<PAGE> 1
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by Registrant [x]
Filed by a Party other than Registrant [ ]
Check appropriate box:
[x] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
H. W. Kaufman Financial Group, Inc.
(Name of Registrant as Specified in its Charter)
H. W. Kaufman Financial Group, Inc.
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (check appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1) or 14a-6(j)(2)
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3)
[x] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11
1. Title of each class of securities to which transaction applies:
Common Stock $.0025 par value
2. Aggregate number of securities to which transaction applies:
3,473,228 (1)
3. Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11: $8.20
4. Proposed maximum aggregate value of transaction: $28,480,496 (2)
Fee payable = $28,480,496 x .01 = $5,696
50
[ ] 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:_____________________________________________________
(1) Includes 3,436,324 shares presently outstanding, 32,670 shares presently
issuable upon exercise of in-the-money vested options and an estimated
4,234 shares to be issued on June 30, 1995 to participants in the
Employee Stock Purchase Plan.
(2) For purposes of calculating the filing fee only. This amount is based
upon the purchase of 3,473,228 shares of Common Stock of the Registrant
of $8.20 per share.
<PAGE> 2
H.W. KAUFMAN FINANCIAL GROUP, INC.
30833 Northwestern Highway, Suite 220
Farmington Hills, Michigan 48334
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders to
be held at 10:00 a.m., local time, on Tuesday, August 15, 1995, at the
headquarters office of H.W. Kaufman Financial Group, Inc., 30833 Northwestern
Highway, Suite 220, Farmington Hills, MI 48334. At the meeting, you will be
asked to consider and vote upon a proposal to approve the merger of the Company
(the "Merger") with a wholly owned subsidiary of AJK Enterprises, Inc. ("AJK")
of which Alan J. Kaufman, a non-employee officer and Director of the Company,
is the sole shareholder. IF THE MERGER IS APPROVED BY THE SHAREHOLDERS AND
CONSUMMATED, EACH HOLDER OF THE COMPANY'S COMMON STOCK WILL RECEIVE, FOR EACH
SHARE OF SUCH COMMON STOCK, CASH IN THE AMOUNT OF $8.20.
The Board of Directors of the Company appointed an independent special
committee thereof ("Special Committee"), consisting of two directors who are
not shareholders of AJK or its subsidiary or employed by either AJK or its
subsidiary or the Company except in their capacity as directors of the Company,
to review and consider the proposed Merger. In connection with its review, the
Special Committee retained the investment banking and stock brokerage firm of
Roney & Co. ("Roney & Co."), which delivered an opinion that the consideration
to be paid to the Company's shareholders is fair from a financial point of
view.
Based upon the Special Committee's review and consideration of the terms
of the Merger Agreement and the Merger, and, in part, upon the opinion of Roney
& Co., the Special Committee unanimously concluded that the proposed Merger is
fair to the Company's unaffiliated shareholders. The Board of Directors, based
in part on the recommendation of the Special Committee, unanimously approved
(with Mr. Alan J. Kaufman not participating in such vote) the Merger Agreement
and the Merger.
The Board of Directors (with Alan J. Kaufman not participating in such
approval), including all members of the Special Committee, unanimously voted to
recommend and do hereby recommend that you vote FOR the approval and adoption
of the Merger Agreement.
Enclosed with this letter are the Notice of the Special Meeting of
Shareholders and a Proxy Statement that describes the proposed Merger, its
background and other related information. Also enclosed is a form of proxy
solicited by the Board of Directors in connection with the Special Meeting.
We urge you to consider carefully all of the materials in the Proxy
Statement and to sign and return the enclosed proxy card as soon as possible.
If you attend the Special Meeting, you may vote in person if you wish, even
though you have previously returned your proxy.
<PAGE> 3
PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES WITH YOUR PROXY CARD.
AFTER APPROVAL OF THE MERGER BY SHAREHOLDERS, YOU WILL RECEIVE A TRANSMITTAL
FORM AND INSTRUCTIONS FOR THE EXCHANGE OF YOUR SHARES AND FOR THE PAYMENT OF
THE $8.20 PER SHARE.
Sincerely,
Brooke Bothe
Secretary
<PAGE> 4
H.W. KAUFMAN FINANCIAL GROUP, INC.
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders of H.W.
Kaufman Financial Group, Inc. will be held on Tuesday, August 15, 1995 at 10:00
a.m., local time, at the headquarters of the Company located at 30833
Northwestern Highway, Suite 220, Farmington Hills, Michigan 48334, for the
following purposes:
1. To consider and vote upon a proposal to approve the Agreement
and Plan of Merger ("Merger Agreement") dated May 26, 1995, as amended, among
the Company, AJK Enterprises, Inc. ("AJK") and AJK Acquisition Company
("Acquisition"), a wholly owned subsidiary of AJK, pursuant to which (i)
Acquisition will merge with and into the Company, with the Company becoming a
wholly owned subsidiary of AJK and (ii) each share of Common Stock of the
Company will be converted into the right to receive $8.20 in cash.
2. To consider and transact such other business as may properly
come before the meeting or any adjournment or postponement thereof.
Only shareholders of record at the close of business on July 7, 1995,
the record date for the Special Meeting, will be entitled to notice of and to
vote at the meeting. A complete list of shareholders entitled to vote at the
meeting will be available for inspection by shareholders at the offices of the
Company, at 30833 Northwestern Highway, Suite 220, Farmington Hills, Michigan
during the 10 days prior to the meeting and will also be available for
inspection at the meeting.
Approval of the Merger requires the favorable vote of the holders of a
majority of the outstanding Shares of the Company. Herbert W. Kaufman,
President, Director and Chief Executive Officer of the Company, will be
entitled to vote, as beneficial holder, approximately 77% of the outstanding
shares of Common Stock at the Special Meeting. He has advised the Company that
he intends to vote his shares for approval of the Merger Agreement.
ACCORDINGLY, IF SUCH SHARES ARE SO VOTED, APPROVAL OF THE MERGER AGREEMENT BY
THE SHAREHOLDERS OF THE COMPANY IS ASSURED.
You are cordially invited to attend the Special Meeting in person.
Again, please complete, date and sign the enclosed proxy card and return it
promptly in the enclosed postage-paid return envelope. This action will not
limit your right to vote in person if you wish to attend the Special Meeting
and vote personally. Your proxy may be revoked by following the procedures set
forth under "INTRODUCTION - Proxies" to the accompanying Proxy Statement.
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE MEETING. THEREFORE,
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE YOUR PROXY AND
RETURN IT IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE
UNITED STATES. PLEASE DO NOT SEND ANY STOCK CERTIFICATES AT THIS TIME. IF YOU
ATTEND THE MEETING AND WISH TO VOTE IN PERSON, YOUR PROXY WILL NOT BE USED.
<PAGE> 5
By Order of the Board of Directors,
Brooke Bothe
Secretary
Farmington Hills, Michigan
July ____, 1995
<PAGE> 6
H.W. KAUFMAN FINANCIAL GROUP, INC.
30833 Northwestern Highway, Suite 220
Farmington Hills, Michigan 48334
Proxy Statement
_______________________
INTRODUCTION
This Proxy Statement is being furnished to the shareholders of H.W.
Kaufman Financial Group, Inc. (the "Company") in connection with the
solicitation of proxies by the Board of Directors of the Company for use at the
Company's Special Meeting of Shareholders to be held August 15, 1995 and at any
adjournment or postponement thereof (the "Special Meeting"). This Proxy
Statement is first being mailed to shareholders on or about July ___, 1995.
PROPOSAL TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, shareholders will consider and vote upon a
proposal to approve the Agreement and Plan of Merger dated May 26, 1995, as
amended (the "Merger Agreement"), among the Company, AJK Enterprises, Inc.
("AJK") and AJK Acquisition Company ("Acquisition"), both Michigan
corporations, pursuant to which (i) Acquisition will merge with and into the
Company, with the Company becoming a wholly owned subsidiary of AJK and (ii)
each share of Common Stock of the Company will be converted into the right to
receive $8.20 in cash (the "Merger").
AJK is a privately held corporation controlled by Alan J. Kaufman who is
the beneficial owner of 15,311 shares of the Company's Common Stock and is a
Director and non-employee Treasurer of the Company. He is the son of Herbert
W. Kaufman, founder, Director and President and Chief Executive Officer of the
Company who is the beneficial holder of 2,636,115 shares, or 76.6%, of the
outstanding shares.
AJK and Acquisition were organized for the purpose of entering into the
transaction set forth in the Merger Agreement. As a result of the Merger, AJK
will acquire control of the entire equity interest in the Company in
consideration of the payment of $8.20 per share for each outstanding share of
Common Stock of the Company. See "SPECIAL FACTORS - Certain Effects of the
Merger." Mr. Alan J. Kaufman serves on the Board of Directors of the Company,
AJK and Acquisition. It is anticipated that other current officers and other
current members of the Board of Directors will continue as such officers and/or
Directors of the Company but will not be officers or directors of AJK. See
"THE MERGER - Interests of Certain Persons in the Merger."
It is not anticipated that any other matter will be brought before the
Special Meeting.
A copy of the Merger Agreement is attached to this Proxy Statement as
Appendix A.
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<PAGE> 7
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
PARTIES TO THE MERGER
The Company was founded in 1969 and is incorporated under the laws of
the State of Michigan. The Company is a nationwide general agent and broker of
specialty insurance products (sometimes referred to as "surplus lines"),
principally property and casualty coverages. In addition, the Company operates
a premium finance subsidiary. For additional information concerning the
Company's business, see "Information Concerning the Company's Business."
AJK and Acquisition, both Michigan corporations, were recently organized
by Alan J. Kaufman for the purpose of effecting the Merger. Neither
corporation has engaged in any activities except in connection with the
proposed Merger.
VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL
The Board of Directors has fixed the close of business on July 7, 1995
(the "Record Date") as the date for the determination of shareholders entitled
to notice of and to vote at the Special Meeting and any adjournment or
postponement thereof. Accordingly, only holders of record of shares of the
Company's Common Stock on the Record Date will be entitled to notice of and to
vote at the Special Meeting. As of the Record Date, there were 3,440,558
shares of Common Stock outstanding, held by approximately 679 holders of
record. Each holder of record of shares of Common Stock on the Record Date is
entitled to one vote per share on the Merger at the Special Meeting. The
presence, in person or by properly executed proxy, of the holders of a majority
of the outstanding shares of the Company's Common Stock entitled to vote is
necessary to constitute a quorum at the Special Meeting. Abstentions and
broker non-votes (where a broker or other record holder submits a proxy but
does not have authority to vote the subject shares) will be considered present
for purposes of establishing a quorum but will not be voted, and, accordingly,
will have the effect of votes against the Merger.
Under the Michigan Business Corporation Act (the "MBCA"), the
affirmative vote of the holders of a majority of the outstanding shares of the
Company's Common Stock is required for approval of the Merger. As of the
Record Date, all current Directors and executive officers of the Company who
may be deemed to be beneficial owners of approximately 2,791,925 shares, or
approximately 81%, of the outstanding shares of the Company's Common Stock
(including Herbert W. Kaufman who is the beneficial holder of approximately 77%
of the outstanding shares) have advised the Company that they intend to vote or
direct the vote of all shares of such stock over which they have voting control
for approval of the Merger.
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<PAGE> 8
ACCORDINGLY, WITH THE VOTE FOR APPROVAL OF THE MERGER BY THE DIRECTORS
AND EXECUTIVE OFFICERS (INCLUDING HERBERT W. KAUFMAN), THERE ARE A SUFFICIENT
NUMBER OF SHARES TO APPROVE THE MERGER WITHOUT THE AFFIRMATIVE VOTE OF ANY
OTHER SHAREHOLDER OF THE COMPANY.
The Board of Directors of the Company (the "Board of Directors" or the
"Board") and an independent special committee thereof, consisting of the two
directors who are not affiliated with AJK, Acquisition or the Company, or
employed by any of them except in their capacity as Directors of the Company,
have unanimously approved the proposed Merger as being fair to the Company's
shareholders. Each of the two members of the Special Committee owns 8,228 and
8,167 shares of the Company, respectively, which includes for both a presently
exercisable option to purchase 6,050 shares of the Company at an exercise price
of $4.96. With respect to the options, upon approval of the Merger, each will
receive the difference between his exercise price and the Merger Consideration
of $8.20 which amounts to $19,602 to each member in addition to the Merger
Consideration for the other 2,178 and 2,117 shares each owns. See "Summary -
Interests of Certain Persons in the Merger; Conflicts of Interest" and "The
Merger - Interests of Certain Person in the Merger."
Under the MBCA, holders of record of the Company's Common Stock whether
they vote for or against the Merger will have no right to exercise so-called
"Dissenters' Rights," a process by which shareholders otherwise have the right
to have the fair value of his or her shares of Common Stock determined in
judicial proceedings. See "The Merger - Dissenters' Rights."
PROXIES
All shares of Common Stock that are entitled to vote and are represented
at the Special Meeting by properly executed proxies received prior to or at the
Special Meeting, and not revoked, will be voted at the Special Meeting in
accordance with the instructions indicated on such proxies. If the instruction
is to abstain with respect to the proposal, the shares represented by the proxy
will be deemed to be present at the Special Meeting but will not be voted with
respect to the proposal, thereby having the same effect as a vote against the
proposal. If no instructions are indicated, the proxy will be voted FOR
approval of the proposed Merger. No other substantive matters will be brought
before the Special Meeting.
Any proxy given pursuant to this solicitation may be revoked by the
person giving it at any time before it is voted. Proxies may be revoked by (i)
filing with the Secretary of the Company, at or before the taking of the vote
at the Special Meeting, a written notice of revocation bearing a later date
than the proxy, (ii) duly executing a later-dated proxy relating to the same
shares and delivering it to the Secretary of the Company before the taking of
the vote at the Special Meeting, or (iii) attending the Special Meeting and
voting in person (although attendance at the Special Meeting will not in and of
itself constitute a revocation of the proxy). Any written notice of revocation
or subsequent proxy should be sent so as to be delivered to the Company at the
address set forth above, or hand delivered to the Secretary of the Company, at
or before the taking of the vote at the Special Meeting.
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<PAGE> 9
EXPENSES OF SOLICITATION
The cost of printing and mailing this Proxy Statement will be borne by
the Company. In addition to solicitation by use of the mails, proxies may be
solicited by Directors, officers and employees of the Company in person or by
telephone, telegram or other means of communication. Such Directors, officers
and employees will not be additionally compensated, but may be reimbursed for
reasonable out-of-pocket expenses in connection with such solicitation.
Arrangements will also be made with custodians, nominees and fiduciaries for
forwarding of proxy solicitation materials to beneficial owners of shares held
of record by such custodians, nominees and fiduciaries, and the Company will
reimburse such custodians, nominees and fiduciaries for reasonable expenses
incurred in connection therewith.
INFORMATION CONTAINED IN THE PROXY STATEMENT
All information contained in this Proxy Statement concerning Alan J.
Kaufman, AJK and Acquisition and their plans for the Company after the Merger
was supplied by such person or corporation. Except as otherwise indicated, all
other information contained in this Proxy Statement has been supplied by the
Company. No person has been authorized to give any information or make any
representations other than those contained herein and, if given, or made, such
information or representations must not be relied upon as having been
authorized by the Company, AJK, Acquisition, Alan J. Kaufman or any of their
representatives.
The date of this Proxy Statement is July ___, 1995.
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<PAGE> 10
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY.................................................... 1
THE MERGER................................................. 6
Background of and Reasons for the Merger............ 6
Recommendation of the Special Committee and
the Board; Fairness of the Merger................. 13
Opinion of Financial Advisor........................ 16
Dissenters' Rights.................................. 24
Interests of Certain Persons in the Merger.......... 24
Certain Effects of the Merger....................... 26
Tax Withholding..................................... 26
Certain Litigation.................................. 27
Certain Federal Income Tax Consequences of the
Merger............................................ 27
Plans for Company if Merger Not Consummated......... 28
THE MERGER AGREEMENT....................................... 29
General............................................. 29
Effective Time...................................... 29
Exchange of Shares - Payment........................ 29
Representations and Warranties...................... 30
Covenants and Conditions to Consummation
of the Merger..................................... 30
Financing the Transaction........................... 32
Amendment and Termination of the Merger Agreement... 33
Expenses............................................ 33
Conduct of Business after the Merger................ 34
INFORMATION CONCERNING THE COMPANY'S BUSINESS.............. 35
General............................................. 35
Insurance Brokerage and General Agency Business..... 35
Premium Finance Business............................ 37
Competition......................................... 37
Regulation and Licensing............................ 38
Employees........................................... 38
Properties.......................................... 39
Legal Proceedings................................... 39
SELECTED FINANCIAL DATA.................................... 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................... 42
Overview............................................ 42
Liquidity and Capital Resources..................... 42
Results of Operations............................... 43
Acquisitions and Their Results on Operations........ 47
Effect of Inflation................................. 47
Recent Accounting Pronouncements.................... 48
PRICE RANGE OF COMMON STOCK................................ 49
Dividends........................................... 50
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
AND CERTAIN SIGNIFICANT EMPLOYEES........................ 50
</TABLE>
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<TABLE>
<S> <C>
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT........................................ 53
DESCRIPTION OF ACQUISITION.............................. 55
TRANSACTION OF OTHER BUSINESS........................... 55
INDEPENDENT AUDITORS.................................... 55
SHAREHOLDER PROPOSALS................................... 55
AVAILABLE INFORMATION................................... 56
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE......... 57
INDEX TO FINANCIAL STATEMENTS........................... F-1
Appendix A - Agreement and Plan of Merger............... A-1
Appendix B-1 - Opinion of Roney & Co. as to Fairness
of the Merger Consideration .......................... B-1
Appendix B-2 - Opinion of Roney & Co. as to Valuation
of the Common Stock of the Company ................... B-2
</TABLE>
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<PAGE> 12
SUMMARY
The following is a brief summary of certain information contained
elsewhere in this Proxy Statement. Certain capitalized terms used in this
Summary are defined elsewhere in this Proxy Statement. Reference is made to
the more detailed information contained in this Proxy Statement, the Appendices
hereto and the documents incorporated by reference in this Proxy Statement.
