<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:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to 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
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(2) Aggregate number of securities to which transaction applies:
1,962,410 shares outstanding and 28,000 shares subject to options
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(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):
$15.3553 for each share outstanding ($30,133,394) and the amount by which
$15.3553 exceeds the exercise price per share of each option ($78,488)
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
approximately $30,250,000
- --------------------------------------------------------------------------------
(5) Total fee paid:
$6,050
- --------------------------------------------------------------------------------
[X] 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
AMERICAN INDEMNITY FINANCIAL CORPORATION
2115 WINNIE
GALVESTON, TEXAS 77550
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
August 9, 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 Monday, August 9, 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, as amended, 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 $15.3553 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 June 11, 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. LOHEN
Helen K. Lohec
Secretary
July 19, 1999
<PAGE> 3
AMERICAN INDEMNITY FINANCIAL CORPORATION
2115 WINNIE
GALVESTON, TEXAS 77550
(PRINCIPAL EXECUTIVE OFFICE)
PROXY STATEMENT
This Proxy Statement and the enclosed form of proxy are being mailed on or
about July 20, 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 June 11, 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 August 9, 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 June 11,
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 Monday,
August 9, 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................ 16
Financing the Merger...................................... 17
Accounting Treatment...................................... 17
Certain Federal Income Tax Consequences................... 17
Regulatory Filings and Approvals.......................... 19
Certain Consequences of the Merger........................ 19
Appraisal Rights.......................................... 19
THE MERGER AGREEMENT........................................ 22
The Merger................................................ 22
Certain Covenants......................................... 24
Representations and Warranties............................ 27
Conditions to the Merger.................................. 28
Termination............................................... 29
UNITED FIRE................................................. 31
THE COMPANY................................................. 32
PRINCIPAL STOCKHOLDERS...................................... 48
ELECTION OF DIRECTORS....................................... 50
EXECUTIVE OFFICERS.......................................... 53
EXECUTIVE COMPENSATION...................................... 53
OTHER TRANSACTIONS.......................................... 60
RELATIONSHIP WITH INDEPENDENT AUDITORS...................... 61
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE
ACT....................................................... 61
PROPOSALS FOR NEXT ANNUAL MEETING........................... 61
GENERAL..................................................... 61
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>
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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.
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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
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
Monday, August 9, 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, as amended (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........... June 11, 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
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business on the Record Date will be entitled to
vote at the Annual Meeting. At the close of
business on July 16, 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
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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 $15.3553 in cash (the "Per Share Amount").
Of the Per Share Amount, $1 will be deposited in an
escrow account (the "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. All income from funds deposited in the Escrow
Account will be distributed to United Fire. The
stockholders of the Company will not be entitled to
receive any interest or other income from funds in
the Escrow Account, nor will such interest or
income be used to satisfy such indemnity claims, if
any.
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. Payment of such amounts for Options will be
subject to deductions of the Reserved Per Share
Amount and claims against the Escrow Fund.
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. Subsequently,
Philo Smith orally confirmed its fairness opinion
based on the Per Share Amount of $15.3553, which
was computed using 1998 audited financial
statements that were issued in late March 1999. 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".
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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".
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, Option holders and the Escrow
Account, 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 July
31, 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 appraisal rights
provided by Delaware law; and (v) by the Company at
any time after July 31, 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
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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.
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. Although
earnings on the Escrow Account will be distributed
to, and will be taxable to, United Fire and the
Company's stockholders will receive none of such
earnings, distributions to the stockholders in 2001
(or later) from the Escrow Account will, for
federal income tax purposes, be deemed to consist
of two elements, principal and imputed interest, as
computed under the original issue discount rules of
the 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 July 14, 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 $14.50, $14.44 and $14.50
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 "The Company -- Per Share Market
and Dividend Information".
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".
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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
August 9, 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
July 20, 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
June 11, 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 July 16, 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 380
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 in favor of approving and adopting the Merger Agreement,
however, will thereby waive their appraisal rights. See "The Merger -- Appraisal
Rights".
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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".
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".
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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.
In August 1998, following its due diligence, including discussions with
management, Philo Smith prepared a descriptive brochure of the Company. At that
time, 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.
During 1998, reports were given by Philo Smith to the Board, including
information regarding prospective interested parties, valuation issues and terms
of other publicly announced mergers and acquisitions involving property and
casualty insurance companies. By December 1998, the Company and/or Philo Smith
had contacted in excess of 50 prospective parties. Selection of the prospective
parties contacted was based primarily on Philo Smith's experience and knowledge
of the insurance industry. At the Board meeting held in January 1999, Philo
Smith presented a detailed report on the results of the work done to that point.
The report reflected that, of the prospective parties initially contacted, 39
had signed confidentiality agreements, 27 had received the descriptive brochure
prepared by Philo Smith, 11 had undertaken due diligence or met with Company
management and six had made proposals to the Company. The report also provided a
preliminary valuation analysis of the Company based on, among other things,
indications by some of the prospective parties. Following this meeting, Philo
Smith continued to conduct discussions with four of the parties indicating an
interest through the previously mentioned proposals.
Of the six proposals made by the prospective parties, two were in writing
and four were informal oral proposals. All of the proposals were for
acquisitions of Common Stock for cash at prices ranging from approximately $9
per share to book value per share, subject to various adjustments to book value.
Five of the proposals were for all of the Common Stock; the other prospective
party proposed an acquisition of 51% to 80% of the shares of Common Stock. Three
of the proposals were contingent upon obtaining outside financing to pay the
purchase price.
During this period of discussion and negotiations by Philo Smith and
representatives of the other prospective parties, a number of discussions were
held between the managements of United Fire and the Company, as well as their
respective representatives. The introductory meeting between United Fire and the
Company took place on October 8, 1998 in Galveston, Texas. Scott McIntyre,
Chairman of the Board of United Fire, John A. Rife, President of United Fire, J.
Fellman Seinsheimer, III, President and Chief Executive Officer of the Company,
and James Amen of Philo Smith attended. Mr. McIntyre returned to Galveston on
December 1, 1998 with certain other members of United Fire's management for a
preliminary due diligence meeting with the Company's management. On December 8,
1998, Mr. Amen met with Mr. McIntyre in Cedar Rapids, Iowa to discuss proposed
transaction terms and structure. Additional discussions and due diligence were
conducted in Galveston during the week of January 11, 1999. United Fire was not
represented by any outside financial advisors in connection with these
negotiations. Negotiations between the Company and United Fire generally
centered on adjustments to the book value of the Company
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to arrive at a purchase price per share, and mechanisms for and scope of
indemnification of United Fire, which resulted in the provisions of the Merger
Agreement regarding the Escrow Account.
The United Fire proposal was deemed to be the most favorable proposal to
the Company's stockholders for several reasons. United Fire proposed the highest
purchase price per share, subject to certain adjustments. As noted above, the
other proposals ranged from approximately $9 per share to various adjusted book
values per share. In contrast to one of the other proposals that contemplated
the acquisition of a controlling interest, but not all of, the Common Stock, the
United Fire proposal contemplated the acquisition of all of the outstanding
shares of Common Stock. In addition, the United Fire proposal was not contingent
on obtaining outside financing, as were three of the other proposals.
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.
On March 4, 1999, 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."
In April 1999, Philo Smith orally confirmed its fairness opinion based on
the Per Share Amount of $15.3553, which was computed using 1998 audited
financial statements that were issued in late March 1999.
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
represented 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. The
Board also recognized that the Common Stock has historically traded at a
significant discount to book value per share, which was $16.72 as of
December 31, 1998. On that date, the closing price per share of Common
Stock was $10.63. See "The Company -- Per Share Information" and "-- Per
Share Market and Dividend Information".
(ii) As mentioned above in "-- Background of the Merger", there were
discussions with other parties that resulted in other proposals, none of
which were deemed acceptable by the Company, primarily because the purchase
prices proposed were less than the purchase price proposed by United Fire.
(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 "-- Opinion of
the Company's Financial Advisor".
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<PAGE> 15
(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.
(viii) The Board's recognition of certain negative aspects of the
terms of the Merger. The Board deemed the indemnification arrangement,
pursuant to which a portion of the Per Share Amount is placed in escrow for
two years to provide a fund for certain indemnification claims, if any, by
United Fire, and the requirement that the Company obtain a reinsurance
contract to be negative factors that required consideration. See "The
Merger Agreement -- The Merger -- Reserved Per Share Amount; Escrow
Agreement" and "The Merger Agreement -- Conditions of the Merger".
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. 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 PER
SHARE CONSIDERATION RECITED IN THE OPINION WAS BASED ON PRELIMINARY, UNAUDITED
1998 FINANCIAL STATEMENTS OF THE COMPANY, AND DOES NOT REFLECT SUBSEQUENT AUDIT
ADJUSTMENTS. PHILO SMITH HAS ORALLY CONFIRMED ITS FAIRNESS OPINION TO THE
COMPANY BASED ON THE AUDITED FINANCIAL STATEMENTS. THE OPINION OF PHILO SMITH
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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 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 amount of the
consideration to be paid to the stockholders in the Merger was the result of
negotiations between the Company and United Fire, and was not based on any
amount recommended by Philo Smith.
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 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 approximately 110
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
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<PAGE> 17
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.
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.
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<PAGE> 18
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. Prior
to that time, no material relationship had existed between Philo Smith, its
affiliates and/or unaffiliated representatives and the Company or its
affiliates. No restrictions were placed by the Company on the scope of Philo
Smith's investigations or recommendations other than any prospective party to
any recommended transaction be financially stable. 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 $377,000) and a fee of $200,000 for rendering
its opinion to the Board. The $200,000 fee for rendering the opinion will be
credited dollar-for-dollar against the transaction fee. 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 June 11, 1999, the executive
officers and directors of the Company owned, directly or indirectly, an
aggregate of 646,236 shares of Common Stock. See "Principal Stockholders",
"Election of Directors" and "Executive Officers". At the Per Share Amount of
$15.3553, 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 $9,923,000.
