<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
AMERICAN INDEMNITY FINANCIAL CORPORATION
----------------------------------------
(Name of Registrant as Specified in its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box): [ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $3.33 1/3 per share
(2) Aggregate number of securities to which transaction applies:
1,962,410 shares outstanding and 28,000 shares subject to options
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$15.36 for each share outstanding ($30,142,617) and the amount by
which $15.36 exceeds the exercise price per share of each option
($78,620)
(4) Proposed maximum aggregate value of transaction:
approximately $30,250,000
(5) Total fee paid:
$6,050
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
PRELIMINARY
AMERICAN INDEMNITY FINANCIAL CORPORATION
P. O. BOX 8985
WILMINGTON, DELAWARE 19899-8985
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
June 2, 1999
Notice is hereby given that the Annual Meeting of Stockholders of
American Indemnity Financial Corporation (the "Company") will be held in the
Board of Directors Room of the United States National Bank of Galveston, 2201
Market Street, Galveston, Texas, at 10:00 a.m. on Wednesday, June 2, 1999, for
the following purposes:
1. To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger, dated March 4, 1999, by and among United Fire &
Casualty Company, an Iowa corporation ("United Fire"), AI Acquisition
Corporation, an Iowa corporation and a wholly owned subsidiary of United Fire
("Sub"), and the Company, pursuant to which (i) Sub will be merged with and into
the Company (the "Merger"), with the Company continuing as the surviving
corporation and becoming a wholly owned subsidiary of United Fire and (ii) each
outstanding share of common stock, par value $3.33 1/3 per share, of the Company
("Common Stock"), other than shares held by the stockholders, if any, who
properly exercise their appraisal rights under Delaware law, will be converted
into the right to receive $15.36 in cash (the "Per Share Amount"). Of the Per
Share Amount, $1 will be deposited in an escrow account, to be distributed two
years after the effective date of the Merger, subject to deductions for certain
indemnity claims that may be asserted by United Fire.
2. To elect three Class II directors of the Company to hold office for
the ensuing three years if the Merger is not consummated.
3. To transact such other business as may properly be brought before
the meeting or any adjournment thereof.
Only holders of Common Stock of the Company of record at the close of
business on April 28, 1999 will be entitled to notice of and to vote at the
meeting.
Stockholders who do not expect to attend the annual meeting are
requested to sign and return the enclosed proxy, for which a return envelope is
enclosed.
By Order of the Board of Directors,
------------------
HELEN K. LOHEC
Secretary
May __, 1999
<PAGE> 3
PRELIMINARY
AMERICAN INDEMNITY FINANCIAL CORPORATION
P. O. BOX 8985
WILMINGTON, DELAWARE 19899-8985
PROXY STATEMENT
This Proxy Statement and the enclosed form of proxy are being mailed on
or about May __, 1999, to the record holders of the Common Stock, $3.33 1/3 par
value ("Common Stock"), of American Indemnity Financial Corporation (the
"Company") on April 28, 1999. The enclosed form of proxy is solicited by the
Board of Directors of the Company (the "Board") to be used at the Annual Meeting
of Stockholders to be held on June 2, 1999. Any stockholder giving such a proxy
may revoke it any time before it is voted by delivering written revocation to
the Secretary of the Company, by voting in person at the annual meeting or by
giving a later proxy. Otherwise, if received in time, it will be voted at the
meeting.
Holders of record of Common Stock at the close of business on April 28,
1999, will be entitled to notice of and to vote at the annual meeting. Each
outstanding share of Common Stock will be entitled to one vote. On the record
date there were outstanding 1,962,410 shares of Common Stock. There are no other
voting securities of the Company outstanding.
The Annual Report to Stockholders for the fiscal year ended December
31, 1998, including financial statements (the "Annual Report"), accompanies this
Proxy Statement, constitutes a part of the proxy soliciting material and is
incorporated herein by reference.
The Annual Meeting of Stockholders will be held at 10:00 a.m. on
Wednesday, June 2, 1999, in the Board of Directors Room of the United States
National Bank of Galveston, 2201 Market Street, Galveston, Texas.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION........................................................................ 3
FORWARD-LOOKING STATEMENTS................................................................... 3
SUMMARY...................................................................................... 4
The Companies........................................................................... 4
The Annual Meeting...................................................................... 4
The Merger.............................................................................. 5
Election of Class II Directors.......................................................... 8
THE ANNUAL MEETING........................................................................... 9
General................................................................................. 9
Matters to Be Considered at the Annual Meeting.......................................... 9
Record Date; Voting at the Annual Meeting............................................... 9
Proxies; Revocation of Proxies.......................................................... 10
Solicitation of Proxies................................................................. 11
THE MERGER................................................................................... 11
Background of the Merger................................................................ 11
The Company's Reasons for the Merger; Recommendation of the Board of Directors.......... 12
Opinion of the Company's Financial Advisor.............................................. 13
Interests of Certain Persons in the Merger.............................................. 15
Financing the Merger.................................................................... 16
Accounting Treatment.................................................................... 16
Certain Federal Income Tax Consequences................................................. 16
Regulatory Filings and Approvals........................................................ 16
Certain Consequences of the Merger...................................................... 17
Appraisal Rights........................................................................ 17
THE MERGER AGREEMENT......................................................................... 19
The Merger.............................................................................. 20
Certain Covenants....................................................................... 22
Representations and Warranties.......................................................... 25
Conditions to the Merger................................................................ 25
Termination............................................................................. 27
THE COMPANIES................................................................................ 27
The Company............................................................................. 27
United Fire............................................................................. 28
PRINCIPAL STOCKHOLDERS....................................................................... 29
ELECTION OF DIRECTORS........................................................................ 30
EXECUTIVE OFFICERS........................................................................... 33
EXECUTIVE COMPENSATION....................................................................... 33
OTHER TRANSACTIONS........................................................................... 39
RELATIONSHIP WITH INDEPENDENT AUDITORS....................................................... 40
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT................................. 40
PROPOSALS FOR NEXT ANNUAL MEETING............................................................ 40
GENERAL...................................................................................... 40
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.............................................. 40
Annex A: Agreement and Plan of Merger........................................................ A-1
Annex B: Opinion of Philo Smith.............................................................. B-1
Annex C: DISSENTERS' RIGHTS UNDER THE DGCL................................................... C-1
</TABLE>
2
<PAGE> 5
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files periodic reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC"). The
reports, proxy statements and other information filed by the Company with the
SEC may be inspected and copied at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and also
are available for inspection at the SEC's Regional Offices at Seven World Trade
Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such material also may be obtained, at
prescribed rates, from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549. In addition, the Company is required to
file electronic versions of certain material with the SEC through the SEC's
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system. The SEC
maintains a site on the Internet's World Wide Web at http://www.sec.gov that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The Common Stock is
traded on the Nasdaq National Market ("Nasdaq") and such reports, proxy
statements and other information concerning the Company may also be inspected at
the offices of Nasdaq, 9801 Washingtonian Boulevard, Gaithersburg, Maryland.
After the Effective Time, the Common Stock will no longer be publicly
traded and will cease to be listed on Nasdaq. Moreover, the Surviving
Corporation will no longer be required to file informational reports under the
Exchange Act, such as proxy statements, and its officers, directors and more
than 10% stockholders will be relieved of the reporting requirements under, and
the "short-swing" profit recapture provisions of, Section 16 under the Exchange
Act.
NO PERSON IS AUTHORIZED TO PROVIDE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROXY STATEMENT
OTHER THAN THOSE CONTAINED HEREIN OR IN THE DOCUMENTS INCORPORATED BY REFERENCE
HEREIN. ANY INFORMATION OR REPRESENTATIONS WITH RESPECT TO SUCH MATTERS NOT
CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY. THE DELIVERY OF THIS PROXY STATEMENT SHALL NOT, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
IN THIS PROXY STATEMENT OR IN THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THEREOF, AS THE CASE MAY
BE.
FORWARD-LOOKING STATEMENTS
Certain statements made herein and in other public filings and releases
by the Company contain "forward-looking" information (as defined in the Private
Securities Litigation Reform Act of 1995) that involve risk and uncertainty.
These include, but are not limited to, changes in interest rates; changes in
premium volumes; the frequency and severity of catastrophic events; increased
competition; regulatory and legislative changes; changes in loss payment
patterns; changes in estimated overall adequacy of loss and loss adjustment
expense reserves; changes in key management personnel; Year 2000 compliance
problems; changes in general market or economic conditions; and other risk
factors. Although the Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, the Company
can give no assurance that these expectations will be achieved. Actual results
and trends in the future may differ materially depending on a variety of factors
including, but not limited to, the factors that are disclosed in conjunction
with the forward-looking statements included herein and in other public filings
and releases by the Company.
3
<PAGE> 6
SUMMARY
The following is a summary of certain information contained elsewhere
in this Proxy Statement. This summary is not intended to be complete and is
qualified in its entirety by reference to the more detailed information
contained elsewhere, or incorporated by reference, in this Proxy Statement and
the Annexes hereto. Stockholders are urged to read the Annual Report, this Proxy
Statement and the Annexes hereto carefully and in their entirety. Unless
otherwise defined herein, all capitalized terms used in this Summary have the
respective meanings assigned to them elsewhere in this Proxy Statement.
THE COMPANIES
<TABLE>
<S> <C>
The Company.......................... The Company, through its principal wholly owned subsidiaries, American
Indemnity Company, American Fire and Indemnity Company, American
Indemnity Lloyds and Texas General Indemnity Company, provides personal
and commercial lines of property and casualty insurance in 13 states.
United Fire & Casualty Company....... United Fire & Casualty Company and its subsidiaries ("United Fire") are
engaged in the business of writing property and casualty insurance and life
insurance. In fiscal year 1998, United Fire reported gross premium revenues
of approximately $365 million, of which approximately 57% can be
attributed to the property and casualty insurance business and 43% can be
attributed to the life insurance business. United Fire reported net income of
approximately $24 million last year, a decrease of approximately 18% from
fiscal year 1997.
AI Acquisition Corporation........... AI Acquisition Corporation ("Sub") is a newly incorporated Iowa
corporation organized in connection with the Merger, and has not carried on
any activities other than in connection with the Merger. Sub is wholly owned
by United Fire. Upon the consummation of the Merger, Sub will be merged
with and into the Company, with the Company continuing as the surviving
corporation (the "Surviving Corporation") and becoming a wholly owned
subsidiary of United Fire.
THE ANNUAL MEETING
Time, Date and Place................. The Annual Meeting will be held at 10:00 a.m. on Wednesday, June 2, 1999,
in the Board of Directors Room of the United States National Bank of
Galveston, 2201 Market Street, Galveston, Texas.
Matters to Be Considered at
the Annual Meeting................... At the Annual Meeting, stockholders will consider and vote upon (a) a
proposal to approve and adopt the Agreement and Plan of Merger, dated
March 4, 1999, by and among United Fire, Sub, and the Company (the
"Merger Agreement"), (b) the election of three Class II directors of the
Company to hold office for the ensuing three years if the Merger is not
consummated and (c) such other business as may properly be brought before
the meeting or any adjournment thereof.. See "The Annual Meeting -
Matters to Be Considered at the Annual Meeting."
Record Date; Voting at the
Annual Meeting....................... April 28, 1999 has been fixed as the record date (the "Record Date") for the
determination of stockholders entitled to notice of, and to vote at, the Annual
Meeting. Accordingly, only stockholders of record at the close of business
</TABLE>
4
<PAGE> 7
<TABLE>
<S> <C>
on the Record Date will be entitled to vote at the Annual Meeting. At
the close of business on May __, 1999, the most recent practicable date prior
to the date of this Proxy Statement, there were 1,962,410 shares of Common
Stock outstanding and entitled to vote. Stockholders of record on the Record
Date are entitled to one vote per share, exercisable in person or by properly
executed proxy, upon each matter properly submitted for the vote of stockholders
at the Annual Meeting. The presence, in person or by properly executed proxy,
of the holders of a majority of the outstanding shares of Common Stock is
necessary to constitute a quorum at the Annual Meeting. The affirmative vote of
the holders of a majority of the outstanding shares of Common Stock is required to
approve and adopt the Merger Agreement. Abstentions and broker non-votes will have
the effect of votes against the proposal to approve and adopt the Merger Agreement.
Since the Company's bylaws provide that the directors are elected by a plurality
of votes cast, broker non-votes or withholding authority to vote for any of the
nominees will have no effect upon the election of directors, unless a vote is cast
in person or by means of another proxy. However, all shares represented by proxies
that are signed by the holder of record will be counted for purposes of determining
the presence of a quorum. If a stockholder does not specify otherwise, the shares
represented by his or her proxy will be voted for the nominees listed therein or
for other nominees selected by the Board. See "The Annual Meeting - Record Date;
Voting at the Annual Meeting."
Proxies; Revocation of
Proxies.............................. This Proxy Statement is being furnished to stockholders of record at the
close of business on the Record Date in connection with the solicitation of
proxies by and on behalf of the Board for use at the Annual Meeting. All
shares of Common Stock which are represented at the Annual Meeting by
properly executed proxies received and not duly and timely revoked will be
voted at the Annual Meeting in accordance with the instructions contained
therein. In the absence of contrary instructions, such shares will be voted
"FOR" the approval and adoption of the Merger Agreement and "FOR" the
election of the nominees for director listed herein or for other nominees
selected by the Board.
Any proxy signed and returned by a stockholder may be revoked by such
stockholder at any time before it is voted, by giving due notice of such
revocation to the Secretary of the Company (2115 Winnie, Galveston,
Texas 77550), by signing and delivering to the Secretary of the Company
a proxy bearing a later date or by attending the Annual Meeting, giving
notice of revocation to the Secretary of the Company prior to the proxy
being voted and voting in person. Attendance at the Annual Meeting without
taking other affirmative action as aforementioned will not constitute a
revocation of a proxy. See "The Annual Meeting - Proxies; Revocation of
Proxies."
THE MERGER
Effects of the Merger; Merger
Consideration........................ At the effective time ("Effective Time") of the transactions contemplated by
the Merger Agreement (the "Merger"), (i) Sub will be merged with and into
the Company, with the Company continuing as the Surviving Corporation
and becoming a wholly owned subsidiary of United Fire and (ii) each
outstanding share of Common Stock, other than shares held by the
</TABLE>
5
<PAGE> 8
<TABLE>
<S> <C>
stockholders, if any, who properly exercise their appraisal rights
under Delaware law, will be converted into the right to receive
$15.36 in cash (the "Per Share Amount"). Of the Per Share Amount,
$1 will be deposited in an escrow account, to be distributed two years
after the effective date of the Merger, subject to deductions for
certain indemnity claims that may be asserted by United Fire.
Treatment of Stock Options.... All outstanding Options (as more fully described under "The Merger
Agreement - The Merger - Option Plans") obligating the Company to issue,
transfer or sell any shares of Common Stock, whether or not then
exercisable, will be canceled and converted into the right to receive an
amount in cash equal to the product, rounded to four decimal places, of
(i) the amount by which the Per Share Amount exceeds the exercise price per
share subject to the Option and (ii) the number of shares subject to the
Option.
Recommendation of the
Company's Board of
Directors............................ The Board has determined that the Merger Agreement and the Merger are
advisable and fair to and in the best interests of the Company and its
stockholders and has approved and adopted the Merger Agreement. ACCORDINGLY,
THE BOARD RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT.
In reaching its determination that the Merger Agreement and the Merger
are advisable and are fair to and in the best interests of the Company
and its stockholders, the Board considered a number of factors, as
more fully described under "The Merger - The Company's Reasons for
the Merger; Recommendation of the Board of Directors."
Opinion of the Company's
Financial Advisor.................... Philo Smith Capital Corporation ("Philo Smith") has delivered its written
opinion to the Board that, as of March 1, 1999, the consideration to be
received by the holders of Common Stock pursuant to the Merger Agreement is
fair to such holders from a financial point of view. The full text of the
written opinion of Philo Smith, which sets forth certain assumptions made,
matters considered and limitations on the review undertaken in connection
with the opinion, is attached hereto as Annex B and is incorporated herein by
reference. The opinion of Philo Smith referred to herein does not constitute
a recommendation as to how any stockholder should vote with respect to such
transaction. STOCKHOLDERS ARE URGED TO, AND SHOULD, READ SUCH OPINION IN ITS
ENTIRETY. Upon consummation of the Merger, the Company will pay Philo Smith
a transaction fee for acting as the Company's financial advisor in connection
with the transaction. See "The Merger - Opinion of the Company's Financial
Advisor - Opinion of Philo Smith."
Interests of Certain Persons
in the Merger........................ Certain members of the Company's executive management and of the Board
will receive economic benefits as a result of the Merger. For information
concerning such benefits, see "The Merger - Interests of Certain Persons in
the Merger."
</TABLE>
6
<PAGE> 9
<TABLE>
<S> <C>
Financing the Merger................. United Fire and its subsidiaries will contribute internally generated funds to
Sub in amounts sufficient to pay the total amount required to pay the
aggregate Per Share Amount to the Company's stockholders and Option
holders, and pay estimated fees, expenses and other transaction costs of
United Fire and Sub in connection with the Merger. See "The Merger -
Financing the Merger."
Conditions to the Merger............. The Merger is subject to certain customary closing conditions, including,
without limitation, the approval of the Merger Agreement by the requisite
vote of the stockholders of the Company in accordance with applicable law,
the representations and warranties of each of United Fire, Sub and the
Company being true and correct in all material respects on and as of the
Effective Time, each of United Fire, Sub and the Company having performed
in all material respects its obligations to be performed prior to the Effective
Time under the Merger Agreement, and the receipt of all consents of any
person required to permit the consummation of the Merger.
Termination; Certain Fees............ The Merger Agreement will be subject to termination at any time prior to the
Effective Time by (i) the mutual consent of United Fire, Sub and the
Company, (ii) by United Fire and Sub at any time after June 30, 1999, if at
such time their conditions to close have not been satisfied through no fault
of United Fire or Sub and United Fire or Sub gives the Company notice of
such termination; (iii) by United Fire and Sub if the Company, the Board or
any committee thereof (A) withdraws or modifies, or proposes to withdraw
or modify, in a manner adverse to United Fire or Sub, the approval or
recommendation by the Company, the Board or any such committee of the
Merger Agreement or the Merger or takes any action having such effect, (B)
approves or recommends, or proposes to approve or recommend, any Target
Takeover Proposal (as defined herein), or (C) otherwise breaches the "no
solicitation" provisions of the Merger Agreement; (iv) by United Fire and
Sub at any time after holders of greater than five percent of the outstanding
Common Stock have delivered notice to the Company of their intent to
demand payment pursuant to the provisions for dissenters' rights provided
by Delaware law; and (v) by the Company at any time after June 30, 1999,
if at such time its conditions to close have not been satisfied through no fault
of the Company and the Company gives United Fire or Sub notice of such
termination. If the Merger Agreement is terminated by the Company under
certain circumstances described herein, the Company will be obligated to pay
to United Fire a termination fee of $1 million in cash. If the Merger
Agreement is terminated by United Fire under certain circumstances
described herein, United Fire will be obligated to pay to the Company a
termination fee of $1 million in cash. See "The Merger Agreement -
Termination".
Appraisal Rights..................... Holders of Common Stock on the Record Date who do not vote in favor of
approving and adopting the Merger Agreement and who otherwise comply
with the applicable statutory procedures of Section 262 of the Delaware
General Corporation Law ("DGCL") will be entitled to appraisal rights
under Section 262 of the DGCL. A summary of the provisions of Section
262 of the DGCL, including a summary of the requirements with which
holders of Common Stock desiring to assert appraisal rights must comply,
is contained herein under the heading "The Merger - Appraisal Rights." The
entire text of Section 262 of the DGCL is attached hereto as Annex C.
</TABLE>
7
<PAGE> 10
<TABLE>
<S> <C>
Certain Federal Income Tax
Consequences......................... A stockholder will recognize gain in the year of the Merger to the extent that
the cash received plus the fair market value of the Escrow Account allocable
to his shares of Common Stock exceeds the adjusted basis of his shares of
Common Stock. Even though the amounts in the Escrow Account will not
be distributed to the stockholders until 2001 (or later), the stockholders will
recognize the full amount of their gain in the year of the Merger because the
installment method of reporting gain does not apply to the disposition of
stock which is traded on an established securities market. A stockholder will
recognize loss in the year of the Merger to the extent that the adjusted basis
of his shares of Common Stock exceeds the cash received plus the fair
market value of the Escrow Account allocable to his shares of Common
Stock. Distributions to the stockholders in 2001 (or later) from the Escrow
Account will consist of two elements, principal and interest, as computed
under the original issue discount rules of he Code and the regulations
promulgated thereunder. If the amount of the payment allocable to principal
is equal to the fair market value of the Escrow Account as of the date of the
Merger, the stockholders will not recognize additional gain or loss from the
disposition of the shares of Common Stock. However, if the amount of the
payment allocable to principal is greater or less than the initial fair market
value of the Escrow Account, each stockholder will recognize an additional
gain or loss from the disposition of his shares of Common Stock. See "The
Merger - Certain Federal Income Tax Consequences".
Certain Information In
Connection With the Common
Stock................................ The Common Stock is listed on the Nasdaq National Market. On March 3,
1999, the trading date preceding the date on which the Merger was
announced, the high, low and closing sales prices of the Common Stock, as
reported on Nasdaq, were $11.75, $11.00 and $11.50 per share, respectively.
On May _, 1999, the last practicable date prior to the date of this Proxy
Statement, the high, low and closing sales prices of the Common Stock, as
reported on Nasdaq, were $_, $_ and $_ per share, respectively.
Stockholders are urged to obtain current market quotations for the Common
Stock prior to making any decision with respect to the Merger. See "Selected
Financial Data - Market Prices of Common Stock."
</TABLE>
ELECTION OF CLASS II DIRECTORS
At the Annual Meeting, the stockholders will be asked to elect three
Class II directors to hold office for terms of three years, or until their
respective successors shall have been elected and shall qualify. If the Merger
is consummated, it is expected that all members of the Board will resign. See
"Election of Directors".
8
<PAGE> 11
THE ANNUAL MEETING
GENERAL
This Proxy Statement and the accompanying Annual Report are being
furnished to holders of Common Stock in connection with the solicitation of
proxies by and on behalf of the Board for use at the Annual Meeting to be held
at 10:00 a.m. on Wednesday, June 2, 1999, in the Board of Directors Room of the
United States National Bank of Galveston, 2201 Market Street, Galveston, Texas,
and at any adjournments or postponements thereof. This Proxy Statement, the
Annual Report and the accompanying Notice and Proxy Card are first being mailed
to holders of Common Stock entitled to notice of, and to vote at, the Annual
Meeting, on or about May _, 1999.
MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING
THE MERGER. At the Annual Meeting, stockholders will be asked to
consider and vote upon a proposal to approve and adopt the Merger Agreement. The
Board has determined that the Merger Agreement and the Merger are advisable and
are fair to and in the best interests of the Company and its stockholders and
has approved and adopted the Merger Agreement. ACCORDINGLY, THE BOARD RECOMMENDS
THAT STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. See
"The Merger - Background of the Merger" and "The Company's Reasons for the
Merger; Recommendation of the Board of Directors."
ELECTION OF CLASS II DIRECTORS. At the Annual Meeting, three Class II
directors (constituting all of the Class II directors) are to be elected to hold
office for terms of three years or until their respective successors shall have
been elected and shall qualify. It is the intention of the persons named in the
enclosed form of proxy to vote such proxy for the election of the three nominees
named below for Class II directorships unless authorization is withheld on the
proxy. If the Merger is consummated, it is expected that all members of the
Board will resign.
STOCKHOLDERS ARE REQUESTED TO COMPLETE, DATE, SIGN AND RETURN PROMPTLY
THE ACCOMPANYING PROXY CARD TO THE COMPANY IN THE ENCLOSED POSTAGE-PAID
ENVELOPE. FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE AT THE
ANNUAL MEETING WILL HAVE THE SAME EFFECT AS A VOTE "AGAINST" THE MERGER
AGREEMENT. SINCE THE COMPANY'S BYLAWS PROVIDE THAT THE DIRECTORS ARE ELECTED BY
A PLURALITY OF VOTES CAST, BROKER NON-VOTES OR WITHHOLDING AUTHORITY TO VOTE FOR
ANY OF THE NOMINEES WILL HAVE NO EFFECT UPON THE ELECTION OF DIRECTORS, UNLESS A
VOTE IS CAST IN PERSON OR BY MEANS OF ANOTHER PROXY.
RECORD DATE; VOTING AT THE ANNUAL MEETING
April 28, 1999 has been fixed as the Record Date for the determination
of the holders of Common Stock entitled to notice of, and to vote at, the Annual
Meeting. Only stockholders of record at the close of business on the Record Date
will be entitled to notice of, and to vote at, the Annual Meeting. At the close
of business on May _, 1999, the most recent practicable date prior to the date
of this Proxy Statement, there were 1,962,410 shares of Common Stock outstanding
and entitled to vote at the Annual Meeting, held by approximately _ stockholders
of record.
Stockholders of record on the Record Date are entitled to one vote per
share, exercisable in person or by properly executed proxy, upon each matter
properly submitted for the vote of stockholders at the Annual Meeting. The
presence, in person or by properly executed proxy, of the holders of a majority
of the outstanding shares of Common Stock is necessary to constitute a quorum at
the Annual Meeting.
Holders of Common Stock on the Record Date who do not vote in favor of
approving and adopting the Merger Agreement and who otherwise comply with the
applicable statutory procedures of Section 262 of the DGCL will be entitled to
appraisal rights under the DGCL in connection with the Merger. Stockholders of
the Company who vote
9
<PAGE> 12
in favor of approving and adopting the Merger Agreement, however, will thereby
waive their appraisal rights. See "The Merger - Appraisal Rights."
The affirmative vote of the holders of a majority of the outstanding
shares of Common Stock is required to approve and adopt the Merger Agreement.
Abstentions and broker non-votes will have the same effect as votes "AGAINST"
the proposal to approve and adopt the Merger Agreement.
The Board is not aware of any matters other than those set forth in the
Notice of Annual Meeting of Stockholders transmitted with this Proxy Statement
that may be brought before the Annual Meeting. If any other matters properly
come before the Annual Meeting, the persons named in the accompanying Proxy Card
will vote the shares represented by all properly executed proxies on such
matters in such manner as shall be determined by a majority of the Board.
PROXIES; REVOCATION OF PROXIES
All shares of Common Stock that are represented at the Annual Meeting
by properly executed proxies received and not duly and timely revoked will be
voted at the Annual Meeting in accordance with the instructions contained
therein. In the absence of contrary instructions, such shares will be voted
"FOR" the approval and adoption of the Merger Agreement, "FOR" the election of
the three nominees named herein for Class II directorships and in the discretion
of the proxyholder as to any other matter which may properly come before the
Annual Meeting. If necessary, the proxyholder may vote in favor of a proposal to
adjourn or postpone the Annual Meeting in order to permit further solicitations
of proxies in the event a quorum is not obtained, or if fewer shares of Common
Stock than the number required therefor are voted in favor of approval and
adoption of the Merger Agreement. However, no proxyholder will vote any proxies
voted against approval of the Merger Agreement for a proposal to adjourn or
postpone the Annual Meeting for the purpose of soliciting additional proxies.
The required vote of the stockholders on the Merger Agreement is based
upon the total number of outstanding shares of Common Stock as of the Record
Date. Therefore, the failure to submit a Proxy Card (or to vote in person at the
Annual Meeting), the abstention from voting by a stockholder and broker
non-votes will have the same effect as votes "AGAINST" the approval and adoption
of the Merger Agreement.
A proxy may be revoked prior to its being voted by: (i) delivering to
the Secretary of the Company, at or before the Annual Meeting, a written
instrument bearing a later date than the proxy which instrument, by its terms,
revokes the proxy, (ii) duly executing a subsequent proxy relating to the same
shares and delivering it to the Secretary of the Company at or before the Annual
Meeting, or (iii) attending the Annual Meeting and giving notice of revocation
to the Secretary of the Company or in open meeting prior to the proxy being
voted (although attendance at the Annual Meeting without taking other
affirmative action as aforementioned will not constitute a revocation of a
proxy). Any written instrument revoking a proxy should be sent to: American
Indemnity Financial Corporation, 2115 Winnie, Galveston, Texas 77550, Attention:
Secretary.
If a quorum is not obtained, or if fewer shares of Common Stock than
the number required therefor are voted in favor of approval and adoption of the
Merger Agreement, it is expected that the Annual Meeting will be postponed or
adjourned in order to permit additional time for soliciting and obtaining
additional proxies or votes, and, at any subsequent reconvening of the Annual
Meeting, all proxies will be voted in the same manner as such proxies would have
been voted at the original convening of the Annual Meeting, except for any
proxies which have theretofore effectively been revoked or withdrawn. In the
absence of a quorum, the Annual Meeting may be adjourned from time to time by
the holders of a majority of the shares represented at the Annual Meeting in
person or by proxy, except that no proxyholder will vote any proxies voted
against approval of the Merger Agreement in favor of any proposal to adjourn or
postpone the Annual Meeting.
The obligations of the Company and United Fire to consummate the Merger
are subject to, among other things, the condition that the stockholders of the
Company, by the requisite vote thereof, approve and adopt the Merger Agreement.
See "The Merger Agreement - Conditions to the Merger".
10
<PAGE> 13
STOCKHOLDERS SHOULD NOT FORWARD ANY CERTIFICATES REPRESENTING COMMON
STOCK WITH THEIR PROXY CARDS. IN THE EVENT THE MERGER IS CONSUMMATED,
CERTIFICATES SHOULD BE DELIVERED IN ACCORDANCE WITH INSTRUCTIONS SET FORTH IN A
LETTER OF TRANSMITTAL WHICH WILL BE SENT TO STOCKHOLDERS PROMPTLY AFTER THE
EFFECTIVE TIME. SEE "THE MERGER AGREEMENT - THE MERGER - EXCHANGE OF
CERTIFICATES."
SOLICITATION OF PROXIES
The Company will bear the costs of soliciting proxies in the
accompanying form from stockholders. In addition to soliciting proxies by mail,
directors, officers and employees of the Company, without receiving additional
compensation therefor, may solicit proxies by telephone, by telegram or in
person. Arrangements will be made with brokerage firms and other custodians,
nominees and fiduciaries to forward solicitation materials to the beneficial
owners of shares of Common Stock held of record by such persons, and the Company
will reimburse such brokerage firms, custodians, nominees and fiduciaries for
reasonable out-of-pocket expenses incurred by them in connection therewith.
THE MERGER
BACKGROUND OF THE MERGER
Following the second quarter of 1998, the Board determined to look at
strategic alternatives for the Company. After considering various financial
advisors available, Philo Smith was retained in July 1998.
Philo Smith considered various alternatives and structures for the
Company. Following its due diligence, including discussions with management, it
was determined that the most likely alternative would be the acquisition of the
Company by, or a possible joint venture with, a larger insurance carrier that
would provide the best value to the Company's stockholders.
Through ________________, 1998, the Company and/or Philo Smith
contacted in excess of 50 prospective parties, of which 39 signed
confidentiality agreements and 27 received the descriptive brochure prepared by
Philo Smith. Eleven of these companies undertook due diligence review or more
limited discussions with Company management. Six made formal or informal
proposals. Further discussions followed with the companies making offers. Of
these, the proposal by United Fire was deemed the most favorable to the Company
and its stockholders.
During 1998, reports were given by Philo Smith to the Board, including
information regarding prospective interested parties and valuation issues. At
the Board meeting held in January 1999, Philo Smith presented a detailed report
on the results of the work done to that point, prospective parties and valuation
indications and discussed with the Board possible courses of action. Following
this meeting, Philo Smith continued to conduct discussions with the parties
indicating an interest through the previously mentioned proposals. Ultimately,
negotiations took place with United Fire and its representatives that resulted
in definitive agreements. These agreements were distributed to the members of
the Board for review and to provide an opportunity to ask questions of legal
counsel and other advisors of the Company. During these periods of discussions
and negotiations by Philo Smith and legal representatives of the parties, a
number of discussions were held between the managements of United Fire and the
Company.
