<PAGE>
[GRAPHIC OMITTED]
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
4100 SOUTH HULEN STREET
FORT WORTH, TEXAS 76109
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
Independent Research Agency for Life Insurance, Inc. (the "Company") to be held
at 1:30 p.m. local time on November 23, 1998, at 4100 South Hulen Street, Fort
Worth, Texas 76109 (the "Special Meeting"). At the Special Meeting you will be
asked to consider and vote upon a proposal to approve an Agreement and Plan of
Merger, dated as of July 1, 1998, as amended and restated as of October 30, 1998
(as amended and restated, the "Merger Agreement"), between the Company and First
Command Financial Corporation ("First Command"). Pursuant to the Merger
Agreement, the Company will be merged (the "Merger") with and into First
Command, which will continue in existence (the "Surviving Corporation").
Pursuant to the Merger, each share of Class A Voting Common Stock, par
value $0.10 per share ("Class A Stock"), of the Company issued and outstanding
(other than shares of Class A Stock held in treasury by the Company) immediately
prior to the effective time of the Merger (the "Effective Time"), which will
occur on the filing of the Articles of Merger in accordance with the applicable
laws of the State of Texas, subject to and upon the terms and conditions of the
Merger Agreement, will be converted into five shares of Voting Common Stock, par
value $0.01 per share ("Surviving Corporation Voting Stock"), of the Surviving
Corporation (the "Class A Consideration"). Further, (i) each share of Class B
Non-Voting Common Stock, par value $0.02 per share ("Class B Stock"), held by a
holder of Class B Stock (a "Class B Shareholder") that is not a holder of Class
A Stock, issued and outstanding immediately prior to the Effective Time, subject
to and upon the terms and conditions of the Merger Agreement, will be converted
into $28.24 in cash, without interest (the "Class B Cash Consideration"), and
(ii) each share of Class B Stock held by a Class B Shareholder that is also a
holder of Class A Stock (a "Class A/B Shareholder"), issued and outstanding
immediately prior to the Effective Time, subject to and upon the terms and
conditions of the Merger Agreement, will be converted into one share of
Nonvoting Common Stock, par value $0.01 per share ("Surviving Corporation
Nonvoting Stock"), of the Surviving Corporation (the "Class B Nonvoting Stock
Consideration," and, together with the Class B Cash Consideration, the "Class B
Consideration"); provided, however that each Class A/B Shareholder may elect to
receive, in lieu of receiving the Class B Nonvoting Stock Consideration, the
Class B Cash Consideration for all shares of Class B Stock held immediately
prior to the Effective Time. Each holder of Common Stock, $0.01 par value per
share of First Command ("First Command Common Stock"), issued and outstanding
immediately prior to the Effective Time, subject to and upon the terms and
conditions of the Merger Agreement, will receive one share of Surviving
Corporation Nonvoting Stock for each 25 shares of First Command Common Stock
held by such shareholder. A copy of the Merger Agreement, which sets forth,
among other things, the terms and conditions concerning the receipt of the Class
A Consideration and the Class B Consideration (collectively, the "Merger
Consideration"), is attached as Annex A to the accompanying Proxy Statement. You
are urged to and should read the accompanying Proxy Statement and related
materials, which, among other things, provide a more detailed description of the
Merger Agreement, the Merger and the other transactions contemplated thereby.
As of June 30, 1998, the liquidation value of Class B Stock was $54.55 per
share. The IRA Board and the Special Committee chose not to use this value in
establishing the price per share to be paid for Class B Stock in the Merger
because in order to pay an amount equal to liquidation value, the Company would
have to liquidate its assets and therefore would not be able to continue as a
going concern.
Your Board of Directors, based upon the unanimous recommendation of a
special committee of independent directors (the "Special Committee"), has
determined that the terms of the proposed Merger are fair to and in the best
interests of the shareholders of the Company (the "IRA Shareholders"), and has
unanimously approved the Merger Agreement and the Merger. In arriving at its
decision, the Board of Directors gave careful consideration to a number
<PAGE>
of factors, including the opinion of PricewaterhouseCoopers LLP, financial
advisor to the Special Committee, to the effect that, as of the date of such
opinion and based on, and subject to the assumptions, limitations and
qualifications set forth in such opinion, the Merger Consideration to be
received by the IRA Shareholders is fair to the Class A Shareholders and the
Class B Shareholders, from a financial point of view. The Board of Directors of
the Company unanimously recommends that you vote "for" approval of the Merger
Agreement.
The Merger requires the approval at the Special Meeting of (i) the holders
of at least 66-2/3% of the outstanding shares of Class A Stock and Class B
Stock, voting together as a single class, (ii) the holders of at least 66-2/3%
of the outstanding shares of Class A Stock and Class B Stock, each voting
separately as a class, and (iii) the holders of a majority of the outstanding
shares of Class B Stock not held by Class A/B Shareholders. As of October 30,
1998, Lamar C. Smith, James N. Lanier, Howard M. Crump, Hal N. Craig, Donaldson
D. Frizzell, Jerry D. Gray, David P. Thoreson, Carroll H. Payne II, Naomi K.
Payne and Freda J. Payne (collectively, the "Management Group"), each of whom is
an officer or director of the Company or First Command (other than Freda J.
Payne) and is also a Class A Shareholder, beneficially owned an aggregate of 19
shares of Class A Stock and 285,481 shares of Class B Stock (representing
approximately 76% and 30.28% of the outstanding Class A Stock and Class B Stock,
respectively). Each member of the Management Group intends to vote all shares of
Class A Stock and Class B Stock beneficially owned by him or her for approval of
the Merger Agreement.
Whether or not you plan to vote in favor of the Merger Agreement, if you
are a Class A/B Shareholder, you should complete, date, sign and return the
enclosed Form of Election in the enclosed pre-addressed postage-prepaid
envelope. Failure to return a properly completed and executed Form of Election
to the Paying Agent by the Election Deadline (as defined in the accompanying
Proxy Statement) will be treated as a Non-Election (as defined in the
accompanying Proxy Statement) and will result, in the event that the Merger is
approved, in your receiving the Class B Nonvoting Stock Consideration in respect
of your shares of Class B Stock, in addition to the Class A Consideration in
respect of your shares of Class A Stock. An election to receive the Class B
Nonvoting Stock Consideration or the Class B Cash Consideration in respect of
your Class B Stock will not constitute a vote in favor of the approval of the
Merger Agreement.
As described above, as a result of the Merger, the Class B Shareholders
will receive $28.24 for each share of Class B Stock exchanged, the Class B Stock
will be eliminated and the Company will be privately owned by the current
holders of Class A Stock.
Your vote is important. Whether or not you plan to attend the Special
Meeting, you are requested to complete, date, sign and return the enclosed proxy
card either in the enclosed pre-addressed postage-prepaid envelope or by fax to
the Company at (817) 731-8621, extension 2468. Your shares will be voted in
accordance with the instructions you have given in your proxy. If no
instructions are given on your proxy, the shares represented by the proxy will
be voted at the Special Meeting in favor of the Merger Agreement and in
accordance with the Proxy Statement on any other business that may properly come
before the Special Meeting or any adjournments or postponements thereof. If you
do not return the accompanying form of proxy, your shares will not be voted in
favor of approval of the Merger Agreement and will have the same effect as a
vote against approval of the Merger Agreement. The proxy may be revoked at any
time prior to the vote at the Special Meeting by following the procedures set
forth in the accompanying Proxy Statement. If you attend the Special Meeting,
you may vote in person even if you have previously returned your proxy card.
The Board of Directors and management of the Company appreciate your
continued support. If you need assistance in completing your proxy card or Form
of Election, or if you have any questions about the Proxy Statement, please feel
free to contact Sandy Allen, Corporate Secretary of the Company, at (817)
731-8621.
Sincerely,
/s/ Lamar C. Smith
------------------------
Lamar C. Smith
Chairman of the Board
<PAGE>
[GRAPHIC OMITTED]
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
4100 South Hulen Street
Fort Worth, Texas 76109
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 23, 1998
To the Shareholders of Independent Research Agency for Life Insurance, Inc.:
Notice is hereby given that a Special Meeting of Shareholders of
Independent Research Agency for Life Insurance, Inc., a Texas corporation (the
"Company"), will be held at 1:30 p.m. local time on November 23, 1998, at 4100
South Hulen Street, Fort Worth, Texas 76109 (the "Special Meeting") for the
following purposes:
1. To consider and vote on a proposal to approve the Agreement and Plan
of Merger, dated as of July 1, 1998, as amended and restated as of
October 30, 1998 (as amended and restated, the "Merger Agreement"),
between the Company and First Command Financial Corporation, a Texas
corporation ("First Command"). Pursuant to the Merger Agreement, the
Company will be merged (the "Merger") with and into First Command,
which will continue in existence (the "Surviving Corporation").
2. To consider such other matters as may properly come before the Special
Meeting or any adjournment or postponement thereof.
The record date for determining the holders of shares of Class A Voting
Common Stock, par value $0.10 per share ("Class A Stock"), and Class B
Non-Voting Common Stock, par value $0.02 per share ("Class B Stock"), of the
Company entitled to receive notice of, and to vote at, the Special Meeting or
any adjournment or postponement thereof has been fixed as of the close of
business on October 30, 1998.
As a result of the Merger, the Class B Shareholders will receive $28.24 for
each share of Class B Stock exchanged, the Class B Stock will be eliminated and
the Company will be privately owned by the current holders of Class A Stock.
The Merger requires the approval at the Special Meeting of (i) the holders
of at least 66-2/3% of the outstanding shares of Class A Stock and Class B
Stock, voting together as a single class, (ii) the holders of at least 66-2/3%
of the outstanding shares of Class A Stock and Class B Stock, each voting
separately as a class, and (iii) the holders of a majority of the outstanding
shares of Class B Stock not held by Class A/B Shareholders.
You are urged to and should read the accompanying Proxy Statement and
related materials, which are incorporated herein by reference and form a part of
this Notice.
The Board of Directors of the Company unanimously recommends that you vote
"for" approval of the Merger Agreement.
If the Merger is consummated, holders of either Class A Stock or Class B
Stock who properly demand appraisal of their Class A Stock or Class B Stock, as
applicable, prior to the shareholder vote, do not vote in favor
<PAGE>
of the approval of the Merger Agreement, and otherwise comply with the
requirements of Articles 5.12 and 5.13 of the Texas Business Corporation Act
(the "TBCA") (all as more fully described in the accompanying Proxy Statement)
will be entitled to statutory appraisal rights. A copy of Articles 5.11 through
5.13 of the TBCA is attached as Annex C to the accompanying Proxy Statement.
October 30, 1998 By order of the Board of Directors
/s/ Sandra T. Allen
--------------------------------------
Sandra T. Allen, Corporate Secretary
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
PROXY STATEMENT
--------------------------------
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MONDAY, NOVEMBER 23, 1998
This Proxy Statement is being furnished to the shareholders of Independent
Research Agency for Life Insurance, Inc., a Texas corporation ("IRA" or the
"Company"), in connection with a special meeting of shareholders of IRA (the
"Special Meeting") to be held on Monday, November 23, 1998 at 1:30 p.m., local
time, at 4100 South Hulen Street, Fort Worth, Texas 76109. The accompanying
proxy is being solicited by IRA's Board of Directors and is to be voted at the
Special Meeting or at any adjournments or postponements thereof.
At the Special Meeting, shareholders of IRA will be asked to consider and
vote upon a proposed merger (the "Merger") of IRA with and into First Command
Financial Corporation ("First Command"), a Texas corporation, pursuant to an
Agreement and Plan of Merger, dated as of July 1, 1998, as amended and restated
as of October 30, 1998 (as amended and restated, the "Merger Agreement"), by and
between the Company and First Command. In the Merger, the Company will be merged
with and into First Command, which will continue in existence (the "Surviving
Corporation").
As a result of the Merger, the Surviving Corporation will be privately
owned by the current holders of Class A Stock.
Upon the terms and conditions set forth in the Merger Agreement, in the
Merger, each share of Class A Voting Common Stock, par value $0.10 per share
("Class A Stock"), of the Company issued and outstanding immediately prior to
the Effective Time (as defined below) (other than shares of Class A Stock held
in treasury by the Company), subject to and upon the terms and conditions of the
Merger Agreement, will be converted into five shares of Voting Common Stock, par
value $0.01 per share ("Surviving Corporation Voting Stock"), of the Surviving
Corporation (the "Class A Consideration"). Further, (i) each share of Class B
Non-Voting Common Stock, par value $0.02 per share ("Class B Stock"), held by a
holder of Class B Stock (a "Class B Shareholder") that is not a holder of Class
A Stock, issued and outstanding immediately prior to the Effective Time, subject
to and upon the terms and conditions of the Merger Agreement, will be converted
into $28.24 in cash, without interest (the "Class B Cash Consideration"), and
(ii) each share of Class B Stock held by a Class B Shareholder that is also a
holder of Class A Stock (a "Class A/B Shareholder"), issued and outstanding
immediately prior to the Effective Time, subject to and upon the terms and
conditions of the Merger Agreement, will be converted into one share of
Nonvoting Common Stock, par value $0.01 per share ("Surviving Corporation
Nonvoting Stock"), of the Surviving Corporation (the "Class B Nonvoting Stock
Consideration," and, together with the Class B Cash Consideration, the "Class B
Consideration"); provided, however, that each Class A/B Shareholder may elect to
receive, in lieu of receiving the Class B Nonvoting Stock Consideration, the
Class B Cash Consideration for all shares of Class B Stock held immediately
prior to the Effective Time. Each holder of Common Stock, $0.10 par value per
share, of First Command ("First Command Common Stock"), issued and outstanding
immediately prior to the Effective Time, subject to and upon the terms and
conditions of the Merger Agreement, will receive one share of Surviving
Corporation Nonvoting Stock for each 25 shares of First Command Common Stock
held by such shareholder. See "THE PROPOSED MERGER--Conversion of Shares."
As of June 30, 1998, the liquidation value of Class B Stock was $54.55 per
share. The IRA Board and the Special Committee chose not to use this value in
establishing the price per share to be paid for Class B Stock in the Merger
because in order to pay an amount equal to liquidation value, the Company would
have to liquidate its assets and therefore would not be able to continue as a
going concern.
A Form of Election (the "Form of Election") with which Class A/B
Shareholders may elect to receive the Class B Nonvoting Stock Consideration or
the Class B Cash Consideration for their shares of Class B Stock accompanies
this Proxy Statement. In order to elect the Class B Nonvoting Stock
Consideration or the Class B Cash
<PAGE>
Consideration, each Class A/B Shareholder must submit a Form of Election to
First Command Bank (the "Paying Agent") by no later than 5:00 p.m. Central
Standard time on November 23, 1998, (the "Election Deadline"). The Form of
Election accompanying this Proxy Statement contains important information for
Class A/B Shareholders concerning the timing and procedures for making an
election. Please read such materials carefully.
The Merger requires the approval at the Special Meeting of (i) the holders
of at least 66-2/3% of the outstanding shares of Class A Stock and Class B
Stock, voting together as a single class, (ii) the holders of at least 66-2/3%
of the outstanding shares of Class A Stock and Class B Stock, each voting
separately as a class, and (iii) the holders of a majority of the outstanding
shares of Class B Stock not held by Class A/B Shareholders. Accordingly, failure
to vote or abstentions will have the effect of a vote against the Merger for the
purpose of determining whether the requisite approval by the holders of Class A
Stock and Class B Stock is obtained. As of October 30, 1998, Lamar C. Smith,
James N. Lanier, Howard M. Crump, Hal N. Craig, Donaldson D. Frizzell, Jerry D.
Gray, David P. Thoreson, Carroll H. Payne II, Naomi K. Payne and Freda J. Payne
(collectively, the "Management Group"), each of whom is an officer or director
of the Company or First Command (other than Freda J. Payne) and is also a Class
A Shareholder, beneficially owned an aggregate of 19 shares of Class A Stock and
285,481 shares of Class B Stock (representing approximately 76% and 30.28% of
the outstanding Class A Stock and Class B Stock, respectively). Each member of
the Management Group intends to vote all shares of Class A Stock and Class B
Stock beneficially owned by him or her for approval of the Merger Agreement.
Approval of the Merger Agreement by the shareholders of First Command
requires the affirmative vote of more than 66-2/3% of the shares of First
Command Common Stock. As of the date hereof, members of the Management Group
beneficially own an aggregate of 1,000 shares of First Command Common Stock
(representing 100% of the outstanding First Command Common Stock). Each such
member of the Management Group intends to vote all shares of First Command
Common Stock beneficially owned by him or her for approval of the Merger
Agreement.
--------------------------------
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF THIS
TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF
THE INFORMATION CONTAINED IN THIS DOCUMENT.
ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
IF THE PROPOSED MERGER IS CONSUMMATED, HOLDERS OF CLASS A STOCK AND CLASS B
STOCK WHO COMPLY WITH THE REQUIREMENTS OF ARTICLES 5.12 AND 5.13 OF THE TEXAS
BUSINESS CORPORATION ACT (THE "TBCA") ARE ENTITLED TO STATUTORY DISSENTERS'
APPRAISAL RIGHTS. TO PERFECT DISSENTERS' RIGHTS, A SHAREHOLDER MUST SEND A
NOTICE TO THE CORPORATION BEFORE THE DATE OF THE VOTE AND MUST NOT VOTE IN FAVOR
OF THE MERGER BY PROXY OR OTHERWISE. A COPY OF ARTICLES 5.11 THROUGH 5.13 OF THE
TBCA IS ATTACHED TO THIS PROXY STATEMENT AS ANNEX C. SEE "THE PROPOSED
MERGER--RIGHTS OF DISSENTING SHAREHOLDERS."
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNECTION
WITH THE SOLICITATION OF PROXIES AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY FIRST
COMMAND OR THE COMPANY. THIS PROXY STATEMENT DOES NOT CONSTITUTE THE
SOLICITATION OF A PROXY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT
IS UNLAWFUL TO MAKE SUCH SOLICITATION.
Only holders of record of Class A Shares and/or Class B Shares at the close
of business on October 30, 1998 (the "Record Date") are entitled to notice of
and to vote at the Special Meeting. At the close of business on
<PAGE>
the Record Date, a total of 25 Class A Shares and 942,808 Class B
Shares were outstanding. Each share of Class A Stock and Class B Stock is
entitled to one vote with respect to the approval of the Merger Agreement at the
Special Meeting. With regard to any other matters presented at the Special
Meeting, each share of Class A Stock will be entitled to one vote, and the Class
B Shareholders will not be entitled to vote on such matters. See "THE SPECIAL
MEETING--Votes Required; Voting Rights." This Proxy Statement is first being
sent to shareholders on or about October 31, 1998.
In addition to solicitation by use of the mails, proxies may be solicited
by directors, officers and employees of IRA in person or by telephone, telegram
or other means of communications. Such directors, officers and employees will
not be additionally compensated but may be reimbursed for reasonable
out-of-pocket expenses in connection with such solicitation. No proxy
solicitation firm has been retained to assist with soliciting and tabulating
proxies for the Special Meeting. Expenses in connection with the solicitation of
proxies will be paid by the Company.
The date of this Proxy Statement is October 30, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS.................................................................1
SUMMARY .........................................................................................................2
The Companies............................................................................................2
Independent Research Agency for Life Insurance, Inc.............................................2
First Command Financial Corporation.............................................................2
The Management Group............................................................................2
Trading Markets and Market Price Data...........................................................3
Special Factors..........................................................................................3
Background of the Merger........................................................................3
Source and Amount of Funds......................................................................3
Purpose and Structure of the Merger.............................................................3
Certain Effects of the Merger; Plans for the Company Following the Merger.......................4
Contracts with Respect to Surviving Corporation Common Stock....................................5
Recommendation of the IRA Board and the Special Committee; Fairness of the Merger...............6
Position of the Management Group and First Command..............................................6
Opinion of the Financial Advisor................................................................6
Interests of Certain Persons in the Merger......................................................7
Employment Agreements...........................................................................7
Certain Transactions in IRA Common Stock........................................................7
Accounting Treatment............................................................................7
Regulatory Filings and Approvals................................................................8
Certain Federal Income Tax Consequences of the Merger...........................................8
The Special Meeting......................................................................................8
Time, Date and Place............................................................................8
Purpose of the Special Meeting..................................................................8
Record Date.....................................................................................8
Quorum .......................................................................................8
Voting Rights; Votes Required...................................................................9
Security Ownership of the Management Group......................................................9
Revocability of Proxy..........................................................................10
The Proposed Merger.....................................................................................10
General ......................................................................................10
Closing; Effective Time........................................................................10
Conversion of Shares...........................................................................10
Class A/B Shareholders Election; Procedures....................................................10
Charter and Bylaws.............................................................................11
Conditions to the Merger.......................................................................11
Termination....................................................................................13
Rights of Dissenting Shareholders..............................................................13
SELECTED FINANCIAL DATA OF IRA...................................................................................14
SELECTED FINANCIAL DATA OF FIRST COMMAND.........................................................................16
SUMMARY PRO FORMA DATA...........................................................................................17
</TABLE>
i
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<TABLE>
<S> <C>
SPECIAL FACTORS..................................................................................................19
Background of the Merger................................................................................19
Source and Amount of Funds..............................................................................24
Credit Facility................................................................................25
Purpose and Structure of the Merger.....................................................................26
Certain Effects of the Merger; Plans for the Company after the Merger...................................27
Contracts with Respect to Surviving Corporation Common Stock............................................30
Surviving Corporation Shareholders' Agreement..................................................30
Recommendation of the IRA Board and the Special Committee; Fairness of the Merger.......................30
Position of the Management Group and First Command as to the Fairness of the Merger.....................32
Opinion of the Financial Advisor........................................................................33
Income Approach................................................................................37
Transaction Approach...........................................................................37
Market Multiple Approach.......................................................................38
American Annuity Group, Inc...........................................................38
Cotton States Life Insurance Company..................................................39
Kansas City Life Insurance Company....................................................39
Current/Historical Market Pricing and Shareholder Agreement Analysis...........................40
Liquidation Value Approach.....................................................................40
Interests of Certain Persons in the Merger..............................................................41
Employment Agreements...................................................................................44
Certain Transactions in IRA Common Stock................................................................44
Purchases by IRA...............................................................................44
Recent Transactions............................................................................45
Purchases by Management Group..................................................................45
Accounting Treatment....................................................................................46
Regulatory Filings and Approvals........................................................................46
Certain Federal Income Tax Considerations...............................................................46
Certain Consequences of Reorganization Status..................................................47
The Company and the Surviving Corporation.............................................47
Class A/B Shareholders................................................................47
Shareholders Who Own Only Class B Stock...............................................48
Certain Post-Merger Considerations for Surviving Shareholders..................................48
Treatment as an S Corporation.........................................................48
Taxation of Surviving Corporation.....................................................48
Taxation of Surviving Corporation Shareholders........................................49
Tax Opinion Engagement.........................................................................49
CERTAIN INFORMATION CONCERNING IRA...............................................................................49
General ...............................................................................................49
Recent Developments.....................................................................................50
Directors and Executive Officers of IRA.................................................................50
Mission Accomplishment Plan.............................................................................51
First Command Bank......................................................................................52
CERTAIN INFORMATION CONCERNING FIRST COMMAND.....................................................................53
General ...............................................................................................53
Business ...............................................................................................53
Properties..............................................................................................54
Directors and Executive Officers of First Command.......................................................55
CERTAIN INFORMATION CONCERNING THE MANAGEMENT GROUP..............................................................56
</TABLE>
ii
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<TABLE>
<S> <C>
THE SPECIAL MEETING..............................................................................................57
General ...............................................................................................57
Record Date.............................................................................................57
Quorum ...............................................................................................58
Votes Required; Voting Rights...........................................................................58
Dissenters' Rights......................................................................................58
Solicitation of Proxies.................................................................................59
Revocability of Proxies.................................................................................59
THE PROPOSED MERGER..............................................................................................60
General ...............................................................................................60
Closing; Effective Time.................................................................................60
Conversion of Shares....................................................................................60
Shareholder Elections...................................................................................61
The Merger Agreement....................................................................................61
The Merger.....................................................................................61
Directors and Officers.........................................................................61
Charter and Bylaws.............................................................................62
Filings; Other Actions; Notification...........................................................62
Expenses ......................................................................................62
Indemnification................................................................................62
Employee Benefits..............................................................................63
Takeover Statute...............................................................................63
Conditions to the Merger.......................................................................63
Termination....................................................................................64
IRA Charter Business Combination Provision..............................................................65
State Anti-takeover Statutes............................................................................65
Rights of Dissenting Shareholders.......................................................................66
MARKET PRICE DATA, DISTRIBUTIONS AND
SECURITY OWNERSHIP OF IRA COMMON STOCK..................................................................68
Number of Security Holders..............................................................................68
Distribution History....................................................................................68
Security Ownership of Management and Certain Beneficial Owners of IRA Common Stock......................69
MARKET PRICE DATA, DISTRIBUTIONS AND SECURITY OWNERSHIP
OF FIRST COMMAND COMMON STOCK...........................................................................71
Number of Security Holders..............................................................................71
Distribution History....................................................................................71
Security Ownership of Management and Certain Beneficial Owners
of First Command Common Stock..................................................................71
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF IRA.....................................................73
DESCRIPTION OF IRA CAPITAL STOCK.................................................................................80
General ...............................................................................................80
Class A Stock...........................................................................................80
Class B Stock...........................................................................................80
Distributions; Preemptive Rights; Liquidation...........................................................81
</TABLE>
iii
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<TABLE>
<S> <C>
DESCRIPTION OF THE SURVIVING CORPORATION CAPITAL STOCK...........................................................82
General ...............................................................................................82
Common Stock............................................................................................82
Restrictions on Transfer of Shares......................................................................82
Subchapter S Provisions.................................................................................83
Revocation of Election.........................................................................83
Inadvertent Termination of Subchapter S Election...............................................83
Provision in Shareholder Wills.................................................................84
Distributions to Pay Tax Liabilities...........................................................84
Nonrecognition of Certain Transfers............................................................85
Legends on Share Certificates..................................................................85
Election to Close Books........................................................................85
Business Combination Provision..........................................................................85
Classified Board........................................................................................85
INDEPENDENT AUDITORS.............................................................................................86
OTHER MATTERS....................................................................................................86
AVAILABLE INFORMATION............................................................................................87
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..................................................................87
FIRST COMMAND FINANCIAL CORPORATION
INDEX TO BALANCE SHEETS................................................................................F-1
</TABLE>
ANNEX A -- Amended and Restated Agreement and Plan of Merger
ANNEX B -- Opinion of the Financial Advisor
ANNEX C -- Provisions of the Texas Business Corporation Act Relating
to Rights of Dissenting Shareholders
ANNEX D -- IRA Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1997, and Quarterly Report on Form 10-Q for the
Period Ended June 30, 1998, as amended September 9, 1998
ANNEX E -- Articles of Incorporation and Bylaws of Surviving
Corporation
ANNEX F -- Tax Opinion of Ernst & Young LLP
iv
<PAGE>
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
Certain of the statements contained in this Proxy Statement and in
documents incorporated herein by reference may be considered forward-looking
statements, including, without limitation, (i) the financial data provided in
"PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS" and the statements in
"SUMMARY PRO FORMA DATA," (ii) the statements in "SPECIAL FACTORS--Purpose and
Structure of the Merger" and "--Certain Effects of the Merger; Plans for the
Company after the Merger," (iii) the statements in "SPECIAL FACTORS--
Recommendation of the IRA Board, the Special Committee and First Command;
Fairness of the Merger" and "--Opinion of the Financial Advisor" concerning,
among other things, prospective considerations that the IRA Board of Directors
(the "IRA Board") took into account in arriving at its recommendation in favor
of the Merger and (iv) variations in the foregoing statements whenever they
appear in this Proxy Statement and the documents incorporated herein by
reference. Forward-looking statements are made based upon either IRA
management's current expectations and beliefs concerning future developments and
their potential effects upon IRA and, if applicable, the Surviving Corporation.
There can be no assurance that future developments affecting IRA or the
Surviving Corporation will be those anticipated by their respective managements.
Actual results may differ materially from those included in the forward-looking
statements. These forward-looking statements involve risks and uncertainties
including, but not limited to, the following: the event of armed conflict;
changes that affect the number of active U.S. military personnel; changes in
general economic conditions, including the performance of financial markets,
interest rates and the level of personal bankruptcies; customer responsiveness
to existing and new services; competitive, regulatory or tax changes that affect
the cost of or demand for IRA's or the Surviving Corporation's services; adverse
litigation results; and other factors set forth elsewhere in this Proxy
Statement and in the documents incorporated by reference herein.
While IRA reassesses material trends and uncertainties affecting its
financial condition and results of operations, in connection with its
preparation of management's discussion and analysis of financial condition and
results of operations contained in the Company's quarterly and annual reports,
neither IRA nor the Surviving Corporation intends to review or revise in light
of future events any particular forward-looking statement referenced in this
Proxy Statement or incorporated herein by reference.
The information referred to above should be considered by shareholders of
IRA (the "IRA Shareholders") when reviewing any forward-looking statements
contained in this Proxy Statement, in any documents incorporated herein by
reference, in any of IRA's public filings or press releases or in any oral
statements made by either IRA, First Command, the Surviving Corporation, or any
of their respective officers or other persons acting on their behalf.
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SUMMARY
The following is a summary of certain information contained elsewhere
in this Proxy Statement. It is not, and is not intended to be, complete in
itself. Reference is made to, and this summary is qualified in its entirety by,
the more detailed information contained elsewhere in this Proxy Statement,
including the annexes hereto which are a part of this Proxy Statement.
Shareholders are encouraged to read carefully all of the information contained
in this Proxy Statement.
IRA shareholders should consider carefully the information set forth
herein under the heading "Special Factors" in addition to the other information
presented herein.
The Companies
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Independent Research IRA was incorporated in 1980 under the laws of the State of Texas and is
Agency for Life Insurance, engaged, directly and indirectly through subsidiaries, in the business of a life
Inc.......................... insurance general agency for sales to United States military personnel. The
Company conducts its operations in all fifty states, the District of Columbia, the
territory of Guam, the United Kingdom, Germany and Italy. The Company's
wholly-owned subsidiary, United Services Planning Association, Inc., is also a
Texas corporation and is a broker-dealer of securities. The Company's wholly-
owned subsidiary, First Command Bank, is a federal savings bank. The
Company's principal executive offices are located at 4100 South Hulen Street,
Fort Worth, Texas 76109, and its telephone number is (817) 731-8621. See
"CERTAIN INFORMATION CONCERNING IRA."
First Command Financial First Command, a Texas corporation, was incorporated on April 1, 1998, for the
Corporation................... purpose of constructing and operating a parking garage (the "Parking Garage")
adjacent to the current executive offices of IRA. First Command plans to rent
parking spaces to current and future tenants leasing space in IRA's building with
the remaining parking spaces to be rented to IRA's employees. IRA has agreed
to loan First Command funds to complete the garage construction. The principal
executive offices of First Command are located at 4100 South Hulen Street, Fort
Worth, Texas 76109, and its telephone number is (817) 731-8621. See
"CERTAIN INFORMATION CONCERNING FIRST COMMAND." First
Command is owned by certain Class A Shareholders of the Company and is not
a subsidiary of the Company.
The Management The Merger is a "going private transaction" under the federal securities laws.
Group......................... Certain individuals who (i) are executive officers and directors of IRA, (ii) are
Class A Shareholders, (iii) will retain their position in the Surviving Corporation
after the Merger and (iv) will retain their equity interest in the Surviving
Corporation, are affiliates engaged in the going private transaction. These
individuals, each a director of IRA (other than Freda J. Payne), are (i) Lamar C.
Smith, Chairman of the Board and Chief Executive Officer of IRA, and
Chairman of the Board, Chief Executive Officer and a director of First
Command, (ii) James N. Lanier, President and Chief Operating Officer of IRA,
and President, Chief Operating Officer and a director of First Command, (iii)
Howard M. Crump, Senior Vice President and Director of Marketing of IRA, and
Vice President and a director of First Command, (iv) Carroll H. Payne II, who
is also a director of First Command, (v) Naomi K. Payne, (vi) Freda J. Payne,
(vii) Hal N. Craig, (viii) Donaldson D. Frizzell, (ix) Jerry D. Gray, and (x) David
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P. Thoreson (collectively, the "Management Group"). See "CERTAIN
INFORMATION CONCERNING THE MANAGEMENT GROUP."
Trading Markets and There is not now and never has been a trading market for shares of either Class
Market Price Data............ A Stock or Class B Stock, because of certain statutory and contractual
restrictions concerning the ownership and disposition of such shares. See
"MARKET PRICE DATA, DISTRIBUTIONS AND SECURITY OWNERSHIP OF IRA COMMON STOCK."
There is currently no market, and it is anticipated that no market will develop,
for the Surviving Corporation Voting Common Stock or the Surviving Corporation
Nonvoting Common Stock (collectively, the "Surviving Corporation Common Stock"),
because of certain statutory and contractual restrictions concerning the
ownership of such shares. See "MARKET PRICE DATA, DISTRIBUTIONS AND SECURITY
OWNERSHIP OF FIRST COMMAND COMMON STOCK."
Special Factors
Background of the For a description of events leading to the approval and adoption of the Merger
Merger....................... Agreement by the Boards of Directors of the Company and First Command, see
"SPECIAL FACTORS--Background of the Merger."
Source and Amount Approximately $16.9 million will be required to pay the Merger Consideration
of Funds..................... (assuming that no Class A/B Shareholder elects to receive the Class B Cash
Consideration), and approximately $1.2 million will be required to pay fees and
expenses related to the Merger. Approximately $2.1 million of the cash required
in connection with the Merger will be provided by the working capital of IRA,
and approximately $16 million of the cash required in connection with the
Merger will be provided from the Credit Facility (as defined below). See
"SPECIAL FACTORS--Source and Amount of Funds."
Purpose and Structure of the First Command was formed on April 1, 1998, as a Texas corporation, to
Merger....................... construct, own and operate the Parking Garage adjacent to the executive offices
of IRA. IRA has agreed to provide First Command with funds pursuant to an
interest-bearing loan to construct the Parking Garage. First Command was
organized as an entity distinct from IRA to limit potential liability of IRA with
respect to the ownership, construction and operation of the Parking Garage. As
First Command presently has a limited number of shareholders and meets the
other requirements of S corporation status, First Command elected S corporation
status in order for its taxable items to "flow through" to its shareholders. See
"SPECIAL FACTORS--Certain Effects of the Merger; Plans for the Company
after the Merger."
One objective of the Company is to deregister the Class B Stock under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which will
cause the Company to no longer be subject to the reporting requirements of the
Exchange Act. The Company currently incurs costs related to its status as a
public reporting corporation under the federal securities laws, including
indirect costs as a result of, among other things, the executive time expended
to prepare and review various filings, furnish information to shareholders and
to attend to other shareholder matters. The Company anticipates that termination of
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registration under the Exchange Act will eliminate the costs and expenses of
various federal securities filings incurred by the Company with respect to
regulatory and reporting requirements of the Exchange Act and will reduce the
amount of time devoted by management in connection therewith. Further, the
Company has faced certain competitive disadvantages resulting from the public
reporting requirements of the Exchange Act. Also, management of the Company
believes that access to public markets by the Company and its shareholders will
not occur because of the restrictions on ownership of the Class B Stock.
Additionally, the Company believes that it will qualify for S corporation status
immediately following the elimination of the Class B Stock. Management of the
Company recognized that, if the Class B Stock were eliminated, both IRA and
First Command would qualify for S corporation status. As a result, in order to
achieve administrative simplicity, reduce compliance responsibilities and
eliminate public reporting requirements as described above, the management of
IRA and the management of First Command decided that IRA should merge with and
into First Command, rather than to continue both as separate S corporations.
Immediately prior to the Merger, First Command will transfer all of its assets,
subject to all of its liabilities, to a newly-formed limited liability company
or Qualified Subchapter S Subsidiary (as defined in the Internal Revenue Code of
1986, as amended (the "Code")) in return for all of the members' interests in
the limited liability company or all of the capital stock of such subsidiary to
keep the planned operations of First Command separate and distinct from IRA
subsequent to the Merger. Because First Command currently has elected to be
treated as an S corporation under the federal tax laws, upon the consummation of
the Merger, the holders of Class A Stock that do not seek appraisal rights under
Articles 5.12 and 5.13 of the TBCA will be shareholders of the Surviving
Corporation, which should be an S corporation. Accordingly, such holders of
Class A Stock, as holders of Surviving Corporation Voting Stock, and Class A/B
Shareholders that elect to receive Surviving Corporation Nonvoting Stock for
their Class B Stock will be entitled to the tax treatment that shareholders of
an S corporation receive under the federal tax laws. See "SPECIAL
FACTORS--Certain Effects of the Merger; Plans for the Company after the Merger."
The Management Group has engaged in the transactions contemplated by the Merger
Agreement to assist the Company in attaining the objectives described above. See
"SPECIAL FACTORS--Purpose and Structure of the Merger."
Certain Effects of the Following the Merger, (i) the holders of Class A Stock (the "Class A
Merger; Plans for the Shareholders"), (ii) the Class A/B Shareholders that elect to receive Surviving
Company Following the Corporation Nonvoting Stock and (iii) the holders of First Command Common Stock
Merger....................... (the "First Command Shareholders") will own 100% of the capital stock of the
Surviving Corporation, to the extent that such shareholders do not elect to seek
appraisal rights. As such, these persons will be the direct beneficiaries of any
future earnings and growth of the Surviving Corporation, and will have the
ability to benefit from any divestitures, strategic acquisitions or other
corporate opportunities that may be pursued by the Company in the future. Upon
consummation of the Merger, the Class B Shareholders that are not Class A/B
Shareholders will cease to have any direct ownership interest in the Company or
other rights as shareholders of the Company, including the right to receive
distributions. After the Merger, such shareholders will benefit from any
increases in the cash flow or the value of the Surviving Corporation only as a
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result of any MAP Units (as defined herein) that such shareholders may then
hold. As a result of the Merger, the Surviving Corporation will be privately
held by the current holders of Class A Stock, including the Management Group.
See "SPECIAL FACTORS--Certain Effects of the Merger; Plans for the Company after
the Merger."
Pursuant to the Articles of Incorporation of the Surviving Corporation and the
Surviving Corporation Shareholders' Agreement (as defined below), the Surviving
Corporation has agreed to declare and make distributions to all shareholders of
the Surviving Corporation (the "Surviving Corporation Shareholders") to allow
them to pay their federal income tax liability attributable to their
distributive share of the Surviving Corporation's taxable income. In addition,
the IRA Board has provided the Class A/B Shareholders the right to receive the
Class B Nonvoting Stock Consideration. See "SPECIAL FACTORS--Background of the
Merger." Further, the IRA Board, which will be the Board of the Surviving
Corporation upon consummation of the Merger, anticipates that the Surviving
Corporation, subject to the fiduciary duties of the Board of Directors of the
Surviving Corporation and the ongoing financial condition of the Surviving
Corporation, will declare and make distributions that are pro rata to all
shareholders on the Surviving Corporation Common Stock that are intended to
approximate the income that the Class A/B Shareholder would have received from
the competitive reinvestment of the Class B Cash Consideration, taking into
account certain income tax considerations. In the event the Surviving
Corporation makes ongoing repurchases of the Surviving Corporation Voting Stock
or Surviving Corporation Nonvoting Stock, the IRA Board presently anticipates
that the repurchase price for such shares will be $28.24 per share, unless
otherwise determined by the Board of Directors of the Surviving Corporation. See
"SPECIAL FACTORS--Certain Effects of the Merger; Plans for the Company after the
Merger."
Contracts with Respect to Upon the Effective Time, the management of the Surviving Corporation will
Surviving Corporation Common request that all Surviving Corporation Shareholders, including the Management
Stock........................ Group, execute the Surviving Corporation Shareholders' Agreement. The Surviving
Corporation Shareholders' Agreement provides for, among other things, certain
restrictions on the transfer of the Surviving Corporation Common Stock held by
such Agreeing Parties and the requirement that shareholders tender their shares
to the Surviving Corporation upon the occurrence of certain operative events,
such as prior to any transfer of the shares, the death or divorce of the
shareholder, the termination of the shareholder as a duly authorized agent of
the Surviving Corporation or the termination of the shareholder as a Texas life
insurance agent. The Surviving Corporation Shareholders' Agreement also contains
certain provisions concerning the S corporation status of the Surviving
Corporation. Further, pursuant to the Surviving Corporation Shareholders'
Agreement, the Surviving Corporation has agreed to declare and make
distributions to all of its shareholders, including the Management Group, in a
timely manner to allow them to pay their federal income tax liability
attributable to their distributive share of the Surviving Corporation's taxable
income. See "SPECIAL FACTORS--Contracts with Respect to Surviving Corporation
Common Stock."
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Recommendation of the IRA The IRA Board, based upon the unanimous recommendation of the Special
Board and the Special Committee, has determined that the terms of the proposed Merger are fair to and
Committee; Fairness of the in the best interests of the IRA Shareholders, including Class B Shareholders
Merger....................... who do not own Class A Stock, and unanimously approved the Merger Agreement. In
arriving at its decision, the IRA Board gave careful consideration to a number
of factors, including the written opinion of PricewaterhouseCoopers LLP,
formerly known as Coopers & Lybrand LLP (the "Financial Advisor"), financial
advisor to the Special Committee. Accordingly, the IRA Board unanimously
recommends that you vote "for" approval of the Merger Agreement. The Board of
Directors of First Command has also unanimously approved the Merger Agreement.
See "SPECIAL FACTORS--Recommendation of the IRA Board and the Special Committee;
Fairness of the Merger."
Position of the Management Group The members of the Management Group have considered the process by which
and First Command............ the Company determined the terms of the Merger and certain additional factors
examined by the Special Committee and the IRA Board (described in detail in
"SPECIAL FACTORS--Recommendation of the IRA Board and the Special Committee;
Fairness of the Merger). Members of the Management Group believe that these
factors, when considered together, provide a reasonable basis for them to
believe, as they do, that the Merger is fair to the IRA Shareholders, including
Class B Shareholders who do not own Class A Stock.
The rules of the Securities and Exchange Commission require First Command to
express its belief as to the fairness of the Merger to the IRA Shareholders.
While First Command has not undertaken any independent evaluation of the Merger
from the standpoint of fairness to the Company's shareholders, it has considered
the factors that were taken into account by the Special Committee and the IRA
Board (described in detail in "SPECIAL FACTORS--Recommendation of the IRA Board
and the Special Committee; Fairness of the Merger) and by the members of the
Management Group. Based solely on these factors, First Command believes that the
Merger is fair to the IRA Shareholders, including Class B Shareholders who do
not own Class A Stock.
These beliefs should not, however, be construed as a recommendation to the IRA
Shareholders by the members of the Management Group in their capacity as
shareholders or First Command to vote or approve the Merger Agreement. See
"SPECIAL FACTORS--Position of the Management Group and First Command." Members
of the Management Group (other than Freda J. Payne) and the officers, directors
and principal shareholders of First Command are executive officers or directors
of the Company and have an interest in the contemplated Merger. See "SPECIAL
FACTORS--Interests of Certain Persons in the Merger."
Opinion of the Financial On June 27, 1998, the Financial Advisor delivered its report and form of written
Advisor..................... opinion to the Special Committee and the IRA Board to the effect that as of such
date and based upon and subject to the assumptions, limitations and
qualifications set forth in such opinion, the Merger is fair to the Class A
Shareholders and the Class B Shareholders from a financial point of view. The
Financial Advisor indicated that it was prepared to deliver its written opinion
in such form when requested to do so by the Special Committee. The Financial
Advisor subsequently confirmed such opinion by delivery of its written opinion,
dated as of the date of this Proxy Statement (the "Financial Advisor Opinion").
A copy of the Financial Advisor Opinion which sets forth the assumptions made,
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procedures followed, other matters considered and limits of its review is attached
hereto as Annex B. Shareholders are urged to and should read the Financial
Advisor Opinion in its entirety. See "SPECIAL FACTORS--Opinion of the
Financial Advisor."
Interests of Certain Persons Class B Shareholders should be aware in considering whether to vote in favor
in the Merger................ of the Merger that the Management Group, along with other Class A/B
Shareholders, have interests in the Merger in addition to their interests as
shareholders of IRA generally. Those interests relate to, among other things, the
fact that each of the members of the Management Group is a Class A
Shareholder and, as such, upon consummation of the Merger will be a
shareholder of the Surviving Corporation, unless such member of the
Management Group elects to seek appraisal rights for his Class A Stock. Further,
the IRA Board and the executive officers of IRA will be the directors and
executive officers of the Surviving Corporation upon consummation of the
Merger. As a result, each member of the Management Group that is currently an
officer or director of the Company will retain his or her position with the
Surviving Corporation upon consummation of the Merger. See "CERTAIN
INFORMATION CONCERNING IRA--Directors and Executive Officers of
IRA."
The Merger Agreement provides that IRA, and, after the Effective Time (as
defined below), the Surviving Corporation, will indemnify (and advance expenses
to) each present and former director, officer and employee of IRA and its
subsidiaries (the "Indemnified Parties") to the fullest extent permitted under
applicable law or under the Articles of Incorporation and Bylaws of IRA and the
Surviving Corporation against any costs incurred in connection with any claim,
proceeding or investigation relating to matters occurring prior to or at the
Effective Time, including the transactions contemplated by the Merger
Agreement. See "THE PROPOSED MERGER--The Merger Agreement--Indemnification."
Employment The IRA Board anticipates that the Surviving Corporation will enter into
Agreements................... employment agreements with each of the Surviving Corporation Shareholders
who are also employees of the Surviving Corporation. See "SPECIAL
FACTORS--Employment Agreements."
Certain Transactions in IRA See "SPECIAL FACTORS--Certain Transactions in Company Stock."
Common Stock.................
Accounting Treatment......... The Merger of the Company into First Command, with First Command becoming
the Surviving Corporation, will be treated for accounting purposes as a business
combination accounted for as a purchase. The conversion of each share of Class
A Stock of the Company issued and outstanding into five shares of the Surviving
Corporation Voting Stock will, in effect, result in the net assets of First
Command being recorded at their existing carrying value in conformity with
Generally Accepted Accounting Principles ("GAAP"), since the book value of
First Command would approximate fair value. The purchase of the Class B Stock
for the Class B Cash Consideration will reduce shareholder's equity of the
Surviving Corporation by a like amount. See "SPECIAL
FACTORS--Accounting Treatment."
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Regulatory Filings and See "SPECIAL FACTORS--Regulatory Filings and Approvals."
Approvals....................
Certain Federal Income A Class A/B Shareholder should not recognize gain or loss upon the exchange of
Tax Consequences of the Class A Stock solely into Surviving Corporation Voting Common Stock and Class B
Merger....................... Stock solely into Surviving Corporation Nonvoting Common Stock, unless he or she
elects the cash option with respect to his or her Class B Stock. Assuming the
Class A/B Shareholder does not elect the cash option, his or her tax basis in
shares of Surviving Corporation Common Stock received pursuant to the Merger
should be the same as the tax basis of the shares of a Class A/B Shareholder
surrendered in exchange therefor. A Class A/B Shareholder who elects the cash
option should consult his or her own tax advisor(s) concerning the election of
that option. A Class B Shareholder that is not a Class A/B Shareholder and is
not related to any shareholder of the Surviving Corporation should recognize
gain or loss equal to the difference between the amount of the Class B Cash
Consideration and the Class B Shareholder's tax basis in all the shares of Class
B Stock surrendered in exchange therefor. The Company should not recognize any
gain or loss as a result of the Merger for U.S. federal income tax purposes. See
"SPECIAL FACTORS--Certain Federal Income Tax Consequences of the Merger."
Ernst & Young LLP ("Ernst & Young") has provided the Company with an
opinion (the "Tax Opinion"), attached as Annex F, with respect to certain United
States federal income tax consequences that should arise from the Merger and
the implementation of the Mission Accomplishment Plan (as described herein).
The Special Meeting
Time, Date and Place......... The Special Meeting will be held on Monday, November 23, 1998, 1:30 p.m.,
local time, at 4100 South Hulen Street, Fort Worth, Texas 76109.
Purpose of the Special Class A Shareholders and Class B Shareholders will consider and vote upon a
Meeting...................... proposal to approve the Merger Agreement between the Company and First Command.
Class A Shareholders and Class B Shareholders, to the extent that Class B Stock
is permitted to vote on such matters, will also consider and vote upon all other
matters as may properly be brought before the Special Meeting. See "THE SPECIAL
MEETING" and "THE PROPOSED MERGER."
Record Date.................. Only shareholders of record of Class A Stock and/or Class B Stock at the close
of business on October 30, 1998 (the "Record Date"), are entitled to notice of
and to vote at the Special Meeting. On such date, there were outstanding 25
shares of Class A Stock and 942,808 shares of Class B Stock held by holders of
record. See "THE SPECIAL MEETING--Record Date."
Quorum....................... The presence, in person or by proxy, of the holders of a majority of Class A
Stock and the holders of a majority of Class B Stock entitled to vote at the
Special Meeting is necessary to constitute a quorum for the transaction of
business at such meeting. See "THE SPECIAL MEETING--Quorum." Abstentions are
counted for purposes of determining whether a quorum exists at the Special
Meeting. However, proxies that reflect abstentions and proxies that are not
returned will have the same effect as a vote against approval of the Merger
Agreement because the affirmative vote of (i) the holders of at least 66-
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2/3% of the outstanding shares of Class A Stock and Class B Stock, voting together as
a single class, (ii) the holders of at least 66-2/3% of the outstanding shares
of Class A Stock and Class B Stock, each voting separately as a class, and (iii)
the holders of at least a majority of the outstanding shares of Class B Stock
not held by Class A/B Shareholders, is required to approve the Merger Agreement.
See "THE SPECIAL MEETING--Votes Required; Voting Rights."
Voting Rights; Votes Each share of Class A Stock and Class B Stock is entitled to one vote with
Required..................... respect to the approval of the Merger at the Special Meeting. With regard to any
other matters presented at the Special Meeting, each share of Class A Stock will
be entitled to one vote, and the Class B Shareholders will not be entitled to
vote. See "THE SPECIAL MEETING--Votes Required; Voting Rights."
The affirmative vote of (i) the holders of at least 66-2/3% of the outstanding
shares of Class A Stock and Class B Stock, voting together as a single class,
(ii) the holders of at least 66-2/3% of the outstanding shares of Class A Stock
and Class B Stock, each voting separately as a class, and (iii) the holders of
at least a majority of the outstanding shares of Class B Stock not held by Class
A/B Shareholders, is required to approve the Merger Agreement.
As of the Record Date, there were 657,327 shares of Class B Stock held by
persons other than the Management Group. Therefore, to receive the requisite
approval of the holders of Class B Stock voting separately as a class, at least
343,058 shares of Class B Stock held by Class B Shareholders who are not members
of the Management Group will be needed to approve the Merger Agreement.
Furthermore, as of the Record Date, there were 583,349 shares of Class B Stock
held by Class B Shareholders who are not Class A/B Shareholders. Therefore,
to receive the requisite approval of a majority of the outstanding shares of Class
B Stock not held by Class A/B Shareholders, at least 291,675 shares of Class B
Stock held by Class B Shareholders who are not Class A/B Shareholders will be
needed to approve the Merger Agreement.
Security Ownership of the As of the Record Date, the Management Group beneficially owns an aggregate
Management Group............. of 16 shares of Class A Stock and 285,481 shares of Class B Stock (representing
approximately 64% and 30.28% of the outstanding Class A Stock and Class B
Stock, respectively). Each member of the Management Group intends to vote all
shares of Class A Stock and Class B Stock beneficially owned by him or her for
approval of the Merger Agreement. See "THE SPECIAL MEETING--Votes
Required; Voting Rights." There are five First Command Shareholders, who
beneficially own an aggregate of 1,000 shares of First Command Common Stock
(representing 100% of the outstanding shares of First Command Common Stock).
Each of the First Command Shareholders is a member of the Management Group
and, other than Freda J. Payne, is (i) a member of the executive committee of the
IRA Board and (ii) an executive officer or director of First Command. To the
knowledge of First Command, each of the First Command Shareholders intends
to vote all shares of First Command Common Stock beneficially owned by him
or her for approval of the Merger Agreement. See "MARKET PRICE DATA,
DISTRIBUTIONS AND SECURITY OWNERSHIP OF FIRST COMMAND
COMMON STOCK--Security Ownership of Management and Certain Beneficial
Owners of First Command Common Stock."
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Revocability of Proxy........ Any IRA Shareholder who executes and returns a proxy may revoke such proxy
at any time before it is voted by (i) notifying in writing the Corporate Secretary
of IRA at 4100 South Hulen Street, Fort Worth Texas 76109, (ii) granting a
subsequent proxy or (iii) appearing in person and voting at the Special Meeting.
Attendance at the Special Meeting will not in and of itself constitute revocation
of a proxy.
The Proposed Merger
General...................... At the Effective Time, pursuant to the Merger Agreement, the Company will be
merged with and into First Command in accordance with the applicable provisions
of the Texas Business Corporation Act ("TBCA").
Closing; Effective Time...... The closing of the Merger (the "Closing") will take place on the first date that
all conditions to the Merger shall be satisfied or waived in accordance with the
Merger Agreement or such date as the Company and First Command may agree
in writing (the "Closing Date"). The Merger will be effective upon the filing of
the Articles of Merger in accordance with the applicable laws of the State of
Texas (the "Effective Time"). See "THE PROPOSED MERGER--Closing;
Effective Time."
Conversion of Shares......... In the Merger, each share of Class A Stock of the Company issued and
outstanding at the Effective Time (other than shares of Class A Stock held in
treasury by the Company), subject to and upon the terms and conditions of the
Merger Agreement, will be converted into five shares of Surviving Corporation
Voting Stock. Further, (i) each share of Class B Stock held by a Class B
Shareholder that is not a Class A/B Shareholder that is issued and outstanding
immediately prior to the Effective Time, subject to and upon the terms and
conditions of the Merger Agreement, will be converted into $28.24 in cash,
without interest, and (ii) each share of Class B Stock held by a Class A/B
Shareholder issued and outstanding immediately prior to the Effective Time,
subject to and upon the terms and conditions of the Merger Agreement, will be
converted into one share of Surviving Corporation Nonvoting Stock; provided,
however, that each Class A/B Shareholder may elect to receive, in lieu of
receiving the Class B Nonvoting Stock Consideration, the Class B Cash
Consideration for all shares of Class B Stock held immediately prior to the
Effective Time. Each holder of First Command Common Stock, issued and
outstanding immediately prior to the Effective Time, subject to and upon the
terms and conditions of the Merger Agreement, will receive one share of
Surviving Corporation Nonvoting Stock for each 25 shares of First Command
Common Stock held by such shareholder. See "THE PROPOSED
MERGER--Conversion of Shares."
Class A/B Shareholders
Election; Procedures......... Subject to certain allocation procedures, Class A/B Shareholders as of the Record
Date will be entitled to, in addition to receiving the Class A Consideration for
their Class A Stock, elect to receive for each share of Class B Stock held thereby
either (A) the Class B Nonvoting Stock Consideration or (B) the Class B Cash
Consideration. A Class A/B Shareholder may not elect to receive both the Class
B Nonvoting Stock Consideration and the Class B Cash Consideration. If such
Class A/B Shareholder indicates that such record holder has no preference as to
the receipt of Class B Nonvoting Stock Consideration or the Class B Cash
Consideration or fails to make a timely election (a "Non-Election"), such Class
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
A/B Shareholder shall be deemed to have elected to receive the Class B Nonvoting
Stock Consideration. The Company will use its best efforts to make a Form of
Election available to all persons who become Class A/B Shareholders of record
between the date of mailing of this Proxy Statement and the Election Deadline.
All such elections shall be made on the Form of Election mailed to Class A/B
Shareholders as of the Record Date along with this Proxy Statement. To be
effective, a Form of Election must be returned, properly completed, to the
Paying Agent no later than the Election Deadline. A Class A/B Shareholder that
fails to submit an effective Form of Election prior to the Election Deadline
shall be deemed to have made a Non-Election.
Elections may be revoked or amended upon written notice to the Paying Agent
prior to the Election Deadline. See "THE PROPOSED MERGER--Shareholder
Elections."
Charter and Bylaws........... Pursuant to the Merger Agreement, the Articles of Incorporation and Bylaws of
First Command as in effect immediately prior to the Effective Time will be the
Articles of Incorporation and Bylaws, respectively, of the Surviving Corporation
following the Merger until duly amended as provided therein and by applicable
law. The Merger Agreement provides that at the Effective Time the Articles of
Incorporation of the Surviving Corporation shall be amended to provide for the
change of the name of the Surviving Corporation to "Independent Research
Agency for Life Insurance, Inc." A copy of the Articles of Incorporation and the
Bylaws of the Surviving Corporation are attached hereto as Annex E. See "THE
PROPOSED MERGER--The Merger Agreement--Charter and Bylaws."
Conditions to the The obligation of First Command to consummate the Merger is subject to the
Merger....................... satisfaction of a number of conditions, including, among others (i) the
performance and compliance of IRA in all material respects with all agreements,
obligations and conditions required by the Merger Agreement to be performed
or complied with by IRA on or prior to the Closing Date; (ii) the holders of (A)
two- thirds (2/3) of the outstanding shares of Class A Stock and Class B Stock,
voting as a single class, (B) two-thirds (2/3) of the outstanding shares of Class
A Stock and Class B Stock, each voting separately as a class, and (C) holders
of a majority of the outstanding shares of Class B Stock not held by Class A/B
Shareholders, that are eligible to vote at the Special Meeting shall have voted for
approval and adoption of the Merger Agreement; (iii) the holders of two-thirds
(2/3) of the outstanding shares of First Command Common Stock shall have
voted for approval and adoption of the Merger Agreement; (iv) all approvals,
consents, authorizations and waivers from governmental and other regulatory
agencies and other third parties required to consummate the transactions
contemplated by the Merger Agreement, which either individually or in the
aggregate, if not obtained, would have a materially adverse effect on the financial
condition, results of operations or business of IRA or would prevent
consummation of the Merger and the other transactions contemplated by the
Merger Agreement, shall have been obtained; (v) on the Closing Date, there shall
be no effective injunction, writ, temporary restraining order or any order of any
nature issued by a court of competent jurisdiction or other governmental
authority directing that the transactions provided for in the Merger Agreement
or any of them not be consummated as so provided or imposing any conditions
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
on the consummation of the transactions contemplated by the Merger Agreement
that First Command deems unacceptable in its sole discretion; (vi) no suit,
action, or other proceeding seeking to restrain, prevent or change the
transactions contemplated by the Merger Agreement or otherwise questioning the
validity or legality of such transactions shall have been instituted and be
pending; and (vii) the holders of no more than 20% of either of the outstanding
Class A Stock or the Class B Stock shall have delivered notice of their intent
to exercise their right to dissent under the TBCA.
The obligation of IRA to consummate the Merger is subject to the satisfaction of
a number of conditions, including, among others (i) the performance and
compliance of First Command with all agreements, obligations and conditions
required by the Merger Agreement to be performed or complied with by First
Command on or prior to the Closing Date; (ii) IRA shall not have received
written notice from the Financial Advisor that it has withdrawn, revoked or
modified its opinion as to the fairness of the Transaction (as defined herein)
to the IRA Shareholders, from a financial point of view; (iii) the holders of
(A) two-thirds (2/3) of the outstanding shares of Class A Stock and Class B
Stock, voting as a single class, (B) two-thirds (2/3) of the outstanding shares
of Class A Stock and Class B Stock, each voting separately as a class, and (C)
holders of a majority of the outstanding shares of Class B Stock not held by
Class A/B Shareholders, that are eligible to vote at the Special Meeting shall
have voted for approval and adoption of the Merger Agreement; (iv) the holders
of two-thirds (2/3) of the outstanding shares of First Command Common Stock
shall have voted for approval and adoption of the Merger Agreement; (v) all
approvals, consents, authorizations and waivers from governmental and other
regulatory agencies and other third parties required to consummate the
transactions contemplated by the Merger Agreement, which either individually or
in the aggregate, if not obtained, would have a materially adverse effect on the
financial condition, results of operations or business of IRA or would prevent
consummation of the Merger and the other transactions contemplated by the Merger
Agreement, shall have been obtained; (vi) on the Closing Date, there shall be no
effective injunction, writ, temporary restraining order or any order of any
nature issued by a court of competent jurisdiction or other governmental
authority directing that the transactions provided for in the Merger Agreement
or any of them not be consummated as so provided or imposing any conditions on
the consummation of the transactions contemplated by the Merger Agreement that
IRA deems unacceptable in its sole discretion; (vii) no suit, action, or other
proceeding seeking to restrain, prevent or change the transactions contemplated
by the Merger Agreement or otherwise questioning the validity or legality of
such transactions shall have been instituted and be pending; and (viii) the
holders of no more than 20% of either of the outstanding Class A Stock or the
Class B Stock shall have delivered notice of their intent to exercise their
right to dissent under the TBCA.
The conditions to each of the parties' obligations to consummate the Merger are
for the sole benefit of such party and may be waived by such party in whole or
in part to the extent permitted by applicable law. In the event a modification
or waiver by IRA or First Command is contemplated that requires shareholder
approval under applicable law, a supplement to this Proxy Statement will be
distributed to IRA Shareholders, and proxies will be resolicited. See "SPECIAL
MEETING OF IRA SHAREHOLDERS--Solicitation of Proxies." Neither First
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Command nor IRA currently contemplates waiving or modifying any of the
foregoing conditions. See "THE PROPOSED MERGER--The Merger
Agreement--Conditions to the Merger."
Termination.................. The Merger Agreement may be terminated and the Merger abandoned at any
time prior to the Effective Time, (i) by mutual consent of the Boards of Directors
of First Command and IRA; (ii) by either IRA or First Command if at the Special
Meeting, or any adjournment thereof, the shareholders of IRA fail to adopt and
approve the Merger; (iii) by either IRA or First Command if the shareholders of
First Command fail to adopt and approve the Merger; and (iv) by either IRA or
First Command if a court of competent jurisdiction or governmental, regulatory
or administrative agency or commission shall have issued an order, decree or
ruling or taken any other action, in each case permanently restraining,
enjoining or otherwise prohibiting the transactions contemplated by the Merger
Agreement, and such order, decree, ruling or other action shall have become
final and nonappealable. See "THE PROPOSED MERGER--The Merger
Agreement--Termination."
Rights of Dissenting
Shareholders................. If the Merger is consummated, shareholders that comply with certain requirements
of the TBCA ("Dissenting Shareholders") will be entitled to exercise their
appraisal rights with regard to their shares of Class A Stock or Class B Stock
in accordance with the procedures set forth in Articles 5.12 and 5.13 of the
TBCA. Shareholders wishing to exercise dissenters' rights must (i) not vote in
favor of approval of the Merger Agreement (which would include submitting a
signed proxy without voting instructions); (ii) deliver to the Company, prior to
the Meeting, written notice of their objection to the Merger stating that they
will exercise their right to dissent under the TBCA if the Merger is effected;
and (iii) strictly comply with the other requirements of the TBCA. Failure to
follow the procedures required by Articles 5.12 and 5.13 of the TBCA may result
in the loss of dissenters' rights (in which event a shareholder will be entitled
to receive the Merger Consideration with respect to such shareholder's shares of
Class A Stock or Class B Stock in accordance with the Merger Agreement). See
"THE PROPOSED MERGER--Rights of Dissenting Shareholders."
</TABLE>
13
<PAGE>
SELECTED FINANCIAL DATA OF IRA
The following table presents summary historical financial data of IRA and
its consolidated subsidiaries for the periods indicated. The related data for
the five years ended September 30, 1997, are derived from the audited financial
statements of IRA and its subsidiaries. IRA's Annual Report on Form 10-K for the
fiscal year ended September 30, 1997 (the "IRA 10-K") is incorporated by
reference in this Proxy Statement and enclosed herewith. The financial data as
of and for the nine months ended June 30, 1998 and 1997, were derived from IRA's
unaudited quarterly financial statements included in IRA's Quarterly Report on
Form 10-Q for the nine months ended June 30, 1998 and incorporated by reference
in this Proxy Statement and enclosed herewith, and, in the opinion of IRA's
management, reflect all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation of such data. The data for the nine months
ended June 30, 1998 and 1997, are not necessarily indicative of results of
operations for the entire year. The data should be read in conjunction with the
consolidated financial statements, related notes and other financial information
of IRA included and incorporated by reference in this Proxy Statement.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Commissions revenue $122,329,601 $116,632,069 $108,443,810 $100,491,633 $93,767,954
Bank operations 58,458 -0- -0- -0- -0-
Operating expenses (113,528,791) (109,040,366) (102,510,314) (93,421,636) (86,224,269)
------------- ------------- ------------- ------------- -------------
Operating income 8,859,268 7,591,703 5,933,496 7,069,997 7,543,685
Other income 5,216,114 3,719,793 4,201,478 3,464,253 3,280,284
------------- ------------- ------------- ------------- -------------
Income before income taxes 14,075,382 11,311,496 10,134,974 10,534,250 10,823,969
Income taxes (4,639,886) (3,842,639) (3,417,024) (3,561,062) (3,567,212)
------------- ------------- ------------- ------------- -------------
Net income $9,435,496 $7,468,857 $6,717,950 $6,973,188 $7,256,757
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Basic earnings per share $10.06 $7.97 $7.18 $7.51 $7.65
</TABLE>
<TABLE>
Nine Months Ended
June 30,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Income Statement Data:
Commissions revenue $95,006,492 $90,834,961
Bank operations 1,087,339 41,995
Operating expenses (92,511,232) (84,944,354)
------------- -------------
Operating income 3,582,599 5,932,602
Other income 7,416,922 5,472,678
------------- -------------
Income before income taxes 10,999,521 11,405,280
Income taxes (3,467,015) (3,728,593)
------------- -------------
Net income $7,532,506 $7,676,687
------------- -------------
------------- -------------
Basic earnings per share $7.64 $8.23
</TABLE>
<TABLE>
<CAPTION>
As of September 30,
------------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Current assets $23,860,692 $23,926,327 $21,367,029 $20,067,223 $19,700,911
Property and equipment 12,145,961 12,614,194 13,303,488 10,883,370 10,918,721
Bank assets 22,062,980 -0- -0- -0- -0-
Other assets 67,826,675 52,149,411 44,964,482 35,145,007 23,970,401
------------ ------------ ------------ ------------ ------------
Total assets $125,896,308 $88,689,932 $79,634,999 $66,095,600 $54,590,033
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Current liabilities $33,395,193 $27,742,525 $27,243,419 $26,644,967 $22,211,796
Bank liabilities 13,437,520 -0- -0- -0- -0-
Long-term obligations 25,127,512 16,998,700 12,376,835 7,256,834 3,256,623
Equity 53,936,083 43,948,707 40,014,745 32,193,799 29,121,614
------------ ------------ ------------ ------------ ------------
Total liabilities and equity $125,896,308 $88,689,932 $79,634,999 $66,095,600 $54,590,033
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Per Share Data:
Book value per share $51.20 $44.72 $39.70 $35.79 $29.55
Cash dividends per share (7.73) (7.63) (4.50) (4.88) (7.31)
Unrealized gains per
share, net (1) (15.23) (10.05) (8.16) (5.79) --
------------ ------------ ------------ ------------ ------------
Per share price (2) $28.24 $27.04 $27.04 $25.12 $22.24
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
As of June 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Balance Sheet Data:
Current assets $13,750,383 $23,860,692
Property and equipment 12,668,931 12,145,961
Bank assets 59,685,034 22,062,980
Other assets 78,028,243 67,826,675
------------ ------------
Total assets $164,132,591 $125,896,308
------------ ------------
------------ ------------
Current liabilities $33,962,103 $33,395,193
Bank liabilities 50,874,747 13,437,520
Long-term obligations 27,613,452 25,127,512
Equity 51,682,289 53,936,083
------------ ------------
Total liabilities and equity $164,132,591 $125,896,308
------------ ------------
------------ ------------
Per Share Data:
Book value per share $54.55 $50.30
Cash dividends per share -- --
Unrealized gains per
share, net (1) (18.27) (14.78)
------------ ------------
Per share price (2) (3) (3)
------------ ------------
------------ ------------
</TABLE>
- ------------------------------
(1) Beginning in fiscal year 1994, as required by Statement of Financial
Accounting Standards ("SFAS") 115 "Accounting for Certain Investments in
Debt and Equity Securities," the Company accounted for unrealized
investment gains in its balance sheet's equity section, net of federal
income taxes. Since the appreciation is unrealized, it is not, and has
never been, included in the determination of the Company's per share
price.
14
<PAGE>
(2) The increase in per share price over the previous year's share price is
added incrementally, 1/12th per month for the ensuing 12 months, to the
current September 30 share price (based upon the prior year's
computation). For example, the book value per share exclusive of
unrealized gains at September 30, 1996, less the dividends declared as of
that date, resulted in a Class B Stock price per share at September 30,
1997 of $27.04. The increase in book value per share, exclusive of
unrealized gains (and net of the fiscal 1996 dividend paid in December
1996), for the fiscal year ended September 30, 1997 was $8.93, of which
$7.73 was paid as a dividend in December 1997. The remaining $1.20 per
share has been allocated at $0.10 per month throughout fiscal year 1998,
which will result in a per share price of $28.24 as of September 1998.
(3) The share price at interim periods is based on the prior year's book value
per share, net of unrealized gains, net of tax, and dividends per share.
Current year net income is either paid as a dividend as of the end of the
year or included in the stock price the following year (see Note 2 above).
15
<PAGE>
SELECTED FINANCIAL DATA OF FIRST COMMAND
The following table presents summary historical financial data of First
Command as of the periods indicated. The historical financial data as of May 31,
1998, are derived from First Command's audited balance sheet enclosed herewith.
The historical financial data as of June 30, 1998, are derived from First
Command's unaudited balance sheet enclosed herewith. Because First Command had
only three months of operations as of June 30, 1998, only balance sheet data
have been presented. The data should be read in conjunction with the balance
sheet, related notes and other financial information of First Command included
elsewhere in this Proxy Statement. See "FIRST COMMAND FINANCIAL CORPORATION
BALANCE SHEET."
<TABLE>
<CAPTION>
As of As of
May 31, 1998 June 30, 1998
-------------------- ----------------------
<S> <C> <C>
Balance Sheet Data:
Current assets.............................. $ 893 $ 1,000
Total assets................................ 13,203 34,265
Current liabilities......................... 12,310 -0-
Stockholders' equity........................ 893 (6,746)
Per Share Data:
Book value per share........................ $ 0.89 $ (6.75)
Cash dividends per share.................... -- --
</TABLE>
16
<PAGE>
SUMMARY PRO FORMA DATA
The following table sets forth selected unaudited pro forma financial data
derived from the Pro Forma Condensed Consolidated Financial Statements included
under the section "PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF
IRA." The pro forma balance sheet data and the pro forma statement of operations
data gives effect to the Merger as if it were consummated on June 30, 1998 and
October 1, 1996, respectively. The pro forma financial information is based on
assumptions that management believes are reasonable and such information is
presented for comparative and informational purposes only. The pro forma
financial information does not purport to represent what the Company's results
of operations or financial condition would have actually been had the Merger in
fact occurred on such dates or to project the Company's results of operations
for any future period or financial condition of any future date. This table
should be read in conjunction with the Pro Forma Condensed Consolidated
Financial Statements included under the section "PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS OF IRA" and the IRA 10-K, the Company's
Quarterly Reports on Form 10-Q for the nine months ended June 30, 1998, the
Consolidated Financial Statements of the Company and related notes thereto, the
Balance Sheet of First Command and related notes thereto and the other financial
information contained in the documents included or incorporated by reference
herein. See "INCORPORATION BY REFERENCE."
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC. AND
FIRST COMMAND CORPORATION
Selected Unaudited Pro Forma Combined Condensed Financial Data
<TABLE>
<CAPTION>
For the
For the Year Ended Nine Months Ended
September 30, 1997 June 30, 1998
---------------------- ---------------------
<S> <C> <C>
Income Statement Data:
Commissions revenue................................. $ 122,329,601 $ 95,006,492
Bank operations..................................... 58,458 1,087,339
Operating expenses.................................. (126,484,173) (102,665,308)
--------------------- --------------------
Operating income.................................... (4,096,114) (6,571,477)
Other income........................................ 4,096,114 6,571,477
--------------------- --------------------
Income before income taxes.......................... -- --
Income taxes........................................ -- --
--------------------- --------------------
Net income.......................................... $ -- $ --
--------------------- --------------------
--------------------- --------------------
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
As of
June 30, 1998
---------------------
<S> <C>
Balance Sheet Data:
Current assets................................................. $ 12,608,585
Property and equipment......................................... 12,695,701
Bank assets.................................................... 59,685,034
Other assets................................................... 78,034,738
---------------------
Total assets.......................................... $ 163,024,058
---------------------
---------------------
Current liabilities............................................ $ 33,962,103
Bank liabilities............................................... 50,874,747
Long-term obligations.......................................... 42,240,784
Equity......................................................... 35,946,058
---------------------
Total liabilities and equity.......................... $ 163,024,058
---------------------
---------------------
Book value per share (1)....................................... $ 99.96
---------------------
---------------------
</TABLE>
- ------------------------------
(1) Pro forma book value per share does not include the anticipated charge to
equity to reflect the Mission Accomplishment Plan compensation that is
expected to be recorded for subsequent periods. Per the Pro Forma
Condensed Consolidated Income Statement, the charge to equity for the nine
months ending June 30, 1998 is expected to have been $10,154,076.
Per share data:
<TABLE>
<CAPTION>
Independent First Command
Research Agency Financial Corporation Pro Forma Combined
----------------- ----------------------- -----------------------
<S> <C> <C> <C>
Basic earnings per year:
Fiscal year ended September 30, 1997 $ 10.06 $ 0.00 $ 0.00
Nine months ended June 30, 1998.... 7.64 (7.75) 0.00
Dividends per share:
Fiscal year ended September 30, 1997 $ 7.73 $ 0.00 $ 0.00
Nine months ended June 30, 1998.... 0.00 0.00 0.00
Book value per share:
At June 30, 1998................... $ 54.55 $ (6.75) $ 99.96
</TABLE>
18
<PAGE>
SPECIAL FACTORS
Background of the Merger
In early 1997,becauseof the costs associated with its being a public
company and the competitive disadvantages of having to make public disclosures
in Exchange Act filings, the Company began to consider becoming a privately-held
company pursuant to a transaction in which the registration of the Class B Stock
under the Exchange Act would be terminated. The Company is a managing general
insurance agency that sells life insurance to United States military personnel.
Most of the Company's competitors are not public companies, so they do not have
to make public disclosures regarding their earnings, products, relationships
with insurance carriers and other matters. Consequently, certain information
about the Company that is publicly available is not similarly available about
the Company's competitors. In the event that the Merger is approved by the
Company's shareholders, the Company will not have to make public disclosures
that can be competitively disadvantageous. Additionally, the costs associated
with compiling information creates an additional disadvantage to IRA as compared
to the Company's competitors that do not have similar public filing
requirements. These costs include the compilation of the information for such
filings, the expense of attorneys and accountants and the management time
required to make such filings.
During this period, Ernst & Young advised the Company that, based upon the
facts presented at that time, upon the elimination of the Class B Stock, the
Company could be eligible for S corporation status. In the ensuing months of
1997, the Company continued to study the feasibility and ramifications of such a
transaction. The Company selected Ernst & Young based on its experience with
respect to tax issues. Ernst & Young has been engaged by the Company as its
principal independent accountants. The Company will pay Ernst & Young a fee of
$150,000 with respect its engagement as the Company's principal independent
accountants for its fiscal year ended September 30, 1998. In addition, Ernst &
Young issued the Tax Opinion for the Company. See "--Certain Federal Income Tax
Considerations--Tax Opinion Engagement."
In March 1998, Ernst & Young, the principal independent accountants for the
Company and First Command, prepared a report for the Company that summarized the
major advantages and disadvantages of IRA electing S corporation status. The
letter contained an example of the tax savings available to IRA, assuming IRA
had elected to be taxed as an S corporation for federal income tax purposes for
the tax year ended September 30, 1998. An example in the letter indicated that
the Company and its shareholders combined would pay approximately 54% less
income tax by electing S corporation status, assuming all items of income and
expense are treated equally by taxpayers of the S corporation and C corporation
and the Company declares a dividend of all of its income to the shareholders. In
addition, the example assumes a tax rate of 39.6% for the shareholders of the S
corporation. The letter also provided certain cautionary language regarding
potential built-in gains tax, excess passive income tax and eligibility
requirements for electing S corporation status. In summary, the letter stated
that, after reviewing the dividend history of IRA (pursuant to which all of its
earnings are paid as dividends to its shareholders), the benefits discussed in
the letter provide a significant level of support for the Company's electing S
corporation status. A copy of this report has been filed as an exhibit to the
Schedule 13E-3, and it will be made available for inspection and copying at the
principal executive offices of the Company during its regular business hours by
any IRA Shareholder or his representative who has been so designated in writing.