In addition, as of June 11, 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 to the Option, such amounts subject to
deduction of the Reserved Per Share Amount and claims against the Escrow Fund.
At the Per Share Amount of $15.3553, the aggregate consideration that would be
received in the Merger by the directors of the Company pursuant to the foregoing
formula would be approximately $74,300, payable to each director in
approximately the following amounts: Jack T. Currie, $13,301; Synott L. McNeel,
$4,091; J. Fellman Seinsheimer, III, $-0-; Fred C. Burns, $4,591; Harris L.
Kempner, Jr., $13,301; William C. Levin, M.D., $13,301; Henry W. Hope, $13,301;
James W. McFarland, Ph.D., $6,696; and Marvin L. West, $5,696.
Key Executive Severance Agreements; Employment Arrangements. 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
Eugene Hornstein, First Vice President 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.
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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.
The Company does not anticipate that any directors or officers of the
Company will serve as directors or officers of the surviving corporation after
the consummation of the Merger. It is contemplated, however, that J. Fellman
Seinsheimer, III, President and Chief Executive Officer of the Company, will
continue to serve as a director and officer of one or more operating insurance
subsidiaries of the Company, and some officers of the Company or its
subsidiaries may continue to serve as officers of such subsidiaries after the
Merger. Except with respect to Mr. Seinsheimer, however, United Fire has not
entered into any agreements, arrangements or commitments with such officers
regarding employment after the consummation of the Merger.
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 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
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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 $15.3553 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.
All earnings on the Escrow Account will be distributed to, and will be
taxable to, United Fire, and none of such earnings will be paid to the Company's
stockholders. Notwithstanding, distributions to the stockholders in 2001 (or
later) from the Escrow Account will, for federal income tax purposes, be deemed
to consist of two elements, principal and imputed interest, as computed under
the original issue discount rules of the 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 shares of Common Stock. Furthermore, each stockholder should recognize
imputed 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 imputed 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
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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 May 12, 1999,
commencing a 30-day waiting period. The waiting period terminated on May 25,
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.
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.
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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 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.
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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).
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.
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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 $15.3553 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 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
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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. The stockholders of
the Company shall not be entitled to receive any interest on, or income from,
the Escrow Fund nor may such interest or income be used to satisfy Indemnity
Claims.
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 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
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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.
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".
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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 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
25
<PAGE> 28
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 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 the
Company shall confer and consult with Sub on all material business decisions
affecting the future performance of the Company, other
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<PAGE> 29
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 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
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<PAGE> 30
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 occurring on or prior to December 31, 1998 that are
in excess of $45,000,000; (xi) the Company and the Escrow Agent shall have
executed and delivered the
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<PAGE> 31
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
August 11, 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
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<PAGE> 32
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 August 11, 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 in
accordance with (iii) above, then the Company will be obligated to pay Sub a
breakup fee of $1,000,000.
United Fire will be obligated to pay the Company a termination fee of
$1,000,000 if the following conditions have not been satisfied by August 11,
1999: (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) the Company
shall have received the opinion of Bradley & Riley, P.C., as to such matters as
the Company shall reasonably request; (iv) 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; (v) the Exchange Fund shall have been
deposited with the Exchange Agent; and (vi) 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.
The Company will be obligated to pay United Fire a termination fee of
$1,000,000 if the following conditions have not been satisfied by August 11,
1999: (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) 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; (v) Sub shall have received from the Company and each of its
subsidiaries certificates dated at or near the Closing Date from the Company's
and each subsidiaries' Secretary and from government officials in various states
regarding certain corporate matters; (vi) 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 occurring on or prior to December 31,
1998 that are in excess of $45,000,000; and (vii) the Company and the Escrow
Agent shall have executed and delivered the Escrow Agreement.
30
<PAGE> 33
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.
31
<PAGE> 34
THE COMPANY
GENERAL DEVELOPMENT OF BUSINESS
The Company is an insurance holding company, which was organized in June
1973 under the laws of Delaware for the purpose of acquiring the outstanding
shares of common stock of American Indemnity Company. The Company currently owns
99.9% of the common stock of American Indemnity Company, its principal operating
subsidiary. American Indemnity Company, incorporated in 1913, is the oldest
Texas stock company engaged in the general casualty insurance business in the
state. The insurance written by American Indemnity Company and its two wholly
owned subsidiaries, American Fire and Indemnity Company and Texas General
Indemnity Company, and its affiliate, American Indemnity Lloyds, includes
automobile, homeowners multiple peril, workers' compensation, fire and allied
lines, commercial multiple peril and general casualty lines.
In this proxy statement, the term "American Indemnity" refers to American
Indemnity Company, its subsidiaries, and its affiliate, American Indemnity
Lloyds, unless the context indicates otherwise.
The principal business of the Company is carried on through American
Indemnity; however, the Company does provide advice and services to American
Indemnity and coordinates its activities in the areas of accounting,
investments, public relations, business development, data processing and
automation, asset and liability management, budgetary planning, compliance with
governmental regulations and procedures, financing arrangements, and other such
matters. American Indemnity and each of its subsidiaries operate under the
day-to-day management of their own officers and directors.
DISTRIBUTION OF BUSINESS
The Company writes the majority of its business in Texas. In general,
American Indemnity has avoided writing business in those jurisdictions where
regulators are most reluctant to grant rate adjustments. The following table
shows the geographic distribution of gross premiums written.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Texas....................................................... 62.4% 68.9% 71.9%
Florida..................................................... 8.6 7.8 6.6
Louisiana................................................... 7.1 7.3 7.3
Alabama..................................................... 5.5 4.8 3.5
Illinois.................................................... 4.6 0.1 0.1
Mississippi................................................. 4.1 3.8 3.8
Tennessee................................................... 2.8 2.7 2.5
Kentucky.................................................... 2.5 2.5 2.1
All other................................................... 2.4 2.1 2.2
------ ------ ------
Total....................................................... 100.0% 100.0% 100.0%
</TABLE>
The following table provides the distribution of the Company's business on
the basis of net premiums written between personal lines (primarily insurance
for private passenger automobiles and residential property) and commercial
lines.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Personal Lines.............................................. 39% 38% 37%
Commercial Lines............................................ 61 62 63
--- --- ---
Total............................................. 100% 100% 100%
</TABLE>
32
<PAGE> 35
FINANCIAL INFORMATION
Net Premiums Written
The following table summarizes, by major classes of policies written, the
amounts and percentages of net premiums written by American Indemnity during the
periods indicated.
NET PREMIUMS WRITTEN
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Personal automobile..................... $14,411 25.0% $15,598 25.3% $17,844 25.9%
Commercial multiple peril............... 12,620 21.9 13,911 22.6 15,973 23.2
Commercial automobile................... 12,282 21.3 14,974 24.4 16,272 23.6
Other liability......................... 7,092 12.3 5,786 9.4 7,646 11.1
Homeowners multiple peril............... 6,488 11.3 6,133 10.0 5,506 8.0
Fire and allied lines................... 3,385 5.9 3,667 6.0 3,506 5.1
Inland marine........................... 1,251 2.2 1,361 2.2 1,366 2.0
All other............................... 50 0.1 58 0.1 750 1.1
======= ===== ======= ===== ======= =====
Net premiums written.......... $57,579 100.0% $61,488 100.0% $68,863 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
In April 1998, A. M. Best Company assigned the Company a rating of B
(Adequate). The Company cannot predict whether this rating will eventually be
changed. Although some mortgage lenders will not accept property insurance
written by B rated insurers, the Company has not seen any reduction in the
number of its property policies which can be attributed to this rating. In the
event that any mortgage lenders take exception to any American Indemnity
property policies, the Company has arranged for a cut-through endorsement
(guaranty bond) from American Reinsurance Company which will meet the standards
of mortgage lenders.
Underwriting Results
A common industry measurement of property-casualty insurance underwriting
results is the "statutory combined ratio." This ratio is the sum of (1) the
ratio of losses and loss adjustment expenses to premiums earned ("loss and loss
adjustment expense ratio"); (2) the ratio of underwriting expenses to premiums
written ("underwriting expense ratio"); and (3) the ratio of statutory
retrospective premium adjustments on workers' compensation policies to premiums
written ("retrospective premium adjustment ratio"). When the statutory combined
ratio is under 100%, underwriting results are profitable. Federal income taxes,
investment income, deferred policy acquisition costs and other non-underwriting
income and expenses are not reflected in the statutory combined ratios.
33
<PAGE> 36
The following table sets forth the Company's statutory combined ratios for
the periods indicated.
STATUTORY COMBINED RATIOS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Premiums earned............................................. $62,080 $64,052 $64,579
Statutory losses incurred................................... 40,278 41,025 38,505
Loss adjustment expenses incurred........................... 9,031 13,411 7,360
Loss ratio................................................ 64.9% 64.0% 59.6%
Loss and loss adjustment expense ratio.................... 79.3 84.8 70.9
Underwriting expense ratio................................ 41.7 36.4 36.4
Retrospective premium adjustment ratio.................... 0.7 (0.9) 0.8
======= ======= =======
Statutory combined ratio............................... 121.7% 120.3% 108.1%
======= ======= =======
</TABLE>
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Reserves for Insured Events. American Indemnity maintains a provision for
losses and loss adjustment expenses to cover the ultimate net cost of losses on
reported and unreported claims. The estimation of unpaid losses and loss
adjustment expenses is perhaps the most crucial and important aspect affecting
underwriting results of the Company and the industry as a whole. The Company
follows the practice of reserving for losses for reported and unreported claims
and for related loss adjustment expenses, in each case based on the terms and
limits of liability as specified in the Company's policies. There has not been a
significant change in reserving assumptions or methodologies during the year,
nor a material change in the geographic locations of business produced.
