition Proposals. From the date hereof until the termination of this
Agreement or the Closing Date, whichever first occurs, none of ACHC or any
Former Shareholder will, nor will any of them cause the Company or ACFS to,
directly or indirectly, (i) take any action to solicit or initiate any offer or
indication of interest from any Person with respect to any Acquisition Proposal
(defined below), (ii) engage in discussions or negotiations with, enter into any
agreements relating to an Acquisition Proposal with, or provide any information
or assistance to, any Person that may be considering making or has made, an
Acquisition Proposal, or (iii) vote their shares of Stock in favor of any such
Acquisition Proposal. "Acquisition Proposal" means any proposal for a merger or
other business combination involving the Company or ACFS, or the acquisition of
any equity interest in, or a substantial portion of the assets of, the Company
or ACFS, other than the transactions contemplated by this Agreement.
5.5 Advice of Changes. The Company, ACFS, ACHC and, with respect to Section 3.6
only, the Former Shareholders shall promptly advise the Buyers and Western in
writing of any event occurring after the date hereof which would render any
representation or warranty of the Company, ACFS, ACHC or, with respect to
Section 3.6 only, a Former Shareholder, contained in this Agreement untrue or
inaccurate, if made on or as of the date of such event or as of the Closing
Date, or which prevents the Company, ACFS, ACHC or the Former Shareholders from
complying with any of their respective obligations hereunder.
5.6 Interim Financial Information. As promptly as practicable after each
regular accounting period subsequent to the Most Recent Fiscal Month End and
prior to the Closing Date, the Company will deliver to the Buyers periodic
financial reports in the form which it customarily prepares for its internal
purposes concerning the Company and ACFS and, if available, unaudited statements
of the financial position of the Company and ACFS (SAP and GAAP) as of the last
day of each accounting period, and statements of income and changes in the
financial position of the Company and ACFS for the period then ended.
5.7 Termination of Affiliate Arrangements. Prior to the Closing, except as set
forth on Exhibit 5.7 hereto or for obligations arising under this Agreement or
any Ancillary Documents, (i) each contract, agreement or other arrangement
existing as of the date of this Agreement or as of the Closing Date imposing any
obligation on the Company or ACFS for the benefit of ACHC or any Former
Shareholder or their respective Affiliates, shall be terminated and (ii) all
intercompany balances or other obligations owed by the Company or ACFS to ACHC
shall be canceled and the Company and ACFS completely discharged from liability
in connection therewith.
5.8 Non-Competition Agreements. Simultaneous with the execution of this
Agreement, each of David R. Markin and Allan R. Tessler shall enter into a
Non-Competition Agreement, substantially in the forms attached hereto as
Exhibits 5.8 (a) and 5.8(b) hereto, respectively.
5.9 Consents. The Sellers and ACHC shall use all reasonable commercial efforts,
but shall not be required, to obtain the consents with respect to the
Commitments indicated by a double asterisk on Section 2.6 of the Disclosure
Schedule. The Buyers and Western agree that the Sellers and ACHC shall not be
required to attempt to obtain the consents with respect to the Commitments
indicated by a single asterisk on such Section 2.6.
5.10 Insurance Licenses. In the event any of the Insurance Licenses granted to
a Seller cannot be assigned to the Buyers hereunder, (i) the Sellers shall cause
such Insurance License to be retired and (ii) from and after the Closing, the
Sellers shall not transact any insurance business pursuant to any such Insurance
License, nor shall they transfer or assign any such Insurance License to any
other Person or in any way permit any other Person to transact insurance
business pursuant to any such Insurance License.
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ARTICLE VI
COVENANTS OF THE BUYERS AND WESTERN
Each of the Buyers and Western hereby covenants and agrees with the Sellers
and ACHC as follows:
6.1 Books and Records; Personnel.
(a) The Buyers and Western shall not dispose of or destroy any of the books
and records of the Company and ACFS relating to periods prior to the Closing
("Books and Records") without first offering such records to the Sellers, ACHC
and the Former Shareholders.
(b) The Buyers and Western shall allow each of the Sellers, ACHC and the
Former Shareholders and each of their agents reasonable access to all Books and
Records during normal working hours at the respective Buyers' principal place of
business or at any location where any Books and Records are stored (or, if
stored in a warehouse or similar facility, at any office location of the
Buyers), and each of the Sellers and ACHC and each of the Former Shareholders
shall have the right, at its or his own expense, to make copies of any Books and
Records; provided, however, that any such access or copying shall be had or done
in such a manner so as not to interfere with the normal conduct of the Buyers'
business and the Buyer shall not move such records outside of the continental
United States.
(c) The Buyers and Western shall make available to each of the Sellers and
ACHC upon written request (i) copies of any Books and Records, (ii) the Buyers'
personnel to assist the Sellers and ACHC in locating and obtaining any Books and
Records, and (iii) any of the Buyers' personnel whose assistance or
participation is reasonably required by any Seller and ACHC in anticipation of,
or preparation for, existing or future Litigation, tax returns or other matters
in which any Seller or ACHC or any of their Affiliates is involved. The Sellers
and ACHC, as applicable, shall reimburse the Buyers and Western for the
reasonable out-of-pocket expenses incurred by any of them in performing the
covenants contained in this Section 6.1(c).
(d) The foregoing provisions of this Section 6.1 shall be in addition to
the obligations of the Buyers and Western under Sections 7.1(a) and 12.2(c)(ii).
6.2 Assumed Liabilities.
(a) As of the Closing Date, the Buyers and Western (each, a "Releasor" and
collectively, the "Releasors") each hereby will (i) fully, unconditionally and
irrevocably release and discharge each of the Sellers, ACHC and the Former
Shareholders, and each of their past and present officers, directors,
shareholders, managers, agents, trustees, representatives, advisors,
consultants, employees, successors, assigns, subsidiaries or Affiliates (each a
"Releasee," and collectively, the "Releasees") from all claims, causes of
action, suits, debts, dues, sums of money, accounts, reckonings, bonds, bills,
specialties, covenants, contracts, controversies, agreements, promises,
variances, trespasses, damages, judgments, extents, executions, claims and
demands whatsoever, which the Releasors or the Releasors' past and present
directors, officers, shareholders, managers, agents, representatives, advisors,
consultants, employees, successors, assigns, subsidiaries or Affiliates ever
had, now have, or hereafter can, shall or may have, against the Releasees,
separately or collectively, for, upon, by reason of, in connection with, with
respect to, or arising out of, any of the Assumed Liabilities or otherwise,
whether known or unknown, from the beginning of the world to the Closing Date,
(ii) hereby covenant and agree not to sue the Releasees with respect thereto and
(iii) waive any rights that ever arose or may have arisen in the past or may
arise in the future in favor of any of them with respect thereto in each case
except as specifically provided in this Agreement or any Ancillary Document.
(b) The Buyers and Western agree that effective from and after the Closing,
the Sellers, ACHC and the Former Shareholders or their Affiliates shall have no
obligation for the self-insured retention portion of any product liability,
general liability, medical and other claims included in the Assumed Liabilities,
which claims were made or are to be made in the future in respect of periods
prior to the Closing ("Claims"), for which the Company or ACFS is responsible
vis a vis the Company's or ACFS's insurers (the "Company's Insurers"), so that
from and after the Closing, neither the Buyers nor Western will look to the
Sellers, ACHC, the Former Shareholders or their Affiliates for reimbursement of
any payment made by any of the Company's Insurers in respect of any Claim.
6.3 Further Assurances. At any time or from time to time after the Closing, the
Buyers and Western shall, at the request of a Seller, ACHC or any Former
Shareholder and at the expense of such Seller, ACHC or Former
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Shareholder, as applicable, execute and deliver any further instruments or
documents and take all such further action as such Seller or ACHC may reasonably
request in order to evidence the consummation of the transactions contemplated
hereby.
6.4 Conduct Prior to Closing. Neither the Buyers nor Western will take or omit
to take any action, the effect of which would reasonably be expected to cause
any of the representations or warranties set forth in Article IV hereof to be
inaccurate as of the Closing Date or prevent the Buyers or Western from
complying with any obligation of the Buyers or Western set forth in this
Agreement.
6.5 Insurance License and Permit Application; Form A Filing. Each of the Buyers
and Western agree to use its respective best efforts to: (a) promptly make its
respective filings, including Required Insurance Filings, and thereafter make
any other required submissions under applicable laws and regulations, including
any Insurance Law, necessary to obtain Insurance Licenses, Permits and Required
Insurance Approvals, including with respect to the formation of Sub 1 and the
authorization of Sub 1 to do business as an insurance company in the State of
Illinois; and (b) to submit a complete Form A Filing to the Illinois Department
of Insurance on or before the twenty-eighth (28th) day following the date
hereof, a copy of which shall be forwarded to the Sellers and their counsel.
6.6 Western Corporate Action. Western shall take all actions necessary in
accordance with the General Corporation Law of the State of Delaware, the
federal securities laws, and Western's Certificate of Incorporation and By-laws
in order to effectuate the transactions contemplated by this Agreement,
including, without limitation, obtaining Stockholder Approval.
6.7 Formation of Sub 1 and Sub 2. As soon as practicable after the date hereof
(and in any event prior to the Closing), Western shall (i) cause Sub 1 to be
formed as an Illinois insurance corporation having all requisite corporate power
under Illinois law to enter into and perform its obligations under this
Agreement, (ii) cause Sub 2 to be formed as an Illinois corporation having all
requisite corporate power under Illinois law to enter into and perform its
obligations under this Agreement and (iii) cause Sub 1 and Sub 2 to execute a
counterpart of this Agreement as a "Buyer" hereunder. Upon such execution by Sub
1, Sub 1 shall become a Party hereto and shall be bound by the provisions hereof
as a Buyer hereunder, and upon such execution by Sub 2, Sub 2 shall become a
Party hereto and shall be bound by the provisions hereof as a Buyer hereunder.
ARTICLE VII
ADDITIONAL COVENANTS
7.1 Tax Matters.
(a) After the Closing Date, each of the Buyers and Western and each of the
Sellers and ACHC shall cooperate fully with each other and make available or
cause to be made available to each other in a timely manner such tax data, prior
tax returns and filings and other information as may be reasonably required for
the preparation by the Buyers and Western or by the Sellers and ACHC of any tax
returns, elections, consents or certificates required to be prepared and filed
by the Buyers or Western or by the Sellers or ACHC and any audit or other
examination by any taxing authority, or judicial or administrative proceeding
relating to liability for Taxes. The Buyers and Western and the Sellers and ACHC
will retain and provide to each other all records and other information which
may be relevant to any such tax return, audit or examination, proceeding or
determination and will provide each other with any final determination of any
such audit or examination, proceeding or determination that affects any amount
required to be shown on any tax return of any of the Buyers, Western, the
Sellers and ACHC for any period. Each of the Buyers and Western and the Sellers
and ACHC will retain copies of all tax returns, supporting work schedules and
other records and documents relating to tax periods or portions thereof ending
prior to or on the Closing Date until the expiration of any applicable statute
of limitations or extension thereof. Any information disclosed or provided by
the Buyers and Western to the Sellers and ACHC, or disclosed or provided by the
Sellers and ACHC to the Buyers and Western shall be kept strictly confidential,
shall be used only for the purposes set forth in this Article VII, and shall not
be disclosed to any third party except as may be required by law.
(b) Except as provided with respect to those taxes that are not Assumed
Liabilities but are payable pursuant to the Tax Statement as provided in Section
7.1(c), each of the Buyers and Western shall cause to be prepared and the
Sellers shall, upon timely receipt from the Buyers and after review thereof,
cause to be timely filed, all required tax returns relating to taxes assumed by
the Buyers (e.g., state sales taxes), but imposed on the Sellers, for any
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period which ends on or before the Closing Date for which tax returns shall not
have been filed as of the Closing Date. Not later than five days before the due
date for payment of taxes with respect to such tax returns, the Buyers shall pay
to the Sellers an amount equal to the taxes shown due on such tax returns.
(c) Within 45 days following the Closing Date, the Buyers shall cause to be
prepared and shall deliver to the Sellers a computation of (i) the federal
income tax liability of each of the Company and ACFS and (ii) the liability of
each of the Company and ACFS for income tax or franchise tax based on net income
for each state, locality and foreign jurisdiction in which either the Company or
ACFS is subject to such tax (the "Tax Statement"), in each case (w) computed, in
the case of Federal income taxes, (1) solely in the event that the parties to
the Assignment Agreement have not agreed upon the amount of the 1997 Taxes on or
prior to the Closing Date, for the period January 1, 1997 through the date prior
to the date of acquisition of the Company and ACFS by ACHC pursuant to the Tax
Sharing Agreement, and (2) for the period beginning on the date of the
acquisition of the Company and ACFS by ACHC through the Closing Date; and, in
the case of such state, local and foreign taxes, computed for the period
beginning on the date of acquisition of the Company and ACFS by ACHC through and
including the Closing Date, (x) excluding any such Tax liability of the Company
or ACFS based solely upon the sale of assets by the Sellers pursuant to this
Agreement and any Tax liability of the Company or ACFS as a result of an
election made pursuant to Section 338(h)(10) of the Code in connection with the
sale of the shares of the Company pursuant to the Assignment Agreement, (y)
subtracting the amount of any payments in respect of such Taxes made by the
Company or ACFS to the appropriate taxing authorities and (z) subtracting the
amount of any distributions made by the Company or ACFS in respect of such Taxes
on or prior to the Closing Date, pursuant to the Tax Sharing Agreement or
pursuant to any tax sharing or similar agreement or arrangement among any of the
Company, ACFS and ACHC and any of their respective Affiliates. The Tax Statement
shall (i) be prepared in a manner consistent with past practice used in the
preparation of the relevant income and franchise tax returns of or with respect
to the Company and ACFS, unless a past practice has been finally determined to
be incorrect by the applicable taxing authority or a contrary treatment is
required by law and (ii) include only the operations of the Company and ACFS as
such operations would be reported for the relevant jurisdiction if a tax return
were filed for either or both the Company and ACFS, as applicable in the
relevant jurisdiction. Unless the Sellers, within 15 days after receipt of the
Tax Statement, provide written notice to the Buyers objecting to the
computations set forth on the Tax Statement, the Buyers shall pay to the Sellers
the amounts shown as due thereon. If such written notice is given to the Buyers
by the Sellers and the parties are unable to agree upon the amounts due within
30 days after such notice is received by the Buyers, the Buyers and the Sellers
shall jointly designate a nationally recognized firm of independent public
accountants which is not affiliated with any of the Parties. Such accounting
firm shall determine the amounts to be paid to the Sellers and such
determination shall be final and binding upon the Parties. The fees, costs and
expenses of such accounting firm shall be borne 50% by the Buyers and Western
and 50% by the Sellers and ACHC.
(d) ACHC and the Sellers shall promptly notify Western and the Buyers in
writing upon receipt by ACHC or the Sellers of notice of any pending or
threatened Tax audits of or assessments against the Sellers in respect of income
or franchise taxes for those periods included on the Tax Statement. The Buyers
and Western shall have the sole right to represent the interests of the Sellers
in any Tax audit or administrative or court proceeding relating to such taxes
and to employ counsel of its own choice. In the event that a taxing jurisdiction
successfully asserts a deficiency solely (i) in respect of the income and
franchise taxes of the Company and ACFS that are included on the Tax Statement
and (ii) for the period beginning on the date of the acquisition of the Company
and ACFS by ACHC through the Closing Date, the Buyers shall prepare a revised
Tax Statement in conformity with the first two sentences of Section 7.1(c)
hereof adjusted to take the amount finally determined to be due in respect of
such deficiency into account and shall pay to the Sellers the additional amount
of tax (and any interest and penalties successfully asserted solely in respect
of such additional amount of tax) computed pursuant to such revised Tax
Statement.
(e) Notwithstanding any other provision of this Agreement, the parties
expressly agree that the Buyers and Western shall not assume any Excluded
Liabilities, including, without limitation, any Tax liabilities of any Seller,
ACHC or any of their respective Affiliates under Treasury Regulation Section
1.1502-6 or any comparable provision of state or local law.
7.2 HSR Act Notification. If necessary, the Sellers and ACHC and the Buyers and
Western shall each promptly prepare and file a notification with the United
States Justice Department (the "Justice Department") and the Federal Trade
Commission (the "FTC"). Western shall inform the Sellers by July 10, 1997
whether such notice is required by the HSR Act. The Parties shall cooperate with
each other in connection with the preparation of such
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notification, including sharing information concerning sales and ownership and
such other information as may be needed to complete such notification, and
providing a copy of such notification to the other prior to filing. Each of the
Parties shall keep all information about any other Party obtained in connection
with the preparation of such notification confidential. The Buyers or Western
shall pay the filing fee required under the regulations promulgated pursuant to
the HSR Act. In the event any Party shall receive a request for additional
information or documentary material from the Justice Department or the FTC, (i)
the Buyers and Western shall be primarily responsible for responding to such
request, and (ii) the Sellers and ACHC shall not respond to such request or
furnish any additional information or documentary material without first
notifying the Buyers and Western in writing.
7.3 SEC Reports. Western shall promptly deliver to the Sellers and ACHC true
and correct copies of any report, statement or schedule filed by Western with
the SEC subsequent to the date hereof and prior to the Closing.
7.4 Meeting of Stockholders. Western shall, as soon as practicable after the
date of this Agreement, take all action necessary in accordance with Delaware
Law and its Certificate of Incorporation and By-Laws to convene a meeting of its
stockholders to consider and vote upon, among other things, such transactions
contemplated by this Agreement as may require stockholder approval (the
"Stockholders' Meeting"). Western shall use its reasonable best efforts to
solicit or secure from stockholders of Western proxies or votes in favor of any
approval of the transactions contemplated by this Agreement as may be required
by Delaware Law, the Securities Act and the Exchange Act.
7.5 Proxy Statement. As soon as practicable after the execution of this
Agreement, Western shall prepare and file with the SEC a preliminary proxy
statement, and a form of proxy, in connection with obtaining Stockholder
Approval (such proxy statement/prospectus, together with any amendments thereof
or supplements thereto and the form of proxy, in each case in the form or forms
mailed to Western's stockholders, being referred to herein as the "Proxy
Statement"). Western will use all reasonable efforts to have or cause the Proxy
Statement to become effective as promptly as practicable, and shall take any
action required to be taken under any applicable federal or state securities
Laws. Each of the Sellers, ACHC and Western shall obtain and furnish all
information concerning it and the holders of its capital stock as the other may
reasonably request in connection with such actions. As promptly as practicable
after the Proxy Statement shall have become effective, Western shall mail the
Proxy Statement to all of its stockholders.
7.6 Best Efforts; Consents; Filings. Subject to the terms and conditions of
this Agreement, Western, the Buyers, ACHC and the Sellers each shall use its
reasonable best efforts to (i) take promptly, or cause to be taken, all
appropriate action, and to do promptly, or cause to be done, all things
necessary, proper or advisable under applicable Law or otherwise to consummate
and make effective the transactions contemplated by this Agreement; (ii) obtain
from any Governmental Entities any consents, licenses, permits, waivers,
approvals, authorizations or orders required to be obtained or made by Western
or the Buyers (or any of their respective subsidiaries) (including, without
limitation, Required Insurance Filings and Required Insurance Approvals) in
connection with the authorization, execution and delivery of this Agreement and
the consummation of the transactions contemplated herein, including, without
limitation, the acquisition of the Acquired Assets by the Buyers (as set forth
herein); (iii) make all necessary filings, and thereafter make any other
required submissions, notifications and filings with respect to this Agreement
and the acquisition of the Acquired Assets required under (A) the Securities Act
and the Exchange Act and the rules and regulations thereunder, and any other
applicable Law, including, without limitation, any other federal or state
securities laws and (B) the HSR Act, if required, provided, however, that
Western, the Sellers and ACHC shall cooperate with each other in connection with
the making of all such filings, including, without limitation, providing copies
of all such documents to the non-filing party and its advisors prior to any
filing and, if requested, to accept all reasonable additions, deletions or
changes suggested by the non-filing party in connection therewith; and (iv)
remove any injunctions or other impediments or delays, legal or otherwise, in
order to consummate and make effective the transactions contemplated by this
Agreement for the purpose of securing to the parties hereto all benefits
contemplated by this Agreement.
7.7 Public Announcement. A press release (the "Press Release") shall be jointly
issued by Western and ACHC as soon as practicable after notice has been given to
A.M. Best of the execution of this Agreement; provided, that Western and ACHC
shall use their best efforts to give such notice to A.M. Best. Western and ACHC
shall consult with each other before issuing any press release with respect to
the transactions contemplated by this Agreement and the purchase of the Acquired
Assets (other than the Press Release) and shall not issue any such press release
(other than the Press Release), unless required by Law, prior to such
consultation.
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7.8 Name. The Sellers shall permit the Buyers and Western to use the name
"American Country" (the "Name") as its proposed name solely in connection with
carrying out their respective obligations hereunder; provided, however, that if
the transaction contemplated by this Agreement is terminated for any reason
whatsoever, the Buyers shall, and Western shall cause the Buyers to, immediately
cease and desist from any and all use of the Name and no Buyer shall use the
Name in connection with any matter whatsoever.
7.9 Non-Competition Covenant.
(a) Each of ACHC and the Company acknowledges and agrees that its covenants
contained in this Section 7.9 are essential to protect the business and goodwill
being purchased by the Buyers and that the Buyers would not purchase the
Acquired Assets but for the agreements and covenants contained in this Section
7.9. Accordingly, each of ACHC and the Company agrees that, from and after the
Closing, it will not, either directly or indirectly, individually, in
partnership, jointly, or in conjunction with any Person, whether as principal,
agent, shareholder or in any other capacity whatsoever:
(i) engage in the Company Business in the Territory;
(ii) solicit or contact potential customers or policyholders on behalf of,
associate with, invest in, obtain any interest in, advise, lend money to or
guarantee the debts or obligations of any Person, which is engaged in the
Company Business in the Territory;
(iii) solicit or accept business from any of the Company's customers or
policyholders, including actively sought prospective customers or
policyholders, for the purposes of providing products or services the same or
substantially similar to those provided in connection with the Company
Business;
(iv) except as requested by the Buyers or Western, persuade or attempt to
persuade any employee of the Company to terminate his or her service with the
Company; or
(v) persuade or attempt to persuade any customer or policyholder of the
Company to terminate or modify such customer's or policyholder's relationship
with the Company.
Notwithstanding anything to the contrary in this Section 7.9, ACHC and the
Company may acquire and/or hold up to five percent (5%) of the capital stock,
other equity interest or public debt of any corporation the stock, other equity
interest or public debt of which is publicly traded.
(b) Each of ACHC and the Company acknowledges and agrees that its breach of
any of the covenants or agreements contained in this Section 7.9 would cause
irreparable injury to the Buyers and Western and that remedies at law for any
actual or threatened breach by ACHC or the Company of such covenants or
agreements would be inadequate. Accordingly, in the event ACHC or the Company
breaches or threatens to breach any of the covenants contained in this Section
7.9, the Buyers and Western shall be entitled to specific performance, or
immediate, preliminary or permanent injunctive relief, as well as money damages
and attorneys' fees and costs. Each of ACHC and the Company agrees that the
existence of any claim or cause of action by ACHC or the Company against the
Buyers or Western, whether predicated upon this Agreement or any other contract
or document executed in connection herewith, shall not constitute a defense to
the enforcement by the Buyers of such covenants.