The Board met on March 4, 1999, with its financial and legal advisors
and received presentations about the United Fire proposal, the resulting
negotiations and discussions and the definitive agreements. Following questions
by the Board of the Company's financial and legal advisors and management and
further discussions and explanations regarding the proposed transaction and the
terms and conditions of the transaction, the Board determined that the United
Fire proposal, as set forth in the definitive agreements presented to the Board,
was advisable and fair to and in the best interest of the Company and its
stockholders. The members of the Board then voted unanimously to approve the
Merger Agreement, the Merger and the transactions contemplated therein.
11
<PAGE> 14
Shortly after the conclusion of this Board meeting, the Company and
United Fire executed the Merger Agreement and issued a press release announcing
the Merger. For a description of the reasons the Company decided to engage in
the Merger at this time, see "The Company's Reasons for the Merger;
Recommendation of the Board of Directors."
THE COMPANY'S REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board has determined that the Merger is advisable and fair to and
in the best interests of the Company and its stockholders and has approved and
adopted the Merger Agreement. Accordingly, the Board recommends that
stockholders vote "FOR" approval and adoption of the Merger Agreement.
In reaching its determination that the Merger is advisable and fair to
and in the best interests of the Company and its stockholders, the Board
considered a number of factors, including, without limitation, the following:
(i) The premium of the Per Share Amount to the historical market
prices for the Common Stock, including the fact that the Per Share
Amount represents a premium of 34% over the $11.50 per share
closing sales price per share of the Common Stock on March 3, 1999,
the last trading date prior to the public announcement of the
execution of the Merger Agreement. See "Selected Financial Data -
Market Prices of Common Stock."
(ii) The Company had previous discussions with other parties that
resulted in other proposals, none of which were deemed acceptable
by the Company.
(iii) The consummation of the Merger, which will be financed in the
form of contributions by United Fire and its subsidiaries of
internally generated funds to Sub, is not subject to a financing
condition.
(iv) The written opinion of Philo Smith to the effect that, as of
the date of such opinion and based upon and subject to certain
assumptions, matters considered and limitations stated therein, the
Per Share Amount to be received by the holders of Common Stock
pursuant to the Merger Agreement is fair to such holders from a
financial point of view. See "The Merger - Opinion of the Company's
Financial Advisor."
(v) The current and prospective environment in which the Company
operates, including economic conditions and the competitive
environment for the property and casualty insurance business.
Specifically, primarily as a result of the increasing competition
in the property and casualty insurance business and the resulting
pressure on premium rates, the Company has reported losses in three
of its last four fiscal years. Combining with United Fire in the
Merger will give the Company access to, among other things, a
broader client base, increased capital resources and means to
effectively reduce its operating costs.
(vi) The Board's view that the terms of the Merger Agreement, as
reviewed by the Board with its legal and financial advisors, are
advisable and fair to and in the best interests of the Company and
its stockholders and provide the Company and its stockholders with
the flexibility, under certain circumstances to accept a Target
Superior Proposal (as defined herein) and terminate the Merger
Agreement upon the payment of a termination fee to United Fire. See
"The Merger Agreement - Certain Covenants - No Solicitation" and "-
Termination".
(vii) The Board's knowledge of the business, operations,
properties, assets, financial condition and operating results of
the Company. Specifically, in order to achieve future growth in its
business and operations, the Company would need significant amounts
of new capital which could more easily be provided by United Fire
than the Company could raise on its own in the public markets.
Moreover, access to United Fire's clients and administrative
operations and systems should enhance the Company's ability to
achieve such future growth.
12
<PAGE> 15
The Board also recognized that members of the Board and the executive
officers of the Company might have interests in the Merger which are different
from the Company's other stockholders. See "Interests of Certain Persons in the
Merger." The foregoing discussion of the information and factors discussed by
the Board is not meant to be exhaustive but includes all material factors
considered by the Board. The Board did not quantify or attach any particular
weight to the various factors that it considered in reaching its determination
that the Merger Agreement and the Merger are advisable and fair to and in the
best interests of the Company and its stockholders. As a result of its
consideration of the foregoing and other relevant considerations, the Board
determined that the Merger Agreement and the Merger are advisable and fair to
and in the best interests of the Company and its stockholders and approved and
adopted the Merger Agreement. ACCORDINGLY, THE BOARD RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
The Company has been informed by United Fire that the purpose of the
Merger is to enable United Fire to acquire the entire equity interest in the
Company. Following the Merger, it is expected that the Company's businesses and
operations will be integrated with the businesses and operations of United Fire
and its affiliates.
OPINION OF THE COMPANY'S FINANCIAL ADVISOR
On March 4, 1999, Philo Smith delivered its opinion to the Board that
as of the date of such opinion, the consideration to be received by holders of
Common Stock pursuant to the Merger Agreement is fair to such holders from a
financial point of view.
THE FULL TEXT OF THE WRITTEN OPINION OF PHILO SMITH, DATED MARCH 1,
1999, WHICH SETS FORTH CERTAIN ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN IN CONNECTION WITH THE OPINION, IS ATTACHED
HERETO AS ANNEX B TO THIS PROXY STATEMENT AND IS INCORPORATED HEREIN BY
REFERENCE. THE OPINION OF PHILO SMITH REFERRED TO HEREIN DOES NOT CONSTITUTE A
RECOMMENDATION AS TO HOW ANY STOCKHOLDER SHOULD VOTE WITH RESPECT TO THE
TRANSACTION. STOCKHOLDERS ARE URGED TO, AND SHOULD, READ SUCH OPINION IN ITS
ENTIRETY.
In connection with its opinion, Philo Smith, among other things, (i)
reviewed the Merger Agreement; (ii) analyzed financial and other information
that is publicly available relating to the the Company, (iii) analyzed certain
other operating data that was made available to them in their role as financial
advisor to the Company, (iv) visited the facilities of the Company and discussed
with management of the Company the financial condition, operating results,
business outlook and prospects of the Company, (v) analyzed the valuations of
publicly traded companies that they deemed comparable to the Company, (vi)
analyzed the financial terms of certain similar transactions that had recently
been effected and (vii) took into account Philo Smith's general experience in
similar transactions and their knowledge derived from their role as financial
advisor to the Company.
Philo Smith did not independently verify any of the foregoing
information, and they relied upon and assumed the accuracy, completeness and
fairness of the presentation and description of the financial statements and
other information of the Company. Philo Smith further relied upon assurances by
the Company that the forward-looking information provided to them has a
reasonable basis. In arriving at their opinion, Philo Smith did not perform any
appraisals or valuations of specific assets of the Company or the liquidation
value of the entirety of the Company's assets, and they express no opinion
regarding the liquidation value of the Company or any of its assets.
The following is a summary of the material financial analyses used by
Philo Smith in connection with providing its opinion to the Board on March 4,
1999. Philo Smith used substantially the same type of financial analyses in
connection with providing the written opinion attached hereto as Annex B.
SELECTED ACQUISITION TRANSACTION ANALYSIS. Philo Smith analyzed certain
information relating to 24 transactions in the previous three years involving
acquisitions of comparable companies whose business is predominantly property
and casualty underwriting. Philo Smith selected comparable companies from a
sample of 68
13
<PAGE> 16
transactions using eight criteria. Such analysis indicated that the purchase
price per share as a multiple of the prior year end book value per share
(calculated in accordance with generally accepted accounting principals
("GAAP")) ranged from a low of 0.6x to a high of 2.7x, with a median of 1.0, as
compared to 0.92x with respect to the Per Share Amount.
COMPARISON OF SELECTED PUBLICLY TRADED COMPANIES. Philo Smith reviewed
and compared certain financial information relating to the Company to
corresponding financial information, ratios and public market multiples for 15
publicly traded corporations: Accel International, Allcity Insurance Company,
American Safety Insurance Group, Chandler Insurance Ltd., GAINSCO Inc., Hallmark
Financial Services, Highlands Insurance Group, Merchants Group, Meridian
Insurance Group, Mobile America Corp., National Security Group, North East
Insurance Company, Old Guard Group, PAULA Financial and Seibels Bruce Group (the
"Selected Companies"). The Selected Companies were chosen because they are
publicly traded companies whose business is predominantly property and casualty
underwriting and for purposes of analysis may be considered similar to the
Company. Philo Smith selected comparable publicly traded companies from a sample
of ___ companies using six criteria. Philo Smith calculated the ratio of median
average multiple of market price to reported book value for the Selected
Companies and compared various financial multiples and ratios. The calculations
for the Company were based on historical and projected financial information
provided by the Company's management and the calculations for each of the
Selected Companies were based on the most recent publicly available information.
This analysis showed that the ratio of market price to prior year end GAAP book
value per share ranged from a low of 0.49 to a high of 1.03, with a median of
0.72, as compared to 0.92 with respect to the Per Share Amount.
DISCOUNTED CASH FLOW ANALYSIS. Philo Smith performed a discounted cash
flow analysis based on a ten year projection by the Company of its cash flows
from operations. A risk adjusted discount rate of 12.5% was used for valuation
purposes, and analyses based on 10% and 15% rates were presented for comparative
purposes. The discounted cash flow analysis recognizes that the Company cannot
pay dividends and needs to maintain appropriate operating leverage measured by
the ratio of Net Premiums Written to Surplus. Philo Smith then assumed the
entire Company was sold at the end of the tenth year at the same multiple of
GAAP book value as derived from the study of acquisition comparables. The net
present value range derived under this method is $6.74 to $10.20 per share.
Philo Smith also derived a value for the Company based upon the Company
being sold at the end of the tenth year at a multiple of projected GAAP net
income. A price-to-earnings multiple of 12.5x was used as an average value to
develop the range, and 10x and 15x multiples were used for comparative purposes.
The average multiple of 12.5x was used because it represents the average
price-to-earnings multiple for the acquisition comparables. The net present
value range produced under this method is $4.24 per share to $6.70 per share.
Philo Smith then derived a range of values excluding the five highest
and lowest values generated by a valuation matrix based on a multiple of GAAP
net income and GAAP equity. The reference range derived is $5.20 to $8.05 per
share. The counter-intuitive result that the Company is worth less than current
GAAP book is due to a projected return on equity below the mid range 12.5%
discount rate assumed.
The analyses carried out by Philo Smith are sensitive to changes in the
underlying assumptions.
HISTORICAL STOCK TRADING ANALYSIS. Philo Smith reviewed the performance
of the per share market prices and daily trading values of the Common Stock over
the two-year period ended February 1, 1999. Philo Smith noted that, for the
five-year period ended February 1, 1999, the average closing price for the
Common Stock was approximately $11.16 per share and the average daily trading
volume for the Common Stock was approximately 3,445 shares. Philo Smith also
noted that the average closing price for the Common Stock during the 30-day
trading period ending February 22, 1999, was approximately $10.92 per share and
that the average daily trading volume for the Common Stock was approximately
3,013 shares. Philo Smith noted that the best indication of value for a company
is believed to be determined by the marketplace, and that the market has valued
the Common Stock significantly below the Per Share Amount for an extended time
period
14
<PAGE> 17
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying Philo Smith's opinion. In arriving at its fairness determination,
Philo Smith considered the results of all such analyses. No company or
transaction used in the above analyses as a comparison is directly comparable to
the Company or the contemplated transaction. The analyses were prepared solely
for purposes of Philo Smith's providing its opinion to the Board as to the
fairness from a financial point of view of the consideration to be received by
the Company's stockholders in the Merger and do not purport to be appraisals or
necessarily reflect the prices at which businesses or securities actually may be
sold. Analyses based upon forecasts of future results are not necessarily
indicative of actual future results, which may be significantly more or less
favorable than suggested by such analyses. Because such analyses are inherently
subject to uncertainty, being based upon numerous factors or events beyond the
control of the parties or their respective advisors, none of the Company, Philo
Smith or any other person assumes responsibility if future results are
materially different from those forecast. As described above, Philo Smith's
opinion to the Board was one of several factors taken into consideration by the
Board in making its determination to approve the Merger Agreement. The foregoing
summary does not purport to be a complete description of the analyses performed
by Philo Smith and is qualified by reference to the written opinion of Philo
Smith set forth in Annex B hereto.
Philo Smith, as part of its investment banking business, is continually
engaged in the valuation of insurance businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements, and valuations for estate, corporate and other purposes. The Company
selected Philo Smith as its financial advisor because it is a nationally
recognized investment banking firm that has substantial experience in
transactions similar to the Merger and specific expertise in the insurance
industry. Philo Smith provides a range of financial advisory and securities
services and, in the course of its normal trading activities may from time to
time effect transactions and hold securities, of the Company or United Fire for
its own account and for the account of customers.
Pursuant to a letter agreement dated July 28, 1998 (the "Engagement
Letter"), the Company engaged Philo Smith to act as its financial advisor in
connection with exploring various strategic alternatives for the Company.
Pursuant to the terms of the Engagement Letter, the Company has agreed to pay
Philo Smith upon consummation of the Merger a transaction fee equal to 1.25% of
the aggregate consideration paid in the Merger (approximately $378,000). The
Company has agreed to reimburse Philo Smith for its reasonable out-of-pocket
expenses, and to indemnify Philo Smith against certain liabilities arising out
of or in connection with the rendering of the fairness opinion.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board with respect to the
Merger, stockholders of the Company should be aware that the directors and
executive officers of the Company have certain interests in the Merger that may
be substantial or in addition to the interests of stockholders of the Company
generally. The Board was aware of these interests and considered them, among
other factors, in approving the Merger Agreement. These interests are summarized
below.
INTERESTS IN COMMON STOCK AND OPTIONS. As of April 28, 1999, the
executive officers and directors of the Company owned, directly or indirectly,
an aggregate of 646,236 shares of Common Stock. Assuming the Per Share Amount of
$15.36, the aggregate consideration that would be received in the Merger,
directly or indirectly, by the executive officers and directors of the Company
in respect of such shares would be approximately $9,945,000.
In addition, as of April 28, 1999, the directors of the Company had
present and future rights to acquire 28,000 shares of Common Stock upon the
exercise of Options (as defined herein) granted to such directors pursuant to
the Company's stock option plans, and the executive officers of the Company held
no Options. All outstanding Options (as more fully described under "The Merger
Agreement - The Merger - Option Plans") obligating the Company to issue,
transfer or sell any shares of Common Stock, whether or not then exercisable,
will be canceled and converted into the right to receive an amount in cash equal
to the product, rounded to four decimal places, of (i) the amount by which the
Per Share Amount exceeds the exercise price per share subject to the Option and
(ii) the number of shares subject
15
<PAGE> 18
to the Option. Assuming the Per Share Amount equals $15.36, the aggregate
consideration that would be received in the Merger by the directors of the
Company pursuant to the foregoing formula would be approximately $78,620.
KEY EXECUTIVE SEVERANCE AGREEMENTS; EMPLOYMENT AGREEMENT. In 1983, the
Company entered into Key Executive Severance Agreements with J. Fellman
Seinsheimer, III, the President and Chief Executive Officer of the Company, and
one other key employee of American Indemnity Company, a subsidiary of the
Company. For a description of the Key Executive Severance Agreements, see
"Executive Compensation - Key Executive Severance Agreements" below. In
connection with the negotiations between the Company and United Fire leading up
to the execution of the Merger Agreement, the agreement with Mr. Seinsheimer has
been superseded by an employment agreement entered into with United Fire as of
March 8, 1999 (the "Employment Agreement"), which becomes effective upon the
closing of the Merger.
The Employment Agreement provides that, upon closing of the Merger, Mr.
Seinsheimer's Key Executive Severance Agreement will terminate. The Employment
Agreement further provides for a three year term of employment, commencing on
the date of closing of the Merger, at Mr. Seinsheimer's current annual salary.
Mr. Seinsheimer will also receive comparable health insurance benefits from
United Fire until age 65. If United Fire terminates Mr. Seinsheimer's employment
prior to the end of the three year term for any reason other than willful
misconduct, United Fire is obligated to continue to pay Mr. Seinsheimer's salary
until the end of such three year term.
DIRECTOR AND OFFICER LIABILITY; INDEMNIFICATION. As more fully
described under "The Merger Agreement Limitation of Liability and
Indemnification of Officers and Directors," the Merger Agreement provides the
certificate of incorporation and bylaws of the Surviving Corporation shall
contain the provisions with respect to limitation of director and officer
liability and indemnification set forth in the certificate of incorporation and
bylaws, respectively, of the Company, which provisions, for a period terminating
on the earlier of (i) three years from the Effective Time, (ii) the closing of a
merger of the Company into United Fire or an affiliate thereof or (iii) the
liquidation of the Company, shall not be amended, repealed or otherwise modified
in any manner that would adversely affect the rights thereunder of individuals
who were directors, officers, employees or agents of the Company at the
Effective Time, unless such modification is required by law. In connection with
any such merger or liquidation, the obligations of the Company with respect to
indemnification under its bylaws shall be assumed by the entity into which the
Company merges or that acquires the Company's assets upon liquidation.
FINANCING THE MERGER
United Fire and its subsidiaries will contribute to Sub funds from
current operations and funds from matured and maturing portfolio investments in
amounts sufficient to pay the total amount required to pay the aggregate Per
Share Amount to the Company's stockholders and Option holders and pay estimated
fees, expenses and other transaction costs of United Fire and Sub in connection
with the Merger. United Fire does not anticipate that borrowed funds will be
used. However, if borrowed funds are used, such borrowings will be on a
temporary basis only, under United Fire's bank line of credit.
ACCOUNTING TREATMENT
The Merger will be accounted for by United Fire as a "purchase" in
accordance with generally accepted accounting principles. Therefore, the
aggregate consideration paid by United Fire in connection with the Merger
(including the direct costs related to the transaction) will be allocated to the
Company's assets and liabilities based upon their estimated fair values, with
any excess being allocated to goodwill. The assets and liabilities and results
of operations of the Company will be consolidated into the assets and
liabilities and results of operations of United Fire subsequent to the
consummation of the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion describes certain United States federal income
tax consequences relevant to the Merger. The discussion is based upon the
Internal Revenue Code of 1986, as amended (the "Code"), existing and
16
<PAGE> 19
proposed Treasury regulations promulgated thereunder, rulings, administrative
pronouncements and judicial decisions, changes to which could materially affect
the tax consequences described herein and could be made on a retroactive basis.
This discussion does not address all aspects of federal income taxation
(including potential application of the alternative minimum tax) that may be
relevant to a particular stockholder based on such holder's particular
circumstances and does not address any aspect of state, local or foreign tax
laws. This summary generally considers only holders that hold their Common Stock
as capital assets (generally, assets held for investment) and may not apply to
all stockholders. In particular, the discussion may not apply to stockholders
(i) who acquired their Common Stock pursuant to the exercise of employee stock
options or other compensation arrangement with the Company; (ii) who are subject
to special tax treatment under the Code (such as broker-dealers, insurance
companies tax-exempt organizations, financial institutions, and regulated
investment companies); (iii) who hold their Common Stock as part of a
"straddle", "hedge", or "conversion transaction", (iv) whose functional currency
is not the U.S. dollar, or (v) who perfect their appraisal rights under the
DGCL.
The Internal Revenue Code of 1986, as amended (the "Code"), provides
that the gain from the sale or other disposition of property is the excess of
the amount realized therefrom over the adjusted basis, and loss is the excess of
the adjusted basis over the amount realized. The amount realized from the sale
or other disposition of property is the sum of money received plus the fair
market value of property (other than money) received. The adjusted basis for
determining the gain or loss from the sale or other disposition of property is
generally the cost of such property as may thereafter be adjusted.
Pursuant to the Merger, each stockholder will receive $15.36 per share,
of which $1.00 per share will be held in the Escrow Account until distributed
pursuant to the terms thereof. The Escrow Account will be invested in short term
government securities and the earnings thereon will be distributed to United
Fire on a quarterly basis. The earnings on the Escrow Account will be taxed to
United Fire. The taxes resulting from such earnings will be paid by United Fire.
A stockholder will recognize gain in the year of the Merger to the
extent that the cash received plus the fair market value of the Escrow Account
allocable to his shares of Common Stock exceeds the adjusted basis of his shares
of Common Stock. Even though the amounts in the Escrow Account will not be
distributed to the stockholders until 2001 (or later), the stockholders will
recognize the full amount of their gain in the year of the Merger because the
installment method of reporting gain does not apply to the disposition of stock
which is traded on an established securities market. A stockholder will
recognize loss in the year of the Merger to the extent that the adjusted basis
of his shares of Common Stock exceeds the cash received plus the fair market
value of the Escrow Account allocable to his shares of Common Stock. The fair
market value of the Escrow Account is determined by considering all of the facts
and circumstances.
The gain or loss so recognized will be capital gain or loss if the
shares of Common Stock are capital assets in the hands of the stockholder. The
shares of Common Stock will generally be capital assets if they are not included
in the taxpayer's inventory or otherwise held for sale to customers in the
ordinary course of business. Gain or loss on the disposition of the shares of
Common Stock will be long-term capital gain or loss if the holding period for
the shares of Common Stock is more than one year on the date of the Merger.
Distributions to the stockholders in 2001 (or later) from the Escrow
Account will consist of two elements, principal and interest, as computed under
the original issue discount rules of he Code and the regulations promulgated
thereunder. If the amount of the payment allocable to principal is equal to the
fair market value of the Escrow Account as of the date of the Merger, the
stockholders will not recognize additional gain or loss from the disposition of
the shares of Common Stock. However, if the amount of the payment allocable to
principal is greater or less than the initial fair market value of the Escrow
Account, each stockholder will recognize an additional gain or loss from the
disposition of his shares of Common Stock. The amount of such additional gain or
loss will be the difference between the stockholder's share of the fair market
value of the Escrow Account in the year of the Merger and his share of the
amount of the Escrow Account allocable to principal when the funds are
distributed in 2001 (or later). Such additional gain or loss will have the same
character as the gain or loss recognized in the year of the Merger with respect
to such
17
<PAGE> 20
shares of Common Stock. Furthermore, each stockholder should recognize interest
income on the amounts held in the Escrow Account based upon their individual
method of accounting, which for cash basis taxpayer would be upon receipt of the
distribution from the Escrow Account to the extent such payment is allocable to
interest.
The receipt of the merger consideration by a stockholder of the Company
pursuant to the Merger may be subject to 31% backup withholding tax unless the
stockholder (i) is a corporation or comes within certain other exempt categories
or (ii) provides a certified taxpayer identification number on Form W-9 and
otherwise complies with the backup withholding rules. Backup withholding is not
an additional tax; any amounts so withheld may be credited against the federal
income tax liability of the stockholder subject to the withholding.
THIS SUMMARY IS NOT A SUBSTITUTE FOR INDIVIDUAL ANALYSIS OF THE TAX CONSEQUENCES
OF THE MERGER TO A STOCKHOLDER. DUE TO THE INDIVIDUAL NATURE OF TAX
CONSEQUENCES, STOCKHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE EFFECTS OF
APPLICABLE STATE, LOCAL OR FOREIGN INCOME OR OTHER TAX LAWS.
REGULATORY FILINGS AND APPROVALS
The regulatory filings and approvals described below must be made
before the Merger can be effected and certain of such approvals may take a
significant period of time to obtain. Although the Company and United Fire
believe that such approvals will be obtained, there can be no assurance that
this will be the case or that such approvals will be obtained in a timely manner
or that such approvals will not be conditioned temporarily or otherwise
encumbered.
STATE INSURANCE REGULATORY APPROVALS. The Company and its subsidiaries
are subject to the insurance laws and regulations of Texas and Colorado, the
domiciliary states of Company subsidiaries, and the laws and regulations of the
other states in which Company subsidiaries are licensed to do business. As of
the date of the Company's annual report on Form 10-K for the year ended December
31, 1998, the Company was licensed to do business in 28 states.
ANTITRUST. The Merger is subject to the requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and the rules and regulations thereunder, which provide that certain
transactions may not be consummated until required information and materials are
furnished to the Antitrust Division of the Department of Justice (the "Antitrust
Division") and the Federal Trade Commission (the "FTC") and the requisite
waiting period expires or terminates. The Company and United Fire made all
filings required by the Antitrust Division and the FTC on April __, 1999,
commencing a 30-day waiting period. The waiting period terminated on May __,
1999. Although the waiting period has expired under the HSR Act [pursuant to
early termination], at any time before or after the Effective Time, the
Antitrust Division or the FTC could take such action under the antitrust laws as
either of them deems necessary or desirable in the public interest, or certain
other persons could take action under the antitrust laws, including seeking to
enjoin the Merger.
CERTAIN CONSEQUENCES OF THE MERGER
As a result of the merger, Sub will be merged with and into the Company
and the Company will become a wholly owned subsidiary of United Fire. Following
consummation of the Merger, the Common Stock will be delisted from Nasdaq,
deregistered under the Exchange Act and will no longer be publicly traded.
APPRAISAL RIGHTS
Under the DGCL, any stockholder who does not wish to accept the Per
Share Amount has the right to dissent from the Merger and to seek an appraisal
of, and to be paid the fair value (exclusive of any element of value arising
from the accomplishment or expectation of the Merger) for such stockholder's
shares of Common Stock, provided that the stockholder complies with the
provisions of Section 262 of the DGCL.
18
<PAGE> 21
Holders of record of Common Stock who do not vote in favor of the
Merger Agreement and who otherwise comply with the applicable statutory
procedures summarized herein will be entitled to appraisal rights under Section
262 of the DGCL. A person having a beneficial interest in shares of Common Stock
held of record in the name of another person, such as a broker or nominee, must
act promptly to cause the record holder to follow the steps summarized below
properly and in a timely manner to perfect appraisal rights.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW
PERTAINING TO APPRAISAL RIGHTS UNDER THE DGCL AND IS QUALIFIED IN ITS ENTIRETY
BY THE FULL TEXT OF SECTION 262 OF THE DGCL WHICH IS REPRINTED IN ITS ENTIRETY
AS ANNEX C. ALL REFERENCES IN SECTION 262 OF THE DGCL AND IN THIS SUMMARY TO A
"STOCKHOLDER" OR "HOLDER" ARE TO THE RECORD HOLDER OF THE SHARES OF COMMON STOCK
AS TO WHICH APPRAISAL RIGHTS ARE ASSERTED.
Under Section 262 of the DGCL, holders of shares of Common Stock
("Appraisal Shares") who follow the procedures set forth in Section 262 of the
DGCL will be entitled to have their Appraisal Shares appraised by the Delaware
Chancery Court and to receive payment in cash of the "fair value" of such
Appraisal Shares, exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair rate of
interest, if any, as determined by such court.
Under Section 262 of the DGCL, when a proposed merger is to be
submitted for approval at a meeting of stockholders, the corporation, not less
than 20 days prior to the meeting, must notify each of its stockholders who was
a stockholder on the record date for such meeting with respect to shares for
which appraisal rights are available, that appraisal rights are so available,
and must include in such notice a copy of Section 262 of the DGCL.
This Proxy Statement constitutes such notice to the holders of
Appraisal Shares and the applicable statutory provisions of the DGCL are
attached to this Proxy Statement as Annex C. Any stockholder who wishes to
exercise such appraisal rights or who wishes to preserve his or her right to do
so should review the following discussion and Annex C carefully, because failure
to timely and properly comply with the procedures therein specified will result
in the loss of appraisal rights under the DGCL.
A holder of Appraisal Shares wishing to exercise such holder's
appraisal rights (a) must not vote in favor of the Merger Agreement and (b) must
deliver to the Company prior to the vote on the Merger Agreement at the Annual
Meeting, a written demand for appraisal of such holder's Appraisal Shares. This
written demand for appraisal must be in addition to and separate from any proxy
or vote abstaining from or against the Merger. This demand must reasonably
inform the Company of the identity of the stockholder and of the stockholder's
intent thereby to demand appraisal of his or her shares. A holder of Appraisal
Shares wishing to exercise such holder's appraisal rights must be the record
holder of such Appraisal Shares on the date the written demand for appraisal is
made and must continue to hold such Appraisal Shares until the consummation of
the Merger. Accordingly, a holder of Appraisal Shares who is the record holder
of Appraisal Shares on the date the written demand for appraisal is made, but
who thereafter transfers such Appraisal Shares prior to consummation of the
Merger, will lose any right to appraisal in respect of such Appraisal Shares.
Only a holder of record of Appraisal Shares is entitled to assert
appraisal rights for the Appraisal Shares registered in that holder's name. A
demand for appraisal should be executed by or on behalf of the holder of record,
fully and correctly, as such holder's name appears on such holder's stock
certificates. If the Appraisal Shares are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, execution of the demand
should be made in that capacity, and if the Appraisal Shares are owned of record
by more than one owner as in a joint tenancy or tenancy in common, the demand
should be executed by or on behalf of all joint owners. An authorized agent,
including one or more joint owners, may execute a demand for appraisal on behalf
of a holder of record; however, the agent must identify the record owner or
owners and expressly disclose the fact that, in executing the demand, the agent
is agent for such owner or owners. A record holder such as a broker who holds
Appraisal Shares as nominee for several beneficial owners may exercise appraisal
rights with respect to the Appraisal Shares held for one or more beneficial
owners while not exercising such rights with respect to the Appraisal Shares
held for other beneficial owners. In such case, the
19
<PAGE> 22
written demand should set forth the number of Appraisal Shares as to which
appraisal is sought. When no number of Appraisal Shares is expressly mentioned,
the demand will be presumed to cover all Appraisal Shares in brokerage accounts
or other nominee forms, and those who wish to exercise Appraisal Rights under
Section 262 of the DGCL are urged to consult with their brokers to determine the
appropriate procedures for the making of a demand for appraisal by such a
nominee.
ALL WRITTEN DEMANDS FOR APPRAISAL SHOULD BE SENT OR DELIVERED TO
AMERICAN INDEMNITY FINANCIAL CORPORATION, 2115 WINNIE, GALVESTON, TEXAS 77550,
ATTENTION: SECRETARY.
Within ten days after the consummation of the Merger, the Company will
notify each stockholder who has properly asserted appraisal rights under Section
262 of the DGCL and has not voted in favor of the Merger Agreement of the date
the Merger became effective.
Within 120 days after the consummation of the Merger, but not
thereafter, the Company or any stockholder who has complied with the statutory
requirements summarized above may file a petition in the Delaware Chancery Court
demanding a determination of the fair value of the Appraisal Shares. The Company
is under no obligation to and has no present intention to file a petition with
respect to the appraisal of the fair value of the Appraisal Shares. Accordingly,
it is the obligation of stockholders wishing to assert appraisal rights to
initiate all necessary action to perfect their appraisal rights within the time
prescribed in Section 262 of the DGCL.
Within 120 days after the consummation of the Merger, any stockholder
who has complied with the requirements for exercise of appraisal rights will be
entitled, upon written request, to receive from the Company a statement setting
forth the aggregate number of Appraisal Shares not voted in favor of adoption of
the Merger Agreement and with respect to which demands for appraisal have been
received and the aggregate number of holders of such Appraisal Shares. Such
statements must be mailed within ten days after a written request therefor has
been received by the Company.
If a petition for an appraisal is filed timely, after a hearing on such
petition, the Delaware Chancery Court will determine the stockholders entitled
to appraisal rights and will appraise the "fair value" of their Appraisal
Shares, exclusive of any element of value arising from the accomplishment or
expectation of the Merger, together with a fair rate of interest, if any, to be
paid upon the amount determined to be the fair value. Stockholders considering
seeking appraisal should be aware that the fair value of their Appraisal Shares
as determined under Section 262 of the DGCL could be more than, the same as or
less than the value of the consideration they would receive pursuant to the
Merger Agreement if they did not seek appraisal of their Appraisal Shares and
that investment banking opinions as to fairness from a financial point of view
are not necessarily opinions as to fair value under Section 262 of the DGCL. The
Delaware Supreme Court has stated that "proof of value by any techniques or
methods which are generally considered acceptable in the financial community and
otherwise admissible in court" should be considered in the appraisal
proceedings.