With respect to reported claims, the Company establishes reserves on a
case-by-case basis, based on the best available evidence as to the cost of the
claim. When the reserve for a particular case is set initially, it is based on
current estimated costs, such as automobile or home repair costs for property
damage claims and, in the case of liability claims, the Company's claims
adjuster's and the handling attorney's best estimate of the settlement costs, as
well as such attorney's judgment as to the climate of the courts with respect to
the size of judgments. While there is no explicit provision made for inflation,
these reserves are reviewed continually on a case-by-case basis to determine if,
for example, updated cost information on property claims or revised estimates
based on new information received in the course of settling or litigating a
claim require the reserve to be adjusted. In this manner, the reserve is updated
implicitly to reflect additional costs resulting from inflation or from changing
social conditions, such as changes in the size of judgments for liability
claims.
In addition to reserving for reported claims, the Company establishes
reserves for incurred but unreported claims. These reserves are based on
historical experience with respect to the probable number and nature of claims
arising from losses not yet reported. In addition, if an event occurs with
respect to which the Company believes that all losses have not been reported,
the Company adjusts the reserve for losses incurred but not reported. This
adjustment of the reserve for incurred but unreported claims is based on the
average severity of claims reported with respect to such an event, historical
experience with respect to the average claim severity of like occurrences, the
judgment of the Company's claims adjusters and an estimate of the probable
number of claims that will arise from such an event.
Loss adjustment expense reserves are established based on the Company's
historical experience with respect to loss adjustment expenses paid and
incurred, as well as an experience-based provision for those loss adjustment
expenses not directly assignable to specific claims which are known as
unallocated loss adjustment expenses. Unallocated loss adjustment expenses are
the overhead costs associated with claim handling and administration, such as
salaries of clerical personnel.
For each year end since 1987, the Company has obtained an independent
actuarial review of its reserves for insured events. As of December 31, 1998,
management believes that the Company's reserves for losses and
34
<PAGE> 37
loss adjustment expenses are reasonable and near the mid-point of the reserve
range estimated by the Company's independent actuary. For years prior to 1997,
the Company's reserves were within the reserve range developed by the Company's
independent actuary and, as a result, no significant adjustments were made to
the Company's reserves during these years. As of December 31, 1997, using
methodology consistent with that used in prior years, the Company analysis
indicated that the Company's reserves were below the reserve range. After
extensive review of the data and discussions with the Company's independent
actuary, management believed it to be prudent to further increase reserves. Loss
and loss adjustment expenses were impacted by a total of approximately
$7,700,000 during 1997, which was the amount required to increase reserves to
near the mid-point of the actuarial range. Loss reserves were increased in all
lines of business, with the most significant increases in the lines of business
with significant casualty exposure such as commercial multi-peril, automobile
liability and other liability.
The Company establishes reserves for reported losses based upon historical
experience and upon a case-basis evaluation of the type of loss, knowledge of
the circumstances surrounding each loss and the policy provisions relating to
the type of loss. The amount of reserves for unreported losses is determined by
estimating unreported losses on the basis of historical and statistical
information for each line of insurance with respect to the probable number and
nature of losses arising from occurrences which have not yet been reported.
Established reserves are closely monitored and are adjusted as needed.
Loss reserves are estimates at a given time of the ultimate amount expected
to be paid on incurred losses based on facts and circumstances known when the
estimates are made. Reserves are not discounted. The settlement period on
insurance losses may be many years, and as additional facts regarding individual
losses become known, it often becomes necessary to refine and adjust the
estimates of liability on a loss.
One factor influencing the predictability of loss reserves, as well as the
underwriting results of the Company, is the amount of net property losses
incurred resulting from weather-related catastrophes. Weather-related
catastrophe losses are an ever present aspect of the property-casualty insurance
business. The cost to the Company of such losses in 1998 was approximately
$2,300,000, compared with $470,000 for 1997 and $3,525,000 for 1996.
With respect to losses for insured events, the Company continues to limit
the potential effects of large losses on underwriting results by maintaining
what it believes to be adequate treaty, facultative and catastrophe reinsurance.
See Note 6 of "Notes to Consolidated Financial Statements" in the Annual Report.
The following table presents the changes in loss reserves for the three
most recent years.
RECONCILIATION OF CONSOLIDATED LOSS RESERVES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Beginning reserve, net...................................... $45,440 $36,833 $39,191
------- ------- -------
Provision for:
Insured events of the current year........................ 45,366 44,016 44,431
Insured events of prior years............................. 4,127 7,820 1,777
------- ------- -------
Incurred loss and loss adjustment expenses................ 49,493 51,836 46,208
------- ------- -------
Payments for losses and loss adjustment expenses:
Attributable to insured events of the current year........ 23,385 21,708 24,941
Attributable to insured events of prior years............. 22,294 21,521 23,625
------- ------- -------
Total payments............................................ 45,679 43,229 48,566
------- ------- -------
Ending reserve, net............................... $49,254 $45,440 $36,833
======= ======= =======
</TABLE>
35
<PAGE> 38
The following table presents the Company's loss reserve development for the
ten years ended December 31, 1998:
CONSOLIDATED LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
------ ------ ------ ------ ------ ------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for Unpaid Claims
and Claim Adjustment
Expense(1)............... 51,624 54,449 47,643 43,407 40,841 40,293 39,191 36,833 45,440 49,254
Paid (Cumulative) as of:
One year later........... 26,186 25,009 25,514 21,184 20,375 22,759 23,625 21,521 22,294 --
Two years later.......... 36,055 39,030 35,756 29,795 31,375 32,389 33,613 34,575 -- --
Three years later........ 44,317 45,892 40,170 36,068 36,407 37,503 40,591 -- -- --
Four years later......... 48,515 48,736 42,984 39,180 38,909 41,641 -- -- -- --
Five years later......... 50,044 50,500 44,914 40,438 41,114 -- -- -- -- --
Six years later.......... 51,324 51,824 45,772 42,164 -- -- -- -- -- --
Seven years later........ 52,491 52,538 47,436 -- -- -- -- -- -- --
Eight years later........ 52,935 54,118 -- -- -- -- -- -- -- --
Nine years later......... 54,330 -- -- -- -- -- -- -- -- --
Liability Re-Estimated as
of(1):
One year later........... 52,934 53,674 48,803 44,183 42,135 42,700 40,968 44,653 49,567 --
Two years later.......... 54,949 57,612 51,887 46,609 45,516 46,267 48,576 48,821 -- --
Three years later........ 56,414 59,599 52,202 48,749 47,640 50,242 49,825 -- -- --
Four years later......... 57,264 59,693 52,947 50,016 50,017 51,118 -- -- -- --
Five years later......... 57,112 60,474 53,737 51,085 49,445 -- -- -- -- --
Six years later.......... 57,552 60,995 54,681 50,814 -- -- -- -- -- --
Seven years later........ 57,957 61,788 54,373 -- -- -- -- -- -- --
Eight years later........ 58,475 61,629 -- -- -- -- -- -- -- --
Nine years later......... 58,232 -- -- -- -- -- -- -- -- --
Redundancy (deficiency).... (6,608) (7,180) (6,730) (7,407) (8,604) (10,825) (10,634) (11,988) (4,127) --
Gross liability -- end of
year..................... 55,602 71,055 71,796
Reinsurance recoverable.... 18,769 25,615 22,542
Net liability -- end of
year..................... 36,833 45,440 49,254
Gross re-estimated
liability -- latest...... 74,193 77,598
Re-estimated recoverable --
latest................... 25,372 28,031
Net re-estimated
liability -- latest...... 48,821 49,567
Gross cumulative
deficiency............... (18,591) (6,543)
</TABLE>
- ---------------
(1) The re-estimated liability shown above has been reduced (increased) by
retrospective premium adjustments which were subsequently collected from
(paid to) workers' compensation policyholders as follows (dollars in
thousands): 1989, $838; 1990, $(2,229); 1991, $(1,004); 1992, $(2,454);
1993, $(1,958); 1994, $(2,223); 1995, $(623); 1996, $170; and 1997, $(580).
Since these amounts are reported separately from incurred losses in the
Company's financial statements prepared in accordance with generally
accepted accounting principles and its statutory financial statements, they
are reconciling items between this table and Schedule P of the statutory
financial statements. Additionally, in accordance with generally accepted
accounting principles, accruals have been made for the Company's estimated
assessments from the Texas Workers' Compensation Insurance Facility, and the
liability for unpaid claims and claim adjustment expenses has been increased
by the following amounts (dollars in thousands): 1989, $4,060; 1990, $4,958;
1991, $2,415; and 1992, $603, and the re-estimated liability shown above has
been increased (decreased) by the following amounts (dollars in thousands):
1989, $751; 1990, $401; 1991, $(366); 1992, $(642); 1993, $(214); 1994, $42;
1995, $54; and 1996, $91. Such amounts are also reconciling items between
this table and Schedule P of the statutory financial statements.
In evaluating the above table, it should be noted that each amount includes
the effects of all changes in amounts for prior periods. For example, the amount
of the deficiency related to losses settled in 1992, but incurred in 1989, will
be included in the cumulative deficiency amount for years 1989, 1990 and 1991.
Conditions and trends that have affected development of the reserves in the past
may not necessarily occur in
36
<PAGE> 39
the future. Accordingly, it is not appropriate to extrapolate future
redundancies or deficiencies based on this table.
Loss reserves amounted to approximately $49,254,000 at December 31, 1998.
In view of the variability inherent in the calculation of loss reserves, should
the ultimate net cost of American Indemnity's losses prove to be substantially
greater than its loss reserves, its operations, earnings and surplus could be
adversely affected. The Company believes, however, that its aggregate loss and
loss adjustment expense reserves are reasonable and adequate to cover the
ultimate net cost of losses and loss adjustment expenses on reported and
unreported claims.