Time, Place and Date of the Special Meeting. The Special Meeting of
shareholders of the Company will be held at 10:00 a.m., local time, on Tuesday,
August 15, 1995, at the headquarters of the Company located at 30833
Northwestern Highway, Suite 220, Farmington Hills, Michigan 48334.
Record Date. Holders of Record of the Company's Common Stock at the
close of business on July 7, 1995 (the "Record Date") will be entitled to
notice of and to vote at the Special Meeting. On that date, there were
3,440,558 shares of Common Stock outstanding, with each share entitled to one
vote on the proposal to be considered at the Special Meeting. See
"Introduction - Voting Rights; Vote Required for Approval."
Purpose of the Special Meeting. At the Special Meeting, shareholders
will consider and vote upon a proposal to approve the merger ("Merger") of the
Company with AJK Acquisition Company ("Acquisition") a wholly owned subsidiary
of AJK Enterprises, Inc. ("AJK") in a transaction in which the Company's
shareholders will receive $8.20 in cash (the "Merger Consideration"), in
exchange for each outstanding share of the Company's Common Stock. See
"Introduction - Proposal to be Considered at the Special Meeting."
Vote Required. Under Michigan law, the affirmative vote of the holders
of a majority of the outstanding shares of the Company's Common Stock is
required for approval of the Merger. Herbert W. Kaufman, the founder, and a
Director, President and Chief Executive Officer of the Company, who as of the
Record Date was the beneficial holder of approximately 77% of the Common Stock
entitled to vote at the Special Meeting, has advised the Company he intends at
the current time to vote all of his shares in favor of the proposal. In
addition, certain other current Directors and officers of the Company
(including Alan J. Kaufman who controls AJK and Acquisition), who as of the
Record Date were the beneficial owners of approximately 4.5% of the Common
Stock entitled to vote at the Special Meeting, have advised the Company that
they intend to vote all shares of such Common Stock over which they have voting
control in favor of the proposal. See "Introduction - Voting Rights; Vote
Required for Approval," "Interests of Certain Persons in the Merger; Conflicts
of Interest," and "The Merger - Interests of Certain Persons in the Merger."
Accordingly, a sufficient number of shares to approve the Merger without the
affirmative vote of any other shareholder is assured.
Purpose of the Merger. The purpose of the Merger is to sell the Company
at a premium over recent market prices of the Common Stock. See "The Merger -
Background of and Reasons For the Merger" and "Price Range of Common Stock."
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<PAGE> 13
Certain Effects of the Merger. Upon consummation of the Merger, each
share of Common Stock will be converted into the right to receive the Merger
Consideration and the Company will become a wholly owned subsidiary of AJK. As
a result, the current holders of the Common Stock will cease to have any
ownership interest in the Company or rights as shareholders and will cease to
participate in the Company's future earnings and growth in value, if any.
Similarly, such shareholders will not face the risk of any decline in the value
of the Company after the Merger.
Special Committee. The Board appointed two of its members as an
independent Special Committee ("Special Committee") to study and analyze the
merger proposal from AJK and Acquisition, to engage investment bankers to
render advice and opinions as to the fairness of the transaction from a
financial point of view to shareholders and as to the value of the Company's
shares, and to make recommendations to the Board of Directors. Aside from
their positions as Directors of the Company, and as the holders of 8,228 and
8,167 shares of the Company's Common Stock which includes for each presently
exercisable options to buy 6,050 shares of the Company, they are not officers
or employees of the Company, nor are they officers, directors, employees or
shareholders of AJK or Acquisition. Further, neither one relies on the
Company, AJK or Acquisition, or any of their affiliates, for any material
monetary, consulting or other benefits. Their only compensation for service to
the Special Committee was payment of $500 per each half day, or any part
thereof, devoted to the work of the Special Committee.
Opinion of Financial Advisor. Roney & Co. ("Roney & Co."), engaged as
investment bankers, rendered a preliminary oral opinion to the Special
Committee of the Board of Directors of the Company on May 19, 1995 to the
effect that the Merger Consideration was fair, from a financial point of view,
to the holders of shares of Common Stock. Roney & Co. rendered its formal
"fairness" opinion to a meeting of the Board of Directors on May 26, 1995. A
copy of a written "fairness" opinion of Roney & Co. dated May 26, 1995
confirming its earlier opinion, setting forth the assumptions made, the matters
considered, the scope and limitations of the review undertaken and the
procedures followed by Roney & Co. in rendering its opinion, is attached hereto
as Appendix B-1. Holders of Common Stock should read carefully the opinion of
Roney & Co. in its entirety including Roney & Co.'s opinion as to the range of
value of the Company's shares of Common Stock, Appendix B-2. See "The Merger -
Opinion of Financial Advisor."
Recommendation of the Board of Directors. The Board of Directors has
unanimously concluded that the Merger is in the best interests of the Company
and its shareholders and that the Merger and the Merger Consideration are fair
to the Company's shareholders and unanimously recommends a vote by shareholders
FOR approval of the Merger. The Board's conclusions were based upon a number
of factors, including the recommendation of the Special Committee that the
Merger Consideration offers a significant premium over recent market prices of
the Common Stock, and the opinion of Roney & Co. that the Merger Consideration
is fair, from a financial point of view, to the Company's shareholders. See
"The Merger - Recommendation of the Board of Directors; Fairness of the
Merger." Alan J. Kaufman did not participate in
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<PAGE> 14
any discussions or vote of the Board of Directors in its consideration of the
Merger.
Interests of Certain Persons in the Merger; Conflicts of Interest. AJK
is a privately held corporation controlled by Alan J. Kaufman, a Director and
non-employee officer of the Company. He is the beneficial owner of 15,311
shares or less than 1/2 of 1% of the outstanding shares, of the Company's
Common Stock. Alan J. Kaufman is the son of Herbert W. Kaufman, founder,
Director and President and Chief Executive Officer of the Company. Herbert W.
Kaufman beneficially holds 2,636,115, or approximately 77%, of the shares of
the Company and has advised the Company he intends to vote his shares for the
Merger. Herbert W. Kaufman will be retained as the Company's President
pursuant to an existing employment agreement. See "Common Stock Ownership of
Certain Beneficial Owners and Management."
Certain officers of the Company have been advised they will continue on
in their same positions with amended employment agreements as indicated below
in "Conditions to Consummation of the Merger; Termination." In addition, both
Alan J. Kaufman and Herbert W. Kaufman own an interest in an entity that leases
a property to the Company. The lease will remain in effect following the
Merger under the same terms. See "The Merger - Interests of Certain Persons in
the Merger" for other interests of various parties.
Federal Income Tax Consequences. The receipt of the Merger
Consideration in exchange for the outstanding shares of Common Stock pursuant
to the Merger will be a taxable transaction for federal income tax purposes and
may also be a taxable transaction under applicable state, local, foreign and
other tax laws. See "The Merger - Certain Federal Income Tax Consequences of
the Merger."
Effective Time of the Merger. The effective time of the Merger will
occur upon the filing of a certificate of merger with the Department of
Commerce of the State of Michigan ("Effective Time"), which will occur after
all conditions to the Merger contained in the Merger Agreement, including the
approval of the Merger by the shareholders of the Company, have been satisfied
or waived. See "The Merger Agreement - General" and "Covenants and Conditions
to Consummation of the Merger."
Conditions to Consummation of the Merger; Termination. The respective
obligations of the Company and Acquisition to consummate the Merger are subject
to satisfaction or waiver at or prior to the Effective Time of the Merger of
various conditions, including the following: (i) accuracy of certain
representations and warranties made by the parties; (ii) compliance by the
parties with their obligations under the Merger Agreement; (iii) the absence of
certain legal proceedings; (iv) approval of the transactions by the
shareholders of the Company; (v) receipt, if required, of certain approvals and
authorizations of governmental authorities; (vi) the execution of amendments to
the existing employment agreements with certain executives of the Company,
which shall provide that bonuses will be determined exclusive of amounts
expended or accrued for debt service on any indebtedness incurred by AJK or
Acquisition in connection with the Merger; and (vii) "financing," that is, AJK
or Acquisition shall have available all the financing necessary to
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<PAGE> 15
perform its obligations under the Merger Agreement. The Merger Agreement may
be terminated at any time prior to the closing by either the Company or
Acquisition: (i) with the consent of the other party; (ii) if a court or
governmental entity permanently restrains, enjoins or otherwise prohibits the
Merger; (iii) if the other party commits a material breach of its
representations, warranties or covenants in the Merger Agreement; (iv) if the
conditions set forth in the Merger Agreement have not been satisfied or waived;
(v) if the closing shall not have occurred within 30 days after obtaining
Company shareholder approval; or (vi) by the Company under certain limited
circumstances, if an unsolicited takeover proposal is submitted which the
Company's Board of Directors in exercising its fiduciary duties and subject to
other conditions, deems to be a superior proposal. See "The Merger Agreement -
Covenants and Conditions to Consummation of the Merger" and "- Amendment and
Termination of the Merger Agreement."
Financing of the Transaction. AJK and Acquisition have obtained a
letter from a large Detroit financial institution indicating its willingness to
advance the funds necessary to accomplish the cash merger subject to
fulfillment of its own various conditions (the "Commitment Letter"). Even
after approval by shareholders of the Company of the Merger Agreement, should
the lending institution not complete the commitment, neither AJK nor
Acquisition will be able to consummate the proposed Merger. See "The Merger
Agreement - Conditions to Consummation of the Merger" and "- Amendment and
Termination of the Merger Agreement" and "- Financing the Transaction."
Amendment to the Merger Agreement. Subject to applicable law, the
Merger Agreement may be amended, modified or supplemented before or after the
vote of Shareholders by written agreement of the respective Board of Directors
of AJK, Acquisition and the Company or their respective officers authorized by
such Boards of Directors at any time prior to the closing of the Merger with
respect to any of the terms contained in the Merger Agreement but after
shareholder approval no amendment which by law may be made only with
shareholder approval will be made unless that further approval is also
obtained. See "THE MERGER - The Merger Agreement - Amendment and Termination
of the Merger Agreement."
Surrender of Share Certificates. Promptly after the Effective Time, a
letter of transmittal ("Letter of Transmittal") with instructions will be
mailed to all shareholders of record at the close of business on the Effective
Date of the Merger for use in surrendering their certificates representing
shares and to receive their Merger Consideration. CERTIFICATES SHOULD NOT BE
SURRENDERED UNTIL THE LETTER OF TRANSMITTAL IS RECEIVED AND COMPLETED. See
"The Merger Agreement - Exchange of Share-Payment."
Dissenters' Rights. Holders of Common Stock who do not vote in favor
of, or who abstain from voting on, the Merger do not have so-called Dissenters'
Rights. If applicable, Section 762 of the MBCA provides the right to have the
"fair value" of a shareholder's shares determined by an appraisal process
supervised by a Michigan Circuit Court. However, one of its exceptions,
Section 762(2)(a), applies to shares listed on a national securities exchange.
The Company's shares of Common Stock are listed on the American
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Stock Exchange. In addition, Section 762(2)(b) contains an exception in the
case of "cash mergers" such as the transaction proposed here.
Stock Options. Holders of outstanding stock options shall receive the
difference between the exercise price of each share subject to an option and
the $8.20 per share. As of June 30, 1994 there were unexercised options for
32,670 shares of Common Stock.
Plans for Company if Merger not Consummated. As consummation of the
Merger is subject to fulfillment and satisfaction of certain covenants and
conditions, including AJK having sufficient financing to pay the Merger
Consideration and the Company obtaining shareholder approval of the Merger,
there can be no assurance that the Merger will be consummated. If the Merger
is not consummated, the Company currently plans to continue its existing
operations and to evaluate alternatives as they may arise.
RECENT PRICES OF COMPANY COMMON STOCK
The Company's Common Stock is traded on the American Stock Exchange
under the symbol "HWK." On April 5, 1995, 30 days prior to the public
announcement of the proposal, the closing price per share as represented on the
American Stock Exchange was $4.53. Accordingly, the premium to be paid
reflected in the final $8.20 cash merger price over the unaffected
pre-announcement stock price (the percent increase of the offer price per share
over the closing market price 30 days prior to the announcement, the "Premium
Over Stock Price") was 81%. On Friday, April 28, the closing price per share
as reported by the American Stock Exchange was $5.625. The premium reflected
over the $8.20 offer price was 46%. On Monday, May 1, 1995, it also closed at
$5.625. On May 2, 1995, the Board of Directors received Alan J. Kaufman's
initial offer of $8.00 and appointed the Special Committee to begin the process
of study and evaluation. No agreements were executed and no offer had been
accepted. On May 4, 1995, the last trading day preceding public announcement
of the proposed Merger, the closing price per share as reported by the American
Stock Exchange was $7-1/8. On July ___, 1995, the last trading date prior to
the printing of this Proxy Statement, the price of Common Stock was $____ per
share. Company shareholders are urged to consider their investment
alternatives. See "PRICE RANGE OF COMMON STOCK, DIVIDENDS."
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THE MERGER
BACKGROUND OF AND REASONS FOR THE MERGER
The President and Chief Executive Officer of the Company, Herbert W.
Kaufman, founded the Company in 1969, as a successor to a small general
insurance brokerage operation he had operated for several previous years. The
Company now places insurance risks with nearly 400 insurance carriers with
which the Company does business. In addition, the Company places risks through
certain underwriters at Lloyd's of London and other foreign (principally
English) insurance carriers or syndicates which insure specialty risks. The
Company's Common Stock has been listed on the American Stock Exchange since
1990.
Herbert W. Kaufman's son, Alan J. Kaufman, an attorney and a 1975
graduate of the Notre Dame Law School, with a practice specializing in
corporate and insurance matters, representing a number of carriers in various
litigation matters, has been a non-employee officer and Director of the Company
for in excess of 20 years. Represented by both legal counsel and financial
advisors unassociated with and independent of the Company, Alan J. Kaufman
indicated his desire to buy the Company and all its business operations. Alan
J. Kaufman's interest was unsolicited and no other officer, director or
shareholder initiated the acquisition discussions with him. On February 14,
1995, the Company and Alan J. Kaufman executed a confidentiality agreement to
allow Alan J. Kaufman's advisors to perform certain due diligence. In addition
to containing confidentiality provisions, the letter contained a 70-day period
in which the Company would not solicit other acquisition proposals (but could
entertain other proposals should any be made). Subsequent to retaining his
financial advisors and counsel, who assisted in the preparation of the proposal
to acquire the Company, Alan J. Kaufman on May 2, 1995 made an oral
presentation to the Company's Board of Directors outlining a suggested proposal
to acquire all the Company's outstanding Common Stock and any exercisable stock
options by means of a "cash merger" in which the Company would be merged with
Acquisition, a subsidiary of a corporation controlled entirely by Alan J.
Kaufman (hereinafter such corporation being referred to as "AJK") and all
Common Stock of the Company would be exchanged for $8.00 per share in cash.
Alan J. Kaufman indicated that since his due diligence investigation began on
February 14, 1995, he had received a commitment for the necessary financing to
accomplish his proposal from a large Detroit financial institution.
In light of the involvement of Alan J. Kaufman, a non-employee officer
and Director and the substantial interest of his father Herbert W. Kaufman, who
beneficially controls 2,636,115 or approximately 77% of the Company's Common
Stock, the Company's Board of Directors on May 2, 1995 appointed a special
committee ("Special Committee") of directors to study and to evaluate the offer
and to negotiate on the Company's behalf. Two members of the Board of
Directors, Alan H. Barry, a CPA and President and Chief Executive Officer of
Brass-Craft Manufacturing Co., a wholly-owned subsidiary of MASCO Corporation
(NYSE), who has served as a Director of the Company since 1989, and Jeffery W.
Barry, a CPA and attorney, who had served as long-time President of Walsh
College of Accounting and Business Administration from 1969 until his
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retirement in 1991, and who has served as a Director of the Company since 1988,
were appointed to the Special Committee and agreed to take on these duties.