The Delaware Chancery Court will determine the amount of interest, if
any, to be paid upon the amounts to be received by stockholders whose Appraisal
Shares have been appraised. The costs of the action may be determined by the
Delaware Chancery Court and taxed upon the parties as the Delaware Chancery
Court deems equitable. The Delaware Chancery Court may also order that all or a
portion of the expenses incurred by any stockholder in connection with an
appraisal, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts used in the appraisal proceeding, be charged pro
rata against the value of all of the Appraisal Shares entitled to appraisal.
Any holder of Appraisal Shares who has duly demanded an appraisal in
compliance with Section 262 of the DGCL will not, after the consummation of the
Merger, be entitled to vote the Appraisal Shares subject to such demand for any
purpose or be entitled to the payment of dividends or other distributions on
those Appraisal Shares (except dividends or other distributions payable to
holders of record of Appraisal Shares as of a record date prior to the
consummation of the Merger).
20
<PAGE> 23
If any stockholder who properly demands appraisal of his or her
Appraisal Shares under Section 262 of the DGCL fails to perfect, or effectively
withdraws or loses, his or her right to appraisal, as provided in Section 262 of
the DGCL, the Appraisal Shares of such stockholder will be converted into the
right to receive the consideration receivable with respect to such Appraisal
Shares in accordance with the Merger Agreement. A stockholder will fail to
perfect, or effectively lose or withdraw, his or her right to appraisal if,
among other things, no petition for appraisal is filed within 120 days after the
consummation of the Merger, or if the stockholder delivers to the Company a
written withdrawal of his or her demand for appraisal. Any such attempt to
withdraw an appraisal demand more than 60 days after the consummation of the
Merger will require the written approval of the Company.
Failure to follow the steps required by Section 262 of the DGCL for
perfecting appraisal rights may result in the loss of such rights, in which
event a stockholder will be entitled to receive the consideration receivable
with respect to his or her Appraisal Shares in accordance with the Merger
Agreement.
THE MERGER AGREEMENT
The following is a brief summary of certain material provisions of the
Merger Agreement, a copy of which is attached as Annex A to this Proxy Statement
and incorporated herein by reference. Such summary does not purport to be
complete and is qualified in its entirety by reference to the Merger Agreement.
All capitalized terms used herein and not defined are used as defined in the
Merger Agreement. Stockholders are urged to review the Merger Agreement
carefully and in its entirety.
THE MERGER
IN GENERAL. The Merger Agreement provides, among other things that,
following approval by the Company's stockholders and the satisfaction or waiver
of the other conditions to the Merger, Sub will be merged with and into the
Company, the separate existence of Sub will cease and the Company will be the
Surviving Corporation. Following the Merger, the Surviving Corporation will be a
wholly owned subsidiary of United Fire. As a result of the Merger, all the
rights, privileges, powers and franchises of the Company and Sub will vest in
the Surviving Corporation and all obligations, duties, debts and liabilities of
the Company will become the obligations, duties, debts and liabilities of the
Surviving Corporation.
EFFECTIVE TIME. The Merger Agreement provides that the closing
("Closing") shall take place at 9:00 a.m., Houston, Texas, time on the second
business day after the satisfaction or waiver of all conditions to the Merger
(the "Closing Date"). At the Closing, the Company and Sub will file a
certificate of merger ("Certificate of Merger") with the Secretary of State of
the State of Delaware and articles of merger ("Articles of Merger") with the
Secretary of State of the State of Iowa. The Merger will become effective upon
such filings or at such other time as is specified in the Certificate of Merger
and the Articles of Merger (the "Effective Time").
CONVERSION OF SECURITIES. At the Effective Time, each outstanding share
of Common Stock (other than shares held in the Company's treasury and shares
held by the stockholders, if any, who properly exercised their appraisal rights
under Delaware law) will be converted into the Per Share Amount, which is the
right to receive $15.36 per share, in cash. Of the Per Share Amount, $1 (the
"Reserved Per Share Amount") shall be deposited with the Escrow Agent, to be
held and distributed pursuant to the terms of the Escrow Agreement. See "-
Reserved Per Share Amount; Escrow Agreement" below. Also at the Effective Time,
each outstanding share of common stock of Sub will be converted into one fully
paid and nonassessable share of Common Stock of the Surviving Corporation. The
shares of Common Stock will no longer be listed or quoted on Nasdaq and the
registration of the Common Stock under the Exchange Act will be terminated. See
"The Merger - Certain Consequences of the Merger."
Shares of Common Stock outstanding immediately prior to the Effective
Time and held by a holder who has not voted in favor of the Merger or consented
thereto in writing and who has delivered a written demand for appraisal of such
shares in accordance with Section 262 of the DGCL will not be converted into the
Per Share Amount, unless and until such holder fails to perfect his right to
appraisal and payment under the DGCL, whereupon such shares shall
21
<PAGE> 24
be treated as if they had been converted as of the Effective Time into the Per
Share Amount. See "The Merger Appraisal Rights".
OPTION PLANS. Prior to the Closing, the Company shall cause each
outstanding option to purchase shares of Common Stock (an "Option"), whether or
not then exercisable, to be canceled and converted into the right to receive an
amount in cash (the "Total Option Amount") equal to the product, rounded to four
decimal places, of (i) the amount by which the Per Share Amount exceeds the
exercise price per share subject to the Option and (ii) the number of shares
subject to the Option. Of the Total Option Amount, an amount equal to the
Reserved Per Share Amount for each share subject to the Option shall be
deposited with the Escrow Agent to be held and distributed pursuant to the terms
of the Escrow Agreement, and the balance (the "Initial Option Amount") shall be
distributed to the Option holders. See "Reserved Per Share Amount; Escrow
Agreement" below.
RESERVED PER SHARE AMOUNT; ESCROW AGREEMENT. At the Closing, the
aggregate Reserved Per Share Amount (the "Escrow Fund") shall be deposited with
an escrow agent (the "Escrow Agent"), to be held and distributed pursuant to the
terms of the Escrow Agreement. The Escrow Agreement provides that, for a period
of two years after the Effective Time, United Fire may from time to time make a
claim (an "Indemnity Claim") against the Escrow Fund for damages (net of any
insurance recovery available to United Fire or the Company) resulting from any
misrepresentation, breach of warranty or nonfulfillment of any covenant or
agreement of the Company under the Merger Agreement, and any misrepresentation
in or omission from any list, schedule, certificate or other instrument
furnished or to be furnished to United Fire or Sub pursuant to the terms of the
Merger Agreement, excluding misrepresentations and omissions relating to the
adequacy of the reserves of the Company and its subsidiaries. An Indemnity Claim
includes all reasonable expenses, disbursements and advances, including
reasonable attorney fees, expenses and disbursements, incurred or made in the
defense or administration of an Indemnity claim by the Escrow Agent, United Fire
or, in certain circumstances, by the Shareholder Representatives. J. Fellman
Seinsheimer, III, Phillip E. Apgar, and Robert S. Lee have been appointed by the
Company as Shareholder Representatives under the Escrow Agreement.
The Escrow Fund shall be invested in United States Treasury Bills
having a remaining maturity of 90 days or less, with any remainder being
deposited and maintained in a money market deposit account with the Escrow
Agent. All income from the Escrow Fund shall be distributed to United Fire, and
the stockholders of the Company shall not be entitled to receive any interest
on, or income from, the Escrow Fund.
On the second anniversary of the Effective Time, the Escrow Agent,
after distributing income from the Escrow Fund to United Fire, shall distribute
the remainder of the Escrow Fund as of such date to the stockholders and Option
holders of the Company as of the Closing Date, unless (i) any Indemnity Claims
are then pending, in which case an amount equal to the aggregate dollar amount
of such Indemnity Claims shall be retained by Escrow Agent in the Escrow Fund,
or (ii) United Fire has given notice to the Shareholder Representatives and the
Escrow Agent of any other Indemnity Claim that it may have with respect to which
it is unable to specify the amount of damages, in which case the entire amount
of the Escrow Fund as of such date shall be retained by Escrow Agent, in either
case (i) or (ii), until it receives joint written instructions of United Fire
and the Shareholder Representatives or an order of a court of competent
jurisdiction, or (iii) the Shareholder Representatives have incurred legal fees
or other out-of-pocket expenses in connection with their obligations under the
Escrow Agreement, in which case the Shareholder Representatives shall be
entitled to reimbursement of such fees and expenses from the Escrow Fund, but
only to the extent that funds remain in the Escrow Fund after the resolution of
all Indemnity Claims described in (i) and (ii) above. Any of the Escrow Fund
remaining after (A) payment of income to United Fire, (B) the resolution of all
Indemnity Claims described in clauses (i) and (ii) of the preceding sentence and
(C) reimbursement of the fees and expenses of the Shareholder Representatives
described in clause (iii) of the preceding sentence shall be promptly
distributed by the Escrow Agent to the stockholders of the Company as of the
Closing Date.
EXCHANGE OF CERTIFICATES. At or before the Effective Time, United Fire
shall deposit with an exchange agent (the "Exchange Agent") selected by mutual
agreement of the Company and United Fire an amount equal to (i) for the Common
Stock, the product of (x) the number of shares of Common Stock issued and
outstanding at the Effective Time (the "Common Stock Outstanding") multiplied by
(y) the Initial Per Share Amount, plus (ii) an aggregate amount for the Options
(the "Option Amount") that is equal to (x) the product of the Initial Per Share
Amount and the aggregate
22
<PAGE> 25
number of shares of Common Stock underlying all of the Options, minus (y) the
sum of the amounts obtained for each Option by multiplying the exercise price
per share of each Option by the number of shares of Common Stock underlying each
Option (the "Aggregate Option Exercise Price") (such amount deposited with the
Exchange Agent pursuant to clauses (i) and (ii) being hereinafter referred to as
the "Exchange Fund"). As promptly as practicable after the Effective Time, the
Exchange Agent shall mail and make available to each stockholder of record and
to each holder of record of an Option, a letter of transmittal that shall
specify that delivery shall be effected, and risk of loss and title to the
certificates representing shares of Common Stock ("Certificates") and Options
shall pass, only upon delivery of the Certificates and the Options. Upon
surrender to the Exchange Agent of a Certificate for cancellation together with
such letter of transmittal, duly executed, the Exchange Agent shall promptly pay
out to the persons entitled thereto the amount, rounded to the nearest cent,
determined by multiplying (x) the number of shares of Common Stock represented
by the Certificate by (y) the Initial Per Share Amount. Upon surrender to the
Exchange Agent of an Option together with such letter of transmittal, duly
executed, the Exchange Agent shall promptly pay out to the Option holder the
amount, rounded to the nearest cent, determined by multiplying (x) the amount by
which the Initial Per Share Amount exceeds the exercise price per share subject
to such Option and (y) the number of shares subject to such Option. No interest
shall be paid or accrued on the cash payable upon the surrender of a Certificate
or an Option. If a Stockholder or an Option holder requests that payment be made
to a person other than the one in whose name the Certificate or Option
surrendered, as the case may be, is registered, it shall be a condition of
payment that the Certificate or Option so surrendered shall be properly endorsed
or otherwise in proper form for transfer and that the person requesting such
payment shall pay any transfer or other taxes required by reason of the payment
to a person other than the registered holder of the Certificate or Option
surrendered or establish to the satisfaction of the Surviving Corporation that
such tax has been paid or is not applicable.
From and after the Effective Time, until surrendered in accordance with
the provisions described above, (i) each Certificate shall represent for all
purposes only the right to receive, upon such surrender, an amount in cash
rounded to the nearest cent equal to the Initial Per Share Amount per share of
Common Stock being converted plus the amount, if any, to be distributed on
account of such Certificate pursuant to the terms of the Escrow Agreement, and
(ii) each Option shall represent for all purposes only the right to receive,
upon such surrender, an amount in cash equal to the product, rounded to the
nearest cent, of (x) the amount by which the Initial Per Share Amount exceeds
the exercise price per share subject to the Option and (y) the number of shares
subject to the Option plus the amount, if any, to be distributed on account of
such Option pursuant to the terms of the Escrow Agreement.
STOCKHOLDERS OF THE COMPANY SHOULD NOT RETURN THEIR STOCK CERTIFICATES
WITH THE ENCLOSED PROXY, AND SHOULD NOT FORWARD THEIR STOCK CERTIFICATES TO THE
EXCHANGE AGENT WITHOUT A LETTER OF TRANSMITTAL, WHICH WILL BE SENT TO EACH
STOCKHOLDER FOLLOWING THE EFFECTIVE TIME OF THE MERGER.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The certificate of incorporation and bylaws of the Company, as in effect
immediately prior to the Effective Time, shall be the certificate of
incorporation and bylaws of the Surviving Corporation until thereafter amended
as provided by law; provided, however, that the certificate of incorporation and
bylaws of the Surviving Corporation shall contain the provisions with respect to
limitation of director and officer liability and indemnification set forth in
the certificate of incorporation and bylaws, respectively, of the Company, which
provisions, for a period terminating on the earlier of (i) three years from the
Effective Time, (ii) the closing of a merger of the Company into United Fire or
an affiliate thereof or (iii) the liquidation of the Company, shall not be
amended, repealed or otherwise modified in any manner that would adversely
affect the rights thereunder of individuals who were directors, officers,
employees or agents of the Company at the Effective Time, unless such
modification is required by law. In connection with any such merger or
liquidation, the obligations of the Company with respect to indemnification
under its bylaws shall be assumed by the entity into which the Company merges or
that acquires the Company's assets upon liquidation. For purposes of the Merger
Agreement, an "affiliate" of a person shall mean any corporation or other entity
controlling, controlled by or under common control with such person.
23
<PAGE> 26
CERTAIN COVENANTS
STOCKHOLDER APPROVAL. Under the Merger Agreement, the Company has
agreed to send notice to its stockholders and conduct a stockholders meeting or
otherwise obtain stockholder approval for the Merger in accordance with
applicable laws. Subject to the provisions described under the caption "No
Solicitation" below, the Company has agreed to recommend to its stockholders
that the stockholders approve the Merger. The Company shall from time to time
notify Sub of the percentage of the outstanding shares of Common Stock as to
which the Company's stockholders have delivered notice of their intent to demand
payment pursuant to their dissenters' or appraisal rights. United Fire and Sub
have the right to terminate the Merger Agreement at any time after holders of
greater than five percent of the outstanding Common Stock have delivered notice
to the Company of their intent to demand payment pursuant to the provisions for
appraisal rights. See "The Merger - Appraisal Rights".
NO SOLICITATION. The Merger Agreement provides that the Company shall
not authorize or permit any officer, director, employee, investment banker,
attorney or other advisor, agent or representative of the Company or any of its
subsidiaries to, directly or indirectly, (i) solicit, initiate or encourage the
submission of any Target Takeover Proposal (as hereinafter defined), (ii) enter
into any agreement with respect to any Target Takeover Proposal, (iii) initiate
any discussions or negotiations regarding any proposal that constitutes, or may
reasonably be expected to lead to, any Target Takeover Proposal or (iv) except
in response to an unsolicited request, furnish any information with respect to
the making of any proposal that constitutes, or may reasonably be expected to
lead to, any Target Takeover Proposal. The Merger Agreement defines a "Target
Takeover Proposal" as (i) any proposal or offer, other than a proposal or offer
by United Fire or any of its affiliates, for a merger or other business
combination involving the Company or one or more of its subsidiaries, (ii) any
proposal or offer, other than a proposal or offer by United Fire or any of its
affiliates, to acquire from the Company or any of its affiliates in any manner,
directly or indirectly, more than 5% of the voting stock of the Company or its
subsidiaries or a material amount of the assets of the Company and its
subsidiaries, taken as a whole, or (iii) any proposal or offer, other than a
proposal or offer by United Fire or any of its affiliates, to acquire from the
stockholders of the Company by tender offer, exchange offer or otherwise more
than 5% of the Common Stock.
The Merger Agreement further provides that neither the Company, the
Board nor any committee thereof shall (i) withdraw or modify, or propose to
withdraw or modify, in a manner adverse to United Fire or Sub, the approval or
recommendation by the Company, the Board or any such committee of the Merger
Agreement or the Merger or take any action having such effect or (ii) approve or
recommend, or propose to approve or recommend, any Target Takeover Proposal.
Notwithstanding the foregoing, if the Board receives an unsolicited Target
Takeover Proposal that, in the exercise of its fiduciary obligations (as
determined in good faith after consultation with outside counsel), it determines
to be a Target Superior Proposal (as hereinafter defined), the Board may
withdraw or modify its approval or recommendation of the Merger Agreement or the
Merger and may (subject to the following sentence) terminate the Merger
Agreement, in each case at any time after the fifth business day following
United Fire's receipt of written notice (a "Target Notice of Superior Proposal")
advising United Fire that the Board has received a Target Takeover Proposal that
it has determined to be a Target Superior Proposal, specifying the principal
terms and conditions of such Target Superior Proposal and identifying the person
making such Target Superior Proposal. The Company may terminate the Merger
Agreement pursuant to the preceding sentence only if the stockholders of the
Company have not yet voted upon the Merger. The Merger Agreement does not
prohibit the Company from taking and disclosing to its stockholders a position
with respect to a tender offer, as contemplated by Rule 14e-2(a) under the
Securities Exchange Act of 1934, as amended, provided that the Company does not
withdraw or modify its position with respect to the Merger or take any action
having such effect or approve or recommend a Target Takeover Proposal. The
Merger Agreement defines a "Target Superior Proposal" as any bona fide Target
Takeover Proposal to merge or combine with the Company or to acquire, directly
or indirectly, more than 50% of the Common Stock, or of the voting stock then
outstanding of any subsidiary of the Company, or a material amount of the assets
of the Company and its subsidiaries, taken as a whole, on terms that the Board
determines in its good faith reasonable judgment (based on the written advice of
Philo Smith & Co., Inc. or another financial advisor of nationally recognized
reputation) to be more favorable to the Company's stockholders than the Merger.
If the Company, the Board or any committee thereof (i) withdraws or
modifies, or proposes to withdraw or modify, in a manner adverse to United Fire
or Sub, the approval or recommendation by the Company, the Board or any
24
<PAGE> 27
such committee of the Merger Agreement or the Merger or takes any action having
such effect, (ii) approves or recommends, or proposes to approve or recommend,
any Target Takeover Proposal, or (iii) otherwise breaches the provisions
described in the two preceding paragraphs, United Fire and Sub may terminate the
Merger Agreement.
If the Company, its Board or a committee thereof (i) withdraws or
modifies, or proposes to withdraw or modify, in a manner adverse to United Fire
or Sub, the approval or recommendation of approval of the Merger Agreement or
the Merger by the Company or its Board, or a committee thereof, or takes any
action having such effect, (ii) approves or recommends, or proposes to approve,
recommend, present or otherwise disclose in any manner to the Company's
stockholders (including any recommendation, presentation, disclosure or approval
contemplated by Rule 14e-2(a) under the Securities Exchange Act of 1934, as
amended), any Target Takeover Proposal, or (iii) otherwise breach the "no
solicitation" provisions of the Merger Agreement, and either (x) the
stockholders of the Company do not approve the Merger or (y) the Company, United
Fire or Sub terminates the Merger Agreement pursuant to this provision, then the
Company is obligated to pay Sub a breakup fee of $1,000,000. The Board did not
view such breakup fee provision of the Merger Agreement as unreasonably impeding
any interested third party from proposing a Target Superior Proposal.
CONDUCT OF BUSINESS. Pursuant to the Merger Agreement, the Company has
agreed that, through the Closing Date, it will comply with certain covenants
regarding various matters. Among other things, the Company has agreed that,
except as contemplated by the Merger Agreement, the Company and its subsidiaries
will each conduct its business only in the ordinary course consistent in all
material respects with past practices and will use reasonable efforts to
preserve intact each of the Company's and its subsidiaries' business
organization, reputation, employees, agents, customers and suppliers and
policyholders. Without limiting the generality of the foregoing, and except as
otherwise provided in the Merger Agreement, prior to the Closing Date, neither
the Company nor any of its subsidiaries will (i) issue or sell any of their
respective capital stock, or any options, warrants, calls or securities
convertible into such capital stock, or enter into any agreement to do any of
the foregoing, or make any change in its capital structure either by way of
stock split, stock dividend or otherwise; (ii) declare or pay any dividends or
make any distribution in respect of capital stock, or purchase, redeem or
otherwise acquire or retire any capital stock; (iii) other than in the ordinary
course of business, without the prior written consent of Sub, enter into or
assume any contract or commitment, or terminate or amend any existing contract
or commitment, or incur or prepay any indebtedness for borrowed money; (iv)
other than in the ordinary course of business, make any loans or advance any
funds to anyone, or extend credit; (v) other than in the ordinary course of
business, enter into, amend or accelerate any payment or contribution under any
employment, agency or consulting agreement or employee benefit plan; (vi) other
than in the ordinary course of business, without the prior consent of Sub, which
consent shall not be unreasonably withheld, hire any new employees or make any
changes affecting the rates of compensation of, or pay any bonuses to (other
than accrued bonuses under current employee benefit plans), or grant any other
benefit to, their respective current directors, officers, agents or employees;
(vii) other than in the ordinary course of business, create or assume any
mortgage or other lien or encumbrance on, or dispose of, any of their respective
assets or properties; (viii) other than in the ordinary course of business,
acquire any assets or any properties or make any investments, or enter into any
agreements to acquire any assets or properties or to make any investments; (ix)
merge or consolidate with any other corporation, or acquire or agree to acquire
any stock (except investments in the ordinary course of business) of any person,
firm, association, corporation or other business organization; (x) make any
change in their respective Articles or Certificate of Incorporation or Bylaws;
(xi) without the prior written consent of Sub, enter into any arrangement with
any person with respect to any United States or foreign patents, patent
applications, trademarks, applications for registration of trademarks, trade
names, fictitious names, copyrights, know-how or trade secrets owned by any of
them, or in any way relating to their respective businesses; (xii) without the
prior written consent of Sub, make any election with respect to the computation
of taxes or take any position in any tax return that could have an adverse
effect on the Company or any of its subsidiaries; (xiii) other than in the
ordinary course of business, without the prior written consent of Sub, make any
other change in their businesses, business practices or operations; or (xiv)
enter into any agreement to do any of the foregoing.
The Company is also required to notify and obtain the written approval
of Sub, which approval shall not be unreasonably withheld, prior to making any
changes to the investment portfolio of the Company's subsidiaries that are not
in the ordinary course of business or that are inconsistent in any material
respect with such subsidiaries' investment
25
<PAGE> 28
practices and policies existing at September 30, 1998. Without the prior written
consent of Sub, the Company may take no actions, other than in the ordinary
course of business, that could cause or result in a reduction in the amount of
any of its subsidiaries' aggregate statutory capital, surplus, asset valuation
reserve and interest maintenance reserve as of December 31, 1998.
NOTIFICATION OF CERTAIN MATTERS. The Merger Agreement provides that
Company shall confer and consult with Sub on all material business decisions
affecting the future performance of the Company, other than decisions made in
the ordinary course of business consistent in all material respects with past
practices, including in particular with respect to the Company's subsidiaries on
all material business decisions involving (i) increases or decreases in the
credited rate of insurance products issued by such subsidiaries and (ii) such
subsidiaries' investment policy.
The Company shall notify Sub promptly in writing of, and
contemporaneously provide Sub with complete and correct copies of any and all
information or documents relating to, and use all reasonable efforts to cure
before the Closing, any event, development, transaction or circumstance
occurring after the date of the Merger Agreement that causes or could cause any
covenant or agreement of the Company under the Merger Agreement to be breached,
or that renders or could render untrue any representation or warranty of the
Company contained in the Merger Agreement as if the same were made on or as of
the date of such event, development, transaction or circumstance; and use all
reasonable efforts to cure, before the Closing, any violation or breach of any
representation, warranty, covenant or agreement made by the Company in the
Merger Agreement, whether occurring or arising before or after the date of the
Merger Agreement.
The Company shall cause the Chief Executive Officer of the Company to
consult and confer with the Chief Executive Officer of United Fire with respect
to all major business decisions affecting the Company or any of its
subsidiaries.
ACCESS TO INFORMATION. Under the Merger Agreement, prior to the
Effective Time the Company has agreed that it will (and will cause its
subsidiaries to) give Sub and its attorneys, accountants, agents and
representatives full access at all mutually agreeable times to all the
properties, books, records, contracts, commitments, employee benefit plans,
documents, instruments and other records of or pertaining to the Company and its
subsidiaries and permit Sub and its attorneys, accountants, agents and
representatives to consult with and ask questions of the officers and employees
of the Company and its subsidiaries; deliver to Sub all audited or unaudited
quarterly or annual financial statements of the Company and its subsidiaries
prepared subsequent to the date of the Merger Agreement; and cooperate with and
assist Sub in discussions with insurance regulators regarding the Company's and
its subsidiaries' financial condition and compliance with insurance laws and
regulations.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
the Company and its subsidiaries, subject to certain exceptions, regarding the
Company and its subsidiaries as to, among other things: (i) organization,
existence, good standing, corporate power and authority, and qualifications or
licensing to do business; (ii) the due authorization, execution and delivery of
the Merger Agreement and the consummation of the transactions contemplated
thereby, and the validity and enforceability of the Company's obligations with
respect thereto; (iii) absence of conflict between the Merger Agreement and any
provision of the certificate of incorporation, bylaws or any other
organizational documents of the Company and its subsidiaries, any law or any
governmental order applicable to the Company or any of its subsidiaries; (iv)
consents and approvals necessary for consummation of the Merger; (v)
capitalization, including the number of shares of Common Stock, the number of
shares of Common Stock issuable upon the exercise of Options, and other
obligations to issue or sell any capital stock of the Company; (vi) ownership in
other entities including the nature of the Company's ownership of stock in
subsidiaries; (vii) consolidated financial statements of the Company; (viii) the
absence of undisclosed liabilities; (ix) financial statements regarding certain
insurance subsidiaries; (x) compliance with statutory reserve requirements
applicable to the insurance industry; (xi) pending litigation that might
materially adversely affect the Company or any of its subsidiaries; (xii)
matters related to real and personal property owned and leased by the Company
and its subsidiaries; (xiii) material contracts; (xiv) compliance with
applicable license and permit regulations; (xv) the conduct of business by the
Company and its subsidiaries in accordance with
26
<PAGE> 29
charter documents, material company agreements and applicable laws; (xvi)
compliance with the filing requirements of governmental authorities, including
the SEC and state insurance departments; (xvii) the absence of certain changes
or events; (xviii) certain tax matters; (xix) insurance coverage; (xx) the
absence of transactions between the Company and certain interested persons;
(xxi) certain employee benefit plan and ERISA matters; (xxii) the absence of
collective bargaining agreements; (xxiii) certain intellectual property matters;
(xxiv) finders' and brokers' fees; (xxv) environmental matters; and (xxvi)
certain Year 2000 issues.
The Merger Agreement also contains various representations and
warranties of United Fire and Sub, subject to certain exceptions, with respect
to, among other things: (i) organization, existence, good standing, corporate
power and authority, and qualification or licensing to do business; (ii) due
authorization and valid execution and delivery of the Merger Agreement and
consummation of the transactions contemplated thereby, and the validity and
enforceability of United Fire's and Sub's obligations with respect thereto;
(iii) absence of conflict between the Merger Agreement and the articles of
incorporation and bylaws or any other organizational documents of United Fire or
Sub, any law or any governmental order applicable to United Fire or Sub; (iv)
consents and approvals necessary for consummation of the Merger; and (v)
finders' and brokers' fees.
CONDITIONS TO THE MERGER
The obligations of United Fire and Sub to consummate the Merger shall
be subject to the fulfillment on or prior to the Closing Date of the following
conditions: (i) the representations and warranties of the Company set forth in
the Merger Agreement shall be true and correct in all material respects on the
Closing Date as if made on and as of such date, except to the extent the
representations and warranties speak as of an earlier date, and Sub shall have
received a certificate to such effect, dated as of the Closing Date, executed on
behalf of the Company by the Chief Executive Officer and Chief Financial Officer
of the Company; (ii) the Company and its subsidiaries shall have performed in
all material respects all of their obligations contained in the Merger Agreement
to be performed on or prior to the Closing Date, and Sub shall have received a
certificate to such effect, executed on behalf of the Company by the Chief
Executive Officer and Chief Financial Officer of the Company and dated as of the
Closing Date; (iii) all corporate action necessary to authorize the execution,
delivery and performance by the Company of the Merger Agreement, and the
consummation of the transactions contemplated hereby, shall have been duly and
validly taken by the Company, and the Company shall have furnished Sub with
copies of all applicable resolutions adopted by the Board and stockholders, if
any, of the Company, certified by the Secretary or Assistant Secretary of the
Company; (iv) no governmental entity or federal or state court of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, executive order, decree, judgment, injunction or
other order (whether temporary, preliminary or permanent), in any case which is
in effect and which prevents or prohibits consummation of the Merger; provided,
however, that each of the parties shall use its reasonable best efforts to cause
any such decree, judgment, injunction or other order to be vacated or lifted;
(v) the waiting period, if any, pursuant to the HSR Act shall have expired or
has been terminated without objection and any necessary approval of the Texas
Department, the Iowa Insurance Department and the insurance departments of other
states and jurisdictions, and all other consents of any person required to
permit the consummation of the transactions contemplated by the Merger Agreement
without any violation by United Fire, Sub, the Company or its subsidiaries of
any law or obligation shall have been obtained and such approvals and consents
shall not contain any materially burdensome conditions or requirements on or
applicable to United Fire, Sub, the Company or any of its subsidiaries; (vi) Sub
shall have received the opinions of Fulbright & Jaworski L.L.P., counsel to the
Company, as to such matters as may be reasonably requested by Sub; (vii) except
as set forth in a disclosure schedule to the Merger Agreement, since December
31, 1998, there shall not have been, occurred or arisen any material adverse
change in, or any event, development, transaction, condition or state of facts
of any character (including without limitation any damage, destruction or loss
whether or not covered by insurance or reinsurance) that individually or in the
aggregate has or could have a material adverse effect on, the business or
financial condition of the Company or its subsidiaries; (viii) Sub shall have
received from the Company and each of its subsidiaries a certificate dated the
Closing Date from the Company's and each subsidiaries' Secretary regarding
certain corporate matters; (ix) the Company's stockholders shall have approved
the Merger and Company stockholders holding more than five percent of the
outstanding Common Stock shall not have delivered notice to the Company of their
intent to demand payment for their shares pursuant to dissenters' rights
provided by Delaware law; (x) the Company shall have entered into a reinsurance
agreement protecting the Company against adverse loss developments with respect
to claims up to $10,000,000
27
<PAGE> 30
occurring on or prior to December 31, 1998 that are in excess of an amount equal
to the sum of (A) the Company's booked loss reserves[, excluding workers'
compensation loss reserves,] as of December 31, 1998 as set forth in the
actuary's report to the Company, plus (B) $2,000,000; (xi) the Company and the
Escrow Agent shall have executed and delivered the Escrow Agreement; and (xii)
there shall not be pending any action, proceeding or investigation by any
governmental entity (A) challenging or seeking material damages in connection
with the Merger, (B) seeking to restrain or prohibit the consummation of the
Merger or otherwise limit the right of Sub or United Fire or any of its
subsidiaries to own or operate all or any portion of the business or assets of
the Company and its subsidiaries, or (C) which otherwise is likely to have a
material adverse effect on the business, operations, condition (financial or
otherwise), assets or liabilities of United Fire, Sub or the Company or its
subsidiaries. The Company agrees to use its reasonable efforts to fulfill, as
soon as practicable, all of such conditions.