NARRATIVE DESCRIPTION OF BUSINESS
General
The Company, through American Indemnity, is a multiple-line property and
casualty insurer. The lines of insurance written by American Indemnity include
automobile, homeowners multiple peril, workers' compensation, fire and allied
lines, commercial multiple peril, inland marine and general casualty lines.
American Indemnity does not write certain high-risk specialty lines, such as
medical and other professional malpractice and directors' and officers'
liability, although it is exposed to a certain extent to such risks through
pooling arrangements required of insurance companies by various state regulatory
authorities.
The insurance written by American Indemnity is produced through
approximately 522 agencies. All such agencies are permitted to, and usually do,
represent other insurance companies. In addition, American Indemnity maintains
five service offices in three states to service its agencies and policyholders.
In five other states, the Company has a marketing representative. During the
second quarter of 1998, the Company began offering nonstandard personal
automobile insurance in Illinois.
American Indemnity competes with individual companies and with groups of
affiliated companies, many of which have nationwide organizations, more
diversified lines of insurance coverage, greater financial resources, larger
sales forces and more widespread agency relationships. Competitors include both
stock and mutual companies and other underwriting organizations.
As of December 31, 1998, the Company and American Indemnity had 147 home
office employees and 76 employees in the field.
Reinsurance
American Indemnity follows the customary practice of reinsuring with other
insurance companies a portion of certain risks under the policies it has
written. This practice is referred to as "ceding." Such reinsurance is
maintained to protect American Indemnity against the severity of individual
claims as well as against unusually serious occurrences in which a number of
claims produce an aggregate extraordinary loss. Although reinsurance does not
discharge American Indemnity from its primary liability for the full amount of
the policies, it does make the assuming reinsurer liable to American Indemnity
to the extent of the reinsured portion of risks. The statutes and regulations of
various states permit the primary insurer, in its financial statements, to treat
risks, to the extent properly reinsured, as though they were risks for which the
primary insurer is not liable.
American Indemnity has reinsurance contracts, known as reinsurance
"treaties," under which certain types of policies are automatically reinsured
without the need for individual approval by the reinsurer of each risk covered.
Other reinsurance contracts provide for "facultative" reinsurance which is
handled on an individual policy or risk basis and requires the specific
agreement of the reinsurer as to each risk insured.
During 1998, property insurance risks were reinsured under treaty
arrangements whereby $900,000 of losses in excess of $100,000 are automatically
reinsured. Effective January 1, 1999, American Indemnity's retention for
property risks increased to $150,000 from $100,000. During 1998, American
Indemnity carried excess catastrophe reinsurance which covered 95% of all losses
with respect to windstorm, hurricane and hail suffered within any two separate
72 hour periods within a 12 month interval up to $36,000,000 in excess of
37
<PAGE> 40
$4,000,000. Although the excess catastrophe reinsurance agreement remains in
effect, the aggregate excess reinsurance provision under this agreement was
terminated effective January 1, 1999. Such aggregate excess reinsurance
provision had been in effect for three years without any claims being made
against it, and the Company elected to cancel that provision to save
approximately $1,600,000 per year in reinsurance costs. The aggregate excess
reinsurance provision that was cancelled covered 95% of all property and
automobile losses up to $4,000,000 in excess of $2,000,000, subject to a
$200,000 per occurrence retention. The Company has never had an individual
catastrophe loss in excess of $6,300,000; however, there can be no assurance
that a greater loss could not occur in the future.
All claims on automobile liability and casualty insurance over $175,000 up
to $2,000,000 are automatically reinsured under a treaty. All claims on
non-standard personal automobile risks in Illinois are reinsured under a fifty
percent quota share reinsurance agreement.
Investments
American Indemnity invests its capital surplus and reserve funds in
securities and other investments authorized by applicable state laws and
regulations and receives income from such investments in the form of interest,
dividends and capital gains. The principal objective of the Company's investment
portfolio is to provide capital for American Indemnity's insurance underwriting
operations. The securities comprising American Indemnity's investment portfolio
consist primarily of taxable government and government agencies and authorities
bonds, tax-exempt state and municipal bonds, corporate bonds, and preferred and
common stocks.
The following table sets forth the investment results of the Company,
exclusive of investments in subsidiaries, for each of the three years ended
December 31, 1998 (dollars in thousands).
<TABLE>
<CAPTION>
ANNUAL PERCENTAGE
EARNED ON
AVERAGE CASH ------------------------- NET CAPITAL
AND INVESTMENTS NET GAINS (LOSSES)
--------------------------------- INVESTMENT INVESTMENTS INVESTMENTS ---------------------
YEAR CASH INVESTMENTS(1) TOTAL INCOME(2) AND CASH ONLY REALIZED UNREALIZED
- ---- ------ -------------- ------- ---------- ----------- ----------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996................. $4,566 $86,388 $90,954 $4,592 5.05% 5.32% $ 658 $ (304)
1997................. 6,262 87,902 94,164 4,368 4.64 5.00 1,482 4,445
1998................. 8,998 86,718 95,716 4,709 4.92 5.43 1,601 (1,005)
</TABLE>
- ---------------
(1) The average of amounts at beginning and end of year with securities valued
at market value.
(2) Net investment income is after deduction of investment expenses and before
net realized gains and losses.
REGULATION AND OTHER RESTRICTIONS
American Indemnity, similar to other insurance companies, is subject to
regulation and supervision by the insurance regulatory authority of each state
or other jurisdiction in which it is licensed to do business. These regulatory
authorities have broad administrative powers relating to the granting and
revocation of licenses to transact business, the licensing of agents, the
approval of policy forms and rates, the form and content of mandatory financial
statements, reserve requirements and the types of investments which may be made.
Detailed annual reports must be filed with the appropriate regulatory
authorities and the books and records of American Indemnity are subject to their
examination.
The Insurance Holding Company System Regulatory Act (the "Texas Act")
regulates insurance companies authorized to do business in the State of Texas
which are members of an insurance holding company system. Under the Texas Act,
no insurance company may pay dividends within any twelve-month period which
exceed the greater of 10% of such insurer's statutory surplus as regards
policyholders, as reported at the end of the preceding calendar year, or the
statutory net investment income of such insurer for such year, without the
consent of the Commissioner of Insurance of the State of Texas. Furthermore,
only such earnings of American Indemnity determined on the statutory basis,
exclusive of restricted surplus and special surplus funds, are available for
distribution as cash dividends and are subject to declaration by American
Indemnity's Board of Directors and to such restrictions imposed by law or
regulation on the payment of dividends. For
38
<PAGE> 41
amounts available for payment of dividends by American Indemnity, see Note 7 of
"Notes to Consolidated Financial Statements" in the Annual Report.
The National Association of Insurance Commissioners (the "NAIC") has
established various model laws, regulations and guidelines as part of its
regulatory oversight of insurance companies. The NAIC Model Insurance Company
System Regulatory Act (the "NAIC Model Act") contains restrictions regarding
payment of dividends which differ from restrictions under Texas law. The NAIC
Model Act requires that no insurance company may pay any extraordinary dividend
or make any other extraordinary distribution to its shareholders until thirty
days after the commissioner of insurance has received notice of the declarations
thereof and has not within that period disapproved the payment, or until the
commissioner of insurance has approved the payment within the thirty-day period.
An extraordinary dividend or distribution includes any dividend or distribution
of cash or other property, whose fair market value together with that of other
dividends or distributions made within the preceding twelve months exceeds the
lesser of 10% of its statutory surplus as regards to policyholders as of the end
of the preceding calendar year or the net income, not including realized capital
gains, for such year. An insurance company may carry forward net income from the
previous two calendar years that has not already been paid out as dividends.
Additionally, under the Texas Act, a Texas insurance company may not enter
into transactions with any member of its holding company system involving sales,
purchases, exchanges, loans or extensions of credit, or investment, involving
either more than 5% of its admitted assets or 25% of its surplus, whichever is
the lesser, as of the end of the prior calendar year, without the approval of
the Commissioner of Insurance of the State of Texas. Certain other states in
which American Indemnity is authorized to do business have enacted statutes
similar to the Texas Act, but such statutes typically provide that they are
inapplicable, in whole or in part, to insurance companies which are subject to
similar regulations in their state of domicile.
American Indemnity, similar to other insurance companies, maintains its
accounts in accordance with statutory insurance practices, which differ in some
respects from generally accepted accounting principles followed by other
business enterprises in determining financial position and results of
operations. Since these differences have been adjusted to present the Company's
consolidated financial statements filed as a part of this report in conformity
with generally accepted accounting principles (see Notes 1 and 7 of "Notes to
Consolidated Financial Statements" in the Annual Report), such consolidated
financial statements do not necessarily disclose American Indemnity's financial
position for purposes of regulation and supervision by the supervising agencies
of each state or jurisdiction in which American Indemnity is licensed to do
business.
In accordance with the insurance laws of Texas and the rules and practices
of the NAIC, American Indemnity is examined periodically by examiners of the
state of Texas and (on an "association" or "zone" basis) by representatives of
the other states in which it is licensed to do business. The most recently
completed examination was made by the state of Texas as of December 31, 1996.
PROPERTIES
The home office facilities consist of two adjacent and connected buildings
owned by American Indemnity with an aggregate of 152,000 square feet located in
the business section of Galveston, Texas. The Company's home office facilities
are 99.9% occupied by the Company and 0.1% leased to other parties. All other
facilities of the Company consist of a total of five service offices in three
states that are leased by American Indemnity for terms of one to five years. The
Company believes that its leased and owned properties are adequate for its
current needs.
LEGAL PROCEEDINGS
The Company is not a party to any litigation except in the ordinary course
of business.