Messrs. Barry are not related. The Board chose them due to their independence
(neither is an officer or an employee of the Company nor a major shareholder)
and each was judged to have the expertise, judgment, knowledge, financial
background and experience to help the Board evaluate the proposal. Due to the
fact that each has been a Director for in excess of five years, each was also
deemed to be familiar with the Company's business. Each indicated his
willingness to devote the time necessary to study, evaluate and negotiate such
a transaction in a timely manner. Their compensation was determined to be $500
per half day, or any portion thereof, for each member and reimbursement for
travel and other expenses, such payment to be made without regard to the
eventual recommendation made by the Special Committee or whether the Merger or
any transaction was consummated.
On May 5, 1995, the Company issued a press release stating it had
received a proposal with respect to a transaction in which shareholders were
being offered $8.00 per share.
Although the confidentiality letter of February 14, 1995 and its 70-day
non-solicitation provisions were not extended, the parties over the next
several weeks proceeded to discuss the definitive terms of a merger agreement,
and the Special Committee through its counsel began negotiations of an
agreement with terms acceptable to it.
On May 2, 1995, immediately following the Board meeting, the Special
Committee held its first meeting. Alan H. Barry was selected as Chairman of
the Special Committee. The Special Committee then decided to select as its
counsel Kemp, Klein, Umphrey & Endelman, Professional Corporation, the
Company's existing securities counsel, due to their familiarity with the
Company and their securities law expertise. The Special Committee also
discussed that it would engage independent investment bankers and that no other
Board member would participate in such decision. At this meeting and all
subsequent meetings, the Special Committee's legal counsel was present. Its
counsel advised the Special Committee on the duties, obligations and procedures
for which the Special Committee would be responsible, including its obligation
to fulfill its fiduciary duties with respect to evaluating the proposed offer.
Its counsel also addressed the role and independence of the Special Committee
and its obligation to review the proposal carefully in order to obtain a fair
price for the Company's shareholders.
The Special Committee also began immediately on May 2, 1995 to interview
financial advisors to assist it in the evaluation of the proposal. On May 5,
1995, it met again and Roney & Co. was selected by the Special Committee on
that day to begin both an evaluation of the Company's Common Stock and of the
proposal. Roney & Co. was directed to advise the Special Committee whether the
offer of $8.00 per share was fair from a financial point of view to
shareholders and, should it so conclude, to render an opinion as to the
fairness from a financial point of view to shareholders of the consideration to
be paid Company shareholders. The Special Committee concluded it was
appropriate to retain Roney & Co. because of its strong regional reputation in
the financial community, the experience of its Corporate Finance Department
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including its experience with the brokerage insurance industry and its
experience serving as financial advisor in similar transactions. There has
been no material relationship between Roney & Co. and the Company or its
affiliates during the last two years.
In view of the creation of the Special Committee and its engagement of
Roney & Co. as financial advisor, the Board of Directors was satisfied that
both it and the shareholders could be justifiably confident that an unbiased
report concerning the value of the Company and the fairness of the proposal
would be rendered. Alan J. Kaufman did not participate in any manner in any
discussions or deliberations of the Special Committee or the Board with respect
to the proposed transaction.
From the time of its selection on May 5, 1995, Roney & Co. conducted its
own review of the business operations and prospects of the Company. Aside from
public reports filed with the SEC that were readily available, Roney & Co. was
provided immediate and free access to financial, operational and executive
officers and personnel of the Company and to internal Company data and
projections.
The Special Committee met on May 19, 1995 to review with Roney & Co. the
steps that had been taken to date by Roney & Co. to complete its onsite due
diligence and interviews with management of the Company and its principal
operating subsidiary, Burns & Wilcox, Ltd. In order to promote an informed
prospective the Special Committee had invited all Board members of the Company
(other than Alan J. Kaufman) to attend and listen, to enable all them to hear
and receive any tentative reports and findings. The representatives of Roney &
Co. also distributed a booklet containing the tentative results of a number of
their analyses, comparisons, tests and tentative findings. At this meeting,
Roney & Co. explained the results of its various models for valuing the
Company's Common Stock, including its discounted cash flow analysis which
included a 15% discount rate (which Roney & Co. had indicated was a
conservative rate for the Company), its consideration of prior Company
acquisitions in comparison to the proposed buyout and its comparison of the
Company with a number of publicly traded companies called a "comparable group"
although none was exactly in the same business as the Company. Several had
insurance brokerage operations that were more of a retail nature (i.e., direct
to the ultimate client) rather than the Company's wholesale business (helping
independent insurance agents place insurance risks for their clients) and
several operated both insurance carriers and brokerage operations. See
"Opinion of Financial Advisor" that follows.
Roney & Co. emphasized that although it had not yet finalized its
report, including a leveraged buy-out model, which was to be completed by May
26, 1995, the date scheduled for a meeting of the Company's Board of Directors,
it was substantially satisfied that the value being offered by AJK was within a
fair range. Roney & Co. also reported that besides its review of public
reports, including the Company's December 31, 1994 annual report on Form 10-K
and the Company's latest Form 10-Q quarterly report for the period ending March
31, 1995, it had conducted onsite management interviews regarding the Company's
business and financial outlook. It also made comparisons of past Company
financial performance and various financial ratios to other public
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<PAGE> 20
companies, and compared the Company's own methods of pricing its own
acquisitions. Roney & Co. also stated it had also received and studied certain
internal financial forecasts from the Company.
The representatives of Roney & Co. informed the Special Committee and
the Board members in attendance at the May 19, 1995 meeting, that based on
their preliminary review of such financial and other information received to
date, Roney & Co.'s initial conclusion was that the proposal of $8.00 per share
was fair to shareholders from a financial point of view. The representatives
also reported that Roney & Co.'s valuation of the Company's Common Stock
itself, as part of its tests performed in its evaluation of the cash merger
proposal, reflected a range of value of between $8 to $9 per share and that the
cash merger consideration being offered by AJK per share was in an acceptable
range.
Representatives of Roney & Co. and the Special Committee then discussed
that although no other inquiries or proposals had arisen from any other
companies or persons concerning an offer to acquire the Company or any portion
of its business since the public announcement of the proposal on May 5, 1995,
that contact should be made with any company that had expressed any interest,
within approximately the last 18 months, in acquiring the Company or its
business. Only two entities were identified and the previous discussions with
them were reviewed. It was mentioned by the Board member who had previously
spoken to both entities that the contacts were unsolicited by the Company and
arose from inquiries by an investment banker and were not initiated either by
the Company or even by the two entities themselves. The director reported that
preliminary discussions with one somewhat over a year ago had produced no
interest at all and discussions with the other about 18 months ago and then
about 6 months later had produced no preliminary understandings or agreements
but a tentative proposal was suggested by that company of a price and terms
deemed unfavorable to the Company's shareholders (partially cash, partially in
a "soft" note dependent upon future performance of the Company) and discussions
were abandoned. Representatives of Roney & Co. nevertheless suggested they be
allowed, and were given permission, to contact the two entities through the
investment banker that had contacted the Company originally, to assure
themselves whether or not any interest existed.
After hearing the Roney & Co. May 19, 1995 preliminary report and
receiving its booklet containing various data and resulting ratios and
comparisons and the review of its contents and the distribution of the booklet
to each Board member, the Special Committee excused the Roney & Co.
representatives and the other members of the Board of Directors to discuss by
itself the next steps. The Special Committee then discussed with its legal
counsel the results of the ongoing review of the proposed form of merger
agreement forwarded by legal counsel for AJK and other legal terms encompassed
by the proposal and the ongoing discussions of proposed modifications. The
Special Committee directed that its legal counsel communicate to AJK's legal
counsel revisions to the proposed agreement. After reviewing Roney & Co.'s
presentation and discussing their own views with respect to the Company, the
Special Committee directed that its Chairman, Alan H. Barry, arrange for an
immediate meeting with Alan J. Kaufman to discuss the preliminary findings of
Roney & Co. On May 22, 1995, Mr. Barry met with Alan J. Kaufman to discuss the
Roney & Co. preliminary report and its preliminary findings including its
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valuation of the Company at between $8 to $9. Mr. Kaufman reported that his
financial advisors had on the other hand established a lower range of value.
Later that same day, Mr. Kaufman informed Mr. Barry that AJK would raise his
offer to $8.20 per share, resulting in an aggregate total cash price of in
excess of $28 million.
The Special Committee next met on May 23, 1995. Board members other
than Alan J. Kaufman were again invited to attend and did so in person or were
present telephonically. Counsel for the Special Committee reported on the
progress of negotiations of the Merger Agreement and issues that were yet open.
Mr. Alan H. Barry next reported on the discussions of Roney & Co. with the two
companies mentioned at the May 19 meeting with which discussions concerning
sale had been held within the last 18 months. After contact and discussions
with the principals of the two companies, Roney & Co. reported one (which was
also an insurance brokerage operation) had no interest whatsoever and the other
(an insurance carrier emphasizing malpractice and other coverages) had
indicated it was not interested in "validating" the existing offer and gave no
indications it had any further interest but was told the Board was meeting to
consider the AJK proposal on Friday, May 26, 1995. Mr. Alan Barry also
reported that he had met with Alan J. Kaufman and that after discussion of
Roney & Co.'s valuation report, AJK raised the offered price to $8.20 per
share. A discussion then ensued that based upon Roney & Co.'s May 19 analyses
which preliminarily concluded that the transaction was fair and with the
increase of $.20 per share that the Special Committee had obtained, upon
confirmation of Roney & Co.'s analyses to be contained in Roney & Co.'s final
report to be delivered on May 26, it would be in a position to make a
recommendation that the AJK offer be accepted.
On May 26, 1995, the Board of Directors met again to consider the
proposal, to hear Roney & Co.'s report regarding its final conclusions and to
discuss any further information concerning the two entities that had been
contacted. Mr. Barry again reported that his meeting with Alan J. Kaufman had
produced an increase in price to $8.20 per share by AJK and that Roney & Co.
had been informed of such increase.
Roney & Co. made an oral presentation of its conclusions, as it had done
on May 19, and distributed its final booklet report containing its various
mathematical calculations and analytical comparisons. Mr. John Donnelly of the
Roney & Co. Corporate Finance Department commented that the $8.20 per share
price now produced a ratio of .99 of net revenues including contingent
commissions and that the value to LTM (last twelve months) operating income was
now in excess of 10. Mr. Donnelly reported that he had contacted both of the
entities with which Company officials had prior discussions and that he had
asked them if they had any interest. It was Mr. Donnelly's opinion that the
insurance carrier's ("insurance carrier") indication was that it was not
interested. Mr. Donnelly also indicated that the other company which was a
brokerage operation seemed to indicate the price was too high and they
expressed no interest at all at the $8.00 level. Mr. Donnelly stated that both
entities had indicated their awareness of the AJK proposal prior to his call.
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Roney & Co. then reported on the "LBO model" it had prepared, something
that was not in its prior draft booklet of its tests and ratios delivered on
May 19. The purpose of the LBO model was to attempt to determine what a
financial buyer might be able to do and if they could leverage to produce the
financing necessary to effectuate this type of buyout and if so, what buyout
price per share such leveraging and financing could produce. The
representatives of Roney & Co. indicated that the Company does not readily lend
itself to an LBO. They indicated that the Company does not have sufficient
leverageable assets for a "financial buyer" to allow it to obtain the kind of
financing or special returns most financial buyers would insist upon.
Roney & Co. was then asked to again run through the evaluation
methodologies it had used in its May 19 draft report which were now also
contained in the finalized report. The Roney & Co. representatives reported
that they examined, among many other factors: (i) publicly traded insurance
brokerage stocks' price earning ratios, price to book and other ratios
associated with such companies; (ii) other mergers and acquisitions within the
same SIC code as the Company and compared their various data including book
value ratios and price to revenue ratios; (iii) the per share price being
offered by AJK compared to prices paid by the Company itself with regard to its
own acquisitions within the last several years; and (iv) discounted cash flow
analyses under three different scenarios (i.e., slow growth of the Company,
Company projections and substantial growth). This latter methodology (i.e.,
discounted cash flow analysis) was intended to arrive at an estimate of "going
concern value." The Roney & Co. representatives reported the average of the
three cash flow methods produced a value of $8.17 per share.
After discussing the above and the various items, ratios and comparisons
contained in the final booklet, which was similar to the May 19 booklet except
for the LBO model and the adjustments and modifications of multiples and ratios
resulting from the $.20 per share increase, Roney & Co. stated that $8.20 was a
fair price from a financial point of view. Roney & Co. further indicated that
if the Company were bought by means of the average of the prices the Company
itself typically paid to buy companies or books of business, the price would be
approximately $6.37 (30% less than the price AJK was offering).
After its oral report, including commenting on the apparent lack of
interest by other possible bidders (in that none had arisen subsequent to the
public announcement on May 5, 1995), the apparent lack of interest of the
companies with which it had contact, and a re-review of various of its analyses
and comparisons also previously rendered on May 19, Roney & Co. rendered its
two final written opinions. One addressed its valuation of the Company and the
other, the "fairness" of what was now the $8.20 per share offer. The letter
addressing "valuation" opined the fair market value of the Common Stock on May
26, 1995 was within a range of $8 to $9 per share based on 3,435,347 shares
issued and outstanding. The second letter addressing "fairness" enumerated
what Roney & Co. had reviewed to arrive at its conclusion and concluded that
"the consideration to be received by the shareholders of the Company...is fair
from a financial point of view to the shareholders of the Company." (See
Appendixes B-1 and B-2 - Opinions of Roney & Co.)
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Upon the receipt of Roney & Co.'s final report and its written opinions,
the Roney & Co. representatives were excused and the Board continued its
discussions of the transaction and the various facts presented in Roney & Co.'s
report. Shortly into such discussions, Mr. Donnelly of Roney & Co. called the
Company to indicate the insurance carrier had indeed, and surprisingly,
contacted him through its investment banker and wished to make an offer. The
Board meeting was temporarily adjourned.
The members of the Board who comprised the Special Committee immediately
withdrew into another office at which time they convened as a meeting of the
Special Committee and called Mr. Donnelly for an update as to what he had just
been told. He mentioned the insurance carrier had made an offer to acquire the
Company for an amount totalling approximately $28 million, of which two-thirds
was to be paid in cash and the remaining one-third was to be evidenced by a
promissory note payable over an as-of-yet undetermined period. The note was to
be fully subordinated to the financing that the insurance carrier would attempt
to obtain and would require to accomplish their proposal.
With that update, the Special Committee then placed a call directly to
the investment banker representing the insurance carrier to hear the recitation
first hand of his client's offer. He confirmed what Mr. Donnelly had informed
the Special Committee including that no commitment for financing had yet been
obtained. He indicated that the insurance carrier had not had enough time to
arrange financing. When asked what portion of the purchase price would likely
be financed, he indicated at least one-third. That seemed to confirm that the
portion of the offer which was to be represented by a promissory note would be
subject to the risk that its repayment would depend upon whether the insurance
carrier could successfully operate the Company and be able to produce
sufficient profit to repay the bank and the balance of the purchase price
represented by the note.
The Special Committee after further considering the insurance carrier's
offer found it inadequate when compared to AJK's offer. The Special Committee
discussed that the $28 million mentioned on behalf of the insurance carrier was
not only somewhat less than the full value now being offered by AJK, but that
in fact AJK's offer of immediate cash made its offer much more preferable; that
having one-third of the purchase price represented by a note which was to be
subordinated to a bank financing and which would depend upon the repayment of
that financing and future performance of the Company then under the control of
the new owners was too much risk. The Special Committee directed counsel to
immediately call back the insurance carrier's representative and relate to him
that the Special Committee believed that its proposal was inferior to the
existing offer and ask if his client was prepared to enhance its offer.
Counsel called back the representative and indicated that the Company had an
offer of more than $28 million "in cash" already. Counsel indicated to the
representative that unless his client was prepared to improve their proposal,
the Company would move ahead as scheduled. The representative stated that his
client had not authorized any additional offer. Counsel informed the
representative that if his client submitted any additional offer before the
shareholder vote, the Board always intended to honor its fiduciary obligations
to the shareholders to consider other offers.
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After further discussion, the Special Committee determined the insurance
carrier's offer to be clearly below the value of AJK's offer and determined
that it would continue its recommendation that the Board of Directors approve
AJK's offer of $8.20 per share.
The Special Committee then terminated its meeting and the full Board of
Directors meeting was reconvened. Mr. Alan H. Barry made a full report to the
Board of the discussions with the insurance carrier's representative and that
in the opinion of the Special Committee the insurance carrier's "proposal" was
"clearly not in the ballpark" and was clearly inadequate when compared with
AJK's offer of $8.20 per share.
After being provided with Mr. Alan H. Barry's and counsel's report of
the meeting of the Special Committee which had just occurred and the
discussions with the other potential bidder's representative that had just
transpired, Mr. Barry reported that the Special Committee was satisfied with
its own analyses and study, and with the Roney & Co. reports that the
transaction was fair to shareholders and was recommending acceptance of the AJK
proposal.