(c) It is the intention of ACHC, the Company, Western and the Buyers that
the provisions of this Section 7.9 be enforced to the fullest extent permissible
under the laws and public policies of each state and jurisdiction in which such
enforcement is sought, but that the unenforceability (or the modification to
confirm with such laws or public policies) of any provision hereof shall not
render unenforceable or impair the remainder of this Section 7.9, which shall be
deemed amended to delete or modify, as necessary, the invalid or unenforceable
provisions. Such parties further agree to alter the remainder of this Section
7.9 in order to render the same valid and enforceable.
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ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF THE BUYERS
AND WESTERN
The obligations of the Buyers and Western hereunder shall be subject to the
satisfaction (or waiver) on or prior to the Closing Date of all of the following
conditions:
8.1 Representations, Warranties and Covenants of the Company, ACFS, ACHC and
the Former Shareholders. Each of the Company and ACFS shall have complied in all
material respects with their respective agreements and covenants contained
herein to be performed on or prior to the Closing Date, and the representations
and warranties of each of the Company, ACFS, ACHC and the Former Shareholders
contained herein and not modified by a materiality qualification shall be true
in all material respects, and all other representations and warranties shall be
true in all respects, on and as of the Closing Date with the same effect as
though made on and as of the Closing Date, except (a) as otherwise contemplated
hereby, and (b) to the extent that any such representations and warranties were
made as of a specified date and as to such representations and warranties the
same shall continue on the Closing Date to have been true in all material
respects as of the specified date; provided, however, that the foregoing shall
not be a condition to the obligations of the Buyers and Western hereunder unless
the failure of such compliance, as stated above, or the failure of the
representations and warranties to be true, as stated above, in the aggregate
could have a Material Adverse Effect. The Buyers shall have received a
certificate of an officer of each of the Company, ACFS and ACHC and a
certificate of the Former Shareholders, each such certificate dated as of the
Closing Date and signed by the applicable officer or all of the Former
Shareholders, as applicable, certifying as to the fulfillment of the condition
set forth in this Section 8.1 (the "Officer's Certificate" or the "Former
Shareholders' Certificate," as applicable).
8.2 Litigation. No suit, investigation, action or other proceeding shall be
pending or overtly threatened by an unrelated third party against any of the
Parties before any court or governmental agency, which has resulted in the
restraint or prohibition of any such party, or could result in the obtaining of
material damages or other relief from such party which could have a Material
Adverse Effect, or a material adverse effect in connection with this Agreement
or the consummation of the transactions contemplated hereby.
8.3 Stockholder Approval; Third Party Consents. Western shall have received
Stockholder Approval. The Buyers and Western shall have received the consents
set forth on Exhibit 8.3 and such consents shall be in full force and effect.
8.4 Governmental Consents. (a) If applicable, the waiting period under the HSR
Act shall have expired or been terminated, (b) each of the Required Insurance
Approvals shall have been obtained, and (c) all other consents, approvals,
authorizations, exemptions and waivers from, by, in respect of, or filings with
governmental or regulatory bodies, authorities, officials or agencies required
in order to enable the Buyers and Western to consummate the transactions
contemplated hereby shall have been obtained and shall be in full force and
effect.
8.5 Opinion of the Sellers' Counsel. The Buyers and Western shall have received
the opinions of counsel to ACHC and the Sellers, dated the Closing Date, setting
forth such opinions as may be agreed to by counsel to the Buyers and Western and
counsel to ACHC and the Sellers.
8.6 No Material Adverse Change. Except as set forth in Section 2.3 of the
Disclosure Schedule, the Company and ACFS shall not have suffered any Material
Adverse Effect since the Most Recent Fiscal Year End.
8.7 Best's Rating. The Company shall have maintained a Best's Rating of A-
(Excellent), and no modifiers shall be attached to such rating, prior to and
through the Closing Date unless such rating has been lowered or such modifiers
attached solely and clearly as a result of (a) the proposed capital structure of
the Buyers or (b) the proposed business plans of the Buyers.
8.8 Insurance Department Examination. No findings, recommendations,
requirements or restrictions on the Company or its assets or operations, except
for those which, individually or in the aggregate, would not have a Material
Adverse Effect shall have been issued, proposed or threatened or otherwise made
known to the Company, Sub 2 and Western by the Illinois Department of Insurance,
pursuant to the examination of the condition and affairs of the Company for the
period January 1, 1993 through December 31, 1996, or otherwise, on or before the
Closing Date.
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8.9 Indemnification from Checker Motors Corporation. CMC shall have executed
and delivered an indemnification agreement in such form as may be agreed to by
the respective parties thereto (the "Indemnification Agreement") pursuant to
which CMC agrees to indemnify the Buyers and Western from any Losses incurred as
a result of (i) partial or complete withdrawal by a member of the affiliated or
controlled group of CMC from the National Industrial Group Pension Plan and any
other Multiemployer Plan in which any member of the affiliated or controlled
group of CMC has participated, and (ii) the maintenance and termination of the
Checker Motors Pension Plan (other than Losses relating to former or current
employees of the Company or ACFS).
8.10 Name. The Company and ACFS each shall have changed its name to exclude the
words "American" or "Country."
8.11 Assumption Agreements. The Company shall have executed the Reinsurance
Assumption Agreement and the Company and ACFS shall have executed the Company
Assumption Agreement and the ACFS Assumption Agreement, respectively, in such
forms as may be agreed to by the parties thereto.
8.12 Section 1445 Certificate. Each Seller shall have furnished the Buyers with
a certificate that such Seller is not a foreign person within the meaning of
Section 1445 of the Code, which certificate shall set forth all information
required by, and otherwise be executed in accordance with, Treasury Regulation
Section 1.1445-2(b).
8.13 Payment of Amended and Restated Buyer Notes. The Buyers and Western shall
have received satisfactory evidence that ACHC has given irrevocable instructions
that the Amended and Restated Buyer Notes be repaid with the proceeds of the
transactions contemplated by this Agreement.
ARTICLE IX
CONDITIONS TO THE OBLIGATIONS OF THE SELLERS,
ACHC AND THE FORMER SHAREHOLDERS
The obligations of each Seller, ACHC, and the Former Shareholders hereunder
shall be subject to the satisfaction (or waiver) on or prior to the Closing Date
of all of the following conditions:
9.1 Representations, Warranties and Covenants of the Buyer. Each of the Buyers
and Western shall have complied in all material respects with their agreements
and covenants contained herein to be performed on or prior to the Closing Date,
and the representations and warranties of each of the Buyers and Western
contained herein and not modified by a material qualification shall be true in
all material respects, and all other representations and warranties shall be
true in all respects, on and as of the Closing Date with the same effect as
though made on and as of the Closing Date, except (a) as otherwise contemplated
hereby, and (b) to the extent that any such representations and warranties were
made as of a specified date and as to such representations and warranties the
same shall continue on the Closing Date to have been true in all material
respects as of the specified date. The Sellers shall have received certificates
of each of the Buyers and Western, dated as of the Closing Date and signed by an
officer of each of the Buyers or Western, as appropriate, certifying as to the
fulfillment of the condition set forth in this Section 9.1 (the "Buyer's
Certificate" or "Western's Certificate").
9.2 Litigation. No suit, investigation, action or other proceeding shall be
pending or overtly threatened by an unrelated third party against any Party
before any court or governmental agency, which has resulted in the restraint or
prohibition of any such party, or could result in the obtaining of material
damages or other relief from such party which could have a Material Adverse
Effect, or a material adverse effect in connection with this Agreement or the
consummation of the transactions contemplated hereby.
9.3 [Intentionally omitted.].
9.4 Governmental Consents. (a) If applicable, the applicable waiting period
under the HSR Act shall have expired or been terminated, (b) each of the
Required Insurance Approvals shall have been obtained, and (c) all other
consents, approvals, authorizations, exemptions and waivers from, by, in respect
of, or filings with governmental or regulatory bodies, authorities, officials or
agencies required in order to enable the Sellers and ACHC to consummate the
transactions contemplated hereby shall have been obtained (except for such
consents, approvals, authorizations, exemptions and waivers, the absence of
which would not prohibit consummation of such transactions or render such
consummation illegal).
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9.5 Releases. Each of the Sellers shall have executed a General Release of each
of the Former Shareholders substantially in the form of Exhibit 9.5 hereto.
9.6 Opinion of the Counsel to the Buyers and Western. The Sellers shall have
received an opinion of Paul, Weiss, Rifkind, Wharton & Garrison and/or Epstein
Becker & Green, P.C., dated the Closing Date, setting forth such opinions as may
be agreed to by counsel to ACHC and the Sellers and counsel to the Buyers and
Western.
9.7 Assumption Agreements. Sub 1 shall have executed the Reinsurance Assumption
Agreement and Sub 1 and Sub 2 shall have executed the Company Assumption
Agreement and the ACFS Assumption Agreement, respectively, in such forms as may
be agreed to by the respective parties thereto.
9.8 Stockholder Approval. Western shall have received the Stockholder Approval.
ARTICLE X
COVENANTS RELATED TO EMPLOYMENT
AND EMPLOYEE BENEFITS ARRANGEMENTS
The Parties hereby covenant and agree as follows:
10.1 Assumption of Pension Plan. As of the Closing Date, Western (or Sub 1) and
the Company shall enter into a Pension Plan Assumption and Trust Sponsor
Substitution Agreement, in such form as may be agreed to by the parties thereto,
pursuant to which Western (or Sub 1) will assume sponsorship of the American
Country Insurance Company Pension Plan (the "Company Pension Plan") and all
liabilities of the Company thereunder with respect to participants and
beneficiaries under the Company Pension Plan and will be substituted for the
Company as sponsor of the trust thereunder. Service taken into account under the
Company Pension Plan prior to the Closing with the Sellers shall be treated as
service with the Buyers for all purposes under the Company Pension Plan.
10.2 Assumption of 401(k) Plan. As of the Closing Date, Western (or Sub 1) and
the Company shall enter into a 401(k) Plan Assumption and Trust Sponsor
Substitution Agreement, in such form as may be agreed to by the parties thereto,
pursuant to which Western (or Sub 1) will assume sponsorship of the American
Country Insurance Company Employees 401(k) Plan (the "Company 401(k) Plan") and
all liabilities of the Company thereunder with respect to participants and
beneficiaries under the Company 401(k) Plan and will be substituted for the
Company as sponsor of the trust thereunder. Service taken into account under the
Company 401(k) Plan prior to the Closing with the Sellers shall be treated as
service with the Buyers for all purposes under the American Country 401(k) Plan.
10.3 Employment. As of the Closing Date, the Buyers shall offer continued
employment to all Employees of the Company and ACFS on such date (including
employees on leave of absence or disability) on terms and conditions identical
to those immediately prior to the Closing; provided, however, that nothing in
this agreement shall be construed to limit in any way the ability of the Buyers
to terminate the employment or any of the terms and conditions of employment of
any Employee or the terms of any Business Benefit Plan at any time after the
Closing.
10.4 Indemnity. In addition to the obligations of the Buyers pursuant to
Section 12.2 hereof, Western and the Business shall jointly and severally
indemnify the Sellers and their affiliates and hold each of them harmless from
and against any Losses which may be incurred or suffered by any of them under
the WARN Act arising out of, or relating to, any action taken by the Buyers or
the Business on or after the Closing Date; provided, however, that as of the
Closing, Company has not incurred any liability or obligation under WARN or any
similar state law and within the six-month period immediately following the
Closing, will not incur any such liability or obligation if, during such
six-month period, only terminations of employment in the normal course of
operations occur.
10.5 Benefit Plans. Without limiting the generality of Section 6.3, the Buyers
shall, or shall cause the Business to, assume all employment-related liabilities
and obligations of the Company and ACFS, Sellers, CRA, CMC and members of their
controlled or affiliated group (including the Business) with respect to the
Employees and their dependents and beneficiaries, including, but not limited to,
(i) liabilities and obligations for benefits, compensation, contributions),
insurance and health maintenance organization premiums, reserves and
administrative expenses whether incurred or accrued before, on or after the
Closing Date and whether or not reported as of the Closing Date, (ii)
liabilities and obligations arising under the continuation coverage requirements
of Section 4980B of the Code and Section 601 of ERISA with respect to all
Employees (or any beneficiary or dependent of
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any Employee) who, as of the Closing Date, have exercised or are eligible to
exercise their right to such continuation coverage, and (iii) liabilities and
obligations to provide post-retirement health and life insurance benefits to
Employees (whether or not currently retired); and the Buyers and the Business
shall jointly and severally indemnify the Sellers, CRA and CMC and hold each of
them harmless from and against any Losses which any of them may incur or suffer
in respect of any of the foregoing liabilities and obligations.
ARTICLE XI
TERMINATION PRIOR TO CLOSING
11.1 Termination. This Agreement may be terminated at any time prior to the
Closing:
(a) By the Sellers in writing if there is a condition in Article IX that
has not been fulfilled or waived on or prior to August 31, 1997; or
(b) By the Buyers and Western in writing if there is a condition in Article
VIII that has not been fulfilled or waived on or prior to August 31, 1997; or
(c) By the mutual written consent of ACHC and the Sellers, on the one hand,
and the Buyers and Western, on the other hand; or
(d) By Western and the Buyers, on the one hand, and ACHC and the Sellers,
on the other hand, in writing, without liability (other than pursuant to
Section 12.9) to the terminating Party on account of such termination
(provided the terminating Party is not otherwise in default or in breach of
this Agreement), if the Closing shall not have occurred on or before August
31, 1997, including because of the failure by the Buyers or Western to obtain
Required Insurance Approvals; or
(e) By Western, the Buyers, ACHC or the Sellers, in writing, if there shall
be (i) any law or regulation (including any Insurance Law) that makes
consummation of the transactions contemplated hereby illegal or otherwise
prohibited or (ii) any judgment, injunction, order or decree (including,
without limitation, under the HSR Act, if required, the Exchange Act or any
applicable Insurance Law) enjoining the Parties from consummating the
transactions contemplated hereby, provided that the Parties shall have used
their reasonable good faith efforts to have any such judgment, injunction,
order or decree lifted and the same shall not have been lifted within
forty-five (45) days after entry by any court or governmental or regulatory
authority; or
(f) By the Sellers and ACHC, in writing, if a Form A filing and an
application for Insurance Licenses have not been submitted by Western on
behalf of itself and Sub 1, as appropriate, to the Illinois Department of
Insurance by the twenty-eighth (28th) day following the date hereof;
provided, however, that notice of such termination must be given prior to the
submission of the filing; or
(g) By Western, if it is unable, in good faith and after using its
reasonable best efforts, to obtain Stockholder Approval.
11.2 Automatic Termination. This Agreement shall be terminated automatically,
without any action by any Party hereto, if (i) the stockholders of Western have
failed to give the Stockholder Approval after the matter shall have been
submitted to such stockholders for a vote thereon or (ii) the applicable
insurance departments, agencies or commissions have denied the Required
Insurance Approvals.
11.3 Effect of Termination. Termination of this Agreement pursuant to this
Article XI shall terminate all obligations of the Parties hereunder, except for
the obligations under Sections 11.3, 12.8, 12.9 and 12.11; provided, however,
that termination pursuant to clause (a), (b), (d) or (f) of Section 11.1 shall
not relieve a defaulting or breaching Party from any liability to any other
Party hereto, including but not limited to liability under Section 12.9.
ARTICLE XII
MISCELLANEOUS
12.1 Survival. Except as otherwise set forth in this Section 12.1 or in
Section 12.2, the representations and warranties made by any party to this
Agreement or in any agreement (other than in the Non-Competition Agreements) or
certificate (including any Ancillary Document executed by the Company, ACFS,
ACHC or any Former Shareholder) shall expire at the Closing, together with any
right to indemnification or otherwise with respect
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thereto. The covenants and agreements contained herein to be performed or
complied with prior to the Closing shall expire at the Closing and the covenants
and agreements to be performed or complied with after the Closing shall, except
as otherwise provided herein, survive indefinitely.
12.2 Indemnification.
(a) If the Closing shall occur, each Seller and ACHC shall indemnify the
Buyers, Western and their Affiliates and hold each of them harmless from and
against all Losses which are incurred or suffered by any of them by reason of
the failure by any of the Sellers or ACHC to perform or comply with any of its
respective covenants or agreements contained herein (including, without
limitation, the obligations of the Sellers or ACHC, as applicable, to pay or
otherwise satisfy the Excluded Liabilities) which are to be performed or
complied with after the Closing.
(b) If the Closing shall occur, in addition to the indemnity obligations of
the Buyers and Western set forth in Article X hereof, the Buyers and Western
shall jointly and severally indemnify the Sellers, ACHC and the Former
Shareholders and their Affiliates and hold each of them harmless from and
against all Losses which are incurred or suffered by any of them by reason of
(i) the breach by the Buyers or Western of any of their respective
representations or warranties made herein, (ii) the failure by the Buyers or
Western to perform or comply with any of the covenants or agreements contained
herein (including, without limitation, the covenants of the Buyers and Western
set forth in Article X hereof) and (iii) the obligations of the Buyers and
Western to pay or otherwise satisfy the Assumed Liabilities or arising out of
any Assumed Liability, or (iv) the conduct by the Buyers or Western of their
respective businesses or their use of the Assumed Assets after the Closing.
(c) (i) In the event that any Party shall incur or suffer any Losses in
may be sought by such Party pursuant to the provisions of this Section
12.2, the party seeking and entitled to be indemnified hereunder (the
"Indemnitee") shall assert a claim for indemnification by written notice
(a "Notice") to the party from whom indemnification is permitted to be
sought (the "Indemnitor") stating the nature and basis of such claim, and
accompanied by any documentation required by Section 12.2. In the case of
Losses arising by reason of any third party claim, the Notice shall be
given within 30 days of the filing or other written assertion of such
claim against the Indemnitee, but the failure of the Indemnitee to give
the Notice within such time period shall not prohibit recovery hereunder
except to the extent that the Indemnitor is prejudiced thereby.
(ii) The Indemnitee shall provide to the Indemnitor on request all
information and documentation reasonably necessary to support and verify
any Losses which the Indemnitee believes give rise to a claim for
indemnification hereunder and shall give the Indemnitor and its counsel
reasonable access to all books, records and personnel in the possession
or under the control of the Indemnitee which would have bearing on such
claim.
(iii) In the case of third party claims for which indemnification is
sought, the Indemnitor shall have the option (x) to conduct any
proceedings or negotiations in connection therewith, (y) to take all
other steps to settle or defend any such claim (provided that the
Indemnitor shall not settle any such claim without the consent of the
Indemnitee (which consent shall not be unreasonably withheld) and (z) to
employ counsel to contest any such claim or liability in the name of the
Indemnitee or otherwise. In any event, the Indemnitee shall be entitled
to participate at its own expense and by its own counsel in any
proceedings relating to any third party claim. The Indemnitor shall,
within 30 days of receipt of the Notice, notify the Indemnitee of its
intention to assume the defense of such claim. Until the Indemnitee has
received notice of the Indemnitor's election whether to defend any claim,
the Indemnitee shall take reasonable steps to defend (but may not settle)
such claim, and, if the Indemnitor shall decline to assume the defense of
any such claim, or shall fail to notify the Indemnitee within 30 days
after receipt of the Notice of the Indemnitee's election to defend such
claim, the Indemnitee shall defend against such claim (provided that the
Indemnitee shall not settle such claim without the consent of the
Indemnitor, which consent shall not be unreasonably withheld). The
expenses of all proceedings, contests or lawsuits in respect of such
claims shall be borne by the Indemnitor, but only if the Indemnitor is
responsible pursuant hereto to indemnify the Indemnitee in respect of the
third party claim and, if applicable, only to the extent required by
Section 12.2(a). Regardless of which Party shall assume the defense of
the claim, the Parties agree to cooperate fully with one another in
connection therewith. If (and to the extent) the Indemnitor is
responsible pursuant hereto to indemnify the Indemnitee in respect of the
third party claim, then within
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ten days after the occurrence of a final non-appealable determination
with respect to such third party claim, the Indemnitor shall pay to the
Indemnitee the amount of any Losses (or such portion thereof as the
Indemnitor shall be responsible for pursuant to the provisions hereof,
and in the event that any Losses incurred by the Indemnitee do not
involve payment by the Indemnitee of a third party claim, then, if (and
to the extent) the Indemnitor is responsible pursuant hereto to indemnify
the Indemnitee against such Losses, the Indemnitor shall within ten days
after agreement on the amount of Losses or the occurrence of a final
non-appealable determination of such amount, to pay to the Indemnitee the
amount of such Losses or such portion thereof as the Indemnitor shall be
responsible for pursuant to the provisions hereof.
(d) If the Closing shall occur, the indemnification provided in this
Section 12.2 shall be the sole and exclusive remedy against any Party.
(e) Nothing in this Agreement shall be interpreted to deny, limit or in any
way modify the remedies of the Buyers or Western under applicable law in the
event of fraud or intentional misrepresentation.
(f) Each of the Parties acknowledges that the remedies at law for any
actual or threatened breach of the obligations and agreements by the Buyers and
Western set forth in Section 1.6 of this Agreement with respect to the payment
of the Purchase Price would be inadequate. Therefore, each Seller and each Buyer
and Western agrees that the Parties shall be entitled to specific performance of
such obligations or agreements, or injunctive relief against activities in
violation of said obligations and agreements, or both.
12.3 Interpretive Provisions. Whenever used in this Agreement, unless expressly
stated otherwise, (a) "to ACHC's knowledge" or "to the knowledge of ACHC" (or
words of like import) shall mean to the actual knowledge of ACHC, and those
persons listed on Exhibit 12.3(A) under the heading "ACHC," (b) "to the
Company's knowledge" or "to ACFS's knowledge" or "to the knowledge of the
Company" or "to the knowledge of ACFS" or "to the Sellers' knowledge" or "to the
knowledge of the Sellers" (or words of like import) shall mean to the actual
knowledge of the Company, ACFS or the Sellers, as the case may be, and those
persons listed in Exhibit 12.3(A) under the heading "The Company or Sellers"
(with respect to such entities) and under the heading "ACFS" (with respect to
ACFS), (c) "to Western's knowledge" or "to the knowledge of Western" (or words
of like import) shall mean to the actual knowledge of Western and those persons
listed on Exhibit 12.3(B) and (d) "to the Former Shareholders' knowledge" or "to
the knowledge of the Former Shareholders" (or words of like import) shall mean
to the actual knowledge of any of the Former Shareholders.
12.4 Entire Agreement. This Agreement (including the Disclosure Schedule and
all Exhibits hereto) and the Confidentiality Agreement constitute the sole
understanding of the Parties with respect to the subject matter hereof.
12.5 Successors and Assigns. The terms and conditions of this Agreement shall
inure to the benefit of and be binding upon the respective successors and
assigns of the Parties hereto; provided, however, that this Agreement may not be
assigned by any Party without the prior written consent of the other Parties
hereto, except that Western may, at its election, assign this Agreement to any
Affiliate so long as (a) the representations and warranties of Western made
herein are equally true of such assignee and (b) such assignment does not have
any adverse consequences to the Sellers or any of their Affiliates (including,
without limitation, any adverse tax consequences or any adverse effect on the
ability of Western or its assignees to consummate (or timely consummate) the
transactions contemplated hereby), such assignment of this Agreement or any of
the rights or obligations hereunder shall not relieve Western of its obligations
under this Agreement until after the Closing, at which time Western shall be
relieved of its obligations hereunder.