39
<PAGE> 42
PER SHARE INFORMATION
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31,
MARCH 31, ------------------------------------------
1999 1998 1997 1996 1995 1994
------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Per Share Cash Consideration:
$15.3553
Book Value per Share (end of
period)............................ $15.47 $16.72 $20.21 $21.32 $20.82 $17.18
Closing Price per Share (end of
period)............................ 12.31 10.63 13.88 10.25 9.83 10.13
Cash Dividends Paid to
Shareholders....................... -- -- 0.30 0.30 0.285 0.21
Income (Loss) per Share.............. (0.31) (2.98) (3.00) 1.00 (2.92) 4.24
</TABLE>
PER SHARE MARKET AND DIVIDEND INFORMATION
<TABLE>
<CAPTION>
PRICE OF
COMMON
STOCK
------------------ DIVIDENDS
HIGH LOW PAID
------- ------- ----------
<S> <C> <C> <C>
1999 QUARTER ENDED
March 31.................................................. $13 5/8 $10 1/2 $ --
June 30................................................... 14 1/4 11 5/8 --
1998 QUARTER ENDED:
March 31.................................................. 14 1/2 9 1/2 --
June 30................................................... 13 11 3/8 --
September 30.............................................. 15 3/8 10 1/4 --
December 31............................................... 13 1/4 10 5/8 --
1997 QUARTER ENDED:
March 31.................................................. 14 10 1/8 .075
June 30................................................... 13 1/2 12 .075
September 30.............................................. 15 1/2 12 1/8 .075
December 31............................................... 15 11 1/4 .075
</TABLE>
The Common Stock is traded on the Nasdaq National Market. As of June 11,
1999 there were approximately 380 stockholders, not including shares held
beneficially in nominee accounts.
At December 31, 1998, American Indemnity had no statutory retained earnings
available for payment of cash dividends. For further discussions of restrictions
on the payment of dividends on the Common Stock, see "The Company -- Regulation
and Other Restrictions" on page 38 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity -- Financing
Activities" and Note 7 to the Notes to Consolidated Financial Statements in the
Annual Report.
SELECTED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
NET PREMIUMS PREMIUMS NET EARNINGS
WRITTEN EARNED INCOME PER SHARE
------------ ----------- ----------- ---------
<S> <C> <C> <C> <C>
1999
First Quarter.......................... $13,802,032 $15,060,358 $ (613,841) $ (.31)
1998
First Quarter.......................... $13,863,572 $15,778,094 $(1,813,047) $ (.92)
Second Quarter......................... 16,436,358 15,787,024 (2,377,013) (1.21)
Third Quarter.......................... 13,741,689 15,086,097 (644,342) (.33)
Fourth Quarter......................... 13,537,045 15,428,913 (1,011,708) (.52)
1997
First Quarter.......................... $16,408,628 $15,944,356 $ (258,833) $ (.13)
Second Quarter......................... 15,872,624 15,736,393 387,907 .20
Third Quarter.......................... 16,959,852 16,904,968 337,056 .17
Fourth Quarter......................... 12,246,999 15,466,438 (6,347,303) (3.23)
</TABLE>
40
<PAGE> 43
FINANCIAL INFORMATION FOR THE QUARTER ENDED MARCH 31, 1999
AMERICAN INDEMNITY FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
PREMIUMS AND OTHER INCOME:
Premiums earned........................................... $15,060,358 $15,778,094
Net investment income (net of investment expenses of
$93,610 in 1999 and $99,686 in 1998)................... 1,102,188 1,179,394
Realized investment gains................................. 35,073 279,707
Interest on premium bills receivable and other income..... 218,358 221,772
----------- -----------
TOTAL............................................. 16,415,977 17,458,967
----------- -----------
EXPENSES:
Losses and loss adjustment expenses....................... 11,180,789 13,005,277
Policy acquisition costs.................................. 5,916,818 6,450,654
Retrospective premium adjustments on workers' compensation
policies............................................... (67,789) (183,917)
----------- -----------
TOTAL............................................. 17,029,818 19,272,014
----------- -----------
NET LOSS BEFORE FEDERAL INCOME TAX.......................... (613,841) (1,813,047)
PROVISION (CREDIT) FOR FEDERAL INCOME TAX:
Current...................................................
Deferred..................................................
----------- -----------
TOTAL............................................. -- --
----------- -----------
NET LOSS.................................................... $ (613,841) $(1,813,047)
=========== ===========
AVERAGE SHARES OUTSTANDING.................................. 1,962,410 1,962,410
BASIC AND DILUTED EARNINGS PER SHARE:
NET LOSS.................................................... $ (0.31) $ (0.92)
=========== ===========
DIVIDENDS DECLARED PER SHARE................................ $ -- $ --
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
41
<PAGE> 44
AMERICAN INDEMNITY FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Investments -- at market value:
Fixed maturities -- bonds:
Available for sale........................................ $ 67,148,245 $ 66,827,552
Preferred stocks.......................................... 1,107,420 1,136,433
Common stocks............................................. 13,759,024 15,595,049
------------ ------------
Total Investments...................................... 82,014,689 83,559,034
Cash and Cash Equivalents................................... 7,814,235 9,822,369
Accrued Investment Income................................... 871,930 767,166
Premiums in Course of Collection, Net....................... 5,467,831 4,697,268
Direct Premium Bills Receivable............................. 9,498,675 9,671,775
Reinsurance Balances Receivable............................. 23,274,852 23,470,118
Prepaid Reinsurance Premiums................................ 2,914,426 2,580,950
Property and Equipment -- less accumulated depreciation of
$5,599,587 in 1999 and $5,509,125 in 1998................. 3,685,171 3,768,975
Deferred Policy Acquisition Costs........................... 8,845,048 8,799,976
Deferred Income Taxes....................................... 3,889,000 3,889,000
Other Assets................................................ 1,708,989 1,581,024
------------ ------------
TOTAL............................................. $149,984,846 $152,607,655
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid Losses and Loss Adjustment Expenses.................. $ 71,770,489 $ 71,796,212
Unearned Premiums........................................... 30,264,606 31,189,456
Reinsurance Balances Held or Payable........................ 7,557,198 6,889,131
Notes Payable to Bank....................................... 317,310 341,357
Accounts Payable and Other Accrued Liabilities.............. 9,722,419 9,578,133
------------ ------------
Total Liabilities................................. 119,632,022 119,794,289
------------ ------------
Stockholders' Equity:
Preferred stock, authorized 2,000,000 shares; none
outstanding
Common stock, $3.33 1/3 par value; authorized 2,500,000
shares; outstanding shares 1,962,410 in 1999 and
1998................................................... 6,541,351 6,541,351
Paid-in surplus........................................... 13,097,668 13,097,668
Accumulated comprehensive income.......................... 3,673,130 5,519,831
Retained earnings......................................... 7,040,675 7,654,516
------------ ------------
Total Stockholders' Equity........................ 30,352,824 32,813,366
------------ ------------
TOTAL............................................. $149,984,846 $152,607,655
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
42
<PAGE> 45
AMERICAN INDEMNITY FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
----------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Loss.................................................. $ (613,841) $ (1,813,047)
Adjustments to reconcile net loss to net cash flow from
operating activities:
Decrease (Increase) in:
Premiums in course of collection....................... (770,563) (552,958)
Direct premium bills receivable........................ 173,100 2,031,680
Reinsurance balances receivable........................ 195,266 2,827,583
Prepaid reinsurance premiums........................... (333,476) (72,225)
Deferred policy acquisition costs...................... (45,072) 323,519
Other assets........................................... (127,965) (188,763)
Increase (Decrease) in:
Unpaid losses and loss adjustment expenses............. (25,723) (3,026,981)
Unearned premiums...................................... (924,850) (1,842,296)
Reinsurance balances held or payable................... 668,067 304,618
Accounts payable and other accrued liabilities......... 144,286 1,006,357
Realized investment gains................................. (35,073) (279,707)
Depreciation.............................................. 90,463 89,648
Other..................................................... (70,490) (87,863)
----------- ------------
Net cash flow used in operating activities........ (1,675,871) (1,280,435)
----------- ------------
INVESTING ACTIVITIES:
Sale of bonds............................................. 3,330,875
Maturity of bonds......................................... 7,526,509 15,515,755
Sale of common stocks..................................... 1,859,211 1,278,884
Purchase of bonds......................................... (8,559,828) (16,605,096)
Purchase of common stocks................................. (1,127,452) (907,384)
Purchase of property and equipment........................ (6,656) (139,784)
Other.....................................................
----------- ------------
Net cash flow from (used in) investing
activities..................................... (308,216) 2,473,250
----------- ------------
FINANCING ACTIVITIES:
Payments on bank loan..................................... (24,047) (22,040)
----------- ------------
Net cash flow used in financing activities................ (24,047) (22,040)
----------- ------------
Net Increase (Decrease) in Cash and Cash Equivalents...... (2,008,134) 1,170,775
Cash and Cash Equivalents, January 1...................... 9,822,369 8,174,074
----------- ------------
Cash and Cash Equivalents, March 31....................... $ 7,814,235 $ 9,344,849
=========== ============
</TABLE>
See Notes to Consolidated Financial Statements
43
<PAGE> 46
AMERICAN INDEMNITY FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) The financial information included herein is unaudited but, in the
opinion of management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation have been included. These interim consolidated
financial statements should be read in conjunction with the Company's Annual
Report for the year ended December 31, 1998. The results of operations for this
interim period are not necessarily indicative of results for the full year.
(2) The Company paid total interest expense of $7,293 and $9,300 for three
months ended March 31, 1999 and March 31, 1998, respectively.
(3) The weighted-average number of shares outstanding was 1,962,410 for
each of the quarters ended March 31, 1999 and March 31, 1998. As the effect of
the diluted shares was anti-dilutive, all per share amounts presented represent
both basic and dilutive earnings per share.