The Board then itself discussed that aside from the Roney & Co. report
which they deemed favorable to the proposal, that the insurance carrier's
"proposal" only confirmed the validity of AJK's bid. Supported by their own
analyses and study, the oral and written reports of Roney & Co., the "proposal"
just made by another potential bidder which was clearly below AJK's offer, the
lack of interest of the one other party that Roney & Co. had contacted, the
fact that no other potential bidder had stepped forward since the press release
had been issued on May 5, 1995 and the announcements that had appeared in the
Dow Jones Wire Services, the Detroit newspapers and various insurance media,
and the favorable recommendation of the Special Committee, the Board
unanimously concluded and approved (without the presence or participation of
Alan J. Kaufman) that the Merger Consideration was fair to shareholders and in
the best interests of the shareholders; that the negotiations with respect to
the Merger Agreement had concluded satisfactorily subject to several minor
adjustments; that the merger proposal, the Agreement and Plan of Merger and
specifically the consideration being offered therein of $8.20 per share was
approved subject to shareholder approval and the other conditions to closing
contained in the Merger Agreement; and that the Board of Directors would
recommend to the shareholders that they approve the AJK proposal and the
Agreement and Plan of Merger.
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD; FAIRNESS OF THE MERGER
The Special Committee of the Board of Directors concluded that the
Merger, including the Merger Consideration ($8.20 per share) and the
negotiation and structure of the Merger, is fair to the shareholders and
recommended to the Board of Directors that it approve the Merger Agreement.
The reason the Special Committee and the Board accepted AJK's offer of
$8.20 per share was to enable all the shareholders of the Company to receive
the Merger Consideration for their shares, with a minimum of conditions and
contingencies. The Special Committee concluded that the Merger Consideration
was fair to the shareholders, and it was concerned that the shareholders might
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lose the opportunity to receive a price that compared as favorably to recent
market prices for the shares, given the relatively small number of shares that
have customarily traded on the American Stock Exchange over the last several
years.
In determining to recommend approval of the Merger Agreement and the
transactions contemplated thereby, the Special Committee and the Board
considered a number of factors, and in the case of the Board, the
recommendation of the Special Committee, including the following:
(i) The Merger Consideration of $8.20 per share, which is more
than 81% above the market price of the shares on April 5, 1995, 30 days before
the public announcement of the proposal.
(ii) The fact that the shares are not actively traded and
constitute a relatively illiquid investment even though listed on the American
Stock Exchange.
(iii) The fairness opinion received by the Special Committee and the
Board from Roney & Co. that $8.20 per share to be received by the shareholders
in the Merger is fair to the shareholders from a financial point of view.
(iv) Roney & Co.'s presentation and report regarding its analysis
of various factors.
(v) The fact that the Merger Consideration of $8.20 substantially
exceeds the net book value of $1.89 per share as of March 31, 1995.
(vi) The fact that all shareholders are being offered the
opportunity to convert all of their shares in the Merger, and will receive
consideration consisting solely of cash.
(vii) The fact that the terms of the Merger Agreement and the price
to be paid to the shareholders were determined through arm's length
negotiations between AJK and its representatives on the one hand, and the
Special Committee and its representatives on the other hand.
(viii) The assets, obligations, operations and earnings of the Company
and its subsidiaries taken as a whole.
(ix) The Special Committee's judgment regarding the prospects of
the Company based on historical performance and management's projections
(x) All of the terms and conditions of the Merger Agreement taken
as a whole.
(xi) The timing of the Merger and the oral representations from
Alan J. Kaufman that he has no current intentions to sell the Company or any of
its material assets after the Merger.
The Special Committee and the Board concluded that the foregoing facts
indicated that the alternative of not proceeding with the Merger would not be
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as financially attractive to the shareholders and would involve substantially
greater uncertainty to them without a commensurate possibility of gains. In
view of the wide variety of factors considered in connection with the
evaluation of the Merger, the Special Committee and the Board did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determinations. The
Special Committee and the Board determined that each of the factors discussed
in (i) through (xi) above were supportive of their determination that the
Merger is fair to the shareholders. However, the Special Committee and the
Board believed that, aside from Roney & Co.'s report, the most important
factors that affected their determination, in descending order of importance
were (i) the price per share offered to the shareholders in the Merger; (ii)
the lack of a strong and active trading market for the shares or a comparable
price on such market, as the one being offered, in the period 30 days, or
earlier, of the announcement and the possibility that any large number of
market sales would depress the present price with the consequent inability of
shareholders to otherwise sell their shares for a fair price; (iii) that the
Merger Consideration is payable in cash; and (iv) the proposed transaction
preserves the continuity of the enterprise, the employment of its more than 450
employees, and its relationships with suppliers and insurance carriers, while
providing a fair price to all shareholders. In addition, the Special Committee
noted in connection with its review of the Company's historical and projected
earnings the fact that the price per share to be received by shareholders in
the Merger takes into account estimated future performance of the Company.
The Special Committee did not separately compute its own valuation for
the shares because it discussed in detail the procedures followed by Roney &
Co. and was satisfied with the accuracy and thoroughness of such procedures.
Furthermore, the Special Committee did not have any members who have as much
experience as Roney & Co. in performing valuations. Accordingly, a separate
valuation, if performed by the Special Committee, would have been given lesser
authority.
The Special Committee and the Board considered the fact that there have
been no other offers by third parties to acquire the Company, purchase a
substantial part of the assets of the Company or purchase a controlling block
of the securities of the Company at a price and with terms deemed more
favorable than that offered by AJK. The Special Committee noted that no offer
to acquire the Company or its assets other than that described under
"Background of and Reasons for the Merger" previously herein has even arisen.
Accordingly, the Special Committee and the Board do not believe that it would
be worthwhile to further seek a third party acquiror for the Company. The
Company, however, has retained the option to consider, negotiate and recommend
any unsolicited offer from a third party to acquire the Company made prior to
the date of the shareholder vote approving the Merger.
The Special Committee did give great weight to the current and
historical market prices of the shares in making its determination with respect
to the fairness of the consideration to be received in the Merger.
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The Special Committee and the Board also reviewed carefully the
interests of certain of the Company's officers and directors in the transaction
and does not believe that its fairness determination was adversely affected as
the result of any such interests. See "- Interests of Certain Persons in the
Merger."
The liquidation of the Company was not considered a reasonable
alternative by the Special Committee or the Board given AJK's interest in
maintaining the Company as a going concern for post-merger operations and the
uncertainty of realizing fair market value of assets in a liquidation sale.
Based on the foregoing factors and the opinion of management that insurance
brokerage operations lack the type of assets to allow for any meaningful
liquidation return in that a good deal of the Company's value is in its
"goodwill" (i.e., its ability to generate revenue as a going concern), the
Special Committee and the Board do not believe that liquidation could have
resulted in greater value being received by the shareholders.
The Special Committee and the Board recognized that the Merger is not
structured to require the approval of the majority of the unaffiliated
shareholders of the Company and that Herbert W. Kaufman, the father of Alan J.
Kaufman, has sufficient voting power to effect the Merger without the
affirmative vote of any other shareholder. Herbert W. Kaufman has expressed
his desire for support of the Merger but only if all shareholders, including
himself, are provided a fair price. The Special Committee and the Board also
recognized the conflicts of interest of various members of management who are
expected to participate in and become part of the ongoing corporation's
management, including Herbert W. Kaufman who is expected to continue on as
President and a Director of the Company. See "- Interests of Certain Persons
in the Transaction." Finally, the Special Committee and the Board acknowledged
that the transaction would eliminate the opportunity for the shareholders to
participate in future growth of the Company but would also eliminate the risk
of any future decreases in the value of the Company. Nonetheless, because the
terms of the Merger Agreement and the price to be paid the shareholders were
determined through arm's length negotiations and the other reasons set forth
above, it was the opinion of the members of the Special Committee and the Board
that the revised proposal of $8.20 per share was fair to the shareholders and
in the best interests of the shareholders.
The Board of Directors of the Company has concluded that the Merger
Consideration and the negotiation and structure of the Merger is fair to and in
the best interests of the shareholders and recommends that shareholders vote to
approve and adopt the Merger Agreement based upon the recommendation of the
Special Committee and the opinion of the Special Committee's financial advisor
to the effect that the $8.20 to be received in the Merger is fair from a
financial point of view to the shareholders which opinion, as well as the
conclusion and analysis of Roney & Co. and the Special Committee, the Board has
adopted as its own.
OPINION OF FINANCIAL ADVISOR
Roney & Co. was retained by the Special Committee to render advice to
the Special Committee in connection with the proposed Merger. The Special
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Committee of the Company had requested the opinion of Roney & Co. as to the
fairness, from a financial point of view, of the proposed consideration to be
received by the shareholders of the Company pursuant to the proposed Merger
offer.
Roney & Co. is a regional investment banking firm. As part of its
investment banking services, it is regularly engaged in the valuation of
corporate securities in connection with public offerings, valuations and merger
and acquisition transactions. Roney & Co. was chosen by the Special Committee
of the Board of Directors to conduct a fairness opinion on the basis of its
familiarity with the financial services industry generally and in the relevant
area, and its qualifications, ability, previous experience, and reputation. No
limitations were imposed by the Special Committee upon Roney & Co. with respect
to the investigations made or the procedures followed by Roney & Co. in
rendering its opinion.
On May 19, 1995 Roney & Co. rendered its oral opinion to the Special
Committee of the Board of Directors to the effect that the range of acceptable
values for the Company was $8 to $9 per share, and as of the date of such
opinion, the consideration of the Merger Agreement was fair, from a financial
point of view, to the shareholders of the Company. Roney & Co. subsequently
rendered written opinions to the Board of Directors dated May 26, 1995, to the
effect that the range of valuation for the Company's Common Stock was $8 to $9
per share, and as of that date, the consideration to be received under the
Merger Agreement by the shareholders of the Company was fair, from a financial
point of view. Such opinion described the assumptions made, matters considered
and the scope of the review undertaken and the procedures followed by Roney &
Co. Roney & Co.'s opinion as to "fairness" is included in this Proxy Statement
as Appendix B-1 and as to "valuation" of the Common Stock in Appendix B-2, and
each is incorporated herein by reference.. SHAREHOLDERS ARE ENCOURAGED TO READ
RONEY & CO.'S OPINIONS IN THEIR ENTIRETY.
Roney & Co.'s opinion is directed to the Board of Directors of the
Company and addresses the "fairness" of the consideration to be received by
shareholders, but does not constitute a recommendation to any shareholder of
the Company. The consideration to be received by the shareholders of the
Company was first proposed by Alan J. Kaufman, the person in control of the
actual acquiring entity, and finally determined through negotiation between the
proposed purchaser and the Special Committee of the Board of Directors. Roney
& Co. did not recommend the amount of consideration to be paid.
In arriving at the opinion as set forth below, Roney & Co. has, among
other things:
Reviewed a draft copy of the Merger Agreement dated May 2, 1995;
Reviewed the Company's Annual Report on Form 10-K and related financial
information for the five fiscal years ended December 31, 1994 and the
quarterly Reports on Form 10-Qs as filed with the United States
Securities and Exchange Commission ("SEC") for the periods ended March
31, 1995, September 30, 1994, June 30, 1994 and March 31, 1994, and
certain internal financial information related thereto;
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<PAGE> 29
Reviewed the Company's Annual Report to Shareholders as filed with the
SEC and related financial information for the three years ended December
31, 1994;
Reviewed other selected financial information for the quarterly periods
ended March 31, 1995, December 31, 1994 and September 30, 1994;
Reviewed the relevant market information regarding the shares of Common
Stock of the Company including historical trading activity, prices and
volume;
Compared certain financial characteristics of the Company to other
publicly held companies in the insurance industry deemed to be relevant;
Reviewed selected information concerning current industry conditions and
trends relating to the valuation of recent mergers and acquisitions
within the insurance brokerage industry;
Compared the proposed terms of the offer contemplated in the draft
Merger Agreement with the financial terms of certain other mergers and
acquisitions which were deemed to be relevant;
Conducted discussions with members of senior management of the Company
concerning the business, operations, recent financial condition and
future prospects of the Company;
Reviewed the Company's internal forecast for the fiscal years 1995
through 1999;
Prepared a discounted cash flow analysis of the Company and an estimate
of the value of the Company under three different scenarios;
Reviewed such other financial and industry data and performed such other
analysis and took into account such other matters as were deemed
appropriate.
In preparing its opinion, Roney & Co. relied upon the accuracy and
completeness of all financial and other information supplied or otherwise made
available to it by the Company and did not independently verify such
information or undertake an independent evaluation or appraisal of the assets
of the Company.
In preparing the fairness opinion, Roney employed 12 different valuation
tests that are more fully described below. These 12 tests included calculating
four average ratios for a group of "comparable" companies (as described more
fully herein) and then applying those average ratios to the proposed offer to
find an implied price per share; calculating four average ratios for recent
mergers and acquisitions in the industry and applying those ratios to the
proposed offer to find an implied price per share; calculating one ratio for
recent acquisitions by the Company itself and applying that ratio to the
proposed offer to find an implied price per share; and calculating three values
for the Company's stock based on a discounted cash
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flow analysis. The average of these 12 tests revealed a valuation of $8.17 per
share.
Stock Price Analysis
Roney & Co. prepared a trading history of the shares of the Company from
January 1994 to May 1995. The data was tabulated showing the highs and lows of
the stock price and the total shares traded for each month over the 17 month
period. This information revealed that the shares of the Company traded in a
tight range from $3.75 to $4.54 between January 1994 and March 1995. During
the month of April 1995, the Company's stock traded on 14 different days. The
low for April was the 7th when the stock closed at $4.48 per share and the high
for April was on the 28th when the stock closed at $5.625. For the month of
May, the Company's stock traded on the 3rd at $6.125, on the 4th at $7.125, on
the 5th at $7.125, on the 8th at $7.125, on the 11th at $7.125, on the 15th at
$6.875, on the 16th at $7.00, on the 17th at $7.00, on the 18th at $6.8125, on
the 19th at $6.75, on the 23rd at $6.75, on the 24th at $6.625 and on the 25th
at $6.875. Roney & Co. gave their written report on the 26th of May to the
Company's Board of Directors. In April and May of 1995 prior to the
announcement of the offer on May 5, the Company had issued a few news releases
that may or may not have caused the shares of the Company to rise or fall. On
April 4, the Company filed its 10-K for the year ended December 31, 1994, on
April 17 the Company declared a 10% stock dividend to be paid on May 17 and on
May 2 the Company released first quarter net earnings of 5 cents a share vs. 3
cents a share for the first quarter of 1994. Roney & Co. concluded that the
$8.20 per share proposed offer was in excess of what the market was willing to
pay for the Company's stock when looking at the time frame from January 1994 up
to April 28, one week prior to the announcement of the offer and even
thereafter.
Comparison with Selected Companies
Roney & Co. compared selected financial ratios for the Company to the
corresponding ratios for a "comparable group" of publicly traded companies.
Although no company was solely involved in the wholesaling of specialty
insurance and related premium financing as does the Company, each of these
somewhat comparable companies according to their business description had
business interests in the insurance brokerage industry or other insurance
related industries Roney & Co. deemed to be relevant. The comparative
companies were also chosen based on conversations with Company management as to
which companies they encountered competing in their same general business. The
comparable list consisted of: (Company/Ticker Symbol) Acordia, Inc. (ACO),
Alexander & Alexander (AAL), Aon Corporation (AOC), Arthur J. Gallagher (AJG),
Baldwin & Lyons (BWINB), W.R. Berkley Corp. (BKLY), E.W. Blanch Holdings, Inc.
(EWB), Continental Corporation (CIC), Gainsco, Inc. (GNA), Hilb Rogal and
Hamilton (HRH), Home Holdings, Inc. (HHI), Marsh & McLennan (MMC), Mutual Risk
Management (MM), Poe & Brown, Inc. (POBR), St. Paul Co. (SPC), Victoria
Financial, Inc. (VICF), Transatlantic Holdings, Inc. (TRH), Underwriters
Financial Group (UFG), Willis Corroon Group (WCG). Roney & Co. chose to use
the following four ratios because of the availability of such information and
the fact that these ratios are commonly used in valuations. The four ratios
are the (i) 1994 price earnings ratio (Stock Price/Earnings per share); (ii)
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the estimated 1995 price earnings ratio; (iii) the price to book ratio (Stock
Price/BookValue per share) (Roney & Co. defined book value as total
shareholders' equity divided by total shares outstanding); and (iv) the Market
Capitalization to Net Revenue Ratio (Market Capitalization/Last 12 months Net
Revenue). Roney & Co. defined market capitalization as stock price times total
shares outstanding. On the average the 1994 price-earnings ratio for the group
was 16.5 and the estimated 1995 price earnings ratio was 13.5. On March 31,
1995, prior to the offer, the Company's Common Stock closed on the American
Stock Exchange at $4.53 which, based on 1994 earnings of $.57 per share and
1995 expected earnings of $.65 per share implied a 1994 price earnings ratio of
7.89 and a 1995 price earnings ratio of 6.92. Roney & Co. then noted the
proposed offer of $8.20 results in an implied 1994 price earnings ratio of 14.3
and a 1995 price earnings ratio of 12.6. Roney & Co. then applied the
comparables group of companies' average multiples of 16.5 and 13.5 for 1994 and
1995 to the Company's earnings and a value of $8.58 per share was derived based
on the 1994 comparables group average multiple and a value of $8.78 was derived
based on the estimated 1995 average group multiple.