Alternatively, the Company will transmit a copy of the report to such IRA
Shareholder (or his or her designated representative) upon written request and
at the expense of such IRA Shareholder. See "--Purpose and Structure of the
Merger."
Additionally, during 1997 the Company established plans to construct and
operate a parking garage for employees of the Company and current and future
tenants in IRA's building. Management was concerned, however, about the
potential liability of IRA in connection with the construction and operation of
a parking garage. As a result, First Command was formed on April 1, 1998, to
limit this potential liability of IRA. At its inception, First Command qualified
for, and elected, S corporation status. See "CERTAIN INFORMATION CONCERNING
FIRST COMMAND--Business."
19
<PAGE>
First Command was formed to construct and manage the parking garage
facilities adjacent to the building currently occupied by IRA. The parking
garage facilities will be used almost exclusively by IRA and its affiliates'
employees and independent contractors. The Company is leasing the land to First
Command for a nominal payment of $1.00 per year. First Command is leasing all of
the parking spaces in the Garage to IRA for a base rent of $51,250.00 per month,
which will provide First Command with funds to service its debt and meet
operating costs of the parking garage. IRA will pay all real estate and personal
property taxes associated with the garage and land that it occupies. IRA will
sublease some of the parking spaces to other tenants who occupy IRA's office
building. The contractual arrangements between First Command and IRA do not
result in a financial benefit or a financial detriment to First Command or IRA.
The terms of the agreements are at least as beneficial to the Company and First
Command as would have been obtained in an arms-length transaction with an
unaffiliated third party. See "CERTAIN INFORMATION CONCERNING FIRST
COMMAND--Business" and "CERTAIN INFORMATION CONCERNING FIRST
COMMAND--Properties."
In April 1998, management of the Company determined that it would be in the
best interests of the Company to further investigate the deregistration of the
Class B Stock, thereby eliminating the Company's reporting requirements under
the Exchange Act and minimizing the administrative duties that correspond with
such reporting requirements. Additionally, management believed that the Company
would qualify for S corporation status after the elimination of its Class B
Stock.
On April 27, 1998, at a special meeting of the IRA Board attended by all
directors except Naomi K. Payne, after a presentation by Lamar C. Smith,
Chairman of the Board and Chief Executive Officer of IRA, and Martin R. Durbin,
Chief Financial Officer of IRA, the IRA Board adopted by a unanimous vote of all
directors present a resolution authorizing and instructing the officers of the
Company to pursue a plan that would allow the Company to achieve operating
efficiencies through elimination of the Class B Stock and its subsequent
qualification for S corporation status. The Company then retained Haynes and
Boone, LLP, Fort Worth, Texas, as special securities and tax counsel. The
Company also engaged Ernst & Young LLP, as tax advisors. The Company selected
these firms because of their reputation in corporate and securities and tax law
matters.
The IRA Board held a special meeting on May 8, 1998, which was attended by
all directors other than Mr. Arnold Punaro. Because Texas law requires all
directors of a Texas insurance company be licensed insurance agents and because
Mr. Punaro was not a licensed insurance agent, Mr. Punaro resigned and became an
advisory director of the Company at this special meeting. Martin R. Durbin and
Lamar C. Smith updated the IRA Board regarding the plan to achieve the IRA
Board's objectives of eliminating its Class B Stock and qualifying for S
corporation status. As part of this plan, management contemplated that, upon the
elimination of the Class B Stock, IRA should qualify as an S corporation. As a
result, in order to achieve administrative simplicity associated with the
elimination of costs and time necessary to prepare two sets of tax returns and
to reduce compliance responsibilities and reporting requirements that would
result from the deregistration of the Class B Stock, management of IRA and First
Command proposed a merger between IRA and First Command, pursuant to which IRA
would merge with and into First Command, which would be the surviving
corporation.
Following this presentation and a discussion, the IRA Board determined that
it would be advisable to establish a special committee of independent directors
(the "Special Committee") to determine whether the terms of the proposed
transaction were fair to and in the best interests of the IRA Shareholders,
which includes the Class B Shareholders who do not own Class A Stock (and
certain Class A/B Shareholders who are not officers or directors). As the IRA
Board had no members that did not own Class A Stock or Class B Stock, pursuant
to the Bylaws of IRA, the IRA Board elected James J. Ellis to serve in the class
of directors whose term expires on December 31, 1999, and Logan Dickinson to
serve in the class of directors whose term expires on December 31, 2000. Mr.
Ellis and Mr. Dickinson were also appointed as the members of the Special
Committee.
Mr. Ellis and Mr. Dickinson were elected to fill two vacancies that existed
on the IRA Board and have agreed to serve on the IRA Board at least through the
end of their respective terms. Both Mr. Ellis and Mr. Dickinson were selected to
serve as directors and members of the Special Committee because each has many
years
20
<PAGE>
of experience in the insurance industry. Mr. Dickinson also has extensive
experience in the investment industry. Messrs. Ellis and Dickinson had (i) no
prior relations with the Company or its affiliates and (ii) little, if any,
knowledge of the Company's operations, prior to their election to the IRA Board.
Each of Messrs. Ellis and Dickinson is paid $1,000 per Special Committee
meeting, unless such meeting is held in conjunction with or immediately prior to
a full meeting of the IRA Board, in which case each receives $500 per Special
Committee meeting. Each of them will receive compensation in his capacity as a
member of the IRA Board to the same extent as other members of the IRA Board
receive compensation.
The Special Committee met on May 18, 19, 20 and 26 for the purposes of
holding initial discussions regarding the Merger, engaging Gardere & Wynne, LLP,
Dallas, Texas, as independent legal counsel for the Special Committee and
interviewing potential financial advisors. During each of these meetings, the
Special Committee members, among themselves, with legal counsel, and with
prospective financial advisors, discussed their understanding of the Company's
history and business, the proposed structure and effect of the Merger and the
incentive compensation plans in effect and to be implemented by the Company. At
its meeting on May 26, 1998, the Special Committee determined to engage Coopers
& Lybrand LLP, now known as PricewaterhouseCoopers LLP, as the Financial
Advisor, reviewed the Financial Advisor's proposed engagement letter and
directed the Special Committee's independent legal counsel to review the
proposed engagement letter and provide comments to the Financial Advisor. The
engagement letter was finalized on and dated June 4, 1998, and executed on
behalf of the Special Committee and the Company on June 8, 1998.
The Financial Advisor had no prior material relationships with the Company,
its affiliates or members of the Special Committee. The Company has engaged the
Financial Advisor to assist the Company in making its information systems Year
2000 compliant. The Financial Advisor will be paid $74,000 as compensation for
such services.
On June 4, 1998, the Special Committee met by telephone conference call
with representatives of the Financial Advisor and the Special Committee's
independent legal counsel for further discussions regarding the Merger and to
determine the due diligence plan and schedule for the Financial Advisor's
engagement. The primary purpose of the meeting was to ensure that the Financial
Advisor had sufficient information to form the foundation of an effective due
diligence effort and to gain the benefit of the Special Committee's analysis in
progress of the Company. The Special Committee members discussed in more detail
with the representatives of the Financial Advisor the Special Committee's
growing understanding of the business of the Company, the proposed terms of the
Merger and the Mission Accomplishment Plan anticipated to be implemented by the
Company. On June 5, 1998, representatives of the Financial Advisor and the
Special Committee's independent legal counsel began a due diligence review of
documents and information related to the Company and the Merger and due
diligence discussions with Martin Durbin, the Company's Chief Financial Officer,
and Robert F. Watson, the Company's General Counsel. On June 10, 1998, the
Special Committee again met by telephone conference call with representatives of
the Financial Advisor and the Special Committee's independent legal counsel to
discuss the schedule for the Financial Advisor's review and analysis, the status
of the due diligence and the detailed terms of the Merger, which had been
distributed to the Special Committee and the Financial Advisor by the Company.
On June 15, 1998, the Special Committee, its independent legal counsel and
representatives of the Financial Advisor met at the Company's offices for due
diligence meetings with Lamar Smith, the Company's Chief Executive Officer,
James Lanier, the Company's Chief Operating Officer, Mr. Watson, Mr. Durbin and
Howard Crump, Director of Marketing (Agency Relations). During this meeting, the
Company's management presented a detailed overview of the Company's history,
business and philosophy, as well as the Company's intent in proposing the
Merger, and responded to questions from the Special Committee and the Financial
Advisor. Messrs. Watson and Durbin outlined the proposed structure and terms of
the Merger, the effect on the IRA Shareholders as a whole and on each category
of IRA Shareholders. Messrs. Watson and Durbin also responded to detailed
questions from the Special Committee and the Financial Advisor.
21
<PAGE>
During the meeting on June 15, 1998, the members of the Special Committee
and representatives of the Financial Advisor interviewed an agent and a district
agent, each of whom is a Class B Shareholder and has been associated with the
Company for approximately 20 years and 6 years, respectively. During this
interview, the agent and district agent were asked questions regarding the
Company's operations, their respective positions with the Company, their roles
as Class B Shareholders and the restrictive nature of the Class B Shareholder
Agreements, and their understanding with respect to the proposed transaction.
The agents informed the Special Committee that they viewed the Class B Stock as
compensatory in nature. Based on the Special Committee's and the Financial
Advisor's discussions with the Company and other due diligence, the Special
Committee believed these two individuals were representative of the Company's
agents, the agent being a long-time and larger Class B Shareholder and the
district agent being a more recent and smaller Class B Shareholder. The Special
Committee did not assign, and did not find it practicable to assign, a specific
weight to these discussions, but considered them along with other due diligence
by the Special Committee with respect to the Company and its operations and
shareholders.
On June 24, 1998, the Special Committee, representatives of the Financial
Advisor and the Special Committee's independent legal counsel met by telephone
conference call to discuss the Financial Advisor's preliminary analysis
regarding the Merger and the rendering by the Financial Advisor of a fairness
opinion. The Special Committee members and the representatives of the Financial
Advisor discussed in detail the effect of the Merger on the IRA Shareholders and
on each category of the IRA Shareholders.
Prior to the June 24, 1998, meeting, the Financial Advisor provided the
Special Committee with a package of information marked "DRAFT," for discussion
at the meeting. The package consisted of an Executive Summary, a Transaction
Summary and Risk Assessment, a draft form of fairness opinion, and information
for joining the planned conference call. The discussion at the meeting centered
around the information in the draft package.
The Executive Summary included in the draft package described the proposed
transaction, enumerated actions performed or then being undertaken by the
Financial Advisor, and set forth the Financial Advisor's preliminary conclusion
that the transaction was fair from a financial point of view. The Financial
Advisor's actions, as outlined in the Executive Summary, included a discounted
cash flow analysis provided to it by the Company (without being impacted for
marketability or share restriction considerations), analysis of a limited set of
companies that might be considered meaningful comparable companies and a
comprehensive transaction search that yielded a very limited set of transactions
that might be considered comparable transactions. See "SPECIAL FACTORS--Opinion
of Financial Advisor."
The Transaction Summary and Risk Assessment included in the draft package
first set forth background information regarding the Company and a detailed
description of the proposed transaction. The Transaction Summary outlined the
historical purchases of the Company's Class B Stock, the lack of a public market
for the Class B Stock and the proposed adoption of the Mission Accomplishment
Plan. The Risk Assessment outlined various issues to be brought to the attention
of the Financial Advisor's internal fairness opinion committee, including (i)
the desire to preserve S corporation status, which is not assured, (ii) the
inability of former Class B Shareholders to vote on material corporate actions,
(iii) the change in tax treatment for the Class B Shareholders from capital
appreciation with the Class B Stock versus ordinary income with stock
appreciation rights for those Class B Shareholders holding MAP Units, (iv) the
Financial Advisor's understanding that at least one Class A Shareholder would
exercise dissenter's rights (although no oral or written notice of such intent
has been received by the Company), and (v) the option of Class A/B Shareholders
to elect different treatment than the Class B Shareholders in the Merger.
The exhibits in the draft package to the Transaction Summary and Risk
Assessment included the following: (i) a graphic presentation of the proposed
transaction prepared by management; (ii) pre-transaction features in the form of
an analysis prepared by the Financial Advisor of the terms of the various
shareholder agreements governing the rights of the IRA Shareholders; (iii)
post-transaction features in the form of a description of the Surviving
Corporation Stock from a recent draft of the proxy statement; (iv) the Financial
Advisor's pre- and post-transaction analysis; and (v) a list of Class B
Shareholders provided by the Company.
22
<PAGE>
The Financial Advisor's pre- and post-transaction analysis included in the
draft package consisted of the following items: (i) a summary prepared by the
Financial Advisor of the features of both groups of IRA Shareholders both before
and after the proposed transaction; (ii) a shareholder value summary for each
group of shareholders based upon holding period and basis in stock showing
status quo value per share, proposed new structure value per share or unit
equivalent, and percent increase value per share or unit equivalent; and (iii)
discounted cash flow models for the status quo and the proposed new structure
for each group of shareholders based upon basis in stock.
The final substantive item included in the draft package was a draft form
of fairness opinion prepared by the Financial Advisor for the Special
Committee's review. The draft form included the Financial Advisor's preliminary
conclusion that the proposed transaction was fair from a financial point of
view.
A copy of the above-described materials provided by the Financial Advisor
to the Special Committee in connection with its June 24, 1998 meeting has been
filed as an exhibit to the Schedule 13-E-3, and it will be made available for
inspection and copying at the principal executive offices of the Company during
its regular business hours by any IRA Shareholder or his representative who has
been so designated in writing. Alternatively, the Company will transmit a copy
of the report to such IRA Shareholder (or his or her designated representative)
upon written request and at the expense of such IRA Shareholder.
At the meeting of the Special Committee on June 27, 1998, which was held
immediately prior to the IRA Board meeting, the Financial Advisor provided the
members of the Special Committee and the Special Committee's independent legal
counsel with its "Presentation to the Board of Directors" and the proposed form
of fairness opinion the Financial Advisor was prepared to render when requested
to do so. The Financial Advisor also indicated that it was prepared to make such
a presentation to the IRA Board.
On June 27, 1998, the IRA Board held a special meeting. During the special
meeting of the IRA Board, the Special Committee made a presentation regarding
its review of the Merger. At the conclusion of such presentation, the Special
Committee announced that it had determined that the Merger was fair to the IRA
Shareholders, including the Class B Shareholders who do not own Class A Stock.
Subsequent to the presentation of the Special Committee, the IRA Board approved
the Merger.
The IRA Board based the amount of the Class B Cash Consideration on the
methodology used by the Company in previous years to determine the price of
Class B Stock in its offerings to agents of the Company, using September 1998 as
the month of the stock price calculation. This methodology has been used by the
Company to establish each purchase and sales price for shares of Class B Stock
since 1981. See "DESCRIPTION OF IRA CAPITAL STOCK--Class B Stock" and note 2 to
"SELECTED FINANCIAL DATA OF IRA."
The IRA Board decided that Class A Shareholders who own Class B Stock
should be entitled to receive Surviving Corporation Nonvoting Stock pursuant to
the Merger because the Class A/B Shareholders otherwise would be taxed at
ordinary income tax rates (rather than at capital gain tax rates) if they could
receive only Class B Cash Consideration for the Class B Stock pursuant to the
Merger. The IRA Board, which will be the Board of the Surviving Corporation upon
consummation of the Merger, anticipates that the Surviving Corporation, subject
to the fiduciary duties of the Board of Directors of the Surviving Corporation
and the ongoing financial condition of the Surviving Corporation, will declare
and pay dividends that are pro rata to all shareholders of the Surviving
Corporation Common Stock that are intended to approximate the income that the
Class A/B Shareholder would have received from the competitive reinvestment of
the Class B Cash Consideration, taking into account income tax considerations.
See "--Certain Effects of the Merger; Plans for the Company after the Merger."
However, if a Class A/B Shareholder would prefer not to receive the Surviving
Corporation Nonvoting Stock for such shareholder's Class B Stock pursuant to the
Merger, the IRA Board has provided the Class A/B Shareholders with the
alternative to receive the Class B Cash Consideration instead of the Surviving
Corporation Nonvoting Stock.
23
<PAGE>
The IRA Board determined that the consideration to be paid to the holders
of Class A Stock was fair because the Class A Stock is the voting class of
common stock and is primarily held by members of the IRA Board and officers of
the Company.
On September 4, 1998, Debra S. Payne, a Class A/B Shareholder, delivered a
letter to Carroll H. Payne II, Freda J. Payne and Naomi K. Payne (in this
paragraph, the "Paynes"), who are also Class A/B Shareholders, demanding that
they tender their shares of Class A Stock to Debra S. Payne, pursuant to the
terms of the Payne Family Stock Agreement. Debra S. Payne claims, among other
things, that the filing of the Schedule 13E-3 by the Company triggered the
provision of the Payne Family Stock Agreement that requires each of the Paynes
to sell their shares of Class A Stock to Debra S. Payne. The Company is also a
party to the Payne Family Stock Agreement. See "DESCRIPTION OF IRA CAPITAL
STOCK--Class A Stock." The Company and each of the Paynes believe that Debra S.
Payne's claims as described in the September 4, 1998 letter are without merit.
In response to these demands of Debra S. Payne, on September 8, 1998, the
Paynes filed a petition for declaratory judgment in state district court in
Tarrant County, Texas. As the Company is a party to the Payne Family Stock
Agreement, it is also a party to the declaratory judgment action. The Paynes and
the Company have asked the court to declare, among other things, that: (i) the
Merger does not trigger or otherwise invoke the buy-sell provision of the Payne
Family Stock Agreement; (ii) Debra S. Payne is not entitled to demand that the
Paynes tender their Class A Stock to her; (iii) the Paynes are not in breach of
contract by refusing to tender their Class A Stock to Debra S. Payne; and (iv)
the Paynes and the Company are not in breach of contract by proceeding with the
Merger, or any part thereof.
Debra S. Payne filed an answer to the Paynes' petition on October 25, 1998.
Among other things, Debra S. Payne's answer denied all of the allegations of the
Paynes contained in the petition. Furthermore, the answer asserted certain
affirmative defenses to the claims of the Paynes, including, among other things,
(i) lack of standing of the Paynes to assert certain claims, (ii) failure of the
petition to state a claim upon which relief can be granted, (iii) the claims are
barred by the doctrine of unclean hands, estoppel and quasi-estoppel, (iv) the
claims are barred due to the illegality of the Merger and (v) the claims are
barred due to the Paynes' and the Company's breaches of contract. The answer
requested dismissal of the action or a declaratory judgment in favor of Debra S.
Payne and that Debra S. Payne recover all costs and any other relief to which
she may be entitled.
The parties are currently engaged in settlement discussions. In the event
that a settlement acceptable to each of the Paynes and the Company is not
entered into, the Paynes and the Company intend to vigorously contest any claim
by Debra S. Payne that the buy-sell provision contained in the Payne Family
Stock Agreement has been or will be triggered as a result of the transactions
contemplated by the proposed Merger.
Source and Amount of Funds
Approximately $16.9 million will be required to pay the Class B Cash
Consideration in the Merger (assuming no Class A/B Shareholder elects to receive
Class B Cash Consideration), and the Surviving Corporation will pay
approximately $1.2 million in fees and expenses associated with the Merger. The
cash required in connection with the Merger will be provided (i) by working
capital of the Company and (ii) pursuant to the terms of the Credit Facility (as
defined below). The following table sets forth the estimated sources and uses of
funds in connection with the Merger, assuming consummation of the Merger
effective on November 23, 1998. In the event that a Class A/B Shareholder elects
to receive the Class B Consideration, or in the event that any IRA Shareholder
elects to seek appraisal rights, the Company will pay such amounts from working
capital or through increases in its outstanding lines of credit.
24
<PAGE>
<TABLE>
<CAPTION>
Sources of Funds Amount
- ------------------------------------------ -----------------------------
<S> <C>
Cash...................................... $ 2,056,000
Credit facility........................... 16,000,000
-----------------------------
Total sources.................... $ 18,056,000
-----------------------------
-----------------------------
</TABLE>
<TABLE>
<CAPTION>
Uses of Funds Amount
- ------------------------------------------ -----------------------------
<S> <C>
Class B Consideration..................... $ 16,890,000
Professional fees......................... 1,095,000
Filing fees............................... 6,000
Printing and mailing costs................ 25,000
Miscellaneous............................. 40,000
-----------------------------
Total uses....................... $ 18,056,000
-----------------------------
-----------------------------
</TABLE>
Credit Facility. The Company has entered into a loan agreement with Norwest
Bank Texas, N.A. ("Norwest"), dated September 30, 1998 (the "Loan Agreement"),
pursuant to which Norwest has agreed to provide a $16 million senior secured
term loan to IRA (the "Credit Facility"), upon the terms and conditions set
forth in the Loan Agreement. Proceeds under the Credit Facility must be used to
finance the purchase of the Class B Stock.
Principal and interest payments under the Credit Facility will be made
monthly in equal payments of $183,309. Interest on indebtedness outstanding
under the Credit Facility is payable at a rate of 6.58% per annum. The maturity
date of the Credit Facility will be September 30, 2008. The Company will incur
no fees as a result of the Credit Facility, and there will be no prepayment
penalty imposed for early repayments of amounts owed under the Credit Facility.
Borrowings under the Credit Facility are secured by a first perfected
security interest in certain shares of mutual funds held by the Company and its
wholly-owned subsidiary, United Services Planning Association ("USPA"), as
evidenced by a Pledge Agreement between Norwest and the Company and a Pledge
Agreement between Norwest and USPA, each dated September 30, 1998 (collectively,
the "Pledge Agreements"). The market value of the securities pledged at the date
of the funding of the Credit Facility by Norwest must be equivalent to 140% of
the funded loan amount. Further, the market value of these securities may not be
less than 120% of the loan balance outstanding at any time. In the event that
the market value of the securities does decrease below 120% of the loan balance,
the Credit Facility provides for a cure period as follows: (i) if the value is
between 110% and 119%, there will be a cure period of 30 days; (ii) if the value
is between 100% and 109%, there will be a cure period of 15 days; and (iii)) if
the value is below 100%, there will be a cure period of 5 days.
The Credit Facility is evidenced and governed by the provisions of the Loan
Agreement, a promissory note executed by the Company payable to Norwest, dated
September 30, 1998 (the "Promissory Note"), the Pledge Agreements, and other
supporting documentation. These documents contain various conditions precedent
to each advance, standard reporting requirements, covenants, events of default,
representations and warranties, covenants and other provisions customary for
credit facilities of this type. Norwest requires the Company to deliver copies
of audited annual financial statements and monthly borrowing base certificates
within the time periods described in the Loan Agreement.
The foregoing discussion of the Loan Agreement and the Credit Facility does
not purport to be complete and is qualified in its entirety by reference to the
Loan Agreement, the Pledge Agreements and the Promissory Note, copies of which
have been filed as exhibits to the Rule 13e-3 Transaction Statement on Schedule
13E-3 (the "Schedule 13E-3"), which has been filed with the Commission. See
"AVAILABLE INFORMATION."
The Company intends that the Surviving Corporation will utilize tax savings
available after the Merger to repay any debts incurred as a result of the
Merger. On a pro forma basis, S corporation status would have reduced the
Company's income tax expense by $4,639,886 for the year ended September 30,
1997, and $3,467,015 for the
25
<PAGE>
nine months ended June 30, 1998. The Company believes that these tax savings are
adequate to service its debt pursuant to the Credit Facility incurred as a
result of the Merger, which the Company anticipates will be approximately
$2,224,344 annually. The Company believes that, until such debt is repaid,
distributions under the Mission Accomplishment Plan will be at least equal to
those made on the Class B Stock. See "THE PROPOSED MERGER" and "PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF IRA."
Purpose and Structure of the Merger
First Command was formed on April 1, 1998, as a Texas corporation, to
construct, own and operate the Parking Garage on the Adjacent Land. IRA has
agreed to provide First Command with funds pursuant to an interest-bearing loan
to construct the Parking Garage. See "CERTAIN INFORMATION CONCERNING FIRST
COMMAND--Business." First Command was organized as an entity distinct from IRA
to limit potential liability of IRA with respect to the ownership, construction
and operation of the Parking Garage. As First Command presently has a limited
number of shareholders and meets the other requirements of S corporation status,
First Command elected S corporation status in order for its taxable items to
"flow through" to its shareholders. See "SPECIAL FACTORS--Certain Effects of the
Merger; Plans for the Company after the Merger."
One objective of the Company is to deregister the Class B Stock under the
Exchange Act, which will cause the Company to no longer be subject to the
reporting requirements of the Exchange Act. The Company currently incurs costs
related to its status as a public reporting corporation under the federal
securities laws, including indirect costs as a result of, among other things,
the executive time expended to prepare and review various filings, furnish
information to shareholders and to attend to other shareholder matters. The
Company anticipates that termination of registration under the Exchange Act will
eliminate the costs and expenses of various federal securities filings incurred
by the Company with respect to regulatory and reporting requirements of the
Exchange Act and will reduce the amount of time devoted by management in
connection therewith. Further, the Company has faced certain competitive
disadvantages resulting from the public reporting requirements of the Exchange
Act. Also, management of the Company believes that access to public markets by
the Company and its shareholders will not occur because of the restrictions on
ownership and transfer of the Class B Stock.
The Company did consider commencing an issuer tender offer in order to
accomplish this goal. However, a successful issuer tender offer could not ensure
that there would not remain outstanding shares of Class B Stock upon such tender
offer's conclusion. In the event that the IRA Shareholders approve the Merger by
the requisite vote, the Class B Stock will be eliminated in accordance with the
terms of the Merger Agreement, which will enable the Company to deregister the
Class B Stock under the Exchange Act.
Additionally, the Company believes that it will qualify for S corporation
status immediately following the elimination of the Class B Stock. Management of
the Company recognized that, if the Class B Stock were eliminated, both IRA and
First Command would qualify for S corporation status. As a result, in order to
achieve administrative simplicity, reduce compliance responsibilities and
eliminate public reporting requirements as described above, the management of
IRA and the management of First Command decided that IRA should merge with and
into First Command, rather than continue both companies as separate S
corporations. Immediately prior to the Merger, First Command will transfer all
of its assets, subject to all of its liabilities, to a newly-formed limited
liability company or Qualified Subchapter S Subsidiary in return for all of the
members' interests in the limited liability company or all of the capital stock
of such subsidiary in order to keep the planned operations of First Command
separate and distinct from IRA subsequent to the Merger. Because First Command
currently has elected to be treated as an S corporation under the federal tax
laws, upon the consummation of the Merger, the holders of Class A Stock that do
not seek appraisal rights under Articles 5.12 and 5.13 of the TBCA will be
shareholders of the Surviving Corporation, which will also be an S corporation.
Accordingly, such holders of Class A Stock, as holders of Surviving Corporation
Voting Stock, and Class A/B Shareholders that elect to receive Surviving
Corporation Nonvoting Stock for their Class B Stock will be entitled to the tax
treatment that shareholders of an S corporation receive under the federal tax
laws.
26
<PAGE>
The Class B Stock has traditionally been viewed by the Company as incentive
stock and a method to compensate its agents and employees through cash dividends
paid and price appreciation. Consequently, any changes to after-tax
profitability of the Company has an impact on the amount of dividends paid on
and appreciation in value for the Class B Stock. Likewise, due to the
methodology underlying the Mission Accomplishment Plan, participants will be
impacted directly by changes in the profitability of the Company prior to
payments under the Mission Accomplishment Plan. If income tax expense decreases,
the Company believes that there should be more funds available for distribution
under the Mission Accomplishment Plan. Any earnings not distributed in a year
through a DER payment will be distributed at some point in time through the SAR
component of the Mission Accomplishment Plan. The Company believes that the
advantages of eliminating double taxation as a result of the Company's election
of S corporation status should benefit the participants in the Mission
Accomplishment Plan, who now include all holders of Class B Stock.
The Management Group has engaged in the transactions contemplated by the
Merger Agreement to assist the Company in attaining the objectives described
above.
Certain Effects of the Merger; Plans for the Company after the Merger
Following the Merger, (i) the Class A Shareholders, (ii) the Class A/B
Shareholders that elect to receive Surviving Corporation Nonvoting Stock and
(iii) the First Command Shareholders will own 100% of the capital stock of the
Surviving Corporation, to the extent that such shareholders do not elect to seek
appraisal rights. As such, these persons will be the direct beneficiaries of any
future earnings and growth of the Surviving Corporation and will have the
ability to benefit from any divestitures, strategic acquisitions or other
corporate opportunities that may be pursued by the Company in the future. Upon
consummation of the Merger, the Class B Shareholders that are not Class A/B
Shareholders will cease to have any direct ownership interest in the Company or
other rights as shareholders of the Company, including the right to receive
distributions. After the Merger, such shareholders will benefit from any
increases in the cash flow or the value of the Surviving Corporation only as a
result of any MAP Units that such shareholders may then hold. However, the Class
B Shareholders that are not Class A/B Shareholders will be entitled to receive
$28.24 per share for their Class B Stock, which the IRA Board, First Command and
the Management Group have determined is fair consideration to the holders of
Class B Stock.
Additionally, the IRA Board traditionally has utilized the dividends
declared and paid on the Class B Stock as a means of compensating its agents,
members of management and key employees, who are the holders of Class B Stock.
After the Merger, the Class B Stock will be eliminated and dividends on Class B
Stock will no longer be paid. However, the IRA Board intends to make similar
payments of compensation to holders of MAP Units pursuant to the Mission
Accomplishment Plan.
Class B Stock has provided two valuable financial benefits to agents. It
appreciated in value until such time as agents terminated or otherwise desired
to receive cash for their shares. Additionally, annual cash dividends were paid
on all outstanding shares of Class B Stock. The Mission Accomplishment Plan was
designed to mirror these two financial benefits. A MAP Unit is composed of one
SAR and one DER. Through SARs, agents will participate in the undistributed
earnings of the Company. When agents leave the Company, their SARs will be
exercised and they will receive a lump sum of cash for the value that will have
accumulated since the MAP Units were granted. Through DERs, agents will
participate in annual cash dividend equivalents that will be paid on all MAP
Units until such time as agents terminate their agreements with the Company.
Class B Stock has been sold exclusively to agents of the Company as
incentive stock since its inception. Periodic offerings were made of Class B
Stock that had been redeemed by the Company following agent terminations. In all
such offerings, more shares were subscribed for than offered. Subscriptions were
prioritized solely by giving consideration to past contributions and future
potential of the agent-subscriber to Company objectives, as determined by the
Executive Committee of the Board of Directors of the Company. The Executive
Committee gave consideration to any recommendations which it received, with
respect to these criteria, from District and Regional Agents of the Company. MAP
Unit awards will also be based on individual merit of agents, in a
27
<PAGE>
manner similar to that used with respect to grants for shares of Class B Stock.
All payments of DERs made by the Company will be made in the same amount per
unit to all holders, similar to dividends paid on capital stock. Additionally,
any change in the per SAR unit value will apply equally to all SAR units.
Any return resulting from the liquidation of the MAP Units will be taxed to
the holders of the MAP Units as ordinary income. In contrast, holders of Class B
Stock were entitled to receive capital gain tax treatment upon liquidation of
their shares of Class B Stock.
Holders of Class B Stock have the right to vote only in the event of
certain extraordinary transactions (such as the Merger) as provided by the TBCA,
or as otherwise provided by law. See "DESCRIPTION OF IRA CAPITAL STOCK--Class B
Stock." Holders of MAP Units will have no voting rights.
Class A/B Shareholders who are not affiliates of the Company will receive
following the Merger shares of Surviving Corporation Voting Stock representing
the same proportionate interest of voting stock owned by such Class A/B
Shareholder in IRA prior to the Merger. The Class A/B Shareholders who are not
affiliates of the Company will be entitled to receive $28.24 per share of Class
B Stock owned by them. As these Class A/B Shareholders would be subject to
income tax at ordinary income rates on any resulting gain, these Class A/B
Shareholders may elect instead to receive Surviving Corporation Nonvoting Stock
in exchange for their Class B Stock.
The impact on Class A/B Shareholders who are affiliates of the Company will
be the same as for Class A/B Shareholders who are not affiliates except the
Class A/B Shareholders who are affiliates of the Company (except for Freda J.
Payne) will also remain as officers and/or directors of the Surviving
Corporation. Under Texas law, each IRA Shareholder has the right to exercise
statutory appraisal rights in the event any shareholder disagrees with the
consideration to be paid pursuant to the Merger. See "THE PROPOSED
MERGER--Rights of Dissenting Shareholders."
Class B Stock is currently registered under the Exchange Act, which
requires, among other things, that the Company furnish certain information to
its shareholders and to the Securities and Exchange Commission (the
"Commission") and comply with the Commission's proxy rules in connection with
meetings of the Company's Class B Shareholders. After the Merger, the Surviving
Company will no longer be subject to the reporting requirements of the Exchange
Act with respect to Class B Stock, and Class B Stock will be subject to
termination of registration under Section 12(g)(4) of the Exchange Act. After
the Merger, the Company will no longer be subject to the reporting requirements
of the Exchange Act.
The termination of the registration of Class B Stock under the Exchange Act
will substantially reduce the information required to be furnished by the
Company to its shareholders and to the Commission and would render inapplicable
certain provisions of the Exchange Act, including requirements that the Company
file periodic reports (including financial statements), the requirements of Rule
13e-3 under the Exchange Act with respect to "going private" transactions,
requirements that the Company's officers, directors and ten-percent shareholders
file certain reports concerning ownership of the Company's equity securities and
provisions that any profit by such officers, directors and shareholders through
purchases and sales of the Company's equity securities within any six month
period may be recaptured by the Company.
It is expected that following the Merger the business and operations of the
Company will be continued by the Surviving Corporation in the Merger,
substantially as they are being conducted presently through IRA and First
Command. There are no known facts or trends that may indicate that the Company's
agency relationships with represented insurance companies will change as a
result of the consummation of the Merger. The Surviving Corporation's corporate
headquarters are expected to remain in Fort Worth, Texas, and the current
directors and executive officers of IRA are expected to be the directors and
executive officers of the Surviving Corporation. See "CERTAIN INFORMATION
CONCERNING IRA--Directors and Executive Officers of IRA."
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For a discussion of the federal tax implications for holders of Class B
Stock, see "--Certain Federal Income Tax Considerations."
First Command is currently an S corporation for federal income tax
purposes. All corporate income, losses, deductions and other taxable items of an
S corporation are "passed through" and taxed at the shareholder level. As a
result, generally an S corporation does not pay federal income taxes on
corporate income; instead, the shareholders of the S corporation are taxed for
their proportionate share of the net income of the S corporation, based on their
respective ownership of the corporation. Consequently, to the extent that an S
corporation generates taxable income, the shareholders of the S corporation may
be subject to tax liability as a result of that corporate income. Upon
consummation of the Merger, management believes that the Surviving Corporation
should be treated as an S corporation, and, as a result of the Merger, (i) each
Class A Shareholder, (ii) each Class A/B Shareholder electing to receive
Surviving Corporation Nonvoting Stock and (iii) each First Command Shareholder,
that do not elect to seek appraisal rights, will be shareholders in an S
corporation and could be subject to personal tax liability arising from any
taxable income generated by the Surviving Corporation. After the Merger,
however, there can be no assurance that the Surviving Corporation will continue
to maintain its status as an S corporation. If the Surviving Corporation fails
to maintain the requirements for S corporation, the shareholders of the
Surviving Corporation will not receive the tax treatment accorded to
shareholders of S corporations.
The Company has made distributions in the past only on Class B Stock.
Pursuant to the Articles of Incorporation of the Surviving Corporation and the
Surviving Corporation Shareholders' Agreement, the Surviving Corporation will
agree to declare and make distributions pro rata to all the Surviving
Corporation Shareholders to allow them to pay the federal income tax liability
attributable to their distributive share of the Surviving Corporation's taxable
income. In addition, the IRA Board has provided the Class A/B Shareholders the
right to receive the Class B Nonvoting Stock Consideration. See "SPECIAL
FACTORS--Background of the Merger." Further, the IRA Board, which will be the
Board of the Surviving Corporation upon consummation of the Merger, anticipates
that the Surviving Corporation, subject to the fiduciary duties of the Board of
Directors of the Surviving Corporation and the ongoing financial condition of
the Surviving Corporation, will declare and make distributions that are pro rata
to all shareholders on the Surviving Corporation Common Stock that are intended
to approximate the income that the Class A/B Shareholder would have received
from the competitive reinvestment of the Class B Cash Consideration, taking into
account certain income tax considerations. See "--Purpose and Structure of the
Merger."
The purpose of this provision is to provide a minimum return to the Class
A/B Shareholders that elect to receive the Class B Nonvoting Stock
Consideration. This minimum return is to be determined based on the hypothetical
after-tax proceeds that would have resulted if the Class A/B Shareholder had
received the Class B Cash Consideration and received capital gains tax treatment
for federal income tax purposes. For example, assuming a reasonable after-tax
return of 5%, an annual dividend of $1.13 (or $28.24 -($28.24 x 20%) x 5%) would
be paid on each outstanding share of Surviving Corporation Common Stock after
the Merger. The distribution will apply to both the Surviving Corporation Voting
Stock and the Surviving Corporation Nonvoting Stock held by the Class A/B
Shareholders. The Company believes that the consideration to be paid for the
Class B Stock held by the Class A/B Shareholders is economically the same as
that to be received by the Class B Shareholders that do not own Class A Stock.
The Class A/B Shareholders can elect to receive the Class B Cash Consideration,
or the Class A/B Shareholders can elect to receive the Class B Nonvoting Stock
Consideration with a value that the Company believes is equal to the Class B
Cash Consideration.
In the event the Surviving Corporation makes ongoing repurchases of the
Surviving Corporation Nonvoting Stock, the IRA Board presently anticipates that
the repurchase price for such shares will be $28.24 per share, unless otherwise
determined by the Board of Directors of the Surviving Corporation. The IRA Board
also anticipates that such Surviving Corporation Nonvoting Stock will only be
repurchased by the Surviving Corporation in the event that a Surviving
Corporation Shareholder is required to tender his or her shares to the Surviving
Corporation pursuant to the terms of the Surviving Corporation Shareholders'
Agreement. See "--Contracts With Respect to Surviving Corporation Common Stock."
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After the Merger, the Surviving Corporation intends to adopt IRA's Mission
Accomplishment Plan and award MAP Units pursuant to the Mission Accomplishment
Plan to the former Class B Shareholders who are agents, members of management or
employees at the time of award as well as to other active agents and employees
of the Surviving Corporation.
Except as otherwise indicated in this Proxy Statement, the Company and
First Command do not have any plans or proposals subsequent to the Merger that
relate to or would result in an extraordinary corporate transaction, such as a
merger, reorganization or liquidation, involving the Company, a sale or transfer
of a material amount of the assets of the Company or any material change in the
Company's corporate structure.
Contracts with Respect to Surviving Corporation Common Stock
Surviving Corporation Shareholders' Agreement. Upon the Effective Time, the
management of the Surviving Corporation will request that all Surviving
Corporation Shareholders execute the Surviving Corporation Shareholders'
Agreement (the parties to the Surviving Corporation Shareholders' Agreement
referred to as the "Agreeing Parties"). The Surviving Corporation Shareholders'
Agreement provides for, among other things, (i) restrictions on the transfer of
Surviving Corporation Common Stock that would cause the Surviving Corporation's
status as an S corporation to terminate; (ii) a requirement that a shareholder
tender his or her shares to the Surviving Corporation (at a price to be
determined by the Surviving Corporation at least annually) in the event of any
threatened or actual transfer of the shares, the death of such Agreeing Party,
any termination of marriage of a Agreeing Party by death or divorce in which
such shareholder does not receive his or her spouse's community interest in the
Surviving Corporation Common Stock, any threatened or actual bankruptcy of the
Agreeing Party, the termination of such Agreeing Party as a Texas life insurance
agent, the cessation of the shareholder as a duly authorized agent of the
Surviving Corporation pursuant to a current written agency agreement (except
that with respect to an involuntary termination as a duly authorized agent of
the Surviving Corporation, such termination requires approval by a vote of 80%
of the Board of Directors of the Surviving Corporation), the change in status of
an Agreeing Party to a "nonresident alien" (as defined in the Code) or any
threatened or actual levy by a creditor or claimant upon the Surviving
Corporation Common Stock held by the Agreeing Party; and (iii) certain
provisions with respect to the S corporation status of the Surviving
Corporation. However, the Surviving Corporation Shareholders' Agreement does
permit, under certain circumstances, Surviving Corporation Shareholders to
pledge the Surviving Corporation Common Stock with the prior written consent of
the executive committee of the Surviving Corporation, subject to such terms,
conditions and restrictions as the executive committee of the Board of Directors
of the Surviving Corporation determines to be appropriate. Pursuant to the
Surviving Corporation Shareholders' Agreement, the Surviving Corporation has
agreed to declare and make annual distributions to all of its shareholders in a
timely manner to allow them to pay their federal income tax liability
attributable to their distributive share of the Surviving Corporation's taxable
income.
Recommendation of the IRA Board and the Special Committee; Fairness of the
Merger
The IRA Board, based upon the unanimous recommendation of the Special
Committee, determined that the terms of the proposed Merger are fair to and in
the best interests of the IRA Shareholders, including Class B Shareholders who
do not own Class A Stock, and unanimously approved the Merger Agreement and the
Merger and recommended that the Merger Agreement be submitted for approval at a
special meeting of the Company's shareholders. In arriving at its decision, the
IRA Board gave careful consideration to a number of factors, including the
opinion of the Financial Advisor. Accordingly, the IRA Board unanimously
recommends that you vote "for" approval of the Merger Agreement.
The IRA Board's approval and recommendation to the Company's shareholders
and the Special Committee's recommendation to the IRA Board were based upon the
following material positive factors:
(1) the Merger will provide the Class B Shareholders with an opportunity to
receive the fair value for their Class B Stock because the price per share of
$28.24 was determined pursuant to a methodology utilized by the Company since
1981 to establish the price pursuant to which (i) sales of Class B Stock have
been made in offerings
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to its agents, members of management and key employees and (ii) purchases of
Class B Stock have been made by the Company pursuant to the terms of
shareholder's agreements between the Company and the Class B Shareholders;
(2) the flexibility provided by the additional resources available to the
Company after the Merger because savings resulting from the Company being an S
corporation under federal income tax laws and no longer being a public reporting
company following the Merger, will be utilized to make compensation payments to
participants in the Mission Accomplishment Plan, including persons who owned
Class B Stock, after the payment of debt incurred to finance the Merger and the
use of such funds for general corporate purposes;
(3) the opinion of the Financial Advisor that the Merger is fair to the
Class A Shareholders and the Class B Shareholders, from a financial point of
view;
(4) the belief of the IRA Board that the costs, both economic as well as in
personnel time, in complying with the many obligations of being a public company
have not provided a commensurate benefit to the Company or the Class B
Shareholders because the Company and its shareholders have not accessed the
public capital markets due to the restrictions on ownership and transfer of the
Class B Stock;
(5) the ability of Class A Shareholders that do not seek appraisal rights
to maintain their proportionate interest in the Surviving Corporation, which the
management of IRA currently anticipates will be an S corporation for federal
income tax purposes;
(6) the previous adoption of the Mission Accomplishment Plan, pursuant to
which the IRA Board intends to utilize the earnings of the Company to make
compensation payments to its agents, members of management and key employees,
including persons who owned Class B Stock, thereby diminishing the availability
of earnings for appreciation and distributions on its capital stock; and
(7) the belief of the IRA Board that the funds generated after the Merger
will be sufficient to service debt incurred as a result of the Merger and to
make distributions on MAP Units that are at least equal to those historically
paid on the Class B Stock.
Neither the Special Committee nor the IRA Board considered the following
factors, for the reasons specified: (i) current or historical market values,
because of the lack of a trading market for the Class A Stock and the Class B
Stock (see "MARKET PRICE DATA, DISTRIBUTIONS AND SECURITY OWNERSHIP OF IRA
COMMON STOCK"); (ii) liquidation value, given the Company's unique structure;
and (iii) firm offers, because neither the Company, First Command nor the
Management Group were aware of any firm offer for the merger or consolidation of
the Company, the sale or transfer of all or any substantial part of the assets
of the Company or securities of the Company that would enable the holder thereof
to exercise control of the Company. As of June 30, 1998, the liquidation value
of Class B Stock was $54.55 per share. The IRA Board and the Special Committee
chose not to use this value in establishing the price per share to be paid in
the Merger for Class B Stock because in order to pay an amount equal to
liquidation value, the Company would have to liquidate its assets and therefore
would not be able to continue as a going concern. The IRA Board believes that
liquidation would not be in the best interests of the IRA Shareholders because
doing so would not allow the Company to continue in its purpose, which is to
serve its customers, who are active and retired military personnel, and agents,
who are also shareholders. As all holders of Class A Stock and Class B Stock are
agents of the Company, the IRA Shareholders would not be able to benefit from
the Company continuing as a going concern in the form of commission income and
participation in the Mission Accomplishment Plan.
Because the Financial Advisor considered the following factors, the Special
Committee and the IRA Board adopted the analysis of the Financial Advisor with
respect to such factors: (i) net book value of the Company (see "--Opinion of
the Financial Advisor--Liquidation Value Approach"); (ii) going concern value of
the Company (see "--Financial Advisor--Income Approach; --Market Multiple
Approach"); and (iii) historical purchase prices paid
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in previous purchases (see "--Financial Advisor--Current/historical Market
Pricing and Shareholder Agreement Analysis").
With respect to comparable transactions, the Special Committee and the IRA
Board adopted the Financial Advisor's conclusion that the companies that the
Financial Advisor analyzed were inapplicable to the proposed transaction and the
Company. None of the "comparables" involved companies with a security ownership
like that of the Company, with all shareholders being licensed Texas life
insurance agents and parties to a restrictive shareholder's agreement.
The foregoing discussion of the information and factors considered and
given weight by the Special Committee and the IRA Board is not intended to be
exhaustive. In view of the variety of factors considered in connection with
their evaluation of the Merger, the Special Committee and the IRA Board did not
find it practicable to, and did not, quantify or otherwise assign relative
weights to the specific factors considered in reaching their determinations.
Neither the Special Committee nor the IRA Board concluded that any factor
weighed against the fairness of the transaction to the IRA Shareholders.
The Special Committee and the IRA Board evaluated the factors described
above in light of their knowledge of the business and operations of the Company,
and their business judgment, and concluded that the Merger and Merger Agreement
and the transactions contemplated thereby are fair to, and in the best interests
of, the Company and its shareholders.
The Special Committee and the IRA Board believe that the terms of the
Merger are procedurally fair because: (i) the Special Committee was
disinterested and was appointed to represent the interests of the Company's
shareholders, including its unaffiliated shareholders; (ii) the Special
Committee retained and was advised by counsel separate from counsel for the
Company; (iii) the Special Committee obtained an opinion concerning the
fairness, from a financial point of view, of the Merger to the IRA Shareholders;
and (iv) the Merger requires the approval at the Special Meeting of the holders
of at least a majority of the outstanding shares of Class B Stock not held by
Class A/B Shareholders. The Special Committee was not retained to act solely on
behalf of unaffiliated shareholders, and the Special Committee did not negotiate
the terms of the Merger.
Position of the Management Group and First Command as to the Fairness of the
Merger
The members of the Management Group have considered the process by which
the Company determined the terms of the Merger and certain additional factors
examined by the Special Committee and the IRA Board (described in detail in
"SPECIAL FACTORS--Recommendation of the IRA Board and the Special Committee;
Fairness of the Merger). Members of the Management Group believe that these
factors, when considered together, provide a reasonable basis for them to
believe, as they do, that the Merger is fair to the IRA Shareholders, including
Class B Shareholders who do not own Class A Stock. As a result, the members of
the Management Group specifically adopted the analysis of the IRA Board and the
Special Committee. See "RECOMMENDATION OF THE IRA BOARD AND THE SPECIAL
COMMITTEE; FAIRNESS OF THE MERGER."
The rules of the Securities and Exchange Commission require First Command
to express its belief as to the fairness of the Merger to the IRA Shareholders.
While First Command has not undertaken any independent evaluation of the Merger
from the standpoint of fairness to the Company's shareholders, it has considered
the factors that were taken into account by the Special Committee and the IRA
Board (described in detail in "SPECIAL FACTORS--Recommendation of the IRA Board
and the Special Committee; Fairness of the Merger) and by the members of the
Management Group. Based solely on these factors, First Command believes that the
Merger is fair to the IRA Shareholders, including Class B Shareholders who do
not own Class A Stock. As a result, First Command specifically adopted the
analysis of the IRA Board and the Special Committee. See "RECOMMENDATION OF THE
IRA BOARD AND THE SPECIAL COMMITTEE; FAIRNESS OF THE MERGER."
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These beliefs should not, however, be construed as a recommendation to the
IRA Shareholders by the members of the Management Group in their capacity as
shareholders or First Command to vote or approve the Merger Agreement. Members
of the Management Group and the officers, directors and shareholders of First
Command are executive officers or directors of the Company (other than Freda J.
Payne) and have an interest in the contemplated Merger. Neither First Command
nor any member of the Management Group has assigned specific relative weights to
the factors considered in reaching its belief as to fairness.
Opinion of the Financial Advisor
The Special Committee retained PricewaterhouseCoopers LLP, formerly known
as Coopers & Lybrand LLP, as the Financial Advisor in June 1998 to render an
opinion to the Special Committee and the IRA Board as to the fairness, from a
financial point of view, of the Merger to the IRA Shareholders.
PricewaterhouseCoopers, LLP (the "Financial Advisor") was formed by the
merger of Price Waterhouse L.L.P. and Coopers & Lybrand L.L.P. The Financial
Advisor maintains an internationally recognized valuation services group which
is continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions and for other purposes. The Financial
Advisor implements a rigorous internal review process prior to issuing a
fairness opinion.
On June 27, 1998, the Financial Advisor made its presentation to the IRA
Board and delivered its form of written opinion to the Special Committee and the
IRA Board that the Transaction (as defined below) is fair from a financial point
of view to the Class A Shareholders and Class B Shareholders. On October 30,
1998, the Financial Advisor delivered its signed, written opinion to the Special
Committee and the IRA Board that, as of the date of the opinion, the Transaction
(as defined below) is fair from a financial point of view to the Class A
Shareholders and Class B Shareholders.
In rendering its opinion, the Financial Advisor considered the following
contemplated transactions: (i) the merger of IRA with and into First Command;
(ii) the simultaneous exchange of the Surviving Corporation Voting Stock for the
Class A Stock; (iii) the simultaneous exchange of the Class B Cash Consideration
for the Class B Stock held by Class B Shareholders that are not Class A
Shareholders; (iv) the simultaneous conversion of the Class B Stock held by the
Class A/B Shareholders into the Class B Cash Consideration or an equivalent
amount of the Surviving Corporation Nonvoting Stock; and (v) the conversion of
the Company's status from a C Corporation to an S corporation (collectively, the
"Transaction").
The full text of the Financial Advisor Opinion, which includes the
assumptions made, general procedures followed and matters considered is set
forth as Annex B to this Proxy Statement. The Financial Advisor relied upon and
assumed the accuracy and completeness of all financial and historical and
prospective operating information that was publicly available or furnished to
the Financial Advisor and did not attempt to independently verify any of such
information nor did it make or obtain any independent evaluations or appraisal
of any assets of the Company. The Financial Advisor was not requested to and did
not solicit third party indications of interest in acquiring all or any part of
the Company. No limitations were imposed by the IRA Board or the Special
Committee upon the Financial Advisor with respect to the investigation made, or
procedures followed by the Financial Advisor in rendering its opinion. The
Financial Advisor did not determine or recommend the amount of the consideration
to be paid by the Company in connection with the Merger.
In rendering its opinion, the Financial Advisor carried out various
procedures and considered certain facts, including: (i) the terms of the Merger
Agreement; (ii) the various incentive compensation plans contemplated by the
management of the Company as of the date of its analysis; (iii) the fact that
the benefit of additional compensation (in the form of future dividend
equivalency rights and stock appreciation rights) will be available to
participants in the aforementioned incentive compensation plans, and thus will
be unavailable to current shareholders; (iv) the financial and operating
implications of the Company's proposed conversion to S corporation status; (v)
management's ongoing commitment to the Company's agents and the maintenance of
the Company's mission and
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corporate culture; (vi) certain financial and other operating information
relating to the Company that was publicly available or furnished to it by the
Company, including cash flow analyses prepared by the Company's management;
(vii) that the Financial Advisor met with members of the Company's management to
discuss the business, operations, historical financial results and future
prospects of the Company, including the prospective implications of the
Company's S corporation election and post transaction incentive plan; (viii)
certain financial and securities data of the Company and compared that data with
similar data for other companies in businesses similar to those of the Company;
(ix) the financial terms of certain recent acquisitions of companies in
businesses similar to those of the Company; (x) that the Financial Advisor
performed a discounted cash flow analysis; and (xi) such other information,
financial studies, tax opinions, analyses and investigations and financial,
economic and market criteria as it deemed relevant and appropriate for purposes
of the Financial Advisor Opinion.
During its analysis, the Financial Advisor reviewed certain documents
provided by the Company. The following is a summary of certain of the documents
provided. The Financial Advisor reviewed (i) certain documents pertaining to the
Mission Accomplishment Plan, including a summary of the Mission Accomplishment
Plan, the form of respective agreements and plan descriptions for certain
members of management, certain agents and certain employees of the Company and
the Board Grant Declaration and Administrative Policies; (ii) a computer listing
of IRA shareholders by name, number of shares owned, and percentage of
ownership; (iii) a plan of merger chart, reflecting a graphical representation
of the going private transaction, a chart depicting the Company and its
subsidiaries prior to the Merger, and a chart depicting the Company and its
subsidiaries after the Merger; (iv) an agent listing by region, which contains a
listing of all active IRA agents in region and district order; (v) an
organizational chart of the Company; (vi) a stock transaction printout
containing a computer listing in chronological order of shares sold and
purchased during the past two years; (vii) certain documents with respect to
prior litigation of the Company, pursuant to which the terms of the Class B
Shareholder's Agreements were held to be binding on a former agent of the
Company; (viii) forms of the Company's agreements with its agents, which contain
information concerning the duties of the agents and their compensation and
commissions; (ix) copies of the Company's agency agreements with certain
insurance companies, which describe the obligations, duties, and
responsibilities of the parties as well as compensation to be paid to IRA for
services provided; (x) copies of the Company's dealer agreements with certain
investment dealers, which describe the obligations, duties, and responsibilities
of the parties as well as compensation to be paid to USPA for services provided;
(xi) a listing of the directors and officers of the Company and a description of
the members of the IRA Board, containing short biographical sketches of current
IRA Board members; (xii) the mission statement of the Company and a history of
the Company, containing excerpts from Company marketing materials reflecting the
Company's history, purpose, goals, and mission; (xiii) a list of the top
producing agents by year for the past ten years; (xiv) a list containing a legal
description of the real property that IRA owns, along with a copy of the plat;
(xv) a list of non-recurring items, describing significant financial items that
have occurred over the past several years which are not predictable and/or
non-recurring such as distributions from Company investments in equity
securities and state and federal income tax refunds; (xvi) the Class B
Shareholder Agreement used by Class B Shareholders; (xvii) the Payne Class A
Shareholder Agreement, which is signed by all members of the Payne family who
own Class A shares; (xviii) the Class A Shareholder Agreement, which is used for
all Class A shareholders except members of the Payne Family; (xix) a copy of the
Articles of Incorporation of the Company, as amended and filed with the State of
Texas, along with a copy of the bylaws of the Company as amended; (xx) certain
internal financial statements, showing financial highlights of the Company for
the past five years and various ratios calculated for internal use; (xxi) the
stock appreciation history of the Class B Stock, by month and year for the past
10 years; and (xxii) certain military customer demographics, summarizing the
significant market niches of the Company and its major competitors within those
markets.
Copies of these documents have been filed as exhibits to the Schedule 13E-3
and will be made available for inspection and copying at the principal executive
offices of the Company during its regular business hours by any IRA Shareholder
or his representative who has been so designated in writing. Alternatively, the
Company will transmit a copy of the documents to such IRA Shareholder (or his or
her designated representative) upon written request and at the expense of such
IRA Shareholder.
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In addition, prospective operating information (the "Model") was provided
to the Financial Advisor and the Special Committee that included a financial
model intended to demonstrate the financial and tax effects of the Merger and
subsequent S corporation status of the Surviving Corporation. The Model has been
filed as an exhibit to the Schedule 13E-3. The Model and summary information
contained therein does not purport to show increasing levels of operating
revenue or cost savings that may occur as a result of the Merger. The Model was
prepared for the purpose of ensuring the required cash flow would be available
to service the debt incurred as a result of the Merger based on current
operating conditions. The assumptions and cautionary statement included in the
Model are an integral part of the analysis.
The most significant assumptions used in the Model include the following:
(1) The Company has assumed no growth in net income as the purpose of
the Model is to evaluate the Company's ability to service the debt
under current operating conditions. Revenue generating assets and
liabilities have been assumed to remain constant while certain other
assets have been projected based on historical trends.
(2) The Mission Accomplishment Plan replaces certain financial elements
of the Company's Class B Stock which was created in order to reward
key employees and agents and allow them the opportunity to share the
Company's growth through dividends and stock appreciation. The
Mission Accomplishment Plan is more financially efficient than Class
B Stock as a way to meet the objective of rewarding key employees
and agents. All current shareholders are key employees and licensed
agents of the Company.
(3) The Company has assumed that 100% of all net income after taxes, on
a GAAP basis, will be distributed to Class B Shareholders in the
event that the Company continues to operate as a C corporation. In
the event the Company changes its tax status to an S corporation it
has been assumed that 85% of taxable income before Mission
Accomplishment Plan distributions will be paid out as Dividend
Equivalent Rights with the remainder increasing the value of the
Stock Appreciation Rights. The 85% represents a limit imposed by
cash flow and tax considerations.
(4) The Company believes that all Class A/B Shareholders will elect to
exchange their Class B Stock for Surviving Corporation Nonvoting
Stock. Consequently, this is the scenario that is contained in the
Model. In order to compensate the Class A/B Shareholders for not
receiving any cash consideration for their Class B Stock, a special
distribution will be paid to them annually based on the performance
of the Company. The purpose of this distribution is to provide a
minimum return to the Class A/B Shareholders that receive the Class
B Nonvoting Stock Consideration pursuant to the Merger. The minimum
return will be based on the hypothetical after-tax proceeds that
would have resulted from the exchange of Class B Stock for the Class
B Cash Consideration and assumes that any gain will be taxed at
capital gain rates for federal income tax purposes.
(5) The Model includes information for each year until the Company's
2009 fiscal year, which is one year following the anticipated payoff
of the debt incurred as a result of the Merger. At that point, in
order to adequately compare the C corporation and S corporation
status of the Company in the Model, all Class B Stock and SAR units
have been converted to cash. Tax effects on the Company,
shareholders and MAP holders have been taken into account.
Additional information in the Model reflects the summary of cash flow
analysis and balance sheet data from 1998 through 2009. The following are
similarities and differences between IRA as if the Merger had never occurred
("Old IRA") and First Command after the consummation of the Merger ("New First
Command") that are described in the Model:
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(1) Old IRA and New First Command reflect the same net income before
corporate taxes and interest.
(2) New First Command as an S corporation would not pay corporate
federal income taxes as Old IRA would continue to do in the future.
New First Command would, however, make distributions to shareholders
in order to pay federal income taxes resulting from taxable income,
deductions, credits and other items that flow through to them.
(3) During fiscal year 1999, the Model indicates that Old IRA would pay
$8.17 million in dividends to Class B Shareholders. New First
Command would make DER payments to MAP participants of $10.76
million even after appropriate payments are made on debt incurred as
a result of the Merger and appropriate distributions are made to New
First Command shareholders. Similar differences occur each year
thereafter due to the S election.
(4) The balance sheet reflects that in addition to (3) above, during
1999 the Company will accrue a SAR payable liability of $8.91
million.
The Model also contains a summary of shareholder cash flows during the
period from 1998 through 2009. Shareholder and MAP participant income taxes have
been taken into account in the summary of shareholder cash flows. The following
are significant differences and similarities between Old IRA and New First
Command and also between Class A/B Shareholders and Class B Shareholders as
described in the Model:
(1) The per share redemption price for Class B Stock is $28.24 under
both Old IRA and New First Command.
(2) The net cash flow per share after taxes over the time period as
described in the Model is $86.52 for both Class A/B Shareholders and
Class B Shareholders. These amounts include stock sale proceeds and
dividends.
(3) The net cash flow per share and per MAP Unit after taxes under First
Command over the time period described in the Model is $125.55 for
both Class A/B Shareholders and Class B Shareholders. These amounts
include stock sale proceeds, MAP payments, earnings on stock sale
proceeds of the Class B Shareholders, and Company distributions to
Class A/B Shareholders who exchanged Class B Stock for Surviving
Corporation Nonvoting Stock.
(4) Both Class A/B Shareholders and Class B Shareholders, based on the
assumptions described in the Model, would receive 45.11% more cash
after taxes under the New First Command scenario than under the IRA
scenario.
(5) If all cash flows are discounted back to 1998 at 4%, both the Class
A/B Shareholders and Class B Shareholders would be 43.56% better off
under the New First Command scenario.
While this information is not intended to predict future performance of the
Company, it does demonstrate the dynamics of the transaction and the intent of
the Company to keep the financial rewards to the Class A/B Shareholder and Class
B Shareholders the same after the Merger. This information intends to show the
benefits that will be available to the Class A/B Shareholders and Class B
Shareholders through this more financially efficient method of rewarding key
employees and agents through the Mission Accomplishment Plan.
Copies of the Model will be made available for inspection and copying at
the principal executive offices of the Company during its regular business hours
by any IRA Shareholder or his representative who has been so designated in
writing. Alternatively, the Company will transmit a copy of this information to
such IRA Shareholder (or his or her designated representative) upon written
request and at the expense of such IRA Shareholder.
36
<PAGE>
The Financial Advisor considered the following approaches in its analysis:
Income Approach. The concept underlying this approach is that realistic
valuation of any investment in an income-producing property is directly related
to the future cash flow attributable to such property. Therefore, future cash
flow represents the recovery of investments as well as a return on investment.
The ability of an enterprise to create adequate cash flow, fund the proper cash
disbursements and provide for related financing activities is the primary
determinant of value in that enterprise.
A major requirement of the income approach is a cash flow analysis, which
is management's estimate of what will occur in the future as it pertains to
revenues, expenses, capital expenditures and working capital requirements. This
analysis is compared to the forecasted financial and operating results of
comparable businesses with an emphasis on growth and profitability.
Another important component of the income approach is the determination of
the cost of equity. Since the cash flow analyses provided by the Company's
management included debt proceeds, principal repayment and interest expense, the
resulting cash flows were appropriately discounted at a cost of equity ranging
from 15% to 20%. The cost of equity is utilized to convert to present value the
operating cash flow the subject property is expected to generate in the future.
Various financial tools and modes are used to calculate these returns. Central
to this analysis was the assumption that the majority of the future cash flow
generated by the Company will accrue to the benefit of the participants of the
Company's incentive compensation plans. However, the Company has no contractual
obligation to make any distribution to the participants of the Company's
incentive compensation plans.
Based on the above procedures, the income approach yielded value
indications for the Class B Stock ranging from $2.32 per share to $11.61 per
share. This value range reflects management's assertions that there will be
insufficient cash flow prospectively to fund dividends or capital appreciation
on the Class B Stock due to the impact of the various incentive compensation
plans. Based on this value range and the transaction price of $28.24 per share
of Class B Stock, the Financial Advisor considered the indications of value
derived from the income approach as supportive of its ultimate conclusion.
Transaction Approach. This approach required an analysis of recent
transactions involving financial planning companies deemed comparable to the
Company. Market derived multiples, based on revenue, EBDIT (earnings before
depreciation, interest and taxes) and book value of equity were developed and
analyzed to consider differences between the Company and the comparable
transactions used in the analysis for factors such as size, product
concentration, market share, growth potential and profitability. Central to this
analysis was the assumption that the majority of the future cash flow generated
by the Company will accrue to the benefit of the participants in the Company's
incentive compensation plans, and, therefore, the growth potential and profit
available to the Class A Stock and Class B Stock would be significantly reduced.
However, the Company has no contractual obligation to make any distribution to
the participants of the Company's incentive compensation plans.
The Financial Advisor conducted an analysis of transactions over the past
twenty-four months for companies in the life insurance and insurance agency
business. Although the life insurance and financial planning industry is
undergoing consolidation, the majority of the transactions identified involved
companies that did not possess qualities similar to the Company. For example, a
large majority of the target companies maintained underwriting operations for
their own insurance products and securities. The few transactions that did
contain pure agency and/or financial planning operations were small in deal size
and considered immaterial by the acquiror. Therefore, financial data pertaining
to the operations of these target companies was unavailable.
However, two transactions relating to pure agency and/or financial planning
operations for which adequate financial information was available were
identified. In September 1997, Amerus Life Insurance Company acquired Delta Life
Corporation for approximately $163 million, and in November 1996, the annuity
division of John Alden Financial Corp. was acquired by SunAmerica Inc. for
approximately $238 million. These transactions posed several issues when
comparing the Company to the targets mentioned above. The issues can be
summarized as follows:
37
<PAGE>
(1) the products offered by both target companies were not from
contractual relationships with independent underwriters, but rather
from affiliations with parent companies;
(2) these transactions were synergistic acquisitions, not
recapitalizations;
(3) the equity of the targets was not severely restricted by shareholder
agreements (as is the case with the Class A Stock and the Class B
Stock of the Company);
(4) the targets' equity was not principally owned by the agents who are
responsible for the generation of revenue (as is the case with the
Company); and
(5) the equity owners of the targets did not have to be registered life
insurance agents in the state of Texas.
Based on these factors, the Financial Advisor assigned minimal weight to the
value indications generated by the transaction approach.
In order to apply transaction multiples to the historical parameters of the
Company, the Financial Advisor first needed to adjust the historical financial
performance of the Company to reflect the impact of the various incentive
compensation plans enacted by the IRA Board prior to the Transaction. After
making such adjustments, the transaction approach yielded value indications for
the Class B Stock ranging from $15.36 per share to $24.93 per share. This value
range reflects management's assertions that there will be insufficient cash flow
prospectively to fund dividends or capital appreciation on the Class B Stock due
to the impact of the various incentive compensation plans. Based on this value
range and the transaction price of $28.24 per share of Class B Stock, the
Financial Advisor considered the indications of value derived from the
transaction approach as supportive of its ultimate conclusion.
Market Multiple Approach. This approach required an analysis of the
publicly traded companies operating in the relevant industry. Market valuation
multiples were developed from the financial statements of the identified
guideline companies. The guideline companies used in this analysis included
American Annuity Group, Cotton States Life Insurance and Kansas City Life
Insurance Company. The Financial Advisor conducted an analysis of comprehensive
lists and directories of public companies engaged in life insurance sales and/or
financial planning. The following criteria were used in choosing potential
guideline companies for this analysis: (i) the company has been profitable; (ii)
the company provides similar services to those provided by IRA (i.e., life
insurance agencies); (iii) the company is not involved in the underwriting of
its own insurance or financial products; (iv) adequate financial data is
available for the company; and (v) the company's stock is traded on an exchange
or in the over the counter market. Central to this analysis was the assumption
that the majority of the future cash flow generated by the Company will accrue
to the benefit of the participants in the Company's incentive compensation
plans. However, the Company has no contractual obligation to make any
distribution to the participants of the Company's incentive compensation plans.
The companies considered by the Financial Advisor in its analysis are described
more fully below.
Due to the nature of the industry, the majority of publicly traded life
insurance and financial planning companies engage in many diverse lines of
business (most underwrite insurance and/or sell mutual funds in which they
manage themselves). Therefore, the guideline company search yielded only three
companies deemed remotely comparable to IRA.
American Annuity Group, Inc. ("AAG"). AAG is a holding company whose
subsidiaries are engaged primarily in the marketing of single premium annuities
for retirement planning. Operations in this area accounted for approximately 80%
of premiums in 1997. Within the past three years however, AAG has made a
concentrated effort to expand their operations into the areas of life insurance
and pre-need funeral financing. Through
38
<PAGE>
acquisitions, AAG nearly doubled its asset base from $4.5 billion in 1992 to
over $7.7 billion in 1997, AAG markets its products in every state except New
York through approximately 1,500 registered agents.
Cotton States Life Insurance Company ("Cotton States"). Cotton States is a
holding company whose subsidiaries market individual life insurance, payroll
deduction life insurance, guaranteed-simplified issue life insurance and
individual annuities. Life insurance related premiums accounted for 25% of
revenue in 1997 while investment income constituted 60%. The maximum individual
insurance policy that is offered is $100,000. Cotton States markets its products
through an agency force of 1,400. All of its business is conducted in the
southeastern United States.
Kansas City Life Insurance Company ("Kansas City"). Kansas City markets
life insurance and annuities through their wholly owned subsidiaries Sunset Life
Insurance Company of America and Old American Insurance Company. The life
insurance segment constituted 86% of Kansas City's revenue in 1997. The company
focuses its marketing efforts primarily on the senior market to cover retirement
and funeral needs. Marketing is executed through an agent force of approximately
1,000 in 48 states.
In analyzing these "comparable" companies and assessing their comparability
to the Company, the Financial Advisor considered certain key facts (e.g., size,
target market, profitability, etc.). The following provides an overview of
significant differences between the "comparable" companies and the Company:
(1) AAG offers only annuity products. Over one third of the Company's
revenues are derived from life insurance premiums. Also AAG's total
asset base is ten times greater than the Company's;
(2) the operations of Cotton States are concentrated only in the
southern region of the United States; the Company, on the other
hand, has a defined global presence;
(3) agents employed by Cotton States also serve as underwriters for the
parent company;
(4) the products sold by the "comparable" companies are underwritten by
parent or related companies;
(5) none of the "comparable" companies has a customer base or agent base
similar to the Company's;
(6) the equity of the "comparable" companies was not severely restricted
by shareholder agreements (as is the case with the Class A Stock and
the Class B Stock of the Company);
(7) the "comparable" companies' equity was not principally owned by the
agents who are responsible for the generation of revenue (as is the
case with the Company); and
(8) the equity owners of the "comparable" companies did not have to be
registered life insurance agents in the state of Texas.
Based on these differences, the Financial Advisor assigned minimal weight to the
value indications generated by the market multiple approach.
In order to apply multiples derived from the "Market Multiple Approach" to
the historical parameters of the Company, the Financial Advisor first needed to
adjust the historical financial performance of the Company to reflect the impact
of the various incentive compensation plans enacted by the IRA Board prior to
the Transaction. After making such adjustments, the market multiple approach
yielded value indications for the Class B Stock ranging from $10.38 per share to
$20.53 per share. This value range reflects management's assertions that there
will be insufficient cash flow prospectively to fund dividends or capital
appreciation on the Class B Stock due to the impact of the various incentive
compensation plans. Based on this value range and the transaction price of
$28.24 per share
39
<PAGE>
of Class B Stock, the Financial Advisor considered the indications of value
derived from the market multiple approach as supportive of its ultimate
conclusion.
Current/Historical Market Pricing and Shareholder Agreement Analysis. In
addition to the traditional valuation, the Financial Advisor considered the
financial implications of the agreements signed by each of the Class A
Shareholders and Class B Shareholders as key to its determination of fairness to
the IRA Shareholders. According to the Class B Shareholder agreements, the Class
B Stock price is set at the discretion of management on an annual basis. Company
management has historically adjusted the per share price of Class B Stock based
on a consistently applied formulaic approach, and $28.24 reflects the stock
price determined in 1998 utilizing that approach. The valuation methodologies
described above and applied to the Company's pro forma operating results yield
value indications for the Class B Stock below the $28.24 cash consideration to
be received in the transaction by the holders of Class B Stock. The pro forma
operating results of the Company reflect implementation by the IRA Board of
various incentive compensation plans that will significantly diminish the
Company's ability to fund future dividends and capital appreciation for the
Class A Stock and the Class B Stock. The foregoing fact pattern was a key
element in the Financial Advisor's determination that the transaction is fair to
the Class B Shareholders and the Class A Shareholders from a financial point of
view. Further, the Class B Shareholders have the right to "put" the Class B
Stock back to the Company at the price determined by management. Based on this
fact, and the fact that the various incentive compensation plans enacted by the
IRA Board will severely reduce the ability of the Company to fund future
dividends and capital appreciation on the Class B Stock, the Class B
Shareholders maximize the present value of their investment in the Company by
accepting the cash payment of $28.24.
For the Class B Stock owned by Class A Shareholders, the above analysis is
also appropriate. However, due to negative tax implications of redeeming the
Class B Stock while accepting Surviving Corporation Voting Stock for the Class A
Stock, the Class A Shareholders have also been given the option to accept
Surviving Corporation Nonvoting Stock in exchange for their Class B Stock.
Although the Surviving Corporation Nonvoting Stock will have a fixed price of
$28.24 per share, the owners of the Surviving Corporation Nonvoting Stock will
receive a "competitive reinvestment" dividend to compensate for the lack of
reinvestment opportunity.
For the Class A Stock, the price is set at five times the price of the
Class B Stock, and holders of Class A Stock have never been paid dividends. The
Class A Shareholders will receive five shares of Surviving Corporation Voting
Stock in exchange for each share of their Class A Stock. Since the Surviving
Corporation Voting Stock and the Surviving Corporation Nonvoting Stock will have
a fixed price of $28.24 per share, the five-for-one exchange fairly adjusts for
the value as delineated in the Class A Shareholder Agreements.
Based upon the proposed Surviving Corporation Shareholder Agreement, the
Surviving Corporation Voting Stock and the Surviving Corporation Nonvoting Stock
will receive dividends to pay tax liabilities that will offset the S corporation
tax liabilities. In addition, all Surviving Corporation Common Stock will
receive a competitive reinvestment dividend on the current price of $28.24 set
by the Surviving Corporation's Board of Directors. The operative events set
forth in the Surviving Corporation Shareholders' Agreement, which trigger
repurchase of the Surviving Corporation Common Stock by the Company, are
comparable to the events outlined in the existing shareholder agreements that
trigger repurchase of the Class A Stock or Class B Stock by the Company.
Liquidation Value Approach. The premise underlying this approach is that
the fair market value of the Company's equity capital can be estimated by
restating assets and liabilities on the Company's balance sheet, which are
typically recorded at historical cost (with the exception of securities that are
accounted for at their market values), to their respective fair market values.
Under the assumption that the carrying amounts in the Company's balance
sheet dated June 30, 1998, are reflective of the respective fair market value of
the Company's assets and liabilities, the resulting unadjusted per share value
for the Class B stock would be $54.55 (shareholder equity of $51,682,289 divided
by 947,483 outstanding shares of Class B Stock). The foregoing per share value
would typically be adjusted for costs incurred
40
<PAGE>
in connection with an orderly liquidation of the Company's assets including, but
not limited to, broker's commissions, taxes and severance payments.
Due to the fact that the Company is an insurance agency (and is therefore
not asset intensive) and is not contemplating liquidation, the Liquidation Value
Approach was deemed inappropriate for the valuation of the stock of the Company
on a going concern basis. The Financial Advisor believes that liquidation of the
Company is particularly inappropriate in this case due to the fact that the
Company's primary mission is to provide for the long-term viability of its
customers as well as its primary asset/constituency, its agents. The Financial
Advisor believes that liquidation would be contrary to the Company's mission and
would result in the unemployment of all or a significant portion of the Class A
Shareholders and Class B Shareholders (who are current employees of the Company)
as well as the elimination of the opportunity for younger agents/Class B
Shareholders to participate in the Company's various incentive compensation
plans.
Based upon the foregoing, it is the Financial Advisor's opinion that, as of
the date of this opinion, the Transaction is fair, from a financial point of
view, to the Class A Shareholders and the Class B Shareholders. The Financial
Advisor believes that its analyses must be considered as a whole and that
selecting portions of its analyses and of the factors considered by it, without
considering all factors and analyses, could create a misleading view of the
processes underlying its opinion. The preparation of a fairness opinion is a
complex process and is not necessarily susceptible to partial analysis or
summary description.
As compensation for the professional services rendered by the Financial
Advisor, the Company agreed to pay the Financial Advisor a non-refundable
professional fee on the terms outlined below. The Financial Advisor's total fee
for services in rendering the Financial Advisor Opinion was $250,000. Of such
fee, $100,000 was due and payable upon execution of the engagement letter,
$100,000 was due and payable when the Financial Advisor informed IRA that it was
prepared to render the Financial Advisor Opinion, and the balance was due and
payable upon issuance of the Financial Advisor Opinion. Additionally, IRA agreed
to reimburse the Financial Advisor for its actual out-of-pocket expenses
(including the fees and expenses of outside counsel) incurred by the Financial
Advisor in connection with the engagement (not to exceed an aggregate of $25,000
without the mutual written agreement of the Financial Advisor and the Special
Committee). Neither the employment to conduct its analysis, nor the compensation
for its engagement, was contingent upon the tenor of the conclusions ultimately
reported.