The obligation of the Company to consummate the transactions provided
for in the Merger Agreement shall be subject to the fulfillment, on or prior to
the Closing Date, of the following conditions: (i) the respective
representations and warranties of United Fire and Sub set forth in the Merger
Agreement shall be true and correct in all material respects on the Closing Date
as if made on and as of such date, except to the extent such representations and
warranties speak as of an earlier date, and the Company shall have received
certificates to such effect, executed on behalf of United Fire and Sub by their
respective Chief Executive Officers and Chief Financial Officers, dated as of
the Closing Date; (ii) United Fire and Sub shall have performed in all material
respects all of their respective obligations contained in the Merger Agreement
to be performed on or prior to the Closing Date, and the Company shall have
received certificates to such effect, executed on behalf of United Fire and Sub
by their respective Chief Executive Officers and Chief Financial Officers, dated
as of the Closing Date; (iii) no governmental entity or federal or state court
of competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, judgment,
injunction or other order (whether temporary, preliminary or permanent), in any
case which is in effect and which prevents or prohibits consummation of the
Merger; provided, however, that each of the parties shall use its reasonable
best efforts to cause any such decree, judgment, injunction or other order to be
vacated or lifted; (iv) the waiting period, if any, pursuant to the HSR Act
shall have expired or has been terminated without objection and any necessary
approvals of the Texas Department, the Iowa Insurance Department and the
insurance departments of other states or jurisdictions and certain other
specified consents required to permit consummation of the transactions
contemplated by the Merger Agreement without any violation by the Company or its
subsidiaries of any law or obligation shall have been obtained; (v) the Company
shall have received the opinion of Bradley & Riley, P.C., as to such matters as
the Company shall reasonably request; (vi) the Company's stockholders shall have
approved the Merger; (vii) all corporate action necessary to authorize the
execution, delivery and performance by United Fire and Sub of the Merger
Agreement and the consummation of the transactions contemplated thereby, shall
have been duly and validly taken by United Fire and Sub, and United Fire and Sub
shall have furnished the Company with copies of all applicable resolutions
adopted by their respective Boards of Directors and their respective
stockholders, certified in each case by a Secretary or Assistant Secretary of
United Fire and Sub, respectively; (viii) the Exchange Fund shall have been
deposited with the Exchange Agent; (ix) the Escrow Agreement shall have been
executed and delivered by United Fire and the Escrow Agent and there shall have
been deposited with the Escrow Agent an amount equal to the Reserved Per Share
Amount multiplied by the sum of the aggregate number of shares of Common Stock
outstanding as of the Closing Date and the aggregate number of shares of Common
Stock underlying all Options outstanding as of the Closing Date; (x) there shall
not be pending any action, proceeding or investigation by any governmental
entity (A) challenging or seeking material damages in connection with the Merger
or (B) seeking to restrain or prohibit the consummation of the Merger. United
Fire and Sub agree to use its reasonable efforts to fulfill, as soon as
practicable, all of such conditions.
TERMINATION
The Merger Agreement may be terminated as to all parties thereto and
the transactions contemplated therein abandoned prior to the Closing: (i) by the
mutual consent of the parties; (ii) by United Fire and Sub at any time after
June 30, 1999, if at such time their conditions to close have not been satisfied
through no fault of United Fire or Sub and United Fire or Sub gives the Company
notice of such termination; (iii) by United Fire and Sub if the Company, the
Board or any committee thereof (A) withdraws or modifies, or proposes to
withdraw or modify, in a manner adverse to United Fire or Sub, the approval or
recommendation by the Company, the Board or any such committee of the
28
<PAGE> 31
Merger Agreement or the Merger or takes any action having such effect, (B)
approves or recommends, or proposes to approve or recommend, any Target Takeover
Proposal, or (C) otherwise breaches the "no solicitation" provisions of the
Merger Agreement; (iv) by United Fire and Sub at any time after holders of
greater than five percent of the outstanding Common Stock have delivered notice
to the Company of their intent to demand payment pursuant to the provisions for
dissenters' or appraisal rights provided by Delaware law; and (v) by the Company
at any time after June 30, 1999, if at such time its conditions to close have
not been satisfied through no fault of the Company and the Company gives United
Fire or Sub notice of such termination.
If certain conditions to the Company's obligation to close the Merger
have not been satisfied by June 30, 1999, then the Company may terminate the
Merger Agreement and United Fire will be obligated to pay to the Company a fee
of $1,000,000. If certain conditions to United Fire's and Sub's obligation to
close the Merger have not been satisfied by such date, then United Fire and Sub
may terminate the Merger Agreement and the Company will be obligated to pay to
United fire a fee of $1,000,000.
THE COMPANIES
THE COMPANY
The Company is a Galveston, Texas based holding Company that is made up
of a group of regional property and casualty insurance companies. The Company
offers personal and commercial lines of insurance through independent agents
representing American Indemnity Company, American Fire and Indemnity Company,
American Indemnity Lloyds and Texas General Indemnity Company. See Item 1 -
"Business" in the Company's 1998 Form 10-K, which is incorporated by reference
herein.
UNITED FIRE
United Fire and its subsidiaries are engaged in the business of writing
property and casualty insurance and life insurance. United Fire is an Iowa
corporation incorporated in 1946. Its principal executive office is located at:
118 Second Avenue S.E.
P.O. Box 73909
Cedar Rapids, Iowa 52407-3909
(319-399-5700)
United Fire's subsidiaries are Addison Insurance Company and Lafayette
Insurance Company, both wholly owned property and casualty insurers, and United
Life Insurance Company, a wholly owned life insurance company.
As of December 31, 1998, United Fire and its subsidiaries employed 559
full-time employees.
United Fire, with its property and casualty subsidiaries, markets most
forms of property and casualty insurance products, including fidelity and surety
bonds and reinsurance, through independent agencies and brokers. United Fire and
its property and casualty subsidiaries also underwrite and broker a limited
amount of excess and surplus lines insurance.
Through its life insurance subsidiary, United Fire underwrites and
markets ordinary life (primarily universal life), annuities (primarily single
premium) and credit life products to individuals and groups through independent
agencies.
United Fire is licensed as a property and casualty insurer in 36
states, primarily in the Midwest and West. Approximately 1,660 independent
agencies represent the United Fire's property and casualty segment. The life
insurance subsidiary is licensed in 24 states, primarily Midwestern and Western,
and is represented by approximately 1,200 independent agencies.
29
<PAGE> 32
PRINCIPAL STOCKHOLDERS
The following table sets forth as of April 28, 1999, (i) the ownership of Common
Stock by each person known by management of the Company to be the beneficial
owner of more than 5% of the outstanding shares of Common Stock, and (ii) the
number of shares of Common Stock owned by all executive officers and directors
of the Company as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF NUMBER OF SHARES PERCENT OF
BENEFICIAL OWNER BENEFICIALLY OWNED CLASS
- - - - - - - - - - - - - ------------------- ------------------ ----------
<S> <C> <C>
J. F. Seinsheimer, Jr.(1) ...................................... 576,880 29.4%
4809 Woodrow
Galveston, Texas 77551
Irma K. Seinsheimer Trust(2)(3) ................................ 471,770 24.0%
2201 Market Street
Galveston, Texas 77550
American Finance Company of Galveston(2)(3) .................... 464,095 23.6%
United States Securities Corporation
One American Indemnity Plaza
Galveston, Texas 77550
J. Fellman Seinsheimer, III(3) ................................. 578,205 29.5%
One American Indemnity Plaza
Galveston, Texas 77550
Dimensional Fund Advisors Inc.(4) .............................. 116,100 5.9%
1299 Ocean Avenue, 11th Floor
Santa Monica, California 90401
Franklin Resources, Inc.(5) .................................... 160,000 8.2%
777 Mariners Island Blvd
San Mateo, California 94404
Tweedy, Browne Company LLC(6) .................................. 199,320 10.2%
52 Vanderbilt Avenue
New York, New York 10017
Executive officers and directors as a group (10 persons)(7) .... 672,236 34.3%
</TABLE>
(1) J. F. Seinsheimer, Jr. resigned as a member of the Board of Directors on
April 24, 1995 and was named Chairman Emeritus. As of April 28, 1999, Mr.
Seinsheimer, Jr. shared voting and dispositive power over 38,095 shares
(1.9%) of the Company's Common Stock with his son, J. Fellman Seinsheimer,
III, and United States National Bank of Galveston as co-trustees of the
Jessie Lee Seinsheimer Trust (the "Seinsheimer Trust"). Mr. Seinsheimer,
Jr. is the sole beneficiary under the Seinsheimer Trust until his death, at
which time the remainder will be divided among his children. Additionally,
pursuant to powers of attorney granted by Mr. Seinsheimer, Jr. to his son,
J. Fellman Seinsheimer, III, Messrs. Seinsheimer will share voting and
dispositive power over the 67,015 shares (3.4%) of the Company's Common
Stock owned of record by Mr. Seinsheimer, Jr. Mr. Seinsheimer, Jr., as
co-trustee of the Irma K. Seinsheimer Trust, as described further in Note 2
below, may be deemed to be the beneficial owner of an additional 471,770
shares of Common Stock beneficially owned by such trust.
(2) The Irma K. Seinsheimer Trust (the "Family Trust") is the beneficial owner
of 471,770 shares of Common Stock. Of the 471,770 shares (24.0%) of Common
Stock beneficially owned, 7,675 shares (0.4%) are owned of record and
464,095 shares (23.6%) are owned by two corporations controlled by the
Family Trust, namely American Finance Company of Galveston and United
States Securities Corporation, that owned of record 289,764 shares (14.8%)
and 174,331 shares (8.9%) of the Company's Common Stock, respectively. Mr.
Seinsheimer, Jr. and William C. Levin, M.D. (a director of the Company) are
co-trustees of the Family Trust and as such have shared voting and
dispositive power with respect to the shares controlled by the Family
Trust. However, Mr. Seinsheimer, Jr. exercises sole voting and dispositive
power over the 7,675 shares owned of record by the Family Trust. Dr. Levin
exercises no voting or dispositive
30
<PAGE> 33
power over, has no pecuniary interest in and disclaims any beneficial
ownership or interest in the shares of Common Stock beneficially owned by
the Family Trust.
(3) As of April 28, 1999, J. Fellman Seinsheimer, III owned of record 9,000
shares (0.5%) of the Company's Common Stock, which does not include 270
shares owned of record by his sons, as to which he disclaims any beneficial
ownership or interest. Pursuant to the Powers of Attorney granted by J. F.
Seinsheimer, Jr. to his son, J. Fellman Seinsheimer, III, the Messrs.
Seinsheimer share voting and dispositive power over 67,015 shares (3.4%) of
the Company's Common Stock owned of record by J. F. Seinsheimer, Jr.
Additionally, J. Fellman Seinsheimer, III, J. F. Seinsheimer, Jr. and
United States National Bank of Galveston, as co-trustee of the Seinsheimer
Trust, share voting and dispositive power over 38,095 shares (1.9%) of the
Company's Common Stock owned by such trust. Additionally, as President of
American Finance Company of Galveston and United States Securities
Corporation, which corporations owned of record 289,764 shares (14.8%) and
174,331 shares (8.9%) of Common Stock, respectively, J. Fellman
Seinsheimer, III has shared voting and dispositive power over an aggregate
of 464,095 shares owned by such corporations.
(4) Based upon information contained in a Schedule 13G filed with the
Securities and Exchange Commission and other information provided by
Dimensional Fund Advisors Inc., a registered investment advisor
("Dimensional"). According to such information, as of December 31, 1998,
all of such shares are held in portfolios of DFA Investment Dimensions
Group Inc., a registered open-end investment company (the "Fund"), or in
series of The DFA Investment Trust Company, a Delaware business trust (the
"Trust"), or the DFA Group Trust and the DFA Participation Group Trust,
investment vehicles for qualified employee benefit plans, for all of which
Dimensional serves as investment manager. Dimensional exercises sole
dispositive power and sole voting power with respect to all such shares.
The Company has been advised by Dimensional that Dimensional disclaims
beneficial ownership of all such shares.
(5) Based upon information contained in a Schedule 13G filed with the
Securities and Exchange Commission by Franklin Resources, Inc. ("FRI"), the
parent holding company of certain direct and indirect investment advisory
subsidiaries (the "Advisory Subsidiaries"). The Advisory Subsidiaries
advise one or more open or closed-end investment companies or other managed
accounts which beneficially owned 160,000 shares of Common Stock. The
Advisory Subsidiaries are granted sole voting and investment power over
such shares by the advisory clients, and, as a result, the Advisory
Subsidiaries may be deemed to be the beneficial owner of the 160,000 shares
of Common Stock. FRI and Charles B. Johnson and Rupert H. Johnson, Jr., the
principal stockholders of FRI, also may be deemed to be the beneficial
owner of the 160,000 shares of Common Stock. Each of FRI, Charles B.
Johnson, Rupert H. Johnson, Jr. and the Advisory Subsidiaries disclaim
beneficial ownership of all such shares.
(6) Based upon information contained in a Schedule 13D filed with the
Securities and Exchange Commission and other information provided by
Tweedy, Browne Company LLC ("TBC"). TBC is a registered investment advisor
beneficially owning 199,320 shares of Common Stock, of which TBC exercises
shared dispositive power with respect to all such shares and sole voting
power with respect to 184,506 such shares. Additionally, certain of the
general partners of TBC may be deemed to have sole power to vote certain
shares and shared power to direct the disposition of all the shares of
Common Stock held in the TBC Accounts.
(7) Based upon information furnished by directors and executive officers.
Includes 26,000 shares issuable on exercise of options.
ELECTION OF DIRECTORS
At the meeting, three Class II directors (constituting all of the Class
II directors) are to be elected to hold office for terms of three years or until
their respective successors shall have been elected and shall qualify. It is the
intention of the persons named in the enclosed form of proxy to vote such proxy
for the election of the three nominees named below for Class II directorships
unless authorization is withheld on the proxy. The Board does not contemplate
that any of the nominees will be unable or unwilling to serve as a director or
become unavailable for any reason, but if that should occur before the meeting,
each of the proxies received by the Board which do not withhold authority to
vote for directors will be voted for another nominee or nominees to be selected
by the Board.
The enclosed form of proxy provides a means for stockholders to vote
for each of the nominees listed therein or to withhold authority to vote for
certain or all of the nominees. Each properly executed proxy received in time
for the meeting will be voted as specified therein. If a stockholder does not
specify otherwise, the shares represented by his or her proxy will be voted for
the nominees listed therein or, as noted above, for other nominees selected by
the Board. Since the Company's bylaws provide that the directors are elected by
a plurality of votes cast, broker non-votes or withholding authority to vote for
any of the nominees will have no effect upon the election of directors, unless a
vote is cast in person or by means of another proxy. However, all shares
represented by proxies that are signed by the holder of record will be counted
for purposes of determining the presence of a quorum. The presence at the
meeting, in person or by proxy, of the holders of a majority of the shares of
Common Stock is necessary to constitute a quorum for the transaction of business
at the meeting.
31
<PAGE> 34
The following table sets forth information with respect to each person
nominated for election as a Class II director and each person whose term of
office as a director will continue after the annual meeting. Except for J.
Fellman Seinsheimer, III, William C. Levin, M.D. and Harris L. Kempner, Jr., who
owned beneficially 29.5%, 2.2% and 1.2%, respectively, of the outstanding shares
of Common Stock at April 28, 1999, each nominee and director owned less than 1%
of the outstanding shares of Common Stock at such date. The table has been
prepared from information obtained from the respective nominees and directors.
<TABLE>
<CAPTION>
SHARES OF
COMMON
STOCK
BENEFICIALLY
SERVED AS OWNED ON
PRINCIPAL DIRECTOR APRIL 28,
NAME AGE OCCUPATION SINCE 1999(1)
- - - - - - - - - - - - - ---- ------ -------------------------------------- --------- -------------
<S> <C> <C> <C> <C>
CLASS II - NOMINEES FOR TERMS EXPIRING IN 2002
Jack T. Currie(2)(3)...................... 70 Investments 1977 7,751(4)
Synott L. McNeel(3)(5).................... 75 Investments 1973 8,000(6)
J. Fellman Seinsheimer, III(2)(3)......... 58 President and Chief Executive 1973 578,205(7)
Officer of the Company
CLASS III - DIRECTORS WHOSE TERMS EXPIRE IN 2000
Fred C. Burns(2).......................... 61 Managing Partner - John L. 1997 2,000(6)
Wortham & Son, L.L.P.
Harris L. Kempner, Jr.(8)................. 59 President - Kempner Capital 1991 22,611(4)(9)
Management, Inc.
William C. Levin, M.D..................... 82 Consultant in Hematology 1973 42,587(10)
CLASS I - DIRECTORS WHOSE TERMS EXPIRE IN 2001
Henry W. Hope(2)(8)....................... 58 Partner - Fulbright & Jaworski L.L.P. 1977 4,479(4)
James W. McFarland, Ph.D(5)............... 53 Dean - A.B. Freeman School of 1994 3,500(11)
Business, Tulane University
Marvin L. West(5)(8)...................... 70 Management Consultant 1980 3,053(11)
</TABLE>
(1) Unless otherwise indicated below, each director or nominee has sole voting
and investment power with respect to the shares attributed to him.
(2) Member of the Nominating and Management Development Committee of the Board
of Directors.
(3) Member of the Executive Committee of the Board of Directors.
(4) Includes 4,000 shares issuable on the exercise of options.
(5) Member of the Audit Committee of the Board of Directors.
(6) Includes 2,000 shares issuable on the exercise of options.
(7) Does not include 270 shares owned of record by his sons, as to which Mr.
Seinsheimer disclaims any beneficial ownership or interest. See Notes (1)
and (3) under "Principal Stockholders".
(8) Member of the Compensation Committee of the Board of Directors.
(9) Includes 18,611 shares held by the H. Kempner Trust, of which Mr. Kempner
is a beneficiary, is one of five trustees and shares voting and investment
power.
(10) Includes 4,000 shares issuable upon the exercise of options, but does not
include 471,770 shares beneficially owned by the Family Trust, of which Dr.
Levin is a co-trustee. See Note (2) under "Principal Stockholders".
(11) Includes 3,000 shares issuable on the exercise of options.
32
<PAGE> 35
Fred C. Burns joined John L. Wortham & Son in 1963 and was elected Partner in
1970. He became Managing Partner in 1985. Mr. Burns serves as a director of
Chase Bank of Texas, The Council of Insurance Agents and Brokers, Assurex
Development Corporation and is a registered principal of the National
Association of Securities Dealers.
Jack T. Currie has been engaged in managing personal investments since January
1986. Prior to 1986, he was engaged in the merchant banking and investment
banking businesses. Mr. Currie is also a member of the Boards of Directors of
SM&R Growth Fund, SM&R Equity Income Fund, SM&R Balanced Fund, Inc. and
Stewart & Stevenson Services, Inc.
Henry W. Hope has been a partner in the law firm of Fulbright & Jaworski L.L.P.
since 1975.
Harris L. Kempner, Jr. has served as a Trustee of H. Kempner Trust Association
of Galveston since 1964 and as President of Kempner Capital Management, Inc.
since 1981. He serves on the Boards of Directors of Imperial Holly Corp., TNP
Enterprises and Cullen Frost Bankers, Inc.
William C. Levin, M.D. served as President of the University of Texas Medical
Branch at Galveston from 1974 until his retirement in September 1987. He served
as the Ashbel Smith Professor at the University until his retirement from that
position in September 1992 and now serves as a consultant in hematology.
James W. McFarland is dean and professor at Tulane University's A.B. Freeman
School of Business, positions he has held since 1988. Prior to that time, he was
dean of the College of Business Administration at the University of Houston. He
is a member of the Boards of Directors of Sizeler Property Investors, Inc. and
Stewart Enterprises, Inc. and serves on the Audit and Compensation Committees of
both companies. Mr. McFarland also serves on the Audit, Executive and
Compensation Committees of Sizeler Property Investors, Inc. In addition, Mr.
McFarland is a member of the Board of Directors of Petroleum Helicopters Inc.
and serves on the Audit Committee of that company.
Synott L. McNeel served as Senior Vice President, Secretary and Treasurer of the
Company from January 1983 until his retirement on December 31, 1993. Prior to
that time he served as Senior Vice President and Treasurer of the Company since
1973.
J. Fellman Seinsheimer, III has served as President and Chief Executive Officer
since July 1992. He served as President and Chief Operating Officer from January
1983 to July 1992, and prior to that time was Executive Vice President and
Secretary of both the Company and American Indemnity, the Company's principal
insurance subsidiary.
Marvin L. West has served as a management consultant since July 1991. From
November 1988 until July 1991, Mr. West handled personal investments. Mr. West
served as Chairman of the Board and President of Westheimer National Bank from
July 1984 until November 1988.
J. Fellman Seinsheimer, III is the son and William C. Levin, M.D. is the
brother-in-law of Mr. Seinsheimer, Jr., the principal stockholder of the
Company.
The Board has an established Executive Committee, Audit Committee, Nominating
and Management Development Committee and Compensation Committee. The Executive
Committee performs various tasks in the management of the business and affairs
of the Company and may exercise all of the powers of the Board when it is not in
session except those reserved by law to the Board. The Audit Committee
recommends the selection of and confers with the Company's independent
accountants regarding the scope and adequacy of annual audits and other review
procedures, reviews reports from the independent accountants relating to the
annual audits and quarterly reviews, and meets with such independent accountants
and the Company's internal auditors and financial personnel to review such
reports and the adequacy of the Company's financial controls, accounting
principles and policies. The Audit Committee also reviews compliance with the
Company's reporting obligations and certain Company policies. The Compensation
Committee is responsible for reviewing and recommending to the Board the
compensation for the executive officers and directors of the Company and for
administering the Company's employee stock option plans. The primary function of
the
33
<PAGE> 36
Nominating and Management Development Committee is to review management's
recommendations for persons to serve as the Company's executive officers and as
members of the Board and committees of the Board (other than the Nominating and
Management Development Committee), together with such other nominees as it may
choose to consider, and to recommend to the Board the persons nominated by the
Committee for such positions. If the Merger is not consummated, the Nominating
and Management Development Committee will consider for the annual meeting of
stockholders to be held in 2000 nominees for director recommended by
stockholders that are submitted in writing, together with adequate information
regarding such person's biographical data and qualifications, addressed to the
Nominating and Management Development Committee at the address of the Company's
principal executive office and received no later than November 24, 1999. The
Nominating and Management Development Committee periodically considers executive
management development and succession matters.
During 1998, the Board held five meetings, the Executive Committee held
one meeting , the Audit Committee held four meetings, the Nominating and
Management Development Committee held one meeting and the Compensation Committee
held one meeting. During 1998, each incumbent director attended 75% or more of
the total number of meetings of the Board and the committees on which he served.
EXECUTIVE OFFICERS
The following table lists the persons currently serving as the
executive officers of the Company and who have been nominated for re-election to
such positions at the directors' meeting to be held following the Annual Meeting
of Stockholders. If elected and if the Merger is not consummated, the persons
named below are expected to serve in the position stated until the next annual
meeting of the directors and until their successors are elected and qualified.
Both officers have been continually employed by the Company in an executive
capacity for the last five years. Mr. Apgar is 45 years of age and has been
employed with American Indemnity Company in various capacities since April 1974,
most recently as Vice President and Controller. Mr. Apgar beneficially owns 500
shares of Common Stock, which represents less than 1% of the shares of Common
Stock outstanding as of April 28, 1999.
<TABLE>
<CAPTION>
SERVED AS
OFFICER
NAME SINCE POSITION
- - - - - - - - - - - - - ------------------------------------------- --------- -------------------------------------
<S> <C> <C>
J. Fellman Seinsheimer, III................ 1973 President and Chief Executive Officer
Phillip E. Apgar, C.P.A.................... 1994 Vice President, Treasurer and Chief
Financial Officer
</TABLE>
EXECUTIVE COMPENSATION
REPORT OF THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
This report is presented by the Compensation Committee (the
"Committee") of the Board of Directors of the Company relating to the
compensation policies of the Company for its executive officers. This report
sets forth the major components of executive compensation and the basis by which
the 1998 compensation determinations were made by the Committee and the Board of
Directors with respect to the executive officers of the Company.
The compensation programs of the Company as they apply to executive
officers are generally administered by or under the direction of the Committee
and are reviewed on an annual basis to insure that remuneration levels and
benefits are competitive and reasonable in light of the overall performance of
the Company in recent years. The Committee is composed of three directors who
are not employees of the Company or its subsidiaries and is responsible for
recommending to the full Board of Directors compensation for the executive
officers of the Company. Stock based compensation decisions for the Company's
executive officers are in each case made by the full Board of Directors of the
Company following recommendations by the Committee.
34
<PAGE> 37
COMPENSATION POLICIES
In determining compensation for the Company's executive officers, the
Committee and the Board seek to ensure that the executive officers are
effectively compensated in terms that are both internally equitable and
externally competitive. Compensation decisions should include consideration of
all factors relevant to these decision, including the performance of the
specific officer under consideration, the financial condition and results of
operations of the Company, conditions prevailing generally in the Company's
industry during the applicable periods and the Company's performance in light of
such conditions. Management's recommendations are requested and considered by
the Committee.
COMPENSATION PROGRAM CONSIDERATIONS
In 1998, compensation for the Company's executive officers consisted
primarily of base salary and certain other benefits, including contributions to
the Company's cash balance retirement plan and to the Company's 401(k) plan. The
Committee and the Board considered certain of these components as follows.
Base Salary -- Base salary levels are determined principally on the
factors mentioned above, as well as the Company's past compensation practices,
compensation practices in the applicable geographic region and by comparison
with companies that are similar to the Company. The most important factor in the
Committee's determination is the Committee's understanding and perception of how
the particular officer performed during the preceding periods under the
circumstances as they existed at such times.
In early 1998, the Company obtained updated compensation information
from two outside firms with respect to both the Chief Executive Officer and the
Chief Financial Officer (the "compensation survey"). This compensation survey
illustrated that the executive officers' base salaries were at or below the
average or predicted base salaries, as well as the total compensation levels, as
shown in the compensation survey for the officers' respective positions. While
the companies used in the compensation survey are not known by the Committee,
the Committee believes that they are not the companies comprising the indices
utilized in the performance graph.
In general, base salary levels and increases in these levels reflect
the Committee's view of the contribution made by the particular executive
officer based on, among other things, the factors listed above. These factors
are typically subjective. No quantifiable goals or standards are established,
although the compensation survey provides certain benchmarks considered by the
Committee for compensation levels. The Committee does not believe that
profitability of the Company in any one year should be determinative of
compensation levels. However, profitability and other results of operations of
the Company must be considered, as well as the performance of the Company
relative to other companies in the industry. The Committee noted the
disappointing results for 1997, as well as 1995, although it recognized the
significant improvement in 1996 over 1995. Though discussions at previous Board
meetings, the Committee was aware of the matters that contributed to the 1995
and 1997 results. The Committee discussed other items of operations of which it
was aware, including the Company's experiences in converting to its new computer
system. Also noted was management's recommendation that no increases in
compensation be given to executive officers in 1998 and that this was consistent
with management's position in the past. Following discussion on these and other
matters, the Committee recommended no adjustment in the base salaries for the
executive officers in 1998.
Stock Options -- The Committee and the Board believe that stock options
provide a valuable incentive to the key employees of the Company, particularly
those having substantial responsibility for the future and success of the
Company. By providing an opportunity to increase their ownership of Company
stock, the interests of the stockholders and those key personnel will become
more closely aligned. Stock options provide the option holder with additional
incentive to remain in the Company's employ and to bring about greater growth
and success of the Company. Options also provide a means to tie compensation
more closely to the Company's financial performance to the extent reflected in
the price of the Company's Common Stock. The Chief Executive Officer currently
has no options outstanding, although the Chief Financial Officer has outstanding
options granted several years ago.
35
<PAGE> 38
Following the discussion noted above, the Committee determined that no
option grants for the executive officers would be recommended to the Board at
the time of these actions by the Committee, but may be considered later in the
year.
Other Matters -- The Company has various other employee benefit plans
and executive officers participate in these on the same terms as eligible,
non-executive employees, subject to any legal limits on such participation.
These include the cash balance retirement plan and 401(k) Plan adopted by the
Company's subsidiary and an automobile bonus plan whereby employees are
compensated for taxes incurred for personal use of company automobiles.
1998 COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER
In considering the compensation for J. Fellman Seinsheimer, III, the
President and Chief Executive Officer of the Company, the Committee considered
the performance of the Company in 1997, its most recently completed fiscal year,
as well as in previous periods. The Committee recognizes that performance of
Company personnel during difficult periods can be more important, and can
provide a greater contribution, than during more prosperous periods,
notwithstanding results that are not satisfactory. Nevertheless, the Committee
believes the results of the Company must be considered along with other
operational issues. Following discussion of these and the matters mentioned
above, the Committee determined that there should be no upward or downward
adjustment in the base compensation of the Chief Executive Officer.
SUMMARY
The Committee believes that the annual compensation for the Company's
executive officers appropriately reflects the contribution of such officers to
the Company and is reflective of the individual performance and the financial
performance of the Company.
COMPENSATION COMMITTEE OF THE
BOARD OF DIRECTORS
Henry W. Hope
Harris L. Kempner, Jr.
Marvin L. West
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Harris L. Kempner, Jr., a director of the Company, is Chairman Emeritus
of the Board of United States National Bank, which serves as the principal
banking institution for the Company. Henry W. Hope, a director of the Company,
is a partner in the law firm of Fulbright & Jaworski L.L.P., which serves as
corporate and securities counsel to the Company.
The full Board of the Company approves all stock grants to employees,
including the executive officers. Mr. Seinsheimer, III the sole employee
director of the Company, abstains from voting with respect to such matters. Mr.
Seinsheimer, III, however, does make recommendations to the Compensation
Committee and the full Board with regard to compensation for certain employees
and stock option grants for all employees of the Company.
SUMMARY OF COMPENSATION
The following table summarizes compensation information concerning each
of the Company's executive officers for each of the three years ended December
31, 1998.
36
<PAGE> 39
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Annual Compensation (Awards)
----------------------------------------- ------------
Other Shares
Annual Underlying All Other
Salary Bonus Compensation Options Compensation
Name and Principal Position Year ($) ($) ($)(1) (#) ($)(2)
---- ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
J. Fellman Seinsheimer, III 1998 212,500 -- 15,728 -- 4,764
President and Chief 1997 212,500 -- 12,911 -- 6,107
Executive Officer 1996 206,400 -- 14,254 -- 6,192
Phillip E. Apgar, C.P.A. 1998 117,276 -- 12,659 -- 3,518
Vice President, Treasurer 1997 117,276 -- 10,975 -- 3,372
and Chief Financial Officer 1996 113,850 -- 12,148 -- 3,416
</TABLE>
(1) Amounts represent tax gross-ups for the lease value and expenses relating
to the use of Company automobiles. The dollar value of all other
perquisites and personal benefits were less than the lesser of either
$50,000 or 10% of the total annual salary and bonus for each named
executive officer and therefore have been excluded.
(2) Amounts represent matching contributions made by the Company under the
Company's 401(k) Plan.
Each executive officer of the Company holds office until the regular meeting of
directors following the annual meeting of stockholders or until his successor is
elected and qualifies.
COMPENSATION OF DIRECTORS
Directors of the Company who are not employed by the Company or its
subsidiaries receive $1,200 for each meeting of the Board attended by such
director and $50 to $300 for each meeting of the Company's subsidiaries' Boards
of Directors on which such persons may serve. Committee members serving on
established committees of the Board receive $300 for each meeting attended. The
Company does not pay director or committee fees to persons who also serve as
officers of the Company.
Non-employee directors also receive options every other year to
purchase 1,000 shares of the Company's Common Stock pursuant to the 1997
Non-Employee Director Stock Option Plan (the "1997 Director Plan"), which was
approved by the Company's stockholders in April 1997. See "Option Grants and
Exercises". Each option is exercisable for a term of ten years from the date of
grant, subject to earlier termination as set forth in the plan. Prior to 1997,
options to purchase an aggregate of 22,000 shares were granted to non-employee
directors under the Company's 1992 Non-Employee Director Stock Option Plan (the
"1992 Director Plan"). Upon approval of the 1997 Director Plan by the Company's
stockholders, the 1992 Director Plan terminated and the remaining 3,000 shares
then reserved for issuance under the 1992 Director Plan were reclassified as
authorized but unissued shares of the Company's Common Stock. All options
previously granted under the 1992 Director Plan will continue for the remainder
of their respective terms.