The average stock price-to-book ratio for the group was 2.7 and the
average market capitalization (stock price times shares outstanding) to net
revenue was 1.47. The March 31, 1995 closing price of the Company's Common
Stock was $4.53 which based on a book value of $1.89 implied a price-to-book
ratio of 2.38. Based on the proposed offer of $8.20, Roney & Co. calculated an
implied price-to-book ratio of 4.34. Roney & Co. then applied the comparable
group's average price-to-book ratio of 2.7 to the Company's book value of $1.89
and a value of $5.11 per share was calculated.
In calculating the market-capitalization-to-net revenue ratio, based on
the $4.53 stock price on March 31, 1995 prior to the offer, with approximately
3,440,000 shares outstanding and net revenue over the last 12 months of
$28,596,000, Roney & Co. found that the Company was trading at a ratio of .55.
Based on the proposed offer of $8.20 for each share of the Company, Roney & Co.
implied a ratio of .90. Roney & Co. then applied the group's average
market-capitalization-to-net revenue ratio to the Company's net revenue of
$28,596,000 and calculated an implied value of $12.24 per share.
On the basis of the foregoing, Roney & Co. concluded that prior to the
proposed offer the Company's stock was trading at a discount to the group based
on all four ratios. This discount was partially explained due to the following
factors: the Company's small net revenue base, small market capitalization,
lack of trading and lack of research coverage relative to the group. Roney &
Co. did not give more or less weight to any of the four ratios used in the
comparison with selected companies. Roney & Co. concluded that the $8.20 offer
was within the acceptable range of values when using the comparisons with
selected companies calculations.
Analysis of Recent Mergers and Acquisitions
Roney & Co. analyzed certain other mergers and acquisitions in the
Standard Industrial Classification (SIC) code in which the Company operates,
6411. Roney & Co. used a sample of 12 U.S. target companies within the 6411
SIC code that completed transactions between July 31, 1989 and March 1, 1995.
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The (Target/Buyers) were: Kendall Insurance Inc. / Corroon & Black Corp.;
Adjustco Inc. / Preferred Health Care Ltd.; Brown & Brown Inc. / Poe &
Associates Inc.; Celina Financial Corp. / National Mutual Insurance Co.;
Madison Capital Inc. / Citation Insurance Group; Woodsmall Cos. / Arthur J.
Gallagher & Co.; Equivest Finance Inc. / Atlantic Investment Partners;
Allegiance Insurance Co. / Horace Mann Educators Corp.; Gen Insurance Co. (Gen
Holding) / Intergroup Healthcare Corp.; Equivest Finance (Atlantic) / Investor
group; Health Enterprises Inc. / Coastal Healthcare Group Inc.; Bankers
Financial Corp. / Miners National Bancorp. The average price-to-book ratio for
the group was 4.96 and the average total value of the offer to net revenues for
the group was 1.31. Based on the $8.20 proposed offer, Roney & Co. calculated
an implied price to book value of 4.34. Roney & Co. then applied the group
average of 4.96 to the Company's book value of $1.89 and calculated a value of
$9.37 per share. With regard to the total net value of the offer to net
revenue ratio, based on the $8.20 proposed offer, Roney & Co. implied a ratio
of .99. Roney & Co. then applied the 1.31 group average to the Company's last
12 months of net revenue of $28,596,000 and calculated a value of $10.79 per
share.
Roney & Co. also consulted other industry sources which regularly issue
reports and analyses concerning the insurance industry. These sources revealed
that in 1994, transactions in the insurance brokerage industry were completed
with an average total value of the offer to net revenue multiple of 1.20.
Based on the $8.20 proposed offer and Company net revenues over the last 12
months of $28,596,000 this would imply a ratio of .99 and an implied value
based on the industry average of $9.99 per share. The sources also highlighted
Hilb, Rogal and Hamilton as an active company in the insurance brokerage
acquisition area. Roney & Co. found that, on the average, Hilb, Rogal and
Hamilton reports paying 6 times operating income for its acquisitions. Roney &
Co. then applied a "6 times operating income" formula to the Company's
operating income and calculated that if one were to pay only 6 times operating
income for the Company, they would pay only $4.93 per share ($2,822,600
operating income multiplied by 6 and divided by 3,435,347 shares outstanding).
Based on the $8.20 offer and operating income of the Company over the last 12
months of $2,822,600, Roney & Co. determined AJK was paying 10.02 times
operating income.
Roney & Co. also analyzed seven acquisitions that the Company itself had
completed from December 1991 through March 1995. These acquisitions included
Floyd West & Co.; RKS Corp.; Howard James Co.; A&H Cleveland; A&H Atlanta (CA);
McLaughlin Agency; Illinois R. B. Jones. Based on these transactions, the
consideration paid by the Company itself in its prior acquisitions reflect an
average total value to net revenue of .77. Based on the $8.20 proposed offer
and net revenue for the Company over the last twelve months of $28,596,000 this
implied a ratio of .99 that AJK would be paying for the Company. Roney & Co.
then applied the .77 times net revenue to the Company's net revenue and
calculated a value of $6.37 per share. That is, if AJK were employing the
Company's own average acquisition price, the acquisition price for the Company
would be approximately $6.37 per share.
On the basis of the foregoing, Roney & Co. concluded that at .99 the
proposed offer is at a premium to the average .77 times net revenue figure the
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Company itself paid on average for its recent acquisitions. Roney & Co. also
found the proposed offer to be at a premium when compared to, on average, what
Hilb, Rogal and Hamilton would reportedly pay. When the other ratios were
considered, including those found in analyzing recent mergers and acquisitions
within the 6411 SIC code, those found using the industry sources and the Hilb,
Rogal and Hamilton reported information, Roney & Co. concluded the $8.20 per
share offer by AJK fell into an acceptable range between the high and low
implied stock values.
Discounted Cash Flow Analysis
A discounted cash flow analysis is a traditional valuation methodology used to
derive a valuation of a corporate entity by capitalizing the estimated future
earnings and calculating the estimated free cash flows of such corporate entity
and discounting such aggregated results back to the present. Roney & Co.
performed three different discounted cash flow calculations. Using the
projections of future performance as described below Roney & Co. calculated the
estimated "free cash flow" based on projected unleveraged net income before
interest and taxes as adjusted for depreciation and amortization and projected
capital expenditures. The first calculation, based upon a slow growth scenario,
used a sales growth rate of 9% in 1995 and 10% every year thereafter.
Commissions paid (commissions paid other agents) were held at Company
historical levels of 43.5%, operating expenses were held at 51.5% (the
historical average), taxes were held at the historical 45% level and the
discount rate used was 15% (this discount rate represents Roney & Co.'s
estimate of the weighted average cost of capital to the Company and is within
the range of discount rates most commonly employed by Roney & Co. itself).
This scenario produced a value of $5.14 per share. The second scenario
employed the Company's own projections dated February 27, 1995 which included
revenue growth rates of 9% in 1995 and 15% thereafter. Those projections
presumed commissions paid other agents were held at historical levels and
operating expenses dropped steadily from 50.4% in 1994 to 47.6% in 1999,
bonuses were added to the expense line, taxes were held at 45% and the discount
rate used was 15%. This second scenario produced a value of $7.35 per share.
The third and most optimistic scenario employed the Company projections as well
as included a number of cost reductions in the operation that Roney & Co.
estimated an industry buyer might use in its analysis. This last scenario used
the same 15% discount rate and produced a value of $9.35 per share. The
average of the three scenarios produced a value of $7.28.
On the basis of the foregoing, Roney & Co. concluded that using the
discounted cash flow approach the $8.20 per share proposed offer was a slight
premium to the $7.35 per share value that was calculated using the Company's
own five year forecast. When analyzing the outcome of the slow growth scenario
the $8.20 proposed offer is a substantial premium, and when analyzing the most
optimistic scenario the $8.20 proposed offer is at a discount. Taking into
account the three scenarios, Roney & Co. concluded the proposed offer of $8.20
per share was within the acceptable range of values when using the discounted
cash flow analysis.
None of the above analyses performed by Roney & Co. was assigned a
greater significance than any other.
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Leveraged Buyout Analysis
A Leveraged Buyout (LBO) analysis was also performed by Roney & Co. to
determine if a "financial buyer" (e.g., a non-industry buyer) would find the
assets of the Company leverageable in such a transaction. An LBO model is a
secondary model used in corporate valuations and therefore given less weight
than primary valuation indicators. Roney & Co. prepared an LBO model and found
that there were not sufficient assets of the Company to leverage for a
financial buyer to be enticed into a transaction that could result in an above
market rate of return which financial buyers usually demand.
Conclusion
Based upon all of the foregoing various analyses and comparisons, Roney
& Co. concluded that the value represented by the offer by AJK of $8.20 per
share was fair, from a financial point of view, to the shareholders of the
Company.
Other Factors for Shareholders to Consider
Although the material analyses performed by Roney & Co. in rendering its
opinion have been summarized above, that summary does not purport to be a
complete description of the analyses performed by Roney & Co. Its analyses and
the summary set forth above must be considered as a whole. Selecting portions
of Roney & Co.'s analyses or even a particular method of analyses of the ones
that were employed, without considering all factors and the differing analyses,
may create an incomplete view of the process by which Roney & Co. reached its
opinion. In addition Roney & Co. gave no one particular analysis more or less
weight than other analyses, nor did Roney & Co. deem various assumptions more
or less probable than other assumptions, so that the ranges of valuations
resulting from any particular analysis described above should not be taken to
be Roney & Co.'s view of the actual value of the Company. Roney & Co. had
indicated to the Company that the preparation of a fairness opinion is to a
large degree judgmental and is not necessarily susceptible to partial analysis
or summary.
In performing its analysis, Roney & Co. made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of the Company. Roney &
Co. used in its analyses various projections of future performance based on
assumptions deemed reasonable by Company management. The projections are based
on numerous variables and assumptions which are inherently unpredictable and
must be considered not certain of occurrence as projected. Accordingly, actual
results could vary significantly from those assumed in the projections and any
related analysis. No one analysis, nor any set of analyses, performed by Roney
& Co. is necessarily indicative of actual values or actual future results,
which may be significantly more or less favorable than suggested by such
analyses. All such analyses were prepared solely as part of Roney & Co.'s
analysis of the fairness, from a financial point of view, of the consideration
to be received by Company shareholders. The analysis does not purport to be an
appraisal or to reflect the prices at which a company might
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<PAGE> 35
actually be sold or the prices at which any securities may trade at the present
time or at any time in the future.
Roney & Co.'s fairness opinion does not address relative merits of the
Merger Agreement as compared to any alternative business strategy that might
exist for the Company or the effect of any other business combinations in which
the Company might engage. In addition as described above, Roney & Co.'s
opinion to the Company's Board of Directors was only one of many factors taken
into consideration by the Board in its decision to approve the Merger Agreement
and the Merger.
For Roney & Co.'s services in connection with the rendering of its
opinions, the Company has paid Roney & Co. $40,000. The Company also agreed to
reimburse Roney & Co. for reasonable out-out-pocket expenses, including
reasonable fees and expenses of legal counsel, and has agreed to indemnify
Roney & Co. against certain expenses and liabilities incurred in connection
with its engagement, including liabilities under federal securities laws.
Roney & Co. may, in the ordinary course of its business, trade
securities of the Company for its own account or for the accounts of customers
and thus may hold long or short positions in such securities at any time (it
presently holds 935 shares for customers). Although there exist no present
plans to do so, Roney & Co. may in the future be considered by the Company to
provide investment banking and securities brokerage services. These
relationships are considered by the Company to be in the ordinary course of
business and to be immaterial to Roney & Co.'s engagement as described herein.
DISSENTERS' RIGHTS
Under Michigan law, rights to demand an appraisal process supervised by
a county circuit court are unavailable if the shares concerned are listed on
the New York or American Stock Exchange. The Common Stock is listed on the
American Stock Exchange. Such dissenters' rights are also unavailable under
Michigan law in "cash merger" transactions such as the Merger proposal to be
voted upon.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
The aggregate amount of cash to be paid to the Company's shareholders
pursuant to the terms of the Merger is approximately $28,337,653, which
includes payment for 3,440,558 shares outstanding as of the Record Date (4,234
of which were issued as of June 30, 1995 by the Company for $7.69 each pursuant
to an Employees Stock Purchase Plan which has now been terminated), the
difference between the exercise price of $4.96 for 24,200 unexercised stock
options, 6,050 held by each of four Board members (two of whom comprise the
Special Committee) and the $8.20 cash merger price; and 8,470 unexercised stock
options held by branch managers or assistant branch managers exercisable at
$2.69 per share who will also receive the difference between their exercise
price and the $8.20 cash merger price. For a listing of the shareholdings and
options of the Company's directors and executive officers, see "Common Stock
Ownership of Certain Beneficial Owners and Management."
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<PAGE> 36
It is anticipated that the officers and Directors of the Company will
continue to serve in such functions for the Company following the Merger. Alan
J. Kaufman will serve as President and the sole director of AJK. Herbert W.
Kaufman, President and Director, and Gerald W. Horton, Senior Vice President,
will continue as officers of the Company after the Merger under their existing
employment agreements amended only to provide that the amortization of any
indebtedness in connection with the proposed Merger will not reduce bonuses or
profit sharing contributions provided for in such agreements. Herbert W.
Kaufman's employment agreement provides that upon his retirement he is also to
serve as a consultant to the Company for seven years. Other senior officers
including Gerald A. Wesolowski, Chief Financial Officer, and Brooke Bothe,
Corporate Secretary, George F. Allen, Senior Vice President of Burns & Wilcox,
Ltd., and David Price, Vice President of Burns & Wilcox, Ltd., will also
continue their employment and compensation arrangements with the Company, and
bonus arrangements, where existing, will also be amended to provide that the
amortization of indebtedness incurred to effectuate the Merger will not affect
their compensation and bonuses.
In addition, Alan J. Kaufman and Herbert W. Kaufman own approximately
50% and 6%, respectively, of the equity interest of a partnership that leases
the headquarters' property to the Company. The lease, which has a term
expiring December 31, 2000 provides for payments by the Company of
approximately $259,000, $279,000, $296,000, $308,000 and $318,000 per year
(1995-1999), in addition to certain prorated costs attributable to property
taxes and operating costs of the building above a 1994 base. The lease will
continue in effect following the Merger.
At December 31, 1994, the Company had a $697,663 receivable from an
irrevocable trust established by Herbert W. Kaufman, in which his children are
the primary beneficiaries. This amount represents the payment of premiums on a
split-dollar life insurance arrangement. The Company has a security interest
in the policy to the extent of the premiums advanced. The balance of such
receivable at December 31, 1993 was $614,029. The Company intends to continue
this arrangement after the Merger.
Neal F. Zalenko, a director, is a certified public accountant. Although
his firm, Zalenko and Associates, P.C., does not perform the audit of the
Company's consolidated financial statements, he is paid to perform advisory and
consulting services. The Company plans to continue this arrangement. For the
year ended December 31, 1994, the Company incurred fees of $20,041 for Zalenko
and Associates, P.C.
Alan J. Kaufman is a principal in the law firm of Kaufman and Payton,
P.C. His firm performs various legal services for the Company. The Company
expects to continue to retain such firm on a regular basis. For the year ended
December 31, 1994, the Company incurred fees of $111,060 for Kaufman and
Payton, P.C.
It is also anticipated that the business of the Company after the Merger
will be conducted in essentially the same manner as it is presently conducted.
Neither the management of the Company nor continuing members of the Board of
Directors of the Company have any present plans to purchase or
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<PAGE> 37
sell any material assets prior to or subsequent to the Merger, other than in
the ordinary course of business.
CERTAIN EFFECTS OF THE MERGER
Upon consummation of the Merger, each share of Common Stock will be
converted into the right to receive the Merger Consideration. Acquisition will
merge with and into the Company, with the Company becoming a wholly owned
subsidiary of AJK. As a result, the present holders of the Common Stock will
cease to have any ownership interest in the Company or rights as stockholders
and will cease to participate in the Company's future earnings and growth in
value of the Company, if any. Similarly, such shareholders will not face the
risk of any decline in the value of the Company after the Merger. Any and all
appreciation or depreciation in the value of the Company will be borne solely
by AJK, controlled by Alan J. Kaufman. The Merger will be a taxable
transaction to the holders of the Common Stock for federal income tax purposes
and may be taxable for state, local, foreign and other tax purposes. The
Company shareholders may incur a taxable gain for federal income tax purposes
as a result of the receipt of cash in exchange for Common Stock if their basis
in the Common Stock is less than $8.20 per share. See "- Certain Federal
Income Tax Consequences of the Merger."