The Financial Advisor has performed numerous valuation and fairness opinion
engagements encompassing a wide and diversified range of industries, including
the insurance industry. The Financial Advisor was retained by the Special
Committee after consideration by it of several candidate firms.
As noted above, certain internal management cash flow analyses were
provided by the Company to the Financial Advisor for purposes of its analysis in
arriving at its Opinion. These analyses were based upon pessimistic assumptions
with the intent of ascertaining whether the Company could adequately service
debt resulting from the Merger. As a matter of course, the Company does not
publish or make generally available internal forecasts as to its future
performance, earnings or financial condition, and such information was not
prepared with a view to public disclosure or in accordance with applicable
accounting guidelines. These analyses were based on numerous variables and
assumptions which are inherently uncertain, difficult to predict and may not be
within the control of the Company, including without limitation, economic and
competitive conditions. Consequently, actual results may differ materially from
those set forth in such analyses.
Interests of Certain Persons in the Merger
Class B Shareholders should be aware in considering whether to vote in
favor of the Merger that the Management Group along with other Class A/B
Shareholders, have interests in the Merger in addition to their interests as
shareholders of IRA generally. Those interests relate to, among other things,
the fact that each of the members of the Management Group is a Class A
Shareholder and, as such, upon consummation of the Merger will be a shareholder
of the Surviving Corporation, unless such member of the Management Group elects
to seek
41
<PAGE>
appraisal rights for his Class A Stock. As a result, each member of the
Management Group that is currently an officer or director of the Company will
retain his or her position with the Surviving Corporation upon consummation of
the Merger. Further, the IRA Board and the executive officers of IRA will be the
directors and executive officers of the Surviving Corporation upon consummation
of the Merger.
Upon consummation of the Merger, the Surviving Corporation will be owned by
the following persons, assuming that none of such persons elects to seek
appraisal rights with respect to his or her shares: (i) the Class A
Shareholders; (ii) the Class A/B Shareholders that elect to receive the Class B
Nonvoting Stock Consideration with respect to their Class B Stock; and (iii) the
First Command Shareholders.
The following table sets forth ownership information as of October 30, 1998
with respect to the Surviving Corporation, assuming that all of the Class A/B
Shareholders elect to receive the Class B Nonvoting Stock Consideration with
respect to their shares of Class B Stock and assuming that none of the Class A/B
Shareholders or the First Command Shareholders elect to seek appraisal rights
with respect to their shares. Members of the Management Group are denoted with
an *.
<TABLE>
<CAPTION>
Position with Amount and
Name and Address the Surviving Title Nature of Percent
of Beneficial Owner Corporation of Class Beneficial Ownership of Class
- ------------------------ ------------------------ ---------------- ---------------------- ------------
<S> <C> <C> <C> <C>
Lamar C. Smith (1)* Director, Chairman of Voting 10 shares 8.00
the Board and Chief Nonvoting 40,010 shares 11.13
Executive Officer MAP Units 46,272 units 3.69
James N. Lanier (1)* Director, President Voting 10 shares 8.00
and Chief Operating Nonvoting 18,010 shares 5.01
Officer MAP Units 22,006 units 1.76
Howard M. Crump (1)* Director and Senior Voting 10 shares 8.00
Vice President and Nonvoting 26,010 shares 7.24
Director of Marketing MAP Units 30,840 units 2.46
Hal N. Craig (1)* Director and Vice Voting 5 shares 4.00
President and Nonvoting 5,600 shares 1.56
Director of Insurance MAP Units 6,770 units 0.54
Donaldson D. Frizzell (1)* Director and Vice Voting 5 shares 4.00
President of Nonvoting 7,100 shares 1.97
Investments MAP Units 8,421 units 0.67
Jerry D. Gray* Director and Regional Voting 5 shares 4.00
5705 Cameron Hall Place Agent Nonvoting 20,000 shares 5.56
Atlanta, GA 30328 MAP Units 23,191 units 1.85
David P. Thoreson* Director and Regional Voting 5 shares 4.00
2016 Empire Mine Circle Agent Nonvoting 27,850 shares 7.75
Gold River, CA 95670 MAP Units 31,837 units 2.54
Carroll H. Payne II* Director Voting 15 shares 12.00
1814 8th Avenue Nonvoting 46,986 shares 13.07
Suite A-3 MAP Units 52,400 units 4.18
Fort Worth, TX 76110
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
Position with Amount and
Name and Address the Surviving Title Nature of Percent
of Beneficial Owner Corporation of Class Beneficial Ownership of Class
- ------------------------ ------------------------ ---------------- ---------------------- ------------
<S> <C> <C> <C> <C>
Naomi K. Payne* Director Voting 15 shares 12.00
11 Marion Terrace Nonvoting 46,977 shares 13.07
Brookline, MA 02146 MAP Units 52,400 units 4.18
Freda J. Payne* Voting 15 shares 12.00
6812 Riverdale Nonvoting 46,978 shares 13.07
Fort Worth, TX 76132 MAP Units 52,400 units 4.18
Debra S. Payne Voting 15 shares 12.00
5910 N. Central Nonvoting 46,528 shares 12.94
Expressway Suite 1000 MAP Units 52,400 units 4.18
Dallas, TX 75206
Richard E. Giles Voting 5 shares 4.00
13003 Richards Nonvoting 5,400 shares 1.50
Overland Park, KS 66213 MAP Units 7,079 units 0.57
Margaret L. Galda Voting 5 shares 4.00
2741 Mannerwood Trail Nonvoting 4,500 shares 1.25
Fort Worth, TX 76109 MAP Units 5,548 units 0.44
Edward T. Elmendorf Jr. Voting 5 shares 4.00
6410 Southwest Blvd. Nonvoting 17,550 shares 4.88
Suite 200 MAP Units 20,219 units 1.61
Fort Worth, TX 76109
Total Voting 125 shares 100.00
Nonvoting 359,499 shares 100.00
MAP Units 411,783 units 32.87(2)
</TABLE>
- ------------------------------
(1) The business address of this person is 4100 South Hulen, Fort Worth,
Texas 76113.
(2) As of October 30, 1998, there were 1,252,889 MAP Units outstanding.
In addition, upon consummation of the Merger, these shareholders of the
Surviving Corporation will be entitled to receive any dividends that are
declared by the Board of Directors of the Surviving Corporation. The IRA Board,
which will be the Board of the Surviving Corporation, subject to the fiduciary
duties of the Board of Directors of the Surviving Corporation and the ongoing
financial condition of the Surviving Corporation, will declare and pay dividends
that are pro rata to all shareholders on the Surviving Corporation Common Stock
that are intended to approximate the income that the Class A/B Shareholder would
have received from the competitive reinvestment of the Class B Cash
Consideration, taking into account income tax considerations. See "--Certain
Effects of the Merger; Plans for the Company after the Merger."
The Merger Agreement provides that IRA, and, after the Effective Time, the
Surviving Corporation, will indemnify (and advance expenses to) each present and
former director, officer and employee of IRA and its subsidiaries (the
"Indemnified Parties"), to the fullest extent permitted under applicable law or
under the Articles of Incorporation and Bylaws of IRA and the Surviving
Corporation against any costs incurred in connection with any claim, proceeding
or investigation relating to matters occurring prior to or at the Effective
Time, including the
43
<PAGE>
transactions contemplated by the Merger Agreement. See "THE PROPOSED MERGER--The
Merger Agreement--Indemnification."
Other than the recommendation of the Special Committee, the IRA Board,
First Command and the Management Group, neither IRA nor First Command is aware
of any recommendations in support of or in opposition to the Merger.
Employment Agreements
The IRA Board anticipates that the Surviving Corporation will enter into
employment agreements with each of the Surviving Corporation Shareholders who
are also employees of the Surviving Corporation. Pursuant to these employment
agreements, it is expected that each of the Surviving Corporation Shareholders
will receive compensation for services rendered to the Surviving Corporation and
reimbursement for certain expenditures in furtherance of the Surviving
Corporation's business paid by the Surviving Corporation Shareholder. The actual
amount of compensation to be received by the Surviving Corporation Shareholders
will not be described in or affected by the employment agreements. Such
compensation will be determined as currently done so by the IRA Board or Chief
Executive Officer and will be initially the same after the consummation of the
Merger as prior to the Merger. In addition, the IRA Board believes that the
Surviving Corporation will offer to the Surviving Corporation Shareholders,
pursuant to the employment agreements, (i) the right to participate in the
Mission Accomplishment Plan and any other equity-based compensation incentives
offered by the Surviving Corporation in the future (currently, only the
Company's Deferred Career Commission Plan) and (ii) reimbursement of amounts
expended up to $1,000 for the cost of tax preparation assistance due to the
complexity of preparing the Surviving Corporation Shareholder's individual tax
return because of the S corporation status of the Surviving Corporation.
Certain Transactions in IRA Common Stock
Purchases by IRA. The following table sets forth the purchases by IRA of
the Class B Stock since October 1, 1995, including the number of shares of Class
B Stock purchased, the range of prices paid by IRA and the average purchase
price for each quarterly period of IRA during such period.
<TABLE>
<CAPTION>
Number of
Shares Highest Price Lowest Price Average Price
Quarter Ended Purchased Per Share Per Share Per Share
- --------------------------------- --------------------- -------------------- ----------------------- --------------------
<S> <C> <C> <C> <C>
December 31, 1995................ 25,975 $ 25.60 $ 25.28 $ 25.30
March 31, 1996................... 48,976 26.08 25.76 25.84
June 30, 1996.................... 53,088 26.56 26.24 26.39
September 30, 1996............... 3,475 27.04 26.72 26.92
December 31, 1996................ 24,810 27.04 27.04 27.04
March 31, 1997................... 35,725 27.04 27.04 27.04
June 30, 1997.................... 16,375 27.04 27.04 27.04
September 30, 1997............... 1,675 27.04 27.04 27.04
December 31, 1997................ 10,575 27.34 27.14 27.15
March 31, 1998................... 85,324 27.64 27.44 27.45
June 30, 1998.................... 10,075 27.94 27.74 27.75
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Number of
Shares Highest Price Lowest Price Average Price
Quarter Ended Purchased Per Share Per Share Per Share
- --------------------------------- --------------------- -------------------- ----------------------- --------------------
<S> <C> <C> <C> <C>
September 30, 1998............... 2,025 $ 28.24 $ 28.04 $ 28.18
December 31, 1998 (1)............ 2,650 28.24 28.24 28.24
------------ ------------
Total.................... 320,748 $ 26.76
</TABLE>
- --------------
(1) Through October 30, 1998.
Recent Transactions. Within the last sixty days, IRA has purchased Class B
Stock from certain agents of IRA in private repurchases, on the date, in the
amounts and at the price per share indicated:
<TABLE>
<CAPTION>
Date Number of Shares Price Per Share
- ---------------------------- --------------------------- -----------------------
<S> <C> <C>
September 11, 1998.......... 250 $ 28.24
September 18, 1998.......... 150 28.24
September 24, 1998.......... 1,025 28.24
October 9, 1998............. 325 28.24
October 21, 1998............ 175 28.24
October 28, 1998............ 650 28.24
October 28, 1998............ 1,075 28.24
October 28, 1998............ 50 28.24
October 28, 1998............ 375 28.24
</TABLE>
Purchases by Management Group. The following table sets forth the purchases
by certain members of the Management Group of the Class B Stock since October 1,
1995, including the member, the number of shares of Class B Stock purchased, the
range of prices paid by such member and the average purchase price for each
quarterly period of such member during such period.
<TABLE>
<CAPTION>
Number of Highest Lowest Average
Member Quarter Ended Shares Purchased Price per Share Price Per Share Price Per Share
- ---------------------- --------------------- -------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C> <C>
Lamar C. Smith......... September 30, 1996 2,000 $ 26.56 $ 26.56 $ 26.56
September 30, 1997 4,000 27.04 27.04 27.04
James N. Lanier........ September 30, 1996 2,000 26.56 26.56 26.56
September 30, 1997 4,000 27.04 27.04 27.04
Howard M. Crump........ September 30, 1996 2,000 26.56 26.56 26.56
September 30, 1997 4,000 27.04 27.04 27.04
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Number of Highest Lowest Average
Member Quarter Ended Shares Purchased Price per Share Price Per Share Price Per Share
- ---------------------- --------------------- -------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C> <C>
Hal N. Craig........... September 30, 1996 500 $ 26.56 $ 26.56 $ 26.56
September 30, 1997 600 27.04 27.04 27.04
Donaldson D. Frizzell.. September 30, 1996 500 26.56 26.56 26.56
September 30, 1997 600 27.04 27.04 27.04
Jerry D. Gray.......... September 30, 1997 1,500 27.04 27.04 27.04
David P. Thoreson...... September 30, 1996 1,000 26.56 26.56 26.56
September 30, 1997 1,500 27.04 27.04 27.04
Carroll H. Payne II.... September 30, 1996 2,000 26.56 26.56 26.56
Naomi K. Payne......... September 30, 1996 2,000 26.56 26.56 26.56
Freda J. Payne......... September 30, 1996 2,000 26.56 26.56 26.56
</TABLE>
Except as described above, none of IRA, First Command nor any of their
respective executive officers or directors have participated in any transaction
involving Class B Stock in the last sixty days.
Accounting Treatment
The Merger of the Company into First Command, with First Command becoming
the Surviving Corporation, will be treated for accounting purposes as a business
combination accounted for as a purchase. The conversion of each share of Class A
Stock of the Company issued and outstanding into five shares of the Surviving
Corporation Voting Stock will, in effect, result in the net assets of First
Command being recorded at their existing carrying value in conformity with GAAP,
since the book value of First Command would approximate fair value. The purchase
of the Class B Stock for cash will reduce shareholder's equity of the Surviving
Corporation by a like amount.
In addition, certain accounting adjustments will be made as a result of the
Merger to the financial statements of the Surviving Corporation. For GAAP
purposes, certain deferred tax asset accounts will not be reversed at the
Effective Date. The majority of the Company's deferred tax asset account is
comprised of the effect of the future tax deduction of agent Deferred Career
Commission Plan. Also for GAAP purposes, certain deferred tax liability
accounts, with the exception of those related to depreciable assets expected to
be used in operations, will not be reversed at the Effective Time. The remainder
of the deferred tax liability account should remain on the books of the
Surviving Corporation for ten years until the built-in gain income tax provision
expires. The majority of the Company's deferred tax liability account is
comprised of the effect of the potential future tax recognition of its current
unrealized gains on investments.
Regulatory Filings and Approvals
Prior to and after the Merger, the Surviving Corporation will file a
disclosure document with the Office of Thrift Supervision as the holding company
of First Command Bank. Also after the Merger, the Surviving Corporation will
file a report notifying the Texas Department of Insurance of the change in the
corporate members of the Surviving Corporation and the change from IRA's
Articles of Incorporation to those of the Surviving Corporation.
Certain Federal Income Tax Considerations
The following is a summary discussion of the material U.S. federal income
tax considerations for Class A Shareholders and Class B Shareholders regarding
the Merger and for Surviving Corporation Shareholders regarding the ownership of
Surviving Corporation Common Stock after the Merger. This summary discussion
includes, where
46
<PAGE>
so indicated, certain of the opinions rendered by Ernst & Young in its Tax
Opinion, which is attached hereto as Annex F. (Except as otherwise specifically
indicated herein, the following federal income tax considerations are not
included in the Tax Opinion.) The Tax Opinion is based on certain assumptions,
facts and representations provided by IRA and First Command management and is
subject to certain limitations and qualifications as noted therein. The facts
and representations provided by management have not been verified by Ernst &
Young in rendering its Tax Opinion. The Company has not requested, and does not
intend to request, a ruling from the Internal Revenue Service (the "IRS") with
regard to any of the matters discussed in the Tax Opinion or herein. Unlike a
ruling from the IRS, an opinion is not binding on the IRS, and there can be no
assurance that the IRS will not take a position contrary to one or more of the
positions included in the Tax Opinion or discussed herein or that such positions
will be upheld by the courts if challenged by the IRS.
This summary discussion does not address all of the tax considerations that
may be relevant to an IRA shareholder in light of his or her particular
circumstances. For this summary discussion, the Company has assumed that the
shares of Class A Stock and Class B Stock are held as "capital assets" (within
the meaning of Section 1221 of the Code). In addition, this summary discussion
does not consider the effect of any applicable foreign, state, local or other
tax law, or of U.S. estate and gift tax laws.
This summary discussion is based upon an interpretation of the Code,
Treasury Regulations promulgated thereunder, court decisions and administrative
rulings and practice, all in effect as of the date hereof. As noted above, the
IRS is not precluded from adopting a contrary position. In addition, there can
be no assurance that future legislation or judicial or administrative changes or
interpretations will not adversely affect the accuracy of the statements and
conclusions set forth herein. Any such changes or interpretations could be
applied retroactively and could affect the tax consequences of the Merger and
the considerations of Surviving Corporation Shareholders after the Merger.
The U.S. federal income tax discussion set forth below is intended for
general information only and may not be applicable to a particular shareholder's
situation. Persons considering an exchange of Class A Stock and/or Class B Stock
for the Merger Consideration should consult their own tax advisors regarding the
particular tax consequences of the exchange, including the tax consequences
under foreign, state, local or other tax laws and the possible effects of
changes (possibly including retroactive changes) in U.S. federal and other tax
laws.
Certain Consequences of Reorganization Status. The Tax Opinion includes an
opinion that the Merger should constitute a "reorganization" (within the meaning
of Section 368(a) of the Code), and that the Merger should have the following
U.S. federal income tax consequences:
The Company and the Surviving Corporation. The Tax Opinion includes an
opinion that no gain or loss should be recognized by either the Company or the
Surviving Corporation as a result of the Merger (Sections 361, 357(a) and
1032(a) of the Code). The Tax Opinion also includes an opinion that the tax
basis and holding period of the Company's assets in the hands of the Surviving
Corporation should be the same as the tax basis and holding period of the
Company immediately prior to the Merger (Sections 362(b) and 1223(2) of the
Code).
Class A/B Shareholders. The Tax Opinion includes an opinion that a Class
A/B Shareholder should not recognize gain or loss upon the exchange of his or
her Class A Stock and Class B Stock solely for Surviving Corporation Common
Stock (Section 354(a) of the Code). The Tax Opinion also includes an opinion
that such shareholder's aggregate tax basis in his or her shares of Surviving
Corporation Common Stock should be the same as his or her aggregate tax basis in
his or her shares of Class A Stock and Class B Stock surrendered in exchange
therefor, decreased by the amount of cash or the fair market value of boot
received and increased by any gain recognized on the exchange (Section 358(a) of
the Code). The Tax Opinion includes an opinion that such shareholder's holding
period in shares of Surviving Corporation Common Stock should include his or her
holding period in his or her shares of Class A Stock and Class B Stock
surrendered in exchange solely therefor (Section 1223(1) of the Code).
47
<PAGE>
A Class A/B Shareholder who (i) exchanges his or her Class A Stock for
Surviving Corporation Voting Stock and (ii) elects to take cash in exchange for
his or her Class B Stock, should recognize income to the extent of the lesser of
(x) the excess of the value of his or her Class B Stock over his or her tax
basis in such stock, and (y) the amount of cash received. Such income should be
treated as a dividend unless such shareholder is entitled, based on his or her
particular circumstances and certain other factors, to take the position that
the exchange, as to such shareholder, does not have the effect of the
distribution of a dividend under Section 356(a)(2) of the Code. If the exchange
has the effect of a dividend, income will be ordinary income taxable at rates up
to 39.6%. If the exchange, as to a shareholder, does not have the effect of a
dividend, such income will be capital gain. Any Class A/B Shareholder electing
the Class B Cash Consideration should consult his or her own tax advisor(s)
concerning the tax consequences of electing that option.
Each Class A/B Shareholder will be required to attach a statement to his or
her federal income tax return for the year of the Merger that contains
information listed in Treasury Regulation Section 1.368-3(b).
Shareholders Who Own Only Class B Stock. The Tax Opinion includes an
opinion that a Class B Shareholder who does not own any Class A Stock and is not
related, under the constructive ownership rules of Section 318 of the Code, to
any Surviving Corporation Shareholder after the Merger, who exchanges his or her
Class B Stock solely for cash should recognize capital gain (or loss) to the
extent the cash received exceeds (or is exceeded by) the tax basis in his or her
Class B Stock (Section 302(b) of the Code). Shareholders should consult their
own tax advisors concerning the tax consequences of receiving solely cash for
Class B Stock with respect to the new capital gains tax rates and holding period
rules effective for transactions after January 1, 1998.
Certain Post-Merger Considerations for Surviving Shareholders.
Treatment as an S Corporation. The Tax Opinion includes an opinion that the
Surviving Corporation should be an S corporation immediately after the Merger.
However, the Tax Opinion does not provide assurance as to future facts and
circumstances that could affect the tax status of the Surviving Corporation. The
Surviving Corporation intends to be organized and operated in a manner to meet,
on a continuing basis, the Code requirements for qualification as an S
corporation for federal income tax purposes. In order to qualify as an S
corporation, the Surviving Corporation cannot be an ineligible corporation (as
defined in Section 1361(b)(2)) of the Code and cannot have (i) more than 75
shareholders, (ii) as a shareholder a person (other than certain specified
estates, trusts and tax exempt organizations) who is not an individual, (iii) a
nonresident alien as a shareholder, and (iv) more than one class of stock (other
than differences in voting rights). The Articles of Incorporation of the
Surviving Corporation and the Surviving Corporation Shareholders' Agreement
provide for, among other things, certain restrictions on the transfer of the
Surviving Corporation Common Stock and the requirement that Surviving
Corporation Shareholders tender their shares to the Surviving Corporation upon
the occurrence of certain operative events, each of which is provided at least
in part to preserve the Surviving Corporation's status as an S corporation. See
"DESCRIPTION OF THE SURVIVING CORPORATION CAPITAL STOCK--Restrictions on
Transfers of Shares." However, no assurance can be given that such requirements
will be met or that the Company will be so qualified at any time.
Taxation of Surviving Corporation. Provided the Surviving Corporation is an
S corporation, it generally will not pay any federal income tax. Instead, its
items of income, gains, losses, deductions and credits will be allocated to the
Surviving Corporation Shareholders and taken into account on their individual
federal income tax returns. However, as indicated in the Tax Opinion, the
Surviving Corporation will be subject to the "built-in gains tax" provisions of
Section 1374 of the Code to the extent any asset received in the Merger has a
"net unrealized built-in gain" (within the meaning of Section 1374(d)(1) of the
Code) at the Effective Time and is disposed of by the Surviving Corporation
during the ten-year "recognition period" (within the meaning of Section
1374(d)(7) of the Code) after that date. In addition, if an S corporation has
subchapter C earnings and profits at the close of its tax year and more than 25%
of its gross receipts are "passive investment income" (within the meaning of
Section 1362(d)(3)(C) of the Code), the corporation may be subject to tax on its
"excess net passive" income (within the meaning of Section 1375(b) of the Code).
In addition, if these two conditions are met for three successive years, its S
corporation status will be automatically terminated. The Company believes that,
although the Surviving
48
<PAGE>
Corporation will have subchapter C earnings and profits after the Merger, the
Surviving Corporation will be operated in such a manner to avoid such
termination.
Taxation of Surviving Corporation Shareholders. Provided the Surviving
Corporation is an S corporation, the Surviving Corporation will allocate to and
among the Surviving Corporation Shareholders its items of income, gains, losses,
deductions and credits for federal income tax purposes. Each shareholder will be
required to report on his or her federal income tax return his or her
distributive share of such items and will be subject to tax on such amounts.
Pursuant to the Articles of Incorporation of the Surviving Corporation and the
Surviving Corporation Shareholders' Agreement, the Surviving Corporation has
agreed to declare and make distributions to the Surviving Corporation
Shareholders in a timely manner to allow them to pay their tax liability
attributable to their distributive shares of its taxable income. See
"DESCRIPTION OF THE SURVIVING CORPORATION CAPITAL STOCK--Subchapter S
Provisions--Distributions to Pay Tax Liabilities." Although there can be no
assurances that a Surviving Corporation Shareholder will not have a tax burden
from such allocation in an amount in excess of the amount of cash previously
distributed by the Surviving Corporation to such shareholder (thus requiring
such shareholder to use funds from other sources to pay any tax liability
arising from such allocation), the Surviving Corporation believes this result is
highly unlikely. EACH SURVIVING CORPORATION SHAREHOLDER SHOULD CONSULT HIS OR
HER OWN TAX ADVISOR(S) CONCERNING HIS OR HER OWNERSHIP OF SURVIVING CORPORATION
COMMON STOCK.
Tax Opinion Engagement. Ernst & Young, who is also the principal
independent accountants for the Company and First Command, has agreed to be paid
by the Company a non-refundable professional fee for its engagement with respect
to the Tax Opinion of $180,000, payable upon delivery of the Tax Opinion.
Additionally, the Company has agreed that, in the event Ernst & Young is
requested or authorized by the Company (including its successor) or is required
by legal process to produce its documents or its personnel as witnesses with
respect to services for the Company, the Company will, so long as Ernst & Young
is not a party to the proceeding or the subject of the investigation, as the
case may be, in which information is sought, reimburse Ernst & Young for its
professional time and expenses, as well as the fees and expenses of its counsel,
incurred in responding to such requests. In addition, the Company has engaged
Ernst & Young as a tax advisor in connection with the Merger. To date, the
Company has paid Ernst & Young $300,000 in connection with its engagement, and
the Company will pay Ernst & Young an additional $50,000 on completion of Ernst
& Young's engagement.
CERTAIN INFORMATION CONCERNING IRA
General
The Company began operations in January 1964, as a sole proprietorship
owned by Carroll H. Payne, doing business as the "Carroll H. Payne Agency." On
January 1, 1971, the name was changed to "Independent Research Agency for Life
Insurance." On January 1, 1977, the Company was organized as a partnership (the
"IRA Partnership") under the general partnership laws of the State of Texas. On
March 9, 1981, the IRA Partnership exchanged all of its assets relating to the
operation of its life insurance business (which constituted substantially all of
its assets) to Independent Research Agency for Life Insurance, Inc. ("IRA"), a
Texas corporation formed by the partners of the IRA Partnership on December 9,
1980. Thereafter, the IRA Partnership continued in existence under another name,
but all of its former life insurance operations are now owned and conducted by
the Company. The IRA Partnership was dissolved in 1992. IRA is engaged in the
business of a life insurance general agency for sales to United States military
personnel. IRA has six wholly-owned subsidiaries engaged in the same business in
the states of Hawaii, Wyoming, Montana, New York, Nevada and Alabama,
respectively. IRA's wholly-owned subsidiary, United Services Planning
Association, Inc., is also a Texas corporation and is a broker-dealer of
securities. IRA's wholly-owned subsidiary, First Command Bank, is a federal
savings bank. IRA's principal executive offices are located at 4100 South Hulen
Street, Fort Worth, Texas 76109, and its telephone number is (817) 731-8621.
49
<PAGE>
For more information regarding the business and other information
regarding IRA, see the IRA 10-K, which has been delivered to the Class A
Shareholders and the Class B Shareholders as a part of Annex D to this Proxy
Statement.
Recent Developments
On June 25, 1998, IRA entered into a Line of Credit Agreement (the
"United American Line of Credit") with United American Insurance
Company ("United American Insurance"), pursuant to which United American
Insurance agreed to loan IRA up to $27,000,000. IRA intends to advance
approximately $7,000,000 of the proceeds under the United American Line of
Credit to First Command pursuant to the Line of Credit (as defined herein)
that First Command has entered into with IRA. See "CERTAIN INFORMATION
CONCERNING FIRST COMMAND--Business." The remainder of the United American
Line of Credit will be used, if at all, for general corporate purposes.
The interest rate on funds advanced under the United American Line of
Credit is 7% per annum, and advances may be made from time to time until
November 30, 2001, upon the request of IRA. Prior to December 1, 2001,
interest on the unpaid principal balance outstanding under the United
American Line of Credit is due and payable monthly as it accrues, commencing
on the last day of the month in which the first advance is made by United
American Insurance. However, if IRA is entitled to advances under the
United American Line of Credit, United American Insurance will, at
IRA's request, make an advance under the United American Line of Credit
that is sufficient to pay the accrued interest that is then due and
payable. After November 30, 2001, the unpaid principal and accrued
and unpaid interest on principal amounts outstanding under the United
American Line of Credit shall be converted into a term loan and shall be due
and payable in 180 equal quarterly installments, with the final payment on
November 30, 2016. The United American Line of Credit is secured by shares
in mutual fund holdings of IRA. IRA intends to repay amounts due under
the United American Line of Credit through cash flow from its
operations. In the event of the failure of IRA to pay any amount when due,
the failure of IRA to perform certain covenants, false representations
by IRA, bankruptcy or insolvency of IRA, the execution of the collateral, or
decrease in the value of the collateral such that the collateral does not
exceed 90% of the loan balance, United American Insurance may (i) exercise
all rights with respect to the collateral; (ii) foreclose or reduce its
claim to judgment; (iii) sell the collateral; (iv) purchase the collateral;
(v) apply for a receiver for the collateral; (vi) retain the collateral in
satisfaction of the indebtedness; or (vii) realize upon the collateral in
any other manner permitted by the issuer of the mutual funds.
Directors and Executive Officers of IRA
The directors and executive officers of IRA will be the directors and
executive officers of the Surviving Corporation after the Merger. For
more information concerning IRA's directors and executive officers, including
certain information regarding executive compensation, see the IRA 10-K,
which has been delivered to the Class A Shareholders and the Class B
Shareholders as Annex D to this Proxy Statement.
On May 8, 1998, the IRA Board elected James J. Ellis and Logan Dickinson as
directors of IRA. See "SPECIAL FACTORS--Background of the Merger."
James J. Ellis has operated his own insurance practice since retiring as
General Manager of Mutual of New York in January of 1992. Mr. Ellis joined
Mutual of New York in 1960 and was appointed General Manager in 1976. Mr. Ellis
is a member of the Board of Jack Henry and Associates and the Advisory Board of
Westwood Trust, the First National Bank Park Cities, Merit Medical Systems, Inc.
and Sentir, Inc. His business address is Regency Plaza, LB 72, 3710 Rawlins,
Suite 1010, Dallas, Texas 75219-4239.
Logan Dickinson has served since 1982 as President and Managing Principal
of Compensation Strategies Group of Texas, Inc., which provides planning for
employee benefits, life and health insurance and administers qualified
retirement and benefit plans. Mr. Dickinson is a Chartered Life Underwriter,
Chartered Financial Consultant and a CPA. His business address is 314 Main
Street, Suite 202, Fort Worth, Texas 76102.
50
<PAGE>
Each of the directors and executive officers of IRA is a United States
citizen, and, to the knowledge of IRA, none of the directors or executive
officers of IRA has, during the last 5 years, (i) been convicted in a criminal
proceeding (excluding traffic violations or similar misdemeanors) or (ii) been a
party to a civil proceeding of a judicial or administrative body of competent
jurisdiction and as a result of such proceeding was or is subject to a judgment,
decree or final order enjoining further violations of, or prohibiting activities
subject to, federal or state securities laws or finding any violation of such
laws.
Mission Accomplishment Plan
On June 27, 1998, the IRA Board authorized the Mission Accomplishment
Plan, pursuant to which certain agents, members of management and key
employees of IRA will be awarded stock appreciation rights ("SARs"), along
with dividend equivalent rights ("DERs" and, together with SARs, "MAP Units").
The SARs award holders the right to participate in changes in the value of
the Company, based on a formula established by the IRA Board. While the IRA
Board may change such formula, the initial policy of the IRA Board is to value
each SAR based on the change in the Company's per SAR unit value as reported by
the Company using GAAP; provided, however, that this per unit value will be
reduced by the dividend equivalent declared by the Company for payment based on
the current year's earnings, if any. For this purpose, the per SAR unit value
does not include the effect of reporting the Company's investments at market
value net of estimated federal income taxes as stated in SFAS 115. Each SAR will
carry a basis equal to the SAR unit value at the time of issuance, and the
appreciation in the value of the SAR will be paid to participants following
their termination from the Company or upon the maturity of the SAR ten years
after the issuance of the SAR. The Company expects that the value of each SAR
will be established no less frequently than monthly. Although MAP Units vest
upon issuance, a holder of a SAR may exercise such SAR, upon compliance with
certain conditions. These conditions include: the participant's termination from
the Company, termination of the participant as a licensed life insurance agent,
death or disability of the participant or at the end of the exercise period
(which is typically ten years). Such holder will be entitled to receive a cash
payment equal to the difference between (i) the per SAR unit value as of the
last day of the calendar quarter during which such holder provides a request for
such payment and (ii) the per SAR unit value as of the date of the grant. The
Company may unilaterally exercise SARs of any participant who holds unexercised
SARs exceeding 5% of total unexercised SARs outstanding. SAR expense will be
accrued as the unit value is earned. The exercise of the SARs will not impact
the results of operations and will only impact the Company's financial position
by the amount of the cash paid.
The DERs provide holders the right to participate in certain dividend
equivalents that may be declared by the IRA Board. The Company expects that the
DERs will reflect payments of annual profits realized by the Company that are
not included in the SARs.
Holders of MAP Units have no voting rights with regard to the Company, and
the MAP Units are not intended to confer any other rights as a shareholder to
such holder. The MAP Units may not be transferred, pledged, assigned or
otherwise encumbered by a holder and are subject to immediate forfeiture if,
among other things, the agency appointment or employment of the holder of the
MAP Units is terminated for cause.
MAP Units will be awarded pursuant to a policy based on merit and services
provided that is adopted from time to time by the IRA Board, and only licensed
agents of IRA will be eligible to receive the MAP Units. Recipients of MAP Units
will not be required to pay any consideration for the receipt of the MAP Units.
All payments of DERs made by the Company will be made in the same amount per
unit to all holders, similar to dividends paid on capital stock. Additionally,
any change in the per SAR unit value will apply equally to all SAR units.
On July 22, 1998 the Company issued 138,275 MAP Units to 563 of its agents
and employees, including members of the Management Group, and on September 30,
1998, the Company issued 1,114,614 MAP Units to 550
51
<PAGE>
of its agents and employees, including members of the Management Group. The
following table sets forth the number of MAP Units issued to members of the
Management Group.
<TABLE>
<CAPTION>
Member of Management Group Number of MAP Units Distributed
- ---------------------------------------------- ---------------------------------------------
July 22, 1998 September 30, 1998
----------------------- --------------------
<S> <C> <C>
Lamar C. Smith.................................... 1,500 44,772
James N. Lanier................................... 1,500 20,506
Howard M. Crump................................... 1,500 29,340
Hal N. Craig...................................... 400 6,370
Donaldson D. Frizzell............................. 400 8,021
Jerry D. Gray..................................... 800 22,391
David P. Thoreson................................. 800 31,037
Carroll H. Payne II............................... 500 51,900
Naomi K. Payne.................................... 500 51,900
Freda J. Payne.................................... 500 51,900
----------- -----------
Total MAP Units held by Management Group.... 8,400 318,137
----------- -----------
----------- -----------
</TABLE>
After the Merger, the Surviving Corporation intends to implement the
Mission Accomplishment Plan and to award MAP Units pursuant to the Mission
Accomplishment Plan to the former Class B Shareholders who are agents, members
of management or employees at the time of award as well as to other active
agents and employees of the Surviving Corporation.
First Command Bank
First Command Bank ("FCB"), a wholly-owned subsidiary of the Company, is a
chartered federal savings bank located in Fort Worth, Texas. FCB commenced
operations on April 21, 1997. The Company, as a thrift holding company, is
required to disclose certain information with respect to FCB pursuant to the
Industry Guide 3 promulgated under the Securities Act, including certain
disclosures regarding average balances, yields and rates, and net interest
income related to the banking operations. In addition, Guide 3 requires certain
disclosures with respect to the investment and loan portfolio as well as an
analysis of the allowance for loan losses and short term borrowings of the
banking operations.
A significant portion of this disclosure has not been included in the
Company's annual and quarterly financial statements due to the noncomplex
structure of FCB. Given FCB's substantial growth since its inception, average
balances would not reflect the current operations of FCB. In addition, these
amounts are required to be compared to prior periods. Due to the lack of
comparability with such periods, this information has not been included.
Although FCB has experienced growth with respect to its loans and deposits, it
nevertheless has maintained a conservative investment position by electing to
keep available funds invested overnight at the Federal Home Loan Bank. As a
result, required disclosures regarding the investment portfolio and the various
investment type and maturities are not applicable. The loan portfolio of First
Command Bank consists primarily of loans to individuals that are either
unsecured or secured by mutual funds. These loans are made at fixed rates with
maturities typically ranging from one to five years. For purposes of recording
nonaccrual loans, loans more than 90 days past due are charged to the allowance
for loan losses. As of September 30, 1997, and June 30, 1998, there were no
loans more than 60 days past due. Consistent with the clients of the Company,
virtually all the loans made by FCB are to members or ex-members of the United
States military. As a result, the loan portfolio contains certain risks related
to armed conflict and other economic conditions related to the United States
military.
Since its inception, FCB has taken a charge to income to establish and
maintain a general reserve for potential loan losses. During fiscal 1997, this
charge was $260,200, none of which was utilized, as no loans were charged off
during the period. For the nine months ended June 30, 1998, $501,000 was charged
to income to increase the allowance for possible loan losses, while $18,000 of
loans were charged-off. The following table reflects activity in the allowance
for possible loan losses since April 1997:
52
<PAGE>
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
September 30, 1997 June 30, 1998
------------------ -------------
(In thousands)
<S> <C> <C>
Beginning balance....................... $ 0 $ 260
Provision for loan losses............... 260 501
Loans charged off....................... 0 (18)
Recoveries.............................. 0 1
--------------------- ---------------------
Ending balance.......................... $ 260 $ 744
--------------------- ---------------------
--------------------- ---------------------
</TABLE>
CERTAIN INFORMATION CONCERNING FIRST COMMAND
General
First Command, a Texas corporation, was incorporated on April 1, 1998, to
construct, own and operate a parking garage (the "Parking Garage") adjacent to
the current executive offices of IRA. The principal executive offices of First
Command are located at 4100 South Hulen Street, Fort Worth, Texas 76109, and its
telephone number is (817) 731-8621.
Business
IRA owns the building in Fort Worth, Texas, in which its home office
operation is conducted, and leases a small portion (approximately 4%) to third
parties. During 1997, the management of IRA determined that it was necessary to
construct the Parking Garage on certain land that is adjacent to IRA's building
(the "Adjacent Land") in order to efficiently use the property and to provide
sufficient parking space for IRA and its tenants. The IRA Board desired to limit
the liability of IRA and its subsidiaries in connection with the construction
and operation of the parking facility. Consequently, First Command was formed on
April 1, 1998, as a Texas corporation, to construct, own and operate the Parking
Garage on the Adjacent Land. Four of the five shareholders of First Command are
members of the executive committee of the IRA Board: Lamar C. Smith, who is the
Chairman and Chief Executive Officer of IRA, James N. Lanier, who is the
President and Chief Operating Officer of IRA, Howard M. Crump, who is the Senior
Vice President and Director of Marketing of IRA, and Carroll H. Payne, II, who
is a director of IRA. Freda J. Payne, who is the fifth shareholder of First
Command, is a Class A/B Shareholder. Freda J. Payne became a shareholder of
First Command on June 26, 1998. Because First Command is owned by such
shareholders and not by the Company, First Command is not a subsidiary of the
Company.
Each First Command Shareholder will be entitled to receive, pursuant to the
Merger, one share of Surviving Corporation Nonvoting Stock for each 25 shares of
First Command Common Stock held by such shareholder.
Pursuant to a Line of Credit Agreement dated June 1, 1998 (the "Line of
Credit"), IRA has agreed to loan up to $7,000,000 to First Command for the
construction of the Parking Garage. The interest rate on funds advanced under
the Line of Credit is 7% per annum. Advances may be made under the Line of
Credit from time to time until November 30, 1999, upon the request of First
Command, provided that the total amount of all advances under the Line of Credit
will not exceed $7,000,000 plus up to $1,500,000 to pay interest accruing on
amounts advanced. Prior to December 1, 1999, interest on the unpaid principal
balance outstanding under the Line of Credit is due and payable monthly as it
accrues, commencing on July 1, 1998. However, if First Command is entitled to
advances under the Line of Credit, IRA will, at First Command's request, make an
advance under the Line of Credit that is sufficient to pay the accrued interest
that is then due and payable. After November 30, 1999, the unpaid principal of
and accrued and unpaid interest on amounts outstanding under the Line of Credit
shall be converted into a term
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<PAGE>
loan and shall be due and payable in 60 equal quarterly installments, with the
final payment on December 1, 2014. The Line of Credit is secured by the Adjacent
Land, the Parking Garage and rents, deposits and other revenues with respect to
the Parking Garage. First Command intends to repay amounts due under the Line of
Credit through revenues generated from the Parking Garage. In the event of the
failure of First Command to pay any amount when due, IRA may (i) declare the
outstanding principal balance, along with any accrued but unpaid interest, due;
(ii) refuse to make further advancements under the Line of Credit; and (iii)
pursue any other legal remedies it may have.
First Command currently has two employees who manage the day-to-day
operations of First Command, including, but not limited to, negotiating
contracts with architecture firms and construction firms, working with municipal
authorities with regard to building code issues and ordinances, overseeing the
progress of the construction of the garage, responding to issues and requests
from the construction companies, and administering other duties such as the
authorization of payment of construction invoices.
In addition, pursuant to a Management Agreement (the "Management
Agreement"), dated June 1, 1998, between IRA and First Command, First Command
has retained IRA, as an independent contractor, to perform various services on
behalf of First Command, including (i) the preparation and processing of payroll
and payroll records for First Command's business, (ii) the processing of
accounts payable for First Command's business and (iii) the administration of
benefits for employees of First Command. Pursuant to the Management Agreement,
IRA will provide certain facilities, equipment and supplies necessary to conduct
these services. First Command will pay IRA a monthly fee of $2,030 for services
rendered under the Management Agreement. The term of the Management Agreement is
one year, and it is automatically renewed thereafter unless otherwise terminated
by (i) mutual agreement or (ii) notice by First Command or IRA at least 30 days
prior to the anniversary of the Management Agreement. First Command and IRA have
agreed to indemnify one another for all claims arising from each of their
negligence or willful misconduct.
First Command also entered into an administrative agreement (the
"Administrative Agreement") with IRA on June 1, 1998 to manage IRA's building.
Under the agreement, IRA is required to pay a monthly fee to First Command in
the amount of $2,080 for the services rendered by First Command. The term of the
Administrative Agreement is one year, and it is automatically renewed thereafter
unless otherwise terminated by (i) mutual agreement or (ii) notice by First
Command or IRA at least 30 days prior to the anniversary of the Management
Agreement. First Command and IRA have agreed to indemnify one another for all
claims arising from each of their negligence or willful misconduct.
First Command is not currently a party to any legal proceedings.
Properties
On June 1, 1998, pursuant to a Ground Lease (the "Ground Lease") between
IRA and First Command, IRA leased the Adjacent Land to First Command for a term
of 99 years and for a nominal annual rental payment. The approximate value of
the transaction was $99.00. Pursuant to the Ground Lease, First Command is
permitted to use the Adjacent Land only for the Parking Garage. First Command is
required to maintain general public liability insurance covering the Adjacent
Land and business operations conducted on the Adjacent Land, property damage
insurance, casualty insurance, builder's risk insurance and such other insurance
as may reasonably be required by IRA. IRA and its agents and employees are not
liable for damages resulting from any accident occurring on the Adjacent Land,
and First Command has agreed to indemnify IRA for any claims against IRA for any
such accidents. First Command is required to conform with all applicable
environmental laws with regard to operations and maintenance of the Adjacent
Land and has agreed to indemnify IRA with respect to environmental claims
imposed on IRA with respect to the Adjacent Land.
First Command entered into an agreement on May 4, 1998 with an independent
third party ("Contractor") to act as a general contractor with respect to the
construction of the Parking Garage. The Parking Garage is expected
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<PAGE>
to be an 801-car parking garage with a surface parking lot. Construction on this
project commenced on or about June 15, 1998. It is anticipated that the Parking
Garage will be completed in the summer of 1999.
On June 1, 1998, pursuant to a Lease Agreement (the "Lease Agreement")
between First Command and IRA, First Command leased to IRA the Adjacent Land,
along with all buildings located on the Adjacent Land, commencing after
substantial completion of the Parking Garage and continuing for fifteen years
thereafter. First Command is obligated under the Lease Agreement to erect the
Parking Garage on the leased premises. IRA is required under the Lease Agreement
to pay rent in the amount of $51,250 per month plus operating expenses
associated with the Parking Garage. In addition, IRA is obligated under the
Lease Agreement to maintain utilities and liability insurance of at least
$1,000,000 for injury and death and at least $100,000 for property damage and
pay all applicable taxes. First Command is required to maintain the premises and
maintain fire and extended coverage insurance in an amount equal to at least 80%
of the replacement cost of the Parking Garage. IRA has agreed to indemnify First
Command for any claims resulting from injuries or death of any person or damages
on the leased premises, the negligence of IRA or the use of the leased premises
by IRA. If First Command receives an offer to purchase the leased premises from
a third party during the term of the Lease Agreement, and First Command wishes
to accept the offer, IRA has the right to purchase the leased premises under the
same terms as presented in the third party's offer to purchase.
Immediately prior to the Merger, First Command will transfer all of its
assets, subject to liabilities, to a newly-formed limited liability company or
Qualified Subchapter S Subsidiary in return for all of the members' interests in
the limited liability company or all of the capital stock of such subsidiary.
This transfer will keep the planned operations of First Command separate and
distinct from IRA subsequent to the Merger.
Directors and Executive Officers of First Command
The following is a list of all directors and executive officers of First
Command as of October 30, 1998, describing their respective names, ages as
positions held with First Command, along with the period of time they have
served in such position. No arrangements or understandings exist between any of
these individuals and any other persons pursuant to which they have been, or
will be, selected as a director or executive officer of First Command. The term
of office of all executive officers and directors is one year. The term of
office of a Director, under the classified board system of election provided in
First Command's Bylaws, is three years.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Lamar C. Smith 50 Director, Chairman of the Board
and Chief Executive Officer
James N. Lanier 58 Director, President and Chief
Operating Officer
Howard M. Crump 51 Director
Carroll H. Payne II 43 Director
Martin R. Durbin 37 Treasurer
Sandra T. Allen 60 Secretary
</TABLE>
Each of the directors and executive officers of First Command is currently
a director or executive officer of IRA. Members of the Board of Directors of
First Command receive a fee of $100 for each meeting. Other than this attendance
fee, none of the executive officers or directors of First Command receive
compensation from First Command for services provided to First Command. For more
information concerning the directors and executive
55
<PAGE>
officers, including certain information concerning executive compensation, see
the IRA 10-K, which has been delivered to the Class A Shareholders and the Class
B Shareholders attached as Annex D to this Proxy Statement.
CERTAIN INFORMATION CONCERNING THE MANAGEMENT GROUP
The Management Group consists of Lamar C. Smith, James N. Lanier, Howard M.
Crump, Hal N. Craig, Donaldson D. Frizzell, Jerry D. Gray, David P. Thoreson,
Carroll H. Payne II, Naomi K. Payne, and Freda J. Payne. Each member of the
Management Group is a Class A Shareholder.
The following contains certain information with respect to each member of
the Management Group. Each member of the Management Group is a citizen of the
United States and, unless otherwise noted, has an address of 4100 South Hulen,
Fort Worth, Texas 76113.
Mr. Smith has served as the Company's Chairman of the Board and Chief
Executive Officer since 1992 and has served as a Director of the Company since
1983. Mr. Smith also has served as Chairman of the Board and Chief Executive
Officer and a Director of First Command since its incorporation in 1998.
Mr. Lanier has served as President and Chief Operating Officer of the
Company since 1992 and has served as a Director of the Company since 1988. Mr.
Lanier also has served as President and Chief Operating Officer and a Director
of First Command since its incorporation in 1998.
Mr. Crump has served as Senior Vice President and Director of Marketing of
the Company since 1992 and as a Director of the Company since 1990. Mr. Crump
also has served as a Director of First Command since its incorporation in 1998.
Mr. Craig has served as Vice President and Director of Insurance of the
Company since 1997 and as a Director of the Company since 1993. From 1994 to
1997, Mr. Craig served as Vice President and Chief Information Officer of the
Company, and from 1992 to 1993 he served as Vice President and Director of
Management Information Systems of the Company.
Mr. Frizzell has served as Vice President and Director of Investments of
the Company since 1992 and as a Director of the Company since 1993.
Mr. Gray has been Regional Agent of the Company's South Atlantic Region
since 1996 and has served as a Director of the Company since 1990. Prior to such
time, he served as a Regional Agent in the midwestern United States for the
Company. His address is 5705 Cameron Hall Place, Atlanta, Georgia 30328.
Mr. Thoreson has been a Regional Agent with respect to the Company's
activities in California and in the Pacific area since 1994 and has served as a
Director of the Company since 1994. Prior to such time, he served as a regional
agent with respect to the Company's activities in Europe. His address is 2016
Empire Mine Circle, Gold River, California 95670.
Mr. Payne has been a Director of the Company since 1983 and as a Director
of First Command since its incorporation in 1998. Mr. Payne has been an
architect since 1988. His address is 1814 8th Avenue, Suite A-3, Fort Worth,
Texas 76110-1354.
Ms. Naomi K. Payne has been a Director of the Company since 1983. Ms. Payne
works with, and coordinates assistance for, deaf and otherwise handicapped
students through various agencies and institutions dedicated to such students.
Her address is 11 Marion Terrace, Brookline, Massachusetts 02146-4937.
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<PAGE>
Ms. Freda J. Payne became a member of the IRA Board in 1983 and served in
this capacity until December 31, 1996. Ms. Payne, who is the widow of Carroll H.
Payne, the founder of IRA, has been principally engaged in overseeing family
investments for the past five years. Her address is 6812 Riverdale, Fort Worth,
Texas 76132.
THE SPECIAL MEETING
General
This Proxy Statement is being furnished to Class A Shareholders and Class B
Shareholders in connection with the solicitation of proxies by the IRA Board for
use at the Special Meeting and any adjournment or postponement thereof.
At the Special Meeting, the Class A Shareholders and Class B Shareholders
will be asked to consider and vote upon a proposal (the "Merger Proposal") to
approve and adopt the Merger Agreement entered into between First Command and
the Company, and the transactions contemplated thereby, including the Merger. If
the Merger is approved by the IRA Shareholders, the Company will merge with and
into First Command, and each share of Class A Stock of the Company issued and
outstanding immediately prior to the Effective Time (other than shares of Class
A Stock held in treasury by the Company), subject to and upon the terms and
conditions of the Merger Agreement, will be converted into five shares of
Surviving Corporation Voting Stock. Further, (i) each share of Class B Stock
held by a Class B Shareholder that is not a Class A/B Shareholder that is issued
and outstanding immediately prior to the Effective Time, subject to and upon the
terms and conditions of the Merger Agreement, will be converted into $28.24 in
cash, without interest, and (ii) each share of Class B Stock held by a Class A/B
Shareholder issued and outstanding immediately prior to the Effective Time,
subject to and upon the terms and conditions of the Merger Agreement, will be
converted into one share of Surviving Corporation Nonvoting Stock; provided,
however that each Class A/B Shareholder may elect to receive, in lieu of
receiving the Class B Nonvoting Stock Consideration, the Class B Cash
Consideration for all shares of Class B Stock held immediately prior to the
Effective Time. Each holder of First Command Common Stock, issued and
outstanding immediately prior to the Effective Time, subject to and upon the
terms and conditions of the Merger Agreement, will receive one share of
Surviving Corporation Nonvoting Stock for each 25 shares of First Command Common
Stock held by such shareholder. If the Merger is approved, all of the
outstanding shares of Surviving Corporation Common Stock will be held by (i) the
Class A Shareholders, (ii) the Class A/B Shareholders who do not elect to
receive Class B Cash Consideration and (iii) the First Command Shareholders, to
the extent that such shareholders do not seek appraisal rights (see "THE
PROPOSED MERGER--Conversion of Shares"). The Merger Agreement (including the
principal exhibits thereto) is attached to this Proxy Statement as Annex A. See
"THE PROPOSED MERGER." The IRA Board, based upon the unanimous recommendation of
the Special Committee, determined that the terms of the proposed Merger are fair
to and in the best interests of the IRA Shareholders, including the Class B
Shareholders who do not own Class A Stock, and unanimously approved the Merger
Agreement and the Merger and recommended that the Merger Agreement be submitted
for approval at a special meeting of the IRA Shareholders. In arriving at its
decision, the IRA Board gave careful consideration to a number of factors,
including the opinion of the Financial Advisor, the financial advisor to the
Special Committee. Accordingly, the IRA Board unanimously recommends that you
vote "for" approval of the Merger Agreement.
Record Date
The IRA Board has fixed the close of business on October 30, 1998, as the
Record Date for the determination of holders of Class A Stock and Class B Stock
entitled to vote at and receive notice of the Special Meeting. Only Class A
Shareholders and Class B Shareholders as of the Record Date will be entitled to
vote at the Special Meeting. At the close of business on the Record Date, the
Company had outstanding and entitled to vote 25 shares of Class A Stock held by
14 holders of record and 942,808 shares of Class B Stock held by 494 holders of
record.
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<PAGE>
Quorum
The presence, in person or by proxy, of the holders of a majority of Class
A Stock and the holders of a majority of Class B Stock entitled to vote at the
Special Meeting is necessary to constitute a quorum for the transaction of
business at such meeting.
Abstentions are counted for purposes of determining whether a quorum exists
at the Special Meeting. However, proxies that reflect abstentions and proxies
that are not returned will have the same effect as a vote against approval of
the Merger Agreement because the affirmative vote of (i) the holders of at least
66-2/3% of the outstanding shares of Class A Stock and Class B Stock, voting
together as a single class, (ii) the holders of at least 66-2/3% of the
outstanding shares of Class A Stock and Class B Stock, each voting separately as
a class, and (iii) the holders of at least a majority of the outstanding shares
of Class B Stock not held by Class A/B Shareholders, is required to approve the
Merger Agreement. See "--Votes Required; Voting Rights."
Votes Required; Voting Rights
Each share of Class A Stock and Class B Stock is entitled to one vote with
respect to the approval of the Merger at the Special Meeting. The affirmative
vote of (i) the holders of at least 66-2/3% of the outstanding shares of Class A
Stock and Class B Stock, voting together as a single class, (ii) the holders of
at least 66-2/3% of the outstanding shares of Class A Stock and Class B Stock,
each voting separately as a class, and (iii) the holders of at least a majority
of the outstanding shares of Class B Stock not held by Class A/B Shareholders,
is required to approve the Merger Agreement. As of October 30, 1998, the
Management Group, each member of which is an officer or director of the Company
or First Command (other than Freda J. Payne) and is also a Class A Shareholder,
beneficially owned an aggregate of 19 shares of Class A Stock and 285,481 shares
of Class B Stock (representing approximately 76% and 30.28% of the outstanding
Class A Stock and Class B Stock, respectively). Each of the Management Group
intends to vote all shares of Class A Stock and Class B Stock beneficially owned
by him or her for approval of the Merger Agreement.
With regard to any other matters presented at the Special Meeting, each
share of Class A Stock will be entitled to one vote, and the Class B
Shareholders will not be entitled to vote on such matters.
If fewer shares of either Class A Stock or Class B Stock are voted in favor
of the Merger Proposal than the number required for approval, it is expected
that the Special Meeting will be postponed or adjourned for the purpose of
allowing additional time for soliciting and obtaining additional proxies or
votes. If a motion to adjourn the meeting is presented for the purpose of
allowing additional time to solicit proxies, shareholders providing proxies that
are not voted against the Merger Proposal will be deemed to have conferred
discretionary authority to vote for such adjournment, and shares voted against
the Merger Proposal shall be voted against a motion to adjourn such meeting. See
"--Solicitation of Proxies."
Because 25 shares of Class A Stock and 942,808 shares of Class B Stock were
outstanding as of the Record Date, the affirmative vote of at least 17 shares of
Class A Stock and 628,539 shares of Class B Stock is a condition to the
consummation of the Merger. As of the Record Date, there were 657,327 shares of
Class B Stock held by persons other than the Management Group, and 343,058
shares of Class B Stock will be needed to approve the Merger in addition to the
number of shares of Class B Stock held by Class A/B Shareholders.
Dissenters' Rights
Holders of Class A Stock or Class B Stock who comply with the applicable
requirements of the TBCA may dissent from the vote on the Merger and exercise
appraisal rights with respect to their Class A Stock or Class B Stock. See "THE
PROPOSED MERGER--Rights of Dissenting Shareholders" and the excerpted sections
of the TBCA attached hereto as Annex C.
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<PAGE>
Solicitation of Proxies
If a shareholder attends the Special Meeting, he or she may vote by ballot.
However, many of IRA's shareholders may be unable to attend the Special Meeting.
Therefore, the IRA Board is soliciting proxies so that each holder of Class A
Stock or Class B Stock on the Record Date has the opportunity to vote on the
proposals to be considered at the Special Meeting.
When a proxy is returned properly signed and dated, the shares represented
thereby will be voted in accordance with the instructions on the proxy. If a
shareholder does not return a signed proxy or vote in person at the Special
Meeting, his or her shares will not be voted. Shareholders are urged to mark the
boxes on the proxy to indicate how their shares are to be voted. If a holder of
Class A Stock or Class B Stock returns a signed proxy, but does not indicate how
his or her shares are to be voted, the shares represented by the proxy will be
voted FOR approval and adoption of the Merger Proposal. A properly executed
proxy marked "ABSTAIN," although counted for purposes of determining whether
there is a quorum and for purposes of determining the aggregate voting power and
number of shares represented and entitled to vote at the Special Meeting, will
not be voted and will have the effect of a vote against the Merger Proposal.
The IRA Board does not know of any matters other than those described in
the notice of the Special Meeting that are to come before the Special Meeting.
If any other matters are properly brought before the Special Meeting, including,
among other things, a motion to adjourn or postpone the Special Meeting to
another time and/or place for the purpose of, among other things, permitting
dissemination of information regarding material developments relating to the
Merger or soliciting additional proxies in favor of the Merger Proposal, one or
more of the persons named on the proxy card will vote the shares represented by
such proxy upon such matters as determined in their best judgment and consistent
with the voting rights of such shares as provided by the IRA Bylaws and the
TBCA; provided, however, that no proxy that is voted against the Merger Proposal
will be voted in favor of any adjournment or postponement for the purpose of
soliciting additional proxies. At any subsequent reconvening of the Special
Meeting, all proxies will be voted in the same manner as such proxies would have
been voted at the original convening of the Special Meeting, except for proxies
that have been effectively revoked or withdrawn prior to the time such Proxies
are voted at such reconvened meeting. See "--Votes Required; Voting Rights."
In addition to solicitation by use of the mails, proxies may be solicited
by directors, officers and employees of IRA in person or by telephone, telegram
or other means of communications. Such directors, officers and employees will
not be additionally compensated but may be reimbursed for reasonable
out-of-pocket expenses in connection with such solicitation. No proxy
solicitation firm has been retained to assist with soliciting and tabulating
proxies for the Special Meeting. Expenses in connection with the solicitation of
proxies will be paid by the Company.
Please do not send any share certificates with your proxy card or the Form
of Election.
Revocability of Proxies
Any IRA Shareholder who executes and returns a proxy may revoke such proxy
at any time before it is voted by (i) notifying in writing Sandra T. Allen,
Corporate Secretary of IRA, at 4100 South Hulen Street, Fort Worth, Texas 76109,
(ii) granting a subsequent proxy or (iii) appearing in person and voting at the
Special Meeting. Attendance at the Special Meeting will not in and of itself
constitute revocation of a proxy.
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<PAGE>
THE PROPOSED MERGER
General
The following is a brief summary of certain aspects of the Merger. This
summary does not purport to be complete and is qualified in its entirety by
reference to the Merger Agreement, a copy of which is included in this Proxy
Statement as Annex A and is incorporated herein by reference.
Closing; Effective Time
The Closing will take place on the first date that all conditions to the
Merger shall be satisfied or waived in accordance with the Merger Agreement or
such date as the Company and First Command may agree in writing. The Merger will
be effective upon the filing of the Articles of Merger in accordance with the
applicable laws of the State of Texas (the "Effective Time").
Conversion of Shares
Upon the terms and subject to the conditions set forth in the Merger
Agreement, each share of Class A Stock of the Company issued and outstanding
immediately prior to the Effective Time (other than shares of Class A Stock held
in treasury by the Company), subject to and upon the terms and conditions of the
Merger Agreement, will be converted into five shares of Surviving Corporation
Voting Stock. Further, (i) each share of Class B Stock held by a Class B
Shareholder that is not a Class A/B Shareholder that is issued and outstanding
immediately prior to the Effective Time, subject to and upon the terms and
conditions of the Merger Agreement, will be converted into $28.24 in cash,
without interest, and (ii) each share of Class B Stock held by a Class A/B
Shareholder issued and outstanding immediately prior to the Effective Time,
subject to and upon the terms and conditions of the Merger Agreement, will be
converted into one share of Surviving Corporation Nonvoting Stock; provided,
however that each Class A/B Shareholder may elect to receive, in lieu of
receiving the Class B Nonvoting Stock Consideration, the Class B Cash
Consideration for all shares of Class B Stock held thereby immediately prior to
the Effective Time. Each holder of First Command Common Stock, issued and
outstanding immediately prior to the Effective Time, subject to and upon the
terms and conditions of the Merger Agreement, will receive one share of
Surviving Corporation Nonvoting Stock for each 25 shares of First Command Common
Stock held by such shareholder.
On the first business day following the Effective Time, the Surviving
Corporation will deposit in trust with the Paying Agent the following amounts
and forms of Merger Consideration required for conversion at the Effective Time
of the Class A Stock and Class B Stock (such deposit being the "Payment Fund"):
(i) certificates representing the requisite number of shares of Surviving
Corporation Voting Common Stock, (ii) cash representing the Class B Cash
Consideration and (iii) certificates representing the requisite number of shares
of Surviving Corporation Nonvoting Common Stock.
The Paying Agent will mail to each record holder of Class A Stock or Class
B Stock, a transmittal letter and instructions for the surrender of the
certificates for payment. After the Effective Time and upon surrender to the
Paying Agent of certificates, together with a duly executed letter of
transmittal, the holder will be entitled to receive the appropriate Merger
Consideration. No interest will be paid or accrue on the Merger Consideration
payable in cash upon the surrender of the certificates. The Paying Agent shall
pay the Merger Consideration attributable to a certificate that has been lost or
destroyed upon receipt of satisfactory evidence of ownership of the shares of
Class A Stock or Class B Stock and of appropriate indemnification. After the
Effective Time, until surrendered in accordance with these provisions, each
certificate (other than certificates representing Dissenting Shares) shall
represent only the right to receive the Merger Consideration as set forth in the
Merger Agreement.
After the Effective Time, there shall be no transfers on the stock transfer
books of the Surviving Corporation of the shares of IRA Common Stock or First
Command Common Stock which were outstanding immediately prior to the Effective
Time. Certificates presented to the Surviving Corporation after the Effective
Time shall be cancelled.
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<PAGE>
Any portion of the Payment Fund that remains unclaimed by the shareholders
of IRA or First Command for six months after the Effective Time shall be repaid
to the Surviving Corporation, upon demand, and any shareholders of IRA or First
Command who have not complied with the herein provisions shall look as a general
creditor only to the Surviving Corporation for payment of their claims for the
Merger Consideration. Notwithstanding the foregoing, the Surviving Corporation
shall not be liable to a holder of shares of IRA Common Stock or First Command
Common Stock for any amounts delivered to a public official pursuant to any
applicable abandoned property, escheat or similar laws.
At the Effective Time, all shares of either Class A Stock or Class B Stock
that are held in treasury by the Company will cease to be outstanding, shall be
cancelled and retired without payment of any consideration therefor and will
cease to exist.
Shareholder Elections
All shareholder elections by Class A/B Shareholders shall be made on the
Form of Election which will be provided by the Paying Agent and mailed to IRA
Shareholders as of the Record Date along with this Proxy Statement. To be
effective, a Form of Election must be returned, properly completed, to the
Paying Agent no later than the Election Deadline. A Class A/B Shareholder that
fails to submit an effective Form of Election prior to the Election Deadline
shall be deemed to have made a Non-Election, which will result in the Class A/B
Shareholder receiving the Class B Nonvoting Stock Consideration. An election by
a Class A/B Shareholder to receive either the Class B Nonvoting Stock
Consideration or the Class B Cash Consideration will not constitute a vote in
favor of the approval of the Merger Agreement. A Class A/B Shareholder may not
elect to receive both the Class B Nonvoting Stock Consideration and the Class B
Cash Consideration.
Elections may be revoked or amended by a Class A/B Shareholder upon written
notice to the Paying Agent prior to the Election Deadline. If a Class A/B
Shareholder revokes the Form of Election and does not properly resubmit such
form thereafter, the Class A/B Shareholder shall be deemed to have made a
Non-Election.
The Company will use its best efforts to make a Form of Election available
to all persons who become Class A/B Shareholders between the date of mailing of
this Proxy Statement and the Election Deadline.
The Merger Agreement
The following is a summary of certain material provisions of the Merger
Agreement not summarized elsewhere in this Proxy Statement. A copy of the Merger
Agreement is attached as Annex A to this Proxy Statement and is incorporated
herein by reference. The following summary does not purport to be complete and
is qualified in its entirety by reference to the Merger Agreement.
The Merger. The Merger Agreement provides that, on the first date that all
conditions to the Merger shall be satisfied or waived in accordance with the
Merger Agreement or such date as the Company and First Command may agree in
writing and at the time the Articles of Merger are filed with the Secretary of
State of the State of Texas in accordance with the TBCA, IRA will be merged with
and into First Command in accordance with the TBCA, the separate corporate
existence of IRA will cease, and First Command will continue as the Surviving
Corporation in the Merger.
Directors and Officers. Pursuant to the Merger Agreement, the directors and
officers of IRA immediately prior to the Effective Time shall, from and after
the Effective Time, be the directors and officers of the Surviving Corporation,
until their successors have been duly elected or appointed and qualified or
until their earlier death, resignation or removal in accordance with the
Articles of Incorporation and Bylaws of the Surviving Corporation. See "CERTAIN
INFORMATION CONCERNING IRA--Directors and Executive Officers of IRA." Because
the Bylaws of the Surviving Corporation will contain a provision for a
classified board similar to that of the Bylaws of IRA, the Merger Agreement
provides that the directors will retain their respective current classes after
the Merger.
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Charter and Bylaws. Pursuant to the Merger Agreement, the Articles of
Incorporation and Bylaws of First Command as in effect immediately prior to the
Effective Time will be the Articles of Incorporation and Bylaws, respectively,
of the Surviving Corporation following the Merger until duly amended as provided
therein and by applicable law. The Merger Agreement provides that at the
Effective Time the Articles of Incorporation of the Surviving Corporation shall
be amended to provide for the change of the name of the Surviving Corporation to
"Independent Research Agency for Life Insurance, Inc." A copy of the Articles of
Incorporation and the Bylaws of the Surviving Corporation is attached hereto as
Annex E.
Filings; Other Actions; Notification. Pursuant to the Merger Agreement, the
parties have agreed, among other things, that (i) each party will provide
certain information, or access to such information, to the other party; (ii)
each party will hold certain information received pursuant to the contemplated
Merger confidential; (iii) IRA will call and hold the Special Meeting as soon as
reasonably practicable after the date of the Merger Agreement, and subject to
their fiduciary duties as advised by counsel, the directors of IRA will
recommend approval and adoption of the Merger Agreement; (iv) IRA and First
Command will prepare and file, and each will cooperate with the other in the
preparation and filing of the Schedule 13E-3 with respect to the transactions
described in this Proxy Statement; IRA will prepare, file and distribute, and
First Command will cooperate with IRA in the preparation and filing of, this
Proxy Statement; and each party will notify the other party of certain
communications with the Commission concerning these documents; (v) each of IRA
and First Command will use its reasonable best efforts to obtain any waivers,
consents or approvals under the terms of any agreement or commitment to which
IRA or First Command is a party that are necessary for the consummation of the
Merger; (vi) IRA and First Command will consult with each other concerning
certain publicity issues; (vii) IRA will attempt to obtain all required
approvals, consents, authorizations and waivers, and First Command will
cooperate with IRA in obtaining such consents; and (viii) certain written
information supplied or to be supplied by IRA or First Command will not contain
any untrue statement of a material fact or omit any material fact necessary in
order to make the statements made, in light of the circumstances under which
they are made, not misleading. to make the statements made, in light of the
circumstances under which they are made, not misleading.
Expenses. The Merger Agreement provides that IRA will pay all expenses
incurred by the parties in connection with the preparation, negotiation,
execution, delivery and consummation of the Merger Agreement and the
transactions contemplated by the Merger Agreement.
Indemnification. The Merger Agreement provides that IRA will indemnify and,
after the Effective Time, the Surviving Corporation will indemnify each present
and former employee, agent, officer or director of IRA or, after the Effective
Time, First Command (the "Indemnified Parties"), to the fullest extent permitted
under applicable law or under the Articles of Incorporation and Bylaws of IRA
and the Surviving Corporation against any losses, claims, damages, liabilities,
costs, expenses, judgments and amounts paid in settlement in connection with any
threatened, pending or contemplated claim, action, suit, proceeding or
investigation arising out of or pertaining to any action or omission occurring
prior to or at the Effective Time (including, without limitation, any claim,
action, suit, proceeding or investigation to which he is a party or is
threatened to be made a party by reason of such relationship with IRA and which
arises out of or relates to the transactions contemplated by the Merger
Agreement) (a "Claim"). The Merger Agreement further provides that the Surviving
Corporation agrees that the provisions of the Surviving Corporation's Articles
of Incorporation or Bylaws as in effect at the Effective Time of the Merger with
respect to exculpation of liability and indemnification of officers, directors
and employees shall not be modified, changed or amended in any manner adverse to
an Indemnified Party except as required by law. In addition, IRA and, after the
Effective Time, the Surviving Corporation, to the fullest extent permitted under
applicable law, will periodically advance reasonable expenses as incurred with
respect to any Claim or potential claim provided that the person to whom
expenses are advanced, if required by applicable law, provides an undertaking to
repay such advances if it is ultimately determined by a court of competent
jurisdiction that such person is not entitled to indemnification pursuant to
these provisions of the Merger Agreement.
In the event any Claim is brought against any Indemnified Party (whether
before or after the Effective Time) in connection with which such Indemnified
Party asserts that he is entitled to be indemnified and held harmless
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<PAGE>
pursuant to these provisions of the Merger Agreement, (i) the Indemnified
Parties may retain counsel which will be reasonably satisfactory to IRA (or the
Surviving Corporation after the Effective Time), (ii) IRA (or, after the
Effective Time, the Surviving Corporation) shall pay all reasonable fees and
expenses of such counsel for the Indemnified Parties promptly as statements
therefor are received, and (iii) IRA (or, after the Effective Time, the
Surviving Corporation) will use their reasonable best efforts to assist in the
vigorous defense of any such matter. Neither IRA nor the Surviving Corporation
shall be liable for any settlement effected without their written consent, which
consent, however, shall not be unreasonably withheld. Any Indemnified Party
wishing to claim indemnification under these provisions of the Merger Agreement,
upon learning of any such Claim, shall notify IRA or the Surviving Corporation
thereof but any failure to so notify IRA or the Surviving Corporation shall not
relieve IRA or the Surviving Corporation of their obligations under these
provisions of the Merger Agreement unless it has been actually prejudiced by
such lack of notice. The Indemnified Parties as a group may retain only one law
firm in each jurisdiction to represent them with respect to any such matter
unless there is, under applicable standards of professional conduct, a conflict
of interest on any significant issue between the positions of any two or more
Indemnified Parties. Any determination required to be made with respect to
whether an Indemnified Party's conduct complied with the standards set forth
under applicable law or the Bylaws of IRA or the Surviving Corporation shall be
made by independent counsel selected by such Indemnified Party and reasonably
satisfactory to IRA or the Surviving Corporation (which shall pay such counsel's
reasonable fees and expenses).
Employee Benefits. The Merger Agreement provides that the Surviving
Corporation will honor and be bound by the terms and conditions of each
Compensation and Benefit Plan (as defined in the Merger Agreement) and each
employee or executive benefit plan, program or agreement of IRA or any of its
subsidiaries in effect prior to the date of the Merger Agreement. The Surviving
Corporation will also, or will cause its subsidiaries to, make available to each
person who is an employee of IRA and its subsidiaries immediately prior to the
Effective Time benefits that are either (a) the same as are made available to
the employees of IRA, on terms and conditions as are generally applicable to the
employees of IRA or (b) no less favorable than those provided under IRA's
benefit plans prior to the effectiveness of the Merger. Any employee benefit
plan or program in which any IRA employee participates after the Effective Time
will (x) waive any pre-existing condition limitation, (y) credit against any
deductible or co-payment requirement subject to a maximum out-of-pocket
limitation any costs incurred by such IRA employee during the comparable period
under the terms of the corresponding IRA plan, program or arrangement, and (z)
credit service with IRA or its subsidiaries prior to the Effective Time for
purposes of meeting any eligibility or vesting waiting periods.
Takeover Statute. The Merger Agreement provides that if any takeover
statute is or may become applicable to the Merger, each of First Command and IRA
and their respective Board of Directors shall grant such approvals and take such
actions as are necessary so that such transactions may be consummated as
promptly as practicable and otherwise act to minimize the effects of such
statute or regulation.
Conditions to the Merger. The obligation of First Command to consummate the
Merger is subject to the satisfaction of a number of conditions, including,
among others (i) the performance and compliance of IRA in all material respects
with all agreements, obligations and conditions required by the Merger Agreement
to be performed or complied with by IRA on or prior to the Closing Date; (ii)
the holders of (A) two-thirds (2/3) of the outstanding shares of Class A Stock
and Class B Stock, voting as a single class, (B) two-thirds (2/3) of the
outstanding shares of Class A Stock and Class B Stock, each voting separately as
a class, and (C) a majority of the outstanding shares of Class B Stock not held
by Class A/B Shareholders, that are eligible to vote at the Special Meeting
shall have voted for approval and adoption of the Merger Agreement; (iii) the
holders of two-thirds (2/3) of the outstanding shares of First Command Common
Stock shall have voted for approval and adoption of the Merger Agreement; (iv)
all approvals, consents, authorizations and waivers from governmental and other
regulatory agencies and other third parties required to consummate the
transactions contemplated by the Merger Agreement, which either individually or
in the aggregate, if not obtained, would have a materially adverse effect on the
financial condition, results of operations or business of IRA or would prevent
consummation of the Merger and the other transactions contemplated by the Merger
Agreement, shall have been obtained; (v) on the Closing Date, there shall be no
effective injunction, writ, temporary restraining order or any order of any
nature issued by a court of competent jurisdiction or other
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<PAGE>
governmental authority directing that the transactions provided for in the
Merger Agreement or any of them not be consummated as so provided or imposing
any conditions on the consummation of the transactions contemplated by the
Merger Agreement that First Command deems unacceptable in its sole discretion;
(vi) no suit, action, or other proceeding seeking to restrain, prevent or change
the transactions contemplated by the Merger Agreement or otherwise questioning
the validity or legality of such transactions shall have been instituted and be
pending; and (vii) the holders of no more than 20% of either of the outstanding
Class A Stock or the Class B Stock shall have delivered notice of their intent
to exercise their right to dissent under the TBCA.