OPTION GRANTS AND EXERCISES
The Company currently maintains two plans pursuant to which options to
purchase shares of the Company's Common Stock are outstanding or available for
future grants.
In April 1992, the Company's stockholders approved the 1992 Employee
Stock Option Plan (the "1992 Option Plan"). Options to purchase up to an
aggregate of 100,000 shares may be granted under the 1992 Option Plan at no less
than the fair market value of the shares of Common Stock on the date of grant
for incentive stock options, and no less than 85% of the fair market value of
the shares of Common Stock on the date of grant for non-incentive stock options.
Under the 1997 Director Plan, 25,000 shares were reserved for the grant of
options. The selection of non-employee directors to whom options are to be
granted, the number of shares subject to an option, the date of grant, the
37
<PAGE> 40
exercise price and the term of an option are specified in the 1997 Director
Plan. Options to purchase 1,000 shares and 8,000 shares were granted under the
1992 Director Plan and the 1997 Director Plan in January 1997 and January 1998,
respectively. As of April 28, 1999, there were 100,000 shares available for the
grant of options under the 1992 Option Plan and 17,000 shares under the 1997
Director Plan.
AGGREGATED OPTION EXERCISES IN 1998 AND OPTION VALUES AT DECEMBER 31, 1998
The following table sets forth information concerning each exercise of
stock options during the year ended December 31, 1998 by each of its executive
officers and the value of unexercised in-the-money options at December 31, 1998.
OPTION EXERCISES AND OPTION VALUES
<TABLE>
<CAPTION>
Number of Shares
Underlying Unexercised Value of Unexercised
Options In-the-money Options at
at December 31, 1998 December 31, 1998
------------------------------ ------------------------------
Shares
Acquired Value
On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
Name (#) ($) (#) (#) (#) (#)
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Phillip E. Apgar............... -- -- 3,000 -- -0- --
</TABLE>
PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the
Company's cumulative total stockholder return on Common Stock with the
cumulative total return of the NASDAQ U.S. Market Index and the Dow Jones
Property and Casualty Insurance Industry Index for the five years ended December
31, 1998. The graph assumes that the value of the investment in the Company's
Common Stock and each index was $100 at December 31, 1993 and that all dividends
were reinvested.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG THE COMPANY, THE NASDAQ U.S. MARKET INDEX AND
THE DOW JONES PROPERTY AND CASUALTY INSURANCE INDUSTRY INDEX
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
MEASUREMENT PERIOD NASDAQ DOW JONES
(FISCAL YEAR COVERED) AIFC U.S. P & C
<S> <C> <C> <C>
1993 100 100 100
1994 79 98 105
1995 79 138 147
1996 83 170 177
1997 113 209 261
1998 87 293 282
</TABLE>
PENSION PLAN
Effective January 1, 1988, American Indemnity established a
noncontributory, retirement plan (the "Plan") carried and funded through a group
annuity covering substantially all full-time employees over 21 years of age who
have more than one year of service. The Plan was amended January 1, 1992 to
comply with the Tax Reform Act that was effective January 1, 1989. Effective
January 1, 1996, the Plan was converted to a Cash Balance Plan and the
38
<PAGE> 41
Company contributes for each participant 5% of such person's salary. In
addition, the Cash Balance Plan provides for 6% interest per annum on such cash
balance. Similar to the pre-1996 Plan, an annuity at retirement, which is based
upon stated plan factors, is available as an alternative to the lump sum payment
of the cash balance. The following table sets forth estimated cash balances and
estimated annuities at an assumed retirement age of 65 and assumed annual salary
growth of 4%.
PROJECTED CASH BALANCES
SALARY AT JANUARY 1, 1998, OR HIRE DATE IF LATER
<TABLE>
<CAPTION>
$20,000 $40,000 $60,000 $80,000 $100,000
-------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Age at January 1, 1998, or hire
date if later
25.................................... $274,251 $548,502 $822,753 $1,097,004 $1,371,255
35.................................... 125,013 250,026 375,039 500,052 625,065
45.................................... 50,806 101,612 152,418 203,224 254,030
55.................................... 15,532 31,064 46,596 62,128 77,660
</TABLE>
PROJECTED ANNUAL ANNUITY
SALARY AT JANUARY 1, 1998, OR HIRE DATE IF LATER
<TABLE>
<CAPTION>
$20,000 $40,000 $60,000 $80,000 $100,000
-------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Age at January 1, 1998, or hire
date if later
25.................................... $25,760 $51,520 $77,280 $103,040 $128,800
35.................................... 11,742 23,484 35,226 46,968 58,710
45.................................... 4,772 9,544 14,316 19,088 23,860
55.................................... 1,459 2,918 4,377 5,836 7,295
</TABLE>
The benefits under the Cash Balance Plan would be supplemented by the
benefits, if any, from the Plan as in effect prior to January 1, 1996 and any
benefit which was earned under previous plans prior to January 1, 1988. The
compensation covered by the Plan includes all salary costs, excluding bonuses,
for all employees who have reached the age of 21. Such compensation includes the
salaries set forth in the salary column of the Summary Compensation Table. Upon
retirement at an assumed retirement age of 65, the estimated annual and lump sum
benefit payable under the Cash Balance Plan would be approximately $15,000 and
$159,600, respectively, for J. Fellman Seinsheimer, III and approximately
$39,000 and $420,000, respectively, for Phillip E. Apgar. Mr. Seinsheimer, III
and Mr. Apgar are the only employees of the Company whose annual salaries exceed
the range of salaries reflected in the tables above.
KEY EXECUTIVE SEVERANCE AGREEMENTS
J. Fellman Seinsheimer, III, the President and Chief Executive Officer
of the Company and American Indemnity Company ("American Indemnity"), a
subsidiary of the Company, and one other key employee of American Indemnity have
each entered into a Key Executive Severance Agreement ("Executive Agreement")
with the Company and American Indemnity. Each officer's Executive Agreement was
effective as of February 7, 1983 and provides that if in the event that a third
person or group commences a tender or exchange offer, circulates a proxy to
stockholders, or takes other steps to effect a change in control of the Company,
such officer will not voluntarily leave the employ of the Company or American
Indemnity, as the case may be, and will continue to perform the duties of his
office until such time as such third person has abandoned or terminated his
efforts to effect a change of control or until a change of control has occurred.
In the event that such officer's employment with the Company or any of its
subsidiaries
39
<PAGE> 42
terminates for any reason (either voluntary or involuntary, other than as a
consequence of his death, disability or willful misconduct) within two years
after a change of control of the Company, the Company or American Indemnity, or
both, will (i) pay to such officer as compensation for services rendered to the
Company and its subsidiaries a lump sum in cash equal to five times the highest
aggregate compensation paid or payable to such officer with respect to any 12
consecutive month period during the three years ending with the date of such
officer's termination, and (ii) continue to provide such officer, for a period
of 15 years from the date of his termination, with such life, accident, medical
and long-term disability insurance plans of the Company and its subsidiaries as
provided to him prior to the change of control, unless and until he obtains
other employment that provides comparable coverage. For purposes of each
officer's Executive Agreement, a change of control of the Company will result
from the occurrence of either of the following events: (i) a third person,
including a "group" as defined in Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended, becomes the beneficial owner of shares of the Company
having 25% or more of the total number of votes that may be cast for the
election of directors of the Company; or (ii) as the result of, or in connection
with, any cash tender or exchange offer, merger or other business combination,
sale of assets or contested election, or any combination of the foregoing
transactions, the persons who were directors of the Company before any of such
transactions shall cease to constitute a majority of the Board of Directors of
the Company or any successor to the Company. The Executive Agreements also
provide that, for a period of one year following any voluntary termination
(except one following a change in control of the Company) by an officer who is a
party to the agreement, that such officer will not participate in any business
which is in competition with the business of the Company and its subsidiaries
within a defined geographic area. Except during the pendency of or following a
change in control, the Board of Directors may determine that an officer who is a
party to an Executive Agreement is no longer a "key executive" of the Company or
American Indemnity and thereupon terminate such officer's Executive Agreement.
If the terms of the Executive Agreements had been activated during the Company's
1998 fiscal year, the sum which would have been payable to the executive officer
named above is $_______. Such payment, if required to be made during 1998, would
have had an adverse impact on the 1997 reported results of operations; however,
it would not have had an adverse effect on the overall financial condition of
the Company.
In connection with the negotiations between the Company and United Fire
leading up to the execution of the Merger Agreement, the agreement with Mr.
Seinsheimer has been superseded by an employment agreement entered into between
Mr. Seinsheimer and United Fire as of March 4, 1999, which becomes effective as
of the Effective Time of the Merger. For a description of the new employment
agreement, see "The Merger - Interests of Certain Persons in the Merger - Key
Employee Severance Agreements; Employment Agreement" above.
OTHER TRANSACTIONS
Harris L. Kempner, Jr., a director of the Company, is Chairman Emeritus
of the Board of United States National Bank, which serves as the principal
banking institution for the Company.
Henry W. Hope, a director of the Company, is a partner in the law firm
of Fulbright & Jaworski L.L.P., which serves as corporate and securities counsel
to the Company.
Eugene Hornstein, in his capacity as First Vice President of American
Indemnity, received compensation from such company in the amount of $93,840 as a
base salary, $2,811 in matching contributions made by the Company under the
Company's 401(k) Plan and a $2,500 bonus included as earnings in connection with
the loss of his Company automobile for the fiscal year ending December 31, 1998.
Mr. Hornstein is the son-in-law of William C. Levin, M.D., a director of the
Company.
Matthew W. Seinsheimer, in his capacity as Assistant Vice President of
American Indemnity, received compensation from such company in the amount of
$57,450 as a base salary and $1,795 in matching contributions made by the
Company under the Company's 401(k) Plan. Mr. Seinsheimer is the son of J.
Fellman Seinsheimer, III, president and chief executive officer of the Company.
Mr. Seinsheimer resigned from the Company on October 30, 1998.
40
<PAGE> 43
See Notes (1) and (3) under "Principal Stockholders" for information
concerning J. Fellman Seinsheimer, III's shared power to vote and dispose of
shares of Common Stock owned of record by his father, Mr. Seinsheimer, Jr., and
shares of Common Stock held by the Seinsheimer Trust.
RELATIONSHIP WITH INDEPENDENT AUDITORS
Deloitte & Touche LLP, or a predecessor of such firm, has been auditing
the accounts of the Company since its inception and has been selected as the
Company's independent accountants for the current year. A representative of
Deloitte & Touche LLP is expected to be available at the Annual Meeting of
Stockholders to respond to appropriate questions and will be permitted to make a
statement if such representative desires to do so.
COMPLIANCE WITH SECTION 16(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors and persons who own more than 10% of a
registered class of the Company's equity securities to file Form 3, Form 4 and
Form 5 reports of ownership and changes in ownership with the Securities and
Exchange Commission. Officers, directors and greater than 10% stockholders are
required by the regulation to furnish the Company with copies of all Section
16(a) reports they file.
To the Company's knowledge, based solely on a review of Forms 3 and 4
and amendments thereto furnished to the Company during its most recent fiscal
year, and Forms 5 and amendments thereto furnished to the Company with respect
to its most recent fiscal year, and written representations from reporting
persons that no Form 5 was required, all Section 16(a) filing requirements were
complied with.
PROPOSALS FOR NEXT ANNUAL MEETING
The Company will hold a 2000 annual meeting of stockholders only if the
Merger is not completed before the time of such meeting. If such a meeting is
held, any proposals of holders of Common Stock intended to be presented at such
annual meeting of stockholders must be received by the Company at P.O. Box 8985,
Wilmington, Delaware 19899-8985, no later than November 24, 1999, in order to be
included in the proxy statement and form of proxy relating to that meeting.
GENERAL
Management of the Company does not intend to present any other items of
business and knows of no other items of business that are likely to be brought
before the meeting, except those set forth in the attached Notice of Annual
Meeting of Stockholders. However, if any other matter should properly come
before the meeting, the persons named on any properly executed and delivered
proxy will have the discretionary authority to vote such proxy in accordance
with their best judgment on such matters.
This solicitation is made on behalf of the Board of Directors of the
Company. The cost of solicitation of proxies in the accompanying form will be
paid by the Company. In addition to solicitation by use of mails, certain
directors, officers and employees may solicit the return of proxies by
telephone, telegram or personal interviews. The Company will also request banks,
brokers and other custodians, nominees and fiduciaries to send proxy materials
to the beneficial owners of shares of the Common Stock, and upon request, they
will be reimbursed by the Company for postage and clerical expenses.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by the Company (File No.
0-8636) with the SEC under the Exchange Act, are incorporated herein by
reference:
41
<PAGE> 44
(a) The Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
(b) The Company's Current Report on Form 8-K, filed March 10, 1999.
All documents filed with the SEC by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and
prior to the date of the Annual Meeting shall be deemed to be incorporated by
reference herein and to be a part hereof from the date any such document is
filed.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THE COMPANY WILL PROVIDE WITHOUT CHARGE
TO EACH PERSON TO WHOM THIS PROXY STATEMENT IS DELIVERED, UPON THE WRITTEN OR
ORAL REQUEST OF SUCH PERSON, BY FIRST-CLASS MAIL OR OTHER EQUALLY PROMPT MEANS
WITHIN ONE BUSINESS DAY OF RECEIPT OF SUCH REQUEST, A COPY OF ANY OR ALL OF THE
DOCUMENTS THAT ARE INCORPORATED BY REFERENCE HEREIN (OTHER THAN EXHIBITS TO SUCH
DOCUMENTS THAT ARE NOT SPECIFICALLY INCORPORATED BY REFERENCE HEREIN). REQUESTS
SHOULD BE DIRECTED TO AMERICAN INDEMNITY FINANCIAL CORPORATION, 2115 WINNIE,
GALVESTON, TEXAS 77550, ATTENTION: SECRETARY (TELEPHONE NUMBER (409) 766-4600).
HELEN K. LOHEC
Secretary
May __, 1999
42
<PAGE> 45
ANNEX A
AGREEMENT AND PLAN OF MERGER
A - 1
<PAGE> 46
================================================================================
AGREEMENT AND PLAN OF MERGER
among
AMERICAN INDEMNITY FINANCIAL CORPORATION
and
UNITED FIRE & CASUALTY COMPANY
and
AI ACQUISITION CORPORATION
-------------
March 4, 1999
-------------
================================================================================
<PAGE> 47
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PREAMBLE .......................................................................................................1
ARTICLE 1
The Merger.............................................................................................1
Section 1.1 Surviving Corporation.......................................................1
Section 1.2 Articles of Incorporation...................................................1
Section 1.3 Bylaws......................................................................2
Section 1.4 Directors...................................................................2
Section 1.5 Officers....................................................................3
Section 1.6 Effective Time..............................................................3
ARTICLE 2
Effect of the Merger on Stockholders and Option Holders................................................3
Section 2.1 Conversion of Acquisition's Common Stock and Target's Common
Stock and Options............................................................................3
(a) Target's Common Stock...............................................3
(b) Acquisition's Common Stock..........................................4
(c) Treasury Stock......................................................4
(d) Target Options......................................................4
Section 2.2 Dissenting Shares...........................................................5
Section 2.3 Exchange of Shares and Options..............................................5
(a) Exchange Agent......................................................5
(b) Payment Procedure...................................................6
(c) Lost, Stolen or Destroyed Certificates or Options...................7
(d) Distribution of Reserved Per Share Amount...........................8
(e) Appointment of Shareholder Representatives..........................8
Section 2.4 No Further Rights...........................................................8
Section 2.5 Closing of Target's Stock Transfer Books....................................8
ARTICLE 3
CERTAIN AGREEMENTS.....................................................................................9
Section 3.1 Due Diligence...............................................................9
Section 3.2 Communications With Agents, Employees or Policyholders......................9
Section 3.3 Stockholder Approval........................................................9
Section 3.4 No Solicitation by Target..................................................10
(a) No Solicitation by Target..........................................10
(b) No Change of Approval..............................................10
(c) Termination Upon Change............................................11
(d) Notification by Target.............................................12
(e) Breakup Fee Payable by Target......................................12
(f) Termination Fee Payable by Parent..................................12
(g) Termination Fee Payable by Target..................................12
</TABLE>
i
<PAGE> 48
<TABLE>
<S> <C>
ARTICLE 4
Representations and Warranties..................................................................................13
Section 4.1 Representations and Warranties of Target.............................................13
(a) Target Organization and Good Standing: Authority to Conduct
Business......................................................................................13
(b) Power and Authority..........................................................13
(c) No Conflicts.................................................................13
(d) Consents and Approvals.......................................................14
(e) Capital Structure of Target..................................................14
(f) Subsidiaries.................................................................14
(g) Organization and Good Standing of Subsidiaries: Authority to
Conduct Business..............................................................................15
(h) Target Financial Statements..................................................16
(i) Target Undisclosed Liabilities...............................................16
(j) Subsidiary Financial Statements..............................................17
(k) Litigation...................................................................18
(l) Real and Personal Property...................................................18
(m) Leases and Rental Contracts..................................................19
(n) Contracts....................................................................19
(o) Compliance with Other Instruments and Laws...................................21
(p) Regulatory Filings...........................................................22
(q) Absence of Certain Changes...................................................23
(r) Taxes........................................................................24
(s) Insurance Policies...........................................................26
(t) Transactions with Interested Persons.........................................26
(u) Bank and Brokerage Accounts..................................................26
(v) Disclosure...................................................................27
(w) Employee Benefit Plans.......................................................27
(x) Employees....................................................................30
(y) Intellectual Property........................................................31
(z) Brokers......................................................................31
(aa) Surplus Relief...............................................................31
(ab) Insurance Issued by Subsidiaries.............................................31
(ac) Computer Software............................................................33
(ad) Books and Records............................................................33
(ae) No Investment Company........................................................34
(af) Investment Portfolio.........................................................34
(ag) Discussions with Regulators..................................................34
(ah) Environmental Matters........................................................34
(ai) Year 2000 Issues.............................................................37
Section 4.2 Representations and Warranties of Parent and Acquisition.............................37
(a) Organization and Good Standing...............................................37
(b) Power and Authority..........................................................37
(c) No Conflicts.................................................................38
(d) Consents and Approvals.......................................................38
(e) Disclosure...................................................................39
(f) Brokers......................................................................39
</TABLE>
ii
<PAGE> 49
<TABLE>
<S> <C>
ARTICLE 5
Covenants.......................................................................................................39
Section 5.1 Covenants of Target..................................................................39
(a) Access to Information........................................................39
(b) Conduct of Business..........................................................40
(c) Consultation with Acquisition Pending Closing................................41
(d) Disposition of Shares by Target..............................................42
(e) Preservation of Business.....................................................42
(f) Investment Portfolio Requirements............................................42
(g) Surplus Items................................................................42
(h) Notice and Cure..............................................................42
(i) Further Actions..............................................................43
(j) Reasonable Efforts...........................................................43
(k) Changes in Optionees........................................................43
(l) Major Business Decisions.....................................................43
Section 5.2 Covenants of Parent and Acquisition..................................................43
(a) Further Actions..............................................................43
(b) Reasonable Efforts...........................................................43
(c) Notice and Cure..............................................................43
ARTICLE 6
Conditions Precedent............................................................................................44
Section 6.1 Parent and Acquisition...............................................................44
(a) Representations and Warranties...............................................44
(b) Performance of Obligations...................................................44
(c) Authorization................................................................44
(e) Approvals and Consents.......................................................45
(f) Legal Opinions...............................................................45
(g) No Adverse Change............................................................45
(h) Secretary's Certificates.....................................................45
(i) Stockholder Approval.........................................................46
Section 6.2 Conditions to the Obligations of Target..............................................47
(a) Representations and Warranties...............................................47
(b) Performance of Obligations...................................................47
(c) No Order.....................................................................47
(d) Approvals and Consents.......................................................47
(e) Legal Opinion................................................................48
(f) Stockholder Approval.........................................................48
(g) Authorization................................................................48
(h) Deposit with Exchange Agent..................................................48
ARTICLE 7
Closing.........................................................................................................49
Section 7.1 Closing..............................................................................49
Section 7.2 Filings at the Closing...............................................................49
</TABLE>
iii
<PAGE> 50
<TABLE>
<S> <C>
ARTICLE 8
Termination.....................................................................................................49
Section 8.1 Termination..........................................................................49
ARTICLE 9
Confidentiality.................................................................................................50
Section 9.1 Confidentiality......................................................................50
ARTICLE 10
Miscellaneous...................................................................................................51
Section 10.1 Consent to Jurisdiction and Service of Process.......................................51
Section 10.2 Expenses.............................................................................52
Section 10.3 Notices..............................................................................52
Section 10.4 Amendment............................................................................53
Section 10.5 Counterparts.........................................................................53
Section 10.6 Governing Law........................................................................53
Section 10.7 Entire Agreement.....................................................................53
Section 10.8 Waivers..............................................................................54
Section 10.9 Interpretation.......................................................................54
Section 10.10 No Assignment........................................................................54
Section 10.11 Survival of Representations and Warranties...........................................54
Section 10.12 Further Assurances...................................................................55
Section 10.13 Knowledge............................................................................55
</TABLE>
iv
<PAGE> 51
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is made this 4th day of March, 1999,
among AMERICAN INDEMNITY FINANCIAL CORPORATION, a Delaware corporation
("Target"), UNITED FIRE & CASUALTY COMPANY, an Iowa corporation ("Parent"), and
AI ACQUISITION CORPORATION, an Iowa corporation and a wholly owned subsidiary of
Parent ("Acquisition").
PREAMBLE
The Board of Directors of Parent, Acquisition and Target deem it in the
best interests of each corporation, and in the best interest of their respective
stockholders that Parent acquire all of the outstanding stock of Target through
the merger of Acquisition into Target in accordance with the terms and
conditions hereinafter set forth (the "Merger").
ACCORDINGLY, Target, Parent and Acquisition hereby agree as follows:
ARTICLE 1
THE MERGER
Section 1.1 Surviving Corporation. In accordance with the provisions of
this Agreement, Sections 1101-1104, 1105 and 1107 of the Iowa Business
Corporation Act and Section 252 of the General Corporation Law of the State of
Delaware (the "GCL") at the Effective Time (as defined in Section 1.6),
Acquisition shall be merged with and into Target, and Target shall be the
surviving corporation (hereinafter sometimes called the "Surviving Corporation")
and shall continue its corporate existence under the laws of the State of
Delaware. The name of the Surviving Corporation shall be "American Indemnity
Financial Corporation." At the Effective Time, the separate existence of
Acquisition shall cease.
Section 1.2 Articles of Incorporation. The Certificate of Incorporation
of Target, as in effect immediately prior to the Effective Time, shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by law; provided, however, that the Certificate of
Incorporation of the
<PAGE> 52
Surviving Corporation shall contain the provisions with respect to limitation of
director and officer liability set forth in the Certificate of Incorporation of
Target, which provisions, for a period terminating on the earlier of (i) three
years from the Effective Time, (ii) the closing of a merger of Target into
Parent or an Affiliate thereof or (iii) the liquidation of Target, shall not be
amended, repealed or otherwise modified in any manner that would adversely
affect the rights thereunder of individuals who were directors, officers,
employees or agents of Target at the Effective Time, unless such modification is
required by law. For purposes of this Agreement, an "Affiliate" of a person
shall mean any corporation or other entity controlling, controlled by or under
common control with such person.
Section 1.3 Bylaws. The Bylaws of Target, as in effect immediately
prior to the Effective Time, shall be the Bylaws of the Surviving Corporation
until thereafter amended as provided by law; provided, however, that the Bylaws
of the Surviving Corporation shall contain the provisions with respect to
indemnification set forth in the Bylaws of Target, which provisions, for a
period terminating on the earlier of (i) three years from the Effective Time,
(ii) the closing of a merger of Target into Parent or an Affiliate thereof or
(iii) the liquidation of Target, shall not be amended, repealed or otherwise
modified in any manner that would adversely affect the rights thereunder of
individuals who were directors, officers, employees or agents of Target at the
Effective Time, unless such modification is required by law. In connection with
any such merger or liquidation, the obligations of Target with respect to
indemnification under its Bylaws shall be assumed by the entity into which
Target merges or that acquires Target's assets upon liquidation.
Section 1.4 Directors. The persons who are serving as directors of
Acquisition immediately prior to the Effective Time shall be the directors of
the Surviving Corporation and shall hold office from the Effective Time until
their respective successors are duly elected or appointed and qualify in the
manner provided in the Articles of Incorporation and Bylaws of the Surviving
Corporation, or as otherwise provided by law.
2
<PAGE> 53
Section 1.5 Officers. The persons who are serving as officers of
Acquisition immediately prior to the Effective Time shall continue in their
respective offices as the officers of the Surviving Corporation and shall hold
such offices from the Effective Time until their respective successors are duly
elected or appointed and qualify in the manner provided in the Articles of
Incorporation and Bylaws of the Surviving Corporation, or as otherwise provided
by law.
Section 1.6 Effective Time. The Merger shall become effective at the
time of filing of Certificate of Merger (substantially in the form of Exhibit A
hereto) (the "Certificate of Merger") with the Secretary of State of the State
of Delaware in accordance with the provisions of Section 252 of the GCL and at
the time of filing of Articles of Merger (substantially in the form of Exhibit B
hereto) (the "Articles of Merger") with the Secretary of State of the State of
Iowa in accordance with the provisions of Section 1105 of the Iowa Business
Corporation Act, respectively, or at the time specified as the effective time in
the Articles of Merger. The date and time when the Merger becomes effective are
herein referred to as the "Effective Time".
ARTICLE 2
EFFECT OF THE MERGER ON STOCKHOLDERS AND OPTION HOLDERS
Section 2.1 Conversion of Acquisition's Common Stock and Target's
Common Stock and Options.
(a) Target's Common Stock. At the Effective Time, each share
of common stock, $3.33- 1/3 par value per share, of Target ("Target's Stock")
issued and outstanding immediately prior to the Effective Time shall, by virtue
of the Merger and without any action on the part of the holder thereof, be
converted into the right to receive and be exchangeable for the Per Share Amount
in cash. For purposes of this Agreement, the "Per Share Amount" shall mean the
quotient, rounded to four decimal places, obtained by dividing (i) the Net Book
Value at December 31, 1998, as set forth in Target's Audited Financial
Statements for the year ended December 31, 1998 (decreased by (x) the cost of
the insurance policy referred to in Section 6.1(j) and (y) $801,385) less the
Option Amount (as defined in Section 2.3), by (ii) the
3
<PAGE> 54
aggregate number of shares of Target's Stock outstanding immediately prior to
the Effective Time. Of the Per Share Amount, $1 (the "Reserved Per Share
Amount") shall be deposited with United States National Bank, Galveston, Texas,
or such other bank as Target and Parent may agree (the "Escrow Agent") to be
held and distributed pursuant to the terms of the Escrow Agreement in
substantially the form (subject to modifications reasonably requested by the
Escrow Agent) attached hereto as Exhibit C (the "Escrow Agreement"), and the
balance (the "Initial Per Share Amount") shall be distributed as provided in
Section 2.3.
(b) Acquisition's Common Stock. At the Effective Time, each
share of common stock, no par value per share, of Acquisition ("Acquisition's
Stock") issued and outstanding immediately prior to the Effective Time shall, by
virtue of the Merger and without any action on the part of the holder thereof,
be converted into and exchangeable for one share of issued, outstanding, fully
paid and nonassessable share of common stock, $3.33 1/3 par value per share, of
the Surviving Corporation. All certificates that immediately prior to the
Effective Time represented the outstanding common stock of Acquisition shall be
deemed for all purposes to represent the number of shares of common stock of the
Surviving Corporation into which such common stock of Acquisition has been
converted pursuant to this Section 2.1 (b).
(c) Treasury Stock. Each share of Target's Stock held in
Target's treasury and each share of Acquisition's Stock held in Acquisition's
treasury immediately prior to the Effective Time shall, by virtue of the Merger,
be canceled and retired and cease to exist, without any conversion thereof.
(d) Target Options. Prior to the Closing, Target shall cause
each outstanding option to purchase shares of Target's Stock (an "Option"),
whether or not then exercisable, to be canceled and converted into the right to
receive an amount in cash (the "Total Option Amount") equal to the product,
rounded to four decimal places, of (i) the amount by which the Per Share Amount
exceeds the exercise price per share subject to the Option and (ii) the number
of shares subject to the Option. Of the Total Option Amount, $1 for each share
subject to the Option (the "Reserved Per Share Amount") shall be deposited with
4
<PAGE> 55
the Escrow Agent to be held and distributed pursuant to the terms of the Escrow
Agreement, and the balance (the "Initial Option Amount") shall be distributed as
provided in Section 2.3.
Section 2.2 Dissenting Shares. Notwithstanding anything in this
Agreement to the contrary, shares of Target's Stock that are issued and
outstanding immediately prior to the Effective Time and that are held by a
Target stockholder who (i) does not vote such shares in favor of the Merger and
(ii) delivers to Target a notice of intention to demand payment for shares of
Target's Stock held by such stockholder (the "Dissenting Shares"), pursuant to
the rights granted a dissenting stockholder under the General Corporation Law of
the State of Delaware (the "GCL") shall not be converted into the amount of
money provided for in Section 2.1 (a) hereof but, rather, shall be converted
into the right to receive such consideration as may be determined to be due with
respect to such Dissenting Shares in accordance with the GCL; provided, however,
that if any holder of Dissenting Shares shall subsequently be deemed to not be
entitled to dissenter's rights, any of the Dissenting Shares held by such
stockholder shall thereupon be deemed to have been converted into the amount of
money provided for in Section 2.1(a) hereof.
Section 2.3 Exchange of Shares and Options.
(a) Exchange Agent. At or before the Effective Time, Parent
shall, or Parent shall cause Acquisition to, pursuant to an agreement reasonably
satisfactory to Target (the "Exchange Agreement"), deposit in immediately
available funds with the exchange agent for Target's Stock and the Options,
which exchange agent shall be selected by Parent or Acquisition and shall be
reasonably satisfactory to Target (the "Exchange Agent"), an amount equal to (i)
for Target's Stock, the product of (x) the number of shares of Target's Stock
issued and outstanding at the Effective Time (the "Target Stock Outstanding")
multiplied by (y) the Initial Per Share Amount, plus (ii) an aggregate amount
for the Options (the "Option Amount") that is equal to (x) the product of the
Initial Per Share Amount and the aggregate number of shares of Target's Stock
underlying all of the Options, minus (y) the sum of the amounts obtained for
each Option by multiplying the exercise price per share of each Option by the
number of shares of Target's Stock underlying
5
<PAGE> 56
each Option (the "Aggregate Option Exercise Price") (such amount deposited with
the Exchange Agent pursuant to clauses (i) and (ii) being hereinafter referred
to as the "Exchange Fund"). For purposes of determining the Initial Per Share
Amount for the purpose of determining the amount of the funds to be deposited
with the Exchange Agent hereunder, the parties shall use the information and
amounts designated on Schedule 4.1(e) (as revised pursuant to Section 5.1(k)) as
in effect at the Effective Time to determine the Stockholders, Optionees, Target
Stock Outstanding, Options and the Aggregate Option Exercise Price. The Exchange
Agreement shall provide that out of the Exchange Fund, the Exchange Agent shall,
pursuant to irrevocable instructions, make the payments referred to in Sections
2.1(a), 2.1(d), 2.2 and 2.3 to each Stockholder (as defined in Section 2.3(b))
and Optionee (as defined in Section 2.3(b)) listed on Schedule 4.1(e), as such
Schedule may be revised in accordance with Section 5.1(k). Any amount remaining
in the Exchange Fund after one year after the Effective Time may be transferred
to the Surviving Corporation at its option; provided, however, that the
Surviving Corporation shall thereafter be liable for the cash payments required
by Sections 2.1(a), 2.1(d), 2.2 and 2.3. Parent shall or shall cause the
Exchange Agent or the Surviving Corporation, as the case may be, to make the
payments required by Sections 2.1(a), 2.1(d), 2.2 and 2.3 solely to the
Stockholders and Optionees listed on Schedule 4.1(e) (as revised pursuant to
Section 5.1(k)) as in effect at the Effective Time.