Reporting Comprehensive Income. Comprehensive income includes all changes
in equity during a period except those resulting from investments by owners and
distributions to owners. The comprehensive loss of the Company was $2,460,542
for the three months ended March 31, 1999 compared with $429,368 for the three
months ended March 31, 1998. The difference between net income (loss) and
comprehensive income (loss) relates to the change in the unrealized appreciation
in market value of investments during the periods.
(4) Recent Accounting Pronouncements. In June 1998, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. The Company is required to adopt the provisions of SFAS No. 133 in
the third quarter of 1999.
In October 1998, the AICPA issued SOP 98-7, "Deposit Accounting: Accounting
for Insurance and Reinsurance Contracts that Do Not Transfer Insurance Risk."
SOP 98-7 addresses deposit accounting for certain insurance and reinsurance
contracts and direct business by insurance enterprises and other enterprises.
The Company is required to adopt the provisions of SOP 98-7 in fiscal year 2000.
Management is currently evaluating but has not yet determined what effect
if any, there will be on the Company's financial statements and related
disclosures from the above-mentioned pronouncements that are not yet effective.
(5) On March 4, 1999 the Company announced the signing of a definitive
agreement providing for the acquisition of American Indemnity Financial
Corporation by United Fire & Casualty Company of Cedar Rapids, Iowa. It is
anticipated that the acquisition will be completed during the third quarter of
1999, subject to customary closing conditions including shareholder and
regulatory approval.
44
<PAGE> 47
AMERICAN INDEMNITY FINANCIAL CORPORATION
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY
The Company has consistently been able to generate adequate amounts of cash
to meet its needs and management is unaware of any trends, demands or
commitments which will or are reasonably likely to have a significant effect on
the Company's liquidity.
Operating Activities
The net cash flow from operating activities for the three months ended
March 31, 1999 was negative primarily as a result of unfavorable underwriting
results. The underwriting results improved during the first three months of 1999
compared with the first three months of 1998 primarily as a result of a decrease
in the frequency of new claims occurrences for the automobile and other
liability lines of business for the comparison periods. Nevertheless,
underwriting results were unprofitable in all major lines of business.
The net cash flow from operating activities for the three months ended
March 31, 1998 was negative primarily as a result of a decrease in net premiums
written and unfavorable underwriting results. The decrease in net premiums
written was primarily the result of competitive pricing pressures and a policy
processing problem that caused a temporary inability to process certain policies
during the quarter. The unfavorable underwriting results were due primarily to
an unanticipated increase in the frequency of new claims occurrences for the
automobile and commercial multiple peril lines of business during the first
three months of 1998.
Investing Activities
During the first three months of 1999, management invested a portion of
available cash balances and the proceeds from the disposition of investments
into investment grade bonds and common stocks. The net cash flow from investing
activities was negative for the first three months of 1999 because total
investment purchases exceeded total investment sales and maturities.
During the first three months of 1999, unrealized investment losses
decreased stockholders' equity by approximately $1,847,000; approximately
$678,000 of this amount was from debt securities, with the remaining losses from
equity securities. These unrealized investment losses were primarily the result
of bond and stock market fluctuations during the first three months of 1999.
The net cash flow from investing activities was positive for the first
three months of 1998 because total investment sales and maturities exceeded
total investment purchases. During the first three months of 1998, the Company's
cash flow from operating activities was negative. As a result, additional funds
were raised through the sale of investments. However, whenever possible,
management invested a portion of available cash balances and the proceeds
received from disposition of investments into investment grade bonds and common
stocks.
Financing Activities
There were no new financing commitments entered into in the first three
months of 1999 and no significant increase in the cost of current financing
arrangements. The Company has not paid any dividends to stockholders since the
fourth quarter of 1997. It is not anticipated that dividends to stockholders
will resume within the foreseeable future.
45
<PAGE> 48
CAPITAL RESOURCES
The activities of insurance companies are regulated by state authorities
and adequate levels of reserves and equity capital are required to be maintained
to ensure that sufficient capital is retained in the business to provide
sufficient funds to meet its obligations. Management believes that the Company
meets all statutory and regulatory requirements and that sufficient funds have
been retained to meet its obligations. The Company has no current commitments or
plans for debt or equity financing.
On March 4, 1999, the Company and United Fire & Casualty Company announced
the signing of an agreement providing for United Fire & Casualty Company's
acquisition of American Indemnity Financial Corporation. It is anticipated that
the acquisition will be completed during the third quarter of 1999.
RESULTS OF OPERATIONS
Premiums earned decreased 4.5% for the three months ended March 31, 1999
compared with the three months ended March 31, 1998 primarily as a result of
soft market conditions experienced during the first quarter of 1999 as has been
the case in recent years. Despite such conditions, the Company endeavored to
remain competitive without engaging in severe price competition or compromising
its underwriting guidelines. Management intends to continue marketing all lines
of business at prices that reflect its experience.
Average invested assets decreased approximately $6,620,000, or 7.4% at
March 31, 1999 compared with March 31, 1998 primarily as a result of investing
activities during 1998 in which total investment sales and maturities exceeded
total investment purchases. During 1998, the Company's cash flow from operating
activities was negative. As a result, additional funds were raised through the
sale of investments. As a result of the decrease in average invested assets, net
investment income decreased 6.5% for the three months ended March 31, 1999
compared with the three months ended March 31, 1998. However, the Company's
average investment yield was 5.33% for the three months ended March 31, 1999
compared with 5.28% for the three months ended March 31, 1998.
The loss and loss adjustment expense ratio was 74.2% for the three months
ended March 31, 1999 compared with 82.4% for the three months ended March 31,
1998. The decrease in this ratio was primarily a result of a decrease in the
frequency of new claims occurrences for the automobile and other liability lines
of business for the comparison periods. Nevertheless, underwriting results were
unprofitable in all major lines of business. Management does not believe that
these unfavorable underwriting results are indicative of a trend.
The policy acquisition cost ratio was 39.3% for the three months ended
March 31, 1999 compared with 40.9% for the three months ended March 31, 1998.
The decrease in this ratio was primarily the result of an increase in deferral
of deferred policy acquisition costs during the first quarter of 1999. During
the first three months of 1999, policy acquisition costs included approximately
$248,000 from expenses related to the pending sale of the Company to United Fire
& Casualty Company.
Primarily as a result of unfavorable underwriting results during the first
three months of 1999 for the reasons discussed above, the net loss of the
Company was approximately $614,000 compared with a net loss of approximately
$1,813,000 during the first three months of 1998.
Year 2000 Issues. The Year 2000 issue (i.e. the ability of computer systems
to accurately identify and process dates beginning with the year 2000 and
beyond) affects virtually all companies and organizations. Some of the Company's
computer systems are already Year 2000 compliant. However, certain of the
Company's computer systems use only two digits to identify a year in a date
field. For example, the year 2000 would be represented in these systems as "00,"
but might in many cases be interpreted by the computer as "1900" rather than
"2000," thereby potentially resulting in processing errors.
The ability to process information in a timely and accurate manner is vital
to the Company's data-intensive insurance business. The Company recognizes that
the computer systems used must be Year 2000 compliant by December 31, 1999 and,
in some instances, well in advance of that date (e.g., by January 1999 in the
case of certain property and casualty insurance policies with one-year terms
expiring on or after January 1, 2000). The Company has been taking steps it
deems appropriate to meet this challenge, including replacing or
46
<PAGE> 49
upgrading certain of its existing computer applications that improve
functionality in addition to being Year 2000 compliant, and planning alternative
measures, if necessary, including manual processing of data.
During 1997, the Company upgraded the principal portion of its policy
processing and claims system to the PMSC Point system as a part of its
technology enhancement and Year 2000 compliance initiatives. The Point system is
one of the Company's most critical software programs as it is used for the daily
administration of the insurance operations. A migration plan was developed and
implemented to move from a non-compliant release of the PMSC Point system to a
subsequent release which, the Company was advised by PMSC, is fully Year 2000
compliant. This migration was completed in September 1998. Company personnel
tested the system for compliance before moving the upgrade into production. In
order to perform this testing, the software's system date was moved forward into
the years 2000 and 2001. In every test case, the software generated the expected
results.
A Year 2000 project plan has been developed and all Company systems have
been addressed as to Year 2000 compliance. According to the plan, 90% of all
software packages have been identified as Year 2000 compliant by either their
vendors or Company resources. The remaining non-compliant software can be
classified into three groups: i) non-critical, ii) scheduled to be modified or
replaced before the year 2000 and iii) those scheduled to be discarded. Computer
related hardware has been found to be 74% compliant, and the remaining hardware,
which includes items such as desktop personal computers and network equipment is
currently being tested for compliance. The telecommunications system is
non-compliant, however, plans are for this to be compliant by the end of the
third quarter of 1999. All other types of equipment such as copiers and fax
machines have been found to be 60% compliant and the remaining items are under
investigation for compliance. In general, 86% of all the items in the Year 2000
project plan have been completed and, except for the policy processing system
described in the following paragraph, the remaining items are scheduled to be
completed by the end of the third quarter of 1999.
The Company currently utilizes a policy processing system for commercial
lines of business for states other than Texas that is not Year 2000 compliant.
The Company currently uses this system for rating purposes only. The ratings
generated by this system are manually entered into the Point system, which then
administers the policies by automated processes. During 1998, the Company
intended to purchase the rating algorithms from PMSC which are required to
process this business under the Point system. However, this decision was not
implemented during 1998 pending the outcome of identifying the strategic
alternatives for the Company which has now lead to the previously discussed
merger with United Fire & Casualty Company. The Company was informed by PMSC in
December 1998 that even if it purchased and proceeded with implementation of
these rating algorithms during the first quarter of 1999 that it was unlikely
that all states would be implemented in time. The Company currently processes
the majority of its commercial business utilizing a combination of manual
systems and automated systems. Management believes that, if necessary, the
policies rated by this system could be entirely rated on a manual basis.