The obligation of IRA to consummate the Merger is subject to the
satisfaction of a number of conditions, including, among others (i) the
performance and compliance of First Command with all agreements, obligations and
conditions required by the Merger Agreement to be performed or complied with by
First Command on or prior to the Closing Date; (ii) IRA shall not have received
written notice from the Financial Advisor that it has withdrawn, revoked or
modified its opinion as to the fairness of the Merger to the IRA Shareholders,
from a financial point of view; (iii) the holders of (A) two-thirds (2/3) of the
outstanding shares of Class A Stock and Class B Stock, voting as a single class,
(B) two-thirds (2/3) of the outstanding shares of Class A Stock and Class B
Stock, each voting separately as a class, and (C) a majority of the outstanding
shares of Class B Stock not held by Class A/B Shareholders, that are eligible to
vote at the Special Meeting shall have voted for approval and adoption of the
Merger Agreement; (iv) the holders of two-thirds (2/3) of the outstanding shares
of First Command Common Stock shall have voted for approval and adoption of the
Merger Agreement; (v) all approvals, consents, authorizations and waivers from
governmental and other regulatory agencies and other third parties required to
consummate the transactions contemplated by the Merger Agreement, which either
individually or in the aggregate, if not obtained, would have a materially
adverse effect on the financial condition, results of operations or business of
IRA or would prevent consummation of the Merger and the other transactions
contemplated by the Merger Agreement, shall have been obtained; (vi) on the
Closing Date, there shall be no effective injunction, writ, temporary
restraining order or any order of any nature issued by a court of competent
jurisdiction or other governmental authority directing that the transactions
provided for in the Merger Agreement or any of them not be consummated as so
provided or imposing any conditions on the consummation of the transactions
contemplated by the Merger Agreement that IRA deems unacceptable in its sole
discretion; (vii) no suit, action, or other proceeding seeking to restrain,
prevent or change the transactions contemplated by the Merger Agreement or
otherwise questioning the validity or legality of such transactions shall have
been instituted and be pending; and (viii) the holders of no more than 20% of
either of the outstanding Class A Stock or the Class B Stock shall have
delivered notice of their intent to exercise their right to dissent under the
TBCA.
The conditions to each of the parties' obligations to consummate the Merger
are for the sole benefit of such party and may be waived by such party in whole
or in part to the extent permitted by applicable law. In the event a
modification or waiver by IRA or First Command is contemplated that requires
shareholder approval under applicable law, a supplement to this Proxy Statement
will be distributed to IRA Shareholders, and proxies will be resolicited. See
"SPECIAL MEETING OF IRA SHAREHOLDERS--Solicitation of Proxies." Neither First
Command nor IRA currently contemplates waiving or modifying any of the foregoing
conditions.
Termination. The Merger Agreement may be terminated and the Merger
abandoned at any time prior to the Effective Time: (i) by mutual consent of the
Boards of Directors of First Command and IRA; (ii) by either IRA or First
Command if at the Special Meeting, or any adjournment thereof, the shareholders
of IRA fail to adopt and approve the Merger; (iii) by either IRA or First
Command if the shareholders of First Command fail to adopt and approve the
Merger; and (iv) by either IRA or First Command if a court of competent
jurisdiction or governmental, regulatory or administrative agency or commission
shall have issued an order, decree or ruling or taken any other action, in each
case permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by the Merger Agreement, and such order, decree,
ruling or other action shall have become final and nonappealable.
In the event of termination of the Merger Agreement by either IRA or First
Command as described above, all information received by any party with respect
to the business of the other party (other than information which is a matter of
public knowledge or which has been or is published in any publication for public
distribution or filed
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<PAGE>
as public information with any governmental authority) shall not at any time be
used for the advantage of, or disclosed to third parties by, such party for any
reason, and neither party shall have any liability or further obligations to the
other party, except as stated in the preceding clause.
IRA Charter Business Combination Provision
Under Article Ten of the Articles of Incorporation of IRA, any business
combination with an interested shareholder (as defined below) shall require the
affirmative vote of the holders of at least 95% of the then outstanding shares
of the capital stock of the Company, voting together as a single class, unless
(a) the IRA Board, by an 80% vote, (i) expressly approves in advance the
acquisition of shares that caused the interested shareholder to become an
interested shareholder or (ii) expressly approves the business combination, or
(b) the interested shareholder pays to the holders of the capital stock of the
Company not less than the fair price (as defined below) paid by such person in
acquiring any of its holdings of the Company's capital stock. Under Article Ten
of the Company's Articles of Incorporation, the following terms are defined as
follows:
(a) a "business combination" shall mean (1) any merger or
consolidation of the Company with an interested shareholder or any other
corporation which is, or after such merger or consolidation would be, an
affiliate of an interested shareholder; (2) a sale or other disposition to
or with an interested shareholder or affiliate of an interested shareholder
of substantially all of the assets of the Company; (3) the issuance or
transfer by the Company of the securities of the Company to an interested
shareholder in a transaction having a fair market value of $2,000,000 or
more; (4) the adoption of a plan or proposal for liquidation or dissolution
of the Company proposed by or on behalf of an interested shareholder or an
affiliate of an interested shareholder; and (5) any reclassification of
securities or recapitalization of the Company or any other transaction
which has the effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any class of equity of the
Company which is directly or indirectly owned by an interested shareholder
or an affiliate of an interested shareholder;
(b) an "interested shareholder" shall mean any person who is a
beneficial owner, directly or indirectly, of more than 10 percent of the
shares of any class of the outstanding capital stock of the Company, or is
an assignee of or has otherwise succeeded to any shares of any class of the
capital stock of the Company which were at any time within the two year
period immediately preceding the date in question beneficially owned by an
interested shareholder; and
(c) a "fair price" shall mean the amount determined by the majority of
the Board of Directors to be the highest per share equivalent price that
can be determined to have been paid at any time by the interested
shareholder for any share or shares of any class or series of the capital
stock of the Company, plus interest from the date the interested
shareholder became an interested shareholder through the date of the
business combination at the rate of 7 percent per annum, less the aggregate
amount of any dividends paid during such time period.
The above description of the Article 10 of the Articles of Incorporation of
IRA is a summary only, and is qualified in its entirety by reference to the
Articles of Incorporation of IRA.
To the extent that the Merger may constitute a "business combination," as
defined in the Articles of Incorporation of IRA, the Company believes that the
provisions of Article 10 of the Articles of Incorporation of IRA will not apply
to the Merger because the IRA Board has approved the Merger by a unanimous vote.
State Anti-takeover Statutes
Articles 13.01 through 13.03 of the TBCA (the "Business Combination Law")
prevents, under certain circumstances, an "Affiliated Shareholder" (generally
defined as a person beneficially owning 20% or more of an issuing corporation's
voting shares (as defined in Article 13.02 of the TBCA)) from engaging in a
"Business
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<PAGE>
Combination" (as defined in Article 13.02 of the TBCA) for three years following
the date such person became an Affiliated Shareholder unless (i) the business
combination or the purchase or acquisition of shares made by the Affiliated
Shareholder on the Affiliated Shareholder's share acquisition date is approved
by the Board of Directors before the Affiliated Shareholder's share acquisition
date or (ii) the business combination is approved, by the affirmative vote of
the holders of at least two-thirds of the outstanding voting shares of the
issuing public corporation not beneficially owned by the Affiliated Shareholder
or an affiliate or associate of the Affiliated Shareholder. The "voting shares"
are those shares of capital stock of the corporation entitled to vote generally
in the election of directors; consequently, only Class A Stock is considered to
be voting shares under the TBCA. The Company believes that the Business
Combination Law is inapplicable to the Merger.
A number of other states have adopted laws and regulations applicable to
attempts to acquire securities of corporations which are incorporated, or have
substantial assets, shareholders, principal executive offices or principal
places of business, or whose business operations otherwise have substantial
economic effects, in such states. In 1982, in Edgar v. Mite Corp., the Supreme
Court of the United States invalidated on constitutional grounds the Illinois
Business Takeover Statute, which, as a matter of state securities law, made
takeovers of corporations meeting certain requirements more difficult. However,
in 1987, in CTS Corp. v. Dynamics Corp. Of America, the Supreme Court held that
the State of Indiana may, as a matter of corporate law, and, in particular, with
respect to those aspects of corporate law concerning corporate governance,
constitutionally disqualify a potential acquiror from voting on the affairs of a
target corporation without the prior approval of the remaining shareholders. The
state law before the Supreme Court was by its terms applicable only to
corporations that had a substantial number of shareholders in the state and were
incorporated there.
IRA conducts business, directly or through subsidiaries, in a number of
states throughout the United States, some of which have enacted takeover laws.
IRA does not know whether any of these laws will, by their terms, apply to the
Merger and has not complied with any such laws. Should any person seek to apply
any state takeover law, IRA will take such action as then appears desirable,
which may include challenging the validity or applicability of any such statute
in appropriate court proceedings. In the event it is asserted that one or more
state takeover laws is applicable to the Merger, and an appropriate court does
not determine that it is inapplicable or invalid as applied to the Merger and/or
IRA might be required to file certain information with, or receive approvals
from, the relevant state authorities.
Rights of Dissenting Shareholders
If the Merger Agreement is approved by the required vote of the Company's
shareholders and is not abandoned or terminated, IRA Shareholders who did not
vote in favor of the Merger may, by complying with Articles 5.12 and 5.13 of the
TBCA, be entitled to dissenters' rights as described therein. If a shareholder
of the Company has a beneficial interest in shares of Class A Stock or Class B
Stock that are held of record in the name of another person, such as a broker or
nominee, and such shareholder desires to perfect whatever dissenters' rights
such beneficial shareholder may have, such beneficial shareholder must act
promptly to cause the holder of record timely and properly to follow the steps
summarized below.
A vote in favor of the Merger by an IRA Shareholder will result in a waiver
of the shareholder's dissenters' rights.
The Company's shareholders will have the right to dissent from the Merger
and to obtain an appraisal of their shares of Class A Stock or Class B Stock in
the event that the Merger Agreement is approved and is not abandoned or
terminated. Appraisal value will be determined as of the day immediately
preceding the Meeting.
The summary set forth below does not purport to be a complete statement of
the provisions of Texas law relating to shareholders' rights to dissent and to
obtain an appraisal of Class A Stock or Class B Stock in connection with the
Merger and is qualified in its entirety by reference to Articles 5.12 and 5.13
of the TBCA, which are attached hereto as Annex D, and the other relevant
provisions of the TBCA. The TBCA contains provisions that,
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<PAGE>
in the case of the merger of a corporation organized under the laws of Texas,
grant Dissenting Shareholders who comply with the procedures set forth in
Articles 5.12 and 5.13 the right to receive payment in cash equal to the
appraisal value of their shares. The principal provisions of Articles 5.12 and
5.13 as they apply to the Merger are summarized below.
To claim dissenters' rights, a shareholder must (i) prior to the
shareholder vote on the Merger, file a written objection to the Merger setting
out that the shareholder's right to dissent will be exercised if the Merger is
effective and giving such shareholder's address to which notice of the Merger
shall be mailed in the event it occurs; (ii) not vote such shareholder's Class A
Stock or Class B Stock in favor of approval of the Merger; (iii) if the Merger
is approved by the Company's shareholders and consummated, demand, in writing,
payment of the fair value of such shareholder's shares of Class A Stock or Class
B Stock from the Surviving Corporation (stating therein the number and class of
shares of Class A Stock or Class B Stock owned by such shareholder and an
estimate of the fair market value of such shares) within ten days after the date
the notice that the Merger has become effective is delivered or mailed to the
shareholder, which notice must be provided to all shareholders who complied with
(i) and (ii) above within ten days after the Effective Time of the Merger; and
(iv) within twenty days of filing such written demand for payment, submit to the
Surviving Corporation the certificate or certificates representing such
shareholder's shares of Class A Stock or Class B Stock for the purpose of having
a notation placed thereon to the effect that a demand for payment with respect
thereto has been made.
Neither an abstention from voting on the Merger proposal nor a vote against
the Merger will be deemed to satisfy the requirement that a written objection be
filed with the Company before the vote on the Merger. However, a shareholder who
has filed a written objection to the Merger as provided above will not be deemed
to have waived such shareholder's dissenter's rights by abstaining from voting
on the Merger proposal or otherwise not voting; however, such a shareholder will
be deemed to have waived such shareholder's dissenters' rights if such
shareholder votes in favor of the Merger. A shareholder who fails to make the
written demand within the ten-day period described above will be bound by the
Merger as if such shareholder had voted in favor thereof. If a shareholder fails
to submit such shareholder's certificates within the twenty-day period described
above, such shareholder's rights to receive payment pursuant to dissenters'
rights shall terminate unless a court for good and sufficient cause determines
otherwise.
In the event that the Merger is approved by the Company's shareholders and
a shareholder elects to exercise such shareholder's dissenters' rights, the
Surviving Corporation shall, within twenty days of the date it receives such
shareholder's written demand for payment, deliver or mail to such shareholder a
written notice that either (i) provides that the Surviving Corporation accepts
the amount claimed by the Dissenting Shareholder as the fair value of such
shareholder's shares and that the Surviving Corporation agrees to pay such
amount within ninety days after the Effective Time of the Merger and upon
surrender of the certificates for such shareholder's shares duly endorsed; or
(ii) contains an estimate by the Surviving Corporation of the fair value of the
shares and an offer to pay such amount within ninety days after the Effective
Time of the Merger, but only if the Surviving Corporation receives from the
shareholder, within sixty days after such date, a notice from the shareholder
that such shareholder agrees to accept such amount upon surrender of such
shareholder's share certificate or certificates duly endorsed.
If the Dissenting Shareholder and the Surviving Corporation fail to agree
on a value within sixty days after the Effective Time of the Merger, either the
shareholder or the Surviving Corporation may, within sixty days after the
expiration of such sixty day period, file a petition in any court of competent
jurisdiction in Tarrant County, Texas for the purpose of obtaining a
determination of the fair value of the shares of the Dissenting Shareholder.
Then, if the court determines that the shareholder has complied with the
requirements for a Dissenting Shareholder under Articles 5.12 and 5.13 of the
TBCA, the court will appoint one or more appraisers to determine the value of
the shareholder's shares. All Dissenting Shareholders who do not reach agreement
with the Surviving Corporation as to the value of their shares within sixty days
of the Effective Time of the Merger will receive notice of such court
proceeding, and those who are found to have complied with Articles 5.12 and 5.13
of the TBCA will be bound by the final judgment of the court as to the value of
their shares.
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A Dissenting Shareholder who makes a written demand for payment of such
shareholder's shares will not thereafter be entitled to vote or to exercise any
other rights of a shareholder, except the right to receive payment for such
shareholder's shares pursuant to the TBCA.
A Dissenting Shareholder may withdraw such shareholder's demand for payment
for such shareholder's shares at any time before such payment is made; however,
the demand may not be withdrawn after payment by the Surviving Corporation has
been made nor may the demand be withdrawn after a petition has been filed with a
court for such payment unless the Surviving Corporation consents to the
withdrawal of the demand.
In the absence of fraud in the transaction, the remedy provided by Article
5.12 of the TBCA is the exclusive remedy for the recovery of the value of shares
or money damages by a Dissenting Shareholder. If the Surviving Corporation
complies but a Dissenting Shareholder fails to comply with the requirements of
Articles 5.12 and 5.13 of the TBCA, such shareholder is not entitled to bring an
action for the recovery of the value of such shareholder's shares or for money
damages.
Any shareholder contemplating the exercise of the rights summarized above
in connection with the merger is urged to consult such shareholder's own
counsel. The failure by a shareholder to follow precisely all of the steps
required by Articles 5.12 and 5.13 of the TBCA will result in the loss of those
rights.
MARKET PRICE DATA, DISTRIBUTIONS AND
SECURITY OWNERSHIP OF IRA COMMON STOCK
There is presently no trading market for the Company's common stock, of
either class, and it is very unlikely that a market will develop in the future.
As an insurance agency incorporated in Texas, only insurance agents licensed in
Texas can, under Texas law, own the Company's capital stock. Therefore, the
stock price cannot be and is not determined by actions and considerations of any
such market.
Number of Security Holders
As of October 30, 1998, the Company had 14 shareholders of record of its
Class A Stock, and 494 shareholders of record of its Class B Stock.
Distribution History
The following is a history of the distributions paid by the Company since
inception. Distributions have only been paid on Class B Stock.
<TABLE>
<CAPTION>
Date of Record Payment Date Per Share
- --------------------------- --------------------------- -------------------------
<S> <C> <C>
October 20, 1987 December 3, 1987 $ 8.00
September 30, 1988 November 30, 1988 2.10
September 30, 1989 November 30, 1989 2.65
September 30, 1990 November 28, 1990 3.00
September 30, 1991 November 30, 1991 4.00
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Date of Record Payment Date Per Share
- --------------------------- --------------------------- -------------------------
<S> <C> <C>
September 30, 1992 December 1, 1992 6.59
September 30, 1993 December 1, 1993 7.31
September 30, 1994 December 1, 1994 4.88
September 30, 1995 December 1, 1995 4.50
September 30, 1996 December 2, 1996 7.63
September 30, 1997 December 1, 1997 7.73
</TABLE>
On October 31, 1988, the Company's shareholders approved an amendment to
the Company's Articles of Incorporation whereby Class B Stock would split on a
basis of five new shares for each one share then outstanding. The par value of
Class B Stock was correspondingly reduced from a par value of $0.10 per share to
a par value of $0.02 per share. The stock split became effective on November 1,
1988.
Security Ownership of Management and Certain Beneficial Owners of IRA Common
Stock
The following table sets forth, as of October 30, 1998, the number of
shares of Class A Stock and Class B Stock and the percentage of outstanding
shares of each class owned of record by (i) each director of the Company; (ii)
each executive officer of the Company; (iii) all directors and officers of the
Company as a group; and (iv) each person who beneficially owns more than five
percent of a class of common stock. Members of the Management Group are denoted
with an *. Prior to the consummation of the Merger, First Command does not
beneficially own shares of Class A Stock or Class B Stock.
<TABLE>
<CAPTION>
Name and Address Position with the Amount and Nature
of Beneficial Owner Company Title of Class of Beneficial Ownership Percent of Class
- -------------------------------- --------------------- ------------------ --------------------------- -------------------
<S> <C> <C> <C> <C>
Lamar C. Smith (1)*............. Director, Chairman of Class A 2 shares 8.00
the Board and Chief Class B 40,000 shares 4.24
Executive Officer
James N. Lanier (1)*............ Director, President Class A 2 shares 8.00
and Chief Operating Class B 18,000 shares 1.91
Officer
Howard M. Crump (1)*............ Director and Senior Class A 2 shares 8.00
Vice President and Class B 26,000 shares 2.76
Director of Marketing
Hal N. Craig (1)*............... Director and Vice Class A 1 share 4.00
President and Director Class B 5,600 shares (2)
of Insurance
Donaldson D. Frizzell (1)*...... Director and Vice Class A 1 share 4.00
President of Class B 7,100 shares (2)
Investments
Jerry D. Gray*.................. Director and Regional Class A 1 share 4.00
5705 Cameron Hall Place Agent Class B 20,000 shares 2.12
Atlanta, GA 30328
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name and Address Position with the Amount and Nature
of Beneficial Owner Company Title of Class of Beneficial Ownership Percent of Class
- -------------------------------- --------------------- ------------------ --------------------------- -------------------
<S> <C> <C> <C> <C>
David P. Thoreson*.............. Director and Regional Class A 1 share 4.00
2016 Empire Mine Cir. Agent Class B 27,850 shares 2.95
Rancho Cordova, CA 95670
Carroll H. Payne II*............ Director Class A 3 shares 12.00
6245 Locke Ave. Class B 46,977 shares 4.98
Fort Worth, TX 76116
Naomi K. Payne*................. Director Class A 3 shares 12.00
6812 Riverdale Class B 46,977 shares 4.98
Fort Worth, TX 76132
James J. Ellis.................. Director Class A -- --
Regency Plaza, LB 72 Class B -- --
3710 Rawlings, Suite 1010
Dallas, TX 75219-4239
Logan Dickinson................. Director Class A -- --
314 Main Street Class B -- --
Suite 202
Fort Worth, TX 76102
Martin R. Durbin (1)............ Treasurer and Chief Class A -- --
Financial Officer Class B 1,725 shares (2)
Robert F. Watson (1)............ Corporate Counsel Class A -- --
Class B -- --
Freda J. Payne*................. Class A 3 shares 12.00
6812 Riverdale Class B 46,977 shares 4.98
Fort Worth, TX 76132
Debra S. Payne.................. Class A 3 shares 12.00
5910 N. Central Expressway Class B 46,528 shares 4.94
Suite 1000
Dallas, TX 75206
Richard E. Giles................ Class A 1 share 4.00
1300 Richards Class B 5,400 shares (2)
Overland Park, KS 66213
Margaret L. Galda............... Class A 1 share 4.00
2741 Mannerwood Trail Class B 4,500 shares (2)
Fort Worth, TX 76109
Edward T. Elmendorf Jr.......... Class A 1 share 4.00
6410 Southwest Blvd. Class B 17,550 shares 1.86
Suite 200
Fort Worth, TX 76109
All directors and executive officers Class A 16 shares 64.00
as a group (13 persons)......... Class B 240,229 shares 25.48
- ------------------------------
</TABLE>
(1) The business address of this person is 4100 South Hulen, Fort Worth, Texas
76113.
(2) Represents less than 1% of the class.
70
<PAGE>
MARKET PRICE DATA, DISTRIBUTIONS AND SECURITY OWNERSHIP
OF FIRST COMMAND COMMON STOCK
There is presently no market for the First Command Common Stock. Upon
consummation of the Merger, the Surviving Corporation will be an insurance
agency incorporated in Texas, and only insurance agents licensed in Texas will
be permitted, under Texas law, to own the Surviving Corporation Common Stock.
Therefore, it is anticipated that no market will develop for the Surviving
Corporation Common Stock, and the stock price will not be determined by actions
and considerations of any such market.
Number of Security Holders
As of October 30, 1998, First Command had five shareholders of record of
its Common Stock.
Distribution History
To date, First Command has paid no distributions on its Common Stock. After
the Merger, pursuant to the Surviving Corporation Shareholders' Agreement, the
Surviving Corporation will pay distributions on the Surviving Corporation Common
Stock that are pro rata to all shareholders, to the extent that Surviving
Corporation Shareholders may be deemed to receive income as the result of
Surviving Corporation's status as an S corporation. Further, the IRA Board,
which will be the Board of the Surviving Corporation upon consummation of the
Merger, anticipates that the Surviving Corporation, subject to the fiduciary
duties of the Board of Directors of the Surviving Corporation and the ongoing
financial condition of the Surviving Corporation, will declare and pay
distributions that are pro rata to all shareholders on the Surviving Corporation
Common Stock that are intended to approximate the income that the Class A/B
Shareholder would have received from the competitive reinvestment of the Class B
Cash Consideration, taking into account income tax considerations. Further,
holders of MAP Units will be entitled to any distribution equivalents that the
Board of Directors of the Surviving Corporation may declare pursuant to the
Mission Accomplishment Plan.
Security Ownership of Management and Certain Beneficial Owners of First Command
Common Stock
The following table sets forth, as of October 30, 1998, the number of
shares of First Command Common Stock and the percentage of outstanding shares of
each class owned of record by (i) each director of First Command; (ii) each
executive officer of First Command; (iii) all directors and officers of First
Command as a group; and (iv) each person who beneficially owns more than five
percent of First Command Common Stock. Members of the Management Group are
denoted with an *.
<TABLE>
<CAPTION>
Name and Address Position with Amount and Nature Percent of
of Beneficial Owner First Command of Beneficial Ownership Class
- --------------------------------------- --------------------------------- ------------------------------ ---------------
<S> <C> <C> <C>
Lamar C. Smith (1)*.................... Director, Chairman of the Board 250 shares 25.00
and Chief Executive Officer
James N. Lanier (1)*................... Director, President and Chief 250 shares 25.00
Operating Officer
Howard M. Crump (1)*................... Director 250 shares 25.00
Carroll H. Payne II*................... Director 225 shares 22.50
1814 8th Avenue
Suite A-3
Fort Worth, TX 76110
Martin R. Durbin (1)................... Treasurer -- --
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
Name and Address Position with Amount and Nature Percent of
of Beneficial Owner First Command of Beneficial Ownership Class
- --------------------------------------- --------------------------------- ------------------------------ ---------------
<S> <C> <C> <C>
Sandra T. Allen (1)................... Secretary -- --
Freda J. Payne*........................ 25 shares 2.50
6812 Riverdale
Fort Worth, TX 76132
All directors and executive officers as
a group (6 persons).................... 975 shares 97.50
- ------------------------------
</TABLE>
(1) The business address of this person is 4100 South Hulen, Fort Worth, Texas
76113.
Each of the First Command Shareholders is a member of the Management Group
and, except for Freda J. Payne, a member of the executive committee of the IRA
Board. On April 1, 1998, each of the First Command Shareholders, other than
Freda J. Payne, acquired 250 shares of First Command Common Stock at a price of
$1.00 per share. On June 26, 1998, Carroll H. Payne, II gifted 25 shares of
First Command Common Stock to Freda J. Payne. See "CERTAIN INFORMATION
CONCERNING FIRST COMMAND."
Upon consummation of the Merger, all of the Surviving Corporation Common
Stock will be held by (i) the Class A Shareholders, (ii) the Class A/B
Shareholders who do not elect to receive Class B Cash Consideration and (iii)
the First Command Shareholders, to the extent that such shareholders do not
elect to seek appraisal rights.
72
<PAGE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF IRA
The following unaudited pro forma condensed consolidated income statements
(the "Pro Forma Condensed Consolidated Financial Statements") have been based on
the historical consolidated financial statements of the Company for the year
ended September 30, 1997 and the nine months ended June 30, 1998 as if the
Merger was consummated on October 1, 1996. The pro forma condensed consolidated
balance sheet gives effect to the Merger as if it was consummated on June 30,
1998. The pro forma adjustments are described more fully in the accompanying
notes.
The information contained in the Pro Forma Condensed Consolidated Financial
Statements assumes that all of the shares of Class B Stock held by Class B
Shareholders who do not own Class A Stock are repurchased and that no Class A/B
shareholder elects to receive the Class B Cash Consideration with respect to his
or shares of Class B Stock. See "THE PROPOSED MERGER--Conversion of Shares." In
event that any of the Class A/B shareholders elects to receive the Class B Cash
Consideration with respect to his or shares of Class B Stock, although remote,
the amount of Class B Cash Consideration paid to such Class A/B shareholder
would decrease shareholders' equity and either decrease cash or increase long
term liabilities by a similar amount. In the event that all of the Class A/B
Shareholders elect to receive the Class B Cash Consideration with respect to
their Class B Stock, the total merger consideration would be approximately $27
million, which would result in a further reduction in shareholders' equity and a
corresponding increase in long term liabilities.
The Pro Forma Condensed Consolidated Financial Statements are presented for
informational purposes only and do not purport to be indicative of the results
of operations that actually would have been achieved had such transactions been
consummated on the date or for the periods indicated and do not purport to be
indicative of the balance sheet data or results of operations as of any future
date or for any future period. The Pro Forma Condensed Consolidated Financial
Statements should be read in conjunction with the Company's historical
consolidated financial statements and notes thereto and other information
contained in the documents incorporated by reference herein.
The pro forma adjustments were applied to the respective historical
statements to reflect and account for the Merger as a business combination
accounted for as a purchase. The net assets of First Command for accounting
purposes are being recorded at their existing carrying value, which approximates
their fair value.
73
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC. AND
FIRST COMMAND FINANCIAL CORPORATION
Unaudited Pro Forma Condensed Consolidated Income Statement
for the Year Ended September 30, 1997
<TABLE>
<CAPTION>
First
Independent Command
Research Financial Pro Forma
Agency Corporation Adjustments Notes Combined
-------------- -------------- --------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Commission revenue...................... $ 122,329,601 $ 0 $ 0 $ 122,329,601
First Command Bank operating income..... 58,458 58,458
Commissions, bonuses and agent expenses. (87,809,129) (12,955,382) (c) (100,764,511)
General and administrative expenses..... (25,719,662) (25,719,662)
-------------- -------------- --------------- --------------
Income (loss) from operations.. 8,859,268 0 (12,955,382) (4,096,114)
Other income, net....................... 5,216,114 (1,120,000) (a) 4,096,114
-------------- -------------- --------------- --------------
Income before taxes............ 14,075,382 0 (14,075,382) 0
Provision for income taxes.............. (4,639,886) 4,639,886 (b) 0
-------------- -------------- --------------- --------------
Net income..................... $ 9,435,496 $ 0 $ (9,435,496) $ 0
-------------- -------------- --------------- --------------
-------------- -------------- --------------- --------------
Weighted average shares outstanding..... 937,502 0 (577,878) 359,624
Net income per share.................... $ 10.06 $ 0.00 $ (10.06) $ 0.00
</TABLE>
74
<PAGE>
Notes to Pro Forma Condensed Consolidated Income Statement
For the Year Ended September 30, 1997
(Unaudited)
(a) Interest expense at 7% on $16.0 million note payable used to repurchase
Class B Stock. The amount financed is based on cash available at June
30, 1998. The Merger is expected to be consummated on November 23, 1998.
At that time, substantially more cash should be available from
operations which would reduce the reliance on borrowed funds to support
the repurchase of the Class B Stock and result in a lower interest cost
to the Merger.
(b) To eliminate federal income taxes payable at the corporate level as a
result of S corporation status.
(c) To accrue Mission Accomplishment Plan compensation. On July 22, 1998 the
Company issued 138,275 MAP Units, consisting of 138,275 SARs and 138,275
DERs, to certain of its agents and employees. These units have an
exercise period of five to ten years, with the SAR portion of each MAP
Unit valued at $1 as an initial base price as determined by the IRA
Board. Regardless of the initial value placed on the SARs, the value to
SAR holders will result from the increase in the SAR value as determined
by the IRA Board. Subject to the discretion of the IRA Board, it is
currently intended that the Company will record monthly accruals for
Mission Accomplishment Plan compensation based on its GAAP net income,
after taxes, but before MAP expense and before any unrealized gains or
losses on investments as SAR expense. This is similar to the manner in
which dividends on Class B Stock have been historically determined. The
determination of the SAR accrual is independent of, and unrelated to,
the Class B Cash Consideration ($28.24 per share) to be paid in the
Merger. The awards of MAP Units vest upon issuance by the IRA Board. The
holders of the SAR units can only cash them out when they leave the
Company, through death, termination or retirement, the Board of
Directors declares a DER payment, or the five to ten year exercise
period expires. The value recorded for the MAP Units will not differ
from the cash out price. The SAR value will equal the amount expensed
net of any DER or SAR payments made.
(d) The pro forma condensed consolidated come statement does not include
anticipated one-time Merger costs of approximately $1.2 million or any
potential one-time adjustments related to changes in deferred taxes as a
result of conversion to S corporation federal income tax status.
75
<PAGE>
Unaudited Pro Forma Condensed Consolidated Income Statement
Nine Months Ended June 30, 1998
<TABLE>
<CAPTION>
First
Independent Command
Research Financial Pro Forma
Agency Corporation Adjustments Notes Combined
--------------- --------------- --------------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Commission revenue...................... $ 95,006,492 $ 0 $ 0 $ 85,006,492
First Command Bank operating income..... 1,087,339 1,087,339
Commissions, bonuses and agent expenses. (70,335,809) (10,154,076) (c) (80,488,885)
General and administrative expenses..... (22,175,423) (22,175,423)
--------------- --------------- --------------- ---------------
Income (loss) from operations.. 3,582,599 0 (10,154,076) (6,571,477)
Other income, net....................... 7,416,922 (7,746) (837,699) (a) 6,571,477
--------------- --------------- --------------- ---------------
Income before taxes............ 10,999,521 (7,746) (10,991,775) 0
Provision for income taxes.............. (3,467,015) 3,467,015 (b) 0
--------------- --------------- --------------- ---------------
Net income..................... $ 7,532,506 $ (7,746) $ (7,524,780) $ 0
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
Weighted average shares outstanding..... 986,144 25 (626,520) 359,624
Basic earnings.......................... $ 7.64 $ (309.84) $ (302.20) $ 0.00
</TABLE>
76
<PAGE>
Notes to Pro Forma Condensed Consolidated Income Statement
Nine Months Ended June 30, 1998
(Unaudited)
(a) Interest expense at 7% on $16.0 million note payable used to repurchase
Class B Stock. The amount financed is based on cash available at June 30,
1998. The Merger is expected to be consummated on November 23, 1998. At
that time, substantially more cash should be available from operations
which would reduce the reliance on borrowed funds to support the repurchase
of the Class B Stock and result in a lower interest cost to the Merger.
(b) To eliminate federal income taxes payable at the corporate level as a
result of S corporation status.
(c) To accrue Mission Accomplishment Plan compensation. On July 22, 1998 the
Company issued 138,275 MAP Units, consisting of 138,275 SARs and 138,275
DERs, to certain of its agents and employees. These units have an exercise
period of five to ten years, with the SAR portion of each MAP Unit valued
at $1 as an initial base price as determined by the IRA Board. Regardless
of the initial value placed on the SARs, the value to SAR holders will
result from the increase in the SAR value as determined by the IRA Board.
Subject to the discretion of the IRA Board, it is currently intended that
the Company will record monthly accruals for Mission Accomplishment Plan
compensation based on its GAAP net income, after taxes, but before MAP
expense and before any unrealized gains or losses on investments as SAR
expense. This is similar to the manner in which dividends on Class B Stock
have been historically determined. The determination of the SAR accrual is
independent of, and unrelated to, the Class B Cash Consideration ($28.24
per share) to be paid in the Merger. The awards of MAP Units vest upon
issuance by the IRA Board. The holders of the SAR units can only cash them
out when they leave the Company, through death, termination or retirement,
the Board of Directors declares a DER payment, or the five to ten year
exercise period expires. The value recorded for the MAP Units will not
differ from the cash out price. The SAR value will equal the amount
expensed net of any DER or SAR payments made.
(d) The pro forma condensed consolidated income statement does not include
$537,000 of the anticipated one-time Merger costs of approximately $1.2
million or any potential one-time adjustments related to changes in
deferred taxes as a result of conversion to S corporation federal income
tax status. Merger costs of $663,000 have been expensed as incurred through
June 30, 1998.
77
<PAGE>
Unaudited Pro Forma Condensed Consolidated Balance Sheet
June 30, 1998
<TABLE>
<CAPTION>
Independent First Command
Research Financial
Agency Corporation Adjustments Notes Combined
-------------- ---------------- --------------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents..... $ 10,420,754 $ 1,000 $ (605,798) (a)
(537,000) (b) $ 9,275,956
Other current assets.......... 3,329,629 3,329,629
-------------- ---------------- --------------- ---------------
Total current assets........ 13,750,383 1,000 (1,142,798) 12,608,585
Property and equipment............. 12,668,931 26,770 12,695,701
First Command Bank assets.......... 59,685,034 59,685,034
Other assets....................... 78,028,243 6,495 78,034,738
-------------- ---------------- --------------- ---------------
Total assets.................. $ 164,132,581 $ 34,265 $ (1,142,798) $ 163,024,058
-------------- ---------------- --------------- ---------------
-------------- ---------------- --------------- ---------------
Current liabilities:
Loans from insurance companies $ 17,176,789 $ 0 $ 17,176,789
Other current liabilities..... 16,785,314 16,785,314
-------------- ---------------- --------------- ---------------
Total current liabilities... 33,982,103 0 0 33,962,103
Stock appreciation rights payable.. 0
Long term liabilities.............. 27,613,452 41,011 16,000,000 (a)
(1,413,679) (c) 42,240,784
First Command Bank liabilities..... 50,874,747 50,874,747
-------------- ---------------- --------------- ---------------
Shareholders' equity...............
Common stock - Class A........ 10 10 (8) (d)
3,584 (d) 3,596
Common stock - Class B........ 55,729 (48,539) (d)
(7,190) (d) 0
Additional paid-in capital.... 1,798,308 990
(1,798,308) (a)
3,605 (d) 4,595
Retained earnings............. 32,551,010 (7,746) (14,795,729) (a)
1,413,679 (c)
(537,000) (b) 18,624,214
Unrealized holding gains...... 17,314,019 17,314,019
Treasury stock - Class A -
at par...................... (8) 8 (d) 0
Treasury stock - Class B -
at par...................... (36,779) 11,760) (a)
48,539 (d) 0
-------------- ---------------- --------------- ---------------
Total shareholders' equity.. 51,682,289 (6,746) (15,729,119) 35,946,424
-------------- ---------------- --------------- ---------------
Total liabilities and equity $ 164,132,591 $ 34,265 $ (1,142,798) $ 163,024,058
-------------- ---------------- --------------- ---------------
-------------- ---------------- --------------- ---------------
Book value per share............... $ 54.55 $ (269.84) $ -- (e) $ 99.96
</TABLE>
78
<PAGE>
Notes to Pro Forma Condensed Consolidated Balance Sheets
June 30, 1998
(Unaudited)
(a) Assumes excess cash of $605,798 is used in conjunction with a $16.0
million note payable to buy back 588,024 shares of Class B Stock at
$28.24 per share. These amounts are based on cash available at June 30,
1998. The Merger is expected to be consummated on November 23, 1998. At
that time, substantially more cash should be available from operations
which would reduce the reliance on borrowed funds to support the
repurchase of the Class B Stock. Also, these amounts exclude shares of
Class B Stock held by Class A/B Shareholders that, pursuant to the terms
of the Merger, will be converted into Surviving Corporation Nonvoting
Stock. Additionally, these amounts assume that no Class A/B Shareholders
will elect to receive the Class B Cash Consideration in lieu of receiving
shares of Surviving Corporation Nonvoting Stock. If any Class A/B
shareholders do elect to receive the Class B Cash Consideration for his
or her Class B Stock, shareholders' equity will be further reduced by
$28.24 per share redeemed. As of June 30, 1998, there were 947,483 shares
of Class B Stock outstanding, of which 588,024 shares are being
repurchased. The par value of the Class B Stock outstanding at June 30,
1998 of $55,729 net of treasury stock of $36,779 represents 947,483
shares outstanding at a $.02 par value. The repurchase price for Class B
Stock has historically been based on the book value per share less
unrealized gains and dividends per share as of the preceding fiscal year
end. The increase in per share price over the previous year's share price
is added incrementally, 1/12th per month for the ensuing 12 months, to
the current September 30 share price (based upon the prior year's
computation).
(b) Costs associated with the Merger are anticipated to be approximately $1.2
million. Of this amount, $663,000 have been expensed as incurred through
June 30, 1998, with the remainder ($537,000) reflected in the pro forma
financial statements. A substantial portion of these expenses are not
expected to be tax deductible and thus have not been tax effected.
(c) Assumes deferred federal income tax payable related to the book versus
tax depreciation temporary differences are removed from liabilities and
credited to equity upon conversion to S corporation status. The deferred
tax asset related to the future tax deduction of the agent Deferred
Career Commission Plan expenses as well as the deferred tax liability
related to unrealized holding gains will remain on the books for a ten
year period until the built-in gain income tax provision expires. If
during this ten-year period the related assets or liabilities are sold or
paid, the tax impact will be recorded to the deferred tax accounts
accordingly. See "SPECIAL FACTORS--Accounting Treatment."
(d) Upon the effective date of the merger, the treasury stock account will be
closed to the common stock account as the treasury stock will be
canceled. In addition, the now reduced par value related to all
outstanding common shares will be reflected in the common stock account
with the remainder increasing paid-in capital.
(e) Pro forma book value per share does not include the anticipated charge to
equity to reflect the Mission Accomplishment Plan compensation that is
expected to be recorded for subsequent periods. See "CERTAIN INFORMATION
CONCERNING IRA--Mission Accomplishment Plan." Per the Pro Forma Condensed
Consolidated Income Statement, the charge to equity for the nine months
ending June 30, 1998 is expected to have been $10,154,076.
79
<PAGE>
DESCRIPTION OF IRA CAPITAL STOCK
General
The Company is authorized to issue two classes of shares which are
designated Class A Voting Common and Class B Nonvoting Common. The total number
of shares that the Company is authorized to issue is 1,000 shares of Class A
Stock, par value $0.10 per share, and 100,000,000 shares of Class B Common, par
value of $0.02 per share. The following is a summary of certain of the rights
and privileges pertaining to Class A Stock and Class B Stock.
The Merger and the Merger Agreement require the approval of (i) the holders
of at least 66-2/3% of the outstanding shares of Class A Stock and Class B
Stock, voting together as a single class, (ii) the holders of at least 66-2/3%
of the outstanding shares of Class A Stock and Class B Stock, each voting
separately as a class, and (iii) the holders of at least a majority of the
outstanding shares of Class B Stock not held by Class A/B Shareholders.
Class A Stock
Holders of Class A Stock are entitled to cast one vote for each share held
of record in all matters presented to the shareholders, including election of
the IRA Board. As of October 30, 1998, there were 25 shares of Class A Stock
issued and outstanding. The holders of Class A Stock do not have cumulative
voting rights; therefore, the holders of more than 50% of the outstanding shares
of Class A Stock can elect all directors. Class A Stock is primarily held by
directors, executive officers and certain insurance agents of IRA and by certain
descendants of Carroll H. Payne, the founder of the Company.
Freda J. Payne, Debra S. Payne, Carroll H. Payne II and Naomi K. Payne (the
"Payne Family Members") are subject to a stock agreement, dated March 22, 1983
("Payne Family Stock Agreement"), between such family members and the Company
that provides, among other things, that in the event a Payne Family Member
desires to sell or otherwise dispose of all or any portion of his or her Class A
Stock, or in the event of the death of a Payne Family Member, the other Payne
Family Members shall have the option to purchase such shares, on a proportionate
basis, for a period of sixty (60) days. In addition, the Payne Family Stock
Agreement provides that, in the event a Payne Family Member desires to sell any
Class B Stock, the person to whom Class B Stock is offered must be a properly
licensed insurance agent under contract with the Company; further, such
recipient of Class B Stock must execute a stock agreement with the Company
limiting the ownership and transferability of Class B Stock, and such recipient,
after the transfer, must not own, along with members of his or her immediate
family, more than 5% of the outstanding shares of stock in the Company. The
Payne Family Stock Agreement also provides that in the event any Payne Family
Member ceases to be a licensed Texas life insurance agent, such Payne Family
Member shall be obligated to dispose of all Class A Stock and Class B Stock
owned by him or her. The Payne Family Stock Agreement further provides that
payment for Class B Stock offered by Payne Family Members to other Payne Family
Members or the Company shall be in cash within sixty days of the acceptance of
such offer.
The other holders of Class A Stock that are not Payne Family Members are
subject to a stock agreement with IRA (the "Class A Stock Agreement"), in which,
among other things, IRA will acquire such Class A Stock within a period of
ninety (90) days in the event such shareholder fails to continue as a licensed
insurance agent, ceases to be a duly authorized agent of IRA, dies, or desires
to sell his or her shares.
Class B Stock
Holders of Class B Stock have no voting rights, except for certain voting
rights in the event of certain extraordinary transactions (such as the Merger)
as provided by the TBCA, or as otherwise provided by law. All holders of Class B
Stock are subject to either the Class B Stock Agreement (as defined below)
and/or the Payne Family Stock Agreement. Consequently, the primary voting
control of the Company is vested in the holders of Class A Stock. Because the
voting rights are limited and significant restrictions exist on the transfer of
Class B Stock,
80
<PAGE>
Class B Stock is viewed primarily as means to distribute distribution income to
shareholders of the Company. As of October 30, 1998, there were 942,808 shares
of Class B Stock outstanding.
Shares of Class B Stock are held by agents and other employees of IRA; in
addition, all of the holders of Class A Stock hold shares of Class B Stock.
Class B Stock was issued by IRA through ten separate offerings. Three of such
offerings occurred in May 1995, September 1996 and June 1997 and were registered
with the Commission under the Securities Act, pursuant to three registration
statements on Form S-1.
Because the number of holders of Class B Stock was equal to or exceeded
500, on January 22, 1997, IRA registered the Class B Stock under Section 12(g)
of the Exchange Act pursuant to a registration statement on Form 8-A. As a
result of the registration of Class B Stock under the Exchange Act, IRA is
required to furnish certain information to its Class B Shareholders and to the
Commission.
As required by Texas law, only persons licensed as insurance agents by the
state of Texas are permitted to own shares in an insurance agency incorporated
in the state of Texas. Each holder of Class B Stock has executed an agreement
with IRA (the "Class B Stock Agreement"). Pursuant to the Class B Stock
Agreement, each Class B Shareholder agrees that, in accordance with Texas law
pertaining to incorporated insurance agencies, the holder must be duly licensed
as a Texas life insurance agent, and, in the event the holder ceases to be so
licensed, the holder and the Company agree that the holder's shares will be
repurchased by the Company. The shares will also be repurchased by the Company
(1) in the event that the holder ceases to be a duly authorized agent of the
Company, (2) in the event of the holder's death, or (3) in the event that the
holder desires to sell or otherwise dispose of his/her shares. Upon the receipt
of written notice of any such event, the Company has ninety (90) days within
which to close the repurchase of such shares. Under the terms of the Class B
Stock Agreement, the price at which the Company will repurchase such shares is
determined by the Company, in its sole and absolute discretion, at least
annually. The Company will determine to pay the repurchase price in cash, by
delivery of the Company's unsecured promissory note containing such terms and
provisions as the Company shall determine, or by a combination of cash and a
promissory note. Under the Class B Stock Agreement, the holder agrees not to
transfer, pledge, assign, or otherwise in any manner encumber any such shares,
except pursuant to the terms of the Class B Stock Agreement.
While the Company may change its methodology or adjust the Class B Stock
price based on other factors at any time in the future, the price at which the
Company has purchased Class B Stock in the past has been determined from the per
share book value of the Class B Stock at the end of the Company's current fiscal
year, reduced by distributions declared for payment on the current year's
earnings. The resultant net increase in per share book value over the previous
year's similarly computed Class B Stock price is then added incrementally,
1/12th per month for the ensuing 12 months to the then current September 30
Class B Stock price (based upon the prior year's computation). For the purposes
of determining the purchase price of Class B Stock, the calculation of per share
book value does not include the effect of reporting the Company's investments at
market value as a result of the application by the Company of SFAS 115.
Distributions; Preemptive Rights; Liquidation
All IRA Shareholders are entitled to receive distributions as may be
declared on the Class A Stock or the Class B Stock by the IRA Board from funds
legally available therefor. The Company has paid distributions on Class B Stock
in each of the years from 1987 through 1997. No distributions have been declared
on Class A Stock. See "MARKET PRICE DATA, DISTRIBUTIONS AND SECURITY OWNERSHIP
OF IRA COMMON STOCK."
Except as otherwise granted by the Payne Family Stock Agreement to the
Payne Family Members, IRA Shareholders do not have preemptive rights to
subscribe to any additional shares issued by the Company. In the event of
liquidation, all IRA Shareholders are entitled to share pro rata in any
distribution of the Company's assets after payment of liabilities.
81
<PAGE>
DESCRIPTION OF THE SURVIVING CORPORATION CAPITAL STOCK
General
The following is a summary of certain of the rights and privileges that,
after the Effective Time, will pertain to the stock of the Surviving
Corporation. For a full description of such stock, reference is made to, and the
following summary is qualified in its entirety by, the Articles of Incorporation
and the Bylaws of the Surviving Corporation, a copy of which is attached hereto
as Annex E.
Common Stock
Following the Merger, the Surviving Corporation will be authorized by its
Articles of Incorporation, as amended, to issue an aggregate of 10,000 shares of
Surviving Corporation Voting Stock and an aggregate of 10,000,000 shares of
Surviving Corporation Nonvoting Stock.
The Surviving Corporation Voting Stock will be entitled to one vote per
share on all matters submitted for action by the shareholders. Accordingly, the
holders of more than 50% of the shares of Surviving Corporation Voting Stock
will be able to elect all of the directors. In such event, the holders of the
remaining shares will not be able to elect any directors. Holders of Surviving
Corporation Nonvoting Stock have no voting rights, except for certain voting
rights in the event of certain extraordinary transactions as provided by the
TBCA, or as otherwise provided by law. There is no provision for cumulative
voting with respect to the election of directors.
All shares of Surviving Corporation Voting Stock will be entitled to share
proportionately in such distributions as the Board of Directors may from time to
time declare from sources legally available therefor.
Upon liquidation or dissolution of the Surviving Corporation, whether
voluntary or involuntary, all shares of Surviving Corporation Common Stock are
entitled to share equally in the assets available for distribution to
shareholders after payment of all prior obligations of the Surviving
Corporation, including all agent and employee compensation plan obligations.
Restrictions on Transfer of Shares
Article Seven of the Articles of Incorporation of the Surviving
Corporation, as amended, provides for certain restrictions on the transfer of
Surviving Corporation Common Stock. Except as otherwise provided therein, the
Articles prohibit a shareholder from selling, assigning, donating, pledging,
encumbering or otherwise disposing of any shares of Surviving Corporation Common
Stock.
The Articles further provide that no shareholder may transfer or encumber,
and no person may acquire, the legal or beneficial ownership of any share of
Surviving Corporation Common Stock now or hereafter owned by him or her if that
transfer, encumbrance or acquisition would cause the S corporation status of the
Surviving Corporation to terminate. Specifically, no transfer may be made to,
and no acquisition may be made by, any person who would cause the Surviving
Corporation to have more than the maximum permitted number of shareholders under
the Code as then in effect or to any person that is not eligible to be a
shareholder of an S corporation under the provisions of the Code. However, the
Articles do permit, under certain circumstances, Surviving Corporation
Shareholders to pledge, mortgage, hypothecate or otherwise encumber his or her
Surviving Corporation Common Stock with the prior written consent of the
executive committee of the Surviving Corporation but subject to such terms,
conditions and restrictions as the executive committee determines to be
appropriate in the exercise of its sole discretion.
In addition, upon the occurrence of certain Operative Events (as defined
below) with respect to a shareholder, such shareholder (or spouse or estate, as
applicable) must tender all of his or her shares to the Surviving Corporation,
and the Surviving Corporation shall have the option, the term of which is 120
days, to purchase all shares of Surviving Corporation Common Stock owned by such
shareholder. The purchase price shall be the amount
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<PAGE>
determined by the Surviving Corporation, which it shall advise the shareholders
in writing of at least annually. To facilitate such purchases, the Surviving
Corporation is permitted to obtain life insurance policies concerning its
shareholders. The purchase price for such purchases by the Surviving Corporation
is to be determined at least annually by the Surviving Corporation and is to be
proportionately adjusted for subsequent changes in the number of issued and
outstanding shares, stock distributions or other increases or decreases in the
number of shares outstanding. The Surviving Corporation may pay the purchase
price in full to such shareholder or may pay 20% of such purchase price in cash
and pay the remainder in four equal annual installments at prime interest rates.
As used in the Articles of Incorporation, an Operative Event shall mean:
(i) any threatened or actual transfer or encumbrance of Surviving Corporation
Common Stock in any manner whatsoever by a shareholder; (ii) the death of a
shareholder; (iii) the termination of the marital relationship of a shareholder
by death or divorce if that shareholder does not succeed to his or her spouse's
community interest in the Surviving Corporation Common Stock or the entering
into of any property settlement arrangement or agreement in connection
therewith, pursuant to which that shareholder's interest in his or her Surviving
Corporation Common Stock is to be diluted, lessened, encumbered or impaired;
(iv) any threatened or actual (a) bankruptcy or insolvency of a shareholder or
(b) institution of legal proceedings because or by reason of the bankruptcy or
insolvency of a shareholder; (v) the termination of the status of a shareholder
as a duly licensed Texas life insurance agent; (vi) the cessation of a
shareholder as a duly authorized agent of the Surviving Corporation pursuant to
a current written agency agreement, except that with respect to an involuntary
termination as a duly authorized agent of the Surviving Corporation, such
termination shall require approval by 80% of the Board of Directors; (vii) the
change of status of a shareholder to a "non-resident alien" as defined in the
Code; or (viii) any threatened or actual levy by a creditor or claimant upon the
shares of Surviving Corporation Common Stock held by a shareholder or any other
seizure or sale by legal process, if it is determined by legal counsel for the
Surviving Corporation that such levy is made in good faith and based upon a bona
fide claim.
Subchapter S Provisions
Article Eight of the Articles of Incorporation of the Surviving Corporation
contains certain provisions with regard to the Surviving Corporation's status as
an S corporation. Each shareholder must provide to the Surviving Corporation,
immediately upon the Surviving Corporation's request, such properly signed
consents or other documents as, in the opinion of the Surviving Corporation, may
be necessary or useful to maintain the Surviving Corporation's status as an S
corporation, and each shareholder is obligated to refrain from any actions that
would interfere with the Surviving Corporation's maintenance of its status as an
S corporation. In addition, Article Eight contains provisions that address the
following matters related to the Surviving Corporation's status as an S
corporation.
Revocation of Election. In the event that the shareholders, by the
affirmative vote of at least 80% of the votes that all of the shareholders are
entitled to cast, determine to terminate the Surviving Corporation's status as
an S corporation, each shareholder, if requested, must execute a consent to such
revocation and deliver this consent to the secretary of the Surviving
Corporation within 60 days. In the event of a termination of the Surviving
Corporation's S status, the shareholders and the Surviving Corporation shall
elect, if applicable, to have Section 1362(e)(2) of the Code not apply, as
provided in Section 1362(e)(3) of the Code. Any person who was a shareholder at
any time during the S Short Year (as defined in the Code) or who is a
shareholder on the first day of the C Short Year (as defined in the Code) must
consent to such election.
Inadvertent Termination of Subchapter S Election. In the event of a
termination of the Surviving Corporation's status as an S corporation other than
as described in the immediately preceding paragraph, if the Surviving
Corporation desires that the Surviving Corporation's status as an S corporation
be continued, the Surviving Corporation and all shareholders as of and/or after
the terminating event must use their best efforts to obtain from the IRS a
waiver of the terminating event on the ground of inadvertency. The Surviving
Corporation and the shareholders must take such steps, and make such
adjustments, as may be required by the IRS pursuant to Section 1362(f)(3) and
(4) of the Code. If a shareholder caused the terminating event to occur, he or
she will bear the
83
<PAGE>
expense of obtaining the waiver and of making such adjustments as may be
required. If the inadvertent termination is not waived by the IRS and the
Surviving Corporation's S status is permanently terminated, the Surviving
Corporation and the shareholders will make the election under Section 1362(e)(3)
of the Code described in the immediately preceding paragraph.
Provision in Shareholder Wills. Each shareholder shall include in his or
her will a direction and authorization to his or her executor in substantially
the following form:
My Executor is hereby directed and authorized to hold stock of an S
Corporation, as defined in the Code (hereinafter "S Stock"), to make an
election to have any corporation treated as an S Corporation, to enter into
agreements with other shareholders or with the corporation relating to a
transfer (including, without limitation, a sale, assignment, exchange,
gift, donation, mortgage, hypothecation, or other encumbrance or other
disposition) (a "Transfer") of S Stock or the management of the S
Corporation, and to allocate amounts received and the tax on undistributed
income between income and principal. During the administration of my
estate, my Executor may allocate the tax deductions and credits arising
from ownership of S Stock between income and principal. In making any such
allocations, my Executor shall consider that the beneficiary is to have
enjoyment of the property at least equal to that ordinarily associated with
an income interest and in all events shall provide the required beneficial
enjoyment to the beneficiary until such time as the S Stock is distributed
to him or her.
Any beneficiary of my estate who receives stock in an S Corporation as
part of his or her distribution shall, prior to such distribution, enter
into a written agreement with said S Corporation (i) to consent to any
election to qualify the S Corporation as such; (ii) to do nothing to
interfere with the S Corporation's maintenance of its status as such; (iii)
to not Transfer the S Stock to any transferee who does not agree to execute
a similar consent; (iv) to not Transfer the S Stock in such manner as will
cause the S Corporation to lose its status as an S Corporation under the
then applicable federal and state income tax statutes and regulations; and
(v) if S status is inadvertently terminated, to join in any endeavor to
obtain a waiver of the terminating event on the grounds of inadvertency
from the Internal Revenue Service if the S Corporation or any shareholder
desires that the S status should continue.
Any S Stock distributed to a beneficiary shall bear an appropriate
legend on the stock certificate stating that the Transfer of the stock is
subject to and restricted to the extent set forth in the subparagraph
above.
Distributions to Pay Tax Liabilities. With respect to all taxable periods
of the Surviving Corporation during which it is an S Corporation, the Surviving
Corporation shall make the distributions described in this paragraph in a timely
manner to allow the tax (including, without limitation, estimated tax payments)
attributable to the income passed through the Surviving Corporation to the
shareholders to be paid when due. To satisfy this requirement, the Surviving
Corporation shall make distributions in an amount equal to the excess of (i) the
sum of the products of (A) the Surviving Corporation's positive taxable income
attributable to such shareholders during each of such taxable periods multiplied
by (B) the highest appropriate federal individual income tax rates in effect for
each of such taxable periods (without regard to exemptions or phase-outs of
lower tax rates but with consideration of the deductibility of state taxes for
federal income tax purposes), over (ii) the sum of the products of (A) the
Surviving Corporation's negative taxable income attributable to such
shareholders during each of such taxable periods multiplied by (B) the highest
appropriate federal individual income tax rate in effect for each of such
taxable periods (without regard to exemptions or phase-outs of lower tax rates
but with consideration of the deductibility of state taxes for federal income
tax purposes). The Surviving Corporation's obligation to declare and pay such a
distribution to the shareholders in such an amount is subject to the
restrictions governing distributions under the Texas Business Corporation Act
and such other pertinent governmental or contractual restrictions as are now, or
may hereafter become effective. If the Surviving Corporation does not have
sufficient funds available to permit it lawfully to declare and pay such
distribution, the shareholders and the Surviving Corporation shall take such
action, adopt such resolutions, and cause such certificates and other documents
to be filed as may be necessary to create sufficient funds
84
<PAGE>
to permit the payment of such distribution, whereupon the Surviving Corporation
shall declare and pay such distribution.
The Articles of Incorporation provide that in no event may the total
distribution made with respect to any outstanding shares of stock of the
Surviving Corporation differ from the amounts paid with respect to any other
outstanding shares of stock of the Surviving Corporation, and in no event shall
these provisions be construed to limit the ability of the Surviving Corporation
to declare and pay additional distributions to shareholders out of the assets of
the Surviving Corporation legally available for such payment at such time or
times as the Board of Directors may determine.
Nonrecognition of Certain Transfers. The Surviving Corporation will not
recognize any transfers that could disqualify the Surviving Corporation as an S
corporation or that are made in violation of the terms of the Articles of
Incorporation.
Legends on Share Certificates. The following legend will be imprinted
conspicuously on the face of each certificate representing shares of stock:
NOTICE IS HEREBY GIVEN THAT THE TRANSFER (INCLUDING, WITHOUT
LIMITATION, THE SALE, ASSIGNMENT, EXCHANGE, GIFT, DONATION, PLEDGE,
MORTGAGE, HYPOTHECATION OR OTHER ENCUMBRANCE OR OTHER DISPOSITION) OF THE
SHARES OF CAPITAL STOCK REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO AND
RESTRICTED BY THE PROVISIONS OF THE ARTICLES OF INCORPORATION OF THE
CORPORATION, AND ALL OF THE PROVISIONS OF THE ARTICLES OF INCORPORATION ARE
INCORPORATED BY REFERENCE IN THIS CERTIFICATE, SPECIFICALLY INCLUDING BUT
NOT LIMITED TO THOSE PROVISIONS OF THE ARTICLES OF INCORPORATION RELATING
TO THE CORPORATION'S TAX STATUS AS AN S CORPORATION.
Election to Close Books. The Surviving Corporation, in the event the
executive committee of the Board of Directors of the Surviving Corporation so
determines, shall consent to close the books of the Surviving Corporation
pursuant to Section 1377(a)(2) of the Code whenever a shareholder sells all of
his stock on a day other than the last day of the Surviving Corporation's fiscal
year if all "affected shareholders" (as defined in Section 1377(a)(2)(B) of the
Code) shall consent thereto.
Business Combination Provision
The Articles of Incorporation of the Surviving Corporation contain a
business combination provision identical to that of Article Ten of the Articles
of Incorporation of IRA, including the requirement that a "fair price" be paid
under certain circumstances. See "THE PROPOSED MERGER--IRA Charter Business
Combination Provision." This provision may have certain anti-takeover effects,
including making it more difficult for the Surviving Corporation to enter into
transactions with certain interested shareholders without the approval of the
Board of Directors of the Surviving Corporation.
Classified Board
The Bylaws of the Surviving Corporation, like the Bylaws of IRA, provide
for a Board of Directors divided into three classes of directors serving
staggered three-year terms. The classification of directors has the effect of
making it more difficult for shareholders to change the composition of the Board
of Directors of the Surviving Corporation in a short period of time. At least
two annual meetings of shareholders, instead of one, will generally be required
to effect a change in a majority of the Board of Directors of the Surviving
Corporation.
85
<PAGE>
INDEPENDENT AUDITORS
The consolidated financial statements of IRA as of September 30, 1997 and
1996 and for the three years in the period ended September 30, 1997, 1996 and
1995, included in the IRA 10-K included and incorporated by reference in this
Proxy Statement, have been audited by Brantley, Frazier, Rogers & Company, P.C.,
independent auditors.
The balance sheet of First Command as of May 31, 1998, included herein, has
been audited by Ernst & Young LLP, independent auditors.
Representatives of Ernst & Young LLP, principal independent accountants to
IRA, will be present at the Special Meeting.
OTHER MATTERS
The IRA Board does not presently know of any matters to be presented for
consideration at the Special Meeting other than matters described in the Notice
of Special Meeting mailed together with this Proxy Statement, but if other
matters are presented, it is the intention of the persons named in the
accompanying proxy to vote on such matters in accordance with their best
judgment. The proxy confers discretionary authority to vote only with respect to
matters that the IRA Board did not know, within a reasonable time before the
mailing of these materials, were to be presented at the Special Meeting.
The Company has enclosed with this Proxy Statement as Annex D its Annual
Report on Form 10-K for the fiscal year ended September 30, 1997, and its
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998, as
amended September 9, 1998, which are incorporated herein by reference.
86
<PAGE>
AVAILABLE INFORMATION
IRA is subject to the informational requirements of the Exchange Act, and
in accordance therewith files reports, proxy statements and other information
with the Commission. First Command is not subject to the informational
requirements of the Exchange Act. IRA and First Command have filed with the
Commission the Schedule 13E-3. As permitted by the rules and regulations of the
Commission, this Proxy Statement omits certain exhibits contained in the
Schedule 13E-3. Copies of the Schedule 13E-3 and the exhibits thereto, as well
as such reports, proxy statements and other information, can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
following Regional Offices of the Commission: Seven World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. The Commission also maintains a Web Site
at http://www.sec.gov which contains reports and other information regarding
registrants that file electronically with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by IRA (File No.
000-22021) pursuant to the Exchange Act are incorporated by reference in this
Proxy Statement:
(1) Quarterly Report on Form 10-Q for the period ended June 30, 1998,
filed on August 14, 1998, and as amended on September 9, 1998.
(2) Quarterly Report on Form 10-Q for the period ended March 31, 1998,
filed on May 12, 1998.
(3) Quarterly Report on Form 10-Q for the period ended December 31, 1997,
filed on February 17, 1998.
(4) Annual Report on Form 10-K for the fiscal year ended September 30,
1997, filed on December 29, 1997.
(5) Current Report on Form 8-K, filed on May 1, 1998.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement to the extent that a statement contained
herein or in any other subsequently filed document, which also is or is deemed
to be incorporated by reference herein, modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy Statement.
This Proxy Statement incorporates by reference documents relating to the
Company that are not presented herein or delivered herewith. These documents
(not including exhibits to such documents other than exhibits specifically
incorporated by reference into such documents) are available without charge to
any person, including any beneficial owner of Class A Stock or Class B Stock, to
whom this Proxy Statement is delivered, upon written or oral request of such
person. Requests for such documents relating to IRA should be directed to
Independent Research Agency for Life Insurance, Inc., 4100 South Hulen Street,
Fort Worth, Texas 76109, Attention: Investor Relations, telephone number (817)
731-8621. To assure timely delivery of such documents, requests for such
documents should be made no later than November 16, 1998.
By Order of the Board of Directors,
/s/ Sandra T. Allen
----------------------
Sandra T. Allen
Secretary
Fort Worth, Texas
October 30, 1998
87
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FIRST COMMAND FINANCIAL CORPORATION
INDEX TO BALANCE SHEETS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors..................................................................................F-2
Balance Sheet as of May 31, 1998................................................................................F-3
Notes to Balance Sheet..........................................................................................F-4
Balance Sheet as of June 30, 1998 (unaudited)...................................................................F-6
Notes to Balance Sheet (unaudited)..............................................................................F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
First Command Financial Corporation
We have audited the balance sheet of First Command Financial Corporation as of
May 31, 1998. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit also includes examining, on a test basis, evidence supporting the amounts
and significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of First Command Financial Corporation
at May 31, 1998, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Dallas, Texas
June 18, 1998
F-2
<PAGE>
FIRST COMMAND FINANCIAL CORPORATION
BALANCE SHEET
MAY 31, 1998
<TABLE>
<S> <C>
Assets:
Cash................................................. $ 893
Construction in progress............................. 12,310
---------------------
Total assets.................................... $ 13,203
---------------------
---------------------
Liabilities:
Advance payable...................................... $ 12,310
---------------------
Total liabilities............................... $ 12,310
Shareholders' equity:
Common stock (1,000 shares authorized, 1,000 shares
outstanding at $0.01 par value)................ 10
Paid in capital...................................... 883
Shareholders' equity............................ 893
---------------------
Total liabilities and shareholders' equity.. $ 13,203
---------------------
---------------------
</TABLE>
See notes to balance sheet.
F-3
<PAGE>
NOTES TO BALANCE SHEET
MAY 31, 1998
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Organization and Operation
First Command Financial Corporation ("FCFC") was chartered in Texas in April
1998. FCFC was incorporated for the purpose of entering into agreements for the
lease of real estate, the construction of a parking garage on that leased real
estate, the financing of said construction and the leasing of space in the
completed garage.
Four individuals, who are members of the executive committee of Independent
Research Agency for Life Insurance, Inc. ("IRA, Inc.") are the shareholders of
FCFC.
Federal Income Taxes
In order to qualify for the flow-through benefits of an S Corporation, FCFC must
have, among other things, only one class of stock and less than 75 shareholders.
FCFC and its shareholders elected to have FCFC taxed as an S Corporation.
NOTE 2 - ADVANCE PAYABLE
At May 31, 1998 FCFC has received $12,310 in advances from IRA, Inc. This
advance will become subject to the IRA, Inc. borrowing agreement as discussed in
Note 3 below.
NOTE 3 - SUBSEQUENT EVENTS AND OTHER AGREEMENTS
On June 1, 1998, FCFC entered into an agreement with IRA, Inc. to lease land
from IRA, Inc. on which FCFC will construct an 801 space parking garage. The
agreement allows FCFC to lease the property for $1 each year from the date of
the agreement for the next 99 years.
On June 1, 1998, FCFC entered into a borrowing agreement with IRA, Inc. for $8.5
million. Under the terms of the agreement, FCFC may borrow up to $7 million
during the next 18 months at an interest rate of 7%. Interest will accrue
monthly, and up to $1.5 million may be added to the outstanding balance of the
loan during the construction period. At the end of the construction period, the
total outstanding debt will be repaid through quarterly payments over the
following fifteen years.
On May 4, 1998, FCFC entered into an agreement with a third party construction
company to act as a general contractor for the purpose of constructing the
parking garage. The construction is expected to be completed in the summer of
1999 with the total costs approximating $6 million for the garage, plus
interest.
On June 1, 1998, FCFC entered into an agreement with IRA, Inc. for the leasing
of the to-be constructed parking garage. Under the terms of the agreement, IRA,
Inc. will lease the garage for $51,250 per month, plus operating expenses, for
fifteen years after the completion of the garage.
On June 1, 1998, FCFC entered into a management agreement with IRA, Inc. for
IRA, Inc. to provide FCFC specified administrative services, facilities,
equipment and supplies necessary to operate the business. FCFC is to pay IRA,
Inc. $2,030 per month in management fees. The agreement term ends May 31, 1999,
but automatically renews itself from year to year unless otherwise terminated as
provided in the agreement.
F-4
<PAGE>
On June 1, 1998, FCFC entered into an administrative agreement with IRA, Inc. to
manage the IRA building as specified in the agreement. IRA, Inc. is to pay
$2,080 per month to FCFC for these services. The agreement term ends May 31,
1999, but automatically renews itself from year to year unless otherwise
terminated as provided in the agreement.
NOTE 4 - IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the FCFC's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in similar
normal business activities.
FCFC, through its management agreement with IRA, is primarily reliant upon IRA
to utilize and appropriately modify its software so that the FCFC's data
processing will function properly with respect to dates in the Year 2000 and
thereafter. However, if such modifications are not successfully made, or are not
completed timely, the Year 2000 Issue could adversely impact the operations of
FCFC. IRA has formed a committee to review these areas and is studying the
impact of the new millennium on all areas of IRA. In addition, IRA plans to
engage a third party specialist to ensure its review and corrective actions are
appropriate.
F-5
<PAGE>
FIRST COMMAND FINANCIAL CORPORATION
BALANCE SHEET
JUNE 30, 1998
(unaudited)
<TABLE>
<S> <C>
Assets:
Cash................................................. $ 1,000
Construction in progress............................. 26,770
Other assets......................................... $ 6,495
---------------------
Total assets.................................... $ 34,265
---------------------
---------------------
Liabilities:
Advance payable...................................... $ 41,011
---------------------
Total liabilities............................... $ 41,011
Shareholders' equity:
Common stock (1,000 shares authorized, 1,000 shares
outstanding at $0.01 par value)................ 10
Paid in capital...................................... 990
Current year earnings (loss)......................... (7,746)
---------------------
Shareholders' equity............................ (6,746)
---------------------
Total liabilities and shareholders' equity.. $ 34,265
---------------------
---------------------
</TABLE>
See notes to balance sheet.
F-6
<PAGE>
NOTES TO BALANCE SHEET
JUNE 30, 1998
(unaudited)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Organization and Operation
First Command Financial Corporation ("FCFC") was chartered in Texas in April
1998. FCFC was incorporated for the purpose of entering into agreements for the
lease of real estate, the construction of a parking garage on that leased real
estate, the financing of said construction and the leasing of space in the
completed garage.
Four individuals, who are members of the executive committee of Independent
Research Agency for Life Insurance, Inc. ("IRA, Inc.") are the shareholders of
FCFC. On June 26, 1998, Carroll H. Payne, II gifted 25 shares of FCFC stock to
Freda J. Payne.
Federal Income Taxes
In order to qualify for the flow-through benefits of an S Corporation, FCFC must
have, among other things, only one class of stock and less than 75 shareholders.
FCFC and its shareholders elected to have FCFC taxed as an S Corporation.
NOTE 2 - ADVANCE PAYABLE
At June 30, 1998 FCFC has received $41,011 in advances from IRA, Inc. This
advance will become subject to the IRA, Inc. borrowing agreement as discussed in
Note 3 below.
NOTE 3 -OTHER AGREEMENTS
On June 1, 1998, FCFC entered into an agreement with IRA, Inc. to lease land
from IRA, Inc. on which FCFC will construct an 801 space parking garage. The
agreement allows FCFC to lease the property for $1 each year from the date of
the agreement for the next 99 years.
On June 1, 1998, FCFC entered into a borrowing agreement with IRA, Inc. for $8.5
million. Under the terms of the agreement, FCFC may borrow up to $7 million
during the next 18 months at an interest rate of 7%. Interest will accrue
monthly, and up to $1.5 million may be added to the outstanding balance of the
loan during the construction period. At the end of the construction period, the
total outstanding debt will be repaid through quarterly payments over the
following fifteen years.
On May 4, 1998, FCFC entered into an agreement with a third party construction
company to act as a general contractor for the purpose of constructing the
parking garage. The construction is expected to be completed in the summer of
1999 with the total costs approximating $6 million for the garage, plus
interest.
On June 1, 1998, FCFC entered into an agreement with IRA, Inc. for the leasing
of the to-be constructed parking garage. Under the terms of the agreement, IRA,
Inc. will lease the garage for $51,250 per month, plus operating expenses, for
fifteen years after the completion of the garage.
On June 1, 1998, FCFC entered into a management agreement with IRA, Inc. for
IRA, Inc. to provide FCFC specified administrative services, facilities,
equipment and supplies necessary to operate the business. FCFC is to pay IRA,
Inc. $2,030 per month in management fees. The agreement term ends May 31, 1999,
but automatically renews itself from year to year unless otherwise terminated as
provided in the agreement.
F-7
<PAGE>
On June 1, 1998, FCFC entered into an administrative agreement with IRA, Inc. to
manage the IRA building as specified in the agreement. IRA, Inc. is to pay
$2,080 per month to FCFC for these services. The agreement term ends May 31,
1999, but automatically renews itself from year to year unless otherwise
terminated as provided in the agreement.
NOTE 4 - IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the FCFC's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions or engage in similar
normal business activities.
FCFC, through its management agreement with IRA, is primarily reliant upon IRA
to utilize and appropriately modify its software so that the FCFC's data
processing will function properly with respect to dates in the Year 2000 and
thereafter. However, if such modifications are not successfully made, or are not
completed timely, the Year 2000 Issue could adversely impact the operations of
FCFC. IRA has formed a committee to review these areas and is studying the
impact of the new millennium on all areas of IRA. In addition, IRA plans to
engage a third party specialist to ensure its review and corrective actions are
appropriate.
F-8
<PAGE>
ANNEX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
BETWEEN
FIRST COMMAND FINANCIAL CORPORATION
AND
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
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AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (the "Agreement") is
dated as of October 30, 1998, and is by and between Independent Research Agency
for Life Insurance, Inc., a Texas corporation ("IRA"), and First Command
Financial Corporation, a Texas corporation ("First Command").
R E C I T A L S
On July 1, 1998, IRA and First Command executed that certain Agreement and
Plan of Merger as of even date (the "Merger Agreement") that provided for the
merger of IRA with and into First Command (the "Merger").
By execution of this Amendment, IRA and First Command hereby amend certain
provisions of the Merger Agreement and restate the Merger Agreement in its
entirety.
NOW, THEREFORE, in consideration of the above premises, the mutual promises
and covenants herein contained, and for other good and valuable consideration,
the full receipt and sufficiency of which are hereby expressly acknowledged by
the parties hereto, it is hereby agreed as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2 hereof),
and subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the Texas Business Corporation Act (the "TBCA"), IRA
shall be merged with and into First Command, the separate existence of IRA shall
cease, and First Command shall be the surviving corporation (sometimes called
the "Surviving Corporation") and shall continue its corporate existence under
the laws of the State of Texas. The name of the Surviving Corporation shall be
"Independent Research Agency for Life Insurance, Inc."
1.2 Effective Time. The Merger shall be effected by the filing of the
Articles of Merger, in the form required by the TBCA and otherwise conforming to
the requirements of the TBCA, with the Secretary of State of the State of Texas.
The Merger shall become effective upon the filing of the Articles of Merger in
accordance with the applicable laws of the State of Texas.
1.3 Effect of the Merger. At the Effective Time, First Command, as the
surviving corporation in the Merger, shall possess all of the rights,
privileges, immunities, powers and franchises of each of First Command and IRA;
all of the property, real, personal and mixed, including subscription of shares,
choses in action and every other asset of each of First Command and IRA shall
vest in the Surviving Corporation without further act or deed; the Surviving
Corporation shall assume and be liable for all the liabilities and obligations
of each of First Command and IRA; and all other effects presumed in a merger
including, without limitation, those set forth in Section 5.06 of the TBCA,
shall result from the Merger.
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ARTICLE II
CONVERSION AND EXCHANGE OF SHARES
2.1 Conversion of Shares. At the Effective Time, by virtue of the Merger
and without any action on the part of First Command, IRA, or the holders of any
of the following securities:
2.1.1 Each share of Class A Voting Common Stock, par value $0.10 per
share, of IRA ("Class A Stock"), issued and outstanding immediately prior
to the Effective Time (other than shares of Class A Stock to be cancelled
pursuant to Section 2.1.4 below and other than the Dissenting Shares, as
defined in Section 2.2 below) shall be converted into five validly issued,
fully paid and nonassessable shares of Voting Common Stock, par value $0.01
per share ("Surviving Corporation Voting Stock"), of the Surviving
Corporation (the "Class A Consideration"). From and after the Effective
Time, each outstanding certificate that represented shares of Class A Stock
shall evidence ownership of and represent the number of shares of Surviving
Corporation Voting Stock into which such shares of Class A Stock shall have
been converted.
2.1.2 Each share of Class B Non-voting Common Stock, par value $0.02
per share, of IRA ("Class B Stock") that is held by a holder of Class B
Stock (a "Class B Shareholder") that is not a holder of Class A Stock
issued and outstanding immediately prior to the Effective Time (other than
the Dissenting Shares, as defined in Section 2.2 below) shall be converted
into the right to receive $28.24 in cash, without interest thereon ("Class
B Per Share Amount"), payable to the holders thereof upon surrender of the
certificates representing such shares.