It is expected that the Merger between Acquisition, the subsidiary
controlled by AJK, whose sole shareholder is Alan J. Kaufman, and the Company
itself will qualify as a tax-free reorganization pursuant to Section
368(a)(1)(A) of the Internal Revenue Code and that neither the Company nor Alan
J. Kaufman will incur any federal income tax as a result of the Merger.
However, as indicated previously, shareholders of the Company receiving $8.20
per share will have taxable gains.
After the Merger is consummated, the Company will file a certification
with the Securities and Exchange Commission that it is owned by less than 300
persons and request termination of registration of its Common Stock. The
Company's obligation to file reports with the SEC, such as annual and quarterly
reports and proxy statements, will terminate immediately upon filing of the
certification. Its registration will be terminated within 90 days after such
filing. Such termination will mean that the Company will no longer be
obligated to hold annual or special shareholder meetings for which proxies must
be solicited pursuant to a proxy statement, to print and to distribute to
shareholders annual or quarterly reports or proxy statements, to maintain a
transfer agent for its Common Stock, or to retain counsel or accountants to
assist in the preparation of any of the above reports or statements.
TAX WITHHOLDING
The Company will have the obligation to deduct and withhold from the
Merger Consideration payable to a holder of Common Stock such amounts as it is
required to deduct and withhold with respect to the payment under applicable
tax law. The Letter of Transmittal each shareholder will receive after the
Special Meeting will, among other instructions, address the issue of what
information is required to prevent tax withholding for any particular
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<PAGE> 38
shareholder (the shareholder will be required to supply certain information to
avoid tax withholding, e.g., his/her social security number).
CERTAIN LITIGATION
On June 16, 1995, a lawsuit was commenced in the Circuit Court for the
County of Oakland, Michigan, Case No. 95-499008-CZ, relating to the proposed
merger and naming as defendants the Company, each of its Directors and AJK and
Acquisition. The plaintiff is Richard N. Frank, and he purports to represent a
class which includes shareholders of the Company other than the defendants.
The complaint sets forth general allegations that, among others, the Directors
breached their fiduciary duties to the shareholders by "grossly" undervaluing
the Company and its shares, by failing to obtain a fair price and that Herbert
W. Kaufman and Alan J. Kaufman agreed to set a low per share buyout price and
that each defendant aided and abetted the other in such attempt. The principal
relief sought is a declaration as a class action and recovery of damages in an
unspecified amount against all defendants, including attorney fees and all
costs. The Company does not anticipate that this lawsuit will affect the
consummation of the Merger and indicates that the allegations are unfounded,
that it will deny the plaintiff's allegations and it will contest it
vigorously.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The receipt of the Merger Consideration by a shareholder in exchange for
shares of Common Stock pursuant to the Merger will be a taxable transaction for
federal income tax purposes under the Internal Revenue Code (the "Code"), and
may also be a taxable transaction under applicable state, local, foreign and
other tax laws.
In general, a shareholder will recognize gain or loss equal to the
difference between the tax basis for the shares of Common Stock held by such
shareholder and the amount of cash received in exchange therefor. Such gain or
loss will be capital gain or loss if the shares of Common Stock are capital
assets in the hands of the shareholder and will be long-term capital gain or
loss if the holding period for the Common Stock is more than one year.
Long-term capital gains recognized in 1995 by shareholders who are individuals
are taxable at a maximum rate of 28% (as compared with a maximum rate of 39.6%
on ordinary income). Corporations generally are subject to tax at a maximum
rate of 35% on both capital gains and ordinary income. The distinction between
capital gain and ordinary income may be relevant for certain other purposes,
including the taxpayer's ability to utilize capital loss carryovers to offset
any gain recognized.
The foregoing discussion may not be applicable to shareholders who
acquired their shares of Common Stock pursuant to the exercise of stock options
or other compensation arrangements or who are not citizens or residents of the
United States or who are otherwise subject to special tax treatment under the
Code.
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<PAGE> 39
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF
THE MERGER IS INCLUDED FOR GENERAL INFORMATION ONLY AND IS BASED ON EXISTING
TAX LAW AS OF THE DATE OF THIS PROXY STATEMENT, WHICH MAY DIFFER ON THE DATE OF
THE CONSUMMATION OF THE MERGER OR AT THE EFFECTIVE TIME. EACH SHAREHOLDER IS
URGED TO CONSULT SUCH SHAREHOLDER'S OWN TAX ADVISOR TO DETERMINE THE PARTICULAR
TAX CONSEQUENCES TO SUCH SHAREHOLDER OF THE MERGER, INCLUDING THE APPLICABILITY
AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
PLANS FOR COMPANY IF MERGER NOT CONSUMMATED
As consummation of the Merger is subject to fulfillment and satisfaction
of certain covenants and conditions, including AJK having sufficient funds to
pay the Merger Consideration and the Company obtaining shareholder approval of
the Merger, there can be no assurance that the Merger will be consummated. If
the Merger is not consummated, the Company currently plans to continue its
existing operations and to evaluate its strategic alternatives.
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<PAGE> 40
THE MERGER AGREEMENT
GENERAL
Pursuant to the Merger Agreement, at the "Effective Time" (as defined in
"Effective Time" below) of the Merger Agreement (i) Acquisition will be merged
with and into the Company, which will be the surviving corporation in the
Merger; (ii) each share, other than shares held by AJK, Acquisition, or by
Company or any of its subsidiaries, will be converted into the right to receive
$8.20 so that AJK, as parent of Acquisition, will become the sole shareholder
of the Company; (iii) each share of capital stock of Acquisition will be
converted into and become one fully paid and nonassessable share of Common
Stock, par value $.0025 per share, of Company as the surviving corporation. In
connection with the Merger, each outstanding stock option will entitle the
holder to receive, for each share of Company Common Stock subject thereto,
$8.20 in cash less the per share exercise price of each stock option.
EFFECTIVE TIME
If the Merger Agreement is approved by the requisite vote of Company
shareholders, and the other conditions to the Merger are satisfied or waived,
the Merger will become effective upon the filing of a Certificate of Merger
with the Department of Commerce, State of Michigan (the "Effective Time"). It
is currently anticipated that the filing will be made as promptly as
practicable after the Special Meeting and approval of the Merger by the
shareholders of the Company. As indicated previously herein, Herbert W.
Kaufman, who beneficially controls 77% of the Company's stock, has advised the
Board of Directors of the Company he presently intends to vote for the Merger.
See "Covenants and Conditions."
EXCHANGE OF SHARES - PAYMENT
In order to receive the cash to which Company shareholders will be
entitled at the Effective Time, each holder of a certificate or certificates
theretofore representing shares of Company Common Stock will be required to
properly surrender such certificates together with a duly executed and properly
completed letter of transmittal and any other required documents, to Mellon
Securities Trust Company, acting as the Paying Agent.
The Paying Agent will send instructions to holders of shares with regard
to the procedure for surrendering certificates in exchange for cash, together
with a letter of transmittal to be used for this purpose, as soon as
practicable after the Effective Time. Holders of shares should surrender
certificates representing shares only with a letter of transmittal.
Upon receipt of such certificate or certificates together with a duly
executed and properly completed letter of transmittal, the Paying Agent will
arrange for the issuance and delivery of a check in the amount of $8.20 to the
person or persons entitled thereto for each share represented by such stock
certificate or certificates.
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<PAGE> 41
HOLDERS OF SHARES SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THE
ENCLOSED PROXY CARD. PLEASE WAIT UNTIL YOU RECEIVE A FORM OF LETTER OF
TRANSMITTAL AFTER THE SPECIAL MEETING.
REPRESENTATIONS AND WARRANTIES
The Company. The Agreement contains certain representations and
warranties by the Company relating to, among other things: (i) corporate
organization, good standing, power, authority and similar matters; (ii)
capitalization; (iii) the authorization, execution, delivery, performance and
enforceability of the Agreement and the transactions contemplated thereby; (iv)
the absence of any violation of its articles of incorporation, bylaws,
applicable judgments, decrees, orders, statutes, or regulations, and certain
contracts, agreements and obligations; (v) the delivery and content of certain
reports and financial statements; (vi) the absence of certain liabilities and
certain changes in its business; (vii) compliance with applicable laws and the
possession of required licenses and permits; (viii) the absence of certain
material litigation that could threaten or impede the Merger; (ix) employees
and employee benefits including ERISA compliance; (x) transactions with
affiliates; (xi) the filing of tax returns and payment of taxes; (xii)
broker's, finder's and similar fees; (xiii) compliance with environmental laws;
(xiv) no agreements or commitments not made in the ordinary course of business;
(xv) no default under any material agreement or contract; (xvi) conduct of the
business has been in the ordinary course of business; (xvii) no change or any
event in its business or assets or results of operations which has had, or is
likely to have, a material adverse effect; (xviii) the Board of Directors has
taken such action as is necessary to render inapplicable to the merger State of
Michigan takeover statutes; (xix) the vote required to effect the Merger; (xx)
the Company has received the opinion of Roney & Co. that the Merger
Consideration is fair to shareholders from a financial point of view.
Acquisition and AJK. The Merger Agreement contains certain
representations and warranties by Acquisition and AJK relating to, among other
things: (i) corporate organization, good standing, power and authority and
similar matters; (ii) the authorization, execution, delivery and performance of
the Agreement and the transactions contemplated thereby; (iii) broker's,
finder's and similar fees; (iv) receipt of commitment from lending sources that
funds will be available to pay the Merger Consideration; and (v) information
supplied by Acquisition or AJK for inclusion in the Proxy Statement is correct
and complete.
COVENANTS AND CONDITIONS TO CONSUMMATION OF THE MERGER
The obligations of the Company and AJK and Acquisition to consummate the
Merger are subject to the following conditions, among others: (i) approval of
the Merger Agreement by a majority of the shareholders of the Company entitled
to vote; (ii) compliance with all statutory requirements for the valid
consummation of the Merger, including the receipt of all required
authorizations, consents and approvals of federal and state governmental
agencies; (iii) no temporary restraining order, preliminary or permanent
injunction or other order or decree shall be in effect preventing the
consummation of the Merger; (iv) AJK and Acquisition shall have received the
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financing necessary to effectuate the Merger and to exchange and convert all
outstanding shares into cash; (v) employment agreements with senior executives
of the Company shall have been amended to provide that formulas for
calculating bonus or profit sharing awards for such executives shall be
determined exclusive of principal or interest paid or accrued on any
indebtedness incurred by AJK or Company in connection with the Merger; and (vi)
the representations and warranties of the other party to the Merger Agreement
shall be true and correct in all material respects as of the Closing Date.
Except for the shareholder approval required by applicable corporate
law and compliance with all statutory requirements for the valid consummation
of the Merger, any of the foregoing conditions may be waived at any time prior
to the Merger by the parties to the Merger Agreement.
The Company has agreed to conduct its business in the ordinary and
usual course prior to the consummation of the Merger and to use its best
efforts to cause the transactions contemplated by the Merger Agreement to be
consummated.
Other Covenants of the Company
The Company has covenanted that it will not initiate or solicit
discussions with, engage in negotiations with, or provide any non-public
information to any person, entity or group involving the possible sale,
transfer or joint venture of any part of the business, stock or assets of the
Company to any person other than AJK, provided, however, that if, prior to
receipt of Company shareholder approval of the Merger, the Board of Directors
of the Company determines, based upon written advice of outside counsel, that
its fiduciary duties under Michigan law so require, the Company may, in
response to unsolicited requests, provide information concerning the Company
and negotiate with any other entity or group concerning a superior proposal for
a different transaction;
Further, the Company has covenanted that until the Effective Time of
the Merger, the Company and its subsidiaries:
(i) will conduct its operations in the usual, regular and
ordinary course consistent with past practice, will use its best efforts to
preserve its business organization and goodwill and keep available the services
of its officers and employees, and will maintain satisfactory relationships
with persons having business relationships with it;
(ii) will not enter into any new material line of business;
(iii) will not change accounting policies except as required by
law or generally accepted accounting principles;
(iv) will not declare or pay any dividend or distribution on any
shares of its capital stock other than the annual cash dividend declared in the
first quarter of each fiscal year and will not adjust or split its capital
stock or repurchase or redeem such stock;
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<PAGE> 43
(v) with certain exceptions relating to existing employee stock
plans, will not issue any additional shares of capital stock;
(vi) will not amend its articles of incorporation or bylaws;
(vii) will not incur or commit to any capital expenditure or other
obligations in connection therewith, in excess of $1,000,000 individually or
$2,000,000 in the aggregate;
(viii) will not acquire or agree to acquire an equity interest in
or a substantial portion of the assets of any other business or entity which
exceeds $1,000,000 individually or $2,000,000 in the aggregate;
(ix) will not make any investment except for transactions in the
ordinary course of business consistent with the Company's practice of investing
its cash in marketable equity and debt securities;
(x) will not sell, lease or otherwise dispose of any material
assets;
(xi) will not incur any indebtedness for borrowed money or
guarantee any such indebtedness except for permitted acquisitions;
(xii) will not take any action that could be expected to, or
result in any representation or warranty becoming untrue;
(xiii) will not increase any compensation or amend any employment
agreement with any of its officers, directors or employees, adopt any new
employee benefit plan, or amend any existing employee benefit plan;
(xiv) will file all required tax returns and pay all taxes due;
(xv) will not settle, pay or discharge any claims or liabilities
other than those in the ordinary course of business or as reflected or reserved
in its most recent unaudited financial statements;
(xvi) will not amend, modify or terminate any material contract,
lease or agreement;
(xvii) will confer on a regular basis with AJK, report on
operational matters and advise of any changes or events having or which could
have a material adverse effect on the Company or which could cause a material
breach of any representation, warranty or covenant of the Company.
Any of the foregoing covenants may also be waived at any time prior to
the Merger.
FINANCING THE TRANSACTION
AJK, Acquisition's parent company, and Alan J. Kaufman, its sole
shareholder, have received a "commitment letter" from NBD Bank ("NBD") to
provide financing necessary to accomplish the Merger subject to the usual
conditions of such a commitment including continued satisfaction by NBD with
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the ongoing results of operations of the Company. Should financing not be
obtained from NBD, or any other source, the Merger and the contemplated
exchange and conversion will be abandoned even if Company shareholder approval
of the Merger has already been obtained.
AMENDMENT AND TERMINATION OF THE MERGER AGREEMENT
The Merger Agreement may be terminated and the Merger abandoned at any
time prior to the Effective Time, whether before or after approval by the
shareholders of the Company, (i) by mutual written consent of AJK and the
Company, upon the approval of the Board of the Company; (ii) by either AJK or
the Company if the other party has materially breached any representations,
warranties, covenants or obligations which remain uncured; (iii) by either AJK
or the Company upon written notice to the other party: (1) if any governmental
entity of competent jurisdiction shall have issued a final permanent order
enjoining or otherwise prohibiting the consummation of the Merger; or (2) if a
closing shall not have occurred within 30 days after Company shareholder
approval; (iv) by either AJK or Acquisition upon written notice to the Company:
(1) if, prior to the Company Special Shareholders Meeting, a takeover proposal
is commenced, publicly proposed, publicly disclosed or communicated to the
Company (or the willingness of any person to make a takeover proposal is
publicly disclosed or communicated to the Company) and (A) the Company
shareholder approval is not obtained at the Company Special Shareholders
Meeting, (B) the Company Special Shareholders Meeting does not occur prior to
150 days after the date of the Merger Agreement, or (C) the Board of Directors
of the Company or any committee thereof shall have withdrawn or modified its
approval or recommendation of the Merger or the Merger Agreement, or approved
or recommended any other person's takeover proposal; or (2) if AJK shall not
have available all the funds, including the financing, necessary to perform its
obligations under the Merger Agreement, including consummating the Merger on
the terms contemplated thereby; (v) by the Company if prior to the receipt of
the Company shareholder approval, the Board of Directors of the Company, to the
extent required by its fiduciary obligations, as determined in good faith by
the Board of Directors based on the advice of outside counsel, decides to
withdraw or modify its approval or recommendation of the Merger Agreement or
the Merger, approve or recommend any superior proposal, enter into an agreement
with respect to such superior proposal or terminate the Merger Agreement, in
each case at any time after the second business day following written notice to
AJK that the Board of Directors of the Company has received a superior proposal
and the Company has paid to AJK its fees and expenses in connection with the
Merger proposal.
The Merger Agreement may be amended at any time prior to the Effective
Time, upon the authorization of the respective Boards of Directors of
Acquisition and the Company, except that after the shareholders of the Company
have approved the Merger Agreement, no amendment to the Merger Agreement will
be made which by law requires the approval by shareholders, unless such actual
further shareholder approval is then obtained.