The Company has received information from certain of its vendors to assure
their systems' compliance as well, or alternatively, to determine to the extent
possible the extent the Company is vulnerable to those third parties' failure to
achieve Year 2000 compliance, and if necessary, to develop alternatives. As a
result of the Company's ongoing efforts to reengineer its business processes and
assuming compliance by third parties with whom the Company conducts business,
management believes that the impact on future earnings from efforts to achieve
Year 2000 compliance will not be significant. However, there can be no assurance
that the systems of other companies on which the Company's systems and
operations rely will be timely compliant, or that a failure to be compliant by
another company would not have a material adverse effect on the Company's future
operations.
The Company believes that in an emergency situation resulting from the
severe failure of computer systems, it could revert to the use of manual systems
that rely on personal computers and spreadsheet software. Through these manual
systems, the Company could perform the minimum functions required to maintain
insurance services and provide a minimum level of information reporting to
maintain a level of control over the business processes. Should the Company have
to utilize manual systems in an emergency as noted above, it is uncertain that
it could maintain current levels of operations and this could have a material
47
<PAGE> 50
adverse impact on the business. The Company intends to maintain constant
surveillance on its Year 2000 issues.
Historical expenses recognized directly related to replacing existing
applications with Year 2000 compliant applications cannot be determined with
precise accuracy because the Point system project was initiated as a result of
management's decision to modernize the business processes of the Company and
accomplish Year 2000 compliance at the same time. Also, the implementation of
the Point system resulted in some staff reductions within the Company. Including
the total costs of conversion to PMSC Point system, expenses recognized directly
related to replacing existing applications with Year 2000 compliant applications
totaled approximately $1,700,000 from January 1, 1996 through December 31, 1998
with funds obtained through operating revenues. The Company currently
anticipates that it will incur future costs of less than $100,000 for additional
third-party vendors and other expenses to achieve Year 2000 readiness for its
information technology systems ("IT systems") excluding the Point system rating
algorithms previously discussed.
Equipment and systems other than IT systems could also be affected. Such
systems typically include built-in or "embedded" technology such as
microcontrollers. The Company has reviewed non-IT system issues relating to Year
2000 compliance. As a result, the Company believes there are no such issues
which might have a significant effect on the Company's operations as a result of
failure to be Year 2000 compliant.
The foregoing statements in this section are intended to be and are hereby
designated "Year 2000 Readiness Disclosure" statements within the meaning of the
Year 2000 Information and Readiness Disclosure Act.
Recent Accounting Pronouncements. The Company is aware of several newly
issued accounting pronouncements which require adoption by the Company either in
1999 or 2000. These recent accounting pronouncements are more thoroughly
discussed in the accompanying notes to consolidated financial statements.
PRINCIPAL STOCKHOLDERS
The following table sets forth as of June 11, 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>
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIALLY PERCENT OF
BENEFICIAL OWNER 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
</TABLE>
48
<PAGE> 51
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIALLY PERCENT OF
BENEFICIAL OWNER OWNED CLASS
- ------------------- ---------------- ----------
<S> <C> <C>
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 (10 672,236 34.3%
persons)(7)...............................................
</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 June 11, 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 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 June 11, 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
49
<PAGE> 52
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.
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, if the Merger is not consummated, 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 June 11, 1999, each
nominee and director owned less than 1% of the outstanding shares of
50
<PAGE> 53
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 JUNE 11,
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, 58 President and Chief Executive 1973 578,205(7)
III(2)(3)........................ 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 & 1977 4,479(4)
Jaworski L.L.P.
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.
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
51
<PAGE> 54
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 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
52
<PAGE> 55
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 sets forth information regarding the persons who served as
the executive officers of the Company through June 1999 and who are currently
serving in such capacities. Mr. J. Fellman Seinsheimer, III currently serves as
President and Chief Executive Officer, and has served as an officer of the
Company since 1973. From 1994 until June 30, 1999, Mr. Phillip E. Apgar served
as Vice President, Treasurer and Chief Financial Officer of the Company. Mr.
Apgar is 45 years of age and was employed with American Indemnity in various
capacities beginning in April 1974, most recently as Vice President and
Controller. As of June 30, 1999, Mr. Apgar beneficially owned 500 shares of
Common Stock, which represents less than 1% of the shares of Common Stock
outstanding as of June 11, 1999. As a result of the pending Merger, Mr. Apgar
announced his resignation from the Company, effective June 30, 1999. Effective
July 1, 1999, Mr. Vaughn V. Vaughan was appointed Vice President, Treasurer and
Chief Financial Officer of the Company. Mr. Vaughan served as Vice President and
Manager of Financial Accounting of American Indemnity from September 1993 until
May 1997. From May to September 1997, he served as Chief Financial Officer of
Grammercy Insurance Company. From September 1997 to the present, Mr. Vaughan has
served as Vice President and Controller of American Indemnity. Messrs.
Seinsheimer and Vaughan have been nominated for re-election to their current
positions at the directors' meeting to be held following the Annual Meeting of
Stockholders. If elected and if the Merger is not consummated, Mr. Seinsheimer
is expected to serve as President and Chief Executive Officer, and Mr. Vaughan
is expected to serve as Vice President, Treasurer and Chief Financial Officer,
until the next annual meeting of the directors and until their successors are
elected and qualified.
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.
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
53
<PAGE> 56
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.
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.
54
<PAGE> 57
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.
55
<PAGE> 58
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.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
(AWARDS)
ANNUAL COMPENSATION ------------
----------------------- 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
56
<PAGE> 59
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 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 June 11, 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 AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1998 DECEMBER 31, 1998
ACQUIRED VALUE --------------------------- ---------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) ($) (#) (#) (#) (#)
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Phillip E. Apgar.......... -- -- 3,000 -- 0 --
</TABLE>
Mr. Apgar's options expired April 15, 1999.
57
<PAGE> 60
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 DOW JONES P
(FISCAL YEAR COVERED) AIFC NASDAQ U.S. & 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 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%.
58
<PAGE> 61
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 were 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 Eugene Hornstein, First Vice President 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 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
59
<PAGE> 62
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 amount which would
have been payable to Mr. Seinsheimer is approximately $1,062,500 and to Mr.
Hornstein is approximately $469,000. Such payments, if required to be made
during 1998, would have had an adverse impact on the 1998 reported results of
operations; however, they 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 Executive 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 Arrangements" above. Mr.
Hornstein's Executive Agreement has not been superseded or modified in
connection with the Merger, and remains in effect.
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.
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.
60
<PAGE> 63
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.
HELEN K. LOHEC
Secretary
July 19, 1999
61
<PAGE> 64
ANNEX A
AGREEMENT AND PLAN OF MERGER
A-1
<PAGE> 65
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
among
AMERICAN INDEMNITY FINANCIAL CORPORATION
and
UNITED FIRE & CASUALTY COMPANY
and
AI ACQUISITION CORPORATION
March 4, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A-2
<PAGE> 66
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
PREAMBLE.......................................................................... A-7
ARTICLE 1
THE MERGER........................................................................ A-7
Section 1.1 Surviving Corporation............................................. A-7
Section 1.2 Articles of Incorporation......................................... A-7
Section 1.3 Bylaws............................................................ A-7
Section 1.4 Directors......................................................... A-7
Section 1.5 Officers.......................................................... A-8
Section 1.6 Effective Time.................................................... A-8
ARTICLE 2
EFFECT OF THE MERGER ON STOCKHOLDERS AND OPTION HOLDERS........................... A-8
Section 2.1 Conversion of Acquisition's Common Stock and Target's Common Stock
and Options....................................................... A-8
(a) Target's Common Stock....................................... A-8
(b) Acquisition's Common Stock.................................. A-8
(c) Treasury Stock.............................................. A-8
(d) Target Options.............................................. A-8
Section 2.2 Dissenting Shares................................................. A-9
Section 2.3 Exchange of Shares and Options.................................... A-9
(a) Exchange Agent.............................................. A-9
(b) Payment Procedure........................................... A-9
(c) Lost, Stolen or Destroyed Certificates or Options........... A-10
(d) Distribution of Reserved Per Share Amount................... A-10
(e) Appointment of Shareholder Representatives.................. A-10
Section 2.4 No Further Rights................................................. A-10
Section 2.5 Closing of Target's Stock Transfer Books.......................... A-10
ARTICLE 3
CERTAIN AGREEMENTS................................................................ A-11
Section 3.1 Due Diligence..................................................... A-11
Section 3.2 Communications With Agents, Employees or Policyholders............ A-11
Section 3.3 Stockholder Approval.............................................. A-11
Section 3.4 No Solicitation by Target......................................... A-11
(a) No Solicitation by Target................................... A-11
(b) No Change of Approval....................................... A-11
(c) Termination Upon Change..................................... A-12
(d) Notification by Target...................................... A-12
(e) Breakup Fee Payable by Target............................... A-12
(f) Termination Fee Payable by Parent........................... A-12
(g) Termination Fee Payable by Target........................... A-12
ARTICLE 4
REPRESENTATIONS AND WARRANTIES.................................................... A-13
Section 4.1 Representations and Warranties of Target.......................... A-13
(a) Target Organization and Good Standing: Authority to Conduct
Business.................................................... A-13
(b) Power and Authority......................................... A-13
(c) No Conflicts................................................ A-13
</TABLE>
A-3
<PAGE> 67
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
(d) Consents and Approvals...................................... A-13
(e) Capital Structure of Target................................. A-13
(f) Subsidiaries................................................ A-13
(g) Organization and Good Standing of Subsidiaries: Authority to
Conduct
Business.................................................... A-14
(h) Target Financial Statements................................. A-14
(i) Target Undisclosed Liabilities.............................. A-14
(j) Subsidiary Financial Statements............................. A-14
(k) Litigation.................................................. A-15
(l) Real and Personal Property.................................. A-15
(m) Leases and Rental Contracts................................. A-16
(n) Contracts................................................... A-16
(o) Compliance with Other Instruments and Laws.................. A-17
(p) Regulatory Filings.......................................... A-17
(q) Absence of Certain Changes.................................. A-18
(r) Taxes....................................................... A-18
(s) Insurance Policies.......................................... A-19
(t) Transactions with Interested Persons........................ A-19
(u) Bank and Brokerage Accounts................................. A-19
(v) Disclosure.................................................. A-19
(w) Employee Benefit Plans...................................... A-20
(x) Employees................................................... A-21
(y) Intellectual Property....................................... A-21
(z) Brokers..................................................... A-22
(aa) Surplus Relief.............................................. A-22
(ab) Insurance Issued by Subsidiaries............................ A-22
(ac) Computer Software........................................... A-22
(ad) Books and Records........................................... A-23
(ae) No Investment Company....................................... A-23
(af) Investment Portfolio........................................ A-23
(ag) Discussions with Regulators................................. A-23
(ah) Environmental Matters....................................... A-23
(ai) Year 2000 Issues............................................ A-25
Section 4.2 Representations and Warranties of Parent and Acquisition.......... A-25
(a) Organization and Good Standing.............................. A-25
(b) Power and Authority......................................... A-25
(c) No Conflicts................................................ A-25
(d) Consents and Approvals...................................... A-25