2.1.3 Each share of Class B Stock that is held by a Class B
Shareholder that is also a holder of Class A Stock (a "Class A/B
Shareholder") issued and outstanding immediately prior to the Effective
Time (other than the Dissenting Shares, as defined in Section 2.2 below)
shall be converted into, at the election of the Class A/B Shareholder,
either (i) the right to receive one share of Nonvoting Common Stock, par
value $0.01 per share ("Surviving Corporation Nonvoting Stock"), of the
Surviving Corporation (the "Class B Nonvoting Stock Consideration") or (ii)
the Class B Per Share Amount (together with the Class B Nonvoting Stock
Consideration, the "Class B Consideration"), payable to the holders thereof
upon surrender of the certificates representing such shares; provided,
however, that a Class A/B Shareholder may not elect to receive a
combination of the Class B Nonvoting Stock Consideration and the Class B
Cash Consideration with respect to shares of Class A Stock held by such
Class A/B Shareholder. The Class A Stock and Class B Stock are hereafter
sometimes collectively referred to as "IRA Common Stock," and the Class A
Consideration and the Class B Consideration are hereafter sometimes
collectively referred to as "Merger Consideration."
2.1.4 Each share of Class A Stock or Class B Stock held in treasury by
IRA immediately prior to the Effective Time shall be cancelled and
extinguished without any conversion thereof, and no payment shall be made
in respect thereof.
2.1.5 Each share of common stock, par value $0.01 per share, of First
Command ("First Command Common Stock"), issued and outstanding immediately
prior to the Effective Time (other than shares of First Command Common
Stock to be cancelled pursuant to Section 2.1.6 below and other than the
Dissenting Shares, as defined in Section 2.2 below) shall be converted into
0.04 validly issued, fully paid and nonassessable shares of Surviving
Corporation Nonvoting Stock (the "First Command Consideration"). From and
after the Effective Time, each outstanding certificate that represented
shares of First Command Common Stock shall evidence ownership of and
represent the number of shares of Surviving Corporation Nonvoting Stock
into which such shares of First Command Common Stock shall have been
converted.
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2.1.6 Each share of First Command Common Stock held in treasury by
First Command immediately prior to the Effective Time shall be cancelled
and extinguished without any conversion thereof, and no payment shall be
made in respect thereof.
2.2 Dissenting Shares. To the extent required by applicable provisions of
the TBCA, shares of IRA Common Stock and shares of First Command Common Stock
that are issued and outstanding immediately prior to the Effective Time and are
held by holders of IRA Common Stock or holders of First Command Common Stock who
comply with all the provisions of the TBCA concerning the right of holders of
IRA Common Stock or holders of First Command Common Stock, as the case may be,
to dissent from the Merger and demand payment of the fair value of their shares
of IRA Common Stock or First Command Common Stock, as the case may be
("Dissenting Shareholders"), shall not be converted into the right to receive
the Merger Consideration but shall instead be converted into the right to
receive such consideration as may be determined to be due such Dissenting
Shareholders pursuant to the laws of the State of Texas (such shares being the
"Dissenting Shares"); provided, however, if any Dissenting Shareholder fails to
establish and perfect his dissenter's rights as provided by applicable law, then
such Dissenting Shareholder shall forfeit all dissenter's rights including the
right to obtain payment of the fair value of the shares held by him, and such
Dissenting Shareholder shall be entitled to receive, as of the Effective Time,
only the Merger Consideration for each share of IRA Common Stock or share First
Command Common Stock, as the case may be, held by him, payable upon surrender of
the certificate representing such shares and such shares shall no longer be
Dissenting Shares. The Surviving Corporation shall comply with all of the
obligations pursuant to the TBCA of a surviving corporation after the
effectiveness of a merger with respect to dissenting shareholders, and the
Surviving Corporation shall direct all negotiations and proceedings with respect
to demands for payment of fair value under Texas law.
2.3 Election Procedures.
2.3.1 Subject to allocation, conversion and proration in accordance
with the provisions of this Section 2.3, each Class A/B Shareholder shall
be entitled, with respect to each share of Class B Stock held by such Class
A/B Shareholder immediately prior to the Effective Time, (a) to elect to
receive in respect of each such share of Class B Stock (i) the Class B
Nonvoting Stock Consideration (a "Stock Election") or (ii) the Class B Cash
Consideration (a "Cash Election") or (b) to indicate that such recordholder
has no preference as to the receipt of Cash Consideration or Stock
Consideration for such Class B Stock (a "NonElection"). A Class A/B
Shareholder may not make a combination of a Stock Election and a Cash
Election with respect to shares of Class A Stock held by such Class A/B
Shareholder. Class B Stock in respect of which a Non-Election is made
(including shares in respect of which such an election is deemed to have
been made pursuant to this Agreement (collectively, "Non-Election Shares"))
shall be deemed Class B Stock in respect of which Stock Elections have been
made. Class B Stock in respect of which a Stock Election has been made,
together with Class B Stock in respect of which a Stock Election is deemed
to be made, is hereafter referred to as "Stock Election Shares," and Class
B Stock in respect of which a Cash Election has been made is hereafter
referred to as "Cash Election Shares."
2.3.2 Elections pursuant to Section 2.3.1 shall be made on a form and
with such other provisions to be reasonably agreed upon by IRA (a "Form of
Election"), to be provided to holders of record of Class B Stock, together
with appropriate transmittal materials, at the time of mailing to holders
of record of IRA Common Stock of the Proxy Statement (as defined in Section
4.4) in connection with the stockholders meeting referred to in Section
4.3. Elections shall be made by mailing to First Command Bank (the "Paying
Agent") a duly completed Form of Election. To be effective, a Form of
Election must be (a) properly completed, signed and submitted to the Paying
Agent at its designated office, by 5:00 p.m. Central Standard time, on
November 23, 1998 (the "Election Deadline"). The Company shall use its best
efforts, as promptly as practicable, to make a Form of Election available
to all persons who become holders of record of Class B Stock between the
date of mailing described in the first sentence of this Section 2.3.2 and
the Election Deadline. Neither IRA nor the Paying Agent will be under any
obligation to notify any person of any defect
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in a Form of Election submitted to the Paying Agent. A holder of Class B
Stock that does not submit an effective Form of Election prior to the
Election Deadline shall be deemed to have made a Non-Election.
2.3.3 An election may be revoked or amended, but only by written
notice received by the Paying Agent prior to the Election Deadline. Upon
any such revocation, unless a duly completed Form of Election is thereafter
submitted in accordance with paragraph (b)(ii), such Shares shall be
Non-Election Shares.
2.3.4 All Cash Election Shares shall be converted into the right to
receive the Class B Cash Consideration, and all Stock Election Shares shall
be converted into the right to receive the Class B Nonvoting Stock
Consideration.
2.4 Payment for Shares; Stock Transfer Books.
2.4.1 On the first business day following the Effective Time, the
Surviving Corporation shall deposit in trust with the Paying Agent, the
following amounts and forms of Merger Consideration required for conversion
at the Effective Time of the Class A Stock and Class B Stock (such deposit
being the "Payment Fund"): (i) the number of shares of Surviving
Corporation Voting Stock equal to the number of shares of Class A Stock
issued and outstanding immediately prior to the Effective Time multiplied
by five; (ii) the funds equal to the Class B Per Share Amount times the
aggregate number of shares of Class B Stock issued and outstanding
immediately prior to the Effective Time held by Class B Shareholders who
are not Class A/B Shareholders; (iii) the number of shares of Surviving
Corporation Nonvoting Stock equal to the number of Stock Election Shares
issued and outstanding immediately prior to the Effective Time; (iv) the
funds equal to the Class B Per Share Amount times the aggregate number of
Cash Election Shares issued and outstanding immediately prior to the
Effective Time; and (v) the number of shares of Surviving Corporation
Nonvoting Stock equal to the number of shares of First Command Common Stock
issued and outstanding immediately prior to the Effective Time multiplied
by 0.04. The Paying Agent shall, pursuant to irrevocable instructions, make
the payments provided for in Section 2.1 out of the Payment Fund. Pending
such payments, the Paying Agent shall, as directed by the Surviving
Corporation, invest cash portions of the cash portion of the Payment Fund
in short-term obligations of, or obligations fully guaranteed by, the
United States of America, or any agency of the United States of America.
Any earnings on the investment of the Payment Fund shall be paid to the
Surviving Corporation as and when requested by the Surviving Corporation.
If, at any time after the Effective Time a Dissenting Shareholder ceases to
be a Dissenting Shareholder by virtue of failing to perfect dissenter's
rights, and (i) such Dissenting Shareholder is not a Class A/B Shareholder
and holds Class B Stock or (ii) such Dissenting Shareholder is a Class A/B
Shareholder and has made a Cash Election with respect the Class B Stock,
upon such occurrence the Surviving Corporation shall promptly deposit to
the Payment Fund an amount of Merger Consideration in cash required for the
conversion of such Class B Stock at the Effective Time.
2.4.2 The Paying Agent shall mail and otherwise make available to each
record holder who held at the Effective Time an outstanding certificate or
certificates that represented shares of Class A Stock, Class B Stock and
First Command Common Stock (the "Certificates") a form of letter of
transmittal and instructions for its use in effecting the surrender of the
Certificates for payment. After the Effective time and upon surrender to
the Paying Agent of a Certificate or Certificates, together with a duly
executed letter of transmittal, the holder of such Certificate shall be
entitled to receive (after taking into account all shares of Class A Stock
then held of record by such holder) in exchange (i) in the case of a holder
of Class A Stock, a certificate evidencing that number of shares of
Surviving Corporation Voting Stock that such holder has the right to
receive in respect of the shares of Class A Stock formerly evidenced by
such Certificate; (ii) in the case of a holder of Class B Stock that is not
a Class A/B Shareholder, Class B Cash Consideration in an amount equal to
the product of the number of shares of Class B Stock represented by such
Certificate multiplied by the Class B Per Share Amount; (iii) in the case
of a Class A/B Shareholder, with respect to the Class B Stock held by such
Class A/B Shareholder, (A) a certificate evidencing that number of shares
of Surviving Corporation Nonvoting Stock that such holder has the right to
receive in
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respect of the Stock Election Shares formerly evidenced by such Certificate
or (B) Class B Cash Consideration in an amount equal to the product of the
number of Cash Election Shares represented by such Certificate multiplied
by the Class B Per Share Amount; and (iv) in the case of a holder of First
Command Common Stock, a certificate evidencing that number of shares of
Surviving Corporation Nonvoting Stock that such holder has the right to
receive in respect of the shares of First Command Common Stock formerly
evidence by such Certificate. Thereafter, such Certificates shall be
cancelled. No interest will be paid or accrue on the Merger Consideration
payable in cash upon the surrender of the Certificates. If payment is to be
made to a person other than the person in whose name the surrendered
Certificate is registered, the Certificate must be properly endorsed or
otherwise in proper form for transfer and the person requesting such
payment must agree to pay any applicable transfer or other taxes or
establish to the satisfaction of the Paying Agent and the Surviving
Corporation that such tax has been paid or is not applicable. The Paying
Agent shall pay the Merger Consideration attributable to a Certificate
which has been lost or destroyed upon receipt of satisfactory evidence of
ownership of the shares of IRA Common Stock or First Command Common Stock
and of appropriate indemnification. After the Effective Time, until
surrendered in accordance with these provisions, each Certificate (other
than Certificates representing Dissenting Shares) shall represent only the
right to receive the Merger Consideration as set forth in this Agreement.
2.4.3 After the Effective Time, there shall be no transfers on the
stock transfer books of the Surviving Corporation of the shares of IRA
Common Stock or First Command Common Stock that were outstanding
immediately prior to the Effective Time. Certificates presented to the
Surviving Corporation after the Effective Time shall be cancelled.
2.4.4 Any portion of the Payment Fund that remains unclaimed by the
shareholders of IRA for six months after the Effective Time shall be repaid
to the Surviving Corporation, upon demand, and any shareholders of IRA who
have not complied with the herein provisions shall look as a general
creditor only to the Surviving Corporation for payment of their claims for
the Merger Consideration. Notwithstanding the foregoing, the Surviving
Corporation shall not be liable to a holder of shares of IRA Common Stock
or First Command Common Stock for any amounts delivered to a public
official pursuant to any applicable abandoned property, escheat or similar
laws.
ARTICLE III
ARTICLES OF INCORPORATION;
BYLAWS; DIRECTORS AND OFFICERS
3.1 Articles of Incorporation. From and after the Effective Time, the
Articles of Incorporation of First Command, as in effect immediately prior to
the Effective Time, shall be and remain the Articles of Incorporation of the
Surviving Corporation until thereafter amended in accordance with the provisions
thereof or Texas law, provided that Article One of such Articles of
Incorporation shall be amended in its entirety to read as follows: "The name of
the Corporation is "Independent Research Agency for Life Insurance, Inc."
3.2 Bylaws. From and after the Effective Time, the Bylaws of First Command,
as in effect immediately prior to the Effective Time, shall be and remain the
Bylaws of the Surviving Corporation until thereafter amended in accordance with
the provisions thereof or Texas law.
3.3 Directors and Officers of the Surviving Corporation. From and after the
Effective Time, the directors of IRA serving immediately prior to the Effective
Time shall become the directors of the Surviving Corporation, each such director
to hold office, subject to the applicable provisions of the Articles of
Incorporation and Bylaws of the Surviving Corporation, until his successor shall
be duly elected or appointed and qualified.
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Pursuant to Section 3:6 of the Bylaws of the Surviving Corporation, the
directors shall be divided into the following classes and shall accordingly
serve the term designated in Section 3:6 of the Bylaws of the Surviving
Corporation:
<TABLE>
<CAPTION>
Class Director
----- --------
<S> <C>
Class I Hal N. Craig
Howard M. Crump
Jerry D. Gray
James J. Ellis
Class II Logan Dickinson
Naomi K. Payne
Lamar C. Smith
Class III Donaldson D. Frizzell
James N. Lanier
Carroll H. Payne II
David P. Thoreson
</TABLE>
From and after the Effective Time, the officers of IRA serving immediately
prior to the Effective Time shall, subject to the applicable provisions of the
Articles of Incorporation and Bylaws of the Surviving Corporation, become the
officers of the Surviving Corporation until their respective successors shall be
duly elected or appointed and qualified.
ARTICLE IV
CERTAIN OBLIGATIONS OF THE PARTIES
IRA covenants and agrees with First Command, and First Command covenants
and agrees with IRA, that between the date of this Agreement and the Closing
Date:
4.1 Full Access. IRA shall, upon reasonable request, afford to First
Command and its affiliates, counsel, accountants and other authorized
representatives full access during normal business hours to the properties,
books and records of IRA in order that First Command may have the opportunity to
make such reasonable investigations as it shall desire to make of the affairs of
IRA, and IRA will cause its officers and employees to furnish such additional
financial and operating data and other information as First Command shall from
time to time reasonably request. First Command shall, upon reasonable request,
provide IRA, its counsel, accountants and other authorized representatives with
such information concerning First Command as may be reasonably necessary for IRA
to ascertain the accuracy and completeness of the information supplied by First
Command for inclusion in the required proxy statement (or any amendment or
supplement to such materials). IRA shall, upon reasonable request, provide First
Command, its counsel, accountants and other authorized representatives with such
information concerning IRA as may be reasonably necessary for First Command to
ascertain the accuracy and completeness of the information supplied by IRA for
inclusion in the required Rule 13e-3 Transaction Statement on Schedule 13E-3 (or
any amendment thereto) (the "Schedule 13E-3").
4.2 Confidentiality. Except as required by law, First Command and its
affiliates will, and will use its best efforts to cause its counsel, accountants
and other authorized representatives to, hold in strict confidence and not
disclose to others for any reason whatsoever, without the prior written consent
of IRA, any information received by them from IRA in connection with the
transactions contemplated by this Agreement. In the event this Agreement is
terminated, IRA and First Command each agrees to return promptly, if so
requested by the other party, every document furnished to any of them by the
other party or any subsidiary, division, associate or affiliate of such other
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party, in connection with the transactions contemplated by this Agreement and
any copies of documents which may have been made and to cause their
representatives and others to whom such documents were furnished promptly to
return such documents and any copies, other than documents filed with the
Securities and Exchange Commission ("SEC") or otherwise publicly available.
4.3 Shareholders' Meeting. IRA shall, in accordance with the provisions of
the TBCA and its Articles of Incorporation and Bylaws, cause a special meeting
of its shareholders (the "Shareholders' Meeting") to be duly called and held as
soon as reasonably practicable after the date of this Agreement for the purpose
of approving and adopting this Agreement. Subject to their fiduciary duties as
advised by counsel, the directors of IRA shall recommend approval and adoption
of this Agreement and that recommendation shall be contained in the Definitive
Proxy Statement (defined below).
4.4 Proxy Statement; Schedule 13E-3. IRA and First Command prepare and
file, and each will cooperate with the other in the preparation and filing of,
the Schedule 13E-3 with the SEC with respect to the transactions contemplated by
this Agreement. In connection with the Shareholders' Meeting, IRA will prepare
and file, and First Command will cooperate with IRA in the preparation and
filing of, a preliminary proxy statement relating to the transactions
contemplated by this Agreement (the "Preliminary Proxy Statement") with the SEC
and will use its best efforts to respond to the comments of the SEC and cause
the Definitive Proxy Statement (herein so called) to be mailed to IRA's
shareholders, all as soon as reasonably practicable. IRA shall prepare and file
with the SEC the Definitive Proxy Statement. Each party to this Agreement will
notify the others promptly of the receipt of the comments of the SEC, if any,
and of any request by the SEC for amendments or supplements to the Schedule
13E-3, the Preliminary Proxy Statement or the Definitive Proxy Statement or for
additional information, and will supply the others with copies of all
correspondence between such party or its representatives and the SEC or members
of its staff with respect to the Schedule 13E-3, the Preliminary Proxy
Statement, the Definitive Proxy Statement or the Merger. Whenever any event
occurs which should be set forth in an amendment of, or a supplement to, the
Definitive Proxy Statement, or an amendment to the Schedule 13E-3, IRA and First
Command will promptly notify the other party and will cooperate with each other
in the prompt preparation, filing, and mailing of such amendment of, or
supplement to, Definitive Proxy Statement, or the preparation and filing of such
amendment to the Schedule 13E-3.
4.5 Waivers, Consents and Approvals. Each of IRA and First Command will use
its reasonable best efforts to obtain any waivers, consents or approvals under
the terms of any agreement or commitment to which IRA or First Command is a
party that are necessary for the consummation of the Merger. In obtaining such
waivers, consents and approvals, IRA and First Command shall not, without the
consent of the other party hereto, agree to any amendment to or modification of
any such instrument.
4.6 Publicity. IRA and First Command agree to consult with each other in
issuing any press release and with respect to the general content of other
public statements about the transactions contemplated by this Agreement, and
shall not issue any such press release prior to such consultation.
4.7 Cooperation with Respect to Filings. IRA shall use its reasonable best
efforts to obtain at the earliest practicable date, and, in any event, prior to
the Closing Date, all approvals, consents, authorizations and waivers as may be
required from governmental and other regulatory agencies and other third parties
in connection with the transactions contemplated by this Agreement which, either
individually or in the aggregate, if not obtained, would have a materially
adverse effect on the financial condition, results of operations or business of
IRA or would prevent consummation of the Merger and the other transactions
contemplated by this Agreement. First Command will, and will cause its
representatives and affiliates to, provide such information and cooperate fully
with IRA in making such applications, filings and other submissions which may be
required or reasonably necessary in order to obtain all approvals, consents,
authorizations and waivers as may be required from governmental and other
regulatory agencies and other third parties in connection with the transactions
contemplated by this Agreement; provided, however, that neither First Command
nor any of its affiliates shall be obligated to execute any guarantees or
undertakings or otherwise incur or assume any liability, other than as a result
of the Merger, in connection with
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obtaining any such approval, consent, authorization or waiver. In the event of
any action, suit, proceeding or investigation of the nature specified in Section
5.5 of this Agreement is commenced, the parties agree to cooperate and use their
best efforts to defend against such actions.
4.8 Accuracy of Information. The written information supplied or to be
supplied by IRA or First Command specifically for inclusion in the Definitive
Proxy Statement, the Schedule 13E-3 and any supplement or amendment to any one
of them, as the case may be, will not contain any untrue statement of a material
fact or omit any material fact necessary in order to make the statements made,
in light of the circumstances under which they are made, not misleading.
4.9 Employee Benefits.
(a) From and after the Effective Time, the Surviving Corporation shall
honor and be bound by the terms and conditions of each Compensation and Benefit
Plan and each employee or executive benefit plan, program or agreement,
including, without limitation, severance agreements, sponsored or maintained by
IRA, or any subsidiary of IRA, or to which the IRA or any subsidiary of IRA is
party or which has been adopted by the board of directors of the IRA prior to
the date hereof (a "Company Benefit Arrangement"). Nothing in the immediately
preceding sentence shall be construed to limit the right of the Surviving
Corporation, following the Effective Time to amend, modify or terminate any such
Company Benefit Arrangement pursuant to the terms and conditions thereof as in
effect immediately prior to the Effective Time. A "Compensation and Benefit
Plan" shall mean each material bonus, deferred compensation, pension,
retirement, profit-sharing, thrift, savings, employee stock ownership, stock
bonus, stock purchase, restricted stock, stock option, employment, termination,
severance, compensation, medical, health or other plan, agreement, policy or
arrangement that covers employees, directors, former employees or former
directors.
(b) Without limiting the generality of the foregoing, from and after the
Effective Time, the Surviving Corporation shall make available to each person
who is an employee of IRA and its subsidiaries immediately prior to the
Effective Time (the "IRA Employees") employee benefit plans and programs which
are either (i) the same as are made available to the employees of IRA, on terms
and conditions generally applicable to the employees of IRA or (ii) no less
favorable to the IRA Employees than the terms and conditions of the Company
Benefit Arrangements in which they were participating immediately prior to the
Effective Time. Notwithstanding the foregoing, in no event shall any employee
receive duplicate benefits with respect to any period of service. To the extent
any employee benefit plan or program in which any IRA Employee participates
after the Effective Time (x) imposes any pre-existing condition limitation, such
condition shall be waived, (y) has a deductible or requires a co-payment by the
IRA Employee that is subject to a maximum out-of-pocket limitation, there shall
be credited against any such deductible or limitation any costs incurred by such
IRA Employee during the comparable period under the terms of the corresponding
Company Benefit Arrangement prior to the Effective Time or (z) imposes a waiting
period, for purposes of eligibility or vesting, the IRA Employees will receive
credit for service with IRA or its subsidiaries prior to the Effective Time.
4.10 Takeover Statute. If any Takeover Statute (as defined below) is or may
become applicable to the Merger, each of IRA and First Command and their
respective Board of Directors shall grant such approvals and take such actions
as are necessary so that such transactions may be consummated as promptly as
practicable on the terms contemplated by this Agreement or by the Merger and
otherwise act to eliminate or minimize the effects of such statute or regulation
on such transactions. A "Takeover Statute" shall mean any "fair price,"
"moratorium," "control share acquisition" or other similar anti-takeover statute
or regulation, including, without limitation, Article 13 of the TBCA.
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ARTICLE V
CONDITIONS TO FIRST COMMAND'S OBLIGATIONS
The obligations of First Command under this Agreement (to be performed on
or before the Closing Date) shall be subject to the satisfaction, on or before
the Closing Date, of each of the following conditions:
5.1 Performance. IRA shall have performed and complied in all material
respects with all agreements, obligations and conditions required by this
Agreement to be performed or complied with by it on or prior to the Closing
Date.
5.2 Adoption by IRA Shareholders. The holders of (i) two-thirds (2/3) of
the outstanding shares of Class A Stock and Class B Stock, voting as a single
class, (ii) two-thirds (2/3) of the outstanding shares of Class A Stock and
Class B Stock, each voting separately as a class, and (iii) a majority of the
outstanding shares of Class B Stock not held by Class A/B Shareholders, that are
eligible to vote at the Shareholders' Meeting shall have voted for approval and
adoption of this Agreement.
5.3 Adoption by First Command Shareholders. The holders of two-thirds (2/3)
of the outstanding shares of First Command Common Stock shall have voted for
approval and adoption of this Agreement.
5.4 Consents. All approvals, consents, authorizations and waivers from
governmental and other regulatory agencies and other third parties required to
consummate the transactions contemplated by this Agreement, which either
individually or in the aggregate, if not obtained, would have a materially
adverse effect on the financial condition, results of operations or business of
IRA or would prevent consummation of the Merger and the other transactions
contemplated by this Agreement, shall have been obtained.
5.5 No Injunction. On the Closing Date there shall be no effective
injunction, writ, temporary restraining order or any order of any nature issued
by a court of competent jurisdiction or other governmental authority directing
that the transactions provided for in this Agreement or any of them not be
consummated as so provided or imposing any conditions on the consummation of the
transactions contemplated by this Agreement that First Command deems
unacceptable in its sole discretion.
5.6 No Proceeding or Litigation. No suit, action, or other proceeding
seeking to restrain, prevent or change the transactions contemplated by this
Agreement or otherwise questioning the validity or legality of such transactions
shall have been instituted and be pending.
5.7 Notice of Dissent. The holders of no more than 20% of either of the
outstanding Class A Stock or the Class B Stock shall have delivered notice of
their intent to exercise their right to dissent under the TBCA.
ARTICLE VI
CONDITIONS TO IRA'S OBLIGATIONS
The obligations of IRA under this Agreement (to be performed on or before
the Closing Date) shall be subject to the satisfaction, on or before the Closing
Date, of each of the following conditions:
6.1 Performance. First Command shall have performed and complied with all
agreements, obligations and conditions required by this Agreement to be
performed or complied with by it on or prior to the Closing Date.
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6.2 Fairness Opinion. IRA shall not have received written notice from
PricewaterhouseCoopers LLP that it has withdrawn, revoked or modified its
opinion as to the fairness of the Merger to the shareholders of IRA from a
financial point of view.
6.3 Adoption by IRA Shareholders. The conditions set forth in Section 5.2
shall have been satisfied.
6.4 Adoption by First Command Shareholders. The conditions set forth in
Section 5.3 shall have been satisfied.
6.5 Consents. All approvals, consents, authorizations and waivers from
governmental and other regulatory agencies and other third parties required to
consummate the transactions contemplated by this Agreement, which either
individually or in the aggregate, if not obtained, would have a materially
adverse effect on the financial condition, results of operations or business of
IRA or would prevent consummation of the Merger and the other transactions
contemplated by this Agreement, shall have been obtained.
6.6 No Injunction. On the Closing Date, there shall be no effective
injunction, writ, temporary restraining order or any order of any nature issued
by a court of competent jurisdiction or other governmental agency directing that
the transactions provided for in this Agreement or any of them not be
consummated as so provided for in this Agreement or any of them not be
consummated as so provided or imposing any conditions on the consummation of the
transactions contemplated by this Agreement that IRA deems unacceptable in its
sole discretion.
6.7 No Proceeding or Litigation. No suit, action, or other proceeding
seeking to restrain, prevent or change the transactions contemplated by this
Agreement or otherwise questioning the validity or legality of such transactions
shall have been instituted and be pending.
6.8 Notice of Dissent. The holders of no more than 20% of either of the
outstanding Class A Stock or the Class B Stock shall have delivered notice of
their intent to exercise their right to dissent under the TBCA.
ARTICLE VII
CLOSING
7.1 Closing. The Closing of the Merger (the "Closing") shall take place at
4100 South Hulen Street, Fort Worth, Texas 76109, at 9:00 a.m., local time, on
the first date that all conditions contained in Articles V and VI of this
Agreement have been satisfied or waived in accordance with this Agreement, or
such later date and time as the parties may agree in writing. The date of the
Closing as set forth in this Agreement shall be called the "Closing Date."
ARTICLE VIII
TERMINATION AND ABANDONMENT
8.1 Methods of Termination. Notwithstanding approval by the shareholders of
IRA, this Agreement may be terminated and the Merger may be abandoned at any
time before the Effective Time:
(a) by mutual consent of the Boards of Directors of First Command and
IRA;
(b) by either IRA or First Command if at the Shareholders' Meeting, or
any adjournment thereof, the shareholders of IRA fail to adopt and approve
this Agreement;
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(c) by either IRA or First Command if the shareholders of First
Command fail to adopt and approve the Agreement; or
(d) by either IRA or First Command if a court of competent
jurisdiction or governmental, regulatory or administrative agency or
commission shall have issued an order, decree or ruling or taken any other
action (which order, decree or ruling the parties hereto shall use their
best efforts to lift), in each case permanently restraining, enjoining or
otherwise prohibiting the transactions contemplated by this Agreement, and
such order, decree, ruling or other action shall have become final and
nonappealable.
8.2 Procedure Upon Termination. In the event of termination and abandonment
by the Board of Directors of First Command or by the Board of Directors of IRA
pursuant to Section 8.1(b), (c) or (d) of this Agreement, delivery of written
notice from the terminating party to the other party shall automatically
terminate this Agreement and shall cause it to be abandoned without further
action by First Command or IRA. If this Agreement is terminated as provided in
this Agreement:
(a) All information received by any party with respect to the business
of the other party (other than information which is a matter of public
knowledge or which has been or is published in any publication for public
distribution or filed as public information with any governmental
authority) shall not at any time be used for the advantage of, or disclosed
to third parties by, such party for any reason; and
(b) Neither party shall have any liability or further obligations to
the other party, except as stated in this Section 8.2.
ARTICLE IX
MISCELLANEOUS PROVISIONS
9.1 Amendment and Modification. Subject to applicable law, this Agreement
may be amended, modified or supplemented before or after the vote of the
shareholders of IRA by written agreement of the respective Boards of Directors
of First Command and IRA or their respective officers authorized by such Board
of Directors at anytime prior to the Closing Date with respect to any of the
terms contained in this Agreement.
9.2 Extension; Waiver. At any time prior to the Effective Time, any party
may by appropriate board action (i) extend the time for the performance of any
of the obligations or other acts of the other party or (ii) waive compliance
with any of the agreements or conditions contained in this Agreement. Any such
waiver or failure to insist upon strict compliance shall not operate as a waiver
of, or estoppel with respect to, any subsequent or other failure. Any agreement
on the part of any party to any such extension or waiver shall be valid only if
set forth in an instrument in writing signed on behalf of such party.
9.3 Fees and Expenses. IRA will pay all expenses incurred by the parties in
connection with the preparation, negotiation, execution, delivery and
consummation of this Agreement and the transactions contemplated by this
Agreement.
9.4 Notices. All notices, requests, demands and other communications
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given if delivered by hand, mailed by certified or
registered mail with postage prepaid or by overnight mail (next day guaranteed
delivery), or if sent by cable, telegram, telex or telecopy (with receipt
confirmation) as follows:
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(a) If to IRA, to:
Robert F. Watson
USPA&IRA
4100 South Hulen
Fort Worth, Texas 76109
Telephone: (817) 731-8621, ext. 2220
Fax: (800) 472-8772, ext. 2176
with a copy to:
Brian D. Barnard
Haynes and Boone, LLP
201 Main Street
Suite 2200
Fort Worth, Texas 76102
or to such other person or address as IRA shall furnish to First Command in
writing.
(b) If to First Command, to:
Robert F. Watson
First Command Financial Corporation
4100 South Hulen
Fort Worth, Texas 76109
Telephone: (817) 731-8621, ext. 2220
Fax: (800) 472-8772, ext. 2176
or to such other person or address as First Command shall furnish to IRA in
writing.
9.5 Assignment. This Agreement and all of the provisions of this Agreement
shall be binding upon and inure to the benefit of the parties and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by either of
the parties without the prior written consent of the other party; provided,
however, that this Section 9.5 is not intended to limit or restrict the class of
persons entitled to the benefits of Section 9.6 of this Agreement or to limit or
restrict any such person's standing or capacity to enforce the provisions of
Section 9.6.
9.6 Indemnification and Insurance.
(a) It is understood and agreed that IRA shall indemnify and hold harmless,
and, after the Effective Time, the Surviving Corporation shall indemnify and
hold harmless, each present and former employee, agent, officer or director of
IRA or, after the Effective Time, First Command (the "Indemnified Parties") to
the fullest extent permitted under applicable law or under the Articles of
Incorporation and Bylaws of IRA and Surviving Corporation against any losses,
claims, damages, liabilities, costs, expenses, judgments and amounts paid in
settlement ("Damages") in connection with any threatened, pending or
contemplated claim, action, suit, proceeding or investigation arising out of or
pertaining to any action or omission occurring prior to or at the Effective Time
(including, without limitation, any claim, action, suit, proceeding or
investigation to which he is a party or is threatened to be made a party by
reason of such relationship with IRA and which arises out of or relates to the
transactions contemplated hereby) (a "Claim"). The Surviving Corporation agrees
that the provisions of the Surviving Corporation's Articles of Incorporation or
Bylaws as in effect at the Effective Time of the Merger with respect to
exculpation of liability and indemnification of officers, directors and
employees shall not be modified, changed or amended in any manner adverse to an
Indemnified Party except as required by law. These rights to
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indemnification and the obligations set forth in this Section 9.6(a) shall
survive the Merger. Without limiting the foregoing, IRA and, after the Effective
Time the Surviving Corporation, to the fullest extent permitted under applicable
law, will periodically advance reasonable expenses as incurred with respect to
any Claim or potential claim provided that the person to whom expenses are
advanced, if required by applicable law, provides an undertaking to repay such
advances if it is ultimately determined by a court of competent jurisdiction
that such person is not entitled to indemnification pursuant to this Section
9.6.
(b) In the event any Claim is brought against any Indemnified Party
(whether before or after the Effective Time) in connection with which such
Indemnified Party asserts that he is entitled to be indemnified and held
harmless pursuant to Section 9.6(a) hereof, (i) the Indemnified Parties may
retain counsel which will be reasonably satisfactory to IRA (or the Surviving
Corporation after the Effective Time), (ii) IRA (or, after the Effective Time,
the Surviving Corporation) shall pay all reasonable fees and expenses of such
counsel for the Indemnified Parties promptly as statements therefor are
received, and (iii) IRA (or, after the Effective Time, the Surviving
Corporation) will use their reasonable best efforts to assist in the vigorous
defense of any such matter. Neither IRA nor the Surviving Corporation shall be
liable for any settlement effected without their written consent, which consent,
however, shall not be unreasonably withheld. Any Indemnified Party wishing to
claim indemnification under Section 9.6(a) hereof, upon learning of any such
Claim, shall notify IRA or the Surviving Corporation thereof but any failure to
so notify IRA or the Surviving Corporation shall not relieve IRA or the
Surviving Corporation of their obligations under this Section 9.6 unless it has
been actually prejudiced by such lack of notice. The Indemnified Parties as a
group may retain only one law firm in each jurisdiction to represent them with
respect to any such matter unless there is, under applicable standards of
professional conduct, a conflict of interest on any significant issue between
the positions of any two or more Indemnified Parties. Any determination required
to be made with respect to whether an Indemnified Party's conduct complied with
the standards set forth under applicable law or the Bylaws of IRA or the
Surviving Corporation shall be made by independent counsel selected by such
Indemnified Party and reasonably satisfactory to IRA or the Surviving
Corporation (which shall pay such counsel's reasonable fees and expenses).
(c) This Section 9.6 shall survive the closing of the transactions
contemplated hereby, is intended to benefit each of the Indemnified Parties
(each of whom shall be entitled to enforce this Section 9.6 against IRA (or the
Surviving Corporation, as the case may be) and shall be binding on all
successors and assigns of IRA and the Surviving Corporation. In the event IRA or
the Surviving Corporation or any of their successors or assigns (i) consolidates
with or merges into any other person and shall not be the continuing or
surviving corporation or entity of such consolidation or merger, or (ii)
transfers all or substantially all of its properties and assets to any person,
then, and in each case, proper provisions shall be made so that the successors
and assigns of IRA and the Surviving Corporation assume the obligations set
forth in this Section 9.6.
9.7 Governing Law. This Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the laws of the
State of Texas.
9.8 Counterparts. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same document.
9.9 Headings. The headings in this Agreement are inserted for convenience
only and shall not constitute a part of this Agreement.
9.10 Entire Agreement. This Agreement embodies the entire agreement and
understanding of the parties in respect of the subject matter contained in this
Agreement. There are no restrictions, promises, warranties, covenants or
undertakings, other than those set forth or referred to in this Agreement. This
Agreement supersedes all prior agreements and understandings between the parties
with respect to the subject matter hereof.
* * * * *
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<PAGE>
IN WITNESS WHEREOF, the parties have signed this Agreement on the date
first above written.
INDEPENDENT RESEARCH AGENCY FOR LIFE
INSURANCE, INC.
By: /s/ Lamar C. Smith
-------------------------------
Name: Lamar C. Smith
Title: Chairman of the Board and
Chief Executive Officer
FIRST COMMAND FINANCIAL CORPORATION
By: /s/ James N. Lanier
-------------------------------
Name: James N. Lanier
Title: President
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<PAGE>
ANNEX B
OPINION OF THE FINANCIAL ADVISOR
<PAGE>
[LETTERHEAD]
October 30, 1998
Special Committee of the Board of Directors
C/O Independent Research Agency for Life Insurance, Inc.
USPA&IRA Building
4100 South Hulen Street
P.O. Box 2387
Fort Worth, Texas 76113
Special Committee of the Board of Directors:
You have requested our opinion as to the fairness to the Class A and
Class B shareholders of Independent Research Agency for Life Insurance, Inc.
(the "Company"), from a financial point of view, of the transaction detailed
in the Agreement and Plan of Merger, dated as of October 30, 1998 the
("Merger Agreement"). The Merger Agreement provides for, among other things:
1) a merger of the Company into First Command Financial Corporation (the
"Merger"); 2) the simultaneous exchange of the voting stock of First Command
Financial Corporation for the Class A Voting Common Stock, par value $0.10
per share ("Class A Stock"), of the Company; 3) the simultaneous exchange of
cash for the Class B Non-Voting Common Stock, par value $0.02 per share
("Class B Stock"), of the Company held by Class B stockholders, and not by
Class A stockholders; 4) the simultaneous conversion of the Class B Stock
held by the Class A stockholders into cash or an equivalent amount of
Surviving Corporation Non-Voting Stock (as defined in the Company's proxy
statement); and 5) conversion of the Company's corporate status from
C-Corporation to S-Corporation. Hereafter the foregoing will be collectively
referred to as the Transaction. Prior to the Merger, the Company has created
an incentive compensation plan for agents and employees and has made awards
pursuant to said plan. Subsequent to the Merger, the Surviving Corporation
plans to make additional awards pursuant to the incentive compensation plans
to agents and employees, including those Class B stockholders of the Company
who are still agents or employees at the time of such award.
In connection with our opinion, we have:
(a) considered the terms of the Merger Agreement;
(b) considered various incentive compensation plans implemented by the
Company as of the date of our opinion;
<PAGE>
Special Committee of the Board of Directors
October 30, 1998
Page 2
(c) considered the fact that the benefit of additional compensation (in
the form of future dividend equivalency rights and stock appreciation rights)
will be available to participants in the aforementioned incentive
compensation plans, and thus be unavailable to common stockholders;
(d) considered the financial and operating implications of the
Company's proposed conversion to S-Corporation status;
(e) considered management's ongoing committment to the Company's agents
and the maintenance of the Company's mission and corporate culture;
(f) considered certain financial and other operating information
relating to the Company that was publicly available or furnished to us by the
Company, including cash flow projections prepared by the Company's management;
(g) met with members of the Company's management to discuss the
business, operations, historical financial results and future prospects of the
Company, including the prospective implications of the Company's
S-Corporation election and post transaction incentive plan;
(h) considered certain financial and securities data of the Company and
compared that data with similar data for other companies in businesses
similar to those of the Company;
(i) considered the financial terms of certain recent acquisitions of
companies in businesses similar to those of the Company;
(j) performed a discounted cash flow analysis; and
(k) considered such other information, financial studies, tax opinions,
analysis and investigations and financial, economic and market criteria as we
deemed relevant and appropriate for purposes of this opinion.
The opinion expressed below is subject to the following qualifications
and limitations:
(i) In arriving at our opinion, we have relied upon and assumed,
without independent verification, the accuracy and completeness of all
financial and other information that was publicly available or furnished to
us by the Company. With respect to management's cash flow projections, we
have assumed that they have been reasonably prepared by management and we
accept no responsibility as to their accuracy.
<PAGE>
Special Committee of the Board of Directors
October 30, 1998
Page 3
(ii) We have not made an independent evaluation or appraisal of specific
tangible or intangible assets of the Company, nor have we been furnished with
any such appraisals. We have not been requested to, and did not, solicit
third party indications of interest in acquiring all or any part of the
Company. The Company has indicated that, as of the date of our analysis, an
acquisition of all or any part of the Company was contrary to the Company's
mission and extremely unlikely.
(iii) Our services with respect to the Transaction do not constitute,
nor should they be construed to constitute in any way, a review or audit of
or any other procedures with respect to any financial information nor should
such services be relied upon by any person to disclose weaknesses in internal
controls or financial statement errors or irregularities.
(iv) Our opinion does not address, and should not be construed to
address, either the underlying business decision to effect the Transaction or
whether the consideration to be received by the stockholders in the
Transaction represents the highest price obtainable.
(v) We express no view as to the federal, state or local tax
consequences of the Transaction.
(vi) Our opinion is based on business, economic, market and other
conditions as they exist as of the date of the information provided to us.
(vii) This opinion is effective as of the date hereof. We have no
obligation to update the opinion unless requested by you in writing to do so
and expressly disclaim any responsibility to do so in the absence of any such
request.
Based upon and subject to the foregoing, it is our opinion that as of
the date hereof, the Transaction is fair to the Company's Class A and Class B
stockholders from a financial point of view.
We will receive a fee as compensation for our services in rendering this
opinion. Neither the employment to conduct this analysis, nor the
compensation for this engagement, is contingent upon conclusions ultimately
reported.
<PAGE>
Special Committee of the Board of Directors
October 30, 1998
Page 4
This letter is for the information of the Special Committee of the
Board of Directors, in their capacity as advisors to the Board of Directors
of the Company, and the Board of Directors, in connection with the
Transaction described herein. This opinion may not be quoted or referred to,
in whole or in part, filed with, or furnished or disclosed to any other
party, or used for any other purpose, without our prior written consent.
PricewaterhouseCoopers LLP has agreed to permit the Company to include
PricewaterhouseCoopers LLP's opinion, in its entirety, in the proxy statement
filed by the Company with the Securities and Exchange Commission in
connection with the Transaction.
Very truly yours,
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
<PAGE>
ANNEX C
PROVISIONS OF THE TEXAS BUSINESS CORPORATION ACT
RELATING TO
RIGHTS OF DISSENTING SHAREHOLDERS
<PAGE>
PROVISIONS OF THE TEXAS BUSINESS CORPORATION ACT
RELATING TO
RIGHTS OF DISSENTING SHAREHOLDERS
(Articles 5.11 through 5.13)
Article 5.11. Rights of Dissenting Shareholders in the Event of Certain
Corporate Actions
A. Any shareholder of a domestic corporation shall have the right to
dissent from any of the following corporate actions:
(1) Any plan of merger to which the corporation is a party if
shareholder approval is required by Article 5.03 or 5.16 of this Act and
the shareholder holds shares of a class or series that was entitled to vote
thereon as a class or otherwise;
(2) Any sale, lease, exchange or other disposition (not including any
pledge, mortgage, deed of trust or trust indenture unless otherwise
provided in the articles of incorporation) of all, or substantially all,
the property and assets, with or without good will, of a corporation if
special authorization of the shareholders is required by this Act and the
shareholders hold shares of a class or series that was entitled to vote
thereon as a class or otherwise;
(3) Any plan of exchange pursuant to Article 5.02 of this Act in which
the shares of the corporation of the class or series held by the
shareholder are to be acquired.
B. Notwithstanding the provisions of Section A of this Article, a
shareholder shall not have the right to dissent from any plan of merger in which
there is a single surviving or new domestic or foreign corporation, or from any
plan of exchange, if:
(1) the shares held by the shareholder are part of a class or series,
shares of which are on the record date fixed to determine the shareholders
entitled to vote on the plan of merger or plan of exchange:
(a) listed on a national securities exchange;
(b) listed on the Nasdaq Stock Market (or successor
quotation system) or designated as a national market security on
an interdealer quotation system by the National Association of
Securities Dealers, Inc., or successor entity; or
(c) held of record by not less than 2,000 holders;
(2) the shareholder is not required by the terms of the plan of merger
or plan of exchange to accept for the shareholder's shares any
consideration that is different than the consideration (other than cash in
lieu of fractional shares that the shareholder would otherwise be entitled
to receive) to be provided to any other holder of shares of the same class
or series of shares held by such shareholder; and
(3) the shareholder is not required by the terms of the plan of merger
or the plan of exchange to accept for the shareholder's shares any
consideration other than:
(a) shares of a domestic or foreign corporation that,
immediately after the effective time of the merger or exchange,
will be part of a class or series, shares of which are:
(i) listed, or authorized for listing upon official
notice of issuance, on a national securities exchange;
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(ii) approved for quotation as a national market
security on an interdealer quotation system by the National
Association of Securities Dealers, Inc., or successor
entity; or
(iii) held of record by not less than 2,000 holders;
(b) cash in lieu of fractional shares otherwise entitled to
be received; or
(c) any combination of the securities and cash described in
Subdivisions (a) and (b) of this subsection.
Article 5.12. Procedure for Dissent by Shareholders as to Said Corporate
Actions
A. Any shareholder of any domestic corporation who has the right to dissent
from any of the corporate actions referred to in Article 5.11 of this Act may
exercise that right to dissent only by complying with the following procedures:
(1)(a) With respect to proposed corporate action that is submitted to
a vote of shareholders at a meeting, the shareholder shall file with the
corporation, prior to the meeting, a written objection to the action,
setting out that the shareholder's right to dissent will be exercised if
the action is effective and giving the shareholder's address, to which
notice thereof shall be delivered or mailed in that event. If the action is
effected and the shareholder shall not have voted in favor of the action,
the corporation, in the case of action other than a merger, or the
surviving or new corporation (foreign or domestic) or other entity that is
liable to discharge the shareholder's right of dissent, in the case of a
merger, shall, within ten (10) days after the action is effected, deliver
or mail to the shareholder written notice that the action has been
effected, and the shareholder may, within ten (10) days from the delivery
or mailing of the notice, make written demand on the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case may
be, for payment of the fair value of the shareholder's shares. The fair
value of the shares shall be the value thereof as of the day immediately
preceding the meeting, excluding any appreciation or depreciation in
anticipation of the proposed action. The demand shall state the number and
class of the shares owned by the shareholder and the fair value of the
shares as estimated by the shareholder. Any shareholder failing to make
demand within the ten (10) day period shall be bound by the action.
(b) With respect to proposed corporate action that is approved
pursuant to Section A of Article 9.10 of this Act, the corporation, in the
case of action other than a merger, and the surviving or new corporation
(foreign or domestic) or other entity that is liable to discharge the
shareholder's right of dissent, in the case of a merger, shall, within ten
(10) days after the date the action is effected, mail to each shareholder
of record as of the effective date of the action notice of the fact and
date of the action and that the shareholder may exercise the shareholder's
right to dissent from the action. The notice shall be accompanied by a copy
of this Article and any articles or documents filed by the corporation with
the Secretary of State to effect the action. If the shareholder shall not
have consented to the taking of the action, the shareholder may, within
twenty (20) days after the mailing of the notice, make written demand on
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, for payment of the fair value of the
shareholder's shares. The fair value of the shares shall be the value
thereof as of the date the written consent authorizing the action was
delivered to the corporation pursuant to Section A of Article 9.10 of this
Act, excluding any appreciation or depreciation in anticipation of the
action. The demand shall state the number and class of shares owned by the
dissenting shareholder and the fair value of the shares as estimated by the
shareholder. Any shareholder failing to make demand within the twenty (20)
day period shall be bound by the action.
(2) Within twenty (20) days after receipt by the existing, surviving,
or new corporation (foreign or domestic) or other entity, as the case may
be, of a demand for payment made by a dissenting
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shareholder in accordance with Subsection (1) of this Section, the
corporation (foreign or domestic) or other entity shall deliver or mail
to the shareholder a written notice that shall either set out that the
corporation (foreign or domestic) or other entity accepts the amount
claimed in the demand and agrees to pay that amount within ninety (90)
days after the date on which the action was effected, and, in the case
of shares represented by certificates, upon the surrender of the
certificates duly endorsed, or shall contain an estimate by the
corporation (foreign or domestic) or other entity of the fair value of
the shares, together with an offer to pay the amount of that estimate
within ninety (90) days after the date on which the action was
effected, upon receipt of notice within sixty (60) days after that date
from the shareholder that the shareholder agrees to accept that amount
and, in the case of shares represented by certificates, upon the
surrender of the certificates duly endorsed.
(3) If, within sixty (60) days after the date on which the
corporate action was effected, the value of the shares is agreed upon
between the shareholder and the existing, surviving, or new corporation
(foreign or domestic) or other entity, as the case may be, payment for
the shares shall be made within ninety (90) days after the date on
which the action was effected and, in the case of shares represented by
certificates, upon surrender of the certificates duly endorsed. Upon
payment of the agreed value, the shareholder shall cease to have any
interest in the shares or in the corporation.
B. If, within the period of sixty (60) days after the date on which the
corporate action was effected, the shareholder and the existing, surviving, or
new corporation (foreign or domestic) or other entity, as the case may be, do
not so agree, then the shareholder or the corporation (foreign or domestic) or
other entity may, within sixty (60) days after the expiration of the sixty (60)
day period, file a petition in any court of competent jurisdiction in the county
in which the principal office of the domestic corporation is located, asking for
a finding and determination of the fair value of the shareholder's shares. Upon
the filing of any such petition by the shareholder, service of a copy thereof
shall be made upon the corporation (foreign or domestic) or other entity, which
shall, within ten (10) days after service, file in the office of the clerk of
the court in which the petition was filed a list containing the names and
addresses of all shareholders of the domestic corporation who have demanded
payment for their shares and with whom agreements as to the value of their
shares have not been reached by the corporation (foreign or domestic) or other
entity. If the petition shall be filed by the corporation (foreign or domestic)
or other entity, the petition shall be accompanied by such a list. The clerk of
the court shall give notice of the time and place fixed for the hearing of the
petition by registered mail to the corporation (foreign or domestic) or other
entity and to the shareholders named on the list at the addresses therein
stated. The forms of the notices by mail shall be approved by the court. All
shareholders thus notified and the corporation (foreign or domestic) or other
entity shall thereafter be bound by the final judgment of the court.
C. After the hearing of the petition, the court shall determine the
shareholders who have complied with the provisions of this Article and have
become entitled to the valuation of and payment for their shares, and shall
appoint one or more qualified appraisers to determine that value. The appraisers
shall have power to examine any of the books and records of the corporation the
shares of which they are charged with the duty of valuing, and they shall make a
determination of the fair value of the shares upon such investigation as to them
may seem proper. The appraisers shall also afford a reasonable opportunity to
the parties interested to submit to them pertinent evidence as to the value of
the shares. The appraisers shall also have such power and authority as may be
conferred on Masters in Chancery by the Rules of Civil Procedure or by the order
of their appointment.
D. The appraisers shall determine the fair value of the shares of the
shareholders adjudged by the court to be entitled to payment for their shares
and shall file their report of their value in the office of the clerk of the
court. Notice of the filing of the report shall be given by the clerk to the
parties in interest. The report shall be subject to exceptions to be heard
before the court both upon the law and the facts. The court shall by its
judgment determine the fair value of the shares of the shareholders entitled to
payment for their shares and shall direct the payment of that value by the
existing, surviving, or new corporation (foreign or domestic) or other entity,
together with interest thereon, beginning 91 days after the date on which the
applicable corporate action from which the shareholder elected to dissent was
effected to the date of such judgment, to the shareholders entitled to payment.
The
C-4
<PAGE>
judgment shall be payable to the holders of uncertificated shares
immediately but to the holders of shares represented by certificates only upon,
and simultaneously with, the surrender to the existing, surviving, or new
corporation (foreign or domestic) or other entity, as the case may be, of duly
endorsed certificates for those shares. Upon payment of the judgment, the
dissenting shareholders shall cease to have any interest in those shares or in
the corporation. The court shall allow the appraisers a reasonable fee as court
costs, and all court costs shall be allotted between the parties in the manner
that the court determines to be fair and equitable.
E. Shares acquired by the existing, surviving, or new corporation (foreign
or domestic) or other entity, as the case may be, pursuant to the payment of the
agreed value of the shares or pursuant to payment of the judgment entered for
the value of the shares, as in this Article provided, shall, in the case of a
merger, be treated as provided in the plan of merger and, in all other cases,
may be held and disposed of by the corporation as in the case of other treasury
shares.
F. The provisions of this Article shall not apply to a merger if, on the
date of the filing of the articles of merger, the surviving corporation is the
owner of all the outstanding shares of the other corporations, domestic or
foreign, that are parties to the merger.
G. In the absence of fraud in the transaction, the remedy provided by this
Article to a shareholder objecting to any corporate action referred to in
Article 5.11 of this Act is the exclusive remedy for the recovery of the value
of his shares or money damages to the shareholder with respect to the action. If
the existing, surviving, or new corporation (foreign or domestic) or other
entity, as the case may be, complies with the requirements of this Article, any
shareholder who fails to comply with the requirements of this Article shall not
be entitled to bring suit for the recovery of the value of his shares or money
damages to the shareholder with respect to the action.
Article 5.13. Provisions Affecting Remedies of Dissenting Shareholders
A. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act shall not thereafter be entitled to
vote or exercise any other rights of a shareholder except the right to receive
payment for his shares pursuant to the provisions of those articles and the
right to maintain an appropriate action to obtain relief on the ground that the
corporate action would be or was fraudulent, and the respective shares for which
payment has been demanded shall not thereafter be considered outstanding for the
purposes of any subsequent vote of shareholders.
B. Upon receiving a demand for payment from any dissenting shareholder, the
corporation shall make an appropriate notation thereof in its shareholder
records. Within twenty (20) days after demanding payment for his shares in
accordance with either Article 5.12 or 5.16 of this Act, each holder of
certificates representing shares so demanding payment shall submit such
certificates to the corporation for notation thereon that such demand has been
made. The failure of holders of certificated shares to do so shall, at the
option of the corporation, terminate such shareholder's rights under Articles
5.12 and 5.16 of this Act unless a court of competent jurisdiction for good and
sufficient cause shown shall otherwise direct. If uncertificated shares for
which payment has been demanded or shares represented by a certificate on which
notation has been so made shall be transferred, any new certificate issued
therefor shall bear similar notation together with the name of the original
dissenting holder of such shares and a transferee of such shares shall acquire
by such transfer no rights in the corporation other than those which the
original dissenting shareholder had after making demand for payment of the fair
value thereof.
C. Any shareholder who has demanded payment for his shares in accordance
with either Article 5.12 or 5.16 of this Act may withdraw such demand at any
time before payment for his shares or before any petition has been filed
pursuant to Article 5.12 or 5.16 of this Act asking for a finding and
determination of the fair value of such shares, but no such demand may be
withdrawn after such payment has been made or, unless the corporation shall
consent thereto, after any such petition has been filed. If, however, such
demand shall be withdrawn as hereinbefore provided, or if pursuant to Section B
of this Article the corporation shall terminate the shareholder's rights under
Article 5.12 of 5.16 of this Act, as the case may be, or if no petition asking
for a finding and determination of fair
C-5
<PAGE>
value of such shares by a court shall have been filed within the time provided
in Article 5.12 or 5.16 of this Act, as the case may be, or if after the hearing
of a petition filed pursuant to Article 5.12 or 5.16, the court shall determine
that such shareholder is not entitled to the relief provided by those articles,
then, in any such case, such shareholder and all persons claiming under him
shall be conclusively presumed to have approved and ratified the corporate
action from which he dissented and shall be bound thereby, the right of such
shareholder to be paid the fair value of his shares shall cease, and his status
as a shareholder shall be restored without prejudice to any corporate
proceedings which may have been taken during the interim, and such shareholders
shall be entitled to receive any dividends or other distributions made to
shareholders in the interim.
C-6
<PAGE>
ANNEX D
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
AND
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1998, AND AS AMENDED ON SEPTEMBER 9, 1998
<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934. For the fiscal year ended September 30, 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 33-56402-FW
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1731373
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4100 South Hulen Street, Fort Worth, Texas 76109
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (817) 731-8621
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
Class B Nonvoting Common Stock
(Title of Class)
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 the 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 )
As of December 1, 1997, all of the voting common stock of the Registrant was
held by affiliates of the Registrant. The aggregate market value of the voting
common stock held by non-affiliates was $ -0-.
As of December 1, 1997, the following number of shares of common stock were
outstanding:
<TABLE>
<CAPTION>
<S> <C>
Class A - Voting $ .02 par - 25
Class B - Non-Voting $ .02 par - 996,680
</TABLE>
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
<S> <C>
Location in Form 10-K Incorporated Documents
Part IV, Item 14 - Exhibits - Page 41 Articles of Incorporation
and Bylaws, and stock agreements in
Exhibit 3 and 10 of Company's Form
S-1 Registration Statement Filed in
May, 1997
</TABLE>
Total number of pages, including cover page - 44
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
<S> <C> <C>
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . 4
Item 3. Legal Proceedings. . .. . . . . . . . . . . . . . . . . . 5
Item 4. Submission of Matters to a Vote
of Security Holders. . . . . . . . . . . . . . . . . . . 5
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . 6
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . .. . . . . . 8
Item 8. Financial Statements and Supplementary Data.. . . . . . .11
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures. . . . . . . . .33
PART III
Item 10. Directors and Executive Officers of the Registrant. . . .34
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . .37
Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . .38
Item 13. Certain Relationships and Related Transactions. . . . . .40
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 41
</TABLE>
<PAGE>
PART I
ITEM 1 - BUSINESS
General Statement of Company's Purpose
The primary business purpose of Independent Research Agency for Life Insurance,
Inc. ("the Company") and its insurance agency subsidiaries is the sale of life
insurance and, through its subsidiary, United Services Planning Association,
Inc., the sale of mutual funds to active duty and former commissioned, warrant
and noncommissioned officers of the United States Military services and their
families. Additionally, the Company formed a de novo federal savings bank during
1997 to generate commercial and consumer loans and receive deposits primarily
from clients of the Company and its subsidiaries. The Company's Board of
Directors considers profit secondary to expanded service to its clientele.
History of the Company
The Company began operations in January 1964, as a sole proprietorship owned by
Carroll H. Payne, doing business as the "Carroll H. Payne Agency." On January 1,
1971, the name was changed to "Independent Research Agency for Life Insurance."
On January 1, 1977, the Company was organized as a partnership (IRA Partnership)
under the general partnership laws of the state of Texas. On March 9, 1981, the
IRA Partnership exchanged all of its assets relating to the operation of its
life insurance business (substantially all of its assets) to Independent
Research Agency for Life Insurance, Inc., a corporation formed by the partners
of IRA Partnership under the laws of the state of Texas on December 9, 1980.
Thereafter, IRA Partnership continued in existence under another name, but all
of its former life insurance operations are now owned and conducted by the
Company. The IRA Partnership was dissolved in 1992.
One of the partnership assets acquired by the Company was all of the shares of
"Independent Research Agency for Life Insurance, Inc.," a Hawaii corporation,
incorporated under the laws of the state of Hawaii on September 14, 1979. It is
a wholly-owned subsidiary of the Company and is a life insurance general agency
in the state of Hawaii.
On March 9, 1981, the Company acquired all of the shares of United Services
Planning Association, Inc. ("USPA"), a corporation incorporated under the laws
of the state of Texas on November 24, 1958, and USPA is a wholly-owned
subsidiary of the Company.
On April 28, 1982, the Company formed a wholly-owned subsidiary, "Independent
Research Agency for Life Insurance, Inc.," a Wyoming corporation. On February
14, 1983, the Company formed a wholly-owned subsidiary, "Independent Research
Agency for Life Insurance, Inc.," a Montana corporation. On September 2, 1983,
the Company formed a wholly-owned subsidiary, "Independent Research Agency (New
York), Inc.," a New York corporation. On January 15, 1988, the Company formed a
wholly-owned subsidiary, "Independent Research Agency for Life Insurance, Inc.,"
a Nevada corporation. On June 28, 1994, the Company formed a wholly-owned
subsidiary, "Independent Research Agency for Life Insurance, Inc.," an Alabama
Corporation. These five subsidiaries are life insurance general agencies in the
states where formed.
On March 21, 1997, the Company formed a wholly-owned subsidiary, "First Command
Bank", a federal savings bank (the "Bank"). The Bank began operations on April
21, 1997.
In addition, the Company markets a relatively small number of variable annuities
through one insurance carrier.
<PAGE>
PART I
ITEM 1 - BUSINESS - Continued
Insurance Agency Operations
As an insurance agency, the Company markets insurance products offered by
several insurance carriers. These products are individual whole life and term
life insurance policies. In addition, the Company markets a relatively small
number of variable annuities through one insurance carrier. The Company is
authorized to market an insurance carrier's products by entering into an agency
agreement with the carrier. A typical agency agreement allows the Company to
solicit applications for insurance and to submit the applications to the carrier
for approval, as well as to deliver policies issued by the carrier. The Company
and its insurance agency subsidiaries have agency agreements with ten insurance
carriers. Consistent with industry practice, all the agreements to which the
Company and its subsidiaries are parties are terminable at will or upon very
short notice.
The Company's income is derived principally from commissions earned from the
sale of insurance products. Commissions are generally a percentage of the
premiums paid by clients. The Company has loan agreements with five of the
insurance carriers it represents as general agent whereby the carriers loan an
amount to the Company equal to the difference between the total amount of first
year commissions to be earned by the Company on certain insurance policies sold
by its agents and the amount of the commissions actually earned by the Company
as of any particular date. The total amount of such loans increased to
$15,842,192 as of September 30, 1997 from $10,458,853 as of September 30, 1996,
due to a shift in sales of policies from carriers with whom the Company does
have such loan agreements. Each of the loan agreements provides that the
outstanding balance of any loan be repaid immediately by the Company if the
policy upon which the loan was calculated is cancelled during its first year.
Historically, less than five percent (5%) of the policies sold by the Company
are cancelled during the first year of the policy.
For the fiscal years ended September 30, 1997, 1996, and 1995 the commissions
earned by the Company from insurance carriers for insurance solicited by it and
the percentage thereof of total commission revenue (shown parenthetically) were
$77,158,888 (63%), $72,975,873 (63%), and $69,165,124 (64%), respectively.
(Total commission revenue represents gross revenue
before deduction of commissions to registered representatives/agents and
other expenses of operation.)
The Company's business is dependent upon its market of active duty and former
members of the United States military services and their families. The Company's
sales force has never sold competitively in the open civilian market, and the
Company has no plans to attempt to sell to such market. In management's view,
the Company is not reliant upon its relationship with any one insurance carrier,
as it can substitute carriers if needed under similar terms.
Investment Sales Operations
The Company's subsidiary USPA is a broker-dealer of several different mutual
funds pursuant to written agreements with the investment companies. USPA has the
non-exclusive right to sell shares of these mutual funds through its agents and
receives commissions from such sales. These sales are principally of mutual
funds which have the stated objective of long term capital growth, through
systematic investment plans or open account brokerage arrangements depending on
suitability considerations. USPA is not obligated to meet any stated sales
volume for any particular mutual fund. USPA does not bear any part of the cost
of printing prospectuses used in connection with any mutual fund offering nor
does it bear the costs of supplemental sales literature, promotion or
<PAGE>
PART I
ITEM 1 - BUSINESS - Continued
Investment Sales Operations - Continued
advertising. The agreements between USPA and the investment companies are
continuous and provide for termination without penalty by either party on
written notice. For the fiscal years ended September 30, 1997, 1996 and 1995,
commissions earned on the sale of shares of mutual funds and the percentage
thereof of total commission revenue (shown parenthetically) were $45,170,713
(37%), $43,656,196 (37%), and $39,278,686 (36%) respectively. (Total commission
revenue represents gross revenue before deduction of commissions to registered
representatives/agents and other expenses of operation.)
Banking Operations
The Company has established First Command Bank (the "Bank"), a federal savings
bank, to offer consumer banking products and services to the Company's clients.
As a federally chartered savings association, the Bank is subject to the primary
supervision of the Office of Thrift Supervision. The Bank was formed on March
21, 1997, and was approved to accept deposits and commence operations on April
21, 1997. The Bank is a wholly-owned subsidiary of the Company and has been
initially capitalized by the Company for $6 million which was drawn from current
liquid assets of the Company. For the period ended September 30, 1997, the Bank
had net interest income after provision for loan losses of $48,095.
Marketing
The Company offers life insurance products, and through USPA, mutual fund
products in the states in which it and its subsidiaries are authorized to do
business, through independent licensed agents who are paid on a commission
basis. The Company offers consumer banking products and services to its clients
through First Command Bank. The selling efforts of the Company are concentrated
on U.S. career military personnel and sales to existing clients formerly on
active duty. Management believes that the products offered (and, in the case of
life insurance products, the benefits and premium rates related thereto) are
generally competitive with those of other such products available for sale in
its market. The Company believes that its most valuable asset is its trained and
established force of field representatives. The Company's average number of
agents during fiscal 1997 was 623. As of September 30, 1997 the Company had 665
agents appointed.
The Company's analysis of the impact of base closures and force reduction in the
U.S. military indicates to the Company a minimal impact upon existing agents in
the field and a market which will continue to present an opportunity for growth
of the Company's business. Specifically, the Company estimates that it will
still be selling, and providing service, to less than twenty-five percent of its
potential overall market (Rank of E-6 and above including all warrant and
commissioned officer ranks) during the forthcoming year.
During fiscal year 1997, the Company's sales efforts resulted in over 47,382
life insurance applications being filed with new coverage exceeding $3.7
billion. Total insurance in force now exceeds $29.8 billion. In addition, during
fiscal year 1997, nearly 57,087 mutual fund applications were processed. These
applications have a face value of $1.12 billion. The Company's clients now have
more than $11.9 billion invested in mutual funds. The Company, through the Bank,
opened approximately 2,600 customer deposit accounts for over $13 million and
originated over 1,000 customer loans for over $17 million.
<PAGE>
PART I
ITEM 1 - BUSINESS - Continued
Regulation and Competition
The insurance, securities and banking industries are heavily regulated as to
trade practices. State insurance laws and regulations are particularly
restrictive as to the advertising and solicitation of insurance. Agents of the
Company are duly examined and licensed and must be continually aware of such
regulations and comply fully at all times. Neither the Company nor its
predecessors have ever been required to cease doing business in any locale as
the result of a violation of such laws and regulations. USPA is subject to both
federal and state regulation as a broker-dealer of securities. Securities laws
are most stringent as to the advertising of, solicitation of, accounting for,
and general representation of securities sold. Representatives of USPA must be
registered representatives of the National Association of Securities Dealers,
Inc. ("NASD"), and licensed with the Securities Department in the state in which
they represent USPA. Neither USPA nor any of its representatives has ever been
fined, suspended, or required to cease doing business in any locale as the
result of a violation of NASD or state laws, rules, or regulations. The
Company's federal savings bank operations, which were established to provide
consumer banking products and services to the Company's clients, are subject to
the primary supervision of the Office of Thrift Supervision.
Competition is keen in the life insurance, securities and consumer banking
businesses. A number of life insurance companies are engaged in sales to
military personnel, offering a variety of policies. These competitors are also
able, through affiliations with securities organizations, to offer investments
to military personnel in competition with USPA. Additionally, military personnel
are offered a number of other specialized savings and investment opportunities,
by other organizations such as banks and credit unions. The Company's sales
force has never sold competitively in the open civilian market.
Taxation of the Company.
The Company will be taxed under the usual practices of taxation applicable to
corporations.
Personnel
The Company utilizes the services of personnel employed by USPA and the Bank,
for which it reimburses them. USPA employs approximately three hundred and eight
(308) people full time at present, whose functions are administrative and sales
supportive. The Bank presently employs fourteen (14) people to service its
current customers. All insurance and mutual fund sales by the Company and USPA
are made by independent contractor agents, of which there are approximately six
hundred and sixty-five (665).
ITEM 2 - PROPERTIES
The Company owns, unencumbered, the building at 4100 South Hulen Street, Fort
Worth, Texas, in which its home office operation is conducted. A portion
(approximately 4%) of this 128,000 square foot building is being leased to third
parties. The Company owns one residential property in Fort Worth, Tarrant
County, Texas, which is currently rented on a month to month basis to the
Company's Director of Training. Monthly rent is currently paid to the Company
for that portion of such residence personally used by this employee. The rent
paid is $1,000 per month. The management of the Company considers the above
monthly rent to be fair and reasonable in the view of the amount of personal
living space rented in the residence by this individual. This residential
<PAGE>
PART I
ITEM 2 - PROPERTIES - Continued
property has traditionally been used for lodging of visiting agents, and
entertainment of prospective agents and current agents. Some of these business
guests remain for conferences and seminars conducted by the Company for periods
from one to fourteen days. The Company also owns approximately nine motor
vehicles and substantial office equipment, including printing and computer
equipment.
ITEM 3 - LEGAL PROCEEDINGS
During the ordinary course of business the Company is subject to litigation from
a number of areas. Currently, the Company is involved in one law suit filed
after the end of its fiscal year, which management believes is without merit and
has a very low probability of loss.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
<PAGE>
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
There is presently no market for the Company's common stock, of either class,
and it is very unlikely that a market will develop in the future. As an
insurance agency incorporated in Texas, only insurance agents licensed in Texas
can, under Texas law, own the Company's stock. Therefore, the stock price cannot
be and is not determined by actions and considerations of any such market.
Number of Security Holders
As of December 1, 1997, the Company had 14 stockholders of record of its Class A
- - voting common stock, and 535 stockholders of record of its Class B -
non-voting common stock.
Dividend History and Restriction
Holders of common shares are generally entitled to receive dividends as may be
declared by the Board of Directors from funds legally available therefor.
Although the Company has paid dividends on its common shares in the years 1987,
1988, 1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996 and 1997 no assurance can
be given that any dividends will be declared and paid in the future. Future
dividend policies shall be subject to the discretion of the Board of Directors
and will depend upon a number of factors, including, among other things, future
earnings, capital requirements, (particularly capital needed for rapid growth or
a major business initiative), war, and the financial condition of the Company,
any one of which could cause the Company to be unable to pay dividends in one or
more years. There are currently no legal or contractual restrictions that
materially limit the Company's ability to pay dividends.
Following is a history of the dividends paid by the Company since inception.
Dividends have only been paid on its Class B - non-voting common stock.
<TABLE>
<CAPTION>
Date of Record Payment Date Per Share
<S> <C> <C>
October 20, 1987 ........... December 3, 1987 $8.00
September 30, 1988 ......... November 30, 1988 2.10
September 30, 1989 ......... November 30, 1989 2.65
September 30, 1990 ......... November 28, 1990 3.00
September 30, 1991 ......... November 30, 1991 4.00
September 30, 1992 ......... December 1, 1992 6.59
September 30, 1993 ......... December 1, 1993 7.31
September 30, 1994 ......... December 1, 1994 4.88
September 30, 1995 ......... December 1, 1995 4.50
September 30, 1996 ......... December 2, 1996 7.63
September 30, 1997 ......... December 1, 1997 7.73
</TABLE>
On October 31, 1988, the Company's stockholders approved an amendment to the
Company's Articles of Incorporation whereby the Company's Class B common stock
would split on a basis of five new shares for each one share then outstanding.
The par value of the stock was correspondingly reduced from a par value of $.10
per share to a par value of $.02 per share. The stock split became effective on
November 1, 1988.
<PAGE>
PART II
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for the five years ended September 30, 1993 through 1997. This
information should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and the financial
statements and related notes thereto included elsewhere herein. The selected
consolidated financial data was derived from the audited financial statements of
the Company.
<TABLE>
<CAPTION>
Years Ended September 30,
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Commissions Revenue .......... $ 122,329,601 $ 116,632,069 $ 108,443,810 $ 100,491,633 $ 93,767,954
Bank Operations .............. 58,458 -0- -0- -0- -0-
Operating Expenses ........... (113,528,791) (109,040,366) (102,510,314) (93,421,636) (86,224,269)
Operating Income ............. 8,859,268 7,591,703 5,933,496 7,069,997 7,543,685
Other Income ................. 5,216,114 3,719,793 4,201,478 3,464,253 3,280,284
Income before Income Taxes ... 14,075,382 11,311,496 10,134,974 10,534,250 10,823,969
Income Taxes ................. (4,639,886) (3,842,639) (3,417,024) (3,561,062) (3,567,212)
Net Income ................... $ 9,435,496 $ 7,468,857 $ 6,717,950 $ 6,973,188 $ 7,256,757
Earnings Per Share ........... $ 10.06 $ 7.97 $ 7.18 $ 7.51 $ 7.65
Cash Dividends Declared ...... $ 7.73 $ 7.63 $ 4.50 $ 4.88 $ 7.31
Balance Sheet Data:
Working Capital (Deficit) .... $ (9,534,501) $ (3,816,198) $ (5,876,390) $ (6,577,744) $ (2,510,885)
(1) Loans from Insurance
Companies (Included in working
capital) .................... 15,842,192 10,458,853 12,319,485 11,128,518 10,681,383
Bank Assets ................... 22,062,980 -0- -0- -0- -0-
Total Assets .................. 125,896,308 88,689,932 79,634,999 66,095,600 54,590,033
Bank Liabilities .............. 13,437,520 -0- -0- -0- -0-
Long-Term Obligations ........ 25,127,512 16,998,700 12,376,835 7,256,834 3,006,623
Stockholders' Equity .......... 53,936,083 43,948,707 40,014,745 32,193,799 29,121,614
</TABLE>
(1) This loan balance will continue to perpetuate as long as the Company does
business with these insurance companies as they have done in the past.
<PAGE>
PART II
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
During the year ended September 30, 1997, the demand for life insurance and
mutual fund investments marketed by the Company to U.S. military personnel
remained strong and total current sales continued to increase. Commission
revenue for the year ended September 30, 1997 increased 4.9% to $122,329,60 from
$116,632,069 recorded during the year ended September 30, 1996. This compares to
a 7.6% increase from fiscal year 1995 to 1996. After factoring in the recent low
inflation rates, the increase in commission revenue of 4.9% is comparable to the
past several years. These variances are attributable to IRA, Inc. and each of
its subsidiaries. This overall increase in commission revenue is considered to
be continuing a trend which has occurred over the past several years, and is
expected to continue in the future due to the long term personal financial
management philosophy espoused to clients, an effectively trained sales force
and efficient marketing practices used by the Company's sales agents.
First Command Bank commenced operations on April 21, 1997. Through strong loan
and deposit growth combined with an initial capitalization of $6 million from
IRA, Inc., net interest income totaled $308,295. This income was partially
offset by a $260,200 provision for loan losses on loans funded during the
period.
The overall growth in commission revenue occurred at a higher rate for insurance
sales than it did for mutual fund sales. During the past fiscal year commission
revenue for insurance sales increased 5.7% to $77,158,888 and commission revenue
for mutual fund sales increased 3.5% to $45,170,713. The percentage increases
from fiscal year 1995 to 1996 were 5.5% and 11.1%, respectively, for insurance
and mutual fund sales.
The Company's analysis of the impact of base closures and force reduction in the
U.S. military indicates to the Company a minimal impact upon existing agents in
the field and a market which will continue to present an opportunity for growth
of the Company's business. Specifically, the Company estimates that it will
still be selling, and providing service, to less than twenty-five percent of its
potential overall market (Rank of E-6 and above including all warrant and
commissioned officer ranks) during the forthcoming year.
Commissions, incentive commissions, and agent expenses for the years ended
September 30, 1997 and 1996 increased 1.7% and 7.2%, respectively, in the
aggregate. Generally, in the past there has been a constant relationship between
commission revenues and commission and agent expenses. The growth of insurance
commission revenues have occurred more from trail commissions than from
first-year commissions. Agents are generally only paid commissions during the
first year following a sale.
It is very likely that this trend of a decrease in the percentage growth of
commissions and agent expenses will continue due to the growing proportion of
the future increase in commission revenue resulting from trail commissions. The
Company receives reduced commissions for several years subsequent to the actual
sale, whereas the agents are generally paid commissions for only twelve months
after a sale. Therefore, commissions and agent expenses could continue to
decrease in relation to commission revenue.
<PAGE>
PART II
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Results of Operations - Continued
General and administrative expenses for the years ended September 30, 1997 and
1996 increased $2,988,813 or 13.1% and $728,499 or 3.3%, respectively, over
their prior years. The increase from 1995 to 1996 is considered a
general inflationary increase. The increase from 1996 to 1997 is primarily due
to costs involved in the redesign of field and home office software. This
redesign will result in improved efficiencies in both personnel and computer
hardware costs in the future. In addition, start-up costs associated with First
Command Bank and general inflationary factors contributed to higher operating
costs.