12.6 Headings. The headings of the Articles, Sections and paragraphs of this
Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.
12.7 Modification and Waiver. No amendment, modification or alteration of the
terms or provisions of this Agreement shall be binding unless the same shall be
in writing and duly executed by the parties hereto, except that any of the terms
or provisions of this Agreement may be waived in writing at any time by the
Party which is entitled to the benefits of such waived terms or provisions. No
waiver of any of the provisions of this Agreement shall be deemed to or shall
constitute a waiver of any other provision hereof (whether or not similar). No
delay on the part of any Party in exercising any right, power or privilege
hereunder shall operate as a waiver thereof.
12.8 Broker's Fees. Each of the Parties hereto (i) represents and warrants that
it has not taken and will not take any action that would cause the other Parties
hereto to have any obligation or liability to any person for a finder's
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or broker's fee, and (ii) agrees to indemnify the other Parties hereto for
breach of the foregoing representation and warranty, whether or not the Closing
occurs.
12.9 Expenses.
(a) If the Closing shall occur, the Sellers shall pay (or reimburse the
Company for amounts previously paid with respect to) the fees and expenses set
forth in clause (b) below (the "Expenses").
(b) For purposes of this Section 12.9, the term "Expenses" shall mean the
following fees and expenses, but only to the extent such fees and expenses were
incurred on or after February 1, 1997 and in connection with the transactions
contemplated by this Agreement:
(i) the reasonable fees and expenses (which are supported by reasonable
documentation) of Hutton Ingram Yuzek Gainen Carroll & Bertolotti, counsel to
the Sellers; and
(ii) the reasonable fees and expenses (which are supported by reasonable
documentation) of Sonnenschein Nath & Rosenthal, counsel to the Sellers.
(c) If the Closing shall not occur, the Buyers and/or Western shall pay, or
reimburse the Company for amounts previously paid with respect to, (i) the
Expenses, (ii) the reasonable fees and expenses (which are supported by
reasonable documentation) of Beermann, Swerdlove, Woloshin, Barezky, Becker,
Genin & London (but only to the extent such fees and expenses were incurred on
or after February 1, 1997) and (iii) miscellaneous fees (which are supported by
reasonable documentation), such as fees incurred in connection with any filing
or presentation to A.M. Best in connection with its rating (but only to the
extent such fees were incurred on or after February 1, 1997), up to a maximum
aggregate amount of $90,000 for all such Expenses and fees and expenses referred
to in clauses (i) through (iii) of this clause (c); provided, that this clause
(c) shall apply only if (x) Western has not submitted an application for
Insurance Licenses to the Illinois Department of Insurance by the 28th day
following the date hereof, (and the Sellers have elected to terminate the
Agreement as provided in Section 11.1(f)), (y) Western is unable, in good faith
and after using its reasonable best efforts, to obtain Stockholder Approval, or
(z) the Closing shall not have occurred on or before August 31, 1997, and all of
the conditions set forth in Article VIII to the Buyers' and Western's
obligations to close shall have been satisfied (or, to the extent a condition
cannot reasonably be satisfied prior to the Closing, the Sellers and ACHC shall
have provided evidence, reasonably satisfactory to Western and the Buyers, of
their ability to satisfy such condition) or waived. Notwithstanding anything to
the contrary in this Section 12.9, this clause (c) shall not apply if the
Agreement has been terminated by reason of Section 11.2(ii).
(d) In any event, (i) the Sellers shall pay (or reimburse the Company for
amounts previously paid with respect to) all reasonable fees and expenses (which
are supported by reasonable documentation) incurred in connection with the
transfer of shares from SCSM to ACHC and any amounts owed to Berenson Minella &
Co., financial advisor to the Sellers and ACHC, in connection with the
transactions contemplated by this Agreement and (ii) the Buyers or Western shall
pay the expenses incurred in connection with the conversion of Statutory
Financial Statements to GAAP Financial Statements and the reasonable fees and
expenses (which are supported by reasonable documentation) of Beermann,
Swerdlove, Woloshin, Barezky, Becker, Genin & London relating to the
transactions contemplated hereby.
(e) Except as otherwise provided herein, each Party hereto shall pay all
costs and expenses incurred by such Party or on its or his behalf in connection
with this Agreement and the transactions contemplated hereby, including, without
limiting the generality of the foregoing, fees and expenses of its own financial
consultants, accountants and counsel.
12.10 Consulting Fees. In the event the Closing occurs after July 31, 1997, the
monthly consulting fees payable to each of Markin and Tessler shall be increased
to $100,000 for the month of August 1997, $75,000 of which shall be pro-rated to
reflect the actual number of days elapsed since July 31, 1997 until the Closing
Date.
12.11 Notices. Any notice, request, instruction or other document to be given
hereunder by any Party hereto to any other party shall be in writing and shall
be given (and will be deemed to have been duly given upon receipt) by delivery
in person, by electronic facsimile transmission with a confirmation of delivery,
by overnight courier or by registered or certified mail, postage prepaid,
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if to the Former Shareholders, to:
Daniel R. DeLeo
American Country Insurance Company
222 N. LaSalle Street
Chicago, Illinois 60601-1105
Telephone: (312) 456-2000
Telecopy: (312) 456-2605
Edwin W. Elder
American Country Insurance Company
222 N. LaSalle Street
Chicago, Illinois 60601-1105
Telephone: (312) 456-2000
Telecopy: (312) 456-2605
Wayne R. Hannah, Jr.
c/o Sonnenschein Nath & Rosenthal
Sears Tower--Suite 8000
233 South Wacker Drive
Chicago, Illinois 60606
Telephone: (312) 876-8000
Telecopy: (312) 876-7934
David R. Markin
70 Blossom Way
Palm Beach, Florida 33480
Telephone: (561) 832-7148
Telecopy: (561) 832-8574
Martin L. Solomon
P.O. Box 70
Coconut Grove, Florida 33233
Telephone: (305) 662-9206
Telecopy: (305) 662-8632
Allan R. Tessler
P.O. Box 9205
1100 Pine Siskin
Jackson, Wyoming 83001
Telephone: (307) 733-1815
Telecopy: (307) 733-1817
Wilmer J. Thomas, Jr.
272 Undermountain Road
Salisbury, Connecticut 06068
Telephone: (203) 435-2546
Telecopy: (203) 435-2548
with a copy to:
Hutton Ingram Yuzek Gainen
Carroll & Bertolotti
250 Park Avenue
New York, New York 10177
Attn: Paulette Kendler, Esq.
Telephone: (212) 907-9650
Telecopy: (212) 907-9681
if to ACHC, prior to or after the Closing, to:
American Country Holding Corp.
c/o Checker Motors Corporation
2016 North Pitcher Drive
Kalamazoo, MI 49007
Attn: David R. Markin
Telephone: (616) 343-6121
Telecopy: (616) 343-6823
with a copy to:
Hutton Ingram Yuzek Gainen
Carroll & Bertolotti
250 Park Avenue
New York, New York 10177
Attn: Paulette Kendler, Esq.
Telephone: (212) 907-9650
Telecopy: (212) 907-9681
if to the Company or ACFS, prior to the Closing, to:
American Country Insurance Company
222 N. LaSalle Street
Chicago, Illinois 60601-1105
Attention: Edwin W. Elder, President
Telephone: (312) 456-2000
Telecopy: (312) 456-2605
with a copy to:
Hutton Ingram Yuzek Gainen
Carroll & Bertolotti
250 Park Avenue
New York, New York 10177
Attention: Paulette Kendler, Esq.
Telephone: (212) 907-9650
Telecopy: (212) 907-9681
if to Sub 2, Sub 1 or Western after the Closing, to:
The Western Systems Corp.
c/o Janney Montgomery Scott Inc.
26 Broadway
New York, New York 10004
Attention: William J. Barrett, Chairman
Telephone: (212) 510-0688
Telecopy: (212) 510-0683
Martin L. Solomon
P.O. Box 70
Coconut Grove, Florida 33233
Telephone: (305) 662-9206
Telecopy: (305) 662-8632
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with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 100196064
Attention: Judith R. Thoyer, Esq.
Telephone: (212) 373-3002
Telecopy: (212) 757-3990
and a copy to:
Epstein Becker & Green, P.C.
250 Park Avenue--12th Floor
New York, New York 10177
Attention: Sidney Todres, Esq.
Telephone: (212) 351-4735
Telecopy: (212) 661-0989
or at such other address for a party as shall be specified by like notice.
12.12 Governing Law. This Agreement shall be construed in accordance with and
governed by the laws of the State of New York applicable to agreements made and
to be performed wholly within such jurisdiction. Each of the parties hereto
hereby irrevocably and unconditionally consents to submit to the exclusive
jurisdiction of the courts of the State of New York and of the United States of
America, in each case located in New York County for any Litigation arising out
of or relating to this Agreement and the transactions contemplated hereby, and
further agrees that service of any process, summons, notice or document by U.S.
registered mail to its respective address set forth in Section 12.11 herein
shall be effective service of process for any Litigation brought against it in
any such court. Each of the parties hereto hereby irrevocably and
unconditionally waives any objection to the laying of venue of any Litigation
arising out of this Agreement or the transactions contemplated hereby in the
courts of the State of New York or the United States of America, in each case
located in New York County, and hereby further irrevocably and unconditionally
waives and agrees not to plead or claim in any such court that any such
Litigation brought in any such court has been brought in an inconvenient forum.
12.13 Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall for all purposes be deemed to be an original and all of
which shall constitute the same instrument.
12.14 Certain Definitions. The following terms shall have the meanings set
forth for purposes of this Agreement and the Disclosure Schedule.
"Accredited Investor" shall have the meaning set forth in Regulation D
promulgated under the Securities Act of 1933, as amended.
"ACFS" is defined in the Recitals.
"ACFS Acquired Assets" is defined in Section 1.2.
"ACFS Assumed Liabilities" is defined in Section 1.4(a).
"ACFS Assignment Agreement" means the ACFS Assignment Agreement referred to
in Section 1.5, in such form as may be agreed to by the parties hereto.
"ACFS Assumption Agreement" means the ACFS Assumption Agreement referred to
in Sections 8.11 and 9.7.
"ACFS Excluded Assets" is defined in Section 1.2(b).
"ACFS Excluded Liabilities" is defined in Section 1.4(b).
"ACHC" is defined in the Recitals.
"Acquired Assets" is defined in Section 1.2.
"Acquisition Proposal" is defined in Section 5.5.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Exchange Act. For purposes of this Agreement, the Company
and ACFS each shall be deemed to be an Affiliate of each of ACHC and the Former
Shareholders.
"A.M. Best" means the A.M. Best Company, Inc.
"Amended and Restated Buyer Note" means any of the Non-Recourse Promissory
Notes, each dated April 17, 1997, by ACHC to each of the Noteholders.
32
<PAGE>
"Ancillary Document" means the Officer's Certificate, the Former
Shareholders' Certificate, Western's Certificate, the Buyer's Certificate or any
other document executed in connection herewith.
"Assignment Agreement" shall mean the Assignment and Assumption Agreement,
dated as of April 17, 1997, by and among CRA, SCSM, ACHC, the Company and ACFS.
"Assumed Liabilities" is defined in Section 1.4(a).
"Automatic Repurchase and Pledge Agreement" means the Amended and Restated
Repurchase and Pledge Agreement, dated as of April 17, 1997, among the David R.
Markin Charitable Remainder Unitrust #1 dated December 16, 1996, Martin L.
Solomon, the Martin L. Solomon 1996 Charitable Remainder Unitrust, the Allan R.
Tessler Charitable Remainder Unitrust #1 dated December 16, 1996, the Douglas
Trust, Jay H. Harris and American Country Holding Corp.
"Best's Rating" shall mean A.M. Best's opinion, expressed as a rating, of
the Company's financial condition and operating performance.
"Books and Records" is defined in Section 6.2(a).
"Business" means individually and collectively the Company and ACFS, and
any predecessor to any of them.
"Business Benefit Plans" shall mean (1) each and every "employee benefit
plan," as defined in Section 3(3) of ERISA, maintained or contributed to by the
Business or in which the Business participates (or at any time during the
preceding five years maintained, contributed to or otherwise participated in),
(2) whether or not an "employee benefit plan" as so defined, each and every
pension, supplemental pension, accidental death and dismemberment, life and
health insurance benefits (including medical, dental, vision and
hospitalization), short or long-term disability, savings, bonus, deferred
compensation, incentive compensation, holiday, vacation, severance pay, salary
continuation, sick pay, sick leave, tuition reimbursement, service award,
company car, scholarship, relocation, patent award, fringe benefit, and other
employee benefit arrangements, plans, contracts, policies or practices of the
Business providing employee or executive compensation or benefits to one or more
Employees, or each (3) each and every plan or arrangement adopted, maintained or
contemplated to be adopted or maintained by the Business pursuant to the
covenants contained in Article X of this Agreement. The term "Business Benefit
Plan" shall include the American Country Insurance Company Pension Plan and the
American Country Insurance Company 401(k) Plan.
"Buyer" is defined in the Recitals.
"Buyer's Certificate" is defined in Section 9.1.
"Claims" is defined in Section 6.3(b).
"Closing" is defined in Section 1.5.
"Closing Date" is defined in Section 1.5.
"CMC" means Checker Motors Corp., a Delaware corporation that was formerly
a subsidiary of SCSM and formerly known as CMC Kalamazoo Inc.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commitments" is defined in Section 2.6.
"Company" is defined in the Recitals.
"Company Acquired Assets" is defined in Section 1.1(a).
"Company Acquired Policies" is defined in Exhibit 1.1(a).
"Company Assumed Liabilities" is defined in Section 1.3(a).
"Company Assignment Agreement" means the Company Assignment Agreement
referred to in Section 1.5, in such form as may be agreed to by the parties
hereto.
"Company Assumption Agreement" means the Company Assumption Agreement
referred to in Sections 8.11 and 9.7.
33
<PAGE>
"Company Business" means the underwriting and marketing of commercial
property and casualty insurance, including specialty transportation coverage
(taxi cabs and limousines), and personal insurance lines for auto and
homeowners' coverage.
"Company Excluded Assets" is defined in Section 1.1(b).
"Company Excluded Liabilities" is defined in Section 1.3(b).
"Company's Insurers" is defined in Section 6.3(b).
"Company 401(k) Plan" is defined in Section 10.2.
"Company Pension Plan" is defined in Section 10.1.
"Comparable GAAP Statements" is defined in Section 2.2(b)(iv).
"Confidentiality Agreement" is defined in Section 5.3.
"CRA" means CRA Holdings Inc., a Delaware corporation that was formerly
known as Great Dane Holdings, Inc.
"Disclosure Schedule" is defined in Section 2.1.
"DOL" means the United States Department of Labor.
"Employees" means all current employees (including those on lay-off,
disability or leave of absence, whether paid or unpaid), former employees and
retired employees of the Business, and the term "Employee" shall mean any of the
Employees.
"Encumbrance" means any mortgage, pledge, lien, charge, title defect,
claim, objection, security interest or other encumbrance with respect to any
Acquired Asset.
"Environmental Claim" means any and all administrative, regulatory or
judicial actions, causes of action, suits, obligations, liabilities, losses,
proceedings, decrees, judgments, penalties, fines, fees, demands, demand
letters, orders, directives, claims (including any claims involving liability in
tort, strict, absolute or otherwise), liens, notices of noncompliance or
violation, and legal and consultant fees and costs of investigations or
proceedings, relating in any way to any Environmental, Health and Safety Law, or
arising from the presence or release (or alleged presence or release) into the
environment of any Hazardous Substance (hereinafter "Claims") including, without
limitation, and regardless of the merit of such Claim, any and all claims by any
governmental or regulatory authority or by any third party or other person for
enforcement, mitigation, cleanup, removal, response, remediation or other
actions or damages, contribution, indemnification, cost recovery, compensation
or injunctive or declaratory relief pursuant to any Environmental, Health and
Safety Law or any alleged injury or threat of injury to human health, safety,
natural resources or the environment.
"Environmental, Health and Safety Laws" means all federal and state laws,
rules and regulations relating to health, safety, hazardous substances, and
environmental matters. Such laws and regulations include but are not limited to
the Resource Conservation and Recovery Act, 42 U.S.C. ' 6901 et seq., as
amended; CERCLA; the Toxic Substances Control Act, 15 U.S.C. ' 2601 et seq., as
amended, the Clean Water Act, 42 U.S.C. ' 466 et seq., as amended; the Clean Air
Act, 46 U.S.C. ' 7401 et seq., as amended.
"Environmental Matters" means any matter arising out of or relating to
Environmental Health and Safety Laws.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Excluded Assets" is defined in Section 1.2(b).
"Excluded Liabilities" is defined in Section 1.4(b).
"Expenses" is defined in Section 12.9(b).
"Financial Statements" is defined in Section 2.2(b).
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<PAGE>
"Former Shareholders" is defined in the Recitals.
"Former Shareholders' Certificate" is defined in Section 8.1.
"FTC" is defined in Section 7.2.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"GAAP Financial Statements" is defined in Section 2.2(b).
"Governmental Entity" means a court, legislature, governmental agency,
commission or administrative or regulatory authority or instrumentality,
domestic or foreign.
"Hazardous Substance" means any substance, material, product, derivative,
compound, mixture, mineral, chemical, waste, medical waste or gas, in each case
whether naturally occurring, human-made or the by-product of any process,
including but not limited to petroleum or petroleum products that is now or
hereafter becomes defined or included within the definition of a "hazardous
substance," "hazardous waste," "hazardous material," "toxic chemical," "toxic
substance," "hazardous chemical," "extremely hazardous substance," "pollutant,"
"contaminant," or any other words of similar meaning under any Environmental,
Health and Safety Laws.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"Indemnification Agreement" is defined in Section 8.12.
"Indemnitee" is defined in Section 12.2(c)(i).
"Indemnitor" is defined in Section 12.2(c)(i).
"Insurance Contracts" mean any contract of insurance to which the Company
is a party, including, without limitation, insurance contracts, reinsurance
contracts, fidelity bonds, surety bonds and funding agreements.
"Insurance Law" means any Law relating to the insurance business or the
operations thereof.
"Insurance License" means a Permit granted by a Governmental Entity to
transact insurance business.
"Insurance Policies" is defined in Section 2.16.
"Insurance Reports" is defined in Section 2.17(a).
"Investment Assets" shall mean bonds, notes, debentures, mortgage loans,
collateral loans and all other instruments of indebtedness, stocks, partnership
interests and other equity interests (including, without limitation, equity
interests in Subsidiaries), real estate and leasehold and other interests
therein, certificates issued by or interests in trusts, cash on hand and on
deposit, personal property and interests therein and all other assets acquired
for investment purposes.
"Justice Department" is defined in Section 7.2.
"Law" means an applicable law, ordinance, rule or regulation enacted or
promulgated, or an order issued or rendered, by any Governmental Entity.
"Leased Property" is defined in Section 2.13(b).
"Litigation" is defined in Section 2.7.
"Losses" means any and all claims, lawsuits, liabilities, damages, costs
(including court costs) or expenses (including, without limitation, reasonable
attorneys' and accountants' fees and any disbursements of either of them).
"Material Adverse Effect" means any event, occurrence, fact, condition,
change or effect that, individually or in the aggregate, is materially adverse
to the business, operations or financial condition of the Company and its
subsidiaries or ACFS taken as a whole, it being understood that in evaluating
the financial condition of the Company and ACFS, the working capital, assets and
liabilities of the Company and ACFS, shall inter alia, be considered.
"Most Recent Consolidated GAAP Financial Statements" is defined in Section
2.2(b)(ii).
"Most Recent Fiscal Month End" is defined in Section 2.2(ii).
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<PAGE>
"Most Recent Fiscal Year End" is defined in Section 2.2(a)(i).
"Most Recent Statutory Balance Sheet" means the balance sheet set forth in
the Most Recent Statutory Financial Statements.
"Most Recent Statutory Financial Statements" is defined in Section
2.2(a)(ii).
"Multiemployer Plan" means a Business Benefit Plan which is a
"multiemployer plan" as such term is defined in section 3(37) or section
4001(a)(3) of ERISA.
"1997 Taxes" shall have the meaning set forth in the Assignment Agreement.
"Noteholders" means, collectively, Martin L. Solomon 1996 Charitable
Remainder Unitrust, Martin L. Solomon and The Douglas Trust.
"Notice" is defined in Section 12.2(c)(i).
"Officer's Certificate" is defined in Section 8.1.
"Ordinary Course of Business" means the ordinary course of business of the
Company and ACFS consistent with past custom and practice.
"Parties" is defined in the Recitals.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Permits" is defined in Section 2.8.
"Permitted Exceptions" is defined in Section 2.4.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock Company, a trust, a joint venture, an unincorporated organization,
or a governmental entity (or any department, agency, or political subdivision
thereof).
"Purchase Price" is defined in Section 1.6.
"Regulatory Filings" is defined in Section 2.17(b).
"Reinsurance Assumption Agreement" means the Reinsurance Assumption
Agreement referred to in Sections 8.11 and 9.7.
"Releasee" is defined in Section 6.3(a).
"Releasor" is defined in Section 6.2(a).
"Reportable Event" has the meaning set forth in ERISA ' 4043.
"Required Insurance Approvals" means the approval of the transactions
contemplated hereby by the requisite insurance department, agency or commission
in the states of Illinois, Indiana and any other jurisdictions where, in the
aggregate, the failure to obtain such approval would have a Material Adverse
Effect.
"Required Insurance Filings" means any filing of or with respect to this
Agreement with the requisite insurance department, agency or commission in each
of the states of Illinois, Indiana, Iowa, Michigan and Wisconsin, and any other
jurisdictions as required by applicable law.
"SAP" means statutory accounting practices required or permitted by
applicable insurance departments, commissions or regulatory authorities applied
on a consistent basis.
"SCSM" means SCSM Holdings, Inc., a Delaware corporation.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Seller" is defined in the Recitals.
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<PAGE>
"Statutory Financial Statements" is defined in Section 2.2(a).
"Stock" means the common stock, par value $100 per share, of the Company.
"Stockholder Approval" means any approvals by the stockholders of Western
necessary to effectuate the transactions contemplated by this Agreement.
"Taxes" means (i) all United States federal, state or local taxes and
foreign taxes, charges, levies, fees, imposts, duties or other assessments and
all additions to tax, penalties and interest relating thereto and (ii) any Taxes
(defined in (i) above) for which a Seller is liable (a) as a transferee, (b) as
an indemnitor, guarantor, surety or in a similar capacity under any contract,
arrangement, understanding or commitment, whether oral or written or (c) under
Treasury Regulation Section 1.1502-6 or any comparable provision of state or
local tax law.
"Tax Statement" is defined in Section 7.1(c).
"Tax Sharing Agreement" shall have the meaning set forth in paragraph 7(a)
of the Assignment Agreement.
"Territory" means the states of Illinois, Indiana, Michigan, Wisconsin and
Iowa.
"WARN Act" means Worker Adjustment and Retraining Notification Act of 1988,
as amended.
"Western" is defined in the Recitals.
"Western's Certificate" is defined in Section 9.1.
12.15 No Third Party Beneficiaries. This Agreement does not create, and shall
not be construed as in any manner creating, any rights enforceable by any person
not a party to this Agreement (except as provided in Section 12.5 hereof).