(e) Disclosure.................................................. A-25
(f) Brokers..................................................... A-26
ARTICLE 5
COVENANTS......................................................................... A-26
Section 5.1 Covenants of Target............................................... A-26
(a) Access to Information....................................... A-26
(b) Conduct of Business......................................... A-26
(c) Consultation with Acquisition Pending Closing............... A-27
(d) Disposition of Shares by Target............................. A-27
(e) Preservation of Business.................................... A-27
(f) Investment Portfolio Requirements........................... A-27
(g) Surplus Items............................................... A-27
(h) Notice and Cure............................................. A-27
</TABLE>
A-4
<PAGE> 68
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
(i) Further Actions............................................. A-28
(j) Reasonable Efforts.......................................... A-28
(k) Changes in Optionees........................................ A-28
(l) Major Business Decisions.................................... A-28
Section 5.2 Covenants of Parent and Acquisition............................... A-28
(a) Further Actions............................................. A-28
(b) Reasonable Efforts.......................................... A-28
(c) Notice and Cure............................................. A-28
ARTICLE 6
CONDITIONS PRECEDENT.............................................................. A-28
Section 6.1 Parent and Acquisition............................................ A-28
(a) Representations and Warranties.............................. A-28
(b) Performance of Obligations.................................. A-28
(c) Authorization............................................... A-29
(d) No Order.................................................... A-29
(e) Approvals and Consents...................................... A-29
(f) Legal Opinions.............................................. A-29
(g) No Adverse Change........................................... A-29
(h) Secretary's Certificates.................................... A-29
(i) Stockholder Approval........................................ A-29
(j) Reserve Reinsurance......................................... A-29
(k) Escrow Agreement............................................ A-29
(l) No Challenge................................................ A-30
Section 6.2 Conditions to the Obligations of Target........................... A-30
(a) Representations and Warranties.............................. A-30
(b) Performance of Obligations.................................. A-30
(c) No Order.................................................... A-30
(d) Approvals and Consents...................................... A-30
(e) Legal Opinion............................................... A-30
(f) Stockholder Approval........................................ A-30
(g) Authorization............................................... A-30
(h) Deposit with Exchange Agent................................. A-30
(i) Escrow Agreement............................................ A-30
(j) No Challenge................................................ A-31
ARTICLE 7
CLOSING........................................................................... A-31
Section 7.1 Closing........................................................... A-31
Section 7.2 Filings at the Closing............................................ A-31
ARTICLE 8
TERMINATION....................................................................... A-31
Section 8.1 Termination....................................................... A-31
ARTICLE 9
CONFIDENTIALITY................................................................... A-32
Section 9.1 Confidentiality................................................... A-32
ARTICLE 10
MISCELLANEOUS..................................................................... A-32
Section 10.1 Consent to Jurisdiction and Service of Process.................... A-32
Section 10.2 Expenses.......................................................... A-32
</TABLE>
A-5
<PAGE> 69
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
Section 10.3 Notices........................................................... A-32
Section 10.4 Amendment......................................................... A-33
Section 10.5 Counterparts...................................................... A-33
Section 10.6 Governing Law..................................................... A-33
Section 10.7 Entire Agreement.................................................. A-33
Section 10.8 Waivers........................................................... A-33
Section 10.9 Interpretation.................................................... A-34
Section 10.10 No Assignment..................................................... A-34
Section 10.11 Survival of Representations and Warranties........................ A-34
Section 10.12 Further Assurances................................................ A-34
Section 10.13 Knowledge......................................................... A-34
</TABLE>
A-6
<PAGE> 70
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 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.
A-7
<PAGE> 71
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 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
A-8
<PAGE> 72
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 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 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) the number of shares of
Target's Stock represented by the Certificate by
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(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 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.
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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.
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 determines to be
a Target Superior Proposal (as hereinafter defined), the Board of Directors
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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.
(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.
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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 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
issuers of
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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 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.
(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
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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 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 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
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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 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 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
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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 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 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
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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 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,
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;
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(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 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.
(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.
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(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.
(ii) No Multiemployer 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
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
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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.
(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.
(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
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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.
(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 4.1(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.
(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
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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.
(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.
(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
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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
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. sec. 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 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.
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(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
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.
(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,
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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 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;
(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;
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(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 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
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warranty 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 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.
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(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.
(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 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.
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(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 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 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
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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.
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;
(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.
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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 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 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
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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
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 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
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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 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.
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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
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FIRST AMENDMENT
TO
AGREEMENT AND PLAN OF MERGER
among
AMERICAN INDEMNITY FINANCIAL CORPORATION
and
UNITED FIRE & CASUALTY COMPANY
and
AI ACQUISITION CORPORATION
June 24, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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<PAGE> 100
FIRST AMENDMENT
TO
AGREEMENT AND PLAN OF MERGER
This First Amendment to Agreement and Plan of Merger ("First Amendment") is
made this 24th day of June 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
Parent, Acquisition and Target entered into an Agreement and Plan of Merger
("Agreement") dated March 4, 1999.
The Board of Directors of Parent, Acquisition and Target deem it in the
best interest of each corporation, and in the best interest of their respective
stockholders that Parent, Acquisition and Target amend the Agreement as set
forth herein.
ACCORDINGLY, Parent, Acquisition and Target hereby agree as follows:
ARTICLE 1
Section 2.1(a)(i) of the Agreement is amended to read as follows:
. . . (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 Two Million Six Hundred One Thousand Three Hundred
Eighty-five Dollars ($2,601,385)) less the Option Amount (as defined in
Section 2.3), by . . .
ARTICLE 2
Section 6.1(j) of the Agreement is amended to read as follows:
(j) Reserve Reinsurance. Target shall have entered into a reinsurance
agreement with Swiss Reinsurance America Corporation (or such other carrier
as the parties may agree) for a premium of not to exceed Two Million One
Hundred Thousand Dollars ($2,100,000), protecting Target against adverse
loss developments with respect to claims up to Ten Million Dollars
($10,000,000) occurring on or prior to December 31, 1998 that are in excess
of Forty-five Million Dollars ($45,000,000).
ARTICLE 3
Sections 8.1(b), (c), (f) and (g) are amended to change "June 30, 1999" to
"July 31, 1999 or such later date as Target, Parent and Acquisition agree."
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IN WITNESS WHEREOF, the parties hereto have executed this First Amendment
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
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<PAGE> 102
July 15, 1999
Mr. J. Fellman Seinsheimer, III
American Indemnity Financial Corporation
2115 Winnie
Galveston, TX 77550
RE: Agreement and Plan of Merger among American Indemnity Financial Corporation,
United Fire & Casualty Company and AI Acquisition Corporation
Dear Mr. Seinsheimer:
I have been advised that the American Indemnity Financial Corporation
shareholders meeting is scheduled for August 9, 1999 and that the closing of the
merger transaction is scheduled for August 10, 1999. Accordingly, I propose that
we extend the references to July 31, 1999 in Sections 8.1(b), (c), (f) and (g)
of the Agreement and Plan of Merger, as amended, to August 11, 1999. If this is
agreeable to you, please sign below on behalf of American Indemnity Financial
Corporation and return a signed copy of this Agreement to me. If you have any
questions or comments, please contact me.
Very truly yours,
UNITED FIRE & CASUALTY COMPANY
By: /s/ SCOTT MCINTYRE
------------------------------------
Scott McIntyre, Chairman of the
Board
AI ACQUISITION CORPORATION
By: /s/ SCOTT MCINTYRE
------------------------------------
Scott McIntyre, President
AMERICAN INDEMNITY FINANCIAL CORPORATION agrees to the extension to August
11, 1999, as set forth above.
AMERICAN INDEMNITY FINANCIAL
CORPORATION
By:/s/ J. FELLMAN SEINSHEIMER, III
------------------------------------
J. Fellman Seinsheimer, III,
President
and Chief Executive Officer
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<PAGE> 103
ANNEX B
FAIRNESS OPINION OF PHILO SMITH
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<PAGE> 104
PHILO SMITH CAPITAL CORPORATION
FINANCIAL CENTRE - 695 EAST MAIN STREET - 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.
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
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<PAGE> 105
American Indemnity Financial Corporation
March 1, 1999
Page Two
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> 106
ANNEX C
APPRAISAL RIGHTS UNDER THE DGCL
C-1
<PAGE> 107
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.
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(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
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is fixed and the notice 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.
(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
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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.)
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