The total of other income for the year ended September 30, 1997 increased
$1,496,321 to $5,216,114. The total of other income for the year ended September
30, 1996 increased $481,685 from the prior year. These fluctuations of other
income are mainly due to mutual fund distributions. Income before income taxes
has remained fairly constant as a percentage of commission revenues for the past
few years. For the years ended September 30, 1997, 1996 and 1995 income before
income taxes has been 11.5%, 9.7% and 9.3% of total commission revenues.
Liquidity and Financial Resources
The Company has operated with a working capital deficiency during all of the
periods presented in the accompanying selected financial data. The Company has
been able to do this because of its loans from insurance companies. As long as
the Company continues to do business in this manner with these insurance
companies (there are no current intentions to change) the loan balance will
continue to replenish itself from new first year insurance commission loans. The
Company had a ratio of current assets to current liabilities of .71 to 1 and .86
to 1 at September 30, 1997 and 1996, respectively. The current ratios when
excluding the loans from insurance companies balances are 1.36 to 1 and 1.38 to
1, respectively.
The Company had a net increase of $4,186,974 in cash and cash equivalents from
the prior year. As reflected in the statement of cash flows, net cash provided
by operating activities continued to remain strong. An additional source of
increased cash flows came from loans from insurance companies.
The Company has land adjacent to its current headquarters which is intended to
be used as a site for the construction of an additional office building and
parking garage. The Company estimates that it will need $20,000,000 of capital
for the construction of this additional office facility for the Home Office. The
remaining retained earnings of the Company have been accumulated in anticipation
of other future capital expenditures and as an additional reserve against
contingencies.
These retained earnings have for the most part been invested in equity and money
market mutual funds. The equity mutual funds have been classified as noncurrent
assets since there are no intentions to liquidate these investments during the
next year.
<PAGE>
PART II
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - Continued
Liquidity and Financial Resources - Continued
From its inception, the Company has purchased the Company stock owned by agents
and employees when their active association with the Companies ended. During the
years ended September 30, 1997 and 1996 the Company redeemed 78,485 shares and
129,963 shares, respectively. The Company will continue this policy so as to
limit stock ownership to those actively involved in the business.
During the years ended September 30, 1997 and 1996, 149,050 and 104,700 shares
of Class B, non-voting common stock were issued from Treasury Stock at $27.04
and $26.56 per share, respectively. These stock offerings were accomplished
using registration statement Form S-1. The primary purpose of these offerings
was to provide the Company's agents with an opportunity to purchase shares of
the Company. The net proceeds are used for the continuing operation of the
Company's business, for further development and expansion, and for limited
contingency planning. It is not anticipated that any part of
the net proceeds will be used for the purpose of retiring or reducing any
indebtedness of the Company.
Return on total equity was 21% and 19% for 1997 and 1996, respectively.
Management has goals of maintaining a return of 15% to 25% in the future.
Presently, the Company has no debt outstanding under its $1,000,000 revolving
line of credit. The Company feels that, between its current cash position and
the working capital generated by operations, it should meet normal financing
requirements. The Company's future building expansion may be partially debt
financed due to the current low interest rate environment.
<PAGE>
PART II
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements
The accompanying consolidated financial statements of Independent Research
Agency for Life Insurance, Inc. and Subsidiaries as of September 30, 1997, 1996
and 1995 and for the years ended September 30, 1997, 1996 and 1995 are presented
in accordance with Regulation S-X and in conformity with generally accepted
accounting principles, as required. Independent Research Agency for Life
Insurance, Inc. is subject to the reporting requirements of Section 13(a) of the
Securities Exchange Act of 1934. The Company is subject to the informational
reporting requirements of Section 13(a) of the Securities and Exchange Act of
1934, as amended (the "Exchange Act") as a result of filing a registration
statement pursuant to Section 12(g) of the Securities Exchange Act of 1934
(which became effective on January 24, 1997) with respect to the Company's Class
B Non-Voting Common Stock, which was held of record by greater than 500
shareholders at the Company's fiscal year end on September 30, 1996 and in
accordance therewith files periodic and current reports and other information
with the Securities and Exchange Commission (the "Commission"). Prior to the
effectiveness of such registration statement, the Company was subject to the
informational reporting requirements of Section 15(d) of the Exchange Act.
Supplementary Data
The selected quarterly financial data required by Item 302(a) of Regulation S-K
is omitted because the Registrant does not meet both of the specified tests.
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants . . . . . . . . . . . 12
Consolidated Balance Sheets - September 30, 1997, 1996 and 1995. . . . . 13
Consolidated Statements of Income - Years ended September 30, 1997,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Consolidated Statements of Changes In Stockholders' Equity - Years
ended September 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . 18
Consolidated Statements of Cash Flows - Years ended September 30,
1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 23
</TABLE>
<PAGE>
November 5, 1997
Board of Directors
Independent Research Agency
for Life Insurance, Inc. and Subsidiaries
Fort Worth, Texas
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have audited the accompanying consolidated balance sheets of Independent
Research Agency for Life Insurance, Inc. and Subsidiaries as of September 30,
1997, 1996 and 1995, and the related consolidated statements of income, changes
in stockholders' equity, and cash flows for the years then ended. 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 Independent
Research Agency for Life Insurance, Inc. and Subsidiaries as of September 30,
1997, 1996 and 1995, and the consolidated results of their operations and their
cash flows for the years then ended in conformity with generally accepted
accounting principles.
BRANTLEY, FRAZIER, ROGERS & COMPANY, P.C.
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS 1997 1996 1995
<S> <C> <C> <C>
Cash - Demand deposits ............ $ 289,074 $ 659,899 $ 454,159
Cash - Money market mutual
fund accounts - Note 2 ........... 18,735,189 18,789,033 16,319,038
Commissions receivable - Note 2 ... 3,003,639 2,671,831 2,319,856
Agents' loans and advances
- Note 2 ......................... 493,891 745,189 940,067
Accounts receivable - Customers
- Note 2 ......................... 54,499 -0- 115,000
Accounts receivable - Other
- Note 2 ......................... 266,746 79,641 643,179
Income taxes receivable - Note 8 .. 744,881 336,579 374,799
Prepaid expenses .................. 83,396 110,139 48,803
Deferred income taxes - Note 8 .... 189,377 534,016 152,128
Total Current Assets ............ 23,860,692 23,926,327 21,367,029
PROPERTY AND EQUIPMENT - At Cost - Note 2
Land .............................. 3,528,333 3,528,333 3,528,333
Office building ................... 9,568,786 9,403,496 9,383,158
Other buildings and improvements .. 131,746 131,746 131,746
Office/computer equipment and
furniture ........................ 7,065,463 6,543,017 6,393,679
Automobiles ....................... 262,187 300,497 295,218
Construction in progress .......... 19,113 -0- -0-
Total Property and Equipment ... 20,575,628 19,907,089 19,732,134
Less: Accumulated depreciation .... (8,429,667) (7,292,895) (6,428,646)
Net Property and Equipment ..... 12,145,961 12,614,194 13,303,488
FIRST COMMAND BANK ASSETS
Cash and cash equivalents -
Note 2 ........................... 4,611,643 -0- -0-
Loans, net of allowance for loan
losses of $260,200 - Note 2
and 11 ........................... 17,098,580 -0- -0-
Premises and equipment, net of
accumulated depreciation of $27,619
- Note 2 ......................... 203,776 -0- -0-
Accrued interest receivable ....... 118,639 -0- -0-
Other assets ...................... 30,342 -0- -0-
Total First Command
Bank Assets ................... 22,062,980 -0- -0-
OTHER ASSETS
Marketable securities at market
value - Notes 2 and 3 ............ 67,714,208 52,036,944 44,852,015
Memberships ....................... 62,467 62,467 62,467
Notes receivable - Other .......... 50,000 50,000 50,000
Total Other Assets ............. 67,826,675 52,149,411 44,964,482
TOTAL ASSETS ....................... $125,896,308 $88,689,932 $79,634,999
</TABLE>
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CURRENT LIABILITIES 1997 1996 1995
<S> <C> <C> <C>
Accounts payable .................. $ 597,578 $ 423,714 $ 486,402
Accrued commissions payable ....... 2,970,067 2,758,258 2,533,614
Accrued bonuses payable ........... 10,232,017 9,959,319 9,210,740
Accrued contribution payable to
employees' Profit Sharing Plan
- Note 10 ........................ 993,511 1,058,617 941,601
Income taxes payable - Note 8 ..... -0- 4,981 626,927
Deferred Career Commission Plan
payable - Note 9 ................. 1,156,257 489,502 423,114
Accrued sales meeting expense ..... 543,750 1,557,397 275,000
Other accrued liabilities ......... 465,171 418,168 426,536
Notes payable - Note 5 ............ 594,650 613,716 -0-
Loans from insurance companies
- Note 4 ......................... 15,842,192 10,458,853 12,319,485
Total Current Liabilities ...... 33,395,193 27,742,525 27,243,419
LONG-TERM OBLIGATIONS
Accrued sales meeting expense and
other ............................ 395,110 1,611 289,111
Notes payable - Note 5 ............ -0- 494,650 -0-
Deferred Career Commission Plan
payable - Note 9 ................. 20,557,266 14,571,565 9,796,309
Deferred income taxes - Note 8 .... 4,175,136 1,930,874 2,291,415
Total Long-Term Obligations .... 25,127,512 16,998,700 12,376,835
FIRST COMMAND BANK LIABILITIES
Deposits - Note 12 ................ 13,292,748 -0- -0-
Accrued interest payable .......... 22,171 -0- -0-
Other liabilities ................. 122,601 -0- -0-
Total First Command Bank
Liabilities ................... 13,437,520 -0- -0-
COMMITMENTS AND CONTINGENCIES - Note 13 and 16
STOCKHOLDERS' EQUITY
Common stock - Note 6
Class A - Voting ................ 10 10 10
Class B - Non-Voting ............ 55,729 55,729 55,729
Additional paid-in capital ........ 4,708,239 2,830,260 3,472,253
Retained earnings - Notes 7, 14
and 17 ........................... 33,160,181 31,223,388 28,305,327
Unrealized holding gains
- Note 3 ......................... 16,046,593 9,875,400 8,217,001
Treasury stock - Class A Common,
at par - Note 6 .................. (8) (8) (8)
Treasury stock - Class B Common,
at par - Note 6 .................. (34,661) (36,072) (35,567)
Total Stockholders' Equity ..... 53,936,083 43,948,707 40,014,745
TOTAL LIABILITIES AND STOCK-
HOLDERS' EQUITY ................... $125,896,308 $88,689,932 $79,634,999
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COMMISSIONS REVENUE 1997 1996 1995
<S> <C> <C> <C>
Insurance sales ............... $77,158,888 $72,975,873 $69,165,124
Mutual fund sales ............. 45,170,713 43,656,196 39,278,686
Total Commissions Revenue .... 122,329,601 116,632,069 108,443,810
FIRST COMMAND BANK OPERATIONS
Interest income on loans ...... 261,685 -0- -0-
Interest income on cash
equivalents .................. 165,083 -0- -0-
Interest expense on deposits .. (118,473) -0- -0-
Provision for loan
losses-Note 11 ................ (260,200) -0- -0-
Other fee income .............. 10,363 -0- -0-
Total First Command Bank
Operation .................... 58,458 -0- -0-
OPERATING EXPENSES
Commissions and agent expenses
- Note 9 ..................... 87,809,129) (86,309,517) (80,507,964)
General and administrative
expenses - Note 10 ........... (25,719,662) (22,730,849) (22,002,350)
Total Operating
Expenses ................... (113,528,791) (109,040,366) (102,510,314)
INCOME FROM OPERATIONS ......... 8,859,268 7,591,703 5,933,496
OTHER INCOME (EXPENSES)
Interest income ............... 914,929 846,607 777,897
Investment income - Including
net gains on sales of
investments - Note 3 ......... 4,749,604 3,216,870 3,616,571
Net rental and other expense .. (385,791) (268,148) (116,795)
Interest expense .............. (61,304) (66,100) (23,925)
Loss on sales of property and
equipment .................... (1,324) (9,436) (52,270)
Total Other Income ......... 5,216,114 3,719,793 4,201,478
INCOME BEFORE INCOME TAXES ..... 14,075,382 11,311,496 10,134,974
PROVISION FOR INCOME TAXES
- Note 8 ...................... (4,639,886) (3,842,639) (3,417,024)
NET INCOME ..................... $ 9,435,496 $7,468,857 $6,717,950
EARNINGS PER SHARE - Note 2 .... $ 10.06 $ 7.97 $ 7.18
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Common Stock Additional
Class Class Paid-In
A B Capital
<S> <C> <C> <C>
BALANCE - September 30, 1994 .......... $ 10 $ 55,729 $ 424,761
Purchase of treasury stock - Note 6 ... - - (350,489)
Payment of dividend - Note 7
Proceeds from stock issuance - Note 6 .. - - 3,397,981
Net income
Net change in unrealized holding
gains on securities
available for sale - Note 3
BALANCE - September 30, 1995 ........... 10 55,729 3,472,253
Purchase of treasury stock
- Note 6 .............................. - - (3,379,850)
Payment of dividend - Note 7
Proceeds from stock issuance
- Note 6 .............................. - - 2,737,857
Net income
Net change in unrealized holding
gains on securities available
for sale - Note 3
BALANCE - September 30, 1996 ........... 10 55,729 2,830,260
Purchase of treasury stock
- Note 6 .............................. - - (2,120,665)
Payment of dividend - Note 7
Proceeds from stock issuance
- Note 6 .............................. - - 3,998,644
Net income
Net change in unrealized holding
gains on securities available
for sale - Note 3
BALANCE - September 30, 1997 ........... $ 10 $ 55,729 $ 4,708,239
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Unrealized Treasury Stock Total
Retained Holding Class Class Stockholders'
Earnings Gains A B Equity
<S> <C> <C> <C> <C>
$26,542,341 $5,208,702 $ (8) $(37,736) $32,193,799
(564,731) - - (786) (916,006)
(4,390,233) - - - (4,390,233)
- - 2,955 3,400,936
6,717,950 - - - 6,717,950
- 3,008,299 - - 3,008,299
28,305,327 8,217,001 (8) (35,567) 40,014,745
- - - (2,599) (3,382,449)
(4,550,796) - - - (4,550,796)
- - - 2,094 2,739,951
7,468,857 - - - 7,468,857
- 1,658,399 - - 1,658,399
31,223,388 9,875,400 (8) (36,072) 43,948,707
- - - (1,570) (2,122,235)
(7,498,703) - - - (7,498,703)
- - - 2,981 4,001,625
9,435,496 - - - 9,435,496
- 6,171,193 - - 6,171,193
$33,160,181 $16,046,593 $ (8) $ (34,661) $53,936,083
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES 1997 1996 1995
<S> <C> <C> <C>
Commissions revenue received ... $121,997,793 $116,277,714 $108,172,477
Commissions paid to agents ..... (82,261,489) (78,914,869) (73,709,584)
Operating expenses paid ........ (22,900,641) (20,070,746) (20,094,588)
Sales meeting expenses paid .... (2,504,172) (1,168,286) (2,309,149)
Contribution to employees=
Profit Sharing Plan ........... (1,409,355) (1,034,981) (1,053,022)
Interest income received ....... 914,929 846,607 777,897
Interest income received on Bank
assets ........................ 308,129 -0- -0-
Interest expense paid .......... (57,141) (29,075) (23,925)
Interest expense paid on
Bank deposits ................. (96,302) -0- -0-
Investment income received ..... 4,749,604 3,216,870 3,616,571
Other income received by Bank .. 10,363 -0- -0-
Net rental and other expenses
paid .......................... (385,791) (268,148) (116,795)
Net customers' custodial funds
received (paid) ............... (172,743) 175,000 (388,538)
Income taxes paid .............. (5,736,186) (6,253,259) (5,381,960)
Income taxes refunded .......... 92,818 230,138 3,520
Net Cash Provided by
Operating Activities ....... 12,549,816 13,006,965 9,492,904
CASH FLOWS FROM INVESTING ACTIVITIES
Net receipts (payments) on agents'
loans and advances ............ 251,298 194,878 (105,339)
Purchase of investments ........ (2,853,624) (4,087,976) (4,602,720)
Proceeds from sales of property
and equipment ................. 15,495 30,715 30,698
Purchase of property and
equipment ..................... (960,289) (523,287) (3,586,939)
Net increase in Bank loans ..... (17,358,780) -0- -0-
Memberships purchased .......... -0- -0- (15,000)
Net Cash Used in
Investing Activities ....... (20,905,900) (4,385,670) (8,279,300)
CASH FLOWS FROM FINANCING ACTIVITIES
Net receipts (payments) on loans
from insurance companies ...... 5,383,339 (1,860,632) 1,190,967
Net increase in Bank deposits .. 13,292,748 -0- -0-
Purchase of treasury stock ..... (1,777,388) (2,165,801) (836,202)
Dividends paid ................. (7,498,703) (4,550,796) (4,390,233)
Payments on notes payable ...... (858,563) (108,282) (79,804)
Proceeds from stock issuance ... 4,030,312 2,780,832 3,463,072
Stock issuance costs ........... (28,687) (40,881) (62,136)
Net Cash Provided by (Used in
Financing Activities ....... 12,543,058 (5,945,560) (714,336)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
NET INCREASE IN CASH AND CASH
EQUIVALENTS .................... 4,186,974 2,675,735 499,268
CASH AND CASH EQUIVALENTS
Beginning of Year .............. 19,448,932 16,773,197 16,273,929
CASH AND CASH EQUIVALENTS
End of Year .................... $23,635,906 $19,448,932 $16,773,197
</TABLE>
<PAGE>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
NET INCOME .............................. $ 9,435,496 $ 7,468,857 $ 6,717,950
Adjustments for Items
Included in Net Income
Not Providing or Using Cash:
Depreciation expense ................ 1,207,927 1,172,430 1,083,853
Loss on sales of property and
equipment .......................... 1,324 9,436 52,270
Decrease in deferred income
taxes due to operations ............ (4,063,546) (2,180,983) (1,567,734)
Provision for loan losses ........... 260,200 -0- -0-
Other Adjustments to Reconcile Net
Income to Net Cash Provided by
Operating Activities:
Increase in commissions
receivable ......................... (331,808) (351,975) (259,546)
(Increase) decrease in other
various receivables ............... (768,545) 716,758 (822,611)
(Increase) decrease in
prepaid expenses and other assets .. (3,599) (61,336) 5,726
Increase (decrease) in
accounts payable and
accrued expenses ................... (9,693) 1,400,502 (800,021)
Increase (decrease) in other
accrued liabilities ................ 169,604 (8,368) 71,892
Increase in Deferred Career
Commission Plan payable ............ 6,652,456 4,841,644 5,011,125
NET CASH PROVIDED BY OPERATING
ACTIVITIES ............................. $12,549,816 $13,006,965 $ 9,492,904
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
During the years ended September 30, 1997, 1996 and 1995, IRA Inc. Issued notes
payable in the amounts of $344,847, $1,216,648 and $79,804 respectively, to
stockholders as consideration for the repurchase of their stock by the Company.
The accompanying notes to financial statements are an integral part of these
statements.
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE 1 - ORGANIZATION AND OPERATION
Independent Research Agency for Life Insurance, Inc. (IRA, Inc.) was
chartered in Texas in December 1980. The Company began operations in March
1981 and is the continuation of a business formerly operated as Independent
Research Agency for Life Insurance, a Texas partnership.
IRA, Inc. acquired United Services Planning Association, Inc., a Texas
corporation (USPA), and Independent Research Agency for Life Insurance, Inc., a
Hawaii Corporation (IRA Hawaii), in March 1981. IRA, Inc. organized Independent
Research Agency for Life Insurance, Inc., a Wyoming Corporation (IRA Wyoming),
in April 1982; Independent Research Agency for Life Insurance, Inc., a Montana
Corporation (IRA Montana), in February 1983; Independent Research Agency (New
York), Inc., a New York Corporation (IRA New York), in September 1983;
Independent Research Agency for Life Insurance, Inc., a Nevada Corporation (IRA
Nevada), in January 1988; and Independent Research Agency for Life Insurance,
Inc., an Alabama Corporation (IRA Alabama), in June 1994.
The subsidiaries IRA Hawaii, IRA Wyoming, IRA Montana, IRA New York, IRA Nevada
and IRA Alabama are maintained solely to permit IRA, Inc. to do business in
those states.
IRA, Inc., IRA Hawaii, IRA Wyoming, IRA Montana, IRA New York, IRA Nevada and
IRA Alabama are engaged in the sale of life insurance to United States
professional military personnel. USPA is engaged in the sale of mutual funds to
United States professional military personnel as a broker-dealer registered with
the Securities and Exchange Commission and the National Association of
Securities Dealers, Inc. The companies share common employees, sales agents and
representatives, and office facilities. Home offices are located in Fort Worth,
Texas. The companies' agents and representatives maintain offices in
approximately 149 cities located in 41 states, 1 U.S. territory and 3 foreign
countries.
In November, 1996, IRA, Inc. received approval from the Office of Thrift
Supervision to organize and operate a denovo Federal Savings Bank. In March,
1997, First Command Bank (the Bank) was formed as a wholly-owned subsidiary and
began operations on April 21, 1997. The Bank generates commercial and consumer
loans and receives deposits primarily from clients of IRA, Inc. and its
subsidiaries.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of IRA, Inc. is presented to
assist in understanding IRA, Inc.'s financial statements. The financial
statements and notes are representations of IRA, Inc.'s management who are
responsible for their integrity and objectivity. These accounting policies
conform to generally accepted accounting principles and have been consistently
applied in the preparation of the financial statements.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of IRA, Inc. and its
wholly-owned subsidiaries, USPA, IRA Hawaii, IRA Wyoming, IRA Montana, IRA New
York, IRA Nevada and IRA Alabama and First Command Bank. All intercompany
accounts and transactions have been eliminated.
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
RECOGNITION OF COMMISSIONS REVENUE
Commissions revenue on sales of insurance policies and mutual fund investments
by the Companies' sales agents are recognized when earned from the insurance and
mutual fund companies. Commissions are paid to the Company usually monthly, as
they are earned on investments made or premiums paid by the individual investors
and policyholders to the mutual fund and insurance companies.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. The Bank's loans are generally
secured by specific items of collateral including consumer assets and business
assets.
While management uses available information to recognize losses on loans,
further reductions in the carrying amounts of loans may be necessary based on
changes in national economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the estimated
losses on loans. Such agencies may require the Bank to recognize additional
losses based on their judgments about information available to them at the time
of their examination.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash and cash equivalents includes
Cash - Demand deposits, Cash - Money market mutual fund accounts and Bank cash
and cash equivalents. The funds in the money market mutual fund accounts are
with various investment companies. The invested funds earn interest at
prevailing rates while on deposit and may be withdrawn on demand by check.
AGENT LOANS AND ADVANCES
Agent loans and advances consist of both secured and unsecured obligations. The
majority of the loans relate to the purchase of computer equipment and are
secured by future commissions receivable. The book value of the loans are
considered to approximate fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject IRA, Inc. to concentrations of
credit risk consist principally of temporary cash investments, commissions
receivable and marketable securities. IRA, Inc. places its temporary cash
investments and marketable securities with financial institutions and
investment companies. Therefore, the majority of these funds are not FDIC
insured. IRA,
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
CONCENTRATION OF CREDIT RISK - Continued
Inc. does however limit the amount of credit exposure to any one company or
institution. Concentrations of credit risk with respect to commissions
receivable are limited due to the number of investment and insurance
companies comprising IRA, Inc.'s supplier base. As of September 30, 1997,
1996 and 1995, IRA, Inc. had no significant concentrations of credit risk.
INCOME TAXES
Deferred income tax assets and liabilities are computed annually for differences
between the financial statement and tax basis of assets and liabilities that
will result in taxable income or deductions in the future based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets and liabilities.
PROPERTY AND EQUIPMENT
Property and equipment is carried at cost less accumulated depreciation.
Depreciation of property and equipment is computed using the straight-line
method over the following estimated useful lives:
<TABLE>
<CAPTION>
Estimated Lives
<S> <C>
Buildings and improvements...................... 7-40 years
Other property and equipment.................... 3-10 years
</TABLE>
Expenditures for maintenance, repairs and minor renewals are charged to
operations as incurred. Upon retirement or other disposition of property or
equipment, the carrying value and the related accumulated depreciation are
removed from the accounts. Depreciation expense amounted to $1,207,927,
$1,172,430 and $1,083,853 for the years ended September 30, 1997, 1996 and 1995,
respectively.
BANK LOANS AND THE ALLOWANCE FOR LOAN LOSSES
Loans are stated at their unpaid principal balances, less the allowance for loan
losses. Interest on loans is recognized over the term of the loan and is
calculated using the simple-interest method on principal amounts outstanding.
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, specific impaired loans, economic conditions, and other
risks inherent in the portfolio. The allowance is increased by a provision for
loan losses, which is charged to expense and reduced by charge-offs, net of
recoveries. Changes in the allowance relating to impaired loans are charged or
credited to the provision for loan losses. Accrual of interest on a loan is
discontinued when management believes, after considering economics, business
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
BANK LOANS AND THE ALLOWANCE FOR LOAN LOSSES - Continued
conditions, and collection efforts, that the borrower's financial condition is
such that collection of interest is doubtful. Uncollectible interest previously
accrued is charged off or an allowance is established by means of a charge to
interest income. Income is subsequently recognized only to the extent cash
payments are received until, in management's judgment, the borrower's ability to
make periodic interest and principal payments is back to normal, in which case
the loan is returned to accrual status.
MARKETABLE SECURITIES
Nearly all of the investments of IRA, Inc. are in publicly traded mutual funds.
IRA, Inc. has classified these investments as available-for-sale securities.
Therefore, these securities are reported at fair value with unrealized gains and
losses excluded from earnings and reported net of taxes as a separate component
of stockholders' equity. Realized gains and losses, determined by using the
average cost method, are included in earnings.
EARNINGS PER SHARE
Earnings per share is calculated based on the weighted average of shares
outstanding during the period. For the years ended September 30, 1997, 1996 and
1995, the weighted average of shares outstanding were 937,502, 937,224 and
935,048, respectively.
NOTE 3 - MARKETABLE SECURITIES
As of September 30, 1997, 1996 and 1995, nearly all of the investment securities
of IRA, Inc. are in publicly traded mutual funds. At September 30, 1997, 1996
and 1995, the investment securities portfolio was comprised of securities
classified as available for sale. The investment securities portfolio at
September 30, 1997, 1996 and 1995, is carried at market.
The determination of classifying the marketable securities as either current or
noncurrent is based upon management's intention to liquidate specific securities
within one year. The aggregate cost and market values of IRA, Inc.'s marketable
securities as of September 30, 1997, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Total Marketable Securities
(At Cost) .......................... $ 38,617,547 $35,763,923 $31,675,947
Gross unrealized gains
- noncurrent portion ............... 29,096,661 16,273,021 13,188,040
Gross unrealized losses
- - noncurrent portion ................ -0- -0- (11,972)
Net unrealized gains
- noncurrent portion ............... 29,096,661 16,273,021 13,176,068
Total Marketable Securities
(At Market) ........................ $ 67,714,208 $52,036,944 $44,852,015
</TABLE>
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE 3 - MARKETABLE SECURITIES - Continued
There were no sales of investment securities for the years ended September 30,
1997, 1996, and 1995. The average cost method is used to determine the cost of
each security at the time of sale.
The excess of market over cost of $29,096,661, $16,273,021, and $13,176,068 is
reflected net of taxes in a separate component of stockholders' equity as of
September 30, 1997, 1996 and 1995 as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net unrealized holding gain ...... $29,096,661 $16,273,021 $13,176,068
Unrealized holding gain
designated to the DCCP .......... (4,783,641) (1,310,294) (726,066)
Tax effect reflected in deferred
taxes ........................... (8,266,427) (5,087,327) (4,233,001)
Unrealized Holding Gain
- Stockholders' Equity .......... $ 16,046,593 $ 9,875,400 $ 8,217,001
</TABLE>
The net change in the unrealized holding gain as reflected in a separate
component of stockholders' equity as of September 30, 1997, 1996 and 1995 was
calculated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Net increase in unrealized
holding gains ...................... $12,823,640 $3,096,953 $5,201,755
Net increase in unrealized
holding gains on DCCP Investments .. (3,473,347) (584,228) (639,207)
Tax effect on undesignated
investments ........................ (3,179,100) (854,326) (1,554,249)
Net Change in Unrealized Holding
Gains .............................. $ 6,171,193 $1,658,399 $3,008,299
</TABLE>
NOTE 4 - LOANS FROM INSURANCE COMPANIES
Loans from insurance companies represent non-interest bearing loans from five
insurance companies which IRA, Inc. represents as general agent. The amounts of
the loans are adjusted monthly and are calculated to be equal to the difference
between the total amount of first year commissions on certain insurance policies
sold by IRA, Inc. and the amount of the first year commissions earned by IRA,
Inc. on the policies.
NOTE 5 - NOTES PAYABLE AND REVOLVING LINE OF CREDIT
As consideration for the repurchase of stock, IRA, Inc. issued notes payable to
some stockholders. As of September 30, 1997 there are notes payable outstanding
to three former stockholders. These notes payable have interest rates ranging
from 5.0% to 5.5% with each having a maturity date of January 2, 1998. These
notes payable are unsecured.
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE 5 - NOTES PAYABLE AND REVOLVING LINE OF CREDIT - Continued
Based on borrowing rates currently available to IRA, Inc. for loans with similar
terms and maturities, the book value of notes payable as of September 30, 1997
are considered to approximate fair value.
During the year ended September 30, 1993 IRA, Inc. established a $1,000,000, one
year revolving line of credit. The revolving line of credit has since been
renewed on an annual basis. Bank advances on the credit line are payable on or
before December 31, 1997 and carry an interest rate at the Bank's prime rate.
The credit line is unsecured. IRA, Inc. had not made any draws on the credit
line during the years ended September 30, 1997, 1996 and 1995.
NOTE 6 - COMMON STOCK
At September 30, 1997, 1996 and 1995, the common stock of IRA, Inc. is as
follows:
<TABLE>
<CAPTION>
Class A Class B
Voting rights Voting Non-Voting
<S> <C> <C>
Par value per share ................................ $0.10 $0.02
Number of shares authorized ........................ 1,000 100,000,000
At September 30, 1997
Number of shares issued ........................... 100 2,786,435
Number of previously issued shares
repurchased and held as treasury stock ........... 75 1,733,078
Number of shares outstanding ...................... 25 1,053,357
At September 30, 1996
Number of shares issued ........................... 100 2,786,435
Number of previously issued shares
repurchased and held as treasury stock ........... 75 1,803,643
Number of shares outstanding ...................... 25 982,792
At September 30, 1995
Number of shares issued ........................... 100 2,786,435
Number of previously issued shares
repurchased and held as treasury stock ........... 75 1,778,380
Number of shares outstanding ...................... 25 1,008,055
</TABLE>
STOCK ISSUANCE
During the year ended September 30, 1997, IRA, Inc. issued 149,050 shares of
Class B treasury stock at $27.04 per share. This provided total proceeds of
$4,030,312 of which $28,687 was used to pay stock issuance costs. This increased
additional paid-in capital by $3,998,644 and decreased treasury stock by $2,981.
During the year ended September 30, 1996, IRA, Inc. issued 104,700 shares of
Class B treasury stock at $26.56 per share. This provided total proceeds of
$2,780,832 of which $40,881 was used to pay stock issuance costs. This increased
additional paid-in capital by $2,737,857 and decreased treasury stock by $2,094.
During the year ended September 30, 1995, IRA, Inc. issued 147,742 shares of
Class B treasury stock at $23.44 per share. This provided total proceeds of
$3,463,072 of which $62,136 was used to pay stock issuance costs. This increased
additional paid-in capital by $3,397,981 and decreased treasury stock by $2,955.
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE 6 - COMMON STOCK - Continued
PURCHASE OF TREASURY STOCK
During the years ended September 30, 1997, 1996 and 1995, IRA, Inc. repurchased
a total of 78,485 shares, 129,963 shares, and 39,325 shares, respectively, of
its previously outstanding Class B common stock in accordance with the terms of
its stock agreements with shareholders. The total cost of the stock repurchased
was $2,122,235 for the year ended September 30, 1997, $3,382,449 for the year
ended September 30, 1996, and $916,006 for the year ended September 30, 1995.
STOCK AGREEMENTS
All shares of IRA, Inc. are subject to agreements between the shareholders
and IRA, Inc. setting forth limitations of transferability and the rights of
IRA, Inc. to repurchase the stock. The provisions are summarized as follows:
1. All shareholders must be at all times duly contracted agents licensed to
sell insurance in Texas.
2. In the event of a shareholder's death, or his desire to sell or
otherwise dispose of stock, the shareholder or the shareholder's
executor must offer such shares to IRA, Inc. IRA, Inc. will repurchase
such shares within ninety (90) days after receipt of such notice at a
price to be established at least annually by IRA, Inc. IRA, Inc. will
pay all cash for such shares, or, may, as determined by IRA, Inc. at
its sole discretion, issue a note as full or partial consideration for
such repurchase.
3. Shares are restricted from encumbrance.
4. IRA, Inc. has the right, on thirty (30) days written notice to
stockholder, to repurchase that number of shares of common stock from
stockholder representing the shares in excess of five percent of the
Company's outstanding shares of common stock.
NOTE 7 - CASH DIVIDENDS
On December 2, 1996, a cash dividend of $7.63 per share ($7,498,703) was paid by
IRA, Inc. from retained earnings on its Class B common stock to its shareholders
of record as of September 30, 1996.
On December 1, 1995, a cash dividend of $4.50 per share ($4,550,796) was paid by
IRA, Inc. from retained earnings on its Class B common stock to its shareholders
of record as of September 30, 1995.
On December 1, 1994, a cash dividend of $4.88 per share ($4,390,233) was paid by
IRA, Inc. from retained earnings on its Class B common stock to its shareholders
of record as of September 30, 1994.
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE 8 - INCOME TAXES
Deferred income tax assets and liabilities are computed annually for differences
between the financial statement and tax basis of assets and liabilities that
will result in taxable income or deductions in the future based on enacted tax
laws and rates applicable to the periods in which the differences are expected
to affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be realized. Income tax
expense is the tax payable or refundable for the period plus or minus the change
during the period in deferred tax assets and liabilities.
Certain items of income and expense are recognized in different years for
financial reporting and income tax purposes. Deferred income taxes are provided
in recognition of these temporary differences. The items comprising the deferred
tax balances as of September 30, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
Current Noncurrent Current Noncurrent Current Noncurrent
Asset Liability Asset Liability Asset Liability
<S> <C> <C> <C> <C> <C> <C>
Effect of tax accumulated
depreciation in excess
of book accumulated
depreciation ................ $ - $(1,476,904) $ - $(1,352,380) $ - $(1,240,047)
Sales meeting accrual ........ 184,876 116,694 529,515 - 93,500 97,750
Allowance for loan losses .... - 88,468 - -
Portion of accrued
vacation .................... 4,501 - 4,501 - 58,629
Deferred Career Commission
Plan accrual ................ - 5,363,033 - 4,508,833 3,083,883
Unrealized investment holding
gains ....................... - (8,266,427) - (5,087,327) (4,233,001)
Deferred Tax Asset
(Liability) ................. $ 189,377 $(4,175,136) $534,016 $(1,930,874) $ 152,128 $(2,291,415)
</TABLE>
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE 8 - INCOME TAXES - Continued
Income tax at the federal statutory rate is reconciled to the Companies' actual
income tax expense for the years ended September 30, 1997, 1996 and 1995 as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C>
Tax at federal
statutory rate ........... $4,785,630 34.0% $3,845,909 34.0% $3,445,891 34.0%
Non-taxable income ......... (211,360) (1.5) (180,936) (1.6) (131,496) (1.3)
Non-deductible expenses .... 42,599 0.3 75,578 0.7 83,395 0.8
Effect of marginal rates ... 35,425 0.3 77,192 0.7 -0- 0.0
Environmental tax .......... 16,000 0.1 11,360 0.1 7,920 0.1
Other ...................... (28,408) (0.2) 13,536 0.1 11,314 0.1
Provision for Income
Taxes ..................... $4,639,886 33.0% $3,842,639 34.0% $3,417,024 33.7%
</TABLE>
The components of the provision for income taxes as of September 30, 1997, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Current tax expense ........... $5,230,085 $5,439,394 $ 4,345,551
Deferred tax benefit .......... (590,199) (1,596,755) (928,527)
Provision for Income Taxes .... $4,639,886 $3,842,639 $ 3,417,024
</TABLE>
For federal income tax purposes, IRA, Inc. and its subsidiaries have elected to
file separate income tax returns for the years 1995 and 1996 and on a
consolidated basis for 1997.
NOTE 9 - DEFERRED CAREER COMMISSION PLAN
During the year ended September 30, 1993, IRA, Inc. established a Deferred
Career Commission Plan for the benefit of its sales agents. This is a
nonqualified plan under which commissions accrue for its sales agents until
their business relationship with the Company terminates. The sales agents
receive no paid commissions under this Plan prior to their termination date.
Commissions which are accrued are determined annually based upon IRA, Inc.'s
business needs. These accrued commissions payable to the sales agents do not
have any superior claims to the assets of IRA, Inc. Deferred Career Commission
Plan expense was $3,704,855, $4,704,578 and $4,390,805 for the years ended
September 30, 1997, 1996 and 1995, respectively. This expense is included in
commissions and agent expenses on the accompanying statements of income.
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE 9 - DEFERRED CAREER COMMISSION PLAN - Continued
The DCCP payable balances for each year are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Commissions accrued to agents ....... $ 2,600,000 $ 4,015,737 $ 4,000,613
Investment income on DCCP
designated investments ............. 1,104,855 688,841 390,192
DCCP Expense ........................ 3,704,855 4,704,578 4,390,805
Unrealized holding gains on
DCCP designated investments -
See Note 3 ......................... 3,473,347 584,228 639,207
Commissions paid to agents .......... (525,746) (447,162) (18,887)
Net Increase in DCCP Payable ........ 6,652,456 4,841,644 5,011,125
DCCP Payable - Beginning of Year .... 15,061,067 10,219,423 5,208,298
DCCP Payable - End of Year .......... $21,713,523 $15,061,067 $10,219,423
Classification on the Balance Sheet:
Current ............................. $ 1,156,257 $ 489,502 $ 423,114
Noncurrent .......................... 20,557,266 14,571,565 9,796,309
Total ............................... $21,713,523 $15,061,067 $10,219,423
</TABLE>
NOTE 10 - PROFIT SHARING PLAN
USPA has in effect a qualified, non-contributory employee Profit Sharing Plan,
which covers substantially all of the Company's employees. The Profit Sharing
Plan contribution expense for the years ended September 30, 1997, 1996 and 1995
amounted to $1,344,249, $1,151,997 and $1,041,671 respectively, and is included
on the accompanying statements of income with general and administrative
expenses.
NOTE 11 - BANK LOANS
The composition of loans as of September 30, 1997 is as follows:
<TABLE>
<CAPTION>
Description Amount
<S> <C>
Debt consolidation .......................... $ 13,386,556
Small business .............................. 2,581,645
Other ....................................... 1,390,579
Total Loans ................................. 17,358,780
Less: Allowance for loan losses ............ (260,200)
Total Loans - Net ........................... $ 17,098,580
</TABLE>
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE 11 - BANK LOANS - Continued
For the period ended September 30, 1997, the Bank had no losses resulting from
the extension of credit. In addition, as of September 30, 1997, there are no
impaired loans or loans on which the accrual of interest had been discontinued.
As of September 30, 1997, there are no loans to certain directors, executive
officers and significant stockholders of the Company.
NOTE 12 - BANK DEPOSITS
Deposit account balances at September 30, 1997 are as follows:
<TABLE>
Description Amount
<S> <C>
Noninterest bearing ......................... $ 902,295
Interest-bearing demand ..................... 11,174,551
Certificates of deposit ..................... 1,215,902
Total Deposits .............................. $ 13,292,748
</TABLE>
A summary of certificates of deposit by maturity as of September 30, 1997 is as
follows:
<TABLE>
<CAPTION>
Year Ending Amount
<S> <C>
September 30, 1998 .......................... $ 623,063
September 30, 1999 .......................... 592,839
Total Certificates of Deposit ............... $ 1,215,902
</TABLE>
The Bank held related party deposits of approximately $32,880 at September 30,
1997.
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
In the normal course of business, the Bank has outstanding commitments and
contingent liabilities, such as commitments to extend credit and standby letters
of credit, which are not included in the accompanying consolidated financial
statements. The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instruments for commitments to extend credit
and standby letters of credit is represented by the contractual or notional
amount of those instruments. The Bank uses the same credit policies in making
such commitments as it does for instruments that are included in the
consolidated balance sheet. As of September 30, 1997 the Bank has committed
credit lines of $3,922,300 of which $1,587,090 has been advanced.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1996 AND 1995
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK - Continued
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation.
NOTE 14 - NET CAPITAL REQUIREMENTS OF SUBSIDIARIES
UNITED SERVICES PLANNING ASSOCIATION, INC.
USPA is subject to the Securities and Exchange Commission Uniform Net Capital
Rule (SEC Rule 15c3-1), which requires the maintenance of minimum net capital
and requires that the ratio of aggregate indebtedness to net capital, both as
defined, shall not exceed 15 to 1. At September 30, 1997, USPA had net capital
of $14,126,621, which was $13,825,765 in excess of its required net capital of
$300,856. The Company's net capital ratio was 0.32 to 1.
FIRST COMMAND BANK
The Bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the Office of Thrift Supervision (OTS). Failure
to meet the minimum regulatory capital requirements can initiate certain
mandatory, and possible additional discretionary actions by regulators, that if
undertaken, could have a direct effect on the Bank and the consolidated
financial statements. Under the regulatory capital adequacy guidelines the Bank
must meet specific capital guidelines involving quantitative measures of the
Bank's assets, liabilities, and certain off- balance-sheet items as calculated
under regulatory accounting practices.
Under the most conservative of these guidelines, at September 30, 1997, the
Bank's actual and required capital amounts were approximately $5,664,000 and
$1,484,000, respectively.
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS - BANK
The fair value of the Bank's financial instruments (loans and deposits) is
considered to approximate book value as of September 30, 1997. This is based
upon the fact that the Bank had only been operating for approximately five
months during the year and there have not been any significant interest rate
variances in that time period.
NOTE 16 - CONTINGENCIES
During the ordinary course of business the Company is subject to litigation from
a number of areas. Currently, the Company is involved in one law suit filed
after the end of its fiscal year, which management believes is without merit and
has a very low probability of loss.
NOTE 17 - SUBSEQUENT EVENTS - CASH DIVIDENDS
The Company is planning a cash dividend of $7.73 per share ($8,142,450) to be
paid on December 1, 1997 by IRA, Inc. from retained earnings on its Class B
common stock to its shareholders of record as of September 30, 1997.
<PAGE>
PART II
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
There has been no Form 8-K filed within 24 months prior to the date of the
most recent financial statements reporting a change of accountants or reporting
disagreements on any matter of accounting principle, practice, financial
statement disclosure, or auditing scope or procedure.
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. Identification - The following is a list in tabular form of all Company
Directors and Executive Officers as of December 1, 1997, providing their names,
ages and positions held as well as the period of time they have served in each
position. No arrangements or understandings exist between any of these
individuals and any other persons pursuant to which they have been, or will be,
selected as a Director or Executive Officer. The term of office of all Executive
Officers is one year. The term of office of a Director is, under the Classified
Board system of election adopted by the Company in 1989, three years.
<TABLE>
<CAPTION>
Name Age Title - Time Served
<S> <C> <C>
Lamar C. Smith 50 Director (1983 - Present),Chairman
of the Board and Chief Executive
Officer (1992 - Present), President
and Chief Executive Officer (1991),
President and Chief Operating
Officer(1985 - 1991), Member of
Executive Committee of Board of
Directors(1985 - Present)
James L. Lanier 58 Director (1988 - Present), President
and Chief Operating Officer (1992 -
Present), Senior Vice President and
Director of Marketing (1990 - 1991),
Member of Executive Committee of
Board of Directors (1990 - Present),
Regional Vice President (1988 -
1989)
Howard M. Crump 51 Director (1990 - Present),Regional
Vice President (1990 - 1991), Senior
Vice President and Director of
Marketing (1992 - Present), Member
of Executive Committee of the
Board of Directors (1992 - Present)
Hal N. Craig 60 Director (1993 - Present), Vice
President and Director of Management
Information Systems (1992 - 1993),
Chief Information Officer (1994 -
Present)
Donaldson D. Frizzell 65 Director (1993 - Present) Vice
President and Director of
Investments (1992 - Present)
Jerry D. Gray 49 Vice President and Director of Client
Services (1988 - 1989), Director
(1990 - Present) and Regional Vice
President (1990 - 1993)
Clinton C. Hayes 46 Director (1992 - Present), Regional
Vice President (1992 - 1993)
</TABLE>
<PAGE>
Part III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. Identification - Continued
<TABLE>
<CAPTION>
Name Age Title - Time Served
<S> <C> <C>
David P. Thoreson 66 Director (1994 - Present), Regional
Vice President (1988 - 1993)
G. Norman Coder 59 Director (1983 - Present), Secretary
(1980 - Present)
Martin R. Durbin 36 Treasurer and Chief Financial Officer
(1996 - Present), Assistant to the
Chairman of the Board (1995 - 1996)
Registered Representative and Agent
(1991 - 1995), Director of Commission
Accounting (1983 - 1991)
Arnold Punaro 51 Director (1997 - Present)
Carroll H. Payne II 43 Director (1983 - Present) (1.)
Naomi K. Payne 39 Director (1983 - Present) (1.)
</TABLE>
(1.) Carroll H. Payne II and Naomi K. Payne are siblings. There are no other
family relationships between any of the Directors and Executive Officers of
the Company or its subsidiaries.
B. Business Experience - The following is a brief description of the business
experience of each Director and Executive Officer during at least the past
five years:
Lamar C. Smith - Having previously been an agent, District Agent, Regional Vice
President*, Senior Vice President and Director of Marketing, Mr. Smith was
elected President and Chief Operating Officer of the Company in December 1985,
and became President and Chief Executive Officer in December 1990, in which
capacities he served until January 1992 at which time he became Chairman of the
Board and Chief Executive Officer, in which positions he continues to serve.
James N. Lanier - Mr. Lanier became an agent of the Company in 1983, a District
Agent in 1986, an Assistant Regional Agent in 1987, and in 1988 he was elected a
Director and Regional Vice President. In January 1990 he became Senior Vice
President and Director of Marketing, in which positions he served until January
1992 at which time be became President and Chief Operating Officer, in which
positions he continues to serve.
Howard M. Crump - Having been an agent and District Agent, Mr. Crump was
appointed Assistant Regional Agent in 1983 and became Regional Agent in January
1990. Mr. Crump was elected Director and Regional Vice President in April 1990,
in which capacities he served until January 1992 when he became Senior Vice
President and Director of Marketing, in which positions he continues to serve.
Hal N. Craig - Having previously been an agent, and Director of Programming, Mr.
Craig became the Director of Insurance Services in 1988. In 1990 Mr. Craig
became the Director of Management Information Systems and was elected Vice
President effective January 1992. He was elected a Director effective January 1,
1993. He became Chief Information Officer in 1994.
<PAGE>
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - Continued
B. Business Experience - Continued
Donaldson D. Frizzell - Having previously been an agent, Mr. Frizzell became
Director of Investments in 1984 and was elected a Vice President effective
January 1992. He continues to serve in these capacities. He was elected a
Director effective January 1, 1994.
Jerry D. Gray - Having previously been an agent and District Agent, Mr. Gray
became an Assistant Regional Agent in 1982, and was elected a Director and
Regional Vice President in 1986, in which capacities he served until 1988, at
which time he was elected a Vice President and became the Director of Client
Services. Beginning in 1990, he was reelected a Director and Regional Vice
President, in which capacities he served through 1993. In 1994 and 1997 he was
reelected a Director.
Clinton C. Hayes - Having previously been an agent and District Agent, Mr. Hayes
became an Assistant Regional Agent in 1988 in which position he served until
October 1992 when he became a Regional Agent. Mr. Hayes was elected a Director
and Regional Vice President effective December 1992, in which capacities he
served through 1993. In 1994 he was reelected a Director.
David P. Thoreson - Having previously been an agent and District Agent, Mr.
Thoreson became a Regional Agent in 1988 and was elected a Director in 1994, in
which capacities he continues to serve.
Arnold L. Punaro - Mr. Punaro was elected as a Director in July, 1997. He is a
Senior Vice President of the Science Applications International Corporation and
a Brigadier General in the U.S. Marine Corps Reserve. In the latter capacity,
his current assignment is Commanding General of the 4th Marine Division, USMC.
He previously served as the Commanding General, Marine Corps Reserve Support
Command, and for Senator Sam Nunn (1973 - 1996), and as Staff Director of the
Senate Armed Services Committee (SASC) or as Staff Director of the Minority of
the SASC from 1983 through 1996. He serves on the faculty of the Marine Corps
University and is an adjunct professor in the graduate school at Georgetown
University. He is a member of the Secretary of Defense Reserve Forces Policy
Board, and the Board of Governors of the Marine Corps Association.
G. Norman Coder - Mr. Coder has been the Company's Secretary since its creation
(1980). He has been on its Board of Directors since 1983.
Martin R. Durbin - Mr. Durbin was elected Treasurer of the Company in 1996, at
which time he also became its Chief Financial Officer and the Director of
Financial Services. He was originally employed by USPA in 1983 and was a field
agent of the Company from 1991 through June, 1995, at which time he was again
employed by USPA as Assistant to the Chairman of the Board.
Carroll H. Payne II - Mr. Payne was elected a Director in 1983 and continues to
serve in this capacity. An established Architect, he was principally employed as
such by Albert S. Komatsu and Associates, Fort Worth, Texas From 1984 and 1988
and is currently self-employed.
Naomi K. Payne - Ms. Payne was elected a Director in 1983, and continues in that
capacity. She has heretofore been engaged in working with, and coordinating
assistance for, deaf and otherwise handicapped students through various agencies
and institutions dedicated to such students.
<PAGE>
Part III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - Continued
B. Business Experience - Continued
* Called "Field Vice President" in 1982.
Messrs. Smith, Lanier, Crump, and Payne also serve on the Executive Committee
of the Company's Board of Directors. Messrs. Smith, Lanier and Crump also
serve on the Boards of Directors of various subsidiaries of the Company,
particularly of United Services Planning Association, Inc. (USPA), the
Company's major subsidiary. All of the Company's Executive Officers serve in
the same capacities for USPA.
C. Involvement In Certain Legal Proceedings - None of the Directors or Executive
Officers of the Company have been during the past five years, nor are
currently, involved in any regulatory, or civil or criminal court proceedings
of any kind.
ITEM 11 - EXECUTIVE COMPENSATION
A. Cash Compensation
The following Summary Compensation Table sets forth the cash compensation and
certain other components of the compensation of the Chief Executive Officer and
the other four most highly compensated executive officers of the Company in
fiscal year 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Name and Fiscal Annual Cash Compensation All Other
Principal Position Year Salary Bonus Other Compensation
(1)
<S> <C> <C> <C> <C> <C>
Lamar C. Smith .........1997 $427,400 $186,000 ----- $22,500
Chairman of the ........1996 398,666 170,000 ----- 22,500
Board and Chief .......1995 386,399 160,000 ----- 30,000
Executive Officer
James N. Lanier ........1997 328,745 146,000 ----- 22,500
President and Chief ....1996 306,242 133,000 ----- 22,500
Operating Officer .....1995 297,114 121,000 ----- 30,000
Howard M. Crump ........1997 286,075 115,000 ----- 22,500
Senior Vice President ..1996 266,583 104,000 ----- 22,500
and Director of .......1995 257,339 95,000 ----- 30,000
Marketing
G. Norman Coder ........1997 155,710 68,000 ----- 22,500
Counsel and Secretary .1996 142,582 66,000 ----- 22,500
1995 137,430 64,000 ----- 29,829
Donaldson D. Frizzell ..1997 130,177 54,000 ----- 22,500
Vice President and .....1996 122,512 50,000 ----- 22,500
Director of ...........1995 110,704 45,000 ----- 22,039
Investments
</TABLE>
(1) - Contribution paid on the employee's behalf into a profit sharing
retirement plan. See B. below.
<PAGE>
Part III
ITEM 11 - EXECUTIVE COMPENSATION - Continued
B. Compensation Pursuant to Plans
A profit sharing retirement plan exists for employees of the Company's
subsidiary, USPA, under the terms of which up to fifteen percent (15%) of annual
compensation, or $22,500 whichever is less, is contributed and held in trust of
such employees until termination of employment, retirement or death/disability.
During the Company's fiscal year ending September 30, 1997, the cash
contribution to this plan on behalf of the highly compensated executive officers
was limited to $22,500, and $112,500 was contributed on behalf of these
Executive Officers as a group. No stock option plans exist or are contemplated
as to the Company's stock.
C. Other Compensations
No other compensation not covered by the immediately preceding paragraphs such
as personal benefits, securities, or property, was paid or distributed during
the Company's fiscal year ending September 30, 1997, to the
individuals named or identified as members of the group above, the aggregate
amount of which, as to any of such individuals, was either the lesser of $50,000
or ten percent (10%) of the cash compensation described above.
D. Compensation of Directors
Directors who are Company employees or agents of the Company actively engaged in
sales or sales management are paid $600 for personal attendance at full Board
meetings. All other Directors are paid a quarterly retainer of $4,000 plus a
meeting fee of $600. If these latter Directors serve at a Board committee
meeting in conjunction with a Board or other Company meeting, they are paid $300
for such committee meeting. If they serve at a Board committee meeting not in
conjunction with any other Company meeting, they are paid $500 for such meeting.
If one of this latter group of Directors participates in a
telephone/teleconference or video-conference Board or Board committee meeting,
they are paid $300 for such participation. Expenses of all Directors required to
travel to a meeting are either paid or reimbursed. Additionally, Directors in
the latter group described above are reimbursed at the rate of $50 per hour for
travel time. During the Company's fiscal year ending September 30, 1997, a total
of $72,775 was paid by the Company to its Directors. No fees are paid for
serving as a Director of a subsidiary except for three Directors of First
Command Bank who are not otherwise employed by Company or its subsidiaries.
These individuals are paid $1,000 plus travel expenses each time they personally
attend a full Board meeting of First Command Bank. This totaled $12,000 for the
period ended September 30, 1997.
ITEM - 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 30, 1997, the number of shares
of Class A voting common stock and Class B non-voting common stock and the
percentage of outstanding shares of each class owned of record by each person
who beneficially owns more than five percent of a class of common stock, by each
Executive Officer and Director of the Company, and by all Executive Officers and
Directors as a group.
<PAGE>
Part III
ITEM - 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- Continued
<TABLE>
<CAPTION>
Name and Address Title of Amount and Nature of Percent of
of Beneficial Owner Class Beneficial Ownership Class
<S> <C> <C> <C>
Freda J. Payne
6812 Riverdale .........Class A 3 shares 12.00
Fort Worth, TX 76132 ...Class B 46,977 shares 4.46
Carroll H. Payne II
6245 Locke Ave. ........Class A 3 shares 12.00
Fort Worth, TX 76116 ..Class B 46,977 shares 4.46
Debra S. Payne
5910 N. Central
Expressway Ste. 1000 ...Class A 3 shares 12.00
Dallas, TX 75206 .......Class B 46,528 shares 4.42
Naomi K. Payne
6812 Riverdale .........Class A 3 shares 12.00
Fort Worth, TX 76132 ..Class B 46,977 shares 4.46
Lamar C. Smith
5111 Turtle Creek Ct. ..Class A 2 shares 8.00
Fort Worth, TX 76116 ..Class B 40,000 shares 3.80
James N. Lanier
3500 Bellaire Park Ct. .Class A 2 shares 8.00
Fort Worth, TX 76109 ..Class B 18,000 shares 1.71
Howard M. Crump
3458 Bellwood Court ....Class A 2 shares 8.00
Fort Worth, TX 76109 ..Class B 26,000 shares 2.47
Hal N. Craig
4429 Dunwick Ln. .......Class A 1 share 4.00
Fort Worth, TX 76109 ...Class B 5,600 shares .53
Donaldson D. Frizzell
6920 Tumbling Trail ....Class A 1 share 4.00
Fort Worth, TX 76116 ..Class B 7,100 shares .67
Jerry D. Gray
519 N. Mur-len .........Class A 1 share 4.00
Olathe, KS 66062 ......Class B 20,000 shares 1.90
David P. Thoreson
2016 Empire Mine Cir. ..Class A 1 share 4.00
Rancho Cordova,
CA 95670 .............Class B 27,850 shares 2.64
Clinton C. Hayes
792 Coverdale Court ....Class A 1 share 4.00
Virginia Beach,
VA 23452 .............Class B 18,250 shares 1.73
G. Norman Coder
4016 Edgehill Rd. ......Class A 1 share 4.00
Fort Worth, TX 76116 ..Class B 22,647 shares 2.15
</TABLE>
<PAGE>
Part III
ITEM - 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- Continued
<TABLE>
<CAPTION>
Name and Address Title of Amount and Nature of Percent of
of Beneficial Owner Class Beneficial Ownership Class
<S> <C> <C> <C>
Martin R. Durbin
5910 C. R. 805 C
Cleburne, TX 76031 ....Class B 1,725 shares .16
Edward T. Elmendorf Jr.
6410 Southwest Blvd.
Suite 200 ..............Class A 1 share 4.00
Fort Worth, TX 76109 ..Class B 17,550 shares 1.67
All Significant ....... Class A 25 shares 100.00
Owners, Executive ..... Class B 392,181 shares 37.23
Officers and Directors
as a Group (15 persons)
</TABLE>
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A. In August 1997, pursuant to the offering of the Company's stock under a
registration statement on Form S-1, effective June 1997, 18,300 shares of the
Class B non-voting common stock of the Company were issued to individuals who
were either Officers and/or Directors of the Company during the year ended
September 30, 1997 for the total consideration of $494,832 ($27.04 per
share). A total of 149,050 shares of Class B non-voting common stock of the
Company were sold during the offering for the total consideration of
$4,030,312 ($27.04 per share).
In September 1996, pursuant to the offering of the Company's stock under
a registration statement on Form S-1, effective May 30, 1996, 15,500 shares
of the Class B non-voting common stock of the Company were issued to
individuals who were either Officers and/or Directors of the Company during
the year ended September 30, 1996 for the total consideration of $411,680
($26.56 per share). A total of 104,700 shares of Class B non-voting common
stock of the Company were sold during the offering for the total
consideration of $2,780,832 ($26.56 per share). In May 1995 pursuant to the
offering of the Company's stock under a registration statement on Form S-1,
effective February 8, 1995, 20,842 shares of the Class B non-voting common
stock of the Company were issued to individuals who were either Officers
and/or Directors of the Company during the year ended September 30, 1995 for
the total consideration of $488,536 ($23.44 per share). A total of 147,742
shares of Class B non-voting common stock of the Company were sold during the
offering for the total consideration of $3,463,072 ($23.44 per share).
B. During the year ended September 30, 1997, 39,385 shares, of the Class B
non-voting common stock were repurchased by the Company from then current
Officers and/or Directors under the terms of the Stock Agreements with such
persons for the total consideration of $1,064,970. A total of 78,485 shares
of Class B non-voting common stock were repurchased by the Company from all
persons under the terms of the Stock Agreements with such persons during this
period for the total consideration of $2,122,235.
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page
<S> <C>
(a)(1) The following financial statements are included in Part II, Item 8:
Report of Independent Certified Public Accountants . . . . . . . . 12
Consolidated Balance Sheets - September 30, 1997, 1996
and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Consolidated Statements of Income - Years ended
September 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . 16
Consolidated Statements of Changes in Stockholders'
Equity - Years ended September 30, 1997, 1996 and 1995. . . . . . 18
Consolidated Statements of Cash Flows - Years ended
September 30, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . 20
Notes to Consolidated Financial Statements . . . . . . . . . . . . 23
</TABLE>
All other schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
Independent Research Agency for Life Insurance, Inc. has no unconsolidated
subsidiaries, no 50% or less owned companies accounted for by the equity method,
no consolidated majority owned subsidiaries engaged in diverse financial
activities, and no affiliates whose securities are pledged as collateral.
(a)(3) Exhibits included herein:
Exhibit 3 - Articles of Incorporation and Bylaws Incorporated herein by
reference to Exhibit 3.a.
and 3.b. in the Registrant's Form S-1 Registration Statement filed
May, 1996.
Exhibit 10 - Material contracts
(a) Stock Agreement - Payne Family
(b) Stock Agreement - Class B Nonvoting Stock
(c) Stock Agreement - Class A Voting Stock
Incorporated herein by reference to Exhibits 10a., 10b. and 10c.,
respectively, in the Registrant's Form S-1 Registration Statement
filed May, 1997.
Exhibit 21 - Subsidiaries of the Registrant. . . . . . . . . . . . 43
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the Registrant during the three
months ended September 30, 1997.
<PAGE>
FORM 10-K
ITEM 14(A)(3)
EXHIBITS
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
% Owned
<S> <C>
United Services Planning Association, Inc. (Texas) ...............100%
Independent Research Agency for Life Insurance, Inc. (Hawaii) ....100%
Independent Research Agency for Life Insurance, Inc. (Wyoming) ...100%
Independent Research Agency for Life Insurance, Inc. (Montana) ...100%
Independent Research Agency for Life Insurance, Inc. (New York) ..100%
Independent Research Agency for Life Insurance, Inc. (Nevada) ....100%
Independent Research Agency for Life Insurance, Inc. (Alabama) ...100%
First Command Bank ...............................................100%
</TABLE>
<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:
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
By /S/ Lamar C. Smith By /S/Martin R. Durbin
Lamar C. Smith Martin R. Durbin
Chairman of the Board and Chief Treasurer and Chief
Executive Officer and Director Financial Officer,
(Duly Authorized Officer) (Principal Financial
and Accounting Officer)
Date: 12/17/97 Date: 12/17/97
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:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/S/ James N. Lanier President and Director 12/17/97
James N. Lanier
/S/ Howard M. Crump Senior Vice President 12/17/97
Howard M. Crump and Director
/S/ Donaldson D. Frizzell Vice President 12/17/97
Donaldson D. Frizzell and Director
/S/ Hal N. Craig Vice President 12/17/97
Hal N. Craig and Director
/S/ Carroll H. Payne II Director 12/17/97
Carroll H. Payne II
/S/ G. Norman Coder Secretary and Director 12/17/97
G. Norman Coder
</TABLE>
<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington DC 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 1998 Commission file number: 33-56402-FW
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
(Exact name of registrant as specified in its charter)
Texas 75-1731373
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
4100 South Hulen Street
Fort Worth, Texas 76109
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number,
including area code (817) 731-8621
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 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.
Class A - Voting Outstanding at July 1, 1998
(Common stock, $0.10 par value) 25
Class B - Nonvoting Outstanding at July 1, 1998
(Common stock, $0.02 par value) 946,883
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.,
AND SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
INDEX NUMBERS
- ------ -------
<S> <C>
PART I - FINANCIAL INFORMATION
Condensed Consolidated Balance Sheet -
June 30, 1998 and September 30, 1997 1-2
Condensed Consolidated Statement of Income -
three months and nine months ended June 30, 199 3
Condensed Consolidated Statement of Cash Flows -
nine months ended June 30, 1998 and 1997 4
Notes to Condensed Consolidated Financial State 5-7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
June 30, September 30,
1998 1997
CURRENT ASSETS (Unaudited) *
<S> <C> <C>
Cash and cash equivalents .......$ 10,420,754 $ 19,024,263
Commissions receivable .......... 2,137,802 3,003,639
Agents' loans and advances ...... 303,457 493,891
Other receivables ............... 725,659 321,245
Income taxes receivable ......... 0 744,881
Prepaid expenses ................ 158,209 83,396
Deferred income taxes ........... 4,502 189,377
------------ ------------
Total Current Assets .......... 13,750,383 23,860,692
------------ ------------
PROPERTY AND EQUIPMENT
Property and equipment .......... 21,217,322 20,575,628
Less: Accumulated depreciation .. (8,548,391) (8,429,667)
------------ ------------
Total Property and Equipment .. 12,668,931 12,145,961
------------ ------------
FIRST COMMAND BANK ASSETS
Cash & Due From Banks ........... 6,064,292 4,611,643
Loans, net of loss reserve ...... 52,838,727 17,098,580
Equipment & Lease Improvements .. 295,936 203,776
Other bank assets ............... 486,079 148,981
------------ ------------
Total First Command
Bank Assets ................. 59,685,034 22,062,980
------------ ------------
OTHER ASSETS
Marketable securities,
at market ...................... 77,915,776 67,714,208
Memberships ..................... 62,467 62,467
Notes receivable - Other ........ 50,000 50,000
------------ ------------
Total Other Assets ............ 78,028,243 67,826,675
------------ ------------
TOTAL ASSETS ......................$164,132,591 $125,896,308
------------ ------------
------------ ------------
</TABLE>
1
<PAGE>
PART I - FINANCIAL INFORMATION - CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable ............... $ 0 $ 597,578
Accrued commissions payable .... 2,925,678 2,970,067
Accrued bonuses payable ........ 9,562,860 10,232,017
Accrued Profit Sharing ......... 867,771 993,511
Income taxes payable ........... 747,621 0
DCCP Payable ................... 1,400,000 1,156,257
Accrued sales meeting expense .. 2,288,215 543,750
Other accrued liabilities ...... 393,169 465,171
Notes payable .................. 0 594,650
Loans from insurance companies . 17,176,789 15,842,192
------------ ------------
Total Current Liabilities .... 35,362,103 33,395,193
------------ ------------
LONG-TERM OBLIGATIONS
Sales meeting and other ........ 1,611 395,110
Deferred Career Commission
Plan payable .................. 25,167,388 20,557,266
Deferred income taxes .......... 2,444,453 4,175,136
------------ ------------
Total Long-term Obligations .. 27,613,462 25,127,512
------------ ------------
FIRST COMMAND BANK LIABILITIES
Deposits ....................... 50,720,554 13,292,748
Other liabilities .............. 154,193 144,772
------------ ------------
Total First Command Bank
Liabilities ................. 50,874,747 13,437,520
------------ ------------
STOCKHOLDERS' EQUITY
Common stock ................... 55,739 55,739
Additional paid-in capital ..... 1,798,308 4,708,239
Retained earnings .............. 32,551,010 33,160,181
Unrealized holding gains ....... 17,314,019 16,046,593
Treasury stock - at par ........ (36,787) (34,669)
------------ ------------
Total Stockholders' Equity ... 51,682,289 53,936,083
------------ ------------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY ............ $164,132,591 $125,896,308
------------ ------------
------------ ------------
</TABLE>
* Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed financial
statements.
2
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
June 30, June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
COMMISSIONS REVENUE $ 95,006,492 $ 90,834,961 $ 33,267,629 $ 31,276,992
------------ ------------ ------------ ------------
FIRST COMMAND BANK
Net interest income ............ 1,503,725 99,520 635,548 99,520
Provision for loan losses ...... (501,300) (58,200) (106,800) (58,200)
Noninterest income ............. 84,914 675 37,171 675
------------ ------------ ------------ ------------
First Command Bank
Operating Inc................. 1,087,339 41,995 565,919 41,995
------------ ------------ ------------ ------------
OPERATING EXPENSES
Commissions, bonuses,
and agent expenses ............. (70,335,809) (65,959,783) (24,258,710) (22,513,136)
General and administrative
expenses ....................... (22,175,423) (18,984,571) (8,314,581) (6,789,781)
------------ ------------ ------------ ------------
Total Operating Expenses ...... (92,511,232) (84,944,354) (32,573,291) (29,302,917)
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS ............ 3,582,599 5,932,602 1,260,257 2,016,070
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Interest income ................. 704,623 642,171 203,489 188,229
Investment income ............... 6,586,893 4,719,985 14,401 12,946
Rental and other income ......... 158,808 158,736 19,040 40,717
Gain (Loss) on disposal
of equipment .................. 0 0 0 0
Interest expense ................ (33,402) (48,214) (7,696) (15,266)
------------ ------------ ------------ ------------
Total Other Income ............ 7,416,922 5,472,678 229,234 226,626
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES ........ 10,999,521 11,405,280 1,489,491 2,242,696
PROVISION FOR INCOME TAXES ........ (3,467,015) (3,728,593) (509,297) (770,601)
------------ ------------ ------------ ------------
NET INCOME ........................$ 7,532,506 $ 7,676,687 $ 980,194 $ 1,472,095
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING ........... 986,144 933,332 949,655 907,805
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET INCOME PER SHARE ..............$ 7.64 $ 8.23 $ 1.03 $ 1.62
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Income ................................................$ 7,532,506 $ 7,676,687
Adjustments for non cash items ............................ 895,444 907,830
Changes in operating assets and liabilities ............... 2,344,531 1,296,412
------------ ------------
Net Cash Provided by Operating Activities ............... 10,772,481 9,880,929
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments ................................... (8,366,454) (2,688,255)
Net increase in loans made by First Command Bank .......... (35,736,727) (3,822,134)
Purchase of property and equipment ........................ (1,418,414) (471,405)
------------ ------------
Net Cash Used for Investing Activities .................. (45,521,595) (6,981,794)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net receipts (payments) on loans from insurance
companies ............................................... 1,334,597 3,859,948
Net increase in deposits by First Command Bank ............ 37,317,383 5,066,889
Purchase of treasury stock ................................ (2,912,049) (2,105,689)
Dividends paid ............................................ (8,141,677) (7,498,703)
------------ ------------
Net Cash Used for Financing Activities .................. 27,598,254 (677,555)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................... (7,150,860) 2,221,580
CASH AND CASH EQUIVALENTS - Beginning of Period .... 23,635,906 19,448,932
------------ ------------
CASH AND CASH EQUIVALENTS - End of Period ..........$ 16,485,046 $ 21,670,512
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.,
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND OPERATION
Independent Research Agency for Life Insurance, Inc. (IRA, Inc.)
was chartered in Texas in December 1980. The Company began
operations in March 1981 and is the continuation of a business
formerly operated as Independent Research Agency for Life Insurance,
a Texas partnership.
IRA, Inc. acquired United Services Planning Association, Inc., a Texas
Corporation (USPA), and Independent Research Agency for Life Insurance, Inc., a
Hawaii Corporation (IRA Hawaii), in March 1981. IRA, Inc. organized Independent
Research Agency for Life Insurance, Inc., a Wyoming Corporation (IRA Wyoming),
in April 1982; Independent Research Agency for Life Insurance, Inc., a Montana
Corporation (IRA Montana), in February 1983; Independent Research Agency (New
York), Inc., a New York Corporation (IRA New York), in September 1983;
Independent Research Agency for Life Insurance, Inc., a Nevada Corporation (IRA
Nevada), in January 1988; and Independent Research Agency for Life Insurance,
Inc., an Alabama Corporation (IRA Alabama), in June 1994.
The subsidiaries IRA Hawaii, IRA Wyoming, IRA Montana, IRA New York, IRA Nevada
and IRA Alabama are maintained solely to permit IRA, Inc. to do business in
those states and are engaged in the sale of life insurance to United States
professional military personnel. USPA is engaged in the sale of mutual funds to
United States professional military personnel as a broker-dealer registered with
the Securities and Exchange Commission and the National Association of
Securities Dealers, Inc. The companies share common employees, sales agents and
representatives, and office facilities. Home offices are located in Fort Worth,
Texas. The companies' agents and representatives maintain offices in
approximately 149 cities located in 41 states, 1 U.S. territory and 3 foreign
countries.
In November 1996, IRA, Inc. received approval from the Office of Thrift
Supervision to organize and operate a denovo Federal Savings Bank. In March
1997, First Command Bank was formed as a wholly-owned subsidiary and began
operations on April 21, 1997.
5
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.,
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Condensed Consolidated Financial Statements include the accounts of IRA,
Inc. and its wholly-owned subsidiaries, USPA, IRA Hawaii, IRA Wyoming, IRA
Montana, IRA New York, IRA Nevada, IRA Alabama and First Command Bank. All
intercompany accounts and transactions have been eliminated.
BASIS OF PRESENTATION
The Condensed Consolidated Balance Sheet as of June 30, 1998, the Condensed
Consolidated Statement of Income for the three months and nine months ended June
30, 1998 and 1997, and the Condensed Consolidated Statement of Cash Flows for
the nine months ended June 30, 1998 and 1997 included herein are unaudited;
however, such information reflects all adjustments (consisting solely of normal
recurring adjustments) which are, in the opinion of management, necessary for a
fair statement of results for the interim periods.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
notes thereto included in the annual Form 10-K filed with the Securities and
Exchange Commission in December 1997, and the audited consolidated financial
statements and notes thereto included in the Company's September 30, 1997 annual
report to shareholders.
The results of operations for the three months and nine months ended June 30,
1998 are not necessarily indicative of the results to be expected for the full
year.
6
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.,
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - STOCKHOLDERS' EQUITY
During the nine months ended June 30, 1998, stockholders' equity was changed by
the following transactions:
<TABLE>
<CAPTION>
Additional Unrealized
Common Paid-in Retained Holding Treasury
Balance - Stock Capital Earnings Gain Stock
<S> <C> <C> <C> <C> <C>
September 30, 1997 $ 55,739 $ 4,708,239 $ 33,160,181 $ 16,046,593 $ (34,669)
Purchase of 105,874 shares
of treasury stock (2,909,931) (2,118)
Payment of dividend (8,141,677)
Net income 7,532,506
Net change in unrealized
holding gain on securities
available for sale 1,267,426
Balance - --------- ------------ ------------ ------------ ------------
June 30, 1998 $ 55,739 $ 1,798,308 $ 32,551,010 $ 17,314,019 $ (36,787)
--------- ------------ ------------ ------------ ------------
--------- ------------ ------------ ------------ ------------
</TABLE>
7
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.,
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NOTE - 3 LINES OF CREDIT
On June 25, 1998, IRA, Inc. entered into a borrowing agreement with United
American Insurance Company whereby, IRA may borrow up to $22 million through
November 30, 2001, with an initial borrowing of $7.0 million scheduled on or
before November 30, 1998. Interest will accrue on the outstanding balance at 7%.
Up to $5.0 million of interest may be added to the loan balance or may be paid
in cash, at IRA's sole option. At the conclusion of the borrowing agreement, the
total outstanding balance will be converted to an amortizing 7% 15 year note
payable. Payments will be made monthly over the 15-year term. IRA has pledged
Company owned mutual funds as collateral. Under the terms of the agreement IRA
will maintain 110% collateral to outstanding balance. As of June 30, no amounts
have been drawn under this agreement.
NOTE 4 - CONTINGENT LIABILITIES
On June 1, 1998, the Company entered into various agreements with First Command
Financial Corporation (FCFC). FCFC will lease the land adjacent to the USPA &
IRA Building upon which an 801-space parking garage. IRA will finance the
construction of the garage and lease all the parking spaces from FCFC.
The ground lease agreement allows FCFC to lease the property for $1 each year
from the date of the agreement for the next 99 years.
Under the terms of the Line of Credit FCFC may borrow up to $7.0 million during
the next eighteen months at an interest rate of 7%. Interest will accrue
monthly, and up to $1.5 million may be added to the outstanding balance of the
loan during the construction period. At the end of the construction period, the
total outstanding will be repaid through quarterly payments over the following
fifteen years.
Under the terms of the parking lease agreement IRA, Inc. will lease essentially
all the parking spaces in the garage for $51 thousand per month plus operating
expenses for fifteen years after the completion of the garage.
8
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.,
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the Company's financial position and operating
results during the periods included in the accompanying condensed consolidated
financial statements.
RESULTS OF OPERATIONS
NINE MONTHS ENDED JUNE 30, 1998 AND 1997 - COMPARISON
During the nine months ended June 30, 1998, the demand for life insurance
and mutual fund investments marketed by the Company to U.S. military
personnel remained strong. Commission revenue for the nine months ended June
30, 1998, increased 4.6% to $95,006,492 from $90,834,961 recorded during the
comparable period in 1997. This overall increase in commission revenue is a
trend which has been maintained over the past several years, and is expected
to continue in the future due to the long term personal financial management
philosophy espoused to clients, an effectively trained sales force and
efficient marketing practices used by the Company's sales agents. The
Company's analysis of the impact of base closures and force reduction in the
U.S. Military indicates to the Company a minimal impact upon existing agents
in the field and a market which will continue to present an opportunity for
growth of the Company's business.
First Command Bank's net interest income totalled $1,503,725 for the nine
months ending June 30, 1998. This income was partially offset by the
establishment of a reserve for possible losses on loans funded during the
period.
Commissions, bonuses, and agent expenses for the nine months ended June 30,
1998 increased 6.6% or $4,376,026 from the same period in 1997. Generally, in
the past there has been a constant relationship between commission revenues and
commissions, bonuses, and agent expenses.