Without limiting the generality of the foregoing, no provision of this Agreement
shall create any third party beneficiary rights in any Employee or former
Employee (including any beneficiary or dependent thereof) of the Company or ACFS
in respect of continued employment (or resumed employment) or any other matters,
and no provision of this Agreement shall create any such rights in any such
persons in respect of any benefits that may be provided, directly or indirectly,
under any Business Benefit Plan.
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Asset
Purchase Agreement to be executed on its behalf as of the date first above
written.
AMERICAN COUNTRY INSURANCE COMPANY
By: /s/ Edwin W. Elder, III
-------------------------------
Name: Edwin W. Elder, III
Title: President
AMERICAN COUNTRY FINANCIAL SERVICES CORP.
By: /s/ Edwin W. Elder, III
-------------------------------
Name: Edwin W. Elder, III
Title: President
AMERICAN COUNTRY HOLDING CORP.
By: /s/ Daniel R. DeLeo
-------------------------------
Name: Daniel R. DeLeo
Title:
THE WESTERN SYSTEMS CORP.
By: /s/ William J. Barrett
-------------------------------
Name: William J. Barrett
Title: Chairman of the Board
38
<PAGE>
/s/ Daniel R. DeLeo
-------------------------------
Daniel R. DeLeo
/s/ Edwin W. Elder
-------------------------------
Edwin W. Elder
/s/ Wayne R. Hannah, Jr.
-------------------------------
Wayne R. Hannah, Jr.
/s/ David R. Martin
-------------------------------
David R. Martin
/s/ Martin L. Solomon
-------------------------------
Martin L. Solomon
/s/ Allan R. Tessler
-------------------------------
Allan R. Tessler
/s/ Wilmer J. Thomas, Jr.
-------------------------------
Wilmer J. Thomas, Jr.
39
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================================================================================
ANNEX B
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-K, AS AMENDED
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
-----------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______ to _______
Commission file number 0-22922
-------
THE WESTERN SYSTEMS CORP.
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
-----------------------------------------------
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 06-0995978
-----------------------------------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
</TABLE>
c/o Janney Montgomery Scott Inc., 26 Broadway, New York, NY 10004
-----------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (212) 510-0688
--------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.60 par value Common Stock Purchase Warrants entitling holders to
purchase one share of Common Stock per Warrant prior to December 31, 1997
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of voting stock (Common Stock, $.60 par value) held
by non-affiliates of the Registrant as of March 14, 1997 was approximately
$12,419,923 (based on the mean between the closing bid and asked prices of the
Common Stock on such date), which value, solely for the purpose of this
calculation, excludes shares held by the Registrant's executive officers and
directors. Such exclusion should not be deemed a determination by the Registrant
that all such individuals are, in fact, affiliates of the Registrant.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: At March 14, 1997, there were
outstanding 7,903,421 shares of the Registrant's Common Stock, $.60 par value.
================================================================================
<PAGE>
PART I
Item 1. Business
Recent Developments
On January 3, 1997 the Company sold its Transmedia Network franchise (the
"Franchise") covering the States of California, Oregon, Washington and parts of
Nevada and substantially all of its operating assets other than cash and cash
equivalents (the "Asset Sale") to its franchisor, Transmedia Network Inc.
("Network"). Upon consummation of the Asset Sale, the Company's assets consisted
principally of cash and cash equivalents aggregating approximately $9,574,000.
These assets (less approximately $800,000 of taxes on the gain resulting from
the Asset Sale) will be utilized by the Company to acquire, merge, consolidate,
invest in transactions or otherwise combine with an operating business (any such
transaction, a "Business Combination"). The Company intends to enter into
Business Combinations that will use substantially all of the Company's available
cash in one or two transactions and structure such Business Combinations so that
the current management of the target business will remain in place. There can be
no assurance, however, that the Company will be able to effectuate a Business
Combination, or that any such Business Combination will be profitable. In
anticipation of the Asset Sale, in the fourth quarter of 1996, the Company
initiated activities to seek a Business Combination. At the present time, there
are no Business Combinations under consideration that the Board of Directors
considers probable of consummation. The Board of Directors will have broad
discretion in its search for and negotiations with respect to a Business
Combination.
Pending a Business Combination, the Company's assets will be invested as
management of the Company deems prudent, which investments may include, but not
be limited to, certificates of deposit, mutual funds, money-market accounts,
stocks, bonds or United States Government or municipal securities, provided,
however, that the Company will attempt to invest its assets in a manner that
will not result in the Company being required to register as an investment
company under the Investment Company Act of 1940.
During the year ending December 31, 1997 and until a Business Combination
is effected, the Company expects to generate interest income in excess of its
minimal operating expenses, exclusive of any due diligence and professional fees
incurred in connection with the identification and consummation of one or more
Business Combination.
The Company has used and intends to continue to use various sources in its
search for potential Business Combinations including its officers and directors,
consultants, special advisors, securities broker-dealers, venture capitalists,
members of the financial community and others who may present management with
unsolicited proposals. The Company may be required to pay a fee in connection
with the consummation of a Business Combination.
The Company does not intend to restrict its search to any specific kind of
industry or business. The Company may investigate and ultimately acquire a
venture that is in its preliminary or development stage, is already in
operation, or in various stages of its corporate existence and development. The
Board of Directors cannot predict at this time the status or nature of any
venture in which the Company may participate. A potential venture might need
additional capital or merely desire to have its shares publicly traded. The
Board of Directors believes that the Company could provide a potential public
vehicle for a private entity interested in becoming a publicly held corporation
without the time and expense typically associated with an initial public
offering.
Once the Company has identified a particular entity as a potential
acquisition or merger candidate, the Board of Directors will seek to determine
whether acquisition or merger is warranted or whether further investigation is
necessary. Such determination will generally be based on the Board's knowledge
and experience, or with the assistance of outside advisors and consultants
evaluating the preliminary information available to them. The Board of Directors
may elect to engage outside independent consultants to perform preliminary
analysis of potential business opportunities.
In evaluating such potential Business Combinations, the Company will
consider, to the extent relevant to the specific opportunity, several factors
including potential benefits to the Company and its stockholders; working
I-1
<PAGE>
capital, financial requirements and availability of additional financing;
history of operation, if any; nature of present and expected competition;
quality and experience of management; need for further research, development or
exploration; potential for growth and expansion; potential for profits; and
other factors deemed relevant to the specific opportunity.
Presently, the Company cannot predict the manner in which it might
participate in a prospective Business Combination. Each separate potential
opportunity will be reviewed and, upon the basis of that review, a suitable
legal structure or method of participation will be chosen. The particular manner
in which the Company participates in a specific business opportunity will depend
upon the nature of that opportunity, the respective needs and desires of the
Company and management of the opportunity, and the relative negotiating strength
of the parties involved. Actual participation in a Business Combination may take
the form of an asset purchase, lease, joint venture, license, partnership, stock
purchase, reorganization, merger or consolidation. The Company may act directly
or indirectly through an interest in a partnership, corporation, or other form
of organization. The Company could participate in opportunities through the
purchase of minority stock positions.
In the Asset Sale, the Company received a total of approximately $7,500,000
in cash, which, in addition to payment for the Franchise, included payment for
the Company's Rights to Receive (as hereinafter defined). The cash and cash
equivalents retained by the Company amounted to approximately $2,074,000 at
December 31, 1996.
General
The following information describes the business carried on by the Company
prior to the Asset Sale.
In December 1991, the Company entered into a franchise agreement (the
"Franchise Agreement") with Network that granted to the Company the exclusive
right to operate the Franchise, the primary business of which was the
acquisition of "Rights to Receive" from client restaurants and other dining
establishments located in California that accept a charge card, "The Transmedia
Card," and the sale of such Rights to Receive to holders of The Transmedia Card
("Cardholders"). The Transmedia Card, a private charge card marketed and issued
by Network, which utilizes a diner's MasterCard[RegTM], Visa[RegTM], American
Express[RegTM] or Discover[RegTM] charge account to bill Transmedia Card
charges, is used by Cardholders to pay for food and beverages when dining at
restaurants or other dining establishments (the "Participating Restaurants")
that participate in the network of such establishments that accept The
Transmedia Card (the "Transmedia Network[RegTM]"). The Transmedia Network is a
unified system that entitles Cardholders recruited by Network, the Company or
any other Network franchisee to a savings of up to 25% on the regular menu
prices of food and beverages charged on The Transmedia Card. Rights to Receive
were the Company's rights to food and beverage credits of Participating
Restaurants that were purchased by the Company in exchange for cash in an amount
equal to approximately 50% of the retail value of such food and beverage
credits.
The Company derived substantially all of its revenues from the excess of
the proceeds of Cardholders' charges on their Transmedia Cards incurred at
Participating Restaurants in the territory included within the Franchise (net of
the up to 25% Cardholder savings and of fees and other charges payable to
Network) over the Company's cost of purchasing Rights to Receive from
Participating Restaurants. Revenues from Cardholders' membership fees were not
significant as the Company only received 40% of initial membership fees (and no
portion of renewal fees) and, under arrangements with Network, such initial fees
were generally waived by the Company.
The Company commenced its franchise operations in the San Francisco Bay
Area in August 1992, in the Los Angeles metropolitan area in October 1993, in
Orange County in January 1995, and in the Lake Tahoe, Nevada area in October
1995. At December 31, 1996, there was an aggregate of 557 Participating
Restaurants, consisting of 221 in the San Francisco Bay Area (including Lake
Tahoe), 269 in the Los Angeles Metropolitan Area and 67 in Orange County. At
December 31, 1996, there was an average Rights to Receive balance (net of Rights
to Receive payable by the Company) per Participating Restaurant for the San
Francisco Bay Area, Los Angeles Metropolitan Area and Orange County Area of
approximately $6,300, $5,600, and $2,600, respectively. During 1996, the Company
added 64,000 new Cardholders residing in California. At December 31, 1996, there
were approximately 146,000 Cardholders after giving effect to non- renewals
during the year.
In addition to acquiring the California franchise, the Company acquired
options to operate Transmedia Network franchises in Oregon and Washington upon
payment of certain prescribed fees. In December 1993, the Company
I-2
<PAGE>
exercised its option to operate the Transmedia Network franchise in Washington
and also agreed with Network to purchase a franchise in Reno, Nevada and the
Nevada portion of the Lake Tahoe resort area. In June 1995, the Company
exercised its option to obtain a Transmedia Network franchise for the State of
Oregon. As used herein, the term "Franchise Territory" means the States of
California, Oregon and Washington, and Reno and Lake Tahoe, Nevada.
In 1995, Network began to offer to holders of The Transmedia Card use of
the card at certain hotels, resorts, golf courses, ski lifts and access to
discount long distance telephone services. The Company's rights under the
Franchise Agreement related only to Participating Restaurants in the Franchise
Territory. The Company did not have any rights to participate in or derive any
income from these other services.
In connection with the Asset Sale, the Company and Network exchanged
general releases of all liabilities, obligations under the Franchise Agreement.
Rights to Receive
The Company's primary business was the acquisition of Rights to Receive
from Participating Restaurants that it recruited to join the Transmedia Network
of dining establishments and the sale of such Rights to Receive to Cardholders.
The Company derived substantially all of its revenues from purchasing Rights to
Receive from Participating Restaurants operating in the Franchise Territory in
exchange for cash in an amount equal to approximately 50% of the retail value of
the food and beverage credits underlying such Rights to Receive and applying
such Rights to Receive against Cardholder charges made at Participating
Restaurants operating in its Franchise Territory.
The Company entered into a contract (a "Restaurant Contract") with each
Participating Restaurant in its Franchise Territory in connection with its
purchase from it of Rights to Receive. The typical Restaurant Contract provided
for the purchase by the Company of between $5,000 and $10,000 in Rights to
Receive. Generally, such Rights to Receive were paid for by the Company in
installments during the initial two-to-three month period thereof. Beginning in
1995, the Company also entered into nine to 12 month commitment agreements with
certain Participating Restaurants. The commitment agreements established a
minimum period of participation by the Participating Restaurant in the event
that the initial credits purchased by the Company from the Participating
Restaurant were exhausted prior to the expiration of the commitment period. The
Company believes that these commitment agreements had a positive effect during
1996 upon restaurant retention and cash flow.
Transmedia Card
The Transmedia Card is a private charge card that entitles Cardholders to a
savings of up to 25% on the regular menu price of food and beverages purchased
at any Participating Restaurant within the Transmedia Network. Participating
Restaurants solicited by the Company were located in the San Francisco Bay Area,
metropolitan Los Angeles and Orange County. The Transmedia Card was developed
and is issued and marketed by Network.
Cardholders may use The Transmedia Card as they would any major credit
card. When paying the check at a Participating Restaurant, a Cardholder presents
The Transmedia Card in payment for the amount of goods and services received, as
well as for taxes and tips, and signs a Network credit card receipt for such
amount. Network, upon receiving the credit card receipt from the Participating
Restaurant, gives the Participating Restaurant a credit against the balance of
Rights to Receive that are held by the Company in respect of such Participating
Restaurant. Network then arranges for the processing of the receipt for the full
amount of the charges through the major credit card account (Visa, Mastercard,
American Express or Discover) designated by the Cardholder in his or her
application (the "Major Credit Card Account") and simultaneously issues a credit
to the Cardholder's Major Credit Card Account in an amount equal to the up to
25% savings on the appropriate food and beverage charges. Taxes and tips are not
eligible for the up to 25% savings. Upon receipt by Network of payment from the
Major Credit Card Account, it pays the Participating Restaurant the taxes and
tips incurred by the Cardholder, deducts the fees and expenses payable to it
under the Franchise Agreement and remits the balance to the Company on a weekly
basis.
Cardholder Marketing
In January 1996, Network initiated a policy to offer both new and existing
Cardholders an alternative to the traditional arrangement of a 25% savings with
an annual membership fee of $50. The new program (the "20%
I-3
<PAGE>
Program") provides a 20% savings to Cardholders with no annual fee so long as
Cardholder usage is at least $200 during each membership year. Commencing in
1996, substantially all programs initiated by Network to obtain new cardholders
utilized the 20% Program and Network took a leading role to promote the
Transmedia Card on a national basis utilizing arrangements with large national
organizations and businesses. Since January 1, 1996 substantially all new
cardholders were enrolled in the 20% Program.
The Company commenced active franchise operations in the San Francisco Bay
Area in August 1992. During 1993, the Company focused its principal efforts on
recruiting restaurants and other dining establishments doing business in the San
Francisco Bay Area to join the Transmedia Network and on marketing The
Transmedia Card to prospective Cardholders. Initial franchise activities
concentrated primarily on establishing a base of restaurants in San Francisco as
a foundation for commencing programs to market The Transmedia Card to
prospective Cardholders. Active marketing efforts to solicit Cardholders
commenced in late 1992 and were directed primarily to professionals, investment
banking and real estate firms and various small and mid-sized businesses.
Marketing to larger businesses, banks, radio station listeners' clubs and
various non-profit organizations commenced in April 1993.
Active marketing efforts to solicit Cardholders in the Los Angeles
metropolitan area commenced in January 1994 and followed the same marketing
strategy implemented by the Company in the San Francisco Bay Area. Active
marketing efforts to solicit Cardholders in Orange County commenced in mid-1995.
Franchise Agreement
The Company entered into the Franchise Agreement with Network on December
9, 1991. Under the original terms of the Franchise Agreement, the Company was
required to pay Network the following fees and charges: (i) $250,000 as an
initial franchise fee (which had been paid); (ii) $250,000 as an initial
contribution to Network's advertising and development fund, of which $125,000
was paid and the remaining $125,000 was payable, without interest, in 12
consecutive equal monthly payments commencing July 1993; and (iii) 150,000
shares of the Common Stock of the Company valued at $21,000, which have been
issued. In September 1993, the Company and Network agreed that the Company would
pay for substantially all of its advertising in California and entered into an
agreement providing, effective as of September 30, 1993, for (i) a refund to the
Company of the remaining unused balance (approximately $55,000) of the Company's
previously advanced $145,000 initial contribution to Network's advertising and
development fund (which refund has been made) and (ii) the termination of the
Company's obligation to pay the remaining monthly installments of such
obligation (approximately $105,000).
In addition, the Company was obligated to pay to Network continuing service
charges as follows: (i) a general service charge equal to 7.5%, and an
advertising fee of 2.5%, of the total dollar amount of Rights to Receive meal
credits used by Cardholders at Participating Restaurants within the Franchise
Territory; (ii) a monthly restaurant service charge of $1.00 per Participating
Restaurant located in the preceding month within the Franchise Territory; and
(iii) a processing charge equal to $.20 per Cardholder transaction slip
forwarded to Network by Participating Restaurants in the Franchise Territory.
Under the Franchise Agreement, the Company purchased options to obtain
Transmedia Network franchises for the States of Oregon and/or Washington for
initial total franchise and advertising fees of $200,000 and $300,000,
respectively. In December 1993, the Company exercised its option for the State
of Washington and in June 1995, the Company exercised its option for the State
of Oregon. In connection with the exercise of such option and the Company's
assumption of certain advertising costs described above, the Company also agreed
with Network to provide for (i) a reduction in the Company's exercise price for
the Transmedia Network franchises in the States of Oregon and/or Washington to
$100,000 and $150,000, respectively, to reflect the Company's assumption of such
advertising obligations; (ii) the exercise of the Washington option by issuance
to Network of 50,000 shares of Common Stock (in lieu of the $150,000 exercise
price) and the exercise of the Oregon option by issuance to the Network of
35,000 shares of Common Stock (in lieu of the $100,000 exercise price); and
(iii) the acquisition of the right to operate the Transmedia Network franchise
in limited areas of Nevada by issuance to Network of 10,000 shares of Common
Stock. The Company was required to commence franchise operations in the State of
Washington, by December 31, 1996 and in the State of Oregon by April 1997.
Pending the completion of the Asset Sale, expansion activities were suspended.
I-4
<PAGE>
Employees
As of December 31, 1996, the Company employed a total of 17 persons, one of
whom was the general manager of the Los Angeles office and one of whom was an
executive officer and director of the Company. Effective with the Asset Sale, 11
of such persons became employees of Network. During the first quarter of 1997,
the Company will operate with a staff of two full time administrative employees
in order to fulfill its public reporting responsibilities. After the first
quarter of 1997, pending completion of one or more Business Combinations, the
Company will have no full time employees or office overhead and will contract
out all required administrative and compliance functions.
Competition
The charge card business, including the restaurant charge card business, is
highly competitive and the Company competed for both Cardholders and
restaurants. Competitors included discount programs offered by major credit card
companies such as American Express[RegTM], Visa, MasterCard and Diners
Club[RegTM], other companies (including Dining a la Card(sm) and
Entertainment[RegTM] that offer different kinds of discount marketing programs
and numerous smaller companies.
Item 2. Properties
The Company presently leases no business premises but maintains an office
c/o Janney Montgomery Scott Inc., 26 Broadway, New York, New York 10004.
During 1996, the Company's principal executive and sales offices were
located at 475 Sansome Street, San Francisco, California. These premises
consisted of approximately 3,000 square feet of space leased until August 31,
1999. The annual base rental during 1996 was approximately $55,200. The Company
leased an additional executive office located at 233 Wilshire Boulevard, Santa
Monica, California. These premises consisted of approximately 2,000 square feet
of space leased until February 1998 at an annual base rent of approximately
$50,400. The Company leased approximately 100 square feet of space at an
executive suite in Costa Mesa in Orange County at a cost of $640 per month.
Effective with the Asset Sale, the San Francisco and Santa Monica leases
were assigned to, and assumed by, Network. The Company's Orange County lease
expired January 31, 1997 and was not renewed.
Item 3. Legal Proceedings
There are no pending legal proceedings to which the Company is a party.
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of stockholders was held on December 27, 1996. Proxies
were solicited with respect to approval of the Asset Sale and approval of
certain amendments to the Company's 1992 Stock Option Plan. The stockholders
approved the Asset Sale. The votes cast for, against or abstaining were as
follows:
<TABLE>
<S> <C>
For ............ 4,611,055
Against ......... 40,919
Abstaining ...... 9,508
</TABLE>
The stockholders also approved the amendments to the 1992 Stock Option Plan.
The number of votes cast for, against or abstaining with respect to approval
were as follows:
<TABLE>
<S> <C>
For ............ 4,310,864
Against ......... 233,659
Abstaining ...... 116,959
</TABLE>
I-5
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock has been traded on NASDAQ under the symbol
("WTSM") since December 23, 1993. The Company's Units are traded on NASDAQ under
the symbol ("WTSMU"). The Company's Warrants are traded on NASDAQ under the
symbol ("WTSMW").
The Company's Common Stock was traded in the over-the-counter market in
what is commonly referred to as the "pink sheets" or on the "OTC Bulletin Board"
of the National Association of Securities Dealers, Inc. under the symbol "WTSM"
from July 16, 1992 to December 22, 1993.
The following table sets forth the high and low bid prices on the OTC
Bulletin Board and the high and low closing bid prices as reported on NASDAQ for
the Company's Common Stock during the quarters indicated. The prices reported
reflect inter-dealer quotations and may not represent actual transactions and do
not include retail mark-ups, mark-downs or commissions.
<TABLE>
<CAPTION>
Quarter Ended High Low
- --------------------------- -------- -------
<S> <C> <C>
March 31, 1995 ......... 3.875 3.25
June 30, 1995 ............ 3.75 2.75
September 30, 1995 ...... 2.75 1.375
December 31, 1995 ...... 2.50 1.00
March 31, 1996 ......... 2.50 1.00
June 30, 1996 ............ 2.625 1.50
September 30, 1996 ...... 2.185 1.125
December 31, 1996 ...... 1.375 .750
</TABLE>
At March 14, 1997, there were approximately 394 holders of record of the
Company's Common Stock. This number does not include an indeterminate number of
stockholders whose shares are held by brokers in "street name." The Company has
not paid any cash dividends on the Common Stock since it became publicly traded.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Net Sales ..................... $9,301,155 $11,368,903 $8,698,738 $ 926,852 $ 14,023
Interest Income ............... 132,951 146,342 38,941 44,709 16,924
Net Income (Loss) ............... 545,024 10,942 (280,994) (924,733) (741,882)
Net Income (Loss) Per Common
Share* ........................ $.07 $0.0 $(.04) $(.16) $(.24)
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA:
Total Assets ............... $7,119,072 $6,203,976 $6,615,697 $4,017,551 $1,493,718
Long Term Obligations ...... 12,026 15,602 4,108 1,702 64,862
</TABLE>
- --------------
*Based on a weighted average number of shares of Common Stock (as restated,
and see Note 8(a) of Notes to Financial Statements) outstanding: 7,955,752,
8,030,685, 7,072,754, 5,804,297 and 3,123,659, shares, respectively, at December
31, 1996, 1995, 1994, 1993 and 1992.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
See Item 1. "Business--Recent Developments" for information in respect of
the sale of substantially all of the Company's operating assets. The information
presented under "Results of Operations" in this Item 7. relates to the
operations of the business the operating assets of which were sold.
I-6
<PAGE>
Results of Operations
Year Ended December 31, 1996 Compared to the Year
Ended December 31, 1995
Net sales for the year ended December 31, 1996 were $9,301,155. This was a
decrease of $2,067,748 as compared to $11,368,903 in net sales during the year
ended December 31, 1995. Sales for the year ended December 31, 1996 continued to
be negatively impacted by a decrease in the average restaurant spending per
Cardholder and by continued competition from other restaurant promotion programs
in the California market. Since the beginning of 1996 substantially all new
cardholders were developed, primarily utilizing telemarketing, under national
20% Programs by Network. Although these programs resulted in a significant
increase in Cardholders, the percentage of these Cardholders who are active card
users is not as great as the percentage of active card users enrolled in the 25%
Program. The Company attributes the continued decrease in average restaurant
spending per Cardholder to this fact as well as to continued competition.