(b) Payment Procedure. As promptly as practicable after the
Effective Time, the Exchange Agent shall mail and make available to each holder
of record ("Stockholder") of a certificate or certificates that immediately
prior to the Effective Time represented outstanding shares of Target's Stock (a
"Certificate") and to each holder of record of an Option (an "Optionee"), a
letter of transmittal that shall specify that delivery shall be effected, and
risk of loss and title to the Certificates and Options shall pass, only upon
delivery of the Certificates and the Options. Upon surrender to the Exchange
Agent of a Certificate for cancellation together with such letter of
transmittal, duly executed, the Exchange Agent shall promptly pay out to the
persons entitled thereto the amount, rounded to the nearest cent, determined by
multiplying (x)
6
<PAGE> 57
the number of shares of Target's Stock represented by the Certificate by (y) the
Initial Per Share Amount. Upon surrender to the Exchange Agent of an Option
together with such letter of transmittal, duly executed, the Exchange Agent
shall promptly pay out to the Optionee the amount, rounded to the nearest cent,
determined by multiplying (x) the amount by which the Initial Per Share Amount
exceeds the exercise price per share subject to such Option and (y) the number
of shares subject to such Option. No interest shall be paid or accrued on the
cash payable upon the surrender of a Certificate or an Option. If a Stockholder
or an Optionee requests that payment be made to a person other than the one in
whose name the Certificate or Option surrendered, as the case may be, is
registered, it shall be a condition of payment that the Certificate or Option so
surrendered shall be properly endorsed or otherwise in proper form for transfer
and that the person requesting such payment shall pay any transfer or other
taxes required by reason of the payment to a person other than the registered
holder of the Certificate or Option surrendered or establish to the satisfaction
of the Surviving Corporation that such tax has been paid or is not applicable.
From and after the Effective Time, until surrendered in accordance with the
provisions of this Section 2.3(b), (i) each Certificate shall represent for all
purposes only the right to receive, upon such surrender an amount in cash
rounded to the nearest cent, equal to the Initial Per Share Amount per share of
Target's Stock being converted plus the amount, if any, to be distributed on
account of each Certificate pursuant to the terms of the Escrow Agreement, and
(ii) each Option shall represent for all purposes only the right to receive,
upon such surrender, an amount in cash equal to the product, rounded to the
nearest cent, of (x) the amount by which the Initial Per Share Amount exceeds
the exercise price per share subject to the Option and (y) the number of shares
subject to the Option plus the amount, if any, to be distributed on account of
each Option pursuant to the terms of the Escrow Agreement.
(c) Lost, Stolen or Destroyed Certificates or Options. In the
event any Certificate or Option shall have been lost, stolen or destroyed, upon
delivery to the Surviving Corporation of an affidavit of that fact by the person
claiming such Certificate or Option to be lost, stolen or destroyed and the
delivery
7
<PAGE> 58
of such other documents as the Surviving Corporation may reasonably request, the
Surviving Corporation shall deliver or cause to be delivered the amount of money
deliverable in respect of such lost, stolen or destroyed Certificate or Option
as determined in accordance with this Article 2; provided, however, that the
Board of Directors of the Surviving Corporation may, as a condition precedent to
the delivery thereof, require the owner of such lost, stolen or destroyed
Certificate or Option to provide to the Surviving Corporation a bond in favor of
the Surviving Corporation, from an issuer satisfactory to the Surviving
Corporation and in an amount equal to the value of the shares of Target's Stock
represented by such Certificate or value of such Option, as the case may be, at
the Effective Time or such other security as the Surviving Corporation shall
reasonably deem necessary, as indemnity against any claim that may be made
against the Surviving Corporation with respect to the Certificate or Option
alleged to have been lost, stolen or destroyed.
(d) Distribution of Reserved Per Share Amount. The Reserved
Per Share Amount shall be distributed as provided in the Escrow Agreement.
(e) Appointment of Shareholder Representatives. J. Fellman
Seinsheimer, III, Phillip E. Apgar, and Robert S. Lee are hereby appointed by
Target as Shareholder Representatives under the Escrow Agreement. Any vacancy
occurring in the position shall be filled by the remaining Shareholder
Representatives.
Section 2.4 No Further Rights. From and after the Effective Time, the
holders of Certificates shall cease to have any rights as stockholders of the
Surviving Corporation, except as provided herein or by law.
Section 2.5 Closing of Target's Stock Transfer Books. After the
Effective Time, there shall be no transfers on the stock transfer books of the
Surviving Corporation of any shares of Target's Stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation, they shall be canceled
and exchanged for the consideration payable pursuant to this Article 2.
8
<PAGE> 59
ARTICLE 3
CERTAIN AGREEMENTS
Section 3.1 Due Diligence. Acquisition shall have the right from the
date hereof and continuing until the Closing Date to inspect the books and
records and assets of Target and its subsidiaries listed on Schedule 4.1(f) (the
"Subsidiaries") and Target shall cooperate, and cause the Subsidiaries to
cooperate, with such investigation in accordance with Section 5.1(a) hereof.
Section 3.2 Communications With Agents, Employees or Policyholders.
Target shall not, and shall cause the Subsidiaries not to, communicate with any
insurance agents, employees or policyholders of the Subsidiaries regarding this
Agreement or the transactions contemplated herein, other than communications
that are approved by Acquisition or oral responses to unsolicited inquiries and,
with respect to communications with employees, those communications necessary in
connection with the consummation of the transactions contemplated by this
Agreement. Acquisition shall have the right to participate in the communications
permitted by this Section other than the oral responses to unsolicited
inquiries.
Section 3.3 Stockholder Approval. As soon as reasonably practicable,
Target shall send notice to its stockholders and conduct a stockholders meeting
or otherwise obtain stockholder approval for the Merger in accordance with
Section 222 of the GCL and any other applicable laws. Target shall permit
Acquisition to review all materials to be sent to Target's stockholders in
connection with obtaining such stockholder approval. All such materials and the
methods of solicitation shall be submitted to Parent for approval, which
approval shall not be unreasonably withheld. Subject to Section 3.4, Target
shall recommend to its stockholders that the stockholders approve the Merger.
Target shall from time to time notify Acquisition of the percentage of the
outstanding shares of Target's Stock as to which Target stockholders have
delivered notice pursuant to Section 262 of the GCL of their intent to demand
payment pursuant to their dissenters' rights and shall immediately notify
Acquisition if Target stockholders holding more than five percent of the
outstanding shares of Target's Stock deliver such notice.
9
<PAGE> 60
Section 3.4 No Solicitation by Target.
(a) No Solicitation by Target. Target shall not, nor shall it
permit any of the Subsidiaries to nor shall it authorize or permit any officer,
director, employee, investment banker, attorney or other advisor, agent or
representative of Target or any of the Subsidiaries to, directly or indirectly,
(i) solicit, initiate or encourage the submission of any Target Takeover
Proposal (as hereinafter defined), (ii) enter into any agreement with respect to
any Target Takeover Proposal, (iii) initiate any discussions or negotiations
regarding any proposal that constitutes, or may reasonably be expected to lead
to, any Target Takeover Proposal or (iv) except in response to an unsolicited
request, furnish any information with respect to the making of any proposal that
constitutes, or may reasonably be expected to lead to, any Target Takeover
Proposal. For purposes of this Agreement, a "Target Takeover Proposal" means (i)
any proposal or offer, other than a proposal or offer by Parent or any of its
Affiliates, for a merger or other business combination involving Target or one
or more of the Subsidiaries, (ii) any proposal or offer, other than a proposal
or offer by Parent or any of its Affiliates, to acquire from Target or any of
its Affiliates in any manner, directly or indirectly, more than 5% of the voting
stock of Target or the Subsidiaries or a material amount of the assets of Target
and the Subsidiaries, taken as a whole, or (iii) any proposal or offer, other
than a proposal or offer by Parent or any of its Affiliates, to acquire from the
stockholders of Target by tender offer, exchange offer or otherwise more than 5%
of Target's Stock.
(b) No Change of Approval. Neither Target, the Board of
Directors of Target nor any committee thereof shall (i) withdraw or modify, or
propose to withdraw or modify, in a manner adverse to Parent or Acquisition, the
approval or recommendation by Target, the Board of Directors of Target or any
such committee of this Agreement or the Merger or take any action having such
effect or (ii) approve or recommend, or propose to approve or recommend, any
Target Takeover Proposal. Notwithstanding the foregoing, if the Board of
Directors of Target receives an unsolicited Target Takeover Proposal that, in
the exercise of its fiduciary obligations (as determined in good faith after
consultation with outside counsel), it
10
<PAGE> 61
determines to be a Target Superior Proposal (as hereinafter defined), the Board
of Directors of Target may withdraw or modify its approval or recommendation of
this Agreement or the Merger and may (subject to the following sentence)
terminate this Agreement, in each case at any time after the fifth business day
following Parent's receipt of written notice (a "Target Notice of Superior
Proposal") advising Parent that the Board of Directors of Target has received a
Target Takeover Proposal that it has determined to be a Target Superior
Proposal, specifying the principal terms and conditions of such Target Superior
Proposal and identifying the person making such Target Superior Proposal. Target
may terminate this Agreement pursuant to the preceding sentence only if the
stockholders of Target shall not yet have voted upon the Merger. Nothing
contained herein shall prohibit Target from taking and disclosing to its
stockholders a position contemplated by Rule 14e-2(a) of the Securities Exchange
Act of 1934, as amended, provided that Target does not withdraw or modify its
position with respect to the Merger or take any action having such effect or
approve or recommend a Target Takeover Proposal. For purposes of this Agreement,
a "Target Superior Proposal" means any bona fide Target Takeover Proposal to
merge or combine with Target or to acquire, directly or indirectly, more than
50% of Target's Stock or of the Subsidiaries' voting stock then outstanding or a
material amount of the assets of Target and the Subsidiaries, taken as a whole,
on terms that the Board of Directors of Target determines in its good faith
reasonable judgment (based on the written advice of Philo Smith & Co., Inc. or
another financial advisor of nationally recognized reputation) to be more
favorable to Target's stockholders than the Merger.
(c) Termination Upon Change. If Target, the Board of Directors
of Target or any committee thereof shall (i) withdraw or modify, or propose to
withdraw or modify, in a manner adverse to Parent or Acquisition, the approval
or recommendation by Target, the Board of Directors of Target or any such
committee of this Agreement or the Merger or take any action having such effect,
(ii) approve or recommend, or propose to approve or recommend, any Target
Takeover Proposal, or (iii) otherwise breach the provisions of Section 3.4(a) or
(b), Parent and Acquisition may terminate this Agreement.
11
<PAGE> 62
(d) Notification by Target. In addition to the obligations of
Target set forth in Section 3.4(b), Target shall promptly advise Parent orally
and in writing of the receipt of any Target Takeover Proposal or any proposal,
discussion or overture that may lead to a Target Takeover Proposal.
(e) Breakup Fee Payable by Target. In the event Target, its
Board of Directors or a committee thereof shall (i) withdraw or modify, or
propose to withdraw or modify, in a manner adverse to Parent or Acquisition, the
approval or recommendation of approval of this Agreement or the Merger by Target
or its Board of Directors, or a committee thereof, or take any action having
such effect, (ii) approve or recommend, or propose to approve, recommend,
present or otherwise disclose in any manner to the Target stockholders
(including any recommendation, presentation, disclosure or approval contemplated
by Rule 14e-2(a) of the Securities Exchange Act of 1934, as amended), any
Target Takeover Proposal, or (iii) otherwise breach the provisions of Section
3.4(a) or (b), and either (x) the stockholders of Target do not approve the
Merger or (y) Target, Parent or Acquisition terminates this Agreement pursuant
to this Section 3.4, then Target shall immediately thereafter pay Acquisition a
fee of $1,000,000 in immediately available funds, which shall constitute the
sole remedy of Parent, Acquisition and any Affiliate of Parent with respect to
the matters described in this sentence.
(f) Termination Fee Payable by Parent. Parent agrees to pay to
Target a fee in immediately available funds of $1,000,000 in the event this
Agreement is terminated by Target pursuant to Section 8.1(f), which shall
constitute the sole remedy of Target and any Affiliate of Target with respect to
such termination.
(g) Termination Fee Payable by Target. Target agrees to pay to
Parent a fee in immediately available funds of $1,000,000 in the event this
Agreement is terminated by Acquisition pursuant to Section 8.1(b), which shall
constitute the sole remedy of Parent, Acquisition and any Affiliate of Parent
with respect to such termination.
12
<PAGE> 63
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
Section 4.1 Representations and Warranties of Target. Target
represents, warrants and, to the extent that an item relates to a future time
period, covenants to Parent and Acquisition as follows:
(a) Target Organization and Good Standing: Authority to
Conduct Business. Target is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware. Target has all
requisite corporate power and authority to carry on its businesses as presently
conducted and to own or lease and to operate its properties as currently
operated. The copies of the Certificate of Incorporation and all amendments
thereto and the Bylaws and all amendments thereto of Target, which have
heretofore been delivered, or promptly after the execution hereof will be
delivered, to Acquisition, are or will be, as the case may be, true and
complete. Target is not in violation of any term of its Certificate of
Incorporation or Bylaws.
(b) Power and Authority. Target has all requisite power and
authority to execute, deliver and perform this Agreement, the Certificate of
Merger and the Articles of Merger. The execution, delivery and performance by
Target of this Agreement, the Certificate of Merger and the Articles of Merger
have been duly authorized by all requisite corporate action on behalf of Target
and except for obtaining the approval of this Agreement by the stockholders of
Target, no other authorizations or approvals by the Board of Directors or
stockholders of Target are necessary to authorize this Agreement or to
consummate the transactions contemplated hereby. This Agreement constitutes
valid and legally binding obligations of Target enforceable against it in
accordance with its terms, except as enforceability may be limited by
bankruptcy, reorganization, insolvency, moratorium or other laws affecting
creditors rights generally and general principles of equity.
(c) No Conflicts. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby by Target in
accordance with the terms hereof, upon receipt of the
13
<PAGE> 64
consents and approvals contemplated by Section 4.1(d), will not violate any
existing provision of the Articles of Incorporation, Certificate of
Incorporation, Bylaws or any other organizational documents of Target or any
Subsidiary or of any law or violate any existing term or provision of any order,
writ, judgment, injunction or decree of any court or any other governmental
department, commission, board, bureau, agency or instrumentality applicable to
Target or any Subsidiary or conflict with or result in a breach of any of the
terms, conditions or provisions of any agreement to which Target or any
Subsidiary is a party, or by which any of their respective properties are bound,
or constitute an event that might permit an early termination of or otherwise
materially affect any such agreement.
(d) Consents and Approvals. Except as set forth on Schedule
4.1(d), no consent, license, approval, order or authorization of, or
registration, declaration or filing with, any governmental authority, agency,
bureau or commission, or any third party is required to be obtained or made by
Target or any Subsidiary in connection with the execution, delivery,
performance, validity and enforceability of this Agreement or the conversion of
the shares of Target's Stock.
(e) Capital Structure of Target. The authorized capital stock
of Target consists solely of 2,500,000 shares of Common Stock, par value
$3.33-1/3 per share, of which 1,962,410 shares are issued and outstanding (the
"Outstanding Target Shares") and 2,000,000 shares of Preferred Stock, par value
$1 per share, of which no shares are issued and outstanding. The Outstanding
Target Shares constitute the only issued and outstanding capital stock of
Target. All of the Outstanding Target Shares have been duly authorized and are
validly issued, fully paid and nonassessable, and except as set forth on
Schedule 4.1(e), there are no existing or outstanding securities convertible
into capital stock of Target, or options, warrants, calls, commitments, or
agreements, other than this Agreement, of any character that relate to the
authorization, issuance, delivery, sale, purchase or redemption by Target of
shares of capital stock of Target.
(f) Subsidiaries. The Subsidiaries are the only corporations,
partnerships, joint ventures or other entities in which Target owns directly or
indirectly a voting or other equity interest, other than
14
<PAGE> 65
issuers of securities held as Investment Assets (as defined in Section 4.1(ff)).
Except as set forth in Schedule 4.1(f), Target owns beneficially and of record
all of the outstanding capital stock of each Subsidiary. Except as set forth on
Schedule 4.1(f), there are no outstanding rights or options to acquire, nor any
outstanding securities convertible into capital stock of any class of any
Subsidiary. All of the issued and outstanding shares of capital stock of each
Subsidiary have been duly authorized and validly issued and are fully paid and
nonassessable. Except as set forth on Schedule 4.1(f), all such shares are free
and clear of any and all liens, charges, security interests and other
encumbrances and claims and none of such shares is the subject of any agreement
under which any such lien, charge, security interest or other encumbrance or
claim might arise. The copies of the Articles of Incorporation or Certificate of
Incorporation and all amendments thereto and of the Bylaws and all amendments
thereto of each Subsidiary, which have heretofore been delivered, or promptly
after the execution hereof will be delivered, to Acquisition, are or will be, as
the case may be, true and complete. No Subsidiary is in violation of any term of
its Articles of Incorporation or Certificate of Incorporation or Bylaws.
(g) Organization and Good Standing of Subsidiaries: Authority
to Conduct Business. Each of the Subsidiaries is a stock insurance company or a
corporation, duly organized, validly existing and in good standing under the
laws of the jurisdiction of incorporation as shown in Schedule 4.1(g). Each of
the Subsidiaries has all requisite corporate power and authority to carry on its
business as presently conducted and to own or lease and to operate its
properties as currently operated. Each of the Subsidiaries is duly licensed and
in good standing to write the lines of insurance and otherwise to do business in
the states and jurisdictions as set forth in Schedule 4.1(g) hereto. Target has
delivered, or promptly after the execution hereof will deliver, to Acquisition
correct and complete copies of all of the insurance licenses of the Subsidiaries
certified by the Secretary of Target, all of which are in full force and effect.
Each of the Subsidiaries has full power and authority to write all the lines of
insurance shown on the insurance licenses
15
<PAGE> 66
of such Subsidiary. Each of the Subsidiaries is not transacting any insurance or
reinsurance or other business in any state requiring a license therefor in which
it is not so licensed.
(h) Target Financial Statements. Target has delivered, or in
the case of the consolidated financial statements of Target and the Subsidiaries
for the year ended December 31, 1998, within 30 days after the execution hereof
will deliver, to Acquisition complete and correct copies of the audited
consolidated financial statements of Target and the Subsidiaries as of and for
the years ended December 31, 1996, 1997 and 1998, together with the notes
thereto and the reports thereon of Deloitte & Touche LLP (the "Audited Financial
Statements"). The Audited Financial Statements have been (and all additional
financial statements of Target delivered to Acquisition pursuant to this
Agreement will be), in each such case, prepared in accordance with generally
accepted accounting principles ("GAAP") applied on a consistent basis throughout
the periods involved. The Audited Financial Statements present fairly the
consolidated financial position, the assets and the liabilities of Target and
the Subsidiaries as of the respective dates thereof and the consolidated results
of operations and changes in stockholders' equity and cash flows for the
respective periods then ended, all in accordance with GAAP. Except as disclosed
in the Audited Financial Statements and reports delivered pursuant to this
Section, neither Target nor any of the Subsidiaries has any debts, obligations
or liabilities, contingent or otherwise, that could materially adversely affect
its financial condition.
(i) Target Undisclosed Liabilities. Other than as set forth in
Schedule 4.1(i), neither Target nor any Subsidiary has any liabilities, whether
absolute, accrued, contingent, matured, unmatured, or otherwise, except (i) as
and to the extent reflected or reserved against on the Audited Financial
Statements of Target and the Subsidiaries as of and for the year ended December
31, 1998, and (ii) liabilities of a nature similar to those currently reflected
on such financial statements and incurred by Target solely in the ordinary
course of business and consistent with prior practices, and, except for
liabilities incurred in connection with insurance polices and annuities, not in
the aggregate material, since the date of such financial statements.
16
<PAGE> 67
(j) Subsidiary Financial Statements. Target has delivered, or
promptly after the execution hereof will deliver to Acquisition, complete and
correct copies of (i) the Quarterly Statements of each of the Subsidiaries filed
with the Texas Department of Insurance (the "Texas Department") for the quarters
ended March 31, June 30 and September 30, 1998 (the "Quarterly Statements"),
(ii) the Annual Statements of each of the Subsidiaries filed with the Texas
Department for the years ended December 31, 1996, 1997 and 1998, together with
the exhibits and schedules thereto (the "Annual Statements"), and (iii) the
audited consolidated statutory financial statements of the Subsidiaries for the
years ended December 31, 1996, 1997 and 1998, together with the notes thereto
(the "Audited Statutory Statements"). The (i) statutory financial statements
(the "Statutory Statements") of each of the Subsidiaries contained in the Annual
Statements and the Quarterly Statements and any additional quarterly or annual
Statements of each of the Subsidiaries filed with the Texas Department and (ii)
Audited Statutory Statements and any additional audited financial statements of
each of the Subsidiaries delivered to Acquisition, have been (or, if not yet
delivered, will be), in each such case, prepared in accordance with Statutory
Accounting Principles ("SAP"), and such accounting practices have been applied
on a consistent basis throughout the periods involved. The Audited Statutory
Statements and each of the Statutory Statements present fairly the financial
position, the assets, and the liabilities of each of the Subsidiaries as of the
respective dates thereof and the results of operations and changes in capital
and surplus and in cash flows for the respective periods then ended, all in
accordance with SAP.
Since December 31, 1998, there has been no material adverse change in
the composition, nature or risk characteristics (credit quality or otherwise) of
the Subsidiaries' investment portfolio. Except as disclosed in Schedule 4.1(j),
the financial statements and reports delivered pursuant to this Section, or as
otherwise referred to in this Agreement, the Subsidiaries have no debts,
obligations or liabilities, contingent or otherwise, that could materially
adversely affect its financial condition.
All reserves, due and uncollected premiums and other related items with
respect to insurance contracts as established or reflected in the Statutory
Statements (i) were determined in accordance with
17
<PAGE> 68
commonly accepted actuarial standards consistently applied, (ii) were fairly
stated in accordance with sound actuarial principles, (iii) were based on
actuarial assumptions which produce reserves as great as those called for in any
contract provision as to reserve basis and method, and are in accordance with
all other contract provisions and the related reinsurance, coinsurance, and
other similar contracts, (iv) met the requirements of the insurance laws and
regulations of each applicable jurisdiction, and of the National Association of
Insurance Commissioners model regulations and actuarial guidelines, and all
appropriate standards of practice as promulgated by the Actuarial Standards
Board and (v) were computed on the basis of assumptions consistent with those
used in computing the corresponding items in the Statutory Statements for the
immediately preceding comparable period. Each of the Subsidiaries owns assets
that qualify as legal reserve assets under the insurance laws and regulations of
each applicable jurisdiction in an amount at least equal to all such required
reserves and other similar amounts.
(k) Litigation. Except as set forth in Schedule 4.1(k) hereto,
there is no judicial, administrative or regulatory action, proceeding,
investigation or inquiry or administrative charge or complaint pending or, to
the knowledge of any executive officer of Target, threatened, that might
materially adversely affect the condition (financial or otherwise), properties,
assets, liabilities, capitalization, ownership, business or operations of Target
or any Subsidiary (Target and the Subsidiaries each being sometimes individually
referred to herein as a "Company" and sometimes collectively referred to herein
as the "Companies"), or result in any liability on the part of any of the
Companies or in which there are claims for damages, or that might materially
adversely affect any registration or insurance license, or the value or
marketability of any of the insurance products of the Subsidiaries, or that
questions the validity of this Agreement or any action taken or to be taken by
any party pursuant hereto or in connection with the transactions contemplated
hereby.
(l) Real and Personal Property. Target has provided to Parent
and Acquisition a list and summary description of all real and, as of December
31, 1998, tangible personal property owned by each of the Companies, whether or
not used or proposed to be used in any of the Companies' business (which
18
<PAGE> 69
together with the additions and deletions thereto in the ordinary course of
business as permitted by this Agreement are hereinafter called the "Assets").
Each Company has, or prior to the Closing Date will have, good and indefeasible
title to the Assets owned by such Company, free and clear of all liens, security
interests and other encumbrances and claims or possible claims, except for
inchoate liens, liens for taxes not yet due, statutory liens as to which to the
knowledge of any executive officer of Target no dispute exists and those leases
and contracts set forth in Schedule 4.1(m). None of the Companies uses or
proposes to use any real or tangible personal property except as set forth in
Schedule 4.1(l) or covered by a lease set forth in Schedule 4.1(m). All of the
Assets are or will be, as the case may be, suitable for their intended use and
are in good condition and repair, subject to ordinary wear and tear. The Assets
constitute all of the real and tangible personal property necessary to conduct
the business of each of the Companies as presently conducted.
(m) Leases and Rental Contracts. Set forth in Schedule 4.1(m)
hereto is a list and summary description of all leases and contracts under which
any of the Companies leases, as lessor or lessee, or rents, any real or personal
property. All such leases and contracts are in full force and effect without any
existing default or breach thereunder.
(n) Contracts. Set forth in Schedule 4.1(n) hereto (with
Section references corresponding to those set forth below) is a complete and
correct list as of the date hereof of all written or oral agreements, contracts
and commitments, with an annual cost or benefit to any of the Companies of,
unless otherwise indicated, $50,000 or more (the "Contracts"), to which any of
the Companies is a party or by which any of the Companies is bound or otherwise
affected as of the date hereof (other than insurance contracts sold by the
Subsidiaries in the ordinary course of business or any agreements or contracts
listed on another schedule to this Agreement), including: (i) mortgages,
indentures, security agreements, loan and credit agreements and other agreements
and instruments relating to the borrowing of money or evidence of credit where
any of the Companies is debtor, (ii) agreements or other arrangements with
insurance agents and agencies and third party administrators pursuant to which
any of the Subsidiaries thereof has paid $100,000 or more in
19
<PAGE> 70
commissions or other consideration during the calendar year 1997 or 1998, (iii)
contracts for the provision of data-processing services, (iv) finder's,
franchise, distribution, sales or brokerage agreements, (v) contracts or options
to purchase or sell real property, (vi) contracts for the purchase of materials,
supplies or equipment, or for providing services, (vii) contracts, arrangements
or treaties with any party regarding reinsurance, excess insurance, ceding of
insurance, assumption of insurance, or indemnification with respect to insurance
currently being provided directly or indirectly by any Subsidiary or regarding
the management of any portion of its business or regarding the sale by it of its
products through any other company or the sale by any other company of its
products through it which have been entered into on or after January 1, 1998,
(viii) contracts with any entity that is an Affiliate of the Companies or with
any officer or director of any of the Companies or any officer or director of
any other entity that is an Affiliate of the Companies, or to the knowledge of
any executive officer of Target, any corporation controlled by such officer or
director, (ix) agreements and instruments representing loans or commitments to
loan to officers, directors, employees or agents (other than insurance agents)
of any of the Companies or of any entity that is an Affiliate of any of the
Companies, (x) contracts of any kind to which the United States government or
any of its agencies is a party, or under any federal, state or local law,
regulation or executive order, (xi) partnership or joint venture agreements of
any kind and (xii) other agreements, contracts and commitments. Target has
delivered or made available, or promptly after the execution hereof will deliver
or make available, to Acquisition complete and correct copies of all written
Contracts together with all amendments thereto and waivers and consents with
respect thereto. In addition, Target has made available, or promptly after the
execution hereof will make available, (i) all insurance policy forms used for
products currently marketed by each of the Subsidiaries in its business and that
are currently in force, and (ii) all forms of agreements or other arrangements
with insurance agents and agencies used by each Subsidiary in its business. All
of such Contracts are in full force and effect and each party thereto has
performed in all material respects all of the obligations required to be
performed by them to date and are not in default thereunder in any material
respect. No Contract to which
20
<PAGE> 71
any of the Companies is a party, or by which any of the Companies or any of its
respective properties is bound, specifically limits any of the Companies'
freedom to compete in any line of business or with any person or entity. None of
the Companies has outstanding any power of attorney other than customary in the
insurance industry to permit agents to execute binders. All contracts,
arrangements or treaties to which any of the Companies is a party regarding
reinsurance, excess insurance, ceding of insurance, assumption of insurance or
indemnification with respect to insurance are either listed on Schedule 4.1(n)
hereto or are listed on Schedule F to each Subsidiary's annual statement filed
with the Texas Department with respect to the year ended December 31, 1998.
(o) Compliance with Other Instruments and Laws. None of the
Companies is in violation of any term of their respective charters, articles of
incorporation, certificate of incorporation, bylaws, or of any mortgage,
indenture, instrument or agreement relating to indebtedness for borrowed money
or regulatory filing or undertaking of or affecting it or of any judgment,
decree or order in which any such Company is named, or in any violation in any
material respect of any term of any other instrument, contract or agreement, or
of any statute, law, ordinance, rule, governmental regulation, permit,
concession, grant, franchise, license or other governmental authorization or
approval applicable to it or any of its respective properties. All insurance
licenses referred to in Schedule 4.1(g) hereto and all permits, concessions,
grants, franchises, other licenses and other governmental authorizations and
approvals necessary for the conduct of the business of each of the Companies
have been duly obtained and are in full force and effect, and, except as set
forth in Schedule 4.1(p), there are no proceedings pending or, to the knowledge
of any executive officer of Target, threatened, that may result in the
revocation, cancellation, or suspension, or any adverse modification, of any
thereof. The execution, delivery and performance of, and compliance with, this
Agreement, and the consummation of the transactions contemplated hereby by
Target in accordance with the terms hereof, will not result in any such
violation or be in conflict with or result in any default under any of the
foregoing referred to in this Section 4.1(o), or result in the creation of any
mortgage, pledge, lien, charge or
21
<PAGE> 72
encumbrance upon any of the properties or assets of any of the Companies or the
loss, revocation, cancellation, suspension or modification of any insurance
license listed in Schedule 4.1(g) hereto, other licenses or material contractual
rights held by any of the Companies pursuant to any of the foregoing or result
in any such revocation, cancellation, suspension or modification.
(p) Regulatory Filings. The Companies have filed or otherwise
provided all reports, data, other information and applications (collectively,
the "Filings") required to be filed with or otherwise provided to the Texas
Department, the Securities and Exchange Commission and all other federal, state
or local governmental authorities (including, without limitation, insurance
departments) with jurisdiction over any of the Companies and all required
regulatory approvals in respect thereof are in full force and effect on the date
hereof. All Filings are true and correct in all material respects, and no Filing
contains any untrue statement of a material fact or fails to state a material
fact necessary to make the Filings and the statements made therein not
misleading except as has been corrected in a later filing made prior to the date
of this Agreement. The Companies have complied in all material respects with all
filing requirements. Target has furnished or made available, or promptly after
the execution hereof will furnish or make available, to Acquisition complete and
correct copies of (i) the most recent reports of examination issued by state
insurance regulatory authorities in respect of each of the Subsidiaries, (ii)
the most recent insurance holding company registrations and annual reports filed
with respect to each of the Subsidiaries, (iii) all other regulatory filings by
any of the Companies and (iv) all complaints filed by any regulatory agency and
other regulatory proceedings initiated or pending with respect to any of the
Companies at any time within the preceding five years. Except as described in
Schedule 4.1(p), since December 31, 1997, no deficiencies material to the
financial condition or operations of any of the Companies have been asserted by
any state regulatory authorities with respect to any reports or filings made by
or with respect to any of the Companies. Target has furnished to Acquisition
copies of all written responses submitted by each of its Subsidiaries (i) in
respect of the most recent examination report of each of its Subsidiaries made
by a state insurance regulatory authority and (ii) to the National Association
22
<PAGE> 73
of Insurance Commissioners regarding each Subsidiary's Insurance Regulatory
Information System (IRIS) ratings. Each of the Companies on the Closing Date
will have substantially completed, in the ordinary course of its business,
consistent with its past practices and to the extent practicable, the
preparation of all reports, data, other information and applications that it
will be required to file with any federal, state or local governmental authority
(including, without limitation, insurance departments) within 60 days following
the Closing Date and such unmade filings will be in form and substance
sufficient to enable the Companies to complete and make such filings on a timely
basis following the Closing Date.