General and administrative expenses for the nine months ended June 30, 1998
increased 16.8%, or $3,190,852 from the same period in 1997. This increase is
primarily due to inflationary factors in addition to costs involved in the
redesign of the corporate database used by the home office. This redesign will
result in improved efficiencies in both personnel and computer hardware costs in
the future.
The total of other income for the initial nine months of fiscal year 1998
increased 35.5% to $7,416,922 from $5,472,678 earned in the comparable nine
month period for 1997. This increase is primarily attributable to greater
distributions from mutual funds.
9
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.,
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997 - COMPARISON
Income from operations for the current quarter decreased $755,813, or 37.5%,
from the comparable period in 1997. The decrease is primarily attributable to a
7.8% increase in commissions, bonuses, and agent expenses and a 22.5% increase
in general and administrative expenses.
The total of other income for the current quarter of 1998 increased to $229,234
from $226,626 earned in the comparable three month period in 1997. This increase
is primarily attributable to greater investment and interest income in 1998.
LIQUIDITY AND FINANCIAL RESOURCES
The Company has historically operated with a working capital deficiency. The
Company has been able to do this because of its loans from insurance companies.
As long as the Company does business with these insurance companies (there are
no current intentions to change) the loan balance will continue to replenish
itself from new first year insurance commission loans. The Company had a ratio
of current assets to current liabilities of .39 to 1 and .71 to 1 at June 30,
1998, and September 30, 1997, respectively. The decline in the current ratio is
the result of paying dividends of $8,141,677 on December 1, 1997, to the
shareholders of record as of September 30, 1997, and the paying of normal
year-end incentive commissions of $5,300,000 to the Company's sales agents. The
current ratio is expected to improve due to income from operations during the
fiscal year.
Cash and cash equivalents, consisting primarily of money market funds are used
to finance the Company's current operations and are held as a reserve for the
payment of current liabilities. Marketable securities have been accumulated in
anticipation of future capital expenditures and as an additional reserve against
contingencies. As of June 30, 1998, the significant nonrecurring short-term
obligation requiring the immediate use of resources is the completion of the
review and testing of Y2K impacted areas of the Company. These issues and the
related costs are discussed fully on the next page.
First Command Bank continues to experience significant growth in both loans and
deposits as both clients and agents embrace the bank and its products. During
the quarter loans increased $11 million while deposits grew $15 million. Loan
growth continues to reflect consumer loans made to clients, largely to
extinguish credit card debt, while deposit growth was experienced primarily in
the money market and certificate of deposit areas. As the bank's deposit growth
continues to out pace its loan growth it should not have an adverse impact on
the liquidity of the Company
10
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.,
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR 2000
The coming year 2000 will cause substantial changes in business operations and
systems which, if not identified and corrected, could have a material impact on
the operations and financial condition of the Company. The largest areas for
concern relate to the software used by our agents, the home office and insurance
companies and mutual funds represented by the Company. Several years ago, the
Company undertook the task of rewriting the software used by our agents to
analyze clients' needs. This project, WINUSPA, is fully compliant with the new
millennium and is in the final testing and implementation stages. It is expected
to be fully implemented by the fourth quarter of this fiscal year. In late 1996,
the Company embarked on the writing of the software used by the Home Office to
track clients' programs among other administrative issues. This project,
Phoenix, is fully compliant with the year 2000 and was implemented in May 1998.
The Company represents major, excellent rated insurance companies and mutual
funds. At this point, their compliance with the year 2000 has been reviewed.
These companies are in the process of becoming compliant, and it is expected no
significant problems will be encountered.
Although the writing of WINUSPA and Phoenix software are major accomplishments,
there are a number of other areas which will be impacted by the year 2000. The
Company has formed a committee to review these areas and is studying the impact
of the new millennium on all areas of the Company. In addition, the Company has
engaged third party specialists to ensure its review and corrective actions are
appropriate. The remaining costs to analyze and correct the impacted areas is
expected to be approximately $1.4 million over the next nine to twelve months.
11
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.,
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact contained in this
Report, including without limitation statements under this Management's
Discussion and Analysis of Financial Condition and Results of Operations",
regarding the Company's business operations and financial position, and
management's expectations for the Company's future operations, are
forward-looking statements. Such forward-looking statements are based on the
beliefs of the Company's management as well as assumptions made by and
information currently available to the Company's management. Although management
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. Actual results could differ materially from those contemplated by
the forward-looking statements. Important risk factors that could cause actual
results to differ materially from such forward-looking statements include,
without limitation, the keen and increasing competition faced by the Company,
risk of business reduction due to armed conflict or the threat of armed
conflict, risk of reduction in the size of the U.S. military force, the absence
of sales to the civilian market, high levels of compensation required for the
Company's agents, changes in regulatory, technological and general economic
conditions, and risk factors disclosed in the Company's Securities and Exchange
Commission filings, including its Registration statement on Form S-1, filed with
the Commission on May 1, 1997. The forward-looking statements contained herein
reflect the current views of the Company's management with respect to future
events and are subject to these and other risks, uncertainties and assumptions
relating to the operations, results of operations, and financial position of the
Company.
12
<PAGE>
PART II - OTHER INFORMATION
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.,
AND SUBSIDIARIES
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibit No. 11: Computation of net income per
common share information is presented on
face of Statement of Income.
(b) A report related to the change in certifying accountants was filed on Form
8-K have on April 28, 1998.
13
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.,
AND SUBSIDIARIES
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.
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.,
(Registrant)
Date September 9, 1998 By /S/ James N. Lanier
----------------- --------------------
JAMES N. LANIER
President
(Duly Authorized Officer)
Date September 9, 1998 By /S/Martin R. Durbin
----------------- --------------------
MARTIN R. DURBIN
Treasurer and
Chief Financial Officer
(Principal Financial Officer)
14
<PAGE>
ANNEX E
ARTICLES OF INCORPORATION
AND
BYLAWS
OF SURVIVING CORPORATION
E-1
<PAGE>
RESTATED ARTICLES OF INCORPORATION
WITH AMENDMENT
OF
FIRST COMMAND FINANCIAL CORPORATION
FIRST COMMAND FINANCIAL CORPORATION, pursuant to the provisions of
Article 4.07 of the Texas Business Corporation Act, hereby adopts Restated
Articles of Incorporation which accurately copy the Articles of Incorporation as
amended by such Restated Articles of Incorporation as hereinafter set forth and
which contain no other change in any provision thereof.
ARTICLE ONE
The Articles of Incorporation of the Corporation are amended by the
Restated Articles of Incorporation as follows:
1. Article 4 of the Articles of Incorporation is hereby amended in its
entirety to read as follows:
4. Shares. The aggregate number of shares which the Corporation is
authorized to issue is ten million ten thousand (10,010,000) shares,
each having a par value of $.01. The shares are to be designated as
Common Stock and will have identical rights and privileges in every
respect, with the sole exception that ten thousand (10,000) of such
shares shall be designated as Voting Common Stock and shall possess the
right to vote on all matters that may come before the stockholders of
the Corporation, and ten million (10,000,000) of such shares shall be
designated as Nonvoting Common Stock and shall not possess the right to
vote on any matter except as specifically provided by the Texas
Business Corporation Act.
2. A new Article 7 is hereby added to the Articles of Incorporation
which shall read in its entirety as follows:
7. Restrictions on Transfer of Shares. Except as otherwise expressly
provided and authorized herein, a Shareholder shall not Transfer (as
defined below) any shares of Stock that he or she now or hereafter
owns. The parties hereto understand that the Corporation may refuse to
Transfer the shares of Stock on its books and records when that
Transfer would not be in compliance with the terms hereof, and that any
attempted Transfer in violation hereof shall be null and void.
A. Definitions. As used herein:
(1) Code. The term "Code" shall mean the Internal Revenue Code
of 1986, as amended from time to time.
(2) Determination Date. The term "Determination Date" shall
mean the day upon which, in the case of a purchase of Stock hereunder,
the Disposition Notice referred to in Section 3.1 has been received by
the Corporation, except that with respect to a Disposition Notice made
in connection with the death of a Shareholder or the termination of a
Shareholder's marital relationship, "Determination Date" shall mean the
date of that death or termination.
E-2
<PAGE>
(3) Disposing Shareholder. The term "Disposing Shareholder"
shall mean that Shareholder (or the surviving spouse of or estate of a
deceased Shareholder in the case of a Shareholder's death) required to
tender shares of Stock to the Corporation upon the occurrence of an
Operative Event with respect to that Shareholder.
(4) Disposition Notice. The term "Disposition Notice" shall
mean the written notice required by paragraph C.(1) below to be made by
the Disposing Shareholder to the Corporation or allowed by paragraph
C.(1) to be made by the Corporation to the Disposing Shareholder.
(5) Operative Event. The term "Operative Event" shall mean,
with respect to any Shareholder, any of the following events:
(a) Any threatened or actual Transfer of Stock in any
manner whatsoever by that Shareholder;
(b) The death of that Shareholder;
(c) The termination of the marital relationship of
that Shareholder by death or divorce if that Shareholder does
not succeed to his or her spouse's community interest in the
Stock or the entering into of any property settlement
arrangement or agreement in connection therewith, pursuant to
which that Shareholder's interest in his or her Stock is to be
diluted, lessened, encumbered or impaired;
(d) Any threatened or actual (i) bankruptcy or
insolvency of that Shareholder or (ii) institution of legal
proceedings because or by reason of the bankruptcy or
insolvency of that Shareholder;
(e) The termination of the status of that Shareholder
as a duly licensed Texas life insurance agent;
(f) The cessation of that Shareholder as a duly
authorized agent of the Corporation pursuant to a current
written agency agreement, except that with respect to an
involuntary termination as a duly authorized agent of the
Corporation, such termination shall require approval by a vote
of eighty percent (80%) of the Board of Directors of the
Corporation;
(g) The change in status of that Shareholder to a
"non-resident alien" as defined in the Code; or
(h) Any threatened or actual levy by a creditor or
claimant upon the shares of Stock held by that Shareholder or
any other seizure or sale by legal process, if it is
determined by legal counsel for the Corporation that such levy
is made in good faith and based upon a bona fide claim.
It shall not be a requirement hereunder that the Executive
Committee of the Board of Directors of the Corporation (the
"Executive Committee") make a determination in every instance
that an Operative Event has so occurred with respect to any
Shareholder, but such determination shall be made in those
instances in which there may be some question as to whether an
Operative Event did in fact occur. Upon such determination by
the Executive Committee that an Operative Event has in fact
occurred, in order to inform the Shareholder of such
occurrence, the Corporation may deliver a written notice to
the Shareholder or his or her legal representative stating
that (i) such an Operative Event has occurred, (ii) the date
thereof and (iii) the reasons for the determination. The
Shareholder affected or his or her legal representative shall
thereupon be required to tender to the
E-3
<PAGE>
Corporation for sale his or her Stock to the Corporation upon
the terms and conditions as set forth in paragraph C. below.
(6) Transfer. The term "Transfer" shall mean, as a noun, a
transfer, sale, assignment, exchange, gift, donation, pledge, mortgage,
hypothecation or other encumbrance or other disposition, and as a verb,
to transfer, sell, assign, exchange, gift, donate, pledge, mortgage,
hypothecate or otherwise encumber or otherwise dispose.
B. Restrictions on Transfer of Shares.
Except as otherwise expressly provided and authorized in the
Articles of Incorporation, a Shareholder shall not Transfer any shares
of Stock that he or she now or hereafter owns. The Corporation may
refuse to Transfer the shares of Stock on its books and records when
that Transfer would not be in compliance with the terms of the Articles
of Incorporation, and any attempted Transfer in violation hereof shall
be null and void.
(1) Restrictions on Transfer.
(a) No Shareholder may Transfer, and no person may
acquire, the legal or beneficial ownership of any share of
Stock now or hereafter owned by him or her if that Transfer or
acquisition would cause the S corporation status of the
Corporation to terminate. Specifically, no Transfer may be
made to, and no acquisition may be made by, any person who
would cause the Corporation to have more than the maximum
permitted number of shareholders under the Code as then in
effect or to any person that is not eligible to be a
shareholder of an S corporation under the provisions of the
Code.
(b) In addition to the requirements of paragraph
B.(1)(a) above, no Transfer of shares of Stock shall be
permitted, and no purported Transfer shall be effective, until
the transferee has followed all of the requirements of
paragraph C. below.
(c) Notwithstanding B.(1)(a) and (b) above, with the
prior written consent of the Executive Committee, a
Shareholder may pledge, mortgage, hypothecate or otherwise
encumber his or her Stock subject to such terms, conditions
and restrictions as the Executive Committee shall determine to
be appropriate in the exercise of its sole discretion.
(2) Effect of Purported Transfer. Any purported Transfer or
acquisition of shares of Stock in violation of paragraph B.(1) above
shall be null and void. The purported transferee shall have no interest
in any of the shares of Stock purported to be transferred. Any such
purported Transfer or acquisition may and should be enjoined by the
Corporation in the event that the Executive Committee so determines.
(3) Beneficial Ownership. Any purported Transfer in violation
hereof will not affect the beneficial ownership of the shares of Stock.
Thus, the Shareholder making the purported transfer will retain the
right to vote and the right to receive distributions and liquidation
proceeds related to those shares. Additionally, a Shareholder making
the purported Transfer shall continue to report the portion of income
or loss allocated by the Corporation in accordance with the provisions
of the Code.
C. Tender Requirement.
(1) Tender for Sale. Upon the occurrence of any Operative
Event with respect to a Shareholder, the Disposing Shareholder, or his
or her legal representative, as the case may be, must tender for sale
all shares of Stock owned by the Disposing Shareholder. In the case of
an Operative Event, the Disposing Shareholder is required to mail a
Disposition Notice to the Corporation no less than one hundred
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twenty (120) days prior to the date of the proposed Transfer.
Alternatively, upon an Operative Event of a Disposing Shareholder, the
Corporation may mail a Disposition Notice to that Disposing
Shareholder. Upon its receipt or its mailing of a Disposition Notice,
the Corporation shall have the exclusive right and option, exercisable
at the sole discretion of the Executive Committee, as described in
paragraph C.(2) to buy such shares of Stock, or any portion thereof, as
provided herein. The Disposition Notice shall be sent by certified
mail, if to the Corporation, to the attention of the president and the
general counsel of the Corporation at the principal address of the
Corporation, or if to the Disposing Shareholder at his or her last
known address. In the event that the Operative Event involves a
proposed Transfer pursuant to an offer to purchase or sell all or any
portion of a Shareholder's Stock received or made by such Shareholder
from or to a third party, the Disposition Notice shall set forth the
full details of such proposed Transfer including, among other things,
the name of the offeror or proposed purchaser or transferee, the number
of shares covered by the offer, the purchase price per share, the terms
of payment, whether for cash or credit (and if by credit, the maturity
and interest rate), any and all other consideration being received or
paid in connection with such proposed Transfer, and any and all other
terms, conditions and details of such offer.
(2) Purchase by Corporation. Upon delivery of a valid
Disposition Notice, the Corporation shall have the exclusive right and
option, exercisable at any time within one hundred twenty (120) days
after the mailing of a Disposition Notice, to purchase all or part of
the Disposing Shareholder's shares of Stock at the Purchase Price and
on the terms and conditions set forth herein. If the Corporation
chooses to exercise the option (in whole or in part), it shall give
written notification (the "Corporate Exercise Notice") to that effect
to the Disposing Shareholder or his or her legal representative, as the
case may be, setting forth the number and type of shares being
purchased and the price and terms and conditions, in accordance with
this Agreement, and such sale and purchase shall be closed on the one
hundred twentieth (120th) day after the Corporate Exercise Notice is
sent to the Disposing Shareholder or to his or her legal representative
(or, if such date is not a business day, on the first business day
thereafter).
(3) Third Party Bound. If, in accordance with this paragraph
C., shares of Stock are Transferred to a third party, the Disposing
Shareholder shall require, as a condition of the sale to such third
party, that the purchaser or transferee of his or her shares will
become a party to this Agreement, but only if the Corporation so
desires and agrees to such purchaser becoming subject to this Agreement
in a written notice sent to the Disposing Shareholder. All shares of
Stock retained by the Disposing Shareholder shall remain subject to all
of the provisions of the Articles of Incorporation.
D. Insurance. In order to facilitate the purchase of shares of
Stock upon the death of a Shareholder, the Corporation may, but is not
required to, apply for and obtain separate policies of insurance upon
the lives of each of the Shareholders payable to the Corporation;
provided, however, that the purchase price of the shares of Stock and
the manner and terms of payment therefor shall be governed in all
respect by paragraphs E and F below. The Corporation will pay the
premiums upon such policies and shall provide proof of payment of such
premiums to any Shareholder, upon his or her request. The Corporation
shall be the sole owner, and shall have the sole right to designate the
beneficiary or beneficiaries, of such policy or policies.
E. Purchase Price.
(1) Purchase Price. In the case of all Operative Events, the
purchase price per share of Stock to be paid by the Corporation shall
be the Purchase Price, as defined in paragraph (2) below.
(2) Agreed Value. The Corporation, at least annually, shall
advise the Shareholders in writing of the price per share of Stock
which the Corporation will pay to any and all Disposing Shareholders
for shares tendered pursuant hereto. Each such determination of the
"Purchase Price" shall become effective on the date specified by the
Corporation and shall remain effective until the next determination of
a new Purchase Price and shall be proportionately adjusted for any
subsequent increase or decrease of the number
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of issued shares of Stock resulting from a subdivision or consolidation
of shares or other adjustment, or the payment of a stock dividend or
other increase or decrease in the number of shares of Stock
outstanding, effective without the receipt of consideration by the
Corporation. It is specifically agreed that this Purchase Price shall
be the purchase price paid by the Corporation hereunder to any
Disposing Shareholder.
F. Payment of Purchase Price.
(1) Transfer and Delivery of Stock. At the closing, or at some
other time or place designated by all of the parties, the Disposing
Shareholder or his or her legal representative shall deliver to the
Corporation in exchange for the concurrent payment of the Purchase
Price, the certificates of shares of the Stock being purchased, free
and clear of all liens, claims, security interests and encumbrances,
duly endorsed for transfer and bearing any necessary documentary
stamps, and such assignments, certificates of authority, tax releases,
consents to transfer by a fiduciary or representative of the Disposing
Shareholder, and any instruments in evidence of the title of the
Shareholder and of the parties' compliance with this Agreement, the
federal and state securities laws, and any other agreements or
regulations as may be recommended by counsel for the Corporation.
(2) Method. The manner of payment of the Purchase Price may
be, at the option of the Corporation, either (i) the payment of the
entire Purchase Price, by cash or by certified, bank cashier, or
treasurer's check, of (ii) down payment of twenty percent (20%) of such
Purchase Price in cash at closing and delivery of a promissory note or
promissory notes for the balance, in non-negotiable form, to the order
of the Disposing Shareholder or his or her legal representative,
pursuant to which the Corporation agrees to pay the balance in four (4)
equal annual installments, with interest on the unpaid balance at the
lesser of (i) the rate of the prime rate published in The Wall Street
Journal per annum on the date of the closing or (ii) the highest
non-usurious rate permitted by applicable law, with each installment of
principal and interest payable annually on each anniversary date of the
making of the promissory note, and with the right of the Corporation to
prepay at any time without premium or penalty. The promissory note
shall be secured by the pledge of Stock purchased thereby, with
executed security instruments covering such pledged Stock, unless such
pledge arrangement is waived by the Disposing Shareholder or his or her
legal representative, as the case may be. Notwithstanding anything
herein to the contrary, in the event that the Disposing Shareholder
dies, the down payment provided for in clause (ii) above shall not be
less than the proceeds received by the Corporation under the insurance,
if any, described in paragraph D above.
3. A new Article 8 is hereby added to the Articles of Incorporation
which shall read in its entirety as follows:
8. Subchapter S Provisions.
A. Subchapter S Representation. Each Shareholder acknowledges
that the Corporation has made a valid election to be treated, for
federal and state income tax purposes, as an S corporation. Each
Shareholder shall provide to the Corporation, immediately upon the
Corporation's request, such properly signed consents or other documents
as, in the opinion of the Corporation, may be necessary or useful to
maintain the Corporation's status as an S corporation, and each
Shareholder covenants that he or she will do nothing to interfere with
the Corporation's maintenance of its status as an S corporation.
B. Revocation of Election. In the event that the Shareholders,
by the affirmative vote of at least eighty percent (80%) of the votes
which all of the Shareholders are entitled to cast, determine to
terminate the Corporation's status as an S corporation, and thereafter
each Shareholder is provided with written notice of such determination,
within sixty (60) days after the delivery of such notice, each
Shareholder, if requested, will execute a consent to such revocation in
the form prescribed by the Internal Revenue Service or any relevant
state tax authority and shall deliver such consent to the Secretary of
the Corporation. If the Corporation's S status is terminated under this
paragraph B., in the event that the
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Executive Committee so determines, the Shareholders and the Corporation
shall elect, if applicable, to have Section 1362(e)(2) of the Code not
apply, as provided in Section 1362(e)(3) of the Code. Any person who
was a Shareholder at any time during the S short year (as defined in
Section 1362(e)(1)(A) of the Code) or who is a Shareholder on the first
day of the C short year (as defined in Section 1362(e)(1)(B) of the
Code) shall consent to such election.
C. Inadvertent Termination of Subchapter S Election. In the
event of a termination of the Corporation's status as an S corporation
other than pursuant to paragraph B. above, if the Corporation and the
Shareholders remaining after such termination desire that the
Corporation's status as an S corporation be continued, the Corporation
and all Shareholders as of and/or after the terminating event shall use
their best efforts to obtain from the Internal Revenue Service a waiver
of the terminating event on the ground of inadvertency. The Corporation
and the Shareholders shall take such steps, and make such adjustments,
as may be required by the Internal Revenue Service pursuant to Section
1362(f)(3) and (4) of the Code. If a Shareholder caused the terminating
event to occur, he or she shall bear the expense of procuring the
waiver, including the legal, accounting and tax costs of taking such
steps, and of making such adjustments as may be required. If the
inadvertent termination is not waived by the Internal Revenue Service
and the Corporation's S status is permanently terminated, in the event
that the Executive Committee so determines, the Corporation and the
Shareholders shall make the election under Section 1362(e)(3) of the
Code contemplated by paragraph B. above.
D. Provision in Shareholder Wills. Each Shareholder shall use
his or her best efforts to include in his or her will a direction and
authorization to his or her executor in substantially the following
form:
(a) My Executor is hereby directed and authorized to hold
stock of an S Corporation, as defined in the Code (hereinafter "S
Stock"), to make an election to have any corporation treated as an S
Corporation, to enter into agreements with other shareholders or with
the corporation relating to a transfer (including, without limitation,
a sale, assignment, exchange, gift, donation, mortgage, hypothecation
or other encumbrance or other disposition (a "Transfer") of S Stock or
the management of the S Corporation, and to allocate amounts received
and the tax on undistributed income between income and principal.
During the administration of my estate, my Executor may allocate the
tax deductions and credits arising from ownership of S Stock between
income and principal. In making any such allocations, my Executor shall
consider that the beneficiary is to have enjoyment of the property at
least equal to that ordinarily associated with an income interest and
in all events shall provide the required beneficial enjoyment to the
beneficiary until such time as the S Stock is distributed to him or
her.
(b) Any beneficiary of my estate who receives stock in an S
Corporation as part of his or her distribution shall, prior to such
distribution, enter into a written agreement with said S Corporation
(i) to consent to any election to qualify the S Corporation as such;
(ii) to do nothing to interfere with the S Corporation's maintenance of
its status as such; (iii) not to Transfer the S Stock to any transferee
who does not agree to execute a similar consent; (iv) not to Transfer
the S Stock in such manner as will cause the S Corporation to lose its
status as an S Corporation under the then applicable federal and state
income tax statutes and regulations; and (v) if S status is
inadvertently terminated, to join in any endeavor to obtain a waiver of
the terminating event on the grounds of inadvertency from the Internal
Revenue Service if the S Corporation desires that the S status should
continue.
(c) Any S Stock distributed to a beneficiary shall bear an
appropriate legend on the stock certificate stating that the Transfer
of the stock is subject to and restricted to the extent set forth in
subparagraph (b) above.
Notwithstanding the foregoing requirement, the failure of a Shareholder
so to direct his or her executor shall not affect the validity of these
Articles of Incorporation.
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E. Distributions to Pay Tax Liabilities.
(a) For the period during which the Corporation is an S
Corporation (the "S Corp Period"), the Corporation shall
promptly declare and make distributions during the S Corp
Period to all Shareholders in a timely manner to allow the
federal income tax (including, without limitation, estimated
tax payments) attributable to the Corporation's taxable income
during the S Corp Period that is passed through the
Corporation to the Shareholders to be paid by such
Shareholders when due (each, a "Due Date"). To satisfy this
requirement, during the S Corp Period, the Corporation shall
pay on or before five (5) days prior to each Due Date, an
amount so that the cumulative amount of distributions during
the S Corp. Period that have been designated by the
Corporation as "Tax Distributions" are at least equal to the
excess of (i) the sum of the products of (A) the Corporation's
positive taxable income (as determined under Section 1366(a)
of the Code) attributed to its Shareholders during each of its
taxable periods during the S Corp Period multiplied by (B) the
highest appropriate federal individual income tax rates in
effect for each such taxable period (without regard to
exemptions or phase-outs of lower tax rates, but with
consideration of the character of any item and the
deductibility of state taxes for federal income tax purposes),
over (ii) the sum of the products of (A) the Corporation's
negative taxable income (as determined under Section 1366(a)
of the Code) attributable to its Shareholders during each of
its taxable periods during the S Corp Period multiplied by (B)
the highest appropriate federal income tax rates in effect for
each such taxable period (without regard to exemptions or
phase-outs of lower tax rates, but with consideration of the
character of any item and the deductibility of state taxes for
federal income tax purposes). The Corporation's obligation to
declare and make any such distributions to the Shareholders is
subject to the restrictions governing dividends under the
Texas Business Corporation Act and such other pertinent
governmental or contractual restrictions as are now or may
hereafter become effective. If the Corporation does not have
sufficient funds available to permit it lawfully to declare
and pay such distributions, the Shareholders and the
Corporation shall take such action, adopt such resolutions,
and cause such certificates and other documents to be filed as
may be necessary to create sufficient funds to permit the
making of such distributions, whereupon the Corporation shall
declare and pay such distributions.
(b) No provision of this Article 8 shall cause the total
distributions made with respect to any outstanding shares of stock of
the Corporation to differ from the amounts paid with respect to any
other outstanding shares of stock of the Corporation.
(c) No provision of this Article 8 shall be construed to limit
the ability of the Corporation to declare and make additional
distributions to Shareholders out of the assets of the Corporation
legally available for such payment at such time or times as the
Executive Committee may determine.
(d) The Corporation's payment of taxes on behalf of any
Shareholder (by means of withholding or otherwise) shall be considered
a distribution for purposes hereof, and the amount of distributions
that the Shareholder is otherwise entitled to hereunder shall be
adjusted accordingly consistent with Regulations Section
1.1361-1(1)(2)(ii).
F. Nonrecognition of Certain Transfers.
(a) The Corporation will not, nor will it be compelled to,
recognize any Transfer, or issue any certificate representing any Stock
to any person who has not delivered to the Corporation (i) a written
undertaking to be bound by the terms and conditions of this Agreement,
and (ii) for so long as the Corporation's status as an S corporation
continues, a written consent to the treatment of the Corporation as an
S corporation. The Corporation will not, nor will it be compelled to,
recognize any Transfer, or issue any certificate representing any Stock
to any person or entity the Transfer to whom or to which in the
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opinion of the Corporation's counsel could disqualify the Corporation
as an S corporation or disqualify it from eligibility for such status.
(b) The Corporation will not, nor be compelled to, recognize
any Transfer made other than in accordance with the terms of the
Articles of Incorporation, nor will it issue any certificate
representing the Stock to any person who has received such Stock in a
Transfer made other than in accordance with the terms of these Articles
of Incorporation.
G. Legends on Share Certificates. The following legend shall
be imprinted conspicuously on the face of each certificate representing
shares of Stock:
NOTICE IS HEREBY GIVEN THAT THE TRANSFER (INCLUDING, WITHOUT
LIMITATION, THE SALE, ASSIGNMENT, EXCHANGE, GIFT, DONATION,
PLEDGE, MORTGAGE, HYPOTHECATION OR OTHER ENCUMBRANCE OR OTHER
DISPOSITION) OF THE SHARES OF CAPITAL STOCK REPRESENTED BY
THIS CERTIFICATE IS SUBJECT TO AND RESTRICTED BY THE
PROVISIONS OF THE ARTICLES OF INCORPORATION OF THE
CORPORATION, AND ALL OF THE PROVISIONS OF SUCH ARTICLES ARE
INCORPORATED BY REFERENCE IN THIS CERTIFICATE, SPECIFICALLY
INCLUDING, BUT NOT LIMITED TO, THOSE PROVISIONS OF THE
ARTICLES RELATING TO THE CORPORATION'S TAX STATUS AS AN S
CORPORATION.
H. Election to Close Books. The Corporation, in the event the
Executive Committee so determines, shall consent to close the books of
the Corporation pursuant to Section 1377(a)(2) of the Code whenever a
Shareholder sells all of his or her Stock on a day other than the last
day of the Corporation's fiscal year if all "affected shareholders" (as
defined in Section 1377(a)(2)(B) of the Code) shall consent thereto.
4. A new Article 10 is hereby added to the Articles of Incorporation
which shall read in its entirety as follows:
10. Fair Price Provision. The stockholder vote required to approve any
Business Combination (as hereinafter defined) shall be as set forth in this
Article 10.
A. (1) Except as otherwise expressly provided in
section B. of this Article 10:
(i) any merger or consolidation of the corporation or
any Subsidiary (as hereinafter defined) with (a) any
Interested Shareholder (as hereinafter defined) or (b) any
other corporation (whether or not itself an Interested
Shareholder) which is, or after such merger of consolidation
would be, an Affiliate (as hereinafter defined) of any
Interested Shareholder;
(ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition (in one transaction or a series
of transactions) to or with any Interested Shareholder or any
Affiliate of any Interested Shareholder of all or
substantially all of the assets of the corporation or any
Subsidiary;
(iii) the issuance or transfer by the corporation or
any Subsidiary (in one transaction or a series of
transactions) of any securities of the corporation or any
Subsidiary to any Interested Shareholder or any Affiliate of
any Interested Shareholder in exchange for cash, securities or
other property (or a combination thereof) having an aggregate
fair market value of $2,000,000 or more;
(iv) the adoption of any plan or proposal for the
liquidation or dissolution of the corporation proposed by or
on behalf of any Interested Shareholder or any Affiliate of
any Interested Shareholder; or
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(v) any reclassification of securities (including any
reverse stock split), or recapitalization of the corporation,
or any merger or consolidation of the corporation with any of
its Subsidiaries or any other transaction (whether or not with
or into or otherwise involving any Interested Shareholder)
which has the effect, directly or indirectly, of increasing
the proportionate share of the outstanding shares of any class
of equity or convertible securities of the corporation or any
Subsidiary which is directly or indirectly owned by any
Interested Shareholder or any Affiliate of any Interested
Shareholder;
shall require the affirmative vote of the holders of at least
ninety-five percent (95%) of all of the then-outstanding
shares of the capital stock of the corporation, voting
together as a single class. Such affirmative vote shall be
required notwithstanding the fact that no vote may be required
or that a lesser percentage may be specified by law.
(2) The term "Business Combination" as used in this
Article Ten shall mean any transaction which is referred to in
any one or more of subparagraphs (i) through (v) of paragraph
(1) of this section A.
B. The provisions of section A. of this Article Ten shall not
be applicable to any particular Business Combination, and such Business
Combination shall require only such affirmative vote as is required by
law or any other provision of the corporation's Articles of
Incorporation or Bylaws if the conditions specified below are met:
(1) the "Continuing Directors" (as hereinafter
defined) of the corporation by at least an eighty percent
(80%) vote:
(i) have expressly approved in advance the
acquisition of the outstanding shares of capital
stock of the corporation that caused such Interested
Person to become an Interested Person, or
(ii) have expressly approved such Business
Combination either in advance of or subsequent to
such Interested Person's having become an Interested
Person; or
(2) the cash or fair market value (as determined by
at least a majority of the Continuing Directors) of the
property, securities or "Other Consideration to the Received"
(as hereinafter defined) per share paid by the Interested
Person to holders of the capital stock of the corporation in
the Business Combination is not less than the "Fair Price" (as
hereinafter defined) paid by the Interested Person in
acquiring any of its holdings of the corporation's capital
stock.
C. For the purposes of this Article 10:
(1) A "person' shall mean any individual, firm,
corporation or other entity.
(2) "Interested Shareholder" shall mean any person
(other than the corporation or any Subsidiary) who or which:
(i) is the beneficial owner, directly or
indirectly, of more than ten percent (10%) of the
shares of any class of the outstanding capital stock
of the corporation;
(ii) is an Affiliate of the corporation and
at any time within the two-year period immediately
prior to the date in question was the beneficial
owner, directly or indirectly, of ten percent (10%)
or more of the shares of any class of the outstanding
capital stock of the corporation; or
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(iii) is an assignee of or has otherwise
succeeded to any shares of any class of the
outstanding capital stock of the corporation which
were at any time within the two-year period
immediately prior to the date in question
beneficially owned by any Interested Shareholder, if
such assignment or succession shall have occurred in
the course of a transaction or series of transactions
not involving a public offering within the meaning of
the Securities Act of 1933.
(3) A person shall be a "beneficial owner" of any
capital stock of the corporation:
(i) which such person or any of its
Affiliates or Associates (as
hereinafter defined) beneficially
owns, directly or indirectly;
(ii) which such person or any of its
Affiliates or Associates has (a) the
right to acquire (whether such right
is exercisable immediately or only
after the passage of time), pursuant
to any agreement, arrangement or
understanding or upon the exercise
of conversion rights, exchange
rights, warrants or options, or
otherwise, or (b) the right to vote
pursuant to any agreement,
arrangement or understanding; or
(iii) which are beneficially owned,
directly or indirectly, by any other
person with which such person or any
of its Affiliates or Associates has
any agreement, arrangement or
understanding for the purpose of
acquiring, holding, voting or
disposing of any shares of such
capital stock.
(4) For the purposes of determining whether a person
is an Interested Shareholder pursuant to paragraph (2) of this
section C., the number of shares of capital stock of the
corporation deemed to be outstanding shall include shares
deemed owned through application of paragraph (3) of this
section C. but shall not include any other shares of capital
stock which may be issuable pursuant to any agreement,
arrangement or understanding, or upon exercise of conversion
rights, warrants or options, or otherwise.
(5) "Affiliate" or "Associate" shall have the
respective meanings ascribed to such terms in Rule 12b-2 of
the General Rules and Regulations under the Securities
Exchange Act of 1934.
(6) "Subsidiary" means any corporation of which a
majority of any class of equity security is owned, directly or
indirectly, by the corporation; provided, however, that for
the purposes of the definition of Interested Shareholder set
forth in paragraph (2) of this section C., the term
"Subsidiary" shall mean only a corporation of which a majority
of each class of equity security is owned directly or
indirectly, by the corporation.
(7) "Continuing Director" means any member of the
Board of Directors of the corporation (the "Board") who is
unaffiliated with the Interested Shareholder and was a member
of the Board prior to the time that the Interested Shareholder
became an Interested Shareholder, and any successor of a
Continuing Director who is unaffiliated with the Interested
Shareholder and is recommended to succeed a Continuing
Director by a majority of Continuing Directors then on the
Board.
(8) "Fair Price" shall mean the following: If there
is only one class of capital stock of the corporation issued
and outstanding, the Fair Price shall mean the highest price
that can be determined by a majority of the Continuing
Directors to have been paid at any time by the Interested
Person for any share or shares of that class of capital stock.
If there is more than one class of capital stock of the
corporation issued and outstanding, the Fair Price shall mean
with
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respect to each class and series of capital stock of the
corporation, the amount determined by a majority of the
Continuing Directors to be the highest per share price
equivalent of the highest price that can be determined to have
been paid at any time by the Interested Person for any share
or shares of any class or series of capital stock of the
corporation. In determining the Fair Price, all purchases by
the Interested Person shall be taken into account regardless
of whether the shares were purchased before or after the
Interested Person became an Interested Person. Also, the Fair
Price shall include any brokerage commissions, transfer taxes
and soliciting dealers' fees paid by the Interested Person
with respect to the shares of capital stock of the corporation
acquired by the Interested Person. In the case of any Business
Combination with an Interested Person, a majority of the
Continuing Directors shall determine the Fair Price for each
class and series of the Capital stock of the corporation.
The Fair Price shall also include interest compounded annually
from the date an Interested Person became an Interested Person
through the date the Business Combination is consummated at
the rate of seven percent (7%) per annum less the aggregate
amount of any cash dividends paid, and the fair market value
of any dividends paid in other than cash, on each share of
capital stock in the same time period, in an amount up to but
not exceeding the amount of interest so payable per share of
capital stock.
(9) "Other Consideration to be Received" shall
include, without limitation, Common Stock or other capital
stock of the corporation retained by its existing stockholders
other than Interested Persons or other parties to such
Business Combination in the event of a Business Combination in
which the corporation is the surviving corporation.
D. A majority of the Board of Directors of the corporation
shall have the power and duty to determine, on the basis of information
known to them after reasonable inquiry, whether a person is an
Interested Shareholder. Once the Board has made a determination
pursuant to the preceding sentence that a person is an Interested
Shareholder, a majority of the number of Directors who are Continuing
Directors shall have the power and duty to interpret all of the terms
and provisions of this Article Ten, and to determine on the basis of
information known to them after reasonable inquiry all facts necessary
to determine compliance with this Article Ten, including, without
limitation, (1) the number of shares of capital stock of the
corporation beneficially owned by any person, (2) whether a person is
an Affiliate or Associate of another, and (3) whether the applicable
conditions set forth in section B. have been met with respect to any
Business Combination.
E. Nothing contained in this Article Ten shall be construed to
relieve any Interested Shareholder from any fiduciary obligation
imposed by law.
F. Notwithstanding any other provisions of the corporation's
Articles of Incorporation or Bylaws or any provision of law which might
otherwise permit a lesser vote or no vote, but in addition to any
affirmative vote of the holders of any particular class or series of
the capital stock of the corporation required by law, or by the
corporation's Articles of Incorporation or Bylaws, the affirmative vote
of the holders of at least ninety-five percent (95%) of the
then-outstanding shares of the capital stock of the corporation, voting
together as a single class, shall be required to alter, amend or repeal
this Article.
5. Current Articles 7, 8 and 9 of the Articles of Incorporation shall
be renumbered Articles 9, 11 and 12, respectively, but shall otherwise remain
unchanged.
ARTICLE TWO
Each such amendment made by the Restated Articles of Incorporation has
been effected in conformity with the provisions of the Texas Business
Corporation Act and such Restated Articles of Incorporation and each such
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amendment made by the Restated Articles of Incorporation were duly adopted by
the shareholders of the Corporation on the 29th day of October, 1998.
ARTICLE THREE
The number of shares outstanding was 1,000; the number of shares
entitled to vote on the Restated Articles of Incorporation as so amended was
1,000; the number of shares voted for such Restated Articles as so amended was
1,000; and the number of shares voted against such Restated Articles as so
amended was -0-.
ARTICLE FOUR
The Articles of Incorporation and all amendments and additions thereto
are hereby superseded by the following Restated Articles of Incorporation which
accurately copy the entire text thereof and as amended as above set forth:
1. Name. The name of the Corporation is First Command Financial
Corporation.
2. Duration. The period of its duration is perpetual.
3. Purposes. The Corporation is being organized under the Texas
Business Corporation Act for the purpose of carrying out any lawful purposes.
4. Shares. The aggregate number of shares which the Corporation is
authorized to issue is ten million ten thousand (10,010,000) shares, each having
a par value of $.01. The shares are to be designated as Common Stock and will
have identical rights and privileges in every respect, with the sole exception
that ten thousand (10,000) of such shares shall be designated as Voting Common
Stock and shall possess the right to vote on all matters that may come before
the stockholders of the Corporation, and ten million (10,000,000) of such shares
shall be designated as Nonvoting Common Stock and shall not possess the right to
vote on any matter except as specifically provided by the Texas Business
Corporation Act.
5. Commencement of Business. The Corporation will not commence business
until it has received for the issuance of its shares consideration having a
minimum value of One Thousand and No/100 Dollars ($1,000.00) and consisting only
of labor done or money or property actually received.
6. No Preemptive Rights. No holder of any shares of any class of stock
of the Corporation shall, as such holder, have any preemptive or preferential
right to receive, purchase or subscribe to additional, unissued or treasury
shares of any class of stock of the Corporation, or securities, obligations or
evidences of indebtedness of the Corporation convertible into or carrying a
right to subscribe to or purchase such shares, or any other securities that may
hereafter from time to time be issued or sold by the Corporation.
7. Restrictions on Transfer of Shares. Except as otherwise expressly
provided and authorized herein, a Shareholder shall not Transfer (as defined
below) any shares of Stock that he or she now or hereafter owns. The parties
hereto understand that the Corporation may refuse to Transfer the shares of
Stock on its books and records when that Transfer would not be in compliance
with the terms hereof, and that any attempted Transfer in violation hereof shall
be null and void.
A. Definitions. As used herein:
(1) Code. The term "Code" shall mean the Internal Revenue Code
of 1986, as amended from time to time.
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(2) Determination Date. The term "Determination Date" shall
mean the day upon which, in the case of a purchase of Stock hereunder, the
Disposition Notice referred to in Section 3.1 has been received by the
Corporation, except that with respect to a Disposition Notice made in connection
with the death of a Shareholder or the termination of a Shareholder's marital
relationship, "DETERMINATION DATE" shall mean the date of that death or
termination.
(3) Disposing Shareholder. The term "Disposing Shareholder"
shall mean that Shareholder (or the surviving spouse of or estate of a deceased
Shareholder in the case of a Shareholder's death) required to tender shares of
Stock to the Corporation upon the occurrence of an Operative Event with respect
to that Shareholder.
(4) Disposition Notice. The term "Disposition Notice" shall
mean the written notice required by paragraph C.(1) below to be made by the
Disposing Shareholder to the Corporation or allowed by paragraph C.(1) to be
made by the Corporation to the Disposing Shareholder.
(5) Operative Event. The term "Operative Event" shall mean,
with respect to any Shareholder, any of the following events:
(a) Any threatened or actual Transfer of Stock in any
manner whatsoever by that Shareholder;
(b) The death of that Shareholder;
(c) The termination of the marital relationship of
that Shareholder by death or divorce if that Shareholder does not succeed to his
or her spouse's community interest in the Stock or the entering into of any
property settlement arrangement or agreement in connection therewith, pursuant
to which that Shareholder's interest in his or her Stock is to be diluted,
lessened, encumbered or impaired;
(d) Any threatened or actual (i) bankruptcy or
insolvency of that Shareholder or (ii) institution of legal proceedings because
or by reason of the bankruptcy or insolvency of that Shareholder;
(e) The termination of the status of that Shareholder
as a duly licensed Texas life insurance agent;
(f) The cessation of that Shareholder as a duly
authorized agent of the Corporation pursuant to a current written agency
agreement, except that with respect to an involuntary termination as a duly
authorized agent of the Corporation, such termination shall require approval by
a vote of eighty percent (80%) of the Board of Directors of the Corporation;
(g) The change in status of that Shareholder to a
"non-resident alien" as defined in the Code; or
(h) Any threatened or actual levy by a creditor or
claimant upon the shares of Stock
held by that Shareholder or any other seizure or sale by legal process, if it is
determined by legal counsel for the Corporation that such levy is made in good
faith and based upon a bona fide claim.
It shall not be a requirement hereunder that the Executive Committee of the
Board of Directors of the Corporation (the "Executive Committee") make a
determination in every instance that an Operative Event has so occurred with
respect to any Shareholder, but such determination shall be made in those
instances in which there may be some question as to whether an Operative Event
did in fact occur. Upon such determination by the Executive Committee that an
Operative Event has in fact occurred, in order to inform the Shareholder of such
occurrence, the Corporation may deliver a written notice to the Shareholder or
his or her legal representative stating that (i) such an Operative Event has
occurred, (ii) the date thereof and (iii) the reasons for the determination. The
Shareholder affected or his
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or her legal representative shall thereupon be required to tender to the
Corporation for sale his or her Stock to the Corporation upon the terms and
conditions as set forth in paragraph C. below.
(6) Transfer. The term "Transfer" shall mean, as a noun, a
transfer, sale, assignment, exchange, gift, donation, pledge, mortgage,
hypothecation or other encumbrance or other disposition, and as a verb, to
transfer, sell, assign, exchange, gift, donate, pledge, mortgage, hypothecate or
otherwise encumber or otherwise dispose.
B. Restrictions on Transfer of Shares.
Except as otherwise expressly provided and authorized in the Articles
of Incorporation, a Shareholder shall not Transfer any shares of Stock that he
or she now or hereafter owns. The Corporation may refuse to Transfer the shares
of Stock on its books and records when that Transfer would not be in compliance
with the terms of the Articles of Incorporation, and any attempted Transfer in
violation hereof shall be null and void.
(1) Restrictions on Transfer.
(a) No Shareholder may Transfer, and no person may
acquire, the legal or beneficial ownership of any share of Stock now or
hereafter owned by him or her if that Transfer or acquisition would cause the S
corporation status of the Corporation to terminate. Specifically, no Transfer
may be made to, and no acquisition may be made by, any person who would cause
the Corporation to have more than the maximum permitted number of shareholders
under the Code as then in effect or to any person that is not eligible to be a
shareholder of an S corporation under the provisions of the Code.
(b) In addition to the requirements of paragraph
B.(1)(a) above, no Transfer of shares of Stock shall be permitted, and no
purported Transfer shall be effective, until the transferee has followed all of
the requirements of paragraph C. below.
(c) Notwithstanding B.(1)(a) and (b) above, with the
prior written consent of the Executive Committee, a Shareholder may pledge,
mortgage, hypothecate or otherwise encumber his or her Stock subject to such
terms, conditions and restrictions as the Executive Committee shall determine to
be appropriate in the exercise of its sole discretion.
(2) Effect of Purported Transfer. Any purported Transfer or
acquisition of shares of Stock in violation of paragraph B.(1) above shall be
null and void. The purported transferee shall have no interest in any of the
shares of Stock purported to be transferred. Any such purported Transfer or
acquisition may and should be enjoined by the Corporation in the event that the
Executive Committee so determines.
(3) Beneficial Ownership. Any purported Transfer in violation
hereof will not affect the beneficial ownership of the shares of Stock. Thus,
the Shareholder making the purported transfer will retain the right to vote and
the right to receive distributions and liquidation proceeds related to those
shares. Additionally, a Shareholder making the purported Transfer shall continue
to report the portion of income or loss allocated by the Corporation in
accordance with the provisions of the Code.
C. Tender Requirement.
(1) Tender for Sale. Upon the occurrence of any Operative
Event with respect to a Shareholder, the Disposing Shareholder, or his or her
legal representative, as the case may be, must tender for sale all shares of
Stock owned by the Disposing Shareholder. In the case of an Operative Event, the
Disposing Shareholder is required to mail a Disposition Notice to the
Corporation no less than one hundred twenty (120) days prior to the date of the
proposed Transfer. Alternatively, upon an Operative Event of a Disposing
Shareholder, the Corporation may mail a Disposition Notice to that Disposing
Shareholder. Upon its receipt or its mailing of a
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Disposition Notice, the Corporation shall have the exclusive right and option,
exercisable at the sole discretion of the Executive Committee, as described in
paragraph C.(2) to buy such shares of Stock, or any portion thereof, as provided
herein. The Disposition Notice shall be sent by certified mail, if to the
Corporation, to the attention of the president and the general counsel of the
Corporation at the principal address of the Corporation, or if to the Disposing
Shareholder at his or her last known address. In the event that the Operative
Event involves a proposed Transfer pursuant to an offer to purchase or sell all
or any portion of a Shareholder's Stock received or made by such Shareholder
from or to a third party, the Disposition Notice shall set forth the full
details of such proposed Transfer including, among other things, the name of the
offeror or proposed purchaser or transferee, the number of shares covered by the
offer, the purchase price per share, the terms of payment, whether for cash or
credit (and if by credit, the maturity and interest rate), any and all other
consideration being received or paid in connection with such proposed Transfer,
and any and all other terms, conditions and details of such offer.
(2) Purchase by Corporation. Upon delivery of a valid
Disposition Notice, the Corporation shall have the exclusive right and option,
exercisable at any time within one hundred twenty (120) days after the mailing
of a Disposition Notice, to purchase all or part of the Disposing Shareholder's
shares of Stock at the Purchase Price and on the terms and conditions set forth
herein. If the Corporation chooses to exercise the option (in whole or in part),
it shall give written notification (the "Corporate Exercise Notice") to that
effect to the Disposing Shareholder or his or her legal representative, as the
case may be, setting forth the number and type of shares being purchased and the
price and terms and conditions, in accordance with this Agreement, and such sale
and purchase shall be closed on the one hundred twentieth (120th) day after the
Corporate Exercise Notice is sent to the Disposing Shareholder or to his or her
legal representative (or, if such date is not a business day, on the first
business day thereafter).
(3) Third Party Bound. If, in accordance with this paragraph
C., shares of Stock are Transferred to a third party, the Disposing Shareholder
shall require, as a condition of the sale to such third party, that the
purchaser or transferee of his or her shares will become a party to this
Agreement, but only if the Corporation so desires and agrees to such purchaser
becoming subject to this Agreement in a written notice sent to the Disposing
Shareholder. All shares of Stock retained by the Disposing Shareholder shall
remain subject to all of the provisions of the Articles of Incorporation.
D. Insurance. In order to facilitate the purchase of shares of Stock
upon the death of a Shareholder, the Corporation may, but is not required to,
apply for and obtain separate policies of insurance upon the lives of each of
the Shareholders payable to the Corporation; provided, however, that the
purchase price of the shares of Stock and the manner and terms of payment
therefor shall be governed in all respect by paragraphs E and F below. The
Corporation will pay the premiums upon such policies and shall provide proof of
payment of such premiums to any Shareholder, upon his or her request. The
Corporation shall be the sole owner, and shall have the sole right to designate
the beneficiary or beneficiaries, of such policy or policies.
E. Purchase Price.
(1) Purchase Price. In the case of all Operative Events, the
purchase price per share of Stock to be paid by the Corporation shall be the
Purchase Price, as defined in paragraph (2) below.
(2) Agreed Value. The Corporation, at least annually, shall
advise the Shareholders in writing of the price per share of Stock which the
Corporation will pay to any and all Disposing Shareholders for shares tendered
pursuant hereto. Each such determination of the "PURCHASE PRICE" shall become
effective on the date specified by the Corporation and shall remain effective
until the next determination of a new Purchase Price and shall be
proportionately adjusted for any subsequent increase or decrease of the number
of issued shares of Stock resulting from a subdivision or consolidation of
shares or other adjustment, or the payment of a stock dividend or other increase
or decrease in the number of shares of Stock outstanding, effective without the
receipt of consideration by the Corporation. It is specifically agreed that this
Purchase Price shall be the purchase price paid by the Corporation hereunder to
any Disposing Shareholder.
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F. Payment of Purchase Price.
(1) Transfer and Delivery of Stock. At the closing, or at some
other time or place designated by all of the parties, the Disposing Shareholder
or his or her legal representative shall deliver to the Corporation in exchange
for the concurrent payment of the Purchase Price, the certificates of shares of
the Stock being purchased, free and clear of all liens, claims, security
interests and encumbrances, duly endorsed for transfer and bearing any necessary
documentary stamps, and such assignments, certificates of authority, tax
releases, consents to transfer by a fiduciary or representative of the Disposing
Shareholder, and any instruments in evidence of the title of the Shareholder and
of the parties' compliance with this Agreement, the federal and state securities
laws, and any other agreements or regulations as may be recommended by counsel
for the Corporation.
(2) Method. The manner of payment of the Purchase Price may
be, at the option of the Corporation, either (i) the payment of the entire
Purchase Price, by cash or by certified, bank cashier, or treasurer's check, or
(ii) down payment of twenty percent (20%) of such Purchase Price in cash at
closing and delivery of a promissory note or promissory notes for the balance,
in non-negotiable form, to the order of the Disposing Shareholder or his or her
legal representative, pursuant to which the Corporation agrees to pay the
balance in four (4) equal annual installments, with interest on the unpaid
balance at the lesser of (i) the rate of the prime rate published in The Wall
Street Journal per annum on the date of the closing or (ii) the highest
non-usurious rate permitted by applicable law, with each installment of
principal and interest payable annually on each anniversary date of the making
of the promissory note, and with the right of the Corporation to prepay at any
time without premium or penalty. The promissory note shall be secured by the
pledge of Stock purchased thereby, with executed security instruments covering
such pledged Stock, unless such pledge arrangement is waived by the Disposing
Shareholder or his or her legal representative, as the case may be.
Notwithstanding anything herein to the contrary, in the event that the Disposing
Shareholder dies, the down payment provided for in clause (ii) above shall not
be less than the proceeds received by the Corporation under the insurance, if
any, described in paragraph D above.
8. Subchapter S Provisions.
A. Subchapter S Representation. Each Shareholder acknowledges that the
Corporation has made a valid election to be treated, for federal and state
income tax purposes, as an S corporation. Each Shareholder shall provide to the
Corporation, immediately upon the Corporation's request, such properly signed
consents or other documents as, in the opinion of the Corporation, may be
necessary or useful to maintain the Corporation's status as an S corporation,
and each Shareholder covenants that he or she will do nothing to interfere with
the Corporation's maintenance of its status as an S corporation.
B. Revocation of Election. In the event that the Shareholders, by the
affirmative vote of at least eighty percent (80%) of the votes which all of the
Shareholders are entitled to cast, determine to terminate the Corporation's
status as an S corporation, and thereafter each Shareholder is provided with
written notice of such determination, within sixty (60) days after the delivery
of such notice, each Shareholder, if requested, will execute a consent to such
revocation in the form prescribed by the Internal Revenue Service or any
relevant state tax authority and shall deliver such consent to the Secretary of
the Corporation. If the Corporation's S status is terminated under this
paragraph B., in the event that the Executive Committee so determines, the
Shareholders and the Corporation shall elect, if applicable, to have Section
1362(e)(2) of the Code not apply, as provided in Section 1362(e)(3) of the Code.
Any person who was a Shareholder at any time during the S short year (as defined
in Section 1362(e)(1)(A) of the Code) or who is a Shareholder on the first day
of the C short year (as defined in Section 1362(e)(1)(B) of the Code) shall
consent to such election.
C. Inadvertent Termination of Subchapter S Election. In the event of a
termination of the Corporation's status as an S corporation other than pursuant
to paragraph B. above, if the Corporation and the Shareholders remaining after
such termination desire that the Corporation's status as an S corporation be
continued, the Corporation and all Shareholders as of and/or after the
terminating event shall use their best efforts to obtain from the Internal
Revenue Service a waiver of the terminating event on the ground of inadvertency.
The Corporation and
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the Shareholders shall take such steps, and make such adjustments, as may be
required by the Internal Revenue Service pursuant to Section 1362(f)(3) and (4)
of the Code. If a Shareholder caused the terminating event to occur, he or she
shall bear the expense of procuring the waiver, including the legal, accounting
and tax costs of taking such steps, and of making such adjustments as may be
required. If the inadvertent termination is not waived by the Internal Revenue
Service and the Corporation's S status is permanently terminated, in the event
that the Executive Committee so determines, the Corporation and the Shareholders
shall make the election under Section 1362(e)(3) of the Code contemplated by
paragraph B. above.
D. Provision in Shareholder Wills. Each Shareholder shall use his or
her best efforts to include in his or her will a direction and authorization to
his or her executor in substantially the following form:
(a) My Executor is hereby directed and authorized to hold
stock of an S Corporation, as defined in the Code (hereinafter "S Stock"), to
make an election to have any corporation treated as an S Corporation, to enter
into agreements with other shareholders or with the corporation relating to a
transfer (including, without limitation, a sale, assignment, exchange, gift,
donation, mortgage, hypothecation or other encumbrance or other disposition (a
"Transfer") of S Stock or the management of the S Corporation, and to allocate
amounts received and the tax on undistributed income between income and
principal. During the administration of my estate, my Executor may allocate the
tax deductions and credits arising from ownership of S Stock between income and
principal. In making any such allocations, my Executor shall consider that the
beneficiary is to have enjoyment of the property at least equal to that
ordinarily associated with an income interest and in all events shall provide
the required beneficial enjoyment to the beneficiary until such time as the S
Stock is distributed to him or her.
(b) Any beneficiary of my estate who receives stock in an S
Corporation as part of his or her distribution shall, prior to such
distribution, enter into a written agreement with said S Corporation (i) to
consent to any election to qualify the S Corporation as such; (ii) to do nothing
to interfere with the S Corporation's maintenance of its status as such; (iii)
not to Transfer the S Stock to any transferee who does not agree to execute a
similar consent; (iv) not to Transfer the S Stock in such manner as will cause
the S Corporation to lose its status as an S Corporation under the then
applicable federal and state income tax statutes and regulations; and (v) if S
status is inadvertently terminated, to join in any endeavor to obtain a waiver
of the terminating event on the grounds of inadvertency from the Internal
Revenue Service if the S Corporation desires that the S status should continue.
(c) Any S Stock distributed to a beneficiary shall bear an
appropriate legend on the stock certificate stating that the Transfer of the
stock is subject to and restricted to the extent set forth in subparagraph (b)
above.
Notwithstanding the foregoing requirement, the failure of a Shareholder so to
direct his or her executor shall not affect the validity of these Articles of
Incorporation.
E. Distributions to Pay Tax Liabilities.
(a) For the period during which the Corporation is an S
Corporation (the "S Corp Period"), the Corporation shall promptly declare and
make distributions during the S Corp Period to all Shareholders in a timely
manner to allow the federal income tax (including, without limitation, estimated
tax payments) attributable to the Corporation's taxable income during the S Corp
Period that is passed through the Corporation to the Shareholders to be paid by
such Shareholders when due (each, a "Due Date"). To satisfy this requirement,
during the S Corp Period, the Corporation shall pay on or before five (5) days
prior to each Due Date, an amount so that the cumulative amount of distributions
during the S Corp. Period that have been designated by the Corporation as "Tax
Distributions" are at least equal to the excess of (i) the sum of the products
of (A) the Corporation's positive taxable income (as determined under Section
1366(a) of the Code) attributed to its Shareholders during each of its taxable
periods during the S Corp Period multiplied by (B) the highest appropriate
federal individual income tax rates in effect for each such taxable period
(without regard to exemptions or phase-outs of lower tax rates, but with
consideration of the character of any item and the deductibility of state taxes
for federal income tax purposes), over
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(ii) the sum of the products of (A) the Corporation's negative taxable income
(as determined under Section 1366(a) of the Code) attributable to its
Shareholders during each of its taxable periods during the S Corp Period
multiplied by (B) the highest appropriate federal income tax rates in effect for
each such taxable period (without regard to exemptions or phase-outs of lower
tax rates, but with consideration of the character of any item and the
deductibility of state taxes for federal income tax purposes). The Corporation's
obligation to declare and make any such distributions to the Shareholders is
subject to the restrictions governing dividends under the Texas Business
Corporation Act and such other pertinent governmental or contractual
restrictions as are now or may hereafter become effective. If the Corporation
does not have sufficient funds available to permit it lawfully to declare and
pay such distributions, the Shareholders and the Corporation shall take such
action, adopt such resolutions, and cause such certificates and other documents
to be filed as may be necessary to create sufficient funds to permit the making
of such distributions, whereupon the Corporation shall declare and pay such
distributions.
(b) No provision of this Article 8 shall cause the total
distributions made with respect to any outstanding shares of stock of the
Corporation to differ from the amounts paid with respect to any other
outstanding shares of stock of the Corporation.
(c) No provision of this Article 8 shall be construed to limit
the ability of the Corporation to declare and make additional distributions to
Shareholders out of the assets of the Corporation legally available for such
payment at such time or times as the Executive Committee may determine.
(d) The Corporation's payment of taxes on behalf of any
Shareholder (by means of withholding or otherwise) shall be considered a
distribution for purposes hereof, and the amount of distributions that the
Shareholder is otherwise entitled to hereunder shall be adjusted accordingly
consistent with Regulations Section 1.1361-1(1)(2)(ii).
F. Nonrecognition of Certain Transfers.
(a) The Corporation will not, nor will it be compelled to,
recognize any Transfer, or issue any certificate representing any Stock to any
person who has not delivered to the Corporation (i) a written undertaking to be
bound by the terms and conditions of this Agreement, and (ii) for so long as the
Corporation's status as an S corporation continues, a written consent to the
treatment of the Corporation as an S corporation. The Corporation will not, nor
will it be compelled to, recognize any Transfer, or issue any certificate
representing any Stock to any person or entity the Transfer to whom or to which
in the opinion of the Corporation's counsel could disqualify the Corporation as
an S corporation or disqualify it from eligibility for such status.
(b) The Corporation will not, nor be compelled to, recognize
any Transfer made other than in accordance with the terms of the Articles of
Incorporation, nor will it issue any certificate representing the Stock to any
person who has received such Stock in a Transfer made other than in accordance
with the terms of these Articles of Incorporation.
G. Legends on Share Certificates. The following legend shall be
imprinted conspicuously on the face of each certificate representing shares of
Stock:
NOTICE IS HEREBY GIVEN THAT THE TRANSFER (INCLUDING, WITHOUT
LIMITATION, THE SALE, ASSIGNMENT, EXCHANGE, GIFT, DONATION,
PLEDGE, MORTGAGE, HYPOTHECATION OR OTHER ENCUMBRANCE OR OTHER
DISPOSITION) OF THE SHARES OF CAPITAL STOCK REPRESENTED BY
THIS CERTIFICATE IS SUBJECT TO AND RESTRICTED BY THE
PROVISIONS OF THE ARTICLES OF INCORPORATION OF THE
CORPORATION, AND ALL OF THE PROVISIONS OF SUCH ARTICLES ARE
INCORPORATED BY REFERENCE IN THIS CERTIFICATE, SPECIFICALLY
INCLUDING, BUT
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NOT LIMITED TO, THOSE PROVISIONS OF THE ARTICLES RELATING TO
THE CORPORATION'S TAX STATUS AS AN S CORPORATION.
H. Election to Close Books. The Corporation, in the event the Executive
Committee so determines, shall consent to close the books of the Corporation
pursuant to Section 1377(a)(2) of the Code whenever a Shareholder sells all of
his or her Stock on a day other than the last day of the Corporation's fiscal
year if all "affected shareholders" (as defined in Section 1377(a)(2)(B) of the
Code) shall consent thereto.
9. Special Provisions Permitted to Be Set Forth in Articles of
Incorporation:
A. Interested Directors and Officers.
(1) If paragraph (2) below is satisfied, no contract or
transaction between the Corporation and any of its directors or officers (or any
other corporation, partnership, association or other organization in which any
of them directly or indirectly have a financial interest) shall be void or
voidable solely because of this relationship or because of the presence or
participation of such director or officer at the meeting of the Board or
committee authorizing such contract or transaction, or because such person's
votes are counted for such purpose.
(2) Paragraph (1) above will apply only if:
(a) The contract or transaction is fair to the
Corporation as of the time it is authorized or ratified by the Board of
Directors, a committee of the Board, or the shareholders; or
(b) The material facts as to the relationship or
interest of each such director or officer as to the contract or transaction are
known or disclosed: (i) to the shareholders entitled to vote thereon and they
nevertheless in good faith authorize or ratify the contract or transaction by a
majority of the shares present, each such interested person to be counted for
quorum and voting purposes; or (ii) to the Board of Directors or the committee,
and the Board or committee nevertheless in good faith authorizes or ratifies the
contract or transaction by a majority of the disinterested directors present,
each such interested director to be counted in determining whether a quorum is
present but not in calculating the majority necessary to carry the vote.
B. Limitation of Liability. No Director of the Corporation shall be
personally liable to the Corporation or its shareholders for monetary damages
for any act or omission in the Director's capacity as a director, except to the
extent otherwise expressly provided by statute of the State of Texas. Any repeal
or modification of this Article shall be prospective only, and shall not
adversely affect any limitation of the personal liability of a Director of the
Corporation existing at the time of the repeal or modification.
C. Indemnification. The Corporation shall, to the maximum extent
permitted from time to time under the laws of the State of Texas, indemnify and
upon request shall advance expenses to any person who is or was a party to any
threatened, pending, or completed action, suit, proceeding, or claim, whether
civil, criminal, administrative or investigative, by reason of the fact that he
or she is or was or has agreed to be a trustee, director or officer of the
Corporation, or is or was serving at the request of the Corporation as a
trustee, director, officer, partner, venturer or proprietor of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees and expenses), judgments, fines, penalties
and amounts paid in settlement incurred in connection with the investigation,
preparation to defend or defense of any such action, suit, proceeding or claim.
Such indemnification shall not be exclusive of any other indemnification rights
arising under any bylaw, agreement, vote of Directors or shareholders or
otherwise and shall inure to the benefit of the heirs and legal representations
of such person. Any repeal or modification of this Article shall be prospective
only, and shall not adversely affect any rights to indemnification of any such
person existing at the time of the repeal or modification.
D. Insurance. The Corporation may purchase and maintain insurance on
any person who is or was a trustee, director or officer of the Corporation or is
or was serving at the request of the Corporation as a trustee,
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director, officer, partner, venturer or proprietor of another corporation,
partnership, joint venture, trust or other enterprise, against any liability
incurred by him in any such position arising out of his status as such, whether
or not the Corporation would have the power to indemnify him against such
liability under Article 9.C. above.
E. Bylaws. The power to alter, amend, repeal, or adopt the Bylaws is
hereby vested in the Board of Directors, subject to repeal or change by action
of the Shareholders.
F. Non-Cumulative Voting. At each election for Directors, every
shareholder entitled to vote at such election shall have the right to vote in
person or by proxy the number of shares owned by him for as many persons as
there are Directors to be elected for whose election he has a right to vote. No
shareholder shall have the right to cumulate his votes in any election of
Directors.
G. Shareholder Consent. It is hereby provided that, in accordance with
Article 9.10.A of the Texas Business Corporation Act, any action required to be
taken at any annual or special meeting of shareholders, or any action which may
be taken at any annual or special meeting of shareholders, may be taken without
a meeting, without prior notice, and without a vote, if a consent or consents in
writing, setting forth the action so taken, shall be signed by the holder or
holders of shares having not less than the minimum number of votes that would be
necessary to take such action at a meeting at which the holders of all shares
entitled to vote on the action were present and voted.
10. Fair Price Provision. The stockholder vote required to approve any
Business Combination (as hereinafter defined) shall be as set forth in this
Article 10.
A. (1) Except as otherwise expressly provided in section B. of
this Article 10:
(i) any merger or consolidation of the corporation or
any Subsidiary (as hereinafter defined) with (a) any Interested Shareholder (as
hereinafter defined) or (b) any other corporation (whether or not itself an
Interested Shareholder) which is, or after such merger of consolidation would
be, an Affiliate (as hereinafter defined) of any Interested Shareholder;
(ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition (in one transaction or a series of transactions)
to or with any Interested Shareholder or any Affiliate of any Interested
Shareholder of all or substantially all of the assets of the corporation or any
Subsidiary;
(iii) the issuance or transfer by the corporation or
any Subsidiary (in one transaction or a series of transactions) of any
securities of the corporation or any Subsidiary to any Interested Shareholder or
any Affiliate of any Interested Shareholder in exchange for cash, securities or
other property (or a combination thereof) having an aggregate fair market value
of $2,000,000 or more;
(iv) the adoption of any plan or proposal for the
liquidation or dissolution of the corporation proposed by or on behalf of any
Interested Shareholder or any Affiliate of any Interested Shareholder; or
(v) any reclassification of securities (including any
reverse stock split), or recapitalization of the corporation, or any merger or
consolidation of the corporation with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise involving any Interested
Shareholder) which has the effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any class of equity or
convertible securities of the corporation or any Subsidiary which is directly or
indirectly owned by any Interested Shareholder or any Affiliate of any
Interested Shareholder; shall require the affirmative vote of the holders of at
least ninety-five percent (95%) of all of the then-outstanding shares of the
capital stock of the corporation, voting together as a single class. Such
affirmative vote shall be required notwithstanding the fact that no vote may be
required or that a lesser percentage may be specified by law.
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(2) The term "Business Combination" as used in this Article
Ten shall mean any transaction which is referred to in any one or more of
subparagraphs (i) through (v) of paragraph (1) of this section A.
B. The provisions of section A. of this Article Ten shall not be
applicable to any particular Business Combination, and such Business Combination
shall require only such affirmative vote as is required by law or any other
provision of the corporation's Articles of Incorporation or Bylaws if the
conditions specified below are met:
(1) the "Continuing Directors" (as hereinafter defined) of the
corporation by at least an eighty percent (80%) vote:
(i) have expressly approved in advance the
acquisition of the outstanding shares of capital stock of the corporation that
caused such Interested Person to become an Interested Person, or
(ii) have expressly approved such Business
Combination either in advance of or
subsequent to such Interested Person's having become an Interested Person; or
(2) the cash or fair market value (as determined by at least a
majority of the Continuing Directors) of the property, securities or "Other
Consideration to the Received" (as hereinafter defined) per share paid by the
Interested Person to holders of the capital stock of the corporation in the
Business Combination is not less than the "Fair Price" (as hereinafter defined)
paid by the Interested Person in acquiring any of its holdings of the
corporation's capital stock.
C. For the purposes of this Article 10:
(1) A "person' shall mean any individual, firm, corporation or
other entity.
(2) "Interested Shareholder" shall mean any person (other than
the corporation or any Subsidiary) who or which:
(i) is the beneficial owner, directly or indirectly,
of more than ten percent (10%) of the shares of any class of the outstanding
capital stock of the corporation;
(ii) is an Affiliate of the corporation and at any
time within the two-year period immediately prior to the date in question was
the beneficial owner, directly or indirectly, of ten percent (10%) or more of
the shares of any class of the outstanding capital stock of the corporation; or
(iii) is an assignee of or has otherwise succeeded to
any shares of any class of the outstanding capital stock of the corporation
which were at any time within the two-year period immediately prior to the date
in question beneficially owned by any Interested Shareholder, if such assignment
or succession shall have occurred in the course of a transaction or series of
transactions not involving a public offering within the meaning of the
Securities Act of 1933.
(3) A person shall be a "beneficial owner" of any capital
stock of the corporation:
(i) which such person or any of its Affiliates or
Associates (as hereinafter defined) beneficially owns, directly or indirectly;
(ii) which such person or any of its Affiliates or
Associates has (a) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of conversion rights, exchange
rights, warrants or options, or otherwise, or (b) the right to vote pursuant to
any agreement, arrangement or understanding; or
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<PAGE>
(iii) which are beneficially owned, directly or
indirectly, by any other person with which such person or any of its Affiliates
or Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any shares of such capital stock.
(4) For the purposes of determining whether a person is an
Interested Shareholder pursuant to paragraph (2) of this section C., the number
of shares of capital stock of the corporation deemed to be outstanding shall
include shares deemed owned through application of paragraph (3) of this section
C. but shall not include any other shares of capital stock which may be issuable
pursuant to any agreement, arrangement or understanding, or upon exercise of
conversion rights, warrants or options, or otherwise.
(5) "Affiliate" or "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934.
(6) "Subsidiary" means any corporation of which a majority of
any class of equity security is owned, directly or indirectly, by the
corporation; provided, however, that for the purposes of the definition of
Interested Shareholder set forth in paragraph (2) of this section C., the term
"Subsidiary" shall mean only a corporation of which a majority of each class of
equity security is owned directly or indirectly, by the corporation.
(7) "Continuing Director" means any member of the Board of
Directors of the corporation (the "Board") who is unaffiliated with the
Interested Shareholder and was a member of the Board prior to the time that the
Interested Shareholder became an Interested Shareholder, and any successor of a
Continuing Director who is unaffiliated with the Interested Shareholder and is
recommended to succeed a Continuing Director by a majority of Continuing
Directors then on the Board.
(8) "Fair Price" shall mean the following: If there is only
one class of capital stock of the corporation issued and outstanding, the Fair
Price shall mean the highest price that can be determined by a majority of the
Continuing Directors to have been paid at any time by the Interested Person for
any share or shares of that class of capital stock. If there is more than one
class of capital stock of the corporation issued and outstanding, the Fair Price
shall mean with respect to each class and series of capital stock of the
corporation, the amount determined by a majority of the Continuing Directors to
be the highest per share price equivalent of the highest price that can be
determined to have been paid at any time by the Interested Person for any share
or shares of any class or series of capital stock of the corporation. In
determining the Fair Price, all purchases by the Interested Person shall be
taken into account regardless of whether the shares were purchased before or
after the Interested Person became an Interested Person. Also, the Fair Price
shall include any brokerage commissions, transfer taxes and soliciting dealers'
fees paid by the Interested Person with respect to the shares of capital stock
of the corporation acquired by the Interested Person. In the case of any
Business Combination with an Interested Person, a majority of the Continuing
Directors shall determine the Fair Price for each class and series of the
Capital stock of the corporation. The Fair Price shall also include interest
compounded annually from the date an Interested Person became an Interested
Person through the date the Business Combination is consummated at the rate of
seven percent (7%) per annum less the aggregate amount of any cash dividends
paid, and the fair market value of any dividends paid in other than cash, on
each share of capital stock in the same time period, in an amount up to but not
exceeding the amount of interest so payable per share of capital stock.
(9) "Other Consideration to be Received" shall include,
without limitation, Common Stock or other capital stock of the corporation
retained by its existing stockholders other than Interested Persons or other
parties to such Business Combination in the event of a Business Combination in
which the corporation is the surviving corporation.
D. A majority of the Board of Directors of the corporation shall have
the power and duty to determine, on the basis of information known to them after
reasonable inquiry, whether a person is an Interested Shareholder. Once the
Board has made a determination pursuant to the preceding sentence that a person
is an Interested Shareholder, a majority of the number of Directors who are
Continuing Directors shall have the power and duty to
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<PAGE>
interpret all of the terms and provisions of this Article Ten, and to determine
on the basis of information known to them after reasonable inquiry all facts
necessary to determine compliance with this Article Ten, including, without
limitation, (1) the number of shares of capital stock of the corporation
beneficially owned by any person, (2) whether a person is an Affiliate or
Associate of another, and (3) whether the applicable conditions set forth in
section B. have been met with respect to any Business Combination.
E. Nothing contained in this Article Ten shall be construed to relieve
any Interested Shareholder from any fiduciary obligation imposed by law.
F. Notwithstanding any other provisions of the corporation's Articles
of Incorporation or Bylaws or any provision of law which might otherwise permit
a lesser vote or no vote, but in addition to any affirmative vote of the holders
of any particular class or series of the capital stock of the corporation
required by law, or by the corporation's Articles of Incorporation or Bylaws,
the affirmative vote of the holders of at least ninety-five percent (95%) of the
then-outstanding shares of the capital stock of the corporation, voting together
as a single class, shall be required to alter, amend or repeal this Article.
11. Registered Office and Agent. The street address of the
Corporation's initial registered office and the name of its initial registered
agent at such address are as follows:
Registered Agent Registered Address
---------------- ------------------
Lamar C. Smith 4100 South Hulen Street
Fort Worth, Texas 76109
12. Initial Directors. The number of directors constituting the initial
board of director(s) is four (4), and the names and addresses of the persons who
will serve as directors until the first annual meeting of the shareholders and
until their successors have been elected and qualified are:
Name Address
---- -------
Lamar C. Smith 4100 South Hulen Street
Fort Worth, Texas 76109
James N. Lanier 4100 South Hulen Street
Fort Worth, Texas 76109
Howard M. Crump 4100 South Hulen Street
Fort Worth, Texas 76109
Carroll H. Payne II 4100 South Hulen Street
Fort Worth, Texas 76109
This instrument is dated and signed effective the 29th day of October,
1998.