The Company's net sales contributed $3,185,652 and $3,792,589 in gross
profit for the years ended December 31, 1996 and 1995, respectively. The Company
operated with an approximate 34% gross profit margin from net sales of Rights to
Receive to Cardholders during the year ended December 31, 1996, compared to 33%
during the year ended December 31, 1995. The approximate 1% increase in gross
profit margin is attributable to restaurant charges by Cardholders who have
enrolled in the 20% program. Operating expenses as a percentage of net sales
increased to 25.2% for the year ended December 31, 1996 compared to 20.6% for
the year ended December 31, 1995. The 4.6% increase in operating expenses as a
percentage of net sales is attributable to the fact that while net sales
decreased, the Company's operating expenses (overhead) are primarily of a fixed
nature.
The Company has incurred franchise costs of approximately 14% of net sales.
Franchise costs were $1,285,214 and $1,586,781 during the years ended December
31, 1996 and 1995, respectively.
Operating expenses (selling, general and administrative expenses)
aggregated $2,341,675 and $2,339,648 for the years ended December 31, 1996 and
1995, respectively. Operating expenses remained virtually constant as
approximately $86,000 in payroll and related cost savings were offset by an
increase in professional fees of $67,000 related to the Asset Sale and
acquisition due diligence relating to possible Business Combinations.
For the year ended December 31, 1996, combined operating expenses consisted
primarily of salaries and associated payroll expenses ($1,131,000), professional
and consulting fees ($230,000), rent and office expenses ($265,000), the
Company's reserve for unrealizable Rights to Receive ($206,000), promotion and
marketing expenses in connection with attracting and maintaining participating
California restaurants ($231,000), advertising and promotional expenses in
connection with attracting and maintaining California Cardholders ($69,000, net
of Network reimbursement) and electronic processing equipment set up and
amortization expenses ($52,000).
For the year ended December 31, 1995, combined operating expenses consisted
primarily of salaries and associated payroll expenses ($1,239,000), professional
and consulting fees ($196,000), rent and office expenses ($262,000), the
Company's reserve for unrealizable Rights to Receive ($194,000), marketing
expenses in connection with attracting and maintaining participating California
restaurants ($231,000) and advertising and promotional expenses in connection
with attracting and maintaining California Cardholders ($51,000 net of Network
reimbursement). Electronic processing equipment set up and amortization expenses
were not significant.
Interest income was $132,951 and $146,342 for the years ended December 31,
1996 and 1995, respectively.
For the year ended December 31, 1996, the Company incurred a loss before
provision for income taxes of $311,976 or $.04 per share. For the year ended
December 31, 1995, however, the Company earned a profit before provision for
income taxes of $10,942 or $0.00 per share. The approximately $323,000 decrease
in earnings before provision for income taxes was primarily due to the decreased
gross profit for the period net of franchise costs.
For the year ended December 31, 1996, the Company recorded a $857,000
credit for income taxes related to the tax benefits associated with
approximately $1,950,000 in unused operating loss carryforwards and other
deductible temporary differences. The Company recorded this tax credit because
it generated substantial taxable income in connection with the Asset Sale in
January 1997, subsequent to the balance sheet date (see "Recent Developments").
For the years ended December 31, 1995 and earlier, the Company did not record
such a tax credit because at that time there was no assurance that the Company
would generate future taxable income.
I-7
<PAGE>
For the year ended December 31, 1996, the Company earned net income of
$545,024 or $.07 per share. The net income was attributable to the credit for
income taxes of $857,000 recorded by the Company less the $311,976 loss incurred
before provision for income taxes. For the year ended December 31, 1995, the
Company earned a profit before income taxes and a net profit of $10,942 or $0.00
per share. The Company incurred no provision for income taxes for the year ended
December 31, 1995 because the income taxes on the Company's $10,942 pretax
profit were eliminated by the Company's net operating loss carryforwards.
Year Ended December 31, 1995 Compared to
Year Ended December 31, 1994
Net sales for the year ended December 31, 1995 were $11,368,903. This was
an increase of $2,670,165 as compared to $8,698,738 in net sales during the year
ended December 31, 1994. The sales increase was primarily attributable to the
increasing number of Cardholders and restaurants available to Cardholders.
However, offsetting this trend, sales for the year ended December 31, 1995 were
negatively impacted by a decrease in the average restaurant spending per
Cardholder. The Company attributes the decrease in average restaurant spending
per Cardholder to increasing competition from other restaurant promotion
programs that were introduced into the California market and to softness in
California's economy in general.
The Company operated with an approximate gross profit margin from net sales
of Rights to Receive to Cardholders of approximately 33%. The Company's net
sales resulted in $3,792,589 and $2,891,229 in gross profit for the years ended
December 31, 1995 and 1994, respectively.
Operating expenses (selling, general and administrative expenses)
aggregated $2,339,648 and $1,996,347 for the years ended December 31, 1995 and
1994, respectively. The increase of $343,301 was primarily due to the fact that
the Company incurred additional salaries and associated payroll expenses related
to the operation of its business in San Francisco and Los Angeles during the
year ended December 31, 1995 and initiated active operations in Orange County in
January 1995. The Company incurred approximately $219,000 in additional salaries
and associated payroll expenses, excluding Orange County, during the year ended
December 31, 1995 compared to the year ended December 31, 1994. These expenses
related to the operation of its business in San Francisco and Los Angeles and
were primarily attributable to increased officers' and employee compensation
including certain bonus and commission arrangements. The Company also incurred
additional operating expenses of approximately $131,000 related to the operation
of its business in Orange County for the year ended December 31, 1995. The
Company did not actively operate in Orange County in 1994 and therefore incurred
no such expenses for the year ended December 31, 1994.
For the year ended December 31, 1994, combined operating expenses consisted
primarily of salaries and associated payroll expenses ($934,000), professional
and consulting fees ($191,000), rent and office expenses ($224,000), the
Company's reserve for unrealizable Rights to Receive ($159,000), marketing
expenses in connection with attracting and maintaining participating California
restaurants ($169,000) and advertising and promotional expenses in connection
with attracting and maintaining California cardholders ($153,000 net of Network
reimbursement).
Interest income was $146,342 and $38,941 for the years ended December 31,
1995 and 1994, respectively. Interest income increased in 1995 primarily because
of the interest earned on the approximately $2,138,000 net proceeds from the
Company's December 1994 Offer of Units.
For the year ended December 31, 1995, the Company earned a net profit of
$10,942 or $0.00 per share. For the year ended December 31, 1994 the Company
incurred a net loss of $280,994 or $.04 per share. The approximately $292,000
increase in net earnings was primarily due to the increased gross profit for the
period net of franchise costs and increased interest income, partially offset by
increased operating expenses (including Orange County expenses), as described
above.
Orange County operations resulted in net losses of approximately $108,000
for the year ended December 31, 1995. Without giving effect to the Orange County
losses, the Company would have generated a net profit of approximately $119,000,
or $.01 per share, for the year ended December 31, 1995.
I-8
<PAGE>
Liquidity and Capital Resources
The Company's working capital at December 31, 1996 and 1995 was
approximately $4,873,000 and $5,165,000, respectively. At February 28, 1997, as
a result of the Asset Sale, its working capital was approximately $8,700,000.
The Company has outstanding 2,052,987 warrants exercisable at $4.00 per share.
The warrants expire December 31, 1997. The Company presently has no other unused
internal sources of liquidity other than cash (or equivalents) on hand and no
external sources of liquidity such as a line of credit from a financial
institution.
During the year ending December 31, 1997 and until a Business Combination
is effected, the Company expects to generate interest income in excess of its
minimal operating expenses, exclusive of any due diligence and professional fees
incurred in connection with the identification and consummation of one or more
Business Combination.
The Company intends to enter into Business Combinations that will use
substantially all of the Company's available cash in one or two transactions and
structure such Business Combinations so that the current management of the
target business will remain in place. There can be no assurance, however, that
the Company will be able to effectuate a Business Combination, or that any such
Business Combination will be profitable. At the present time, there are no
Business Combinations under consideration that the Board of Directors considers
probable of consummation. The Board of Directors will have broad discretion in
its search for and negotiations with respect to a Business Combination.
Pending a Business Combination, the Company's assets will be invested as
management of the Company deems prudent, which investments may include, but not
be limited to, certificates of deposit, mutual funds, money-market accounts,
stocks, bonds or United States Government or municipal securities, provided,
however, that the Company will attempt to invest its assets in a manner that
will not result in the Company being required to register as an investment
company under the Investment Company Act of 1940.
The Company has used and intends to continue to use various sources in its
search for potential Business Combinations including its officers and directors,
consultants, special advisors, securities broker-dealers, venture capitalists,
members of the financial community and others who may present management with
unsolicited proposals. The Company may be required to pay a fee in connection
with the consummation of a Business Combination.
The Company does not intend to restrict its search to any specific kind of
industry or business. The Company may investigate and ultimately acquire a
venture that is in its preliminary or development stage, is already in
operation, or in various stages of its corporate existence and development. The
Board of Directors cannot predict at this time the status or nature of any
venture in which the Company may participate. A potential venture might need
additional capital or merely desire to have its shares publicly traded. The
Board of Directors believes that the Company could provide a potential public
vehicle for a private entity interested in becoming a publicly held corporation
without the time and expense typically associated with an initial public
offering.
Presently, the Company cannot predict the manner in which it might
participate in a prospective Business Combination. Each separate potential
opportunity will be reviewed and, upon the basis of that review, a suitable
legal structure or method of participation will be chosen. The particular manner
in which the Company participates in a specific business opportunity will depend
upon the nature of that opportunity, the respective needs and desires of the
Company and management of the opportunity, and the relative negotiating strength
of the parties involved. Actual participation in a Business Combination may take
the form of an asset purchase, lease, joint venture, license, partnership, stock
purchase, reorganization, merger or consolidation. The Company may act directly
or indirectly through an interest in a partnership, corporation, or other form
of organization. The Company could participate in opportunities through the
purchase of minority stock positions.
The Company may be required to seek additional capital in order to
effecuate a Business Combination. There can be no assurance that additional
financing will be available to the Company or, if available, that it can be
obtained on acceptable terms. Failure to obtain such financing could result in
the delay or abandonment of one or more potential Business Combinations.
I-9
<PAGE>
Inflation and Seasonality
Inflation did not significantly impact the Company's business during 1996,
nor did the Company believe its business to be seasonal.
Forward-Looking Statements
This report contains forward-looking statements and information that is
based on management's beliefs and assumptions, as well as information currently
available to management. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. Such statements are
subject to certain risks, uncertainties and assumptions. Should one or more of
these risks or uncertainties materialize, or should the underlying assumptions
prove incorrect, actual results may vary materially from those anticipated,
estimated or expected.
Item 8. Financial Statements and Supplementary Data
See index to financial statements included as part of Item 14 below.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
I-10
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant.
Management
As of April 15, 1997, the executive officers and directors of The Western
Systems Corp. (the "Company") were as follows:
<TABLE>
<CAPTION>
Term of Office
Present Position Director Class of as Director
Name Age with the Company Since Director Expires
- ------------------------------- ------ -------------------------- ------------ ----------- ----------------
<S> <C> <C> <C> <C> <C>
William J. Barrett ......... 57 Chief Executive Officer January III 1998
and Director 1992
Stuart M. Pellman ............ 55 Director January III 1998
1992
Herbert M. Gardner ......... 57 Director January II 1997
1992
C. Scott Bartlett, Jr. ...... 64 Director August I 1999
1991
Richard O. Starbird ......... 72 Director July 1992 I 1999
Howard Grafman ............... 68 Director July 1992 I 1999
Paulette Grafman ............ 50 Director September II 1997
1993
</TABLE>
The following information concerning the directors and executive officers
of the Company has been furnished by each of them.
William J. Barrett was elected Chief Executive Officer of the Company in
January 1997. He has served as a director of the Company since January 1992 and
as Secretary and Assistant Treasurer of the Company since August 1992. Mr.
Barrett has been principally employed as a Senior Vice President of Janney
Montgomery Scott Inc., an investment banking firm, for more than five years. Mr.
Barrett is a director of the following publicly-held corporations: Supreme
Industries, Inc., a company that manufactures specialized truck bodies,
Fredericks of Hollywood, Inc., an apparel marketing company, Shelter Components
Corporation, a distributor to the manufactured housing and recreation vehicle
industries and manufacturer of carpet and bathroom products, TGC Industries,
Inc., which provides geophysical services to the oil and gas industries and
manufactures and distributes specialty packaging products, and Chase Packaging
Corporation, a specialty packaging supplier.
Stuart M. Pellman served as President and Chief Executive Officer of the
Company from January 1992 until the Company's sale of its Transmedia Network
Franchise (the "Asset Sale") to its former franchisor, Transmedia Network, Inc.
("Network") in January 1997. Since the Asset Sale, Mr. Pellman has been
principally employed as an executive officer of Network. He continued to serve
as the Company's Chief Financial Officer and Chief Accounting Officer until
April 1997. He has been a director of the Company since January 1992. From May
1989 until September 1991, Mr. Pellman was a corporate securities attorney with,
and a member of, the San Francisco, California law firm of Steefel, Levitt &
Weiss. Prior thereto and since 1965, he was engaged in the private practice of
law in New York City. In 1979, he co-founded the law firm of Slade & Pellman in
New York City and was a member of that firm until December 1988. Commencing in
1986, Mr. Pellman supervised Slade & Pellman's representation as general counsel
to Network.
Herbert M. Gardner has served as a director of the Company since January
1992. Mr. Gardner has been principally employed as a Senior Vice President of
Janney Montgomery Scott Inc. for more than five years. Mr. Gardner is a director
of Network and also is a director of other publicly-held corporations as
follows: Shelter Components Corporation, Nu Horizons Electronics, Corp., an
electronics components distributor, TGC Industries, Inc., Hirsch International
Corp., a distributor of computerized embroidery machines and a developer of
related software, and Chase Packaging Corporation. Mr. Gardner also is Chairman
of the Board of Supreme Industries, Inc., a manufacturer of specialized truck
bodies and shuttle buses.
I-11
<PAGE>
C. Scott Bartlett has served as a director of the Company since August
1991. Since November 1990, he has been principally engaged as a consultant to
the banking industry and in conjunction with such activities served as Senior
Vice President and Chief Credit Officer of MTB Bank from 1992 to 1994. From
April 1984 to November 1990, he was an Executive Vice President and Chairman of
the Credit Policy Committee of National Westminster Bank USA. He is also a
director of Harvard Industries, Inc., an automotive supplier, NVR, Inc., a
homebuilding company, Darling International, Inc., a recycler of animal
by-products, Bucyrus-Erie Company, a manufacturer of surface mining equipment,
Janus Industries, Inc., a holding company, and The Bibb Company, a manufacturer
of bedding, napery and industrial fabrics.
Richard O. Starbird has served as a director of the Company since July
1992. Mr. Starbird has been Emeritus Professor at Western Washington University
in Bellingham, Washington since 1983, where he is currently engaged as a
graduate school advisor, researcher and writer. Mr. Starbird also is a director
of Fredericks of Hollywood, Inc.
Howard Grafman has served as a director of the Company since July 1992.
Since February 1996, Mr. Grafman has been principally engaged as Chairman of the
Board of KRUZ-FM, a radio station based in Santa Barbara, California, and a
private investor. Mr. Grafman founded Century Broadcasting Corporation, an
independent operator of FM radio stations, in 1964 and served as its President
until 1987 and as one of its directors until 1992. Prior to founding Century
Broadcasting Corporation, Mr. Grafman was actively involved in the
communications and broadcasting industries.
Paulette W. Grafman has served as a director of the Company since September
1993 and served as Executive Vice President of the Company from September 1993
until January 1996. Since February 1996, Ms. Grafman has been principally
engaged as President and General Manager of KRUZ- FM. Ms. Grafman was Vice
President and General Manager of KMEL, an FM radio station in San Francisco,
California from November 1985 to November 1992, when the station was sold by
Century Broadcasting Corporation. During the prior 10 years, she held executive
and sales positions with several radio stations in Los Angeles. She served on
the Board of Directors of the Northern California Broadcasters Association in
1987 and 1988, and as an officer of the Association since 1989, including the
office of President in 1991 and 1992. She was principally engaged as a private
investor from November 1992 to September 1993. Howard Grafman and Paulette
Grafman are spouses.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "Commission"). Officers, directors and greater than 10% shareholders are
required by the Commission's regulations to furnish the Company with copies of
all Section 16(a) forms they file.
Based solely on review of copies of such forms furnished to the Company, or
written representations that no Form 5s were required to be filed by such
persons, the Company believes that during the year ended December 31, 1996,
there was compliance with all Section 16(a) filing requirements applicable to
its officers, directors and greater than 10% beneficial owners.
Item 11. Executive Compensation.
Summary Compensation Table
The following table sets forth, for the fiscal years indicated, all
compensation awarded to, earned by or paid to the chief executive officer
("CEO") of the Company. There was no executive officer of the Company, other
than the CEO, whose salary and bonus exceeded $100,000 with respect to the
fiscal year ended December 31, 1996.
I-12
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------------------------ ---------------------------
Other Annual All Other
Compensation Number of Compensation
Name and Principal Position Year Salary ($) Bonus ($) ($)(1)(2) Options ($)
- ----------------------------- ------- ------------- ------------ --------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Stuart M. Pellman, 1996 200,000 -- 4,680 -- --
President and Chief 1995 175,000 25,580 4,680 150,000 --
Executive Officer 1994 145,000 -- 4,680 -- --
</TABLE>
- --------------
(1) Perquisites and other personal benefits, securities or property received by
Mr. Pellman did not exceed the lesser of $50,000 or 10% of his annual salary
and bonus.
(2) Mr. Pellman's employment agreement required the Company to pay the premiums
(not exceeding $4,800 per annum) on term life insurance in the face amount
of $1,000,000 on the life of Mr. Pellman under policies owned by Mr.
Pellman. See "--Employment Agreements."
Option Grants
No options were granted to Mr. Pellman during 1996.
Aggregated Fiscal Year-End Option Value Table
The following table sets forth certain information concerning unexercised
options held as of December 31, 1996 by Mr. Pellman. No stock options were
exercised by Mr. Pellman during the fiscal year ended on such date.
AGGREGATED FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised in-the-
Options at December 31, Money Options at December 31,
1996(#) 1996 ($)(1)
Name Exercisable/ Unexercisable Exercisable/ Unexercisable
- ------------------- ----------------------------- -------------------------------
<S> <C> <C>
Stuart M. Pellman 287,500/0 $251,562/0
</TABLE>
- --------------
(1) Based on the closing price of a share of Common Stock ($.875 as reported by
the National Association of Securities Dealers Automated Quotation System on
December 31, 1996).
Director Compensation
Directors who are not officers or employees of the Company receive such
compensation for their services as the Board of Directors may from time to time
determine. Currently, directors who are not employees of the Company receive a
fee of $100 for each Board of Directors or committee meeting attended, plus
reasonable out-of-pocket expenses. Directors who are officers or employees of
the Company are not entitled to any compensation for their service as a
director.
Long-Term Incentive and Pension Plans
The Company does not have any long-term incentive or defined benefit
pension plans.
Employment Agreements
Mr. Pellman served as President and Chief Executive Officer of the Company
pursuant to an employment agreement that commenced as of January 1, 1995 and
terminated on December 31, 1996. Mr. Pellman received a base annual salary of
$200,000 during 1996. Pursuant to the terms of the employment agreement, the
Company paid Mr. Pellman an annual bonus equal to 5% of the Company's pre-tax
income up to $2,000,000 plus 6-1/2% of the Company's pre-tax income, if any,
over $2,000,000. Mr. Pellman did not receive a bonus pursuant to this clause at
the end of December 31, 1996. He also was not entitled to receive any bonus
payment as a result of the consummation of the Asset Sale. In addition, Mr.
Pellman received the sum of $25,000 in consideration of his
I-13
<PAGE>
agreement to enter into the employment agreement. Mr. Pellman's employment
agreement required the Company to pay the premium (not exceeding $4,800 per
annum) on term life insurance in the face amount of $1,000,000 on the life of
Mr. Pellman under policies owned by Mr. Pellman.
Compensation and Stock Option Committee Report on Executive Compensation
General
The Compensation and Stock Option Committee was established by the Board of
Directors in September 1993 to make recommendations to the Board of Directors
regarding compensation of executive officers and administration of the Company's
1992 Stock Option Plan. It acted one time by unanimous written consent during
1996. Messrs. Barrett, Bartlett and Starbird currently serve as members of the
Compensation and Stock Option Committee. Following the Asset Sale, Mr. Barrett
was elected Chief Executive Officer of the Company.
Compensation Philosophy
The Compensation and Stock Option Committee's executive compensation
philosophy is (and the Board of Directors was) to base management's pay, in
part, on the achievement of the Company's annual and long-term performance
goals, to provide competitive levels of compensation, to recognize individual
initiative, achievement and length of service to the Company, and to assist the
Company in attracting and retaining qualified management. The Compensation
Committee also believes that the potential for equity ownership by management is
beneficial in aligning management's and stockholders' interests in the
enhancement of stockholder value.
Salaries
Base salaries for the Company's executive officers are determined initially
by evaluating the responsibilities of the position held and the experience of
the individual and by reference to the competitive marketplace for management
talent, including a comparison of base salaries for comparable positions at
comparable companies. Annual salary adjustments are determined by evaluating the
competitive marketplace, the performance of the Company, the performance of the
executive particularly with respect to the ability to manage growth of the
Company, the length of the executive's service to the Company and any increased
responsibilities assumed by the executive.
Bonuses
The Company from time to time will consider the payment of bonuses to its
executive officers, although no formal plan currently exists, except as provided
in individual employment agreements. Bonuses would be determined based, first,
upon the level of achievement by the Company of its strategic and operating
goals and, second, upon the level of personal achievement by participants. The
achievement of goals by the Company includes, among other things, the
performance of the Company as measured by return on assets. The achievement of
personal goals includes the actual performance of the Company for which the
executive officer has responsibility as compared to the planned performance
thereof, the level of cost savings achieved by such executive officer, other
individual contributions, the ability to manage and motivate reporting employees
and the achievement of assigned projects. Mr. Pellman did not receive a bonus
for the year ended December 31, 1996.
Compensation of Chief Executive Officer
Mr. Pellman's base salary of $200,000 was based upon the factors described
in the "Salaries" paragraph above.
Stock Option Plan
It is the philosophy of the Compensation Committee that stock options
should be awarded only to key employees of the Company to promote long-term
interests between such employees and the Company's stockholders and to assist in
the retention of such employees. The Stock Option Committee did not award any
stock options to Mr. Pellman during the year ended December 31, 1996.