EXPENSES
All expenses of the Company incurred in connection with the proposed
Merger will be borne by the Company whether or not the Merger is consummated
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as contemplated by the Merger Agreement, except as noted below. The Company
estimates that its expenses for fees paid the members of the Special Committee,
printing, fairness opinion, filing, exchange (paying) agent, accounting and
legal services will be approximately as follows:
<TABLE>
<S> <C>
Special Committee $ 20,000
Printing 25,000
Fairness Opinion 40,000
Filing Fees 6,000
Exchange Agent 20,000
Accounting 10,000
Legal 125,000
--------
Total $246,000
========
</TABLE>
In the event AJK or Alan J. Kaufman do not obtain the financing
necessary to consummate the Merger after shareholder approval of the Merger has
been obtained, Alan J. Kaufman has agreed to reimburse the Company for up to
$100,000 of its expenses.
In the event the Company shareholders do not approve of the Merger
proposal or the Company exercises its "fiduciary out" and any other party other
than AJK or Acquisition effect a takeover proposal, or the Company authorizes
or recommends another takeover proposal with some other party prior to 12
months after the Merger Agreement is terminated, the Company has agreed to
reimburse AJK for all its reasonable out-of-pocket expenses incurred by AJK or
its affiliates (including Alan J. Kaufman) in connection with the Merger
including all fees and expenses (including commitment, standby and related
fees) of counsel, commercial banks, other lenders, investment banking firms,
accountants, experts and consultants to AJK or any of its affiliates.
CONDUCT OF BUSINESS AFTER THE MERGER
Following the Merger of Acquisition and Company in which Company will be
the ongoing (surviving) entity, the Company will continue its business in
substantially the same manner that it conducted its business before the Merger,
but as a corporation wholly owned by and controlled by its parent company, AJK,
which in turn will be controlled by its sole shareholder, Alan J. Kaufman.
Upon the consummation of the Merger, it is expected that the current directors
and officers of the Company will continue in such positions.
The Articles of Incorporation and Bylaws of the Company as in effect at
the Effective Time shall be the Articles of Incorporation and Bylaws of the
Company immediately after the Merger. Alan J. Kaufman, as sole shareholder of
AJK, the parent company after the Merger, will have the power and authority to
cause the adoption of restated Articles of Incorporation and Bylaws after the
Merger.
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INFORMATION CONCERNING THE COMPANY'S BUSINESS
GENERAL
H.W. Kaufman Financial Group, Inc. (with its consolidated subsidiaries,
the "Company") is a nationwide general agent and broker of specialty insurance
products, principally property and casualty coverages. The Company was
incorporated in 1969 in Michigan and in the same year was the survivor of a
merger with DEK Electronics, Inc., a Maryland corporation traded on the
over-the-counter market. In 1971, the Company acquired its principal operating
subsidiary, Burns & Wilcox, Ltd. ("Burns & Wilcox"). In 1990, the Company's
shares were listed on the American Stock Exchange.
The Company's business strategy is to target niche areas in the
insurance marketplace that standard insurance carriers traditionally avoid, and
to increase its share of this specialty market by developing its existing
offices and/or acquiring sales offices in strategic locations and by developing
new products. The Company, through a series of acquisitions and new office
openings, has expanded from three offices at the end of 1983 to 35 at December
31, 1994, and then 36 at March 31, 1995.
Burns & Wilcox, Ltd., the Company's principal subsidiary, represents a
number of insurance carriers either as a general agent or as a broker. The
Company also places insurance through certain Underwriters at Lloyd's. The
Company does not assume the insurance risk, but rather serves as a
non-exclusive intermediary between the insurance carriers and a large pool of
independent agents, who at various times may look to the Company, among other
sources, to find specialty insurance coverages for their clients. For its
services the Company receives commissions from the insurance carriers. A large
portion of the commissions received by the Company are from a subsidiary of the
Nationwide Group, referred to hereafter as the "Primary Carrier."
The specialty coverages placed by the Company are atypical in that they
cannot be placed with standard carriers. For example, the Company emphasizes
specialty insurance coverages for, among others, construction-related insurance
risks, security guards, day care and pre-schools, burglar and fire alarm
monitoring companies, homeowners' associations, dry cleaners, exercise and
health studios, motels, apartment complexes and grocery stores. The premiums
for specialty coverages are not generally based upon predetermined underwriting
criteria.
In 1988, the Company entered the premium finance business through its
subsidiary Royal Premium Budget, Inc. This provided the Company the ability to
provide financing for the payment of premiums on insurance coverages placed by
the Company or by independent agents. Royal assumes minimal risk in that it
requires a substantial down payment to finance the premium, and retains power
of attorney to cancel the underlying financed policy.
INSURANCE BROKERAGE AND GENERAL AGENCY BUSINESS
Burns & Wilcox. Burns & Wilcox does business with various insurance
carriers on a nationwide basis and on their behalf solicits insurance business
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<PAGE> 47
directly from independent insurance agents, rather than from the public. Such
insurance agents in turn seek out Burns & Wilcox when they are having
difficulty finding an insurance carrier to fulfill their clients' requirements
for insurance coverage. At December 31, 1994, Burns & Wilcox had in excess of
400 contracts with insurance carriers, several of which allow the Company to
act as a general agent with certain in-house binding authority. However, most
of the contracts with insurance carriers allow the Company to place business
with them on a brokerage basis with no binding authority. Not all contracts
deal with every branch office of the Company, as some are on a branch basis,
some are regional and others are national in scope.
Insurance Agents. Burns & Wilcox maintains mailing lists of over 25,000
independent insurance agents for which it has placed policies in recent years,
and who comprise a pool from which business may come. Burns & Wilcox actually
did business with 15,610 and 9,998 agents from this pool during the years ended
December 31, 1994 and 1993 respectively. Of the numerous insurance agents who
used Burns & Wilcox to place insurance coverages, no one agent accounted for
over five percent of the Company's commissions and fees in 1994, 1993 and 1992.
The ten largest agents with which business was conducted accounted for, in the
aggregate, approximately 4% in 1994, 4% in 1993 and 6% in 1992 of the Company's
commissions and fees.
The Primary Carrier. Only one insurance carrier, the Primary Carrier,
accounted for over ten percent of the Company's commissions and fees, including
profit-sharing commissions in 1994, 1993 and 1992. In 1994, 1993 and 1992, the
five insurers with which the Company placed the largest amount of insurance
risks accounted for 50%, 47% and 50% of the Company's commissions and fees,
respectively. The Primary Carrier accounted for approximately 26%, 29% and 33%
of the Company's commissions and fees in the years ended December 31, 1994,
1993 and 1992. The Primary Carrier is the Company's principal source for
primary and excess property and casualty insurance coverages and is rated "A+"
(the highest rating) by A.M. Best Company, an internationally recognized
insurance industry rating source. Although the Company placed business during
1994 with 382 other insurance carriers and other general agencies, and believes
that it could replace the coverages now placed with the Primary Carrier, no
assurance can be given that the business placed through one or more other
carriers would be as profitable to the Company.
Compensation. The Company is compensated for its services by the
payment of commissions by insurance carriers which are usually based upon a
percentage of the premium paid by the insured. Commission rates are dependent
on a number of factors including the type of insurance and the particular
insurance carrier. The Company may also receive profit-sharing commissions
which are based on the profit the insurance carrier makes on the overall volume
of business placed by the Company in a given period of time.
Expansion Program. The Company has actively sought to expand its branch
network through the acquisition of existing agencies and the opening of
additional offices.
Summarized below is the expansion of Burns & Wilcox offices over the
eight years ended December 31, 1994:
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AGGREGATE NUMBER OF COMPANY OFFICES
Year Ended December 31
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987
- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
35 32 30 26 23 21 19 17
</TABLE>
The 35 offices at December 31, 1994 are located in 22 states,
representing a geographic diversity which the Company believes is an important
factor in obtaining appointments as a general agency or contracts with
insurance carriers. From these offices the Company also does business in
states in which no branch office is located and in recent years has placed
policies in all 50 states and Mexico. At June 30, 1995, the Company had 36
offices.
In the past the Company had acquired existing insurance agencies with a
relatively small investment and payment of the balance based on volume produced
over a period of years. Such acquisitions had been funded by the Company's
operations and had not required at any one time a material commitment of
capital. More recently the Company has been able to purchase larger agencies
than in the past and these acquisitions have been funded by the Company's
operations alone or in combination with seller and bank financing. The Company
does not forego the possibility of borrowing funds to accomplish an acquisition
should that seem necessary or appropriate to management.
PREMIUM FINANCE BUSINESS
Royal. Royal Premium Budget, Inc. ("Royal") was incorporated in March
1988, as a subsidiary of the Company, primarily to provide a source for
financing insurance premiums for clients of insurance agents doing business
with Burns & Wilcox. In 1989, Royal expanded its financing of insurance
premiums to other creditworthy purchasers of property and casualty insurance.
The Company has a line of credit with a local bank in the amount of $2,500,000
for insurance premium financing. There were no amounts outstanding under the
available line of credit as of December 31, 1994.
In 1994, Royal's gross revenues increased 3.8% to $455,000 from $438,000
in 1993. Gross revenue primarily consists of interest income earned on
contracts written. The average outstanding balance at any one time during 1994
was approximately $2,400,000.
During 1994 Royal obtained licenses for premium financing in two
additional states bringing the total number of states in which Royal is
licensed to twenty-four.
COMPETITION
The business of acting as an intermediary and negotiating between
insurance carriers and insurance agents in order to place insurance risks is
highly competitive, and there are a great many insurance agency and brokerage
concerns in the geographic areas in which the Company operates that actively
compete with the Company in every area of its business. The principal factors
-37-
<PAGE> 49
of competition are price, service and the selection and availability of
insurance carriers with whom particular types of insurance are placed. There
are many competing firms which are larger and have greater financial resources
than the Company.
The Company is also in competition with certain insurance companies that
write insurance directly with their customers without the intervention of
agents and without paying commissions. In addition, some insureds and groups
of insureds have initiated programs of self-insurance such as formation of
industry insurance pools and captive insurance companies. To date, the Company
believes that such direct writing insurance and self-insurance has had
relatively little effect on the Company's business and operations.
The Company's competition in the premium finance business arises
primarily from other finance companies and institutions in general that lend
money. Royal is currently an insignificant participant in the business of
financing insurance premiums.
REGULATION AND LICENSING
At December 31, 1994, the Company or its employees were licensed to
carry on the Company's business in 49 states. License laws and regulations
vary from state to state and are often quite complex. Under the laws of most
states, the regulatory authorities have relatively broad discretion with
respect to granting, renewing and revoking agents' licenses to transact
business in the state. The manner of operating in particular states may vary
according to the licensing requirements of the particular state which may
require, among other things, that a firm operate in the state through a local
designated agent or through a local corporation. The Company's operations
depend on the validity of and its good standing under the licenses and
approvals pursuant to which it operates. There can be no assurance that a
state authority might disagree and cause the Company to restrict its method of
doing business in the state or possibly exclude or temporarily suspend the
Company from carrying on some or all of its activities in the state. However,
the Company believes it is operating within existing state regulations and
interpretations generally followed by the industry.
EMPLOYEES
As of December 31, 1994, the Company had 436 full-time employees, 55 of
whom were located at the Farmington Hills, Michigan Corporate Headquarters
office where the majority of the Company's general and administrative functions
are conducted. None of the Company's employees are represented by labor
unions. The Company considers its employee relations to be good.
The Company has a number of "middle management" employees experienced in
its business operations. At December 31, 1994, the Company had 40 managers
with an average of approximately 21 years experience in the placement of
standard and specialty insurance risks or in the general agency business. The
Company seeks out experienced managers for its various branch operations and it
has generally been able to employ persons with suitable management and selling
experience to effectively manage its operations.
-38-
<PAGE> 50
PROPERTIES
The Company's corporate headquarters relocated to Farmington Hills,
Michigan April 1, 1994 where the Company leases approximately 14,738 square
feet of space under a lease that expires December 31, 2000. In addition to its
corporate headquarters, the Company leases office facilities under
noncancellable operating leases in the cities in which its branch offices are
located, with a total leased space of approximately 132,864 square feet. In
addition to minimum fixed rentals, a number of leases contain escalation
clauses related to cost-of-living or other factors. The Company owns no real
estate. See "Interest of Certain Persons in the Merger."
The Company also leases assorted office equipment used in day-to-day
operations. The Company believes all its facilities, computing systems and
other equipment are well-suited and adequate for its business.
LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to various claims and
lawsuits in the ordinary course of business. Most legal proceedings against
the Company allege negligence and are generally described as "errors and
omissions" ("E&O") suits. Such suits typically allege, for instance, failure
to advise clients to include coverage for certain risks under issued policies,
failure to notify of a rejection of an application for insurance, or failure to
notify of cancellations of policies. The Company maintains an "E&O" liability
insurance policy. The Company does not submit any claim to its "E&O" carrier
that it feels, after consultation with legal counsel, is a nuisance suit,
without merit or far below the deductible limit of the "E&O" insurance policy.
The current deductibility limit requires the Company to pay the first $250,000
on each claim, except for policies written through the Primary Carrier, on
which the deductibility limit is $100,000 on each claim. The policy has a
limit on liability of $10,000,000 for each claim as well as an aggregate
liability limit of $10,000,000. If not submitted to the carrier, counsel for
the Company is retained to defend the action.
Based on discussions with its general counsel, the law firm of Kaufman
and Payton, of which Alan J. Kaufman is a principal, and its other counsel
handling matters in other states, the Company's management is of the opinion
that no presently pending individual item of litigation, or group of similar
items of litigation, after giving effect to "E&O" insurance, where applicable,
is likely in the aggregate to have a material adverse effect upon the
consolidated financial position of the Company and its subsidiaries.
-39-
<PAGE> 51
SELECTED FINANCIAL DATA
The following historical selected financial data of the Company for
each of the five fiscal years ended December 31, 1994 have been derived from
the financial statements of the Company, which have been audited by BDO
Seidman, independent certified public accountants. The Company's financial
statements for the three years ended December 31, 1994, together with such
auditors' report thereon, are included elsewhere in this Proxy Statement. The
financial information set forth as of March 31, 1995 and 1994 and for the
three-month periods then ended is unaudited but, in the opinion of the Company
management, includes all adjustments necessary for a fair presentation.
Unaudited financial statements as of March 31, 1995 and for the three months
then ended are also included elsewhere in this Proxy Statement. Operating
results for the three-month periods ended March 31, 1995 and 1994 are not
necessarily indicative of results that may be expected for the entire year.
This information should be read in conjunction with the Management's Discussion
and Analysis of Financial Condition and Results of Operations, and the
financial statements and notes thereto included elsewhere in this Proxy
Statement. (The following amounts are in thousands except per share data.)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31 YEAR ENDED DECEMBER 31,
-------------------- ---------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Commissions and fees $13,355 $12,261 $52,364 $44,924 $39,131 $27,413 $23,752
Cost of commissions
and fees 5,750 5,467 22,746 19,878 17,088 11,836 10,429
------- ------- ------- ------- ------- ------- -------
GROSS PROFIT 7,605 6,794 29,618 25,046 22,043 15,577 13,323
------- ------- ------- ------- ------- ------- -------
Divisional operating
expenses 5,530 5,012 20,766 18,123 15,792 11,904 10,431
General and admini-
strative expenses 1,747 1,594 6,169 5,130 4,418 3,148 2,636
------- ------- ------- ------- ------- ------- -------
TOTAL OPERATING
EXPENSES 7,277 6,606 26,935 23,253 20,210 15,052 13,067
------- ------- ------- ------- ------- ------- -------
OPERATING INCOME 328 188 2,683 1,793 1,833 525 256
Other income - net 184 109 537 549 395 684 564
------- ------- ------- ------- ------- ------- -------
Income before
income taxes 513 297 3,220 2,342 2,228 1,209 820
Taxes on income 357 205 1,453 1,036 1,014 558 389
------- ------- ------- ------- ------- ------- -------
NET INCOME $ 155 $ 92 $ 1,767 $ 1,306 $ 1,214 $ 651 $ 431
======= ======= ======= ======= ======= ======= =======
EARNINGS PER SHARE:
NET INCOME PER
COMMON SHARE $ .05 $ .03 $ .52 $ .38 $ .35 $ .19 $ .13
======= ======= ======= ======= ======= ======= =======
</TABLE>
-40-
<PAGE> 52
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Weighted number
of common shares
outstanding 3,435 3,424 3,426 3,423 3,422 3,422 3,422
BALANCE SHEET DATA
(at end of period)
Working capital
(deficit) $ 1,525 $ 1,434 $ 1,898 $ 1,478 $ (731) $ (898) $ (194)
Total assets 47,827 42,629 47,904 41,266 35,305 26,696 23,793
Long term debt 475 425 425 -- -- 450 31
Stockholders' equity 6,507 5,210 6,768 5,568 4,705 3,887 3,575
Book value per share 1.89 1.52 1.97 1.63 1.38 1.14 1.05
CASH DIVIDENDS YEARLY
- - per share .149 .132 .115 .099 .094
</TABLE>
All share and per share data have been adjusted to reflect a 3-for-2 stock
split distributed September 10, 1990, and 10% stock dividends distributed May
1994 and May 1995.
-41-
<PAGE> 53
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The property and casualty insurance business is subject to significant
fluctuations due to economic and competitive conditions, interest rates,
premium rates and the frequency and severity of claims. The Company believes
that since the early 1980's the industry has passed through several such
periods, known as "soft" and "hard" markets. The Company believes that the
"soft" market which began in mid-1987 continues, except for some hardening the
Southeast and Southwest regions of the country.