(q) Absence of Certain Changes. Other than as set forth in
Schedule 4.1(q), since September 30, 1998, none of the Companies has (i) issued,
sold or delivered or agreed to issue, sell or deliver any additional shares of
its capital stock or any options, warrants or rights to acquire any such capital
stock, or securities convertible into or exchangeable for such capital stock,
(ii) incurred any obligations or liabilities, whether absolute, accrued,
contingent or otherwise (including, without limitation, liabilities as guarantor
or otherwise with respect to obligations of others), other than obligations and
liabilities relating to the issuance of insurance policies in the ordinary
course of each Subsidiary's business, or incurred in the ordinary course of
Target's or the Companies' business, or obligations and liabilities otherwise
reflected on financial statements delivered to Acquisition, (iii) mortgaged,
pledged or subjected to any lien, lease, security interest or other charge or
encumbrance, any of its assets, tangible or intangible, (iv) acquired or
disposed of any assets or properties, or entered into any agreement or other
arrangements for any such acquisition or disposition, except for assets acquired
or disposed of in the ordinary course of business, (v) declared, made, paid or
set apart any sums for any dividend or other distribution to its stockholders or
any other Affiliate or purchased or redeemed any shares of its capital stock or
granted any option, warrant or right to purchase any such capital stock, or
reclassified such capital stock, (vi) paid or become obligated to pay any
service fees or other sums to Target or any of its Affiliates, (vii) forgiven or
canceled any debts or claims or waived any statutory, contractual or common law
rights of material value, (viii) entered into any transaction other than
23
<PAGE> 74
in the ordinary course of business, (ix) granted any rights or licenses under
any of their respective trade names or entered into general agency arrangements,
(x) other than renewals in the ordinary course of business, entered into any
agreement regarding reinsurance, surplus relief obligations, excess insurance,
ceding of insurance, assumption of insurance or indemnification with respect to
insurance or management of business, (xi) suffered any adverse change in their
respective operations, financial condition, income, assets or liabilities, (xii)
suffered any damage, destruction or loss, whether or not covered by insurance or
reinsurance, materially adversely affecting, in any case or in the aggregate,
their respective businesses, financial condition, properties or assets or (xiii)
suffered any strike, picketing, boycott or other labor trouble materially
adversely affecting their respective businesses, financial condition or
operations.
(r) Taxes. For the purposes of this Agreement, the term
"taxes" shall include all federal, state, local and foreign taxes, fees and
other governmental charges of any nature (including without limitation, premium
taxes), and interest and penalties with respect thereto, and any payment
required under any tax allocation or sharing agreement. Except as set forth in
Schedule 4.1(r): (i) all tax and information returns and reports of each of the
Companies and of any member of any affiliated group of corporations (within the
meaning of section 1504 of the Internal Revenue Code of 1986, as amended (the
"Code"), as in effect at the time of the due date for the filing of such returns
and reports) of which any of the Companies is or was a member required by law to
be filed (taking into account all extensions) have been timely filed, and are
correct and complete in all material respects; (ii) all taxes upon each of the
Companies or for which any of the Companies may be liable, or in respect of any
of the assets, income or franchises of any of the Companies, have been paid by
such Company or have been paid on such Company's behalf, or adequate accruals,
reserves and provisions have been established on the books of the Companies for
the payment of such taxes; (iii) there are no tax liens upon any of the
properties or assets of any of the Companies, except for ad valorem taxes not
yet delinquent, taxes (other than ad valorem taxes) not yet due and payable, and
taxes the validity of which are being contested in good faith and for which
adequate reserves have been provided: (iv) no foreign,
24
<PAGE> 75
federal, state, local or other taxing authority has provided any of the
Companies or any member of any affiliated group of corporations of which any of
the Companies is or was a member with any written notice of any audit,
investigation, proceeding or claim with respect to any taxes for which any of
the Companies may be liable; (v) none of the Companies nor any member of any
affiliated group of corporations (as defined above) of which any of the
Companies is or was a member has granted any waiver of any statutes of
limitations applicable to any claim for taxes which has not expired or has
agreed to any extension of time with respect to any tax assessment or deficiency
for taxes for which any of the Companies may be liable which has not expired;
(vi) all taxes that any of the Companies is required by law to withhold or
collect have been withheld or collected and, to the extent required, have been
paid over to the proper governmental authorities in a timely manner; (vii) none
of the returns filed by or on behalf of any of the Companies is currently being
audited by any federal, state, local, foreign or other taxing authority; (viii)
the accruals and reserves for taxes (A) reflected in the Target Financial
Statements are adequate to cover all liabilities for all accrued or unpaid taxes
for which each of the respective Companies has any liability or, as to contested
claims, any reasonably estimated liability for taxes relating to such claims
with respect to the periods covered thereby, and (B) established or to be
established on the books of each of the Companies for the period beginning
October 1, 1998, through the Effective Time will be adequate to cover all such
liabilities and reasonably estimated liabilities with respect to such period,
all in accordance with GAAP applied on a consistent basis throughout the periods
involved; (ix) all ceding commissions paid or accrued by any Subsidiary (for any
period as to which any applicable statute of limitations remains open) in
connection with any reinsurance, coinsurance, or other similar contract have
been capitalized and amortized over the respective life of each such contract in
accordance with all applicable tax laws; (x) none of the Companies is a party to
or bound by any tax indemnity, tax sharing, tax allocation or similar
agreements; (xi) all material elections with respect to taxes affecting each of
the Companies are set forth in Schedule 4.1(r); (xii) none of the Companies is a
party to any agreement, contract, arrangement or plan that has resulted or could
result, separately or in the aggregate, in
25
<PAGE> 76
the payment of any "excess parachute payments" within the meaning of Section
280G of the Code; and (xiii) none of the Companies has nor has had a permanent
establishment in any foreign country, as defined in any applicable tax treaty or
convention between the United States and such foreign country.
(s) Insurance Policies. Set forth in Schedule 4.1(s) hereto is
a complete and correct list as of the date hereof of the insurance policies
maintained by or for the benefit of any of the Companies or their Affiliates or
other officers or directors. Such policies are in full force and effect, all
premiums due thereon have been paid and the insured has complied in all material
respects with the provisions of such policies.
(t) Transactions with Interested Persons. Except as set forth
on Schedule 4.1(t), no officer, director, employee, agent or broker (or spouse
or any child thereof) of any of the Companies, or of any corporation that is an
Affiliate of any of the Companies, owns, directly or indirectly, on an
individual or joint basis, any material interest in, or serves as an officer,
employee or director of, any customer, insurance agency, competitor or supplier
of any of the Companies or any person or entity that has a material contract or
arrangement, including, without limitation, any employment or severance
agreement, with any of the Companies.
(u) Bank and Brokerage Accounts. Target has provided, or
promptly hereafter shall provide, Acquisition with a complete and accurate list
of each bank or trust company, other financial institution, mutual fund or stock
brokerage firm in which each of the Companies has an account or safe deposit box
and each custodial account maintained by each of the Companies and, in each
case, the names of such accounts, the account numbers and the names of all
persons authorized to draw thereon or to have access thereto. Target has
provided, or promptly hereafter shall provide, Acquisition with a complete and
accurate list of all credit cards issued to any present or past officer,
employee or agent of any of the Companies under which any of the Companies has
any current or potential future liability.
26
<PAGE> 77
(v) Disclosure. Neither this Agreement nor any written
document, statement, list, schedule, exhibit, certificate or other instrument
furnished or to be furnished to Acquisition or Parent by or on behalf of any of
the Companies in connection with the transactions contemplated hereby contains
or will contain when made or delivered any untrue statement of a material fact,
or fails to state or will fail to state when made or delivered a material fact
necessary to make the statements contained herein and therein not misleading.
There is no fact known to any executive officer of Target that materially
adversely affects, or in the future may materially adversely affect, the
condition (financial or otherwise) of properties, assets, liabilities,
capitalization, ownership, business or operations of any of the Companies, other
than any fact that affects the property and casualty insurance industry
generally.
(w) Employee Benefit Plans.
(i) List of Plans. Schedule 4.1(w) includes a
complete and accurate list of all, whether written or oral, employee benefit
plans ("Plans") as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") and compensation and benefit
arrangements, whether written or oral, other than Plans for base compensation of
employees and de minimis fringe benefits ("Benefit Arrangements"), including,
but not limited to any (A) employment or consulting agreements, (B) incentive
bonus or deferred bonus arrangements, (C) arrangements providing termination
allowance, severance or similar benefits, (D) equity compensation plans, (E)
deferred compensation plans, (F) cafeteria plans, (G) employee assistance
programs, (H) bonus programs, (I) scholarship programs, (J) vacation policies,
and (K) stock option plans that (1) are currently in effect or were maintained
within three years of the Effective Time, or have been approved before the
Effective Time but are not yet effective, for the benefit of directors,
officers, employees, former employees, independent contractors or former
independent contractors (or their beneficiaries) of any of the Companies or (2)
with respect to which any of the Companies has or could in the future have a
liability or obligation ("Designated Plans"). Schedule 4.1(w) indicates, with
respect to each Designated Plan, whether the Designated Plan is active, frozen
or terminated.
27
<PAGE> 78
(ii) No Multiemplover Pension Plans. Neither any
Company nor any entity (whether or not incorporated) that was at any time during
the six years before the Effective Time treated as a single employer together
with any Company under section 414 of the Code has ever maintained, had an
obligation to contribute to, or incurred any liability with respect to a
multiemployer pension plan as defined in Section 4001(a)(3) of ERISA.
(iii) No Title IV Plans. Except as listed on Schedule
4.1(w), neither any Company nor any entity (whether or not incorporated) that
was at any time during the three years before the Effective Time treated as a
single employer together with any Company under section 414 of the Code has ever
maintained, or had an obligation to contribute to, or incurred any liability
with respect to any plan subject to Title IV of ERISA.
(iv) Plan Documents. With respect to each Designated
Plan, Target has made available to Acquisition, as applicable, true and complete
copies of (A) all written documents comprising such Plan or Benefit Arrangement
(including amendments and individual agreements relating thereto); (B) the
trust, group annuity contract or other document that provides for the funding of
the Designated Plan or the payment of Designated Plan benefits; (C) the three
most recent annual Form 5500 reports (including all schedules thereto) filed
with respect to the Designated Plan; (D) the most recent actuarial report,
valuation statement or other financial statement; (E) the most recent Internal
Revenue Service ("IRS") determination letter; (F) the summary plan description
currently in effect and all material modifications thereto; and (G) all other
correspondence from the IRS or Department of Labor received that relate to one
or more of the Designated Plans with respect to any matter, audit or inquiry
that is still pending.
(v) Compliance with Law. The Companies have operated
each Designated Plan in a manner that is in substantial compliance with the
terms thereof, with ERISA and with all other applicable laws, regulations and
administrative agency rulings and requirements applicable thereto to the extent
that failure to do so would not have a material adverse effect on the Companies.
Except as otherwise disclosed
28
<PAGE> 79
in Schedule 4.1(w), with respect to each Designated Plan that is a Plan, there
has been no transaction described in section 406 or 407 of ERISA or section 4975
of the Code relating to the Plan unless exempt under section 408 of ERISA or
section 4975 of the Code, as applicable.
(vi) Contributions and Plan Assets. Payment as may be
required under the terms of each Designated Plan or under the Code has been made
of all amounts which the Companies are required, under applicable law or under
any Designated Plan or any agreement related to any Designated Plan to which the
Company is a party, to have paid as contributions thereto as of the last day of
the most recent fiscal year of each Designated Plan ended prior to the date
hereof and except as disclosed on Schedule 4.1(w), all payments and
contributions for benefits earned under any Designated Plan through the date
hereof but not paid are set forth on the most recent financial statements of the
Companies. Benefits under all Designated Plans are as represented in the
governing instruments providing pursuant to (i) above, and have not been
increased subsequent to the date as of which documents have been provided.
(vii) Determination Letters. Each Designated Plan, as
amended to date, that is intended to be qualified under sections 401(a) and
501(a) of the Code has been determined to be so qualified by the IRS, has been
submitted to the IRS for a determination with respect to such qualified status
or the remedial amendment period established under Section 401(b) of the Code
with respect to the Designated Plan will not have expired prior to the Effective
Time.
(viii) Tax or Civil Liability. None of the Companies
have participated in, or is aware of any conduct that could result in the
imposition upon it of any excise tax under sections 4971 through 4980B of the
Code or civil liability under Section 502(i) of ERISA with respect to any
Designated Plan.
(ix) Claims Liability. There is no action, claim or
demand of any kind (other than routine claims for benefits) that has been
brought or, to the knowledge of any executive officer of Target, threatened
against, or relating to, any Designated Plan, and no executive officer of Target
has knowledge of any pending investigation or administrative review by any
governmental agency relating to any Designated Plan.
29
<PAGE> 80
(x) Retiree Medical Coverage. Except as set forth in
Schedule 4.1(w), no Designated Plan provides any medical coverage to employees
or independent contractors of any Company beyond termination of their employment
with the Company by reason of retirement or otherwise, other than coverage as
may be required under section 4980B of the Code or Part 6 of ERISA, or under the
continuation of coverage provisions of the laws of any state or locality.
(x) Employees. Set forth in Schedule 4.l(x) hereto is
a list of all employees, agents (other than insurance agents), consultants and
similar persons retained by each of the Companies together with their present
rate of compensation (including bonuses) and a description of any existing or
proposed written or oral agreements with any of them regarding such employment
or engagement, other than agreements described in Schedule 4.1(w) hereto. None
of the Companies is a party to any collective bargaining or other labor union
contract applicable to persons employed by such Company. No Company has breached
or otherwise failed to comply in any material respect with any provision of any
such agreement or contract and there are no formally filed grievances
outstanding against any Company or, to the knowledge of any executive officer of
Target, threatened, against any Company, under any such agreement or contract.
There are no unfair labor practice complaints pending or, to the knowledge of
any executive officer of Target, threatened, against any of the Companies nor
any judicial or regulatory proceeding, investigation or inquiry or employee
complaint currently pending or, to the knowledge of any executive officer of
Target, threatened, against any of the Companies relating to union
representation or otherwise. No executive officer of Target knows of any current
activities or proceedings of any labor union (or representatives thereof) to
organize any unorganized employees of any of the Companies, nor of any strikes,
slowdowns, work stoppages, lockouts or written threats thereof, by or with
respect to any employees of any of the Companies. During the past five years,
there have not been any formally filed grievances involving employees of any of
the Companies.
30
<PAGE> 81
(y) Intellectual Property. To the knowledge of any executive
officer of Target, there are no United States or foreign patents or patent
applications needed by any of the Companies to operate their respective
businesses. Set forth in Schedule 4.l(y) hereto is a complete list and summary
description of all trademarks, trade names, service marks, copyrights (whether
registered or as to which registration has been applied for in any jurisdiction)
and fictitious names relating to the business of each of the Companies and all
common law trademarks and trade names used by each of the Companies, none of
which is owned by or licensed to anyone other than the Companies. To the
knowledge of any executive officer of Target , except as set forth in Schedule
4.1(y), there is no existing or, to the knowledge of any executive officer of
Target, threatened infringement, misuse or misappropriation by others or pending
or threatened claims by any of the Companies against others for infringement,
misuse or misappropriation of any patent, trademark, trade name, fictitious
name, copyright, trade secret or know-how relating to the business of any of the
Companies.
(z) Brokers. All activities of the Companies relating to this
Agreement and the transactions contemplated hereunder have been carried on by
the Companies in such manner so as not to give rise to any valid claim by any
person for a finder's fee, brokerage commission or other like payment, except
for the fee payable by Target to Philo Smith & Co. (Bermuda) Ltd.
(aa) Surplus Relief. At December 31, 1998, each Subsidiary was
not, currently is not and on the Closing Date will not be, subject to any
surplus relief obligations or reinsurance contracts or arrangements involving
financings or otherwise.
(ab) Insurance Issued by Subsidiaries.
(i) All insurance benefits payable by each Subsidiary
and, to the knowledge of any executive officer of Target, by any other person
that is a party to or bound by any reinsurance, coinsurance, or other similar
contract with such Subsidiary have been paid in accordance with the terms of the
insurance contracts under which they arose or are adequately reserved for.
31
<PAGE> 82
(ii) All insurance contracts offered, issued,
reinsured or underwritten by any Subsidiary have been duly approved under all
applicable insurance laws and regulations and have been adequately reserved for
as prescribed under such laws and regulations.
(iii) The respective underwriting standards utilized
and ratings applied by any Subsidiary and, to the knowledge of any executive
officer of Target, by any other person that is a party to or bound by any
reinsurance, coinsurance or other similar contracts with any Subsidiary conform
in all material respects to industry-accepted practices and to the standards and
ratings required pursuant to the terms of the respective reinsurance,
coinsurance, or other similar contracts.
(iv) All amounts (including without limitation
amounts based on paid and unpaid losses) to which any Subsidiary is entitled
under reinsurance, coinsurance, assumption fronting or other similar contracts
by which any Subsidiary insures, or is insured by, a third person against loss
or liability from risks assumed, are fully collectible.
(v) To the knowledge of any executive officer of
Target, each insurance agent or general agent, at the time such agent offered,
wrote, sold or produced business for any Subsidiary, was duly licensed as an
insurance agent for the business offered, written, sold or produced by such
agent in the particular jurisdiction in which such agent offered, wrote, sold or
produced such business for any Subsidiary and other than as set forth on
Schedule 4.l(bb)(v), no such insurance agent, general agent or any group of
affiliated agents has written 5% or more of any Subsidiary's total in-force
insurance business.
(vi) To the knowledge of any executive officer of
Target, no insurance agent of any Subsidiary has violated (or with or without
notice or lapse of time or both, will or would have violated) any term or
provision of any law or any writ, judgment, decree, injunction or similar order
applicable to, or engaged in any misrepresentation with respect to, the writing,
sale or production of business for any Subsidiary.
32
<PAGE> 83
(ac) Computer Software. Set forth on Schedule 4.1(cc) hereto
is a complete and correct list and summary description of all computer hardware,
software, programs and similar systems owned by or licensed to each of the
Companies or being utilized in connection with the business, operations or
affairs of any of the Companies. To the knowledge of any executive officer of
Target, the computer hardware, software, programs and similar systems set forth
on Schedule 4.1(cc) hereto are all of the computer hardware, software, programs
and similar systems necessary to enable each of the Companies to conduct their
respective businesses as presently conducted. Each of the Companies has to the
knowledge of any executive officer of Target, and at all times after Closing
will have, the right to use, free and clear of any royalty or other payment
obligations (except as disclosed in Schedule 4.1(cc)), claims of infringement or
alleged infringement or other liens all computer hardware, software, programs
and similar systems disclosed in Schedule 4. l(cc) hereto. To the knowledge of
any executive officer of Target, none of the Companies is in conflict with or in
violation or infringement of, nor has any of the Companies received any notice
of any conflict with or violation or infringement of or any claimed conflict
with, any asserted rights of any other person with respect to any computer
hardware, software, programs, or similar systems, including without limitation
any such item disclosed on Schedule 4.1(cc) hereto.
(ad) Books and Records. The minute books and other similar
records of each of the Companies contain a complete and correct record, in all
material respects, of all actions taken at all meetings and by all written
consents in lieu of meetings of the stockholders and board of directors of each
of the Companies, respectively and of each committee thereof. The books and
records of each of the Companies accurately reflect in all material respects the
business or condition of each of the Companies, respectively, and have been
maintained in all material respects in accordance with good business and
bookkeeping practices.
33
<PAGE> 84
(ae) No Investment Company. None of the Companies is, and none
of the Companies has registered as, an investment company within the meaning of
the Investment Company Act of 1940, as amended.
(af) Investment Portfolio. Target has provided Acquisition
with a complete and correct list as of December 31, 1998 of all stocks, notes,
debentures, bonds, mortgage loans, policy loans and other securities and
investments owned of record or beneficially by any Subsidiary, which as of such
date constituted the entire investment portfolio of each Subsidiary (which
portfolio with additions and deletions thereto in the ordinary course of
business as permitted by this Agreement is hereafter called the "Investment
Assets"). The Subsidiaries have good and indefeasible title to the Investment
Assets, and all of the Investment Assets are in compliance with the requirements
of all applicable laws and insurance regulations. As of the Closing, the
Subsidiaries' investment portfolio shall consist of the Investment Assets, and
the Subsidiaries shall own and have good and indefeasible title to the
Investment Assets.
(ag) Discussions with Regulators. Except as described in
Schedule 4.1(p), since September 30, 1998, no employee, agent or representative
of any of the Companies has had any discussions or communications with any
regulators regarding an adverse change in any of the Companies' condition
(financial or otherwise) or regarding a material breach of market conduct
requirements of any of the Companies.
(ah) Environmental Matters. Except as disclosed on Schedule
4.1(hh):
(i) All material permits, licences and other
authorizations required under the Environmental Laws as of the date hereof for
the operation of all real property owned or leased by the Companies have been
obtained or applied for, and the Companies are in compliance in all material
respects with the terms and conditions thereof, except where the failure to
obtain, apply for or comply with any such permit or terms and conditions thereof
would not singly and in the aggregate have a material adverse effect.
34
<PAGE> 85
(ii) None of the Companies as of the date hereof has
failed to substantially comply with any Environmental Laws except for
violations, if any, which singly or in the aggregate would not have a material
adverse effect.
(iii) None of the Companies, and to the knowledge of
any executive officer of Target, no other person has released, placed, stored,
buried or dumped any Hazardous Substance on or beneath the real properties owned
or leased by the Companies, the existence of which requires the Companies to
implement corrective actions under Environmental Law and would have a material
adverse effect.
(iv) None of the Companies has received any written
or, to the knowledge of any executive officer of Target, oral notice or order
from any governmental agency or private or public entity advising it that it is
responsible for or potentially responsible for cleanup or remediation of any
Hazardous Substances and none of the Companies has entered into any written
agreements concerning such cleanup.
(v) There is no Environmental Claim pending or, to
the knowledge of any executive officer of Target, threatened against any of the
Companies or, to the knowledge of any executive officer of Target, against any
other person or entity whose liability for any Environmental Claim any Company
has retained or assumed either contractually or by operation of law, which
singly or in the aggregate would have a material adverse effect.
(vi) There are no past or present actions,
activities, circumstances, conditions, events or incidents (including, without
limitation, the release, emission, discharge, presence or disposal of any
Hazardous Substance) which would form the basis of any Environmental Claim
against any of the Companies, or, to the knowledge of any executive officer of
Target, against any other person or entity whose liability for any Environmental
Claim any Company has retained or assumed either contractually or by operation
of law, which singly or in the aggregate would have a material adverse effect.
(vii) Target has delivered or otherwise made
available for inspection to Acquisition true, complete and correct copies of any
reports, studies, analyses, tests or monitoring possessed or initiated
35
<PAGE> 86
by any of the Companies pertaining to Hazardous Substances in, on, or beneath or
adjacent to the real properties owned or leased by the Companies or regarding
any Company's compliance with applicable Environmental Laws.
(viii) No transfers of permits or other governmental
authorizations under Environmental Laws will be required to permit Acquisition
to conduct the business of the Companies in substantial compliance with all
applicable Environmental Laws immediately following the Closing, as conducted by
the Companies immediately prior to the Closing. To the extent that transfers or
additional permits and other authorizations are required, Target agrees to
cooperate with Acquisition to effect such transfers and obtain such permits and
other authorizations prior to the closing.
(ix) For purposes of this Section 4.1(hh), the
following terms shall have the definitions set forth below:
(A) "Environmental Law" means all foreign,
federal, state and local laws, regulations, rules and ordinances as in effect on
the Closing Date relating to pollution or protection of human health or the
environment, including, without limitation, laws in effect on the Closing Date
relating to releases or threatened releases of Hazardous Substances into the
environment or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, release, transport or handling of Hazardous Substances,
and all laws and regulations with regard to record keeping, notification,
disclosure and reporting requirements respecting Hazardous Substances.
(B) "Hazardous Substances" means all
substances defined as hazardous substances, oils, pollutants or contaminants in
the National Oil and Hazardous Substances Pollution Contingency Plan, 40 C.F.R.
ss. 300.5, in effect on or before the Closing Date or defined as such by, or
regulated as such under, any Environmental Law.
(C) "Environmental Claim" means any written
claim, action, investigation of which any executive officer of Target has
knowledge, notice or cause of action, by any person or entity
36
<PAGE> 87
alleging potential liability (including, without limitation, potential liability
for investigatory costs, cleanup costs, governmental response costs, natural
resources damages, property damages, personal injuries, or penalties) arising
out of, based on or resulting from (x) the presence, or release into the indoor
or outdoor environment, of any Hazardous Substance at any location, whether or
not owned or operated by any of the Companies or (y) circumstances forming the
basis of any violation or alleged violation, of any Environmental law.
(ai) Year 2000 Issues. The status of Target's preparation for
so-called "Year 2000 Issues" is as set forth in Schedule 4.1(ii) hereto.
Section 4.2 Representations and Warranties of Parent and Acquisition.
Each of Parent and Acquisition represents, warrants and, to the extent that an
item relates to a future time period, covenants to Target as follows:
(a) Organization and Good Standing. Each of Parent and
Acquisition is an Iowa corporation, validly existing and in good standing under
the laws of the State of Iowa.
(b) Power and Authority. Each of Parent and Acquisition has
all requisite power and authority to execute, deliver and perform this Agreement
and any other agreements or instruments contemplated hereby to be executed by
it. The execution, delivery and performance by Parent and Acquisition of this
Agreement and any other agreements or instruments contemplated hereby to be
executed by Parent and Acquisition have been duly authorized by all requisite
action on behalf of Parent and Acquisition and, except for obtaining the
approval of this Agreement by Parent (which approval Parent shall give prior to
the Closing Date), no other authorization or approval by the Board of Directors
or stockholders of Parent or the Board of Directors or stockholder of
Acquisition or any other Affiliate of Parent is necessary to consummate the
transactions contemplated hereby. This Agreement constitutes, and each other
agreement contemplated hereby to be executed by Parent or Acquisition will
constitute when executed and delivered, a valid and legally binding obligation
of Parent and Acquisition enforceable against them in accordance with their
37
<PAGE> 88
respective terms, except as enforceability may be limited by bankruptcy,
reorganization, insolvency, moratorium or other laws affecting creditors rights
generally and general principles of equity.
(c) No Conflicts. The execution and delivery of this Agreement
and any other agreements and instruments contemplated hereby by Parent and
Acquisition and the consummation of the transactions contemplated hereby, in
accordance with the terms hereof and thereof, upon receipt of the consents and
approvals contemplated by Section 4.2(d), will not violate any existing
provision of the Articles of Incorporation, Bylaws or other organizational
documents of Parent or Acquisition or of any law or violate any existing term or
provision of any order, writ, judgment, injunction or decree of any court or any
other governmental department, commission, board, bureau, agency or
instrumentality applicable to either Parent or Acquisition or conflict with or
result in a breach of any of the terms, conditions or provisions of any
agreement to which Parent or Acquisition is a party, or by which any of their
respective properties are bound, or constitute an event that might permit an
early termination of or otherwise materially affect any such agreement.
(d) Consents and Approvals. No consent, license, approval,
order or authorization of, or registration, declaration or filing with, any
governmental authority, agency, bureau or commission or any third party is
required to be obtained or made by Parent or Acquisition, in connection with the
execution, delivery, performance, validity, and enforceability of this
Agreement, except for (i) filings to be made with, and approvals to be obtained
from, the Texas Department, the Iowa Insurance Department and the insurance
departments of other states or jurisdictions, (ii) filings under the pre-merger
notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of
1976 ("HSR") and (iii) registrations, declarations or filings required to be
made subsequent to the Closing Date with any governmental entity or third party
not entailing any requirement of consent, license, approval, order or
authorization on the part of such governmental entity or third party.
38
<PAGE> 89
(e) Disclosure. Neither this Agreement nor any written
document, statement, list, schedule, exhibit, certificate or other instrument
furnished or to be furnished to Target by or on behalf of Parent or Acquisition
in connection with the transactions contemplated hereby contains or will contain
when made or delivered any untrue statement of a material fact, or fails to
state or will fail to state when made or delivered a material fact necessary to
make the statements contained herein and therein not misleading. There is no
fact known to any executive officer of Parent or Acquisition that materially
adversely affects, or in the future may materially adversely affect, the
condition (financial or otherwise), properties, assets, liabilities,
capitalization, ownership, business or operations of Parent or Acquisition.
(f) Brokers. All activities of Parent and Acquisition and any
Affiliate of Parent relating to this Agreement and the transactions contemplated
hereunder have been carried on by such person in such manner so as not to give
rise to any valid claim by any person against Target for a finder's fee,
brokerage commission or other like payment, except for the fee payable by Target
to Philo Smith & Co. (Bermuda) Ltd.
ARTICLE 5
COVENANTS
Section 5.1 Covenants of Target. From the date hereof through the
Closing Date, Target will and will cause the Subsidiaries to:
(a) Access to Information. Upon reasonable notice, give
Acquisition and its attorneys, accountants, agents and representatives full
access at all mutually agreeable times to all the properties, books, records,
contracts, commitments, employee benefit plans, documents, instruments and other
records of or pertaining to each of the respective Companies and permit
Acquisition and its attorneys, accountants, agents and representatives to
consult with and ask questions of the officers and employees of each Company;
deliver to Acquisition all audited or unaudited quarterly or annual financial
statements of each such Company prepared subsequent to the date of this
Agreement; and cooperate with and assist Acquisition in discussions
39
<PAGE> 90
with insurance regulators regarding each of the Companies' financial condition
and compliance with insurance laws and regulations.
(b) Conduct of Business. Keep the books and records of each
Company consistent in all material respects with prior periods and, with respect
to the Subsidiaries, in accordance with SAP and, with respect to the
consolidated group consisting of Target and the Subsidiaries, in accordance with
GAAP, and conduct their respective businesses and corporate affairs in the
ordinary course consistent in all material respects with past practices, and
will not:
(i) issue or sell any of their respective capital
stock, or any options, warrants, calls or securities convertible into such
capital stock, or enter into any agreement to do any of the foregoing, or make
any change in its capital structure either by way of stock split, stock dividend
or otherwise;
(ii) declare or pay any dividends or make any
distribution in respect of capital stock, or purchase, redeem or otherwise
acquire or retire any capital stock;
(iii) other than in the ordinary course of business,
without the prior written consent of Acquisition, enter into or assume any
contract or commitment, or terminate or amend any existing contract or
commitment, or incur or prepay any indebtedness for borrowed money;
(iv) other than in the ordinary course of business,
make any loans or advance any funds to anyone, or extend credit;
(v) other than in the ordinary course of business,
enter into, amend or accelerate any payment or contribution under any
employment, agency or consulting agreement or Benefit Plan;
(vi) other than in the ordinary course of business,
without the prior consent of Acquisition, which consent shall not be
unreasonably withheld, hire any new employees or make any changes affecting the
rates of compensation of, or pay any bonuses to (other than accrued bonuses
under current Benefit Plans), or grant any other benefit to, their respective
current directors, officers, agents or employees;
40
<PAGE> 91
(vii) other than in the ordinary course of business,
create or assume any mortgage or other lien or encumbrance on, or dispose of,
any of their respective assets or properties;
(viii) other than in the ordinary course of business,
acquire any assets or any properties or make any investments, or enter into any
agreements to acquire any assets or properties or to make any investments;
(ix) merge or consolidate with any other corporation,
or acquire or agree to acquire any stock (except investments in the ordinary
course of business) of any person, firm, association, corporation or other
business organization;
(x) make any change in their respective Articles or
Certificate of Incorporation or Bylaws;
(xi) without the prior written consent of
Acquisition, enter into any arrangement with any person with respect to any
United States or foreign patents, patent applications, trademarks, applications
for registration of trademarks, trade names, fictitious names, copyrights,
know-how or trade secrets owned by any of them, or in any way relating to their
respective businesses;
(xii) without the prior written consent of
Acquisition, make any election with respect to the computation of taxes or take
any position in any tax return that could have an adverse effect on any of the
Companies;
(xiii) other than in the ordinary course of business,
without the prior written consent of Acquisition, make any other change in their
businesses, business practices or operations; or
(xiv) enter into any agreement to do any of the
foregoing.