COMPENSATION AND STOCK OPTION COMMITTEE: William J. Barrett,
C. Scott Bartlett, Jr.
Richard O. Starbird
I-14
<PAGE>
COMMON STOCK PERFORMANCE
The following graph compares, for the periods indicated, the percentage
change in the cumulative total stockholder return on the Common Stock of the
Company (the "Common Stock") with the cumulative total return of (a) the Nasdaq
Market Index, a broad equity market index (the "Broad Market"), and (b) an index
consisting of the following publicly traded Miscellaneous Business Credit
Institutions with the same Standard Industrial Classification Code (6159) as the
Company: Allied Capital Lending Corp., Banca Quadrum S.A. de C.V. (ADR),
Financing Federal Corp., First Enterprise Financial Group, Inc., HPSC Inc.,
Metris Companies Inc., MLC Holdings Inc., PDS Financial Corp., Rockford
Industries Inc., Source Capital Corp., Southern Pacific Fund Corp., Student Loan
Marketing Association, Walnut Financial Service Inc. and Winfield Capital Corp.
(the "Industry Index").
COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN AMONG THE WESTERN
SYSTEMS CORP., INDUSTRY INDEX AND BROAD MARKET INDEX
<TABLE>
<CAPTION>
Fiscal Year Ending
------------------------------------------------------------
1992 1992 1993 1994 1995 1996
------- --------- ----------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
The Western Systems Corp. ...... 100 700.00 1,400.00 1,652.00 652.00 350.00
Industry Index .................. 100 101.06 73.73 56.71 109.99 154.82
Broad Market .................. 100 108.21 129.80 136.28 176.76 219.66
</TABLE>
[GRAPH OMITTED]
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information as of April 15, 1997
with respect to the beneficial ownership of Common Stock by (i) each person
known to the Company to be the beneficial owner of five percent or more thereof,
(ii) each director of the Company, (iii) the Chief Executive Officer and (iv)
all executive officers and directors as a group. All persons identified below as
holding options and/or Common Stock purchase warrants (the "Warrants") are
deemed to be beneficial owners of shares of Common Stock subject to such options
or purchasable upon exercise of such Warrants by reason of their right to
acquire such shares within 60 days after April 15, 1997, through the exercise of
such options and/or the Warrants. Unless otherwise indicated, the address for
each person or entity listed below is the Company's principal executive office.
I-15
<PAGE>
<TABLE>
<CAPTION>
Name and Address Shares Percentage
of Beneficial Owner(1) Beneficially Owned of Class
- --------------------------------------- --------------------- -------------
<S> <C> <C>
Stuart M. Pellman .................. 538,480(2) 6.2%
c/o Transmedia Network Inc.
475 Sansome Street
San Francisco, California 94111
Herbert M. Gardner .................. 447,254(3) 5.2%
William J. Barrett .................. 691,008(4) 8.0%
MassMutual Corporate Investors ...... 698,707(5) 8.1%
1295 State Street
Springfield, MA 01111
C. Scott Bartlett, Jr. ............... 56,281(6) *
Howard Grafman ..................... 144,762(7) 1.7%
Richard O. Starbird .................. 110,997(8) 1.3%
Paulette W. Grafman .................. 29,705(9) *
All Directors and Executive Officers
as a Group (7 persons) ............... 2,018,487(10) 23.4%
</TABLE>
- --------------
* Less than 1%
(1) All of such persons and entities have sole investment and voting power over
the shares listed as being beneficially owned by them.
(2) Includes (i) 287,500 shares subject to options and (ii) 132,646 shares owned
by an individual retirement account as to which Mr. Pellman is the
beneficiary (including 8,823 shares underlying Warrants).
(3) Includes (i) 6,000 shares underlying Warrants, (ii) 42,321 shares
beneficially owned by Mr. Gardner's spouse (including 7,352 shares
underlying Warrants), (iii) 8,333 shares owned by an individual retirement
account as to which Mr. Gardner is the beneficiary, and (iv) 256,298 shares
owned by Mr. Gardner's qualified plan (including 22,058 shares underlying
Warrants). Mr. Gardner disclaims beneficial ownership of the shares
beneficially owned by the members of his family.
(4) Includes (i) 38,705 shares underlying Warrants, (ii) 137,860 shares
beneficially owned by Mr. Barrett's spouse (including 17,646 shares
underlying Warrants), and (iii) 405,597 shares owned by Mr. Barrett's
qualified plan (including 44,117 shares underlying Warrants). Mr. Barrett
disclaims beneficial ownership of the shares beneficially owned by the
members of his family.
(5) Based upon Amendment No. 1 dated June 5, 1995 to a Statement on Schedule 13G
filed with the Commission by MassMutual Corporate Investors, MassMutual
Participation Partners and MassMutual Corporate Value Partners in which the
three entities indicate that they may be regarded as a group. MassMutual
Corporate Investors, MassMutual Participation Partners and MassMutual
Corporate Value Partners beneficially own 405,590, 54,000 and 56,000 shares
of Common Stock respectively. MassMutual Corporate Investors also holds
Warrants to purchase 183,117 shares of Common Stock, of which it may be
deemed the beneficial owner. The Boards of Directors of each of MassMutual
Corporate Investors, MassMutual Participation Partners and MassMutual
Corporate Value Partners have sole investment and voting power over the
respective securities of the Company held by each such entity. MassMutual
Corporate Investors and MassMutual Participation Partners are each
closed-end mutual funds whose shares are traded on the New York Stock
Exchange.
I-16
<PAGE>
(6) Includes (i) 8,399 shares held jointly with Mr. Bartlett's spouse, (ii)
36,000 shares subject to options and (iii) 5,882 shares underlying Warrants
held jointly with Mr. Bartlett's spouse.
(7) Includes (i) 6,000 shares subject to options, (ii) 17,205 shares underlying
Warrants and (iii) 5,000 shares held by Radio First International, Inc., of
which Mr. Grafman is a principal stockholder. Does not include shares
reported as beneficially owned by Paulette W. Grafman.
(8) Includes (i) 16,000 shares subject to options, and (ii) 14,705 shares
underlying Warrants.
(9) Includes 4,705 shares underlying Warrants. Does not include shares reported
as beneficially owned by Howard Grafman.
(10) Includes an aggregate of 345,500 shares subject to options and 370,315
shares underlying Warrants.
Item 13. Certain Relationships and Related Transactions.
Not applicable.
I-17
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
<TABLE>
(a) Financial Statements: Page
------
<S> <C> <C>
Report of Independent Auditors F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the Three Years in the Period ended
December 31, 1996 F-4
Consolidated Statement of Stockholders' Equity for the Three Years in the Period ended
December 31, 1996 F-5
Consolidated Statements of Cash Flows for the Three Years in the Period ended
December 31, 1996 F-6
Notes to Financial Statements F-8
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period covered by this report.
(c) Exhibits
2.1 Purchase Agreement dated as of November 15, 1996 by and between the Company and
Network, incorporated by reference as Exhibit A to the Company's Definitive Proxy
Statement for Special Meeting of Stockholders held on December 27, 1996.
3.1 Amended Certificate of Incorporation of the Company, incorporated by reference to
Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1991 (the "1991 10-K").
3.2 Certificate of Amendment to Amended Certificate of Incorporation, incorporated by
reference to Exhibit 3(d) to the Company's Registration Statement on Form S-1 (File No.
33-44845) (the "1992 Form S-1").
*3.3 Certificate of Amendment to Amended Certificate of Incorporation, filed with the
Secretary of State of the State of Delaware on January 3, 1997.
3.4 Amended and Restated By-Laws of the Company, incorporated by reference to Exhibit
3(b) to the Company's Registration Statement on Form S-1 (File No. 33-84234) (the
"1994 Form S-1").
4.1 Form of Common Stock Certificate, incorporated by reference to Exhibit 4(b) to the
1992 Form S-1.
4.2 Form of Warrant Certificate, incorporated by reference to Exhibit 4(b) to the 1994
Form S-1.
4.3 Warrant Agreement dated as of June 25, 1993, between the Registrant and American
Stock Transfer & Trust Company, as Warrant Agent, incorporated by reference to Exhibit
4(c) to the 1994 Form S-1.
4.4 Form of Amendment of Warrant Agreement, incorporated by reference to Exhibit 4(d) to
the 1994 Form S-1.
*10.1 The Company's 1992 Stock Option Plan, as amended through March 26, 1997.
10.2 Form of Indemnification Agreement between the Company and its officers and directors,
incorporated by reference to Exhibit 10(d) to the 1992 Form S-1.
10.3 Form of Registration Rights Agreement between the Company and certain of the Company's
stockholders, incorporated by reference to Exhibit 10(l) to the 1992 Form S-1.
*10.14 Franchise Termination Agreement dated as of January 2, 1997, by and between the
Company and Network.
11. Computation of earnings per share of Common Stock, incorporated by reference to
Exhibit 11 to the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
22. Subsidiaries of the Registrant, incorporated by reference to Exhibit 22 to the 1991 10-K.
</TABLE>
- --------------
*Filed herewith.
(d) Financial Statement Schedules: none
I-18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE WESTERN SYSTEMS CORP.
Date: March 26, 1997 and April 29, 1997
/s/ William J. Barrett
----------------------------------------
William J. Barrett
Chief Executive Officer and Director
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints William J. Barrett and Herbert M. Gardner his
true and lawful attorney-in-fact, each acting alone, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities to sign any and all amendments to this report, and to file
the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact or their substitutes, each acting
alone, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 26, 1997 /s/ William J. Barrett
----------------------------------------
William J. Barrett
Chief Executive Officer and Director
(Principal Executive Officer)
Date: March 26, 1997 /s/ Stuart M. Pellman
----------------------------------------
Stuart M. Pellman
Chief Financial Officer and Director
(Principal Financial Officer and
Principal Accounting Officer)
----------------------------------------
Date: March , 1997 C. Scott Bartlett, Jr.
Director
Date: March 26, 1997 /s/ Herbert M. Gardner
----------------------------------------
Herbert M. Gardner
Director
Date: March 26, 1997 /s/ Howard Grafman
----------------------------------------
Howard Grafman
Director
Date: March 26, 1997 /s/ Paulette Grafman
----------------------------------------
Paulette Grafman
Director
----------------------------------------
Date: March , 1997 Richard O. Starbird
Director
I-19
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page(s)
---------
<S> <C>
Independent Auditors' Report ......................................................... F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995 ........................ F-3
Consolidated Statements of Operations for the Three Years in the Period Ended
December 31, 1996 .................................................................. F-4
Consolidated Statement of Shareholders' Equity for the Three Years in the Period Ended
December 31, 1996 .................................................................. F-5
Consolidated Statements of Cash Flows for the Three Years in the Period Ended
December 31, 1996 .................................................................. F-6
Notes to Consolidated Financial Statements .......................................... F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors
The Western Systems Corp.
(formerly The Western Transmedia Company, Inc.)
San Francisco, California
We have audited the accompanying consolidated balance sheets of The Western
Systems Corp. (formerly The Western Transmedia Company, Inc.), and subsidiary as
of December 31, 1996 and 1995 and the consolidated statements of operations,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion 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 audits 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 The Western
Systems Corp. (formerly The Western Transmedia Company, Inc.) and subsidiary as
of December 31, 1996 and 1995 and the results of its operations and its cash
flows for the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
LAZAR, LEVINE & COMPANY LLP
New York, New York
March 12, 1997
F-2
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
--------------- ---------------
<S> <C> <C>
CURRENT ASSETS:
Cash (including interest bearing deposits) (Note 2c) ......... $ 2,073,697 $ 3,040,620
Accounts receivable (Note 2e) ................................. 107,717 134,544
Rights to receive--net of reserve for unrealizable rights to
receive (Notes 2c and 2f) .................................... 3,335,763 2,321,626
Deferred income taxes (Note 10) .............................. 857,000 --
Prepaid expenses and other current assets ..................... 194,800 133,590
------------ ------------
TOTAL CURRENT ASSETS .......................................... 6,568,977 5,630,380
PROPERTY AND EQUIPMENT--NET (Notes 2g, 3 and 6) ............... 81,871 109,376
OTHER ASSETS (Notes 2h, 4 and 5) .............................. 468,224 464,220
------------ ------------
TOTAL ASSETS ................................................... $ 7,119,072 $ 6,203,976
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable--rights to receive (Note 2f) ............... $ 633,436 $ 365,941
Accrued liabilities .......................................... 202,112 96,681
Capitalized lease obligations--current portion (Note 6) ...... 3,576 2,854
------------ ------------
TOTAL CURRENT LIABILITIES .................................... 839,124 465,476
------------ ------------
LONG-TERM DEBT (Note 6) ....................................... 12,026 15,602
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 5, 9, 12 and 13)
SHAREHOLDERS' EQUITY (Notes 7 and 8):
Preferred stock, $.10 par value, 2,000,000 shares authorized;
none issued or outstanding .................................... -- --
Common stock, $.60 par value, 25,000,000 shares authorized;
7,903,421 issued and outstanding for December 31, 1996 and
1995, respectively .......................................... 4,742,053 4,742,053
Additional paid-in capital .................................... 5,542,062 5,542,062
Retained earnings (deficit) ................................. (4,016,193) (4,561,217)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY .................................... 6,267,922 5,722,898
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................... $ 7,119,072 $ 6,203,976
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------
1996 1995 1994
-------------- -------------- -------------
<S> <C> <C> <C>
NET SALES (Note 2i) ........................... $ 9,301,155 $ 11,368,903 $ 8,698,738
COST OF SALES (Note 2i) ........................ 6,115,503 7,576,314 5,807,509
----------- ------------ -----------
GROSS PROFIT ................................. 3,185,652 3,792,589 2,891,229
----------- ------------ -----------
EXPENSES AND OTHER (INCOME):
Franchise costs .............................. 1,285,214 1,586,781 1,212,262
Operating expenses ........................... 2,341,675 2,339,648 1,996,347
Interest expense .............................. 3,690 1,560 2,555
Interest income .............................. (132,951) (146,342) (38,941)
----------- ------------ -----------
3,497,628 3,781,647 3,172,223
----------- ------------ -----------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES ................................. (311,976) 10,942 (280,994)
PROVISION (CREDIT) FOR INCOME TAXES
(Notes 2j and 10) ........................... (857,000) -- --
----------- ------------ -----------
NET INCOME (LOSS) .............................. $ 545,024 $ 10,942 $ (280,994)
=========== ============ ===========
INCOME (LOSS) PER COMMON SHARE (Note 11) ...... $.07 $ -- $(.04)
==== ==== =====
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (Notes 7 and 11) ......... 7,955,752 8,030,685 7,072,754
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Shares Additional Retained Common Total
(As Restated Common Paid-In Earnings Stock Shareholders'
Notes 7a and 7b) Stock Capital (Deficit) Subscribed Equity
------------------- ------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 6,960,169 $4,176,101 $3,612,109 $(4,291,165) $ 226,875 $3,723,920
Shares issued in connection
with exercise of franchise
option (Note 7c) ......... 60,000 36,000 144,000 -- (180,000) --
Shares issued re:
employment agreement
(Note 7c) .................. 25,000 15,000 31,875 -- (46,875) --
Exercise of stock options ... 17,500 10,500 2,875 -- -- 13,375
Shares issued upon exercise
of warrants in unit
offering (Note 7d) ......... 800,000 480,000 1,658,393 -- -- 2,138,393
Exercise of warrants
(Note 7d) .................. 5,754 3,452 13,810 -- -- 17,262
Adjustment for fractional
shares resulting from
reverse stock split ...... (2) -- -- -- -- --
Net loss for the year ended
December 31, 1994 ......... -- -- -- (280,994) -- (280,994)
----------- ----------- ----------- ------------ ---------- -----------
Balance at December 31, 1994 7,868,421 4,721,053 5,463,062 (4,572,159) -- 5,611,956
Shares issued in connection
with exercise of franchise
option (Note 7e) ......... 35,000 21,000 79,000 -- -- 100,000
Net income for the year
ended December 31, 1995 -- -- -- 10,942 -- 10,942
----------- ----------- ----------- ------------ ---------- -----------
Balance at December 31, 1995 7,903,421 4,742,053 5,542,062 (4,561,217) -- 5,722,898
Net income for the year
ended December 31, 1996 -- -- -- 545,024 -- 545,024
----------- ----------- ----------- ------------ ---------- -----------
BALANCE AT
DECEMBER 31, 1996 ......... 7,903,421 $4,742,053 $5,542,062 $(4,016,193) $ -- $6,267,922
=========== =========== =========== ============ ========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------------
1996 1995 1994
--------------- -------------- ---------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from franchisor for cardholder restaurant
spending ................................................ $ 9,322,378 $11,390,947 $ 8,533,074
Cash paid for franchise fees .............................. (1,288,992) (1,591,277) (1,188,947)
Cash paid for rights to receive ........................... (7,035,292) (7,237,918) (7,698,146)
Cash paid to suppliers and employees ..................... (2,051,261) (2,314,820) (1,754,795)
Interest received .......................................... 132,951 146,342 38,941
Interest paid ............................................. (3,690) (1,560) (2,555)
------------ ------------- ------------
Net cash provided (utilized) by operating
activities ............................................. (923,906) 391,714 (2,072,428)
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ........................ (39,500) (22,024) (59,053)
Security deposits .......................................... (663) (805) (4,064)
------------ ------------- ------------
Net cash (utilized) by investing activities ............ (40,163) (22,829) (63,117)
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options .................. -- -- 13,375
Proceeds from exercise of warrants ........................ -- -- 17,262
Proceeds from sale of units .............................. -- -- 2,400,000
Expenses associated with offering of stock and units ...... -- -- (261,607)
Payments on capital lease obligations ..................... (2,854) (2,674) (5,121)
------------ ------------- ------------
Net cash (utilized) provided by financing
activities ............................................. (2,854) (2,674) 2,163,909
------------ ------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ............................................. (966,923) 366,211 28,364
Cash and cash equivalents, at beginning of year ......... 3,040,620 2,674,409 2,646,045
------------ ------------- ------------
CASH AND CASH EQUIVALENTS, AT END OF YEAR $ 2,073,697 $ 3,040,620 $ 2,674,409
============ ============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------------
1996 1995 1994
------------- ------------- ---------------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME (LOSS) TO
NET CASH PROVIDED (UTILIZED) BY
OPERATING ACTIVITIES:
Net income (loss) .................................... $ 545,024 $ 10,942 $ (280,994)
Adjustments to reconcile net income (loss) to net cash
provided (utilized) by operating activities: .........
Depreciation and amortization ..................... 63,664 53,348 43,731
Reserve for unrealizable rights to receive ......... 206,301 194,112 158,570
Other ............................................. -- 897 --
Deferred tax asset ................................. (857,000) -- --
Changes in assets and liabilities: ..................
Decrease (increase) in accounts receivable ......... 26,826 14,696 (143,021)
Decrease (increase) in rights to receive ............ (1,220,438) 753,181 2,564,153)
(Increase) decrease in prepaid expenses and other
current assets ....................................... (61,209) (100,283) 4,471
(Decrease) increase in accounts payable--rights to
receive ............................................. 267,496 (412,624) 672,148
(Decrease) increase in accrued expenses ............ 105,430 (122,555) 36,820
------------ ---------- -------------
Net cash provided (utilized) by operating
activities ....................................... $ (923,906) $ 391,714 $(2,072,428)
============ ========== =============
</TABLE>
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
a) During the year ended December 31, 1994, the Company acquired the
franchise rights for the states of Washington and Nevada in exchange for
an aggregate of 60,000 shares of common stock. These shares are valued by
the Company at $180,000.
b) During the year ended December 31, 1995, the Company acquired the
franchise rights for the state of Oregon in exchange for 35,000 shares of
its common stock. These shares are valued by the Company at $100,000.
c) During the years ended December 31, 1995 and 1994 the Company entered into
capitalized lease obligations aggregating $15,190 and $6,263,
respectively, for new office equipment.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 1--DESCRIPTION OF COMPANY:
On January 3, 1997, the Company completed a sale of its Transmedia Network
Inc. (Network) franchise and substantially all of its operating assets, other
than cash and cash equivalents, to Network. This sale is described in Footnote
13. The following information and the information in Footnotes 2 - 12 describes
the business carried on by the Company prior to the asset sale.
The Western Systems Corp. (formerly The Western Transmedia Company, Inc.),
the "Company", was incorporated in the State of Delaware on May 30, 1978, under
the name of Vigilance Systems Corp.
In accordance with Statement of Financial Accounting Standards No. 7, the
Company was treated as a development stage company from January 1, 1991, the
date the Company began devoting substantially all of its efforts towards
establishing a new business, through September 30, 1993. During this period, the
Company incurred a cumulative loss of $1,009,443.
In December 1991, the Company, through an exchange of stock, acquired 100%
of the shares of a newly formed affiliate, TM West Corp. ("TM West"). This
transaction was accounted for as the reorganization of entities under common
control which is accounted for utilizing the pooling of interests method. TM
West had raised approximately $150,000 in a private offering of its common stock
in October 1991. In December 1991, TM West entered into a franchise agreement
with Network . See also Note 5.
The franchise agreement (which was assigned by TM West to the Company in
May 1992) allowed the Company to acquire rights to receive goods and services
from restaurants ("Rights to Receive" --see Note 2f) which are then sold to the
franchisors' cardholders for cash. The Rights to Receive are primarily purchased
for cash or obtained in exchange for media advertising and other services
purchased by the Company on behalf of the restaurants.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company's financial statements are prepared in accordance with
generally accepted accounting principles (GAAP). Those principles considered
particularly significant are detailed below.
(a) Use of Estimates:
In preparing financial statements in accordance with generally accepted
accounting principles, management makes certain estimates and assumptions, where
applicable, that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting period. While actual results could differ from those estimates,
management does not expect such variances, if any, to have a material effect on
the financial statements.
(b) Principles of Consolidation:
The consolidated financial statements include the accounts of The Western
Systems Corp. and its wholly-owned subsidiary, TM West, an inactive company.
All material intercompany balances and transactions have been eliminated.
(c) Concentration of Credit Risk/ Fair Value:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments and rights
to receive.
The Company maintains significant cash investments, which exceed the
Federal depository insurance coverage limit, primarily with one financial
institution. The Company performs periodic reviews of the relative credit rating
of this institution as part of its investment strategy.
Concentration with regards to rights to receive (see Note 2f below) are
limited due to the Company's large customer base. However, at December 31, 1996
all of these rights to receive do pertain to the restaurant industry.
F-8
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
The carrying amounts of cash and cash equivalents, trade receivables, other
current assets, accounts payable and debt obligations approximate fair value.
(d) Statements of Cash Flows:
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents.
(e) Allowance for Doubtful Accounts:
An allowance for doubtful accounts has not been established as of December
31, 1996 and 1995, since accounts receivable as reflected on the balance sheet
consists entirely of cash collected by and in transit from the franchisor (see
Note 5).
(f) Rights to Receive:
Rights to Receive (see Note 5) are composed primarily of food and beverage
credits due from restaurants. Rights to Receive are stated at cost which
approximates 50% of the retail value of Rights to Receive obtained. Cost is
determined by the first-in, first-out method. Accounts payable--Rights to
Receive represents the unfunded portion of the total commitment.