FIRST COMMAND FINANCIAL CORPORATION
By: /s/ Lamar C. Smith
-------------------------------------------
LAMAR C. SMITH, Chairman of the Board and
Chief Executive Officer
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<PAGE>
AS AMENDED OCTOBER 29, 1998
BYLAWS
of
FIRST COMMAND FINANCIAL CORPORATION
(A Texas Corporation)
E-25
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I: OFFICES
Sec. 1:1. Registered Office and Agent
Sec. 1:2. Other Offices
ARTICLE II: SHAREHOLDERS
Sec. 2:1. Place of Meetings
Sec. 2:2. Annual Meetings
Sec. 2:3. Special Meetings
Sec. 2:4. Notice
Sec. 2:5. Order of Business at Meetings
Sec. 2:6. Quorum
Sec. 2:7. Majority Vote; Withdrawal of Quorum
Sec. 2:8. Method of Voting
Sec. 2:9. Election of Directors
Sec. 2:10. Voting List
Sec. 2:11. Record Date; Closing Transfer Books
Sec. 2:12. Action Without Meeting
ARTICLE III: DIRECTORS
Sec. 3:1. Management
Sec. 3:2. Place of Meetings
Sec. 3:3. Regular Meetings; Notice
Sec. 3:4. Special Meetings; Notice
Sec. 3:5. Quorum; Majority Vote
Sec. 3:6. Number; Qualification; Election; Term
Sec. 3:7. Removal and Vacancies of Directors
Sec. 3:8. Advisory Director
Sec. 3:9. Amendment of this Article III
Sec. 3:10. Procedure
Sec. 3:11. Compensation
Sec. 3:12. Action Without Meeting
ARTICLE IV: OFFICERS
Sec. 4:1. Number and Qualification
Sec. 4:2. Term and Compensation
Sec. 4:3. Removal; Vacancies
Sec. 4:4. Authority
Sec. 4:5. Chairman of the Board
Sec. 4:6. President
Sec. 4:7. Vice President/Senior or Executive Vice President
Sec. 4:8. Secretary
Sec. 4:9. Treasurer
ARTICLE V: CERTIFICATES OF STOCK
Sec. 5:1. Certificates
Sec. 5:2. Issuance
Sec. 5:3. Payment for Shares
Sec. 5:4. No Preemptive Rights
Sec. 5:5. Lien
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Sec. 5:6. Lost, Stolen, or Destroyed Certificates
Sec. 5:7. Registered Owner
Sec. 5:8. Registration of Transfer
ARTICLE VI: EXECUTIVE COMMITTEE
Sec. 6:1. Designation; Authority; Responsibility
Sec. 6:2. Procedure; Removal; Vacancies
Sec. 6:3. Meetings; Quorum; Majority Vote
Sec. 6:4. Action Without Meeting
ARTICLE VII: MISCELLANEOUS PROVISIONS
Sec. 7:1. Notice
Sec. 7:2. Fiscal Year and Seal
Sec. 7:3. Checks and Notes; Books and Records
Sec. 7:4. Resignation
Sec. 7:5. Interested Directors, Officers, Shareholders
Sec. 7:6. Limitation of Liability
Sec. 7:7. Indemnification
Sec. 7:8. Dividends and Reserves
Sec. 7:9. Purchase Own Shares
Sec. 7:10. Annual Statement
Sec. 7:11. Construction
Sec. 7:12. Amendment of Bylaws
</TABLE>
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<PAGE>
BYLAWS
OF
FIRST COMMAND FINANCIAL CORPORATION
(A Texas Corporation)
ARTICLE I
OFFICES
Sec. 1:1. Registered Office and Agent. The registered office of First
Command Financial Corporation (the "Corporation") is 4100 South Hulen, Fort
Worth, Texas 76109.
Sec. 1:2. Other Offices. The Corporation may also have offices at such
other places both within and without the State of Texas as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE II
SHAREHOLDERS
Sec. 2:1. Place of Meetings. All meetings of the shareholders for the
election of directors are to be held at such time and place, within or without
the State of Texas, as is stated in the notice of the meeting or in a duly
executed waiver of notice thereof. Except as specifically provided by the Texas
Business Corporation Act, only holders of Voting Common Stock shall be entitled
to vote at meetings of the shareholders of the Corporation.
Sec. 2:2. Annual Meetings. An annual meeting of the shareholders is to
be held on the first business day following the 5th of December of each year
unless amended by notice duly given. At the meeting, the shareholders shall
elect directors and transact such other business as may properly be brought
before the meeting.
Sec. 2:3. Special Meetings. Special meetings of the shareholders for
any purpose or purposes, unless otherwise prescribed by statute, by the Articles
of Incorporation, or by these Bylaws, may be called by the President or the
Board of Directors. Business transacted at a special meeting is to be confined
to the objects stated in the notice of meeting.
Sec. 2:4. Notice. Written or printed notice stating the place, day, and
hour of the meeting, and in case of a special meeting, the purpose or purposes
for which the meeting is called, shall be delivered not less than ten (10) nor
more than sixty (60) days before the date of the meeting, either personally or
by mail, by or at the direction of the President, the Secretary, or the officer
or person calling the meeting, to each shareholder of record entitled to vote at
such meeting. If mailed, such notice will be deemed to be delivered when
deposited in the United States mail with postage thereon prepaid addressed to
the shareholder at such shareholder's address as it appears on the stock
transfer books of the Corporation.
Sec. 2:5. Order of Business at Meetings. The order of business at
annual meetings and so far as practicable at other meetings of shareholders will
be as follows unless changed by the Board of Directors:
(A) Call to order
(B) Proof of due notice of meeting
(C) Determination of quorum and examination of proxies
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<PAGE>
(D) Announcement of distribution of annual statement
(E) Reading and disposing of minutes of last meeting of
shareholders
(F) Reports of officers and committees
(G) Unfinished business
(H) New business
(I) Election of directors
(J) Other business
(K) Adjournment
Sec. 2:6. Quorum. The holders of a majority of the shares entitled to
vote, represented at the meeting in person or by proxy, shall constitute a
quorum at a meeting of shareholders. If a quorum is not represented in person or
by proxy at a meeting of the shareholders, the shareholders entitled to vote
thereat, represented in person or by proxy, may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum is
represented in person or by proxy. At such adjourned meeting at which a quorum
is represented in person or by proxy, any business may be transacted which might
have been transacted at the meeting as originally notified.
Sec. 2:7. Majority Vote; Withdrawal of Quorum. When a quorum is present
at any meeting, the vote of the holders of a majority of the shares having
voting power, present in person or represented by proxy, will decide any
question brought before such meeting; unless the question is one upon which, by
express provisions of the statutes, of the Articles of Incorporation, or of
these Bylaws, a different vote is required in which case such express provisions
will govern and control the decision of such question. The shareholders present
at a duly organized meeting may continue to transact business until adjournment
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum.
Sec. 2:8. Method of Voting. Each outstanding share, regardless of
class, shall be entitled to one vote on each matter submitted to a vote at a
meeting of shareholders, except to the extent that the voting rights of the
shares of any class or classes are limited or denied by the Articles of
Incorporation and except as otherwise provided in the Texas Business Corporation
Act. A shareholder may vote either in person or by proxy executed in writing by
the shareholder or by such shareholder's duly authorized attorney-in-fact. No
proxy will be valid after eleven months from the date of its execution unless
otherwise provided in the proxy. A proxy will be revocable unless expressly
provided therein to be irrevocable and unless otherwise made irrevocable by law.
Each proxy is to be filed with the Secretary of the Corporation prior to or at
the time of the meeting. Any vote may be taken orally or by show of hands unless
someone entitled to vote objects in which case written ballots are to be used.
Sec. 2:9. Election of Directors. Directors are to be elected by
plurality vote. Cumulative voting is not permitted.
Sec. 2:10. Voting List. The officer or agent having charge of the stock
transfer books for shares of the Corporation shall make, at least ten (10) days
before each meeting of shareholders, a complete list of the shareholders
entitled to vote at such meeting or any adjournment thereof, arranged in
alphabetical order, with the address of each and the number of voting shares
held by each, which list, for a period of ten (10) days prior to such meeting,
is to be kept on file at the registered office of the Corporation and is to be
subject to inspection by any shareholder at any time during usual business
hours. Such list is to be produced and kept open at the time and place of the
meeting and will be subject to the inspection of any shareholder during the
whole time of the meeting.
Sec. 2:11. Record Date; Closing Transfer Books. For the purpose of
determining shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or entitled to receive payment of any
dividend, or in order to make a determination of shareholders for any other
proper purpose, the Board of Directors of the Corporation may provide that the
stock transfer books will be closed for a stated period not to exceed sixty
days. If the stock transfer books are closed for the purpose of determining
shareholders entitled to notice of or to vote at a meeting of shareholders, such
books are to be closed for at least ten (10) days immediately
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<PAGE>
preceding such meeting. In lieu of closing the stock transfer books, the Board
of Directors may fix in advance a date as the record date for any such
determination of shareholders, such date in any case to be not more than sixty
days and, in case of a meeting of shareholders, not less than ten (10) days
prior to the date on which the particular action, requiring such determination
of shareholders, is to be taken. If the stock transfer books are not closed and
no record date is fixed for the determination of shareholders entitled to notice
of or to vote at a meeting of shareholders, or the determination of shareholders
entitled to receive payment of a dividend, the date on which notice of the
meeting is mailed or the date on which the resolution of the Board of Directors
declaring such dividend is adopted, as the case may be, will be the record date
for such determination of shareholders. When a determination of shareholders
entitled to vote at any meeting of shareholders has been made as provided
herein, such determination will apply to any adjournment thereof except when the
determination has been made through the closing of stock transfer books, and the
stated period of closing has expired.
Sec. 2:12. Action Without Meeting. Any action required by the Texas
Business Corporation Act to be taken at any annual or special meeting of
shareholders, or any action which may be taken at any annual or special meeting
of shareholders, may be taken without a meeting, without prior notice, and
without a vote, if a consent or consents in writing setting forth the actions so
taken, are signed by the holder or holders of shares having not less than the
minimum number of votes that would be necessary to take such action at a meeting
at which the holders of all shares entitled to vote on the action were present
and voting. Further, but subject to the provisions required or permitted for
notice of meetings, the shareholders may participate in and hold a meeting of
such shareholders by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this provision shall
constitute presence in person at such meeting, except where a person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
ARTICLE III
DIRECTORS
Sec. 3:1. Management. The business and affairs of the Corporation are
to be managed by the Board of Directors who may exercise all such powers of the
Corporation and do all such lawful acts and things as are not (by statute or by
the Articles of Incorporation or by these Bylaws) directed or required to be
exercised by, or done or reserved to, the shareholders.
Sec. 3:2. Place of Meetings. Meetings of the Board of Directors,
regular or special, may be held either within or without the State of Texas.
Sec. 3:3. Regular Meetings; Notice. Regular meetings of the Board of
Directors are to be held without notice immediately following the annual meeting
of shareholders and at the same place unless (by unanimous consent of the
directors then elected and serving) such time or place shall be changed.
Sec. 3:4. Special Meetings; Notice. Special meetings of the Board of
Directors may be called by the President on twenty-four (24) hours notice to
each director, either personally or by mail or telegram. Special meetings shall
be called by the President or Secretary in like manner and on like notice in
response to the written request of any two directors. Neither the business to be
transacted at, nor the purpose of, any special meeting of the Board of Directors
need be specified in the notice or waiver of notice of such meeting unless
required by these Bylaws. Attendance of a director at a meeting will constitute
a waiver of notice of such meeting, except where a director attends a meeting
for the express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
Sec. 3:5. Quorum; Majority Vote. A majority of the number of directors
fixed by these Bylaws shall constitute a quorum for the transaction of business.
The act of the majority of the directors present at a meeting at which a quorum
is present shall be the act of the Board of Directors, unless the act of a
greater number is required
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<PAGE>
by the Articles of Incorporation or these Bylaws. If a quorum is not present at
a meeting of the Board of Directors, the directors present thereat may adjourn
the meeting from time to time, without notice other than announcement at the
meeting, unless a quorum is present.
Sec. 3:6. Number; Qualification; Election; Term. The Board of Directors
shall consist of not less than three (3) nor more than fifteen (15) directors.
The number of directors may be increased or decreased by the affirmative vote of
the holders of not less than eighty percent (80%) of the outstanding shares of
Voting Common Stock of the corporation at any annual meeting or at any special
meeting called for that purpose, provided, however, the number of directors
shall in no event be less than three (3) nor more than fifteen (15). The Board
shall be divided into three (3) classes, Class I, Class II, and Class III. The
number of directors in each class shall be the whole number contained in the
quotient arrived at by dividing the authorized number of directors by three and
if a fraction is also contained in such quotient, then if such fraction is
one-third (1/3) the extra director shall be a member of Class III and if the
fraction is two-thirds (2/3) one of the directors shall be a member of Class III
and the other shall be a member of Class II. Each director shall serve for a
term ending on the third annual meeting following the annual meeting at which
such director was elected; provided, however, that the directors first elected
to Class I shall serve for a term ending on the annual meeting next ensuing, the
directors first elected to Class II shall serve for a term ending on the second
annual meeting following the meeting at which such directors were first elected,
and the directors first elected to Class III shall serve a full term as
hereinabove provided. The foregoing notwithstanding, each director shall serve
until his successor shall have been duly elected and qualified unless he shall
die, resign, become disqualified, disabled or shall otherwise be removed. At
each annual election, the directors chosen to succeed those whose terms then
expire shall be identified as being of the same class as the directors they
succeed. If for any reason the number of directors in the various classes shall
not conform with the formula set forth in the preceding paragraph, the Board of
Directors may redesignate any director into a different class in order that the
balance of directors in such classes shall conform thereto.
Sec. 3:7. Removal and Vacancies of Directors. Any director of the
Corporation may be removed from the Board, with or without cause, only by a vote
of the holders of not less than eighty percent (80%) of the outstanding shares
of Voting Common Stock entitled to vote thereon. Vacancies in the Board of
Directors by reason of death, resignation, an increase in the number of
directors, removal or other cause shall be filled by the vote of a majority of
the remaining directors although less than a quorum. A director so selected by
the remaining directors to fill a vacancy shall serve for the unexpired term of
and in the same class as the director whose position is vacated, unless the
person is selected to fill a vacancy created by an increase in the number of
directors, in which event the remaining directors shall fill such vacancy
consistent with the formula for classes of directors set forth in Section 3:6
above.
Sec. 3:8. Advisory Director. The Board of Directors may appoint such
number of advisory directors as it shall from time to time determine. Each
advisory director appointed shall hold office for the term for which he is
elected or until his earlier death, resignation, retirement or removal by the
Board of Directors. The advisory directors may attend and be present at the
meetings of the Board of Directors, although a meeting of the Board of Directors
may be held without notice to the advisory directors and the advisory directors
shall not be considered in determining whether a quorum of the Board of
Directors is present. The advisory directors shall advise and counsel the Board
of Directors on the business and operations of the Corporation as requested by
the Board of Directors; however, the advisory directors shall not be entitled to
vote on any matter presented to the Board of Directors.
Sec. 3:9. Amendment of this Article III. Notwithstanding the provisions
of Section 7:12 of these Bylaws with respect to amendment of the Bylaws, Article
III of the Bylaws of the Corporation relating to a Classified Board, may not be
amended, altered, changed or repealed in any respect unless such action is
approved by the affirmative vote of the holders of not less than eighty percent
(80%) of the outstanding shares of Voting Common Stock.
Sec. 3:10. Procedure. The Board of Directors shall keep regular minutes
of its proceedings. The minutes are to be placed in the minute book of the
Corporation.
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<PAGE>
Sec. 3:11. Compensation. By resolution of the Board of Directors, the
directors may be paid their expenses, if any, of attendance at each meeting of
the Board of Directors and may be paid a fixed sum for attendance at each
meeting of the Board of Directors or a stated salary as a director. No such
payment will preclude any director from serving the Corporation in any other
capacity and receiving compensation therefor. Members of the executive committee
or of special or standing committees may, by resolution of the Board of
Directors, be allowed like compensation for attending committee meetings.
Sec. 3:12. Action Without Meeting. Unless otherwise restricted by the
Articles of Incorporation or these Bylaws, any action required or permitted to
be taken at a meeting of the Board of Directors may be taken without a meeting
if a consent in writing, setting forth the action so taken, is signed by all the
members of the Board of Directors. Such consent will have the same force and
effect as a unanimous vote at a meeting. Any such signed consent, or a signed
copy thereof, is to be placed in the minute book of the Corporation. Further,
but subject to the provisions required or permitted for notice of meetings, the
directors may participate in and hold a meeting of such directors by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in a
meeting pursuant to this provision will constitute presence in person at such
meeting except where a person participates in the meeting for the express
purpose of objecting to the transaction of any business on the ground that the
meeting is not lawfully called or convened.
ARTICLE IV
OFFICERS
Sec. 4:1. Number and Qualification. The officers of the Corporation
shall consist of a Chairman of the Board, Chief Executive Officer, President, a
Secretary, and a Treasurer, each of whom shall be elected by the Board of
Directors on the expiration of an officer's term or whenever a vacancy exists.
The Corporation may also have such other officers (including Vice-Presidents,
Assistant Secretaries and Assistant Treasurers) and assistant officers and
agents as the Board of Directors may deem necessary, each of whom may be elected
by the Board at any meeting. Any two or more offices may be held by the same
person. No officer shall execute, acknowledge, verify or countersign any
instrument on behalf of the Corporation in more than one capacity, if such
instrument is required by law, by these Bylaws, or by any act of the Corporation
to be executed, acknowledged, verified or countersigned by two or more officers.
No officer or agent need be a director, and no officer or agent need be a
shareholder, or a resident of the State of Texas.
Sec. 4:2. Term and Compensation. Unless otherwise specified by the
Board at the time of election or appointment or in an employment contract
approved by the Board, each officer's and agent's term is to end at the first
meeting of directors held after the next annual meeting of the shareholders.
Such officer or agent shall serve until the end of such person's term or, if
earlier, such person's death, resignation, or removal. The compensation of
officers and agents is to be fixed from time to time by the Board of Directors.
Sec. 4:3. Removal; Vacancies. Any officer or agent elected or appointed
by the Board of Directors may be removed by the Board of Directors whenever in
its judgment the best interests of the Corporation will be served thereby, but
such removal will be without prejudice to the contract rights, if any, of the
person so removed. Election or appointment of an officer or agent will not of
itself create contract rights. Any vacancy occurring in any office of the
Corporation (by death, resignation, removal, or otherwise) may be filled by the
Board of Directors.
Sec. 4:4. Authority. All officers and agents of the Corporation, as
between themselves and the Corporation, will have such authority and perform
such duties in the management of the Corporation as may be provided in these
Bylaws or as may be determined by resolution of the Board of Directors not
inconsistent with these Bylaws.
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Sec. 4:5. Chairman of the Board. The Board of Directors may elect a
Chairman of the Board. The Chairman of the Board shall preside at all meetings
of the directors and shareholders. When designated as such by the Board, the
Chairman of the Board shall be the Corporation's Chief Executive Officer.
Sec. 4:6. President. The President shall have general charge over the
affairs of the Corporation. When the Chairman of the Board is designated as
Chief Executive Officer, the President shall be subject to the direction of the
Chairman of the Board. If the Chairman is not designated as Chief Executive
Officer, then the President shall be Chief Executive Officer, subject only to
the direction of the Board of Directors. The President shall, in any case, be
the Chief Operating Officer of the Corporation.
Sec. 4:7. Vice President/senior or Executive Vice President. Each Vice
President shall perform such duties as may be assigned to him by the Chairman or
the President. A Senior or Executive Vice President may be designated as such
based upon tenure or responsibility.
Sec. 4:8. Secretary. The Secretary shall be ex-officio Secretary of the
Board of Directors, shall give or cause to be given all required meeting notices
to the shareholders and directors, shall record all proceedings of the meetings
of the shareholders and directors in a book to be kept for that purpose; and
shall perform such other duties as may be assigned to him by the Board of
Directors; he shall have custody of the seal of the Corporation and shall affix
the same to any instrument when duly authorized to do so and attest the same,
and he shall be sworn to the faithful discharge of his duties. This office may
be combined with the office of Treasurer.
Sec. 4:9. Treasurer. The Treasurer shall keep account of all monies of
the Corporation received or disbursed, and shall deposit all monies and
valuables in the name and to the credit of the Corporation in such banks and
depositories as the Board of Directors shall designate. This office may be
combined with any other office of the Corporation.
ARTICLE V
CERTIFICATES OF STOCK
Sec. 5:1. Certificates. The Corporation shall deliver certificates
representing all shares to which shareholders are entitled; and such
certificates shall be signed by the President and by the Secretary, or such
other officers as the Directors of the Corporation may prescribe, and may be
sealed with the seal of the Corporation or a facsimile thereof. The signatures
of such officer or officers upon a certificate may be facsimiles if the
certificate is countersigned by a transfer agent or registered by a registrar,
either of which is other than the Corporation itself or an employee of the
Corporation. In case any officer who has signed or whose facsimile signature has
been placed upon such certificate ceases to be such officer before such
certificate is issued, it may be issued by the Corporation with the same effect
as if such person were such officer at the date of its issuance. Each
certificate representing shares is to state upon the face thereof: (A) that the
Corporation is organized under the laws of the State of Texas; (B) the name of
the person to whom issued; (C) the number and class of shares and the
designation of the series, if any, which such certificate represents; and (D)
the par value of each share represented by such certificate or a statement that
the shares are without par value.
Sec. 5:2. Issuance. Shares (both treasury and authorized but unissued)
may be issued for such consideration (not less than par value) and to such
persons as the Board of Directors may from time to time determine. Shares may
not be issued until the full amount of the consideration, fixed as provided by
law, has been paid.
Sec. 5:3. Payment for Shares. The consideration paid for the issuance
of shares is to consist of any tangible or intangible benefit to the
Corporation, including cash, promissory notes, services performed, contracts for
services to be performed, or property (tangible or intangible) actually
received. In the absence of fraud in the transaction, the judgment of the Board
of Directors as to the value of the consideration received for shares will be
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conclusive. When such consideration has been paid to the Corporation, the shares
will be deemed to have been issued, the shareholder entitled to receive such
issue will be a shareholder with respect to such shares, and the shares will be
considered fully paid and nonassessable. The consideration received for shares
will be allocated by the Board of Directors in accordance with law between
stated capital and capital surplus accounts.
Sec. 5:4. No Preemptive Rights. No shareholder or other person may have
any preemptive rights whatsoever to acquire additional, unissued, or treasury
shares of the Corporation, or securities of the Corporation convertible into or
carrying a right to subscribe to or acquire shares, or any other securities or
property whatsoever.
Sec. 5:5. Lien. For any indebtedness of a shareholder to the
Corporation, the Corporation will have a first and prior lien on all shares of
its stock owned by such shareholder and on all dividends or other distributions
declared thereon.
Sec. 5:6. Lost, Stolen, or Destroyed Certificates. The Corporation
shall issue a new certificate in place of any certificate for shares previously
issued if the registered owner of the certificate: (A) makes proof in affidavit
form that it has been lost, destroyed, or wrongfully taken; (B) requests the
issuance of a new certificate before the Corporation has notice that the
certificate has been acquired by a purchaser for value in good faith and without
notice of an adverse claim; (C) gives a bond in such form, and with such surety
or sureties, with fixed or open penalty as the Corporation may direct, to
indemnify the Corporation (and its transfer agent and registrar, if any) against
any claim that may be made on account of the alleged loss, destruction, or theft
of the certificate; and (D) satisfies any other reasonable requirements imposed
by the Corporation. When a certificate has been lost, apparently destroyed, or
wrongfully taken, and the holder of record fails to notify the Corporation
within a reasonable time after such holder has notice of it, and the Corporation
registers a transfer of the shares represented by the certificate before
receiving such notification, the holder of record is precluded from making any
claim against the Corporation for the transfer or for a new certificate.
Sec. 5:7. Registered Owner. Prior to due presentment for registration
of transfer of a certificate for shares, the Corporation may treat the
registered owner as the person exclusively entitled to vote, to receive notices,
and otherwise to exercise all the rights and powers of a shareholder.
Sec. 5:8. Registration of Transfer. The Corporation shall register the
transfer of a certificate for shares presented to it for transfer if: (A) the
certificate is properly endorsed by the registered owner or by such owner's duly
authorized attorney; (B) the signature of such person has been guaranteed by a
national banking association or member of a national stock exchange, and
reasonable assurance is given that such endorsements are effective; (C) the
Corporation has no notice of an adverse claim or has discharged any duty to
inquire into such a claim; and (D) any applicable law relating to the collection
of taxes has been complied with.
ARTICLE VI
EXECUTIVE COMMITTEE
Sec. 6:1. Designation; Authority; Responsibility. The Board of
Directors may, by resolution adopted by a majority of the full Board of
Directors fixed by the Bylaws, designate from among its members an executive
committee and one or more other committees, each of which shall be comprised of
one or more members and, to the extent provided in such resolution will have and
may exercise all of the authority of the Board of Directors, except that no such
committee may have the authority of the Board of Directors to amend the Articles
of Incorporation, approve a plan of merger or consolidation, recommend to the
shareholders the sale, lease, or exchange of all or substantially all of the
property and assets of the Corporation otherwise than in the usual and regular
course of its business, recommend to the shareholders a voluntary dissolution of
the Corporation or a revocation thereof, amend, alter, or repeal the Bylaws of
the Corporation or adopt new Bylaws for the Corporation, fill vacancies in or
remove members of the Board of Directors of any such committee, fix the
compensation of any member of such committee, or alter or repeal any resolution
of the Board of Directors which by its terms provides that it is not so
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amendable or repealable; and, unless such resolution, the Articles of
Incorporation, or these Bylaws of the Corporation expressly so provide, no such
committee may declare a dividend or authorize the issuance of shares of the
Corporation. The designation of such committee and the delegation thereto of
authority will not operate to relieve the Board of Directors or any member
thereof of any responsibility imposed by law.
Sec. 6:2. Procedure; Removal; Vacancies. The executive committee shall
keep regular minutes of its proceedings and report the same to the Board of
Directors when required. The minutes of the proceedings of the executive
committee are to be placed in the minute book of the Corporation. Any member of
the executive committee elected or appointed by the Board of Directors may be
removed by the Board of Directors whenever in its judgment the best interests of
the Corporation will be served thereby. A vacancy occurring in the executive
committee (by death, resignation, removal, or otherwise) may be filled by the
Board of Directors in the manner provided above for original designation.
Sec. 6:3. Meetings; Quorum; Majority Vote. The time, place, and notice
(if any) of executive committee meetings shall be determined by the executive
committee. At meetings of the executive committee, a majority of the number of
members designated by the Board of Directors will constitute a quorum for the
transaction of business. The act of a majority of the members present at any
meeting at which a quorum is present will be the act of the executive committee
except as otherwise specifically provided by statute or by the Articles of
Incorporation or by these Bylaws. If a quorum is not present at a meeting of the
executive committee, the members present thereat may adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum is present.
Sec. 6:4. Action Without Meeting. Any action required or permitted to
be taken at a meeting of the executive committee may be taken without a meeting
if a consent in writing, setting forth the action so taken, is signed by all the
members of the executive committee. Any such signed consent, or a signed copy
thereof, is to be placed in the minute book of the Corporation. Further, but
subject to the provisions required or permitted for notice of meetings, the
members of the executive committee may participate in and hold a meeting of such
members of the executive committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
provision will constitute presence in person at such meeting except where a
person participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
ARTICLE VII
MISCELLANEOUS PROVISIONS
Sec. 7:1. Notice. Whenever by statute, the Articles of Incorporation,
or these Bylaws notice is required to be given to a director or shareholder, and
no provision is made as to how the notice is to be given, it is not to be
construed to mean personal notice, but any notice may be given (A) in writing,
by mail, sufficient postage prepaid, addressed to the director or shareholder at
the address appearing on the books of the Corporation, or (B) in any other
method permitted by law. Any notice required or permitted to be given by mail
will be deemed given at the time when the same is deposited in the United States
mail. Whenever any notice is required to be given to a shareholder or director
of the Corporation under the provisions of the Texas Business Corporation Act or
under the provisions of the Articles of Incorporation or these Bylaws, a waiver
thereof in writing signed by the person or persons entitled to such notice,
whether before or after the time stated therein, will be equivalent to the
giving of such notice.
Sec. 7:2. Fiscal Year and Seal. The fiscal year of the Corporation
shall be fixed by resolution of the Board of Directors. The corporate seal (of
which there may be one or more exemplars) shall contain the name of the
Corporation and the name of the state of incorporation. The seal may be used by
impressing it or reproducing a facsimile of it or otherwise.
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Sec. 7:3. Checks and Notes; Books and Records. All checks or demands
for money and notes of the Corporation are to be signed by such officer or
officers or such other person or persons as the Board of Directors may from time
to time designate. The Corporation shall keep correct and complete books and
records of account, shall keep minutes of the proceedings of its shareholders
and Board of Directors, and shall keep at its registered office or principal
place of business, or at the office of its transfer agent or registrar, a record
of its shareholders giving the names and addresses of all shareholders and the
number and class of the shares held by each. Any books, records, and minutes may
be in written form or in any other form capable of being converted into written
form within a reasonable time.
Sec. 7:4. Resignation. Any director, officer, or agent may resign by
giving written notice to the President or the Secretary. Any such resignation
will become effective at the time specified therein or immediately if no time is
specified therein. Unless otherwise so specified, the acceptance of such
resignation will not be necessary to make it effective.
Sec. 7:5. Interested Directors, Officers, Shareholders.
(A) If paragraph (B) below is satisfied, no contract or
transaction between the Corporation and one or more of its directors or
officers, or between the Corporation and any other Corporation, partnership,
association or other organization in which one or more of the Corporation's
directors or officers are directors or officers or have a financial interest,
shall be void or voidable solely for this reason, solely because the director or
officer is present at or participates in the meeting of the Board of Directors
or committee thereof which authorizes the contract or transaction, or solely
because his or their votes are counted for such purpose.
(B) Paragraph (A) above will apply only if:
(1) The contract or transaction is fair to the
Corporation as of the time it is authorized, approved, or ratified by the Board
of Directors, a committee of the board, or the shareholders; or
(2) The material facts as to the relationship or
interest of the director or officer and as to the contract or transaction are
disclosed or are known to the Board of Directors or the committee, and the Board
or committee in good faith authorizes the contract or transaction by the
affirmative vote of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or
(3) The material facts as to the relationship or
interest of the director or officer and as to the contract or transaction are
disclosed or are known to the shareholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by a vote of the
shareholders.
(C) For purposes of paragraphs (A) and (B) above, common or
interested directors may be counted in determining the presence of a quorum at a
meeting of the Board of Directors or of a committee which authorizes the
contract or transaction.
Sec. 7:6. Limitation of Liability. No Director of the Corporation shall
be personally liable to the Corporation or its shareholders for monetary damages
for any act or omission in the Director's capacity as a director, except to the
extent otherwise expressly provided by statute of the State of Texas. Any repeal
or modification of this Article shall be prospective only, and shall not
adversely affect any limitation of the personal liability of a Director of the
Corporation existing at the time of the repeal or modification.
Sec. 7:7. Indemnification. The Corporation shall, to the maximum extent
permitted from time to time under the laws of the State of Texas, indemnify and
upon request shall advance expenses to any person who is or was a party to any
threatened, pending, or completed action, suit, proceeding, or claim, whether
civil, criminal, administrative or investigative, by reason of the fact that he
or she is or was or has agreed to be a trustee, director or officer of the
Corporation, or is or was serving at the request of the Corporation as a
trustee, director, officer,
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partner, venturer or proprietor of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys' fees
and expenses), judgments, fines, penalties and amounts paid in settlement
incurred in connection with the investigation, preparation to defend or defense
of any such action, suit, proceeding or claim. Such indemnification shall not be
exclusive of any other indemnification rights arising under any bylaw,
agreement, vote of Directors or shareholders or otherwise and shall inure to the
benefit of the heirs and legal representations of such person. Any repeal or
modification of this Section shall be prospective only, and shall not adversely
affect any rights to indemnification of any such person existing at the time of
the repeal or modification.
Sec. 7:8. Dividends and Reserves. Subject to statute and the Articles
of Incorporation, dividends may be declared by the Board of Directors at any
regular or special meeting and may be paid in cash, in property, or in shares of
the Corporation. The declaration and payment will be at the discretion of the
Board of Directors. By resolution the Board of Directors may create such reserve
or reserves out of the earned surplus of the Corporation as the directors from
time to time in their discretion think proper to provide for contingencies, to
equalize dividends, to repair or maintain any property of the Corporation, or
for any other purpose they believe to be beneficial to the Corporation. The
directors may modify or abolish any such reserve in the manner in which it was
created.
Sec. 7:9. Purchase Own Shares. The Corporation may, directly or
indirectly, purchase its own shares to the extent of the aggregate of
unrestricted capital surplus available therefor and unrestricted reduction
surplus available therefor.
Sec. 7:10. Annual Statement. At least ten (10) days before each annual
meeting, the Board of Directors shall mail to each shareholder of record a full
and clear statement of the business and condition of the Corporation including a
reasonably detailed balance sheet, income statement, and surplus statement, all
prepared in conformity with generally accepted accounting principles applied on
a consistent basis.
Sec. 7:11. Construction. Whenever the context so requires, the
masculine will include the feminine and neuter, and the singular will include
the plural, and conversely. If any portion of these Bylaws is determined invalid
or inoperative, then, so far as is reasonable and possible, the remainder of
these Bylaws is to be considered valid and operative, and effect is to be given
to the intent manifested by the portion held invalid or inoperative. The table
of contents and headings used in these Bylaws have been inserted for convenience
only and do not constitute matters to be construed in interpretation.
Sec. 7:12. Amendment of Bylaws. These Bylaws may be altered, amended,
or repealed at any meeting of the Board of Directors at which a quorum is
present by the affirmative vote of a majority of the directors present at such
meeting, provided notice of the proposed alteration, amendment, or repeal is
contained in the notice of such meeting.
- END OF BYLAWS -
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I, the undersigned, being the Secretary of the Corporation DO HEREBY
CERTIFY THAT the foregoing, consisting of 25 pages total, are the Bylaws of
First Command Financial Corporation, as adopted by the unanimous written consent
of the Board of Directors of said Corporation effective April 3, 1998, and as
amended by the unanimous written consent of the Board of Directors of said
Corporation effective October 29, 1998.
/s/ Sandra T. Allen
-----------------------------------
Sandra T. Allen, Secretary
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ANNEX F
TAX OPINION OF ERNST & YOUNG LLP
<PAGE>
[Letterhead]
October 30, 1998
Board of Directors
Independent Research Agency for Life Insurance, Inc.
USPA & IRA Building
4100 South Hulen Street
P.O. Box 2387
Fort Worth, TX 76113
Gentlemen:
Pursuant to your request, we submit this memorandum setting forth our opinion
with respect to certain U.S. federal income tax consequences that should arise
from the (i) proposed merger (the "Proposed Merger") of Independent Research
Agency for Life Insurance, Inc. ("IRA") with and into First Command Financial
Corporation ("First Command") pursuant to the Agreement and Plan of Merger,
dated July 1, 1998, and (ii) implementation by IRA, prior to and separate from
the Proposed Merger, of the proposed deferred compensation plan, as described
below.
In rendering the opinions expressed below, we have relied upon the completeness,
truth and accuracy, at all relevant times, of the following documents
(collectively, the "Documents"):
1. The Agreement and Plan of Merger, dated July 1, 1998, by and between IRA and
First Command;
2. The Preliminary Proxy Statement, dated October 13, 1998;
3. The Statement of Facts and Representations, dated July 1, 1998, issued by
authorized representatives of IRA and First Command to Ernst & Young LLP;
4. Form of Shareholders' Agreement;
5. Form of Restated Articles of Incorporation, as proposed to be amended;
6. The Mission Accomplishment Plan for a Select Group of Management of
Independent Research Agency for Life Insurance, Inc., the Mission
Accomplishment Plan for Agents of Independent Research Agency for Life
Insurance, Inc., the Mission Accomplishment Plan for a Select Group of
Highly Compensated Employees of Independent Research Agency for Life
Insurance, Inc., and the Mission Accomplishment Plan for a Select Group of
Key Employees of Independent Research Agency for Life Insurance, Inc.
(collectively, the "MAP");
7. The IRA MAP Board Grant Declaration and Administrative Policies; and
8. The MAP Award Agreement entered into by and between participating
individuals and IRA, and the accompanying MAP Certificate and Plan Summary.
<PAGE>
Additionally, in rendering the opinions expressed below, you have represented to
us and we are relying upon, without any independent investigation or review
thereof, that the following are true:
1. The authenticity of all documents submitted to us as originals, the
conformity to original documents of all documents submitted to us as copies,
and the authenticity of the originals of such documents; and
2. The genuineness of all signatures, the due authorization, execution, and
delivery of all relevant documents by all parties thereto, and the due
authority of all persons executing such documents.
Authorized representatives of IRA and First Command have represented to us that
the Documents provide a complete and accurate description of the facts and
circumstances surrounding the Proposed Merger. We have made no independent
investigation of such facts and circumstances, and any change or modification to
such facts and circumstances or to the Documents may materially affect the
opinions expressed herein.
Statement of Business Purpose
Authorized representatives of IRA and First Command have represented to us that
the primary business purpose for the Proposed Merger is to de-register the Class
B stock under the Securities Exchange Act of 1934 (the "Exchange Act"), which
will allow IRA to avoid the reporting requirements of the Exchange Act. IRA
currently incurs significant costs related to its status as a public reporting
corporation under the federal securities laws, including indirect costs arising
from, among other things, the time and effort expended by executives of the
company preparing and reviewing public filings, furnishing information to
shareholders, and attending to various other shareholder matters. IRA
anticipates that the termination of its registration under the Exchange Act will
eliminate such significant costs and expenses (both direct and indirect) arising
from various regulatory and reporting requirements imposed by federal securities
laws.
An additional business purpose for the Proposed Merger is to achieve
administrative simplicity and reduce the compliance responsibilities that would
be present if both IRA and First Command operated as separate S corporations
going forward.
2
<PAGE>
Statement of Facts as Represented by IRA
Background
IRA, a Texas corporation, was formed in December, 1980, as a Texas insurance
agency. IRA began operations in March, 1981, upon the receipt of all the assets
and liabilities of Independent Research Agency for Life Insurance, a Texas
general partnership. Included in the transfer of the assets and liabilities from
the general partnership to IRA was all the outstanding stock of Independent
Research Agency for Life Insurance, Inc., a Hawaii corporation.
In March, 1981, IRA acquired all the outstanding stock of United States Planning
Association, Inc. ("USPA"), a Texas corporation. IRA subsequently organized
several operating subsidiaries which currently operate in Wyoming, Montana, New
York, Nevada, and Alabama. All IRA subsidiaries (the "IRA Subsidiaries") except
USPA and First Command Bank ("FCB") were formed and are being maintained to
permit IRA to do business in those states in which the entities are registered
to do business. Neither IRA nor any IRA Subsidiary is, or at any relevant time
has been, a life insurance company within the meaning of Treas. Reg. Section
1.801-3.
IRA and the IRA Subsidiaries (excluding USPA and FCB) are engaged in the sale of
insurance products to United States active duty and former commissioned, warrant
and noncommissioned military personnel. IRA and the IRA Subsidiaries (excluding
USPA and FCB) conduct their business through independent contractors (typically
referred to as "agents") located in approximately 149 cities throughout the
United States, in one U.S. territory, and in three foreign countries. All IRA
Subsidiaries are, and at all relevant times have been, wholly-owned by IRA.
USPA acts as a broker/dealer of several widely-owned mutual funds pursuant to
written agreements with certain investment companies. Such agreements give USPA
the non-exclusive right to sell shares of such mutual funds through USPA agents
and/or the agents of IRA. USPA is, and its selling agents are, registered with
the Securities and Exchange Commission ("SEC") and the National Association of
Securities Dealers, Inc.
In November of 1996, IRA received approval from the Office of Thrift Supervision
to organize and operate a federal savings bank. In March of 1997, IRA formed FCB
as a wholly-owned first-tier subsidiary. FCB commenced banking operations on
April 21, 1997. FCB makes commercial and consumer loans and receives deposits
primarily from clients of IRA and the IRA Subsidiaries. FCB is a bank as defined
in Section 581 of the Internal Revenue Code of 1986, as amended (the "IRC").
3
<PAGE>
IRA and the IRA Subsidiaries share common employees, sales agents and
representatives, and office facilities. The home offices of IRA and the IRA
Subsidiaries are located in Fort Worth, Texas.
Stockholder's Equity
IRA has, and at all relevant times has had, two classes of common stock
outstanding - Class A and Class B. IRA does not currently have, nor at any
relevant time has it had, any preferred stock issued and outstanding. IRA does
not currently have, nor at any relevant time has it had, any outstanding
options, warrants, or convertible debt instruments.
Class A common stock is voting common stock. There are currently 25 shares of
Class A voting common stock issued and outstanding, all of which are owned by 14
individuals. Carroll Payne, II, the son of IRA's founder, and persons related to
Carroll Payne, II own 12 shares (48% of the vote and value) of the Class A
common stock.(1) Members of the Board of Directors of IRA (unrelated to Carroll
Payne, II) own 10 shares (40% of the vote and value) of the Class A common
stock. The remaining three shares are owned by other unrelated individuals. All
owners of Class A common stock have owned their respective shares for at least
two years except one Class A shareholder who purchased her one share of Class A
stock in December of 1997 from a retiring Class A shareholder, and one Class A
shareholder who purchased his one share of Class A stock in March of 1998. As of
June 15, 1998, the individuals owning Class A common stock also own
approximately 38% of the Class B common stock.
The Class B common stock is nonvoting common stock. As of October 30, 1998,
there were approximately 942,808 shares of Class B common stock issued and
outstanding, which were owned by approximately 496 individuals. The Class B
shares are registered with the SEC pursuant to Section 12(g) of the Exchange
Act. A majority of the Class B shareholders are independent insurance agents
through which IRA sells its products. IRA has historically paid a substantial
portion of its annual operating profits to its stockholders in the form of an
annual dividend. Substantially all the owners of Class B common stock have owned
their respective shares for at least two years.
All shares of issued and outstanding IRA common stock are subject to varying
degrees of limited transferability, and, according to IRA legal counsel, cannot
be owned by persons other than insurance agents licensed in the State of Texas.
- -----------------
(1) Carroll Payne, II currently owns three shares of the Class A common
stock. Naomi Payne and Debra Payne, Carroll's sisters, each own three shares
of the Class A common stock, and Freda Payne, Carroll's stepmother, owns an
additional three shares of such stock.
4
<PAGE>
The stock owned by the Payne family members described in footnote 1, supra (the
"Payne Family Members"), are subject to a stock agreement, dated March 22, 1983
(the "Payne Family Stock Agreement"), between such family members and IRA that
provides (among other things) that in the event a Payne Family Member desires to
sell or otherwise dispose of all or any portion of his or her Class A common
stock, or in the event of the death of a Payne Family Member, the other Payne
Family Members shall have the option to purchase such shares, on a proportionate
basis, for a period of sixty (60) days. If the other Payne Family Members choose
not to exercise their right of first refusal with respect to the Class A stock,
the Payne Family Stock Agreement provides that IRA shall purchase such stock.
With respect to the Class B stock, the Payne Family Stock Agreement provides
that, in the event a Payne Family Member desires to sell any Class B common
stock, IRA has a right of first refusal with respect to such stock and if it
fails to exercise such right, the person to whom Class B common stock is offered
must be a properly licensed insurance agent under contract with IRA and must
execute a stock agreement with IRA limiting his or her ownership and
transferability rights.
The owners of Class A common stock who are not Payne Family Members are subject
to a stock agreement (the "Class A Stock Agreement") pursuant to which (among
other things) IRA has the right to acquire the Class A stock within a period of
ninety (90) days in the event the shareholder (i) fails to continue as a
licensed insurance agent, (ii) ceases to be a duly authorized agent of IRA,
(iii) dies, or (iv) desires to sell his or her shares. The terms of the Class A
Stock Agreement provide that IRA, in its sole discretion, shall annually
determine the price at which IRA will repurchase any Class A shares.
The owners of Class B common stock who are not Payne Family Members are subject
to a stock agreement (the "Class B Stock Agreement") pursuant to which the Class
B stock will be repurchased by IRA, within ninety (90) days, if the shareholder
(i) fails to continue as a licensed insurance agent, (ii) ceases to be a duly
authorized agent of IRA, (iii) dies, or (iv) desires to sell or dispose of his
or her shares. The terms of the Class B Stock Agreement provide that IRA, in its
sole discretion, shall annually determine the price at which IRA will repurchase
any Class B shares.(2)
SAR and DER Plan
On June 27, 1998, IRA's Board of Directors approved and adopted the MAP. The
primary purpose of the MAP is to provide agents and a select group of key
employees and independent contractors of IRA (and its affiliates) an opportunity
to participate in the success of IRA. Under the MAP, IRA will award "stock
appreciation rights" ("SARs")
- ------------------
(2) The Class B common stock will have an expected redemption price as of
November 23, 1998, as determined by the Board of Directors in accordance with
the Class B Stock Agreement, of $28.24 per share.
5
<PAGE>
along with "dividend equivalent rights" ("DERs") to agents and employees for
services rendered. A SAR is the right to participate in the undistributed
earnings of IRA. A DER is the right to participate when the Board of Directors
declares a dividend equivalent based upon the earnings of IRA. The number of
SAR/DER units that are awarded will vary from time to time as determined by IRA
in its sole discretion. Participation in the MAP is limited to agents, a select
group of management employees, and certain other key employees of IRA
("Participants") as determined from time to time by the Board of Directors in
its sole discretion for services rendered.
There are two types of MAP awards: (1) a SAR which increases in value as
determined by IRA, and (2) a DER that participates in an annual cash dividend
equivalent declared by the Board. The Board will grant a Participant one or more
MAP Units for services rendered, each of which refers collectively to a single
SAR unit and a single DER unit. IRA will determine annually the number of MAP
Units to grant based on IRA's Future Incentive Commission needs, Profit Sharing
Plan needs, and other factors. The value of each SAR will be established no less
frequently than annually.
At the end of the exercise period or following separation of service, SAR
holders are entitled to exercise their rights to receive a cash payment equal to
the difference between (1) the per SAR unit value determined by IRA as of the
last day of the calendar quarter during which the participant provides the Plan
Administrator with a written request for a cash payment on an approved form,
less (2) the per SAR unit value as of the date of grant. A DER unit is exercised
when the Board declares a cash dividend equivalent to be paid before the end of
the plan year.
SARs and DERs may not be transferred, pledged, assigned, or otherwise encumbered
in any manner except as specified in the MAP Agreement. There will be no
separate account, fund, trust, insurance policy, or other source of funding
related to the grant of SARs or DERs under the MAP. Payment of SAR awards will
be made in cash from the general assets of IRA. IRA may maintain and transfer
property to satisfy obligations arising under a DER. The Board, in its sole and
absolute discretion, has the power to interpret and administer the MAP
including, but not limited to, setting MAP policy, determining award amounts,
and determining valuation methods.
First Command Financial Corporation
IRA currently owns land adjacent to its current headquarters on which IRA
intended to construct a parking garage (the "Facilities"). In April, 1998, Lamar
Smith, Jim Lanier, Howard Crump and Carroll Payne, II formed First Command with
the intent that First
6
<PAGE>
Command would construct the Facilities.(3) In June of 1998, Carroll Payne, II
gifted 25 shares of First Command stock to Freda Payne. It was anticipated
that First Command would rent parking spaces to current and future tenants
leasing space in IRA's building, and that the remaining parking spaces would
be rented to IRA employees. The Board of Directors of IRA believed it
prudent (and continue to believe it prudent) to utilize a separate legal
entity to design, construct and operate the Facilities in an effort to minimize
IRA's legal liability risk with respect to such activities.
First Command currently employs two full-time employees, has its own officers
and directors separate and distinct from IRA,(4) and, according to First Command
legal counsel, has complied with all corporate formalities necessary to be
respected as a separate legal entity for Texas law purposes. Authorized
representatives of First Command have entered into executory legal contracts for
the design and construction of the Facilities, and have executed a 99-year
ground lease with IRA with respect to the property upon which the Facilities
will be constructed. Construction of the Facilities began on June 20, 1998.
First Command anticipates hiring additional employees in the near future as
construction of the Facilities progresses and operations expand.
First Command has made a timely election under IRC Section 1362 to be treated as
an S corporation for federal income tax purposes.
Proposed Action Steps
For the business purposes stated above, the Board of Directors of IRA and the
Board of Directors of First Command have decided to consolidate the operations
of IRA and First Command by effecting the Proposed Merger pursuant to the
following steps:
1. The operating assets and liabilities of First Command will be contributed to
a wholly-owned subsidiary of First Command prior to the Proposed Merger in
an effort to continue to segregate potential liabilities arising from the
parking garage from the assets of IRA. The subsidiary will be either a
single member limited liability company or will be a corporation that elects
under IRC Section 1361(b)(3) to be a qualified subchapter S subsidiary.
2. First Command will obtain the financing (approximately $18 million) from IRA
necessary to effect the Proposed Merger. IRA will obtain financing from an
unrelated
- --------------------
(3) The individuals who formed First Command were (and are) members of the
Executive Committee of IRA and currently hold both Class A and Class B common
stock of IRA.
(4) First Command's Board Members own stock of IRA and currently
serve on either IRA's Board of Directors or Executive Committee. Not all members
of IRA's Board of Directors and/or Executive Committee serve on First Command's
Board. The meetings of the Board of Directors of First Command and IRA are held
at separate times and are evidenced by separate minutes.
7
<PAGE>
third-party lender (approximately $16 million).(5) In the Proposed Merger,
First Command will assume IRA's obligation to the third-party lender.
3. IRA will merge (pursuant to Texas law) with and into First Command, with
First Command as the surviving corporation, in exchange for (i) First
Command voting common stock, (ii) First Command nonvoting common stock, and
(iii) approximately $16.9 million. As part of the Proposed Merger, (i) IRA's
Class A shareholders will exchange their IRA Class A stock solely for First
Command voting common stock (except to the extent any Class A shareholders
exercise dissenters rights and receive solely cash for their stock), (ii)
IRA's Class B shareholders who also own IRA Class A stock will exchange
their IRA Class B stock solely for First Command nonvoting common stock
(except to the extent such shareholders choose the cash option or exercise
dissenters rights and receive cash for their stock), and (iii) IRA's Class B
shareholders who do not own IRA Class A stock will exchange their IRA Class
B stock solely for cash of approximately $28.24 per share (without
interest). The voting and nonvoting stock to be issued by First Command will
carry shareholder rights identical in all respects except for the right to
vote. The First Command shareholders immediately before the Proposed Merger
will continue to own their equity in First Command after the Proposed
Merger.
4. First Command will change its name to IRA.
5. First Command will make a timely election under IRC Section 1361(b)(3)
causing the IRA Subsidiaries to be qualified subchapter S subsidiaries for
federal income tax purposes.
New Shareholders' Agreement
Authorized representatives of IRA have represented that in connection with the
Proposed Merger, the existing shareholder agreements will be terminated and a
new Shareholders' Agreement will be entered into by and between First Command
(which will have changed its name to IRA) and its shareholders. The new
Shareholders' Agreement will provide for, among other things, (i) restrictions
on the transfer of First Command stock that could cause First Command to exceed
the maximum number of shareholders permitted for an S corporation under the IRC,
(ii) a right of first refusal of First Command to purchase its stock from its
shareholders in the event of a sale or other disposition of such stock, the
death of a shareholder, any termination of marriage by death or divorce, any
threatened or actual bankruptcy of a shareholder for the purpose of protecting
First Command's S election, the termination of a shareholder as a Texas life
insurance agent, or any threatened or actual levy by a creditor or claimant upon
First Command stock held by a
- --------------------
(5) Such financing will likely be supplied by Norwest Bank, N.A.
8
<PAGE>
shareholder, and (iii) certain provisions with respect to the S corporation
status of First Command. The new Shareholders' Agreement will also provide that
all First Command stock (voting and nonvoting) will carry identical distribution
and transfer rights, and that annual distributions will be paid to shareholders
to enable shareholders to pay federal and state income tax resulting from the
corporate income passed through to such shareholders. Additionally, the new
Shareholders' Agreement provides that no binding agreement has been, or will be
entered into altering a shareholder's right to distribution or liquidation
proceeds.
Statement of Representations
The following representations have been made by authorized representatives of
IRA and First Command, as reflected in the Statement of Facts and
Representations, dated July 1, 1998, with respect to the Proposed Merger:
a) The Proposed Merger will qualify as a statutory merger pursuant to
applicable provisions of the Texas Business Corporation Act.
b) The value of First Command stock and other consideration received by each
IRA shareholder will be approximately equal to the value of the IRA stock
surrendered in the exchange.
c) To the best knowledge and belief of the management of IRA, there is no plan
or intention on the part of the shareholders of IRA to sell, exchange, or
otherwise dispose of, reduce the risk of loss (by short sale or otherwise)
of the holding of, enter into any contract or other arrangement with respect
to, or consent to the sale or other disposition of (each of the foregoing, a
"disposition") a number of shares of First Command stock received in the
Proposed Merger that would reduce the IRA shareholders' ownership of First
Command stock to a number of shares having a value, as of the date of the
Proposed Merger, of less than 50% of the value of the formerly outstanding
IRA stock as of the same date. In addition, (i) there has been no
"disposition" of shares of IRA stock in anticipation of the Proposed Merger
and (ii) there is no plan or intention on the part of any shareholders of
IRA to effect a "disposition" of shares of IRA stock in anticipation of the
Proposed Merger. Moreover, (i) there has been no distribution of property by
IRA to a shareholder of IRA with respect to its stock in anticipation of the
Proposed Merger and (ii) there is no plan or intention on the part of IRA to
effect a distribution of property to a shareholder of IRA with respect to
its stock in anticipation of the Proposed Merger. For purposes of this
representation, IRA stock exchanged for cash or other property, surrendered
by dissenters, or exchanged for cash in lieu of fractional shares of First
Command stock have been treated as outstanding IRA stock on the date of the
Proposed Merger.
9
<PAGE>
d) First Command has no plan or intention to reacquire any of its stock issued
in the Proposed Merger, other than pursuant to the right of first refusal in
Article III of the new Shareholders' Agreement.
e) There is no plan or intention to liquidate First Command; to merge First
Command with or into another corporation; or to cause First Command to sell
or otherwise dispose of any of the assets of IRA acquired in the Proposed
Merger, except for dispositions made in the ordinary course of business.
f) The liabilities of IRA to be assumed by First Command and the liabilities to
which the assets of IRA are subject were incurred by IRA in the ordinary
course of business and are associated with the assets to be transferred.
g) Following the Proposed Merger, First Command will continue the historic
business of IRA or will use a significant portion of IRA's historic business
assets in a business.
h) There is no intercorporate indebtedness existing between IRA and First
Command which was acquired, or will be settled, at a discount.
i) Neither IRA nor First Command is an "investment company" as that term is
defined in IRC Section 368(a)(2)(F)(iii), or if either IRA or First
Command is an "investment company" pursuant to IRC Section
368(a)(2)(F)(iii), neither is a company in which (i) more than 25% of the
value of the company's total assets is invested in the stock or
securities of any one issuer, nor in which (ii) more than 50% of the
value of the company's total assets is invested in the stock or
securities of five or fewer issuers, disregarding each company's
ownership of its 50% or more owned subsidiaries and deeming each company
to own its ratable share of the assets of each of such subsidiaries. For
purposes of this representation, the term "total assets" is defined in
IRC Section 368(a)(2)(F)(iv).
j) The Class B nonvoting common stock of IRA constitutes stock for federal
income tax purposes.
k) IRA is not under the jurisdiction of a court in a Title 11 or similar case
within the meaning of IRC Section 368(a)(3)(A).
l) The total adjusted basis and the fair market value of the assets of IRA to
be transferred by IRA to First Command will equal or exceed the sum of the
liabilities to be assumed by First Command plus the amount of the
liabilities to which the assets to be transferred are subject.
10
<PAGE>
m) No options will be issued by IRA pursuant to any compensation plan prior to
or in connection with the Proposed Merger.
n) First Command will have a valid S election in effect at the time of the
Proposed Merger.
o) IRA is not a financial institution eligible to use the reserve method of
accounting for bad debts as described in IRC Section 585.
p) At no relevant time has IRA been a life insurance company pursuant to
Subchapter L of the IRC.
q) At no relevant time has IRA had in effect an election pursuant to IRC
Section 936 (Puerto Rico and possession tax credit).
r) At no relevant time has IRA been a domestic international sales corporation
as defined in IRC Section 992(a).
s) All shareholders of IRA receiving stock in First Command pursuant to the
Proposed Merger are eligible S corporation shareholders with the meaning of
IRC Section 1361(b)(1).
t) The First Command nonvoting common stock issued in connection with the
Proposed Merger will have shareholder rights (in particular, rights to
distribution and liquidation proceeds) identical in all respects to the
shareholder rights of the First Command voting stock except for the right to
vote. No binding agreement has been, or will be entered into altering a
shareholder's right to distribution or liquidation proceeds.
u) The new Shareholders' Agreement and the restrictions on the transfer of
First Command common stock reflected therein and in the Articles of
Incorporation (to which restrictions all First Command stock will be
subject) do not have as a principal purpose the avoidance of the "one class
of stock" requirement in IRC Section 1361(b)(1)(D).
v) At the time of the Proposed Merger or pursuant to the Proposed Merger,
neither IRA nor First Command will have issued a call option, warrant,
convertible debt or similar instrument, that is substantially certain to be
exercised by the holder and has a strike price substantially below the fair
market value of the underlying stock (other than the SARs or DERs issued
pursuant to the MAP).
w) Compensation paid to any shareholder-employee of IRA (or any affiliate of
IRA) prior to or subsequent to the Proposed Merger will be for services
actually rendered
11
<PAGE>
and will be commensurate with amounts paid to third parties bargaining at
arm's-length for similar services.
x) Awards made under the MAP will be unfunded and unsecured obligations of IRA
and will not confer voting rights to participating individuals.
y) All MAP Participants who will receive awards under the MAP prior to or
pursuant to the Proposed Merger will either be employees or independent
contractors of IRA and will receive such awards in connection with the
performance of services to IRA or its subsidiaries. Subsequent to the
Proposed Merger, all MAP Participants will receive such awards in connection
with the performance of services to First Command or its subsidiaries.
z) All compensation to be paid or accrued in connection with the MAP Units
will, after considering all other compensation to be paid or accrued,
constitute "reasonable compensation" as that term is defined in Treas. Reg.
Section 1.162-7 (and case law thereunder).
Federal Income Tax Consequences
Based on the foregoing statement of facts and representations and statement of
business purpose, and based on the information set forth in the Documents, but
subject to the limitations and qualifications set forth in the Scope section
below, it is our opinion that:
1. The Proposed Merger should constitute a reorganization within the meaning of
IRC Section 368(a).
2. IRA and First Command should both be parties to the reorganization within
the meaning of IRC Section 368(b).
3. No gain or loss should be recognized by IRA upon the transfer of its assets
to First Command in exchange for First Command common stock, cash (including
cash in lieu of fractional shares and cash for dissenters, if any), and the
assumption by First Command of the liabilities of IRA (IRC Section 361; IRC
Section 357(a)).
4. No gain or loss should be recognized by First Command upon the issuance of
its common stock as partial consideration for the assets of IRA (IRC
Section 1032(a)).
5. The basis of the assets of IRA in the hands of First Command should be the
same as the basis of such assets in the hands of IRA immediately prior to
the Proposed Merger (IRC Section 362(b)).
12
<PAGE>
6. The holding period of the assets of IRA in the hands of First Command should
include the holding period of such assets in the hands of IRA immediately
prior to the Proposed Merger (IRC Section 1223(2)).
7. No gain or loss should be recognized by an IRA shareholder upon the exchange
of his or her IRA stock solely for First Command stock (IRC Section 354(a)).
8. Provided that he or she is not related, under the constructive ownership
rules of IRC Section 318, to any First Command shareholder after the
Proposed Merger, an IRA shareholder who exchanges his or her IRA stock
solely for cash should recognize capital gain (or capital loss) to the
extent the cash received exceeds (or is exceeded by) the basis in his or
her IRA shares (IRC Section 302(b)).
9. The basis of First Command common stock received by an IRA shareholder
should be the same as his or her basis in the IRA stock surrendered in the
exchange, decreased by the amount of cash or the fair market value of boot
received, if any, and increased by any gain recognized on the exchange (IRC
Section 358(a)).
10. The holding period of First Command stock received by an IRA shareholder
should include the period during which the IRA shareholder held the IRA
stock surrendered in the exchange (provided the IRA stock was a capital
asset in the hands of such shareholder on the date of the exchange (IRC
Section 1223(1)).
11. The Proposed Merger should not constitute a reorganization under IRC
Section 368(a)(1)(F).
12. The conversion of SARs and DERs of IRA into SARs and DERs of First Command
should not constitute boot in the Proposed Merger. Consequently, those
individuals owning IRA SARs and DERs immediately prior to the Proposed
Merger should not recognize gain or loss on the exchange of such SARs and
DERs for First Command SARs and DERs.
13. The S election currently in effect for First Command should remain in effect
during the Proposed Merger, and the combined IRA/First Command entity should
be an S corporation immediately after the Proposed Merger.
14. The new Shareholders' Agreement should not cause First Command to be
considered to have more than a single class of stock for purposes of IRC
Section 1361(b)(1)(D).
15. The grant or holding of an SAR and/or DER should not result in the
individual plan participant being treated as a shareholder for purposes of
subchapter S.
13
<PAGE>
16. First Command will be subject to the built-in gains tax provisions of IRC
Section 1374 to the extent any asset received pursuant to the Proposed
Merger has an unrealized built-in gain at the time of the Proposed Merger
and such asset is disposed of by First Command during the recognition
period (as defined in IRC Section 1374(d)(7)) after the Proposed Merger.
If an asset received in the Proposed Merger is disposed of after the
recognition period, IRC Section 1374 should not apply.
Based on the foregoing statement of facts and representations, and based on the
information set forth in the Documents, but subject to the limitations and
qualifications set forth in the Scope section below, it is our opinion as to the
issues related to IRA's reporting and withholding requirements under the IRC in
conjunction with the implementation of the MAP that:
1. The grant or holding of a SAR should not trigger the constructive receipt of
income to the individual plan participant under IRC Section 451.
2. The grant or holding of a DER should not trigger the constructive receipt of
income to the individual plan participant under IRC Section 451.
3. The payment made by IRA under the MAP should be deductible by IRA in the
year, and in the amount, included in each individual participant's taxable
income.
4. The benefits under the MAP should be subject to Federal Insurance
Contributions Act ("FICA") taxes and Self Employment Contributions Act
("SECA") taxes in the year the individual participant actually or
constructively receives payment.
5. Under the current design and drafting of the MAP, the MAP benefits should
not be subject to IRC Section 280G "excess parachute payment" penalties.
Scope of Opinion
The scope of this opinion is expressly limited to the federal income tax
issues specifically addressed above in the section entitled "Federal Income
Tax Consequences." Specifically, our opinion has not been requested and none
is expressed with regard to any foreign, state, or local income tax
consequences for IRA, First Command or any of their shareholders. Our opinion
has not been requested and none is expressed with regard to the federal,
state, or local bank regulatory consequences for IRA, FCB, and First Command
or with regard to federal, state or local insurance agency regulatory laws. We
have made no determination nor expressed any opinion as to any limitations,
including those which may be imposed under IRC Section 382, on the
availability of net operating loss carryovers (or built-in gains or losses),
if any, after the Proposed Merger, nor on the
14
<PAGE>
application (if any) of the alternative minimum tax to this transaction.
We have not expressed any opinion on any issues relating to the IRA Subsidiaries
nor on the application of any consolidated return rules. We have not expressed
an opinion on employee benefit issues, unless expressly stated above. Further,
we have made no determination as to whether IRA's dividend distributions have
been sufficient to eliminate any personal holding company tax liability, if
applicable. We have made no determination nor expressed any opinion as to the
fair market value of the (i) SARs, (ii) DERs, (iii) MAP benefits, (iv) any
assets to be transferred in connection with the Proposed Merger, and/or (v) any
stock exchanged or canceled in connection with the Proposed Merger.
Our opinion, as stated in this letter, is based upon the analysis of the IRC,
the Regulations thereunder, current case law, and published rulings as of the
date of this letter (the "Authorities"), as well as the Statement of Facts and
Representations provided us by the managements of IRA and First Command (and
their representatives). The foregoing Authorities are subject to change, and
such change may be retroactively effective. If so, our views, as set forth
above, may be affected and may not be relied upon. Further, any variation or
differences in the facts or representations recited herein, for any reason,
might affect our conclusions, perhaps in an adverse manner, and make them
inapplicable. In addition, we have undertaken no obligation to update, and
therefore will not be updating, this opinion for changes in facts or law
occurring subsequent to the date hereof.
This opinion is being rendered only to the addressees in connection with the
Proposed Merger, and is solely for their benefit and solely for the purpose set
forth above. This opinion may not be relied upon by any other person or persons,
or used for any other purposes, including, but not necessarily limited to,
filings with governmental agencies without our prior written consent. However,
we consent to have this opinion included in a final proxy filing with the SEC
and the Office of Thrift Supervision on or around October 30, 1998.
This letter is an opinion of our firm as to the interpretation of existing law
and, as such, is not binding on the Internal Revenue Service or the courts. This
letter may be used by IRA and First Command in responding to inquiries from the
Internal Revenue Service regarding the Proposed Merger.
Very truly yours,
/s/ Ernst & Young LLP
----------------------------
Ernst & Young LLP
15
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
NOVEMBER 23, 1998
This Proxy is Solicited on Behalf of the Board of Directors.
The undersigned hereby appoints Robert F. Watson and Martin R. Durbin,
as Proxies, each with the power to appoint his or her substitute, and hereby
authorizes them to represent and to vote, as designated below, all the shares of
(i) Class A Voting Common Stock, $0.10 par value per share and (ii) Class B
Non-Voting Common Stock, $0.02 par value per share, of INDEPENDENT RESEARCH
AGENCY FOR LIFE INSURANCE, INC. (the "Company"), that the undersigned is
entitled to vote at the Special Meeting of Shareholders of the Company to be
held on Monday, November 23, 1998, at 1:30 p.m., Fort Worth, Texas time, and at
any adjournment or postponement thereof, on all matters set forth in the Notice
of Special Meeting and Proxy Statement dated October 30, 1998, a copy of which
has been received by the undersigned, as follows:
See Reverse Side
<PAGE>
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC.
4100 South Hulen Street
Fort Worth, Texas 76109
This Proxy, when properly executed and delivered, will be voted as specified
below. If no specification is made, this Proxy will be voted for each of the
proposals. The Proxies cannot vote your shares unless you properly sign and
return this card.
- --------------------------------------------------------------------------------
The Board of Directors recommends that the shareholders vote FOR the proposal.
Please review carefully the Proxy Statement delivered with this Proxy.
- --------------------------------------------------------------------------------
1. Approval and adoption of the Agreement and Plan of Merger, dated as of July
1, 1998, as amended and restated as of October 30, 1998, by and among the
Company and First Command Financial Corporation.
/ / FOR / / AGAINST / / ABSTAIN
2. The Proxies are authorized to vote upon such matters as may properly come
before the meeting or any adjournment or postponement thereof as they
determine to be in the best interests of the Company.
The undersigned hereby revokes all proxies heretofore given by the undersigned
to vote at said meeting or any adjournment or postponement thereof.
--------------------------------------
Signature
Dated: ____________ ___, 1998 --------------------------------------
Signature, if held jointly
Important: Please mark, sign, date and return this Proxy either in the enclosed
envelope or by fax to the Company at (817) 731-8621, extension 2468. No postage
is required if mailed in the United States. Please date this Proxy and sign your
name exactly as it appears on your stock certificate. Where there is more than
one owner, each should sign. When signing as an attorney, administrator,
executor, guardian or trustee, please add your title as such. If executed by a
corporation, the Proxy should be signed by a duly authorized officer and state
the full name of the corporation.
Notwithstanding shareholder approval of the proposal, the Company reserves the
right to terminate the Merger Agreement and abandon the Merger, upon the terms
and subject to the conditions set forth in the Merger Agreement.
<PAGE>
FORM OF ELECTION OF
CLASS A/B SHAREHOLDERS OF
INDEPENDENT RESEARCH AGENCY FOR LIFE INSURANCE, INC. ("COMPANY")
This Form of Election, when properly submitted by a holder of Class B Non-Voting
Common Stock of the Company, par value $0.02 per Share ("Class B Stock"), who is
also a holder of Class A Voting Common Stock of the Company, par value $0.10 per
Share (a "Class A/B Shareholder"), will permit such Class A/B Shareholder to
elect to receive either (i) one share of Nonvoting Common Stock, par value $0.01
per share ("Surviving Corporation Nonvoting Stock"), of First Command Financial
Corporation, a Texas corporation (the "Class B Nonvoting Stock Consideration"),
for each share of Class B Stock held by such Class A/B Shareholder or (ii)
$28.24 in cash (the "Class B Cash Consideration") for each share of Class B
Stock held by such Class A/B Shareholder, in connection with the merger (the
"Merger") of the Company with and into
FIRST COMMAND FINANCIAL CORPORATION ("FIRST COMMAND").
A Class A/B Shareholder may not elect to receive both the Class B Nonvoting
Stock Consideration and the Class B Cash Consideration.
------------------------
By Hand Delivery Facsimile By
or Overnight: Transmission: Mail:
First Command Bank (888) 763-7600 First Command Bank
4100 South Hulen Street or 4100 South Hulen Street
Fort Worth, Texas 76109 (817) 763-0557 Fort Worth, Texas 76109
Attention: Paying Agent Attention: Paying Agent
Confirm by Telephone:
(888) 763-7600 or (817) 763-0000
------------------------
First Command Bank is the Paying Agent.
FOR INFORMATION, CALL (888) 763-7600 or (817) 763-0000
------------------------
1
<PAGE>
PLEASE READ THE INSTRUCTIONS IN THIS FORM OF ELECTION CAREFULLY BEFORE
COMPLETING THIS FORM OF ELECTION.
ELECTION OF CLASS B STOCK (Attach
additional sheets if necessary).
See "Election" and Instruction 6.
Mark only one box.
<TABLE>
<CAPTION>
<S> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Number of Shares of Class B Stock
held by the Class A/B Shareholder:
Name and Address of Registered Holder(s)
(Please fill in, if blank, exactly as name(s) appear(s) on certificate(s))
- -------------------------------------------------------------------------------
--------------------------------------------------
Class B Nonvoting Stock Election:
/ /
--------------------------------------------------
Class B Cash Election:
/ /
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
/ / Check this box if this election represents a revocation of any earlier
election.
November 23, 1998, is the Election Deadline by which date a completed Form
of Election must be received by the Paying Agent in order for any Class B
Nonvoting Stock Election or Class B Cash Election (as such terms are defined
below) contained herein to be valid. Any Form of Election received by the Paying
Agent after the Election Deadline shall be deemed to indicate a Non-Election (as
defined below).
Information as to the federal income tax consequences of receiving Class B
Nonvoting Stock Consideration or Class B Cash Consideration in exchange for your
Class B Stock is set forth under the caption "SPECIAL FACTORS--Certain Federal
Income Tax Considerations" in the Proxy Statement furnished to you concurrently
herewith. You are urged, in addition, to consult with your tax advisor.
TO FIRST COMMAND BANK:
In connection with the Merger, and pursuant to an Agreement and Plan of
Merger, dated as of July 1, 1998, as amended and restated as of October 30, 1998
(as amended and restated, the "Merger Agreement"), (the "Merger Agreement"),
between the Company and First Command, the undersigned hereby makes the election
set forth herein concerning the Class B Stock held by the undersigned, who is a
Class A/B Shareholder. Pursuant to such election set forth herein, the
undersigned elects that each share of Class B Stock held by the undersigned
issued and outstanding immediately prior to the effective time of the Merger,
subject to and upon the terms and conditions of the Merger Agreement, will be
converted into (i) the right to receive the Class B Nonvoting Stock
Consideration (a "Class B Nonvoting Stock Election"), (ii) the Class B Cash
Consideration (the "Class B Cash Election") or (iii) the right to make no
election (a "Non-Election"), in which case the undersigned will receive the
Class B Nonvoting Stock Consideration. See "THE PROPOSED MERGER--Shareholder
Elections." Except as expressly provided herein, capitalized terms shall have
the meanings ascribed to them in the Proxy Statement.
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The undersigned understands that the elections referred to above are
subject to certain terms, conditions and limitations that are set forth in the
Merger Agreement, the Instructions below and the Proxy Statement with respect to
the Merger (including all documents incorporated therein, and as it may be
amended from time to time, the "Proxy Statement") delivered prior hereto. The
Merger Agreement is included as Annex A to the Proxy Statement. Extra copies of
this Form of Election and the Proxy Statement may be requested from the Paying
Agent, at the addresses or phone numbers shown above. The filing of this Form of
Election with the Paying Agent is acknowledgment of the receipt of the Proxy
Statement. The undersigned understands and acknowledges that all questions as to
the validity, form and eligibility of any election shall be reasonably
determined by the Paying Agent, and such determination shall be final and
binding.
ELECTION
The appropriate election(s) must be made in the box above in order to make
a Class B Nonvoting Stock Election, a Cash Election or Non-Election with respect
to all the shares of Class B Stock held of record by such Class A/B Shareholder.
All Class A/B Shareholders wishing to make a Class B Nonvoting Stock
Election or a Class B Cash Election must ensure that the Paying Agent receives a
properly completed Form of Election prior to the Election Deadline. All Class
A/B Shareholders submitting Election Forms after such time will be deemed to
have made a Non-Election regardless of the election specified on such form.
The Paying Agent reserves the right to deem that you have made a
Non-Election if:
A. No election choice is indicated in the box above;
B. You fail to follow the instructions on this Form of Election or
otherwise fail to properly make an election;
C. A completed Form of Election is not actually received by the Election
Deadline; or
D. You mark both the "Class B Nonvoting Stock Election" box and the
"Class B Cash Election" box.
Consummation of the Merger is subject to the satisfaction of certain
conditions. No payments will be made prior to the Effective Time of the Merger.
INSTRUCTIONS
This Form of Election is to be completed and submitted to the Paying Agent
prior to the Election Deadline by those Class A/B Shareholders desiring to make
a Class B Nonvoting Stock Election or Class B Cash Election.
Your election is subject to certain terms, conditions and limitations that
have been set out in the Merger Agreement and the Proxy Statement. The Merger
Agreement is included as Annex A to the Proxy Statement. Extra copies of the
Proxy Statement may be requested from the Paying Agent at the addresses or phone
numbers shown above. The filing of this Form of Election with the Paying Agent
is acknowledgment of the receipt of the Proxy Statement.
1. Election Deadline. For any Class B Nonvoting Stock Election or Class B
Cash Election contained herein to be considered, this Form of Election, properly
completed, must be received by the Paying Agent at one of the addresses shown
above on this Form of Election no later than 5:00 p.m. Central Standard Time on
the Election Deadline.
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2. Revocation or Amendment of Form of Election. An election may be revoked
or amended, but only by written notice received by the Paying Agent prior to the
Election Deadline. Upon any such revocation, unless a duly completed Form of
Election is thereafter submitted in accordance with the procedures set forth in
the Proxy Statement, such shareholder will be deemed to have made a
Non-Election.
3. Delivery of Form of Election. This Form of Election, properly completed
and duly executed, should be delivered to the Paying Agent at one of the
addresses set forth above.
4. Inadequate Space. If the space provided herein is inadequate, the number
of shares of Class B Stock held by the Class A/B Shareholder should be listed on
additional sheets and attached hereto.
5. Signatures on Election Form.
(a) All signatures must correspond exactly with the name written on the
face of the certificate(s) representing the Class B Stock, without alteration,
variation or any change whatsoever.
(b) If the certificate(s) representing the Class B Stock is (are) held of
record by two or more joint owners, all such owners must sign this Form of
Election.
(c) If the shares of Class B Stock held by a Class A/B Shareholder are
registered in different names on several certificates, it will be necessary to
complete, sign and submit as many separate Forms of Election as there are
different registrations of certificates.
6. Elections. Each Class A/B Shareholder is entitled to make a Class B
Nonvoting Stock Election or a Class B Cash Election with respect to all of his
or her Class B Stock, provided the Form of Election for any holder making such
election is properly completed and received by the Paying Agent prior to the
Election Deadline. To properly complete the box, the number of shares of Class B
Stock held by each Class B Shareholder must be written in the column under the
heading "Number of Shares of Class B Stock," and either the "Class B Nonvoting
Stock Election" box or the "Class B Cash Election" box should be marked. MARK
ONLY ONE BOX. A Class A/B Shareholder submitting a Form of Election may not
elect to receive both the Class B Nonvoting Stock Consideration and the Class B
Cash Consideration.
7. Miscellaneous. Neither the Company nor the Paying Agent is under any
duty to give notification of defects in any Form of Election. The Company and
the Paying Agent shall not incur any liability for failure to give such
notification, and each of the Company and the Paying Agent has the absolute
right to reject any and all Forms of Election not in proper form or to waive any
irregularities in any Form of Election.
8. Information and Additional Copies. Information and additional copies of
this Form of Election may be obtained by telephoning toll-free (888) 763-7600,
or, in Fort Worth, (817) 763-0000.
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