(c) Consultation with Acquisition Pending Closing. Confer and
consult with Acquisition on all material business decisions affecting the future
performance of each of the Companies, other than decisions made in the ordinary
course of business consistent in all material respects with past practices,
including in particular with respect to the Subsidiaries on all material
business decisions involving (i) increases
41
<PAGE> 92
or decreases in the credited rate of insurance products issued by the
Subsidiaries and (ii) the Subsidiaries' investment policy.
(d) Disposition of Shares by Target. With respect to Target,
not dispose of, encumber or grant any rights regarding any of the capital stock
of any Subsidiary.
(e) Preservation of Business. Use all reasonable efforts to
(i) preserve intact each of the Companies' present business organization,
reputation, employees, agents, customers and suppliers, and policyholders, (ii)
maintain all licenses of each Subsidiary to do business in each jurisdiction in
which it is so licensed, (iii) maintain in full force and effect all agreements
of each Company (except as otherwise contemplated by this Agreement) and (iv)
maintain all assets and properties of each Company in good working order and
condition, ordinary wear and tear excepted.
(f) Investment Portfolio Requirements. Notify and obtain the
written approval of Acquisition, which approval shall not be unreasonably
withheld, prior to making any changes to the Subsidiaries' investment portfolio
or the Investment Assets that are not in the ordinary course of business or that
are inconsistent in any material respect with the Subsidiaries' investment
practices and policies existing at September 30, 1998.
(g) Surplus Items. Take no actions other than in the ordinary
course of business as contemplated by this Agreement, without the prior written
consent of Acquisition, that could cause or result in a reduction in the amount
of any Subsidiary's aggregate statutory capital, surplus, asset valuation
reserve and interest maintenance reserve, as set forth in the Annual Statement
for the year ended December 31, 1998.
(h) Notice and Cure. Notify Acquisition promptly in writing
of, and contemporaneously provide Acquisition with complete and correct copies
of any and all information or documents relating to, and use all reasonable
efforts to cure before the Closing, any event, development, transaction or
circumstance occurring after the date of this Agreement that causes or could
cause any covenant or agreement of Target under this Agreement to be breached,
or that renders or could render untrue any representation or warranty
42
<PAGE> 93
of Target contained in this Agreement as if the same were made on or as of the
date of such event, development, transaction or circumstance; and use all
reasonable efforts to cure, before the Closing, any violation or breach of any
representation, warranty, covenant or agreement made by Target in this
Agreement, whether occurring or arising before or after the date of this
Agreement.
(i) Further Actions. Execute, acknowledge and deliver any
further documents, including, but not limited to, any financial statements of
any Subsidiary filed with the Texas Department after the date hereof, reasonably
requested by Acquisition consistent with the terms of this Agreement.
(j) Reasonable Efforts. Use its reasonable efforts to fulfill,
as soon as practicable, all of the conditions contained in Section 6.1 hereof.
(k) Changes in Optionees. Promptly, inform Acquisition in
writing of any changes in the Optionees listed on Schedule 4.1(e) to this
Agreement.
(l) Major Business Decisions. Cause the Chief Executive
Officer of Target to consult and confer with the Chief Executive Officer of
Parent with respect to all major business decisions affecting any of the
Companies.
Section 5.2 Covenants of Parent and Acquisition. From the date hereof
through the Closing Date, Parent and Acquisition will each:
(a) Further Actions. Execute, acknowledge and deliver any
further documents reasonably requested by Target consistent with the terms of
this Agreement.
(b) Reasonable Efforts. Use their reasonable efforts to
fulfill, as soon as practicable, all of the conditions contained in Section 6.2
hereof.
(c) Notice and Cure. Notify Target promptly in writing of, and
contemporaneously provide Target with complete and correct copies of, any and
all information or documents relating to, and use all reasonable efforts to cure
before the Closing, any event, development, transaction or circumstance
occurring after the date of this Agreement that causes or could cause any
covenant or agreement of Parent
43
<PAGE> 94
or Acquisition under this Agreement to be breached, or that renders or could
render untrue any representation or warranty of Parent or Acquisition contained
in this Agreement as if the same were made on or as of the date of such event,
development, transaction or circumstance; and use all reasonable efforts to
cure, before the Closing, any violation or breach of any representation,
warranty, covenant or agreement made by Parent or Acquisition in this Agreement,
whether occurring or arising before or after the date of this Agreement.
ARTICLE 6
CONDITIONS PRECEDENT
Section 6.1 Parent and Acquisition. The obligations of Parent and
Acquisition to consummate the transactions provided for in this Agreement shall
be subject to the fulfillment, on or prior to the Closing Date, of the following
conditions:
(a) Representations and Warranties. The representations and
warranties of Target set forth in Section 4.1 hereof shall be true and correct
in all material respects on the Closing Date as if made on and as of such date,
except to the extent the representations and warranties speak as of an earlier
date, and Acquisition shall have received a certificate to such effect, dated as
of the Closing Date, executed on behalf of Target by the Chief Executive Officer
and Chief Financial Officer of Target.
(b) Performance of Obligations. Target and the Subsidiaries
shall have performed in all material respects all of their obligations contained
in this Agreement to be performed on or prior to the Closing Date, and
Acquisition shall have received a certificate to such effect, executed on behalf
of Target by the Chief Executive Officer and Chief Financial Officer of Target
and dated as of the Closing Date.
(c) Authorization. All corporate action necessary to authorize
the execution, delivery and performance by Target of this Agreement, and the
consummation of the transactions contemplated hereby, shall have been duly and
validly taken by Target, and Target shall have furnished Acquisition with copies
of all applicable resolutions adopted by the Board of Directors and
stockholders, if any, of Target, certified by the Secretary or Assistant
Secretary of Target.
44
<PAGE> 95
(d) No Order. No governmental entity or federal or state court
of competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, judgment,
injunction or other order (whether temporary, preliminary or permanent), in any
case which is in effect and which prevents or prohibits consummation of the
Merger; provided, however, that each of the parties shall use its reasonable
best efforts to cause any such decree, judgment, injunction or other order to be
vacated or lifted.
(e) Approvals and Consents. The waiting period, if any,
pursuant to HSR shall have expired or has been terminated without objection and
any necessary approval of the Texas Department, the Iowa Insurance Department
and the insurance departments of other states and jurisdictions, and all other
consents of any person required to permit the consummation of the transactions
contemplated by this Agreement without any violation by Parent, Acquisition,
Target or the Subsidiaries of any law or obligation shall have been obtained and
such approvals and consents shall not contain any materially burdensome
conditions or requirements on or applicable to Parent, Acquisition, Target or
any Subsidiary.
(f) Legal Opinions. Acquisition shall have received the
opinions of Fulbright & Jaworski L.L.P., as to such matters as may be reasonably
requested by Acquisition.
(g) No Adverse Change. Except as set forth in a Schedule
hereto, since December 31, 1998, there shall not have been, occurred or arisen
any material adverse change in, or any event, development, transaction,
condition or state of facts of any character (including without limitation any
damage, destruction or loss whether or not covered by insurance or reinsurance)
that individually or in the aggregate has or could have a material adverse
effect on, the business or financial condition of any Company.
(h) Secretary's Certificates. Acquisition shall have received
from Target (i) a certificate dated the Closing Date from Target's Secretary
attaching (A) a copy of Target's Certificate of Incorporation certified by the
Secretary of State of Delaware, which certification shall be dated not more than
ten days prior to the Closing Date, (B) a copy of Target's Bylaws, and (C) a
Good Standing Certificate for Target from the
45
<PAGE> 96
Secretary of State of Delaware and from each state where Target is qualified to
do business, which Certificates shall be dated no more than ten days prior to
the Closing Date, and (ii) a certificate dated the Closing Date from the
Secretary of each Subsidiary attaching (A) a copy of such Subsidiary's Articles
of Incorporation, certified by the Secretary of State of the state of each
Subsidiary's incorporation, which certification shall be dated not more than ten
days prior to the Closing Date, (B) a copy of such Subsidiary's Bylaws, (C) a
Good Standing Certificate for each Subsidiary from the Texas Secretary of State,
and from each of the states where such Subsidiary is qualified to do business,
which Certificate shall be dated not more than ten days prior to the Closing
Date and (D) Certificates of Status and Authority for each Subsidiary from the
Texas Department.
(i) Stockholder Approval. Target's stockholders shall have
approved the Merger and Target stockholders holding more than five percent of
the outstanding Target's Stock shall not have delivered notice to Target
pursuant to Section 262 of the GCL of their intent to demand payment for their
shares pursuant to dissenters' rights provided by the GCL.
(j) Reserve Reinsurance. Target shall have entered into a
reinsurance agreement protecting Target against adverse loss developments with
respect to claims up to $10,000,000 occurring on or prior to December 31, 1998
that are in excess of an amount equal to the sum of (i) Target's booked loss
reserves as of December 31, 1998 as set forth in the actuary's report to Target,
plus (ii) $2,000,000.
(k) Escrow Agreement. Target and the Escrow Agent shall have
executed and delivered the Escrow Agreement.
(l) No Challenge. There shall not be pending any action,
proceeding or investigation by any governmental entity (i) challenging or
seeking material damages in connection with the Merger, (ii) seeking to restrain
or prohibit the consummation of the Merger or otherwise limit the right of
Acquisition or Parent or any of its subsidiaries to own or operate all or any
portion of the business or assets of the
46
<PAGE> 97
Companies, or (iii) which otherwise is likely to have a material adverse effect
on the business, operations, condition (financial or otherwise), assets or
liabilities of Parent, Acquisition or the Companies.
Section 6.2 Conditions to the Obligations of Target. The obligation of
Target to consummate the transactions provided for in this Agreement shall be
subject to the fulfillment, on or prior to the Closing Date, of the following
conditions:
(a) Representations and Warranties. The respective
representations and warranties of Parent and Acquisition set forth in Section
4.2 hereof shall be true and correct in all material respects on the Closing
Date as if made on and as of such date, except to the extent such
representations and warranties speak as of an earlier date, and Target shall
have received certificates to such effect, executed on behalf of Parent and
Acquisition by their respective Chief Executive Officers and Chief Financial
Officers, dated as of the Closing Date.
(b) Performance of Obligations. Parent and Acquisition shall
have performed in all material respects all of their respective obligations
contained in this Agreement to be performed on or prior to the Closing Date, and
Target shall have received certificates to such effect, executed on behalf of
Parent and Acquisition by their respective Chief Executive Officers and Chief
Financial Officers, dated as of the Closing Date.
(c) No Order. No governmental entity or federal or state court
of competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, judgment,
injunction or other order (whether temporary, preliminary or permanent), in any
case which is in effect and which prevents or prohibits consummation of the
Merger; provided, however, that each of the parties shall use its reasonable
best efforts to cause any such decree, judgment, injunction or other order to be
vacated or lifted.
(d) Approvals and Consents. The waiting period, if any,
pursuant to HSR shall have expired or has been terminated without objection and
any necessary approvals of the Texas Department, the
47
<PAGE> 98
Iowa Insurance Department and the insurance departments of other states or
jurisdictions and all other consents listed on Schedule 4.1(d) required to
permit consummation of the transactions contemplated by this Agreement without
any violation by Target or the Subsidiaries of any law or obligation shall have
been obtained.
(e) Legal Opinion. Target shall have received the opinion of
Bradley & Riley, P.C., as to such matters as Target shall reasonably request.
(f) Stockholder Approval. The Target stockholders shall have
approved the Merger.
(g) Authorization. All corporate action necessary to authorize
the execution, delivery and performance by Parent and Acquisition of this
Agreement. and the consummation of the transactions contemplated hereby, shall
have been duly and validly taken by Parent and Acquisition, and Parent and
Acquisition shall have furnished Target with copies of all applicable
resolutions adopted by their respective Boards of Directors and their respective
stockholders, certified in each case by a Secretary or Assistant Secretary of
Parent and Acquisition, respectively.
(h) Deposit with Exchange Agent. There shall have been
deposited with the Exchange Agent the Exchange Fund in accordance with Section
2.3(a).
(i) Escrow Agreement. The Escrow Agreement shall have been
executed and delivered by Parent and the Escrow Agent and there shall have been
deposited with the Escrow Agent an amount equal to the Reserved Per Share Amount
multiplied by the sum of the aggregate number of shares of Target's Stock
outstanding as of the Closing Date and the aggregate number of shares of
Target's Stock underlying all Options outstanding as of the Closing Date.
(j) No Challenge. There shall not be pending any action,
proceeding or investigation by any governmental entity (i) challenging or
seeking material damages in connection with the Merger or (ii) seeking to
restrain or prohibit the consummation of the Merger.
48
<PAGE> 99
ARTICLE 7
CLOSING
Section 7.1 Closing. A closing (the "Closing") for the consummation of
the transactions contemplated herein shall be held at the offices of Fulbright &
Jaworski L.L.P., Houston, Texas at 9:00 A.M., local time, on the second business
day following the date on which all of the conditions set forth in Article 6
have been (or can be at the Closing) satisfied or have been waived by the party
permitted to do so (the "Closing Date").
Section 7.2 Filings at the Closing. Subject to the provisions of
Article 6 hereof, Acquisition and Target shall at the Closing cause the Articles
of Merger to be filed and recorded in accordance with the provisions of Section
252 of the GCL and the Certificate of Merger to be filed and recorded in
accordance with the provisions of Section 1105 of the Iowa Business Corporation
Act and shall take any and all other lawful actions and do any and all other
lawful things necessary to cause the Merger to become effective.
ARTICLE 8
TERMINATION
Section 8.1 Termination. This Agreement, other than the obligations
contained in Articles 9 and 10, which shall survive any termination of this
Agreement, may be terminated as to all parties hereto and the transactions
contemplated herein abandoned prior to the Closing:
(a) by the mutual consent of the parties hereto;
(b) by Parent and Acquisition at any time after June 30, 1999,
if at such time the conditions set forth in Section 6.1(a), (b), (c), (f), (h),
(j) or (k) hereof have not been satisfied through no fault of Parent or
Acquisition and Parent or Acquisition gives Target notice of such termination;
(c) by Parent and Acquisition at any time after June 30, 1999,
if at such time the conditions set forth in Section 6.1(d), (e), (g), (i) or (l)
hereof have not been satisfied through no fault of Parent or Acquisition and
Parent or Acquisition gives Target notice of such termination;
49
<PAGE> 100
(d) By Parent and Acquisition, pursuant to Section 3.4(c);
(e) by Parent and Acquisition at any time after holders of
greater than five percent of the outstanding Target's Stock have delivered
notice to Target pursuant to the GCL of their intent to demand payment pursuant
to the provisions for dissenters' rights provided by the GCL;
(f) by Target at any time after June 30, 1999, if at such time
the conditions set forth in Section 6.2(a), (b), (e), (g), (h) or (i) hereof
have not been satisfied through no fault of Target and Target gives Parent or
Acquisition notice of such termination; and
(g) by Target at any time after June 30, 1999, if at such time
the conditions set forth in Section 6.2(c), (d), (f) or (j) hereof have not been
satisfied through no fault of Target and Target gives Parent or Acquisition
notice of such termination.
Except as provided in Sections 3.4(e), (f) and (g),
termination of this Agreement as provided in this Agreement shall not affect any
other rights or remedies any party may have at law, in equity or otherwise for
breach of this Agreement or otherwise.
ARTICLE 9
CONFIDENTIALITY
Section 9.1 Confidentiality. From and after the date hereof, unless
otherwise agreed to by the parties, each of the parties shall keep, and shall
ensure that its directors, officers, employees, contractors, consultants and
agents keep, confidential all information acquired from another party pursuant
to this Agreement or otherwise, including the contents of this Agreement and any
document delivered pursuant thereto or in connection therewith, except that the
foregoing restriction shall not apply to any information that: (i) is or
hereafter becomes generally available to the public other than by reason of any
default with respect to a confidentiality obligation under this Agreement; (ii)
was already known to the recipient party as evidenced by prior written documents
in its possession (unless the information is covered by a prior confidentiality
agreement between the parties); (iii) is disclosed to the recipient party by a
third party who
50
<PAGE> 101
is not in default of any confidentiality obligation to the disclosing party
hereunder; (iv) is developed by or on behalf of the receiving party, without
reliance on confidential information received hereunder; (v) is submitted by the
recipient party to governmental authorities or regulatory bodies to facilitate
the issuance of approvals necessary or appropriate for the operation of their
businesses, provided that reasonable measures shall be taken to assure
confidential treatment of such information; (vi) is provided by the recipient
party to third parties under appropriate terms and conditions, including
confidentiality provisions substantially equivalent to those in this Agreement
and with the consent of the other party to this Agreement or (vii) is otherwise
required to be disclosed in compliance with applicable laws or regulations or
order by a court or other government authority or regulatory body having
competent jurisdiction. Without limiting the generality of the foregoing, no
press release or similar public announcement or disclosure concerning this
Agreement or the transactions contemplated herein shall be made by any party
hereto without the prior consent of the other parties unless the party making
the announcement or disclosure is informed by such party's counsel that such
information is required to be disclosed in compliance with applicable laws or
regulations or order by a court or other government authority or regulatory body
having competent jurisdiction. Any party shall be entitled, in addition to any
other right or remedy it may have, at law or in equity, to an injunction,
without the posting of any bond or other security, enjoining or restraining the
other parties from any violation or threatened violation of this Section.
ARTICLE 10
MISCELLANEOUS
Section 10.1 Consent to Jurisdiction and Service of Process. Any legal
action, suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby may be instituted in any state or federal court
sitting in Linn County, Iowa, or Galveston County, Texas, and each party agrees
not to assert as a defense in any such action, suit or proceeding, any claim
that it is not subject personally to the jurisdiction of such court, that the
action, suit or proceeding is brought in an inconvenient forum, that the
51
<PAGE> 102
venue of the action, suit or proceeding is improper or that this Agreement or
the subject matter hereof may not be enforced in or by such court. Any and all
service of process and any other notice in any such action, suit or proceeding
shall be effective against a party if given properly pursuant to the United
States Federal Rules of Civil Procedure or other applicable rules.
Section 10.2 Expenses. Each Party shall bear its respective legal and
other costs and expenses incurred in connection with the preparation, execution,
delivery and performance of this Agreement and the transactions contemplated
hereby without right of reimbursement from any other party.
Section 10.3 Notices. All notices and other communications hereunder
shall be in writing and shall be delivered personally, telegraphed, telexed
(with appropriate answerback received), sent by facsimile transmission (with
immediate confirmation thereafter) or sent by registered, certified or express
mail, postage prepaid, return receipt requested, or sent by a nationally
recognized overnight courier service, marked for overnight delivery. Any such
notice shall be deemed given when so delivered personally, telegraphed, telexed
(provided the correct answerback is received) or sent by facsimile transmission
(provided confirmation is received immediately thereafter); or if mailed, upon
receipt or rejection by the addressee; or if sent by overnight courier, one
business day after the date of delivery to the courier service marked for
overnight delivery; in each case addressed as follows:
(a) If to Parent or Acquisition, to:
J. Scott McIntyre
United Fire & Casualty Company
118 Second Avenue, S.E.
Cedar Rapids, Iowa 52407-3909
Telephone: 800-343-9131
Facsimile: 319-399-5462
52
<PAGE> 103
with a copy to:
Michael K. Denney
Bradley & Riley, P.C.
100 First Street, S.W.
Cedar Rapids, Iowa 52404
Telephone: 319-363-0101
Facsimile: 319-363-9824
(b) If to Target, to:
J. Fellman Seinsheimer, III
American Indemnity Financial Corporation
2115 Winnie
Galveston, Texas 77550
Telephone: 409-766-4600
Facsimile: 409-766-5531
with a copy to:
Arthur H. Rogers
Fulbright & Jaworski L.L.P.
1301 McKinney, Suite 5100
Houston, Texas 77010-3095
Telephone: 713-651-5151
Facsimile: 713-651-5246
or to such other address as the parties hereto may specify from time to time by
notice given as provided herein.
Section 10.4 Amendment. This Agreement may be amended only by an
instrument in writing executed by each of the parties hereto.
Section 10.5 Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 10.6 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas, without regard to
principles of conflicts of laws.
Section 10.7 Entire Agreement. This Agreement, together with the
Exhibits and Schedules hereto, sets forth the entire agreement and understanding
between the parties hereto with respect to the subject
53
<PAGE> 104
matter hereof and supersedes any prior negotiations, agreements, understandings
or arrangements between the parties hereto with respect to the subject matter
hereof.
Section 10.8 Waivers. The provisions of this Agreement may only be
waived by an instrument in writing executed by the party granting the waiver.
The failure of a party at any rime or times to require performance of any
provision hereof in any instance shall in no manner affect the right of such
party at a later time to enforce the same or any other provision of this
Agreement in respect of any subsequent instance. No waiver of any condition or
of the breach of any term contained in this Agreement in one or more instances
shall be deemed to be or construed as a further or continuing waiver of such
condition in respect of any subsequent instance or breach or a waiver of any
other condition or of the breach of any other term of this Agreement. Without
limiting the generality of the foregoing, no action taken pursuant to this
Agreement, other than proceeding with the consummation of the transactions
contemplated herein, shall be deemed to constitute a waiver by the party taking
such action or of compliance with any representations, warranties, covenants or
agreements contained in this Agreement.
Section 10.9 Interpretation. When a reference is made in this Agreement
to Articles, Sections, Exhibits or Schedules, such reference shall be to an
Article, Section, Exhibit or Schedule, respectively, of this Agreement unless
otherwise indicated. The table of contents and the headings contained in this
Agreement are for reference purposes only and shall not affect the meaning or
interpretation hereof.
Section 10.10 No Assignment. This Agreement and the rights, interests
and obligations hereunder may not be assigned by Parent, by Acquisition or by
Target, by operation of law or otherwise, except that Acquisition may assign all
of its rights, interests and obligations hereunder to another wholly owned
(directly or indirectly) subsidiary of Parent, provided that such subsidiary
agrees in writing to be bound by all of the terms, conditions and provisions
contained herein.
Section 10.11 Survival of Representations and Warranties. The
respective representations and warranties, obligations, covenants and agreements
contained in this Agreement or in any Schedule, certificate
54
<PAGE> 105
or letter delivered pursuant hereto (including the officer certificates
delivered pursuant to Section 6.1(a) and (b)), other than those contained in
Articles 1 and 2 and except as otherwise provided in Section 8.1, shall expire
and be terminated and extinguished at the Effective Time, except to the extent
specifically provided in the Escrow Agreement.
Section 10.12 Further Assurances. From and after the Closing, each
party shall execute and deliver such documents and take such other actions as
the other party may reasonably request to further effect or evidence the
purposes and intent of this Agreement.
Section 10.13 Knowledge. Knowledge (including the terms "known to" and
"to the knowledge of") will be deemed to be present with respect to any
executive officer of the Companies, Parent or Acquisition, when the matter in
question was brought to the attention of such executive officer of the
Companies, Parent or Acquisition, as the case may be.
55
<PAGE> 106
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
AMERICAN INDEMNITY FINANCIAL CORPORATION
By /s/ J. Fellman Seinsheimer, III
-----------------------------------------------
Name: J. FELLMAN SEINSHEIMER, III
--------------------------------------------
Title: President and Chief Executive Officer
-------------------------------------------
UNITED FIRE & CASUALTY COMPANY
By /s/ Scott McIntyre
-----------------------------------------------
Name: SCOTT McINTYRE
--------------------------------------------
Title: Chairman of the Board
-------------------------------------------
AI ACQUISITION CORPORATION
By /s/ Scott McIntyre
-----------------------------------------------
Name: SCOTT McINTYRE
--------------------------------------------
Title: President
-------------------------------------------
56
<PAGE> 107
ANNEX B
FAIRNESS OPINION OF PHILO SMITH
B - 1
<PAGE> 108
PHILO SMITH CAPITAL CORPORATION
Financial Centre o 695 East Main Street o Stamford, CT 06901
Telephone: (203) 348-7365 Fax: (203) 348-4307
March 1, 1999
Board of Directors
American Indemnity Financial Corporation
One American Indemnity Plaza
Galveston, TX 77550
Gentlemen:
In connection with the acquisition through a cash merger (the "Merger") by
United Fire & Casualty Company ("UFCS") of American Indemnity Financial
Corporation ("AIFC" or the Company") (the "Transaction") pursuant to the Merger
Agreement dated as of March 2, 1999, between AIFC and UFCS, you have requested
our opinion as to the fairness, from a financial point of view, to the Company's
present common shareholders of the consideration to be received by such
shareholders for their common stock in the proposed Merger.
Under the terms of the Merger and subject to the approval of the common
shareholders of the Company, AIFC common shareholders will receive from UFCS a
total of $28,736,571 in cash at the closing of the Transaction for the common
stock of AIFC ($14.64 per share on a fully-diluted basis) and deferred cash
consideration of $1,962,410 or $1.00 per share payable in two years subject to
adjustments relating to indemnities.
As a customary part of its investment banking business, Philo Smith Capital
Corporation ("PSCC") is engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, private placements, and valuations for
estate, corporate and other purposes. PSCC does not make a market for the
Company's common stock. PSCC is a party to a separate engagement agreement with
the Company whereby PSCC is providing advisory services to the Company with
respect to the Transaction, pursuant to which PSCC will receive a fee contingent
upon the consummation of the Transaction. In return for our services in
connection with providing this opinion, the Company will pay us a fee, which fee
is not contingent upon the consummation of the Transaction, and indemnify us
against certain liabilities.
In arriving at our opinions, we have undertaken such reviews, analyses, and
inquiries as we deemed necessary and appropriate under the circumstances. Among
other things, we have (i) reviewed the Merger Agreement; (ii) analyzed financial
and other information that is publicly available relating to the Company; (iii)
analyzed certain other operating data of the Company that has been available to
us in our role as financial advisor to the Company; (iv) visited the facilities
of the Company and discussed with management of the Company the financial
condition, operating results, business outlook and prospects of the Company; (v)
analyzed the valuations of publicly traded companies that we deemed comparable
to the Company; (vi) analyzed the financial terms of certain similar
transactions that have recently been effected; and (vii) taken into account our
general experience in similar transactions and our knowledge derived from our
role as financial advisor to the Company.
B - 2
<PAGE> 109
American Indemnity Financial Corporation
March 1, 1999
Page Two
In connection with our review, we have not independently verified any of the
foregoing information, and we have relied upon and assume the accuracy,
completeness, and the fairness of the presentation and description of the
financial statements and other information of the Company. We have further
relied upon assurances by the Company that the forward-looking information
provided to us has a reasonable basis, and with respect to transaction expenses,
projections and other business outlook information, reflects the best currently
available estimates, and the Company is not aware of any information or fact
that would make the information, whether forward-looking or otherwise, provided
to us incomplete or misleading. In arriving at our opinion, we have not
performed any appraisals or valuations of specific assets of the Company or the
liquidation value of the entirety of the Company's assets, and express no
opinion regarding the liquidation value of the Company or any of its assets. Our
opinions are based upon the information available to us and the facts and
circumstances as they exist and are subject to evaluation on the date hereof;
events occurring after the date hereof could materially affect the assumptions
used in preparing this opinion. We have assumed that AIFC will be able to obtain
the reinsurance or insurance arrangement required to satisfy the condition set
forth in section 6.1 (j) of the Merger Agreement on commercially reasonable
terms.
Based upon and subject to the foregoing, and based upon such other facts as we
consider relevant, it is our opinion that, as of the date hereof, the
consideration to be received by the Company's present common shareholders for
their common stock in the Merger is fair to such common shareholders from a
financial point of view.
Very truly yours,
PHILO SMITH CAPITAL CORPORATION
By: /s/ James A. Amen
-------------------------------
James A. Amen
Managing Director
B - 3
<PAGE> 110
ANNEX C
APPRAISAL RIGHTS UNDER THE DGCL
C - 1
<PAGE> 111
SECTION 262
OF THE
DELAWARE GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS.-(a) Any stockholder of a corporation of this
State who holds shares of stock on the date of the making of a demand pursuant
to subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of the stockholder's shares of stock under
the circumstances described in subsections (b) and (c) of this section. As used
in this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1.) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to Sections 251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
C - 2
<PAGE> 112
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice
C - 3
<PAGE> 113
is given prior to the effective date, the record date shall be the close of
business on the day next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw' such stockholder's demand for appraisal and to accept the terms
offered upon the merger or consolidation. Within 120 days after the effective
date of the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
C - 4
<PAGE> 114
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of such
stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation. (Last amended by Ch.
339, L. 98, eff. 7-1-98.)
C - 5
<PAGE> 115
AMERICAN INDEMNITY FINANCIAL CORPORATION
P.O. BOX 8985 - WILMINGTON, DELAWARE 19899-8985
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING
OF STOCKHOLDERS ON JUNE 2, 1999
THE UNDERSIGNED hereby appoints J. Fellman Seinsheimer, III and Phillip E.
Apgar, or either of them, the attorneys and proxies of the undersigned, with
full power of substitution, for the Annual Meeting of Stockholders of American
Indemnity Financial Corporation to be held at 10:00 a.m. on Wednesday, June 2,
1999, in the Board of Directors Room of the United States National Bank of
Galveston, 2201 Market Street, Galveston, Texas, or at any adjournment thereof,
and to vote at such meeting the shares of Common Stock of the Company held of
record by the undersigned on the record date for such meeting.
(1) [ ] To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger, dated March 4, 1999, by and among
United Fire & Casualty Company, an Iowa corporation ("United Fire"),
AI Acquisition Corporation, an Iowa corporation and a wholly owned
subsidiary of United Fire ("Sub"), and the Company, pursuant to which
(i) Sub will be merged with and into the Company (the "Merger"), with
the Company continuing as the surviving corporation and becoming a
wholly owned subsidiary of United Fire and (ii) each outstanding
share of common stock, par value $3.33 1/3 per share, of the Company
("Common Stock"), other than shares held by the stockholders, if any,
who properly exercise their appraisal rights under Delaware law, will
be converted into the right to receive $15.36 in cash (the "Per Share
Amount"). Of the Per Share Amount, $1 will be deposited in an escrow
account, to be distributed two years after the effective date of the
Merger, subject to deductions for certain indemnity claims that may
be asserted by United Fire.
(2) [ ] FOR the election (except as indicated to the contrary below) of
Jack T. Currie, Synott L. McNeel and J. Fellman Seinsheimer, III as
Class II directors. TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL
NOMINEE, WRITE THE NOMINEE'S NAME IN THE SPACE PROVIDED BELOW:
_________________________________________________________________________
[ ] Authority is hereby WITHHELD to vote for each of the nominees listed
above.
(3) [ ] In their discretion on such other matters as may properly come
before the meeting or any adjournment thereof.
Each of the above matters are more particularly described in the
accompanying Proxy Statement dated May , 1999, relating to such meeting.
<PAGE> 116
THIS PROXY WILL BE VOTED AS DIRECTED. IF NOT OTHERWISE SPECIFIED, THIS
PROXY WILL BE VOTED FOR THE ELECTION OF THE LISTED NOMINEES AND FOR THE
APPROVAL OF THE MERGER PROPOSAL.
As noted in the accompanying proxy statement, receipt of which is hereby
acknowledged, if any of the listed nominees become unavailable for any reason
and authority to vote for election of directors is not withheld, this proxy
will be voted for another nominee, or other nominees, to be selected by the
Board of Directors.
NUMBER
(NAME) OF SHARES (AMOUNT)
- - - - - - - - - - - - - ------ ----------- --------
____________________________________ _____________ _____________________
____________________________________ _____________ _____________________
Dated _______________________, 1999
___________________________________
___________________________________
(Signature of Stockholder(s))
Your signature should correspond with
your name as it appears hereon. Joint
owners should each sign. When signing
as attorney, executor, administrator,
trustee or guardian, please set forth
your full title as it appears hereon.
PLEASE MARK, SIGN, DATE AND RETURN IMMEDIATELY.