The Company reviews the realizability of the Rights to Receive on a
periodic basis and writes-off those amounts receivable from restaurants that
have ceased operations or whose credits are not utilized by the franchisors'
cardholders. The analysis of rights to receive is as follows:
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------
Total Funded Unfunded
------------- ------------- ----------
<S> <C> <C> <C>
Cost ............................................. $3,722,523 $3,089,087 $633,436
Reserve for unrealizable rights to receive ...... (386,760) (386,760) --
----------- ----------- ---------
Net ............................................. $3,335,763 $2,702,327 $633,436
=========== =========== =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
------------------------------------------
Total Funded Unfunded
------------- ------------- ----------
<S> <C> <C> <C>
Cost ............................................. $2,616,041 $2,250,100 $365,941
Reserve for unrealizable rights to receive ...... (294,415) (294,415) --
----------- ----------- ---------
Net ............................................. $2,321,626 $1,955,685 $365,941
=========== =========== =========
</TABLE>
(g) Property and Equipment:
Property and equipment are stated at cost. Depreciation on property and
equipment is provided on a straight-line basis over the estimated useful lives
of the assets of 5 to 7 years. Leasehold improvements are amortized over the
term of the lease. Maintenance and repairs are charged to operating expenses as
incurred; renewals and betterments are capitalized.
Depreciation expense for the years ended December 31, 1996, 1995 and 1994
aggregated $28,629, $25,498 and $16,631, respectively.
(h) Amortization:
The cost of the franchise rights acquired (see Note 5) is being amortized
on a straight-line basis through the end of the franchise term. Amortization
expense charged to operations for the years ended December 31, 1996, 1995 and
1994 aggregated $31,600, $27,850 and $27,100, respectively.
F-9
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(Continued)
(i) Net Sales/Cost of Sales:
Net sales represent the retail value of the Rights to Receive sold, less up
to the 25% savings offered to the franchisors' cardholders. A sale is recognized
when the franchisor (see Note 5) receives a restaurant charge card receipt from
a restaurant in the Company's franchise area, indicating that a cardholder has
charged a meal. The cost of a sale consists of the actual cost of rights to
receive from a restaurant (see Note 2f above).
Revenues from card membership fees generated prior to 1996 were not been
material since the Company waived substantially all first year membership fees.
The Company received no portion of renewal fees.
Additionally, in January 1996, Network initiated a policy to offer both new
and existing cardholders an alternative to the traditional arrangement of a 25%
savings with an annual membership fee of $50.00. The new program provides a 20%
savings to cardholders with no annual fee so long as cardholder usage is at
least $200 during each membership year. Since January 31, 1996 substantially all
new cardholders were enrolled in the 20% Program (see Note 5).
(j) Income Taxes:
In February 1992, the Financial Accounting Standards Board issued Statement
No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires the use
of the asset and liability approach of providing for income taxes and required
implementation no later than for fiscal years beginning after December 15, 1992.
Effective January 1, 1993 the Company adopted the provisions of SFAS 109. (See
also, Note 10).
(k) Reclassifications:
Certain reclassifications were made to the 1995 and 1994 financial
statements to conform to the current year's reporting format.
NOTE 3--PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1995
-------- --------
<S> <C> <C>
Furniture and fixtures .............................. $ 70,964 $ 69,990
Office equipment .................................... 89,744 89,594
Leasehold improvements .............................. 1,285 1,285
--------- ---------
161,993 160,869
Less: accumulated depreciation and amortization ...... 80,122 51,493
--------- ---------
$ 81,871 $109,376
========= =========
</TABLE>
NOTE 4--OTHER ASSETS:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
------- --------
<S> <C> <C>
Other assets consists of the following:
Franchise agreement--net of accumulated amortization of $127,200
and $95,600 for 1996 and 1995, respectively (Notes 2g and 5) ...... $423,800 $455,400
Security deposits ................................................ 9,483 8,820
Point of sale equipment--net of accumulated amortization of $3,435
for 1996 ......................................................... 34,941 --
--------- ---------
$468,224 $464,220
========= =========
</TABLE>
F-10
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 5--FRANCHISE AGREEMENT:
TM West, a wholly-owned subsidiary of the Company (see Note 1), was formed
for the purpose of negotiating and entering into a franchise agreement with
Network. This franchise agreement was executed in December, 1991, and assigned
by TM West to the Company in May 1992. The term of the franchise agreement was
for 10 years with an option exercisable by the Company for two additional
successive 10 year periods, provided certain conditions are met. In connection
with this operation, the Company changed its name to The Western Transmedia
Company, Inc. (see Note 1).
Under the initial franchise agreement, the Company acquired the exclusive
right to operate a franchise in the state of California, the primary business of
which is the acquisition of "Rights to Receive" from restaurants located in
California that accept the Transmedia Card (a private charge card marketed and
issued by Network) and the sale of such Rights to Receive to holders of the card
who are then entitled to either a 25% or 20% savings from listed menu prices
when dining at participating restaurants.
Restaurants that join the Transmedia program are provided with two of their
essential needs: advance financing and additional diners. The Company purchases
for cash, and in some instances, prepaid advertising, from full service
restaurants, food and beverage credits (Rights to Receive) which are then used
by card members when patronizing such restaurants. Rights to Receive are
purchased in an amount equal to approximately 50% of the listed menu prices of
such food and beverage credits.
The Company derives its revenues from the difference between the amount it
pays to restaurants for the food and beverage credits and the cardmember's
charges at such restaurants net of the up to 25% savings (exclusive of tip and
applicable taxes) and franchise fees payable to Network. The Company also
receives 40% of the Restaurant Card membership fee for the initial year of
membership of cardholders solicited by the Company and no portion of any renewal
fees. However, the Company and Network have waived substantially all first year
membership fees in connection with its marketing programs. Additionally, in
January 1996, Network initiated a policy to offer both new and existing
cardholders an alternative to the traditional arrangement of a 25% savings with
an annual membership fee of $50.00. The new program provides a 20% savings to
cardholders with no annual fee so long as cardholder usage is least $200 during
each membership year. Since January 1, 1996 substantially all new cardholders
were enrolled in the 20% Program (see Note 2(i)).
The franchise agreement to operate in California, provided for an initial
franchise fee of $250,000 (which was paid in July 1992) as well as 150,000
shares of common stock of the Company (see Note 7b), which shares were issued in
January 1992. The franchise agreement also provided for payments to Network's
advertising and promotion fund in the amount of $250,000; one-half of which was
paid with the initial franchise fee and the balance to be paid in 12 equal
consecutive monthly installments, without interest, commencing in July 1993. The
funds for advertising and promotion were to be used by Network for the exclusive
benefit of the Company during the two year period following the effective date
of the franchise agreement. Effective September 30, 1993 the Company entered
into an agreement with Network whereby substantially all local advertising
expenses would be paid directly by the Company, instead of through the
advertising and promotional fund to which the Company had contributed. As a
result of this agreement, the Company's remaining obligation under this note was
terminated. In addition, Network reimbursed the Company approximately $55,000
for the unused portion of the fund contributed by the Company.
In December 1993, the Company exercised it's option to acquire the
franchise to operate in the state of Washington through the issuance of 50,000
shares of common stock to Network valued by the Company at $150,000. The Company
also acquired the franchise to operate in the City of Reno, Nevada and the
Nevada portion of the Lake Tahoe resort area by issuing 10,000 shares of common
stock to Network at a value of $30,000. The Company also exercised an option in
June, 1995 to operate in the state of Oregon for an initial payment of $100,000.
The Company issued 35,000 shares of its common stock to effect this payment.
For each of the franchises, the Company was also required to pay Network a
71/2% general service charge and a 21/2% advertising fee based on the gross
dollar amount of food and beverage credits used by cardmembers
F-11
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 5--FRANCHISE AGREEMENT--(Continued)
within each territory. The Company was also required to pay a miscellaneous
administrative fee based upon the number of participating restaurants and charge
card transactions during any given month. Additionally, the Company was subject
to a non-compete agreement.
See Note 13 re: subsequent event--sale of substantially all operating
assets.
NOTE 6--LONG-TERM DEBT:
The Company is the lessee of office and computer equipment through leases
which expire in years through 2000. The assets (and liability) under these
leases are recorded at the lower of the present value of the minimum lease
payments or the fair market value of the asset. The assets are depreciated over
their estimated productive lives. Depreciation of assets under capitalized
leases, included in depreciation expense for the years ended December 31, 1996,
1995 and 1994, aggregated $5,250, $3,381 and $2,914, respectively.
Minimum future lease payments under capitalized leases as of December 31,
1996 and for each of the next four fiscal years and in the aggregate are as
follows:
<TABLE>
<S> <C>
1997 .................................... $ 6,544
1998 .................................... 5,583
1999 .................................... 4,349
2000 .................................... 6,324
-------
Total minimum lease payments ............ 22,800
Less: amount representing interest ...... 7,198
-------
$15,602
=======
</TABLE>
The interest rate has been calculated at approximately 10% and was based
upon the lower of the Company's incremental borrowing rate at the inception of
the lease or the lessor's implicit rate of return.
In connection with the sale of the Company's assets, subsequent to the
balance sheet date, the leases and the liabilities thereunder were assigned to
Network (see Note 13).
NOTE 7--COMMON STOCK:
(a) In December 1991, the Company effected a reverse stock split of its
issued and outstanding common stock on a one (1) for thirty (30) basis.
The number of authorized shares (25,000,000) was not changed.
In May 1992, the Company effected a second reverse stock split on a one
(1) for two (2) basis resulting in 1,500,000 shares, $.60 par value,
issued and outstanding. The number of authorized shares was not changed.
All references to the number of common shares and per share amounts in
the accompanying financial statements, have been restated to reflect the
reverse stock splits.
(b) In January 1992, the Company issued 150,000 shares, as restated, of its
common stock to Network (see Note 5) in connection with the franchise
agreement. These shares were issued at a post reverse stock split price
of $.14 per share.
In July 1992, the Company completed a private placement of 3,397,317
shares of its common stock at a price of $.60 per share (par value) which
yielded net proceeds of approximately $1,966,000. With the completion of
this private placement, the Company had 4,897,265 shares of its common
stock outstanding. In addition, during 1991 and 1992 the Company also
expended approximately $369,000 in costs associated with a terminated
public offering.
F-12
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 7--COMMON STOCK--(Continued)
(c) In July 1993, the Company completed a private placement of 1,764,624
units (each unit consisting of one share of common stock and one common
stock purchase warrant) at a price of $1.70 per unit which yielded net
proceeds of approximately $2,625,000. In November 1993, the Company also
completed a private placement of 294,117 units (each unit consisting of
one share of common stock and one common stock purchase warrant) at a
price of $1.70 per unit for net proceeds of approximately $463,000. The
warrants are exercisable at a price of $3.00 per share through December
1994 and at $4.00 per share thereafter and through December 1997. The
warrants are also redeemable at a price of $1.00 per warrant, at the
option of the Company, based upon certain circumstances.
In July 1993, the Company also issued 2,500 shares of common stock in
lieu of consulting fees aggregating $6,250.
Pursuant to the terms of a employment agreement with an officer of the
Company (see Note 12a) the Company reflected $46,875 as additional
compensation for the year ended December 31, 1993. Payment was made by
issuing 25,000 shares of common stock. The value of the shares is
included in common stock subscribed as of December 31, 1993.
As payment for the exercise of franchise options for the states of
Washington and the City of Reno, Nevada and the Nevada portion of the
Lake Tahoe resort area (see Note 5), the Company has agreed to issue
60,000 shares of common stock to Network. These shares are valued by the
Company at $180,000. This amount is also included in common stock
subscribed as of December 31, 1993.
(d) In December 1994, through a unit offering, warrant holders of 800,000
warrants exchanged their warrants and paid $3.00 per warrant for a unit
consisting of a share of common stock and a new warrant. This offering
resulted in net proceeds to the Company of $2,138,393. These new warrants
are exercisable at a price of $4.00 per share through December 31, 1997.
In addition, in December 1994, holders of 5,754 existing warrants
exercised their right to purchase common stock at a price of $3.00 per
share.
(e) In June 1995, as payment for the exercise of a franchise option for the
state of Oregon, the Company issued 35,000 shares of its common stock to
Network. These shares are valued by the Company at $100,000.
NOTE 8--STOCK OPTION PLAN:
The Company has established a Stock Option Plan (the "Plan"), as amended,
under which options to purchase up to a maximum of 750,000 shares of common
stock may be granted to officers and other key employees. Stock options granted
under this Plan, which may be either incentive stock options or nonqualified
stock options for federal income tax purposes, expire up to ten years after date
of grant and become exercisable over a three year period. Employees who have
left the Company have 90 days to exercise their options. In December 1996, the
stockholders agreed to an amendment to the Plan, whereby in the event of a sale
of the assets of the Company (see Note 13) all options outstanding would become
immediately exercisable without regard to any vesting provisions.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation" requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing
F-13
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 8--STOCK OPTION PLAN--(Continued)
model with the following weighted average assumptions for 1996 and 1995,
respectively: risk-free interest rates of 6.8 % and 8.4%; volatility factors of
the expected market price of the Company's common stock of .41 and .38; and a
weighted average expected life of the options of 7 1/2 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
1996 1995
----------- ------------
<S> <C> <C>
Net income
As reported ............ $545,024 $ 10,942
Pro forma ............... 475,054 (85,248)
Primary earnings per share
As reported ............ $ .07 $ --
Pro forma ............... .06 (.01)
</TABLE>
A summary of stock activity, and related information for the years ended
December 31 follows:
<TABLE>
<CAPTION>
Weighted Average
Options Exercise Price
------- ----------------
<S> <C> <C>
Outstanding, December 31, 1993 ....................................... 349,000 $1.72
Granted ............................................................ 32,500 3.25
Exercised ......................................................... (17,500) .76
Cancelled ......................................................... (12,500) 2.39
------- -----
Outstanding, December 31, 1994 ....................................... 351,500 1.88
Granted ............................................................ 320,000 2.85
Exercised ......................................................... -- --
Cancelled ......................................................... (2,500) 1.75
------- -----
Outstanding, December 31, 1995 ....................................... 669,000 2.35
Weighted average fair value of options granted during the year ...... .94
Granted ............................................................ 50,000 1.94
Exercised ......................................................... -- --
Cancelled ......................................................... (245,000) 2.46
------- -----
Outstanding, December 31, 1996 .................................... 474,000 $2.24
======= =====
Weighted average fair value of options granted during the year ...... $.18
Options exercisable as of:
December 31, 1994 ................................................... 106,833 $1.43
December 31, 1995 ................................................... 179,833 1.61
December 31, 1996 ................................................... 278,167 2.02
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 ranged from
$.60 to $3.75. The weighted average remaining contractual life of these options
is 8 years.
F-14
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 9--BUSINESS CONCENTRATIONS:
Most of the Company's participating restaurants are located in the San
Francisco/Los Angeles areas. No single participating restaurant accounted for
more than 5% of the Company's sales in any fiscal year presented.
No single participating restaurant's Rights to receive balance was greater
than 5% of the total Rights to receive balance at December 31, 1996 and 1995.
NOTE 10--INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
--------------------------------
1996 1995 1994
------------- ------- ------
<S> <C> <C> <C>
Current taxes:
Federal ....................................... $ -- $-- $--
State ....................................... -- -- --
----------- ---- ----
Total .................................... -- -- --
----------- ---- ----
Deferred taxes:
Federal .................................... (104,000) -- --
State ....................................... (33,000) -- --
----------- ---- ----
Total .................................... (137,000) -- --
----------- ---- ----
Benefit of operating loss carryforwards ...... (720,000) -- --
----------- ---- ----
Provision (credit) for income taxes ......... $(857,000) $-- $--
=========== ==== ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts for assets and liabilities for financial reporting
purposes as well as the effect of operating loss carryforwards. Significant
components of the Company's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ -------------
<S> <C> <C>
Tax effects of:
Operating loss carryforwards ......... $720,000 $ 680,000
Allowance for rights to receive ...... 140,000 115,000
Property and equipment ............... (3,000) (2,500)
--------- ----------
Gross deferred tax asset ............... 857,000 792,500
Valuation allowance ..................... -- (792,500)
--------- ----------
Net deferred tax asset .................. $857,000 $ --
========= ==========
</TABLE>
The Company has available at December 31, 1996 and 1995, unused operating
loss carryforwards of approximately $1,950,000 and $1,744,000 respectively which
expire in various years through 2011. As of December 31, 1996, the Company has
recorded the tax benefits associated with future deductible temporary
differences and NOL carryforwards since it generated taxable income in
connection with a sale of its operating assets in January 1997, subsequent to
the balance sheet date (see Note 13).
NOTE 11--EARNINGS (LOSS) PER SHARE:
Earnings (loss) per share has been computed on the basis of the weighted
average number of common shares and common equivalent shares outstanding during
each period presented. The effect on earnings (loss) per share resulting from
the exercise of common stock warrants and options is antidilutive and therefore
not shown for 1994.
F-15
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 12--COMMITMENTS AND CONTINGENCIES:
(a) Employment/Consulting Agreements:
The Company entered into an employment agreement with its Chief Executive
Officer, which agreement commenced January 1, 1995 and expired on December 31,
1996. The agreement provided for a base annual salary of $175,000 for the first
year and $200,000 for 1996. This employee is also entitled to a bonus, based
upon pre-tax earnings, of 5% on the first $2,000,000 and 6 1/2% on all earnings
in excess of $2,000,000. The employee was also granted options to acquire
150,000 shares of common stock at prices ranging from $2.82 to $3.75 per share.
The employment agreement also contains provisions for a covenant not to compete
in the event of termination and various buy-out provisions in the event of
termination, disability, death or a sale of a controlling interest or
substantially all the assets of the Company.
The Company also entered into an agreement with an Executive Vice
President. This agreement was effective as of January 1, 1995 and would have
expired on December 31, 1996. The terms of this agreement provided for an annual
base salary of $115,000 for the first year and $140,000 for the second year.
This employee was also granted options to acquire 105,000 shares of common stock
at prices ranging from $2.82 to $3.75 per share. The Executive Vice President
resigned from the Company in January 1996.
The Company had also entered into a consulting agreement with a company in
which a director and its executive vice president are shareholders. The
agreement provided for monthly consulting fees of $2,500 for the first 12
months, increasing to $2,917 per month thereafter through December 1996. This
agreement was terminated effective December 31, 1995.
(b) Operating Lease:
The Company has entered into operating leases for office space which expire
in various years through 1999 with renewal options. The leases provide for
payment of taxes and the Company's proportionate share of basic operating costs.
Minimum future base rental payments under these leases, for each of the
next three years and in the aggregate are as follows:
<TABLE>
<S> <C>
Year ending December 31, 1997 ...... $ 60,078
Year ending December 31, 1998 ...... 58,874
Year ending December 31, 1999 ...... 40,399
---------
$159,351
=========
</TABLE>
Rent expense for the years ended December 31, 1996, 1995 and 1994
aggregated $115,991, $113,859 and $91,931, respectively.
Effective with the asset sale (see Note 13) the aforementioned leases were
assigned to and assumed by Network.
The Company also leases office space in Orange County, California, on a
month-to-month basis, at a cost of $640 per month. The Company terminated this
lease on January 31, 1997.
(c) Subsequent Event:
See Note 13 regarding sale of substantially all operating assets.
F-16
<PAGE>
THE WESTERN SYSTEMS CORP. AND SUBSIDIARY
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
NOTE 13--SUBSEQUENT EVENT--SALE OF ASSETS:
On January 3, 1997, the Company sold its Transmedia Network franchise for
the states of California, Oregon, Washington and parts of Nevada and
substantially all of its operating assets, other than cash and cash equivalents,
to its franchisor, Transmedia Network, Inc. ("Network"). Upon consummation of
the asset sale, the Company's assets consisted principally of cash and cash
equivalents aggregating approximately $9,574,000 and liabilities consisting of
approximately $800,000 of taxes on the gain resulting from the asset sale. The
Company also transferred its obligations under capital and operating leases
entered into, to Network. In connection with the asset sale the Company and
Network exchange general releases of all liabilities and obligations under the
franchise agreement (see Note 5). However, pursuant to the terms of the
contract, should the Rights to Receive of a certain restaurant group become
uncollectible within 12 months of the closing date, the Company is obligated to
repurchase those Rights to Receive from Network at the then outstanding full
cash amount. The Company would then have the opportunity to recover the amount
paid to Network from the restaurant group and guarantors. Such Rights to Receive
totaled approximately $100,000.
F-17
<PAGE>
================================================================================
ANNEX C
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10Q
---------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1997
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-22922
The Western Systems Corporation
(Exact Name Of Registrant As Specified In Its Charter)
Delaware 06-0995978
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
c/o Janney Montgomery Scott Inc., 26 Broadway, New York, NY 10004
- ----------------------------------------------------------- -------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (212) 510-0688
--------------
The Western Transmedia Company, Inc., 475 Sansome St., San Francisco, CA 94111
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: May 8, 1997 there were
outstanding 7,869,833 shares of the issuer's Common Stock, $.60 par value.
<PAGE>
PART II--OTHER INFORMATION
Item 5. Other Information
On May 1, 1997, the Company entered into a definitive agreement to purchase
the assets of American Country Insurance Company of Chicago and an affiliated
company for $40,250,000. The Company anticipates closing the acquisition in July
1997, subject to regulatory approval and approval by stockholders of the
Company. A more detailed description of the transaction is contained in the
Company's Press Release dated May 1, 1997 filed as an exhibit to the Quarterly
Report on Form 10-Q and incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit 11--Computation of Earnings (Loss) Per Share
Exhibit 27--Financial Data Schedule
Exhibit 99 - Press Release dated May 1, 1997.
b) Reports on Form 8-K
The Registrant filed no reports on Form 8-K during the quarter ended March
31, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE WESTERN SYSTEMS CORP.
Date: May 12, 1997
By: /s/ William J. Barrett
---------------------------------
William J. Barrett
Chief Executive Officer and Director
(Principal Executive Officer, Acting Principal
Financial Officer and Acting Principal
Accounting Officer)
<PAGE>
THE WESTERN SYSTEMS CORP.
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
INDEX
<TABLE>
<CAPTION>
Page(s)
--------
<S> <C> <C>
PART 1. Financial Information ......................................................
ITEM 1. Financial Statements:
Consolidated Balance Sheets--March 31, 1997 (unaudited) and December 31, 1996 3
Consolidated Statements of Operations--Three Months Ended March 31, 1997
and 1996 (unaudited) ......................................................... 4
Consolidated Statements of Cash Flows--Three Months Ended March 31, 1997
and 1996 (unaudited) ......................................................... 5
Notes to Interim Consolidated Financial Statements (unaudited) ............... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations .................................................................. 8
PART 2. Other Information ............................................................
SIGNATURES
EXHIBITS: Exhibit 11--Computation of Earnings (Loss) Per Share ........................
Exhibit 27--Financial Data Schedule ..........................................
</TABLE>
<PAGE>
THE WESTERN SYSTEMS CORP.
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------------- --------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash ............................................................ $ 9,558,676 $ 2,073,697
Deferred tax asset (Note 3) ....................................... -- 857,000
Accounts receivable ............................................. -- 107,717
Rights to receive--net .......................................... -- 3,335,763
Prepaid expenses and other current assets ........................ 27,874 194,800
------------ ------------
TOTAL CURRENT ASSETS ............................................. 9,586,550 6,568,977
------------ ------------
PROPERTY AND EQUIPMENT--NET ....................................... -- 81,871
------------ ------------
OTHER ASSETS:
Franchise agreement--net .......................................... -- 423,800
Security deposits ................................................ -- 9,483
Other assets ...................................................... -- 34,941
------------ ------------
-- 468,224
------------ ------------
TOTAL ASSETS ...................................................... $ 9,586,550 $ 7,119,072
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable--rights to receive .............................. $ -- $ 633,436
Accrued liabilities ............................................. 58,449 202,112
Income taxes payable (Note 3) .................................... 783,000 --
Capitalized lease obligations--current portion .................. -- 3,576
------------ ------------
TOTAL CURRENT LIABILITIES ....................................... 841,449 839,124
------------ ------------
LONG-TERM DEBT:
Capitalized lease obligations .................................... -- 12,026
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.10 par value, 2,000,000 shares authorized; none
issued or outstanding .......................................... -- --
Common stock, $.60 par value, 25,000,000 shares authorized;
7,903,421 shares issued and outstanding ........................ 4,742,053 4,742,053
Additional paid-in capital ....................................... 5,542,062 5,542,062
Retained earnings (deficit) .................................... (1,539,014) (4,016,193)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY ....................................... 8,745,101 6,267,922
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........................ $ 9,586,550 $ 7,119,072
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
THE WESTERN SYSTEMS CORP.
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
--------------------------
1997 1996
------------ -----------
<S> <C> <C>
NET SALES ......................................................... $ 54,396 $2,591,458
COST OF SALES ...................................................... 36,263 1,713,600
----------- -----------
GROSS PROFIT ...................................................... 18,133 877,858
----------- -----------
OPERATING EXPENSES:
Franchise costs ................................................... 7,254 359,225
Operating expenses ................................................ 100,915 540,830
----------- -----------
108,169 900,055
----------- -----------
LOSS FROM OPERATIONS ................................................ (90,036) (22,197)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income ................................................... 114,359 35,321
Interest (expense) ................................................ -- (981)
Gain on sale of franchise--net of purchase expenses (Note 2) ...... 4,092,856 --
----------- -----------
4,207,215 34,340
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES ........................... 4,117,179 12,143
----------- -----------
INCOME TAXES (Note 3):
Provision for income taxes:
Current ......................................................... 783,000 --
Deferred ......................................................... 857,000 --
----------- -----------
1,640,000 --
----------- -----------
NET INCOME ......................................................... $2,477,179 $ 12,143
=========== ===========
EARNINGS PER COMMON SHARE .......................................... $.31 $0.00
----- -------
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING .............................. 7,956,941 7,950,803
---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
THE WESTERN SYSTEMS CORP.
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
---------------------------
1997 1996
----------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from franchisor for cardholder restaurant spending ....... $ 179,359 $ 2,600,564
Cash paid for franchise fees ........................................... (24,251) (360,927)
Cash paid for rights to receive ........................................ -- (2,164,476)
Cash paid to suppliers and employees ................................... (238,968) (488,712)
Interest received ...................................................... 114,359 35,321
Interest paid .......................................................... -- (982)
----------- -----------
Net cash provided (utilized) by operating activities .................. 30,499 (379,212)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ..................................... -- (1,125)
Cash received from sale of operating assets ............................ 7,454,480 --
Security deposits ...................................................... -- (45)
----------- -----------
Net cash (utilized) by investing activities ........................... 7,454,480 (1,170)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of capital lease obligations .................................. -- (654)
----------- -----------
Net cash (utilized) by financing activities ........................... -- (654)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................. 7,484,979 (381,036)
Cash and cash equivalents, at beginning of year ........................ 2,073,697 3,040,620
----------- -----------
CASH AND CASH EQUIVALENTS, AT END OF PERIOD ............................ $ 9,558,676 $ 2,659,584
----------- -----------
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED (UTILIZED) BY
OPERATING ACTIVITIES:
Net income ............................................................. $ 2,477,179 $ 12,143
Adjustments to reconcile net income to net cash provided (utilized)
by operating activities:
Deferred taxes ....................................................... 857,000 --
Allowance for unrealizable rights to receive ......................... -- 52,038
Depreciation and amortization ........................................ -- 15,048
Net book value of assets transferred to buyer ........................ 534,493 --
Changes in assets and liabilities:
Decrease in accounts receivable ....................................... 107,717 9,007
Decrease (increase) in rights to receive .............................. 3,335,763 (1,009,235)
Decrease in prepaid expenses and other current assets ................. 166,926 14,825
(Decrease) increase in accounts payable--rights to receive ............ (633,436) 550,238
(Decrease) in accrued expenses ........................................ (143,663) (23,276)
Increase in income taxes payable ...................................... 783,000 --
----------- -----------
Net cash provided (utilized) by operating activities ................. $ 7,484,979 $ (379,212)
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
THE WESTERN SYSTEMS CORP.
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1--DESCRIPTION OF THE COMPANY AND BASIS OF PRESENTATION:
Through January 3, 1997, the Company was operating under a franchise
agreement with Transmedia Network, Inc. ("Network") which granted to the
Company the right to operate a franchise in California, Washington, Oregon
and certain parts of Nevada, the primary business of which was the
acquisition of Rights to Receive food and beverage credits from restaurants
that accept the Transmedia restaurant card (a private restaurant charge card
marketed and issued by Network). See Note 2 below regarding sale of the
franchise and certain assets of the Company.
In the opinion of management, the accompanying unaudited interim
consolidated financial statements of The Western Systems Corp. formerly The
Western Transmedia Company, Inc. (the "Company") and its subsidiary TM West
Corp. ("TM West") contain all adjustments necessary (consisting of normal
recurring accruals or adjustments only) to present fairly the Company's
financial position as of March 31, 1997 and the results of its operations and
cash flows for the three month periods ended March 31, 1997 and 1996.
The accounting policies followed by the Company are set forth in Note 2 to
the Company's consolidated financial statements included in its Annual Report
on Form 10-K for the year ended December 31, 1996, which is incorporated
herein by reference. Specific reference is made to this report for a
description of the Company's securities and the notes to consolidated
financial statements included therein.
NOTE 2--SALE OF OPERATING ASSETS:
On January 3, 1997, the Company sold its Transmedia Network franchise for the
states of California, Oregon, Washington and parts of Nevada and substantially
all of its operating assets, other than cash and cash equivalents, to its
franchisor, Network, for cash of approximately $7,500,000. The Company also
transferred its obligations under capital and operating leases entered into, to
Network. In connection with the Asset Sale, the Company and Network exchanged
general releases of all liabilities and obligations under the franchise
agreement. However, pursuant to the terms of the contract, should the Rights to
Receive of a certain restaurant group become uncollectible within 12 months of
the closing date, the Company is obligated to repurchase those Rights to Receive
from Network, at the time the determination is made that such Rights to Receive
are uncollectible, at the then outstanding full cash amount. The Company would
then have the right to recover damages, including the amount paid to Network,
from the restaurant group and guarantors. At March 31, 1997 the cash equivalent
of such Rights to Receive totaled approximately $90,000.
NOTE 3--INCOME TAXES:
As of the year end of December 31, 1996 the Company established a deferred
tax asset of $857,000, based primarily upon available net operating losses,
to offset the anticipated gain from the sale of substantially all of its
assets on January 3, 1997. This gain resulted in approximately $4,117,000 of
income for the quarter ended March 31, 1997 and accordingly, the liability
resulting from the $1,640,000 provision for income taxes has been offset by
the deferred tax asset.
NOTE 4--SUBSEQUENT EVENTS:
On April 30, 1997, the Company entered into an agreement with American
Country Insurance Company and its' wholly-owned subsidiary, American Country
Financial Services (collectively "American") whereby the Company will acquire
substantially all the assets and assume substantially all the liabilities of
American for cash of approximately $40,000,000. Financing for the purchase
will be provided by the sale of approximately 24 million newly issued shares
of the Company for approximately $27,000,000, by the Company's cash on hand
of approximately $9,000,000 and the balance by a bank term loan. The
transaction is subject to shareholder and regulatory approval and is expected
to close in the third quarter of 1997.
6
<PAGE>
THE WESTERN SYSTEMS CORP.
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
Note 4--SUBSEQUENT EVENTS:--(Continued)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Recent Developments
On January 3, 1997, the Company sold its Transmedia Network franchise (the
"Franchise") covering the States of California, Oregon, Washington and parts
of Nevada and substantially all of its operating assets other than cash and
cash equivalents (the "Asset Sale") to its franchisor, Transmedia Network
Inc. ("Network"), for a cash payment of approximately $7,500,000. Upon
consummation of the Asset Sale, and at March 31, 1997, the Company's assets
consisted principally of cash and cash equivalents aggregating approximately
$9,600,000. These assets (less approximately $800,000 of taxes on the gain
resulting from the Asset Sale) will be utilized by the Company to acquire,
merge, consolidate, invest in transactions or otherwise combine with an
operating business (any such transaction, a "Business Combination"). The
Company intends to enter into transactions which will use substantially all
of the Company's available cash in one or two transactions and structure such
Business Combinations so that the current management of the target business
will remain in place. There can be no assurance, however, the Company will be
able to effectuate a Business Combination, or that any such Business
Combination will be profitable. In anticipation of the sale, in the fourth
quarter of 1996, the Company initiated activities to seek such an acquisition
or affiliation.
On April 30, 1997, the Company entered into an agreement with American
Country Insurance Company and its' wholly-owned subsidiary, American Country
Financial Services (collectively "American") whereby the Company will acquire
substantially all the assets and assume substantially all the liabilities of
American for cash of approximately $40,000,000. Financing for the purchase
will be provided by the sale of approximately 24 million newly issued shares
of the Company for approximately $27,000,000, by the Company's cash on hand
of approximately $9,000,000 and the balance by a bank term loan. The
transaction is subject to share holder and regulatory approval and is
expected to close in the third quarter of 1997.
Pending a business combination, the Company's assets will be invested as
management of the Company deems prudent, which may include, but will not be
limited to, certificates of deposit, mutual funds, money-market accounts,
stocks, bonds or United States Government or municipal securities, provided,
however, that the Company will attempt to invest the net proceeds in any
manner which will not result in the Company being deemed to be an investment
company under the Investment Company Act of 1940.
Results of Operations
Three Months Ended March 31, 1997 Compared to the Three Months Ended March
31, 1996
As discussed above in "Recent Developments" the Company sold its
Transmedia Network franchise on January 3, 1997, and therefore, operated its
Transmedia Franchise for only two days during the three-month period ended
March 31, 1997. Accordingly, the results of operations for the three month
period ended March 31, 1997 are not comparable to the three month period
ended March 31, 1996.
The following information relates primarily to the business carried on by
the Company prior to the Asset Sale.
Net sales for the two days of operation, during the three month period
ended March 31, 1997, were $54,396. Net sales were $2,591,458 during the
three month period ended March 31, 1996.
The Company incurred franchise costs of approximately 14% of net sales.
Franchise costs were $7,254 and $359,225 for the three month periods ended
March 31, 1997 and 1996, respectively.
7
<PAGE>
THE WESTERN SYSTEMS CORP.
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
Note 4--SUBSEQUENT EVENTS:--(Continued)
The Company operated with an approximate 33% gross profit margin from net
sales of Rights to Receive to Cardholders. The Company's net sales
contributed $18,133 and $877,858 in gross profit for the three month periods
ended March 31, 1997 and 1996, respectively.
Operating expenses (selling, general and administrative expenses)
aggregated $100,915 and $540,830 for the three month periods ended March 31,
1997 and 1996, respectively. The approximately $440,000 decrease in operating
expenses for the respective three month periods is primarily because upon
completion of the Asset Sale, on January 3, 1997, the Company's operating
overhead was limited to the administrative, accounting and legal costs of
compliance with public reporting and tax requirements.
For the three month period ended March 31, 1997, operating expenses
consisted primarily of salaries and payroll-related expenses ($52,500) and
professional and consulting fees ($45,000).
For the three month period ended March 31, 1996, operating expenses
consisted primarily of salaries and payroll expenses ($298,000), professional
and consulting fees ($32,000), rent and office expenses ($67,000), the
Company's reserve for unrealizable Rights to Receive ($52,000), advertising
and promotional expenses in connection with attracting and maintaining
California cardholders ($13,000 net of Transmedia Network reimbursement), and
marketing expenses in connection with attracting and maintaining
participating California restaurants ($46,000).
Interest income was approximately $114,000 and $35,000 for the three month
periods ending March 31, 1997 and 1996, respectively. The approximately
$79,000 increase in interest income earned by the Company for the respective
three month periods is because of the additional interest earned on the
approximately $7,454,000 gross proceeds received from the Company's Asset
Sale.
For the three month period ended March 31, 1997, the Company generated
income before provision for income taxes of $4,117,179 compared to income of
$12,143 for the three month period ended March 31, 1996. The increase was
primarily attributable to the Company's gain on the Asset Sale.
For the three month period ended March 31, 1997 the Company established a
financial statement provision for income taxes of $1,640,000. The $1,640,000
amount is the full theoretical tax expense on the Company's approximately
$4,117,000 pretax income at an assumed 40% combined Federal and California
effective tax rate. The tax provision does not give effect to the Company's
$1,950,000 net operating loss carryforwards and other deductible temporary
differences. Of the total $1,640,000 financial statement tax expense the
$783,000 current portion is the actual projected net "tax return" tax payable
by the Company after utilizing the Company's net operating loss
carryforwards. The $857,000 deferred portion is not actually payable and is
required under the provisions of SFAS 109 to reverse the $857,000 tax asset
recognized during the year ended December 31, 1996. This asset, which
recorded the tax benefit of the Company's $1,950,000 net operating
carryforwards, was required at the end of 1996 because it was more likely
than not at that time that the losses would be utilized. For the years ended
December 31, 1995 and earlier, the Company did not record such a tax credit
because at that time there was no assurance that the Company would generate
future taxable income.
For the three month period ended March 31, 1997, the Company earned net
income of $2,477,179 or $.31 per share. The net income was primarily
attributable to the Company's gain on the Asset Sale net of taxes and
expenses. For the three month period ended March 31, 1996 the Company earned
income before provision for income taxes and net income of $12,143 or $.00
per share. The Company incurred no provision for income taxes for the three
months ended March 31, 1996 because the income taxes on the Company's $12,143
pretax profit were eliminated by the Company's net operating loss
carryforwards.
8
<PAGE>
THE WESTERN SYSTEMS CORP.
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
Note 4--SUBSEQUENT EVENTS:--(Continued)
Liquidity and Capital Resources
The Company's working capital was approximately $8,745,000 at March 31,
1997 and $5,730,000 at December 31, 1996. The approximately $3,015,000
increase is primarily attributable to the Company's gain on the Asset Sale
net of expenses and accrued taxes.
The Company's cash balances were approximately $9,559,000 and $2,074,000
at March 31, 1997 and December 31, 1996, respectively. The approximately
$7,485,000 increase is primarily attributable to the cash proceeds from the
Company's gain on the Asset Sale.
At March 31, 1997, the Company's had no debt, its net worth was
approximately $8,745,000 and its current ratio was 11.4:1.
Cash provided by operating activities for the three month period ended
March 31, 1997 was approximately $7,485,000. During the three month period
ended March 31, 1997 the Company received approximately $7,454,000 gross
proceeds from the Company's Asset Sale, cash generated from cardholder
restaurant spending net of franchise fees was approximately $155,000 and
interest income was approximately $114,000. Operating expenditures during the
three month period ending March 31, 1997 consisted of approximately $239,000
paid to suppliers and employees.
Cash flow used in operating activities for the three month period ended
March 31, 1996 was approximately $379,000. During the three month period
ended March 31, 1996 cash generated from cardholder restaurant spending net
of franchise fees was approximately $2,240,000 and interest income was
approximately $35,000. Operating expenditures during the three month period
ending March 31, 1996 consisted of approximately $2,164,000 paid to purchase
Rights to Receive and $489,000 paid to suppliers and employees.
Cash flow used in investing activities for the three month period ended
March 31, 1996 was $1,170 primarily for the purchase of office furniture and
equipment. The Company did not have any cash flows from investing activities
during the three month period ended March 31, 1997.
Cash flow used in financing activities for the three month period ended
March 31, 1996 was $654 for the payment of capital lease obligations. The
Company did not have any cash flows from financing activities during the
three month period ended March 31, 1997.
During the year ending December 31, 1997 and until a business acquisition
or affiliation is effected the Company expects to generate interest income in
excess of its minimal operating expenses, exclusive of any due diligence and
professional fees incurred in connection with the identification and
consummation of one or more Business Combinations.
The Company presently has outstanding 2,052,987 warrants which expire
December 31, 1997. These warrants will be adjusted (upon completion of the
acquisition discussed earlier), pursuant to their anti-dilution provisions,
to entitle the holder of each warrant to purchase approximately 2.1 shares at
approximately $1.85 per share. No assurance can be given, however, that the
Company will raise additional capital from the exercise of its Warrants or
obtain additional financing. The Company presently has no other unused
internal sources of liquidity other than cash (or equivalents) on hand and no
external sources of liquidity such as a line of credit or otherwise from a
financial institution.
The Company intends to enter into transactions which will use
substantially all of the Company's available cash in one or two transactions
and structure such Business Combinations so that the current management of
the target business will remain in place. There can be no assurance, however,
that the Company will be able to effectuate a Business Combination, or that
any such Business Combination will be profitable. In anticipation of the
sale, in the fourth quarter of 1996, the Company initiated activities to seek
such an acquisition or affiliation. See discussion re: Recent Developments.
9
<PAGE>
THE WESTERN SYSTEMS CORP.
(FORMERLY THE WESTERN TRANSMEDIA COMPANY, INC.)
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
Note 4--SUBSEQUENT EVENTS:--(Continued)
Inflation and Seasonality
Inflation did not significantly impact the Company's business during 1996
nor the three months ended March 31, 1997. The Company does not believe that
its business was seasonal.
Forward-looking Statements
This report may contain forward-looking statements and information that is
based on management's beliefs and assumptions, as well as information
currently available to management. When used in this document, the words
"anticipate," "expect," "intend," and similar expressions are intended to
identify forward-looking statements. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to be correct. Such
statements are subject to certain risks, uncertainties and assumptions.
Should one or more of these risks or uncertainties materialize, or should the
underlying assumptions prove incorrect, actual results may vary materially
from those anticipated, estimated or expected.
10
<PAGE>
ANNEX D
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
THE WESTERN SYSTEMS CORP.
THE WESTERN SYSTEMS CORP. (the "Corporation"), a corporation organized and
existing under the laws of the State of Delaware, does hereby certify:
I. The name of the Corporation is The Western Systems Corp.
II. The original Certificate of Incorporation of the Corporation was
filed with the Secretary of State of the State of Delaware on May 30, 1978 under
then name Vigilance Systems Corp.
III. This Amended and Restated Certificate of Incorporation of the
Corporation further amends and restates the Certificate of Incorporation of the
Corporation, as amended prior to the date hereof, by principally (a) revising
those provisions of Article First relating to the name of the Corporation, (b)
deleting those provisions set forth in Article Third as to the nature of the
Corporation's business or purposes to be conducted or promoted other than to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware, (c) increasing the
number of shares of Common Stock authorized in Article Fourth and decreasing the
par value per share of such Common Stock, (d) deleting Article Fifth in its
entirety that sets forth the names and addresses of the Incorporators, (e)
deleting Article Sixth in its entirety relating to the perpetual existence of
the Corporation, (f) deleting certain provisions of Article Seventh relating to
specified powers of the Board of Directors of the Corporation, including such
Board's ability to designate one or more committees of such Board, (g) deleting
certain provisions of Article Eighth relating to meetings of stockholders being
held and books of the Corporation being kept within or outside of the State of
Delaware, (h) deleting Article Ninth in its entirety regarding the Corporation's
reservation of the right to amend, alter, change or repeal any provision
contained in the Certificate of Incorporation of the Corporation, (i) deleting
Article Tenth in its entirety relating to the classification of directors and
(j) revising those provisions of Article Eleventh relating to the elimination of
personal liability of directors and the indemnification of persons acting on
behalf of the Corporation.
IV. The amendments and the restatement of the Certificate of
Incorporation of the Corporation herein certified have been duly adopted by the
directors and stockholders of the Corporation in accordance with the provisions
of Sections 242 and 245 of the General Corporation Law of the State of Delaware.
V. The text of the Certificate of Incorporation of the Corporation as
amended or supplemented heretofore is hereby restated, integrated and further
amended to read in its entirety as follows:
"FIRST: The name of the Corporation is American Country Holdings Inc. (the
"Corporation").
SECOND: The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, City of Wilmington, County of
New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The nature of the business or purposes to be conducted or promoted
is to engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of the State of Delaware (the
"DGCL").
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is sixty-two million (62,000,000) shares, of which
sixty million (60,000,000) shares are to be shares of Common Stock, $.01 par
value per share, and two million (2,000,000) are to be shares of Preferred
Stock, $.10 par value per share.
The Board of Directors of the Corporation is authorized to issue shares of
Preferred Stock from time to time in one or more series for such
consideration as it may determine; to fix or alter the voting powers,
designations, preferences and rights, including, but not limited to, dividend
rights, dividend rate or rates, conversion or exchange rights, and terms of
redemption (including sinking fund provisions), redemption price or prices
and liquidation preferences, or any of them, as to wholly unissued series of
shares of Preferred Stock; and to fix the number of shares constituting any
such series and designation thereof, or any of them, and to increase or
decrease the number of shares of any series subsequent to the issue of shares
of that series, but
1
<PAGE>
not below the number of shares of that series then outstanding. In case the
number of shares of such series be so decreased, the shares constituting such
decrease shall resume the status which they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
FIFTH: In furtherance and not in limitation of the rights, powers,
privileges and discretionary authority granted or conferred by the DGCL or
other statutes or laws of the State of Delaware, the Board of Directors of
the Corporation is expressly authorized to adopt, amend or repeal the By-Laws
of the Corporation. The Corporation may in its By-Laws confer powers upon its
Board of Directors in addition to the foregoing and in addition to the powers
and authorities expressly conferred upon the Board of Directors of the
Corporation by applicable law.
SIXTH: Elections of directors need not be by written ballot unless and to
the extent that the By-Laws of the Corporation so provide.
SEVENTH: To the fullest extent that the DGCL, as it exists on the date
hereof or as it may hereafter be amended, permits the limitation or
elimination of the liability of directors, no person serving as a director of
the Corporation shall be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided, however, that the foregoing shall not eliminate or limit the
liability of a director (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the DGCL, or (iv) for any transaction from
which the director derived an improper personal benefit. Neither the
amendment to or repeal of this Article Seventh nor the adoption of any
provision of any Certificate of Incorporation of the Corporation inconsistent
with this Article Seventh shall adversely affect any right or protection
existing under this Article Seventh at the time of such amendment or repeal.
EIGHTH: The Corporation shall, to the fullest extent permitted by Section
145 of the DGCL, as the same may be amended and supplemented, or by any
successor thereto, indemnify any and all persons whom it shall have power to
indemnify under said Section 145 from and against any and all of the
expenses, liabilities or other matters referred to in or covered by said
Section 145. The Corporation shall advance expenses to the fullest extent
permitted by said Section 145. Such right to indemnification and advancement
of expenses shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person. The indemnification and
advancement of expenses provided for herein shall not be deemed exclusive of
any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any By-Law of the Corporation, agreement, vote
of stockholders or disinterested directors, or otherwise."
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate of Incorporation of the Corporation to be signed by its Acting Chief
Executive Officer and to be attested to by its Secretary on this __________ day
of ____________, 1997.
THE WESTERN SYSTEMS CORP.
By:
-----------------------------------
William J. Barrett
Acting Chief Executive Officer
Attest:
By:
-----------------------------------
Ann C.W. Green
Secretary
2