This "soft" market is characterized by lower premiums as insurance
companies compete for new business. Commission revenue, the Company's primary
source of income, is a fixed percentage of premiums. Therefore, when premium
rates are low, the Company concentrates on specialty products and selected
markets whose rates tend to vary less due to the fact that these coverages are
not as readily available.
LIQUIDITY AND CAPITAL RESOURCES
On March 31, 1995, the Company's financial condition reflected working
capital of $1,524,610, a tangible net worth of $2,056,907 and stockholders'
equity of $5,951,089. This compared to a working capital of $1,433,875, a
tangible net worth of $1,264,212, and stockholders' equity of $5,209,884, at
March 31, 1994. During the past year, the Company had increased profits and
received an additional $1,151,000 in Deferred Revenue. Working capital
remained relatively unchanged at March 31, 1995 compared to March 31, 1994.
This was due to expenditures for Books of Business of $923,000. The Company
had also spent additional funds in expanding its corporate-wide computer
network.
At December 31, 1994, the Company's financial condition reflected
working capital of $1,898,000, tangible net worth of approximately $3,420,000
and stockholders' equity of approximately $6,768,000. This compared to a
working capital of $1,478,000, a tangible net worth of approximately $2,573,000
and stockholders' equity of approximately $5,568,000 at December 31, 1993.
The Company's working capital increased in calendar year 1994 as a
result of 1994 year-end profits and even though the Company made payments of
$624,000 on acquisitions purchased during 1994.
Cash and cash equivalents were $10,370,260, $9,296,749 and $7,014,297 at
December 31, 1994, 1993 and 1992, respectively. The increase of $1,073,511 in
1994 was due to increased profitability and the net cash provided by operations
resulting from current year profits. The increase of $2,282,452 in 1993 was
due to increased working capital coupled with increased profitability.
The Company maintains two lines of credit from a Detroit area banking
institution, one for $500,000 for H.W. Kaufman Financial Group and the second
for $2,500,000 for Royal, both of which are on an ongoing basis and dependent
-42-
<PAGE> 54
on the banks' continued satisfaction with the management, operations and
financial condition of the H.W. Kaufman Financial Group, Inc. and subsidiaries.
The $500,000 line is available for operating and non-operating needs. The
interest rate of the $2,500,000 line is the bank's variable base lending rate
plus one quarter of one percent. The interest rate on the $500,000 line is the
bank's base lending rate. At December 31, 1994, the bank's base rate was 8.5%.
As of December 31, 1994, no balances were outstanding under either line of
credit. (Since AJK has received its commitment for financing of the Merger
from another bank, it is anticipated these lines of credit will terminate upon
the Effective Date.) The Company believes that internally generated funds and
available credit are sufficient to meet the Company's working capital needs for
the immediately foreseeable future.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
components of the Company's consolidated statements of income as a percentage
of commissions and fees.
<TABLE>
<CAPTION>
THREE MONTHS
---------------------
END MARCH 31, YEARS ENDED DECEMBER 31,
--------------------- --------------------------------------
1995 1994 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commissions and fees 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of commissions and fees 43.1 44.6 43.4 44.2 43.7
----- ----- ----- ----- -----
Gross Profit 56.9 55.4 56.6 55.8 56.3
----- ----- ----- ----- -----
Divisional operating expenses 41.4 40.9 39.7 40.4 40.3
General and administrative
expenses 13.1 13.0 11.8 11.4 11.3
----- ----- ----- ----- -----
Total operating expenses 54.5 53.9 51.5 51.8 51.6
----- ----- ----- ----- -----
Operating income 2.4 1.5 5.1 4.0 4.7
Other income - net 1.4 0.9 1.0 1.2 1.0
----- ----- ----- ----- -----
Income before taxes 3.8 2.4 6.1 5.2 5.7
Taxes on income 2.7 1.7 2.8 2.3 2.6
----- ----- ----- ----- -----
Net Income 1.1% 0.7% 3.3% 2.9% 3.1%
====== ====== ====== ====== ======
</TABLE>
The category "Commissions and fees" consist of the following components:
commissions, fees, profit-sharing commissions and volume bonuses. Commissions
are amounts earned by the Company and paid by the insurance carriers, and are a
percentage of the premiums invoiced. Fees are amounts received by the Company
for services rendered to the referring agent, and may include inspection,
policy-writing and underwriting fees. Profit-sharing commissions are paid by
several insurance carriers, but principally the "Primary Carrier" for whom the
Company acts as a general agent. Profit-sharing commissions are based upon the
ratio of the amounts of premium placed with the carrier and the loss-experience
related to these policies. Volume bonuses are additional commissions paid by
several carriers for increased sales.
Three Months Ended March 31, 1995 and 1994
Commissions and fee income increased $1,094,287 or 8.9% to $13,355,797
for the three months ended March 31, 1995 as compared to $12,261,510 for the
three
-43-
<PAGE> 55
months ended March 31, 1994 due to expanding sales at new and existing offices.
Profit-sharing commissions in the three months ended March 31, 1995 accounted
for approximately 4.1% of commissions and fees as compared to 2.6% of
commissions and fees for the comparable period in 1994.
Gross profit increased $811,180 or 11.9% to $7,605,121 for the three
months ended March 31, 1995 as compared to $6,793,941 for the three months
ended March 31, 1994. Gross profit as a percentage of commissions and fees was
56.9% in the three months ended March 31, 1995 as compared to 55.4% in the
three months ended March 31, 1994. The increase was primarily due to the
increase in profit-sharing commissions.
Total operating expenses, including both divisional and general and
administrative expenses, were $7,276,834 for the three months ended March 31,
1995 compared to $6,605,600 for the three months ended March 31, 1994. Total
operating expenses increased due to higher payroll expense resulting from
recent acquisitions and increases in corporate support staff. Total operating
expenses as a percent of commissions and fee income increased to 54.5% in 1995
as compared to 53.9% in 1994.
Other income increased $75,401 to $184,936 in the period ended March 31,
1995 as compared to $109,535 in the comparable period in 1994. The increase
represented increased dividends and interest on investments.
The Company's provision for income taxes increased to $357,791 for the
three months ended March 31, 1995 as compared to $205,000 for the three months
ended March 31, 1994. The increase in taxes is primarily due to increased
profitability and an increase in state income tax for prior years.
As a result of the foregoing factors, net income increased $62,555 to
$155,431 for the three months ended March 31, 1995 as compared to $92,876 for
the three months ended March 31, 1994.
Three Months Ended March 31, 1995 and December 31, 1994
Commissions and fee income increased $256,862 to $13,355,797 for the
three months ended March 31, 1995 or 2.0% as compared to $13,098,935 for the
three months ended December 31, 1994. The profit sharing and volume bonus
commissions received in the three months ended March 31, 1995 totaled $545,386
compared to $122,116 for the three months ended December 31, 1994. The
increase in commission and fee income was primarily due to increased profit
sharing commissions.
Gross profit increased $348,472 or 4.8% to $7,605,121 for the three
months ended March 31, 1995 as compared to $7,256,649 for the three months
ended December 31, 1994. Gross profit as a percentage of commissions and fees
was 56.9% in the three months ended March 31, 1995 as compared to 55.4% in the
three months ended December 31, 1994. The higher gross profit percentage for
the three months ended March 31, 1995 was primarily due to the larger
profit-sharing commissions recorded during the first quarter of 1995.
-44-
<PAGE> 56
Total operating expenses, including both divisional and general and
administrative expenses, increased $640,355 to $7,276,834 for the three months
ended March 31, 1995 from $6,636,479 for the three months ended December 31,
1994. Operating expenses increased due to increased payroll expense resulting
from recent acquisitions and increases in corporate support staff. Total
operating expenses as a percent of commissions and fee income increased to
54.5% for the three months ended March 31, 1995 as compared to 50.7% for the
three months ended December 31, 1994.
Other income was $184,936 for the period ending March 31, 1995 as
compared to $163,354 for the period ended December 31, 1994.
The Company's provision for income taxes decreased to $357,791 for the
three months ended March 31, 1995 compared to $374,000 for the three months
ended December 31, 1994. The decrease in taxes reflects a decreased
profitability in the first quarter of 1995.
As a result of the foregoing factors, net income decreased from $155,431
for the three months ended March 31, 1995 as compared to $409,524 for the three
months ended December 31, 1994.
Fiscal Years Ended December 31, 1994, 1993 and 1992
Total commission and fees were $52,363,586, $44,924,237 and $39,131,000
for the years ended December 31, 1994, 1993 and 1992, respectively. The
$7,439,349 or 16.6% increase from 1993 to 1994 was attributable to increased
volume of sales at existing locations, and the acquisition of Howard James
Company in Encino, California; and the acquisition from Alexander Howden of its
Cleveland, Ohio and the Atlanta, Georgia offices. The $5,793,237 or 14.8%
increase from 1992 to 1993 was attributable to increased sales at existing
locations.
The Company recognized profit-sharing commissions and volume bonuses of
$1,832,992, $1,287,112 and $2,513,299 which represented 3.5%, 2.9% and 6.4% of
total commissions and fees in the years ended December 31, 1994, 1993 and 1992,
respectively.
Of the amounts stated immediately above, $944,035, $531,670 and
$1,842,793 were received from the Primary Carrier.
Of the amount received in 1994 from the Primary Carrier, $45,222
represented a volume bonus, as compared to $427,349 for 1993. The Bonus
Commission Agreement with the Primary Carrier was not renewed for 1994,
therefore, volume bonuses were lower than in 1993. Profit-sharing commissions
increased to $898,813 in 1994 from $104,321 in 1993. The level of
profit-sharing commissions from the Primary Carrier increased in 1994 versus
1993 due to the combination of an increased number of policies at a lower
average premium, coupled with a change in the profit-sharing agreement to which
an addendum was added to provide a guaranteed amount, while the agreement is in
effect.
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<PAGE> 57
As rates and loss ratios may vary from year-to-year, and the Primary
Carrier reserves the unilateral right to modify the agreement, the Company is
uncertain as to the amount of the profit-sharing commissions and volume bonuses
it will earn in future years. The recognition of profit-sharing commissions
and volume bonuses adds no additional costs to the Company's operations as all
costs of commissions and fees attributable to their generation have already
been recorded when the policies were placed with the carrier. Accordingly,
profit-sharing commissions and volume bonuses tend to impact heavily on gross
profits. The Primary Carrier discontinued its volume bonus arrangement with
the Company in 1994.
Cost of commissions and fees as percentage of commissions and fee income
were 43.4%, 44.2% and 43.7% for the years ended December 31, 1994, 1993 and
1992, respectively. The decrease in 1994 represents a decrease in commission
paid out to agents.
Gross profit as a percentage of commission and fee income was 56.6%,
55.8% and 56.3% for the years ended December 31, 1994, 1993 and 1992,
respectively.
Total operating expenses for the years ended December 31, 1994, 1993 and
1992 were $26,935,394, $23,253,205 and $20,210,056, respectively. General and
administrative expenses were $6,169,386, $5,130,113 and $4,418,106. Divisional
operating expenses were $20,766,008, $18,123,092 and $15,791,950, respectively.
The increase of $1,039,273 or 20.3% in general and administrative
expenses in 1994 versus 1993 was primarily the result of increased salaries and
benefits combined with an increase in the cost of business insurance, primarily
E&O coverage. The same factors were also attributable for the prior year's
increase.
The increase of $2,642,916 or 14.6% in divisional operating expenses in
1994 versus 1993 was primarily a result of expenses associated with an
expanding office base. Nonetheless, divisional operating expenses decreased as
a percent of commission and fees in 1994 to 39.7%, compared to 40.4% in 1993,
as established offices were able to generate increased revenues without
incurring substantially increases costs. Divisional operating expenses as a
percentage of commissions and fees were 40.3% in 1992. Amortization expense,
which primarily represents the amortization of intangible assets acquired in
the purchase of agencies and books of business, was $1,143,426, $1,036,537 and
$1,040,177 in the years ended December 31, 1994, 1993 and 1992, respectively.
The category "Other Income" represents interest income and other
revenues which totalled $537,668, $548,897 and $395,391 for the years ended
December 31, 1994, 1993 and 1992, respectively. The increase in 1993 was the
result of higher dividend and interest income due to increases in interest
bearing cash accounts and investments in 1993 and realized gain on securities.
The decrease in 1994 was the result of a realized loss of $18,894 on the sale
of marketable securities while in 1993 there was a realized gain of $96,128 on
the sale of marketable securities.
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<PAGE> 58
Net income for the years ended December 31, 1994, 1993 and 1992 was
$1,767,324, $1,305,701 and $1,213,570, respectively. The $461,623 or 35.4%
increase in 1994 versus 1993 was attributable to increased commissions and fees
coupled with increases dollar-wise in total operating expense but remaining
stable as a percentage of commission and fees income. This improvement
reflects the Company's concerted effort in the past two years to control
expenses.
The Company's provision for income taxes was $1,453,000, $1,036,000 and
$1,014,500 for the years ended December 31, 1994, 1993 and 1992, respectively.
The 1994 and 1993 increases in income taxes are primarily due to increased
profitability coupled with increases in expenses not deductible for tax
purposes, such as amortization of goodwill attributable to acquisitions. The
effective tax rates for the years ended December 31, 1994, 1993 and 1992 were
45.1%, 44.2% and 45.5%, respectively. See Note 10 of the Notes to the
Consolidated Financial Statements for a reconciliation of statutory to
effective tax rates, Appendix F.
ACQUISITIONS AND THEIR RESULTS ON OPERATIONS
In keeping with management's belief that geographic diversity is
integral to its expansion program, the Company has acquired or opened
twenty-one offices in thirteen states since 1987. A majority of offices were
acquired by purchasing a "book of business" as opposed to "opening" branches
which were initiated simply on the potential market deemed to exist in that
particular area.
The Company has continued to acquire existing agencies or to open new
offices as the appropriate opportunities arise. As the Company grew, it was
able to purchase larger agencies than in the past and to arrange other
financing and purchase methods as management deemed necessary to meet the
circumstances of the acquisition. The rental obligation of the leased space in
which to operate these branches and the costs of necessary furniture and
fixtures has not been and is not expected to be, material in relation to
aggregate revenues of the Company. Accordingly, the Company does not
anticipate material commitments for capital expenditures and further
anticipates that through its internal and external sources of funds, it will
have the funds to fulfill any such commitments, along with continued expansion
of its branch network.
EFFECT OF INFLATION
The Company does not believe that inflation has had a material effect on
the results of its operations to date. Increased sales during the three months
ended March 31, 1995 and the years ended December 31, 1994 and 1993 were
attributable primarily to the continuing expansion of sales efforts and
outlets.
The Company has a large percentage of its investment portfolio in
short-term investments. Changes in current market interest rates
correspondingly affect yields on this portfolio.
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<PAGE> 59
RECENT ACCOUNTING PRONOUNCEMENTS
Since the Company does not provide postretirement or postemployment
benefits other than a profit sharing plan, SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," and SFAS No. 112, "Employers'
Accounting for Postemployment Benefits," will not have any effect on the
financial statements of the Company.
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<PAGE> 60
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is listed and traded on the American Stock
Exchange ("ASE") under the symbol "HWK." The following table sets forth, for
the periods indicated, the high and low closing prices for the Company's Common
Stock as reported by the ASE and as adjusted for the 10% stock dividends in
both 1994 and 1995. The quotations do not include retail mark-ups, mark-downs
or commissions.
CLOSING PRICES(1)
<TABLE>
<CAPTION>
1992 HIGH LOW
---- ---
<S> <C> <C>
First Quarter $3.20 $2.27
Second Quarter 2.58 2.17
Third Quarter 3.10 2.38
Fourth Quarter 2.58 2.17
1993
First Quarter 5.37 3.41
Second Quarter 4.34 3.41
Third Quarter 4.75 4.55
Fourth Quarter 5.16 4.65
1994
First Quarter 5.06 4.34
Second Quarter 4.66 3.75
Third Quarter 4.10 3.69
Fourth Quarter 4.55 3.86
1995
First Quarter 4.77 3.75
</TABLE>
(1) As adjusted for April 1994 and April 1995 stock dividends.
On April 5, 1995, 30 days preceding public announcement that it had been
approached concerning a proposed merger that would result in an $8.00 sale
price for each share outstanding, the closing price per share of the Company's
Common Stock as reported by the ASE was $4.53. On May 4, 1995, the day
preceding the announcement, the closing price was $7.125. On May 25, 1995, the
last trading day before the Company's public announcement of the signing of the
definitive merger agreement which would result in an exchange of each share for
$8.20, the closing price per share was $6.875. On July _____, 1995, the last
full trading day prior to the printing of this Proxy Statement, the closing
price of the Common Stock was $______ per share. Company shareholders are
urged to obtain current market quotations for their shares.
The Articles of Incorporation of the Company authorize the issuance of
7,500,000 shares of Common Stock, $.0025 par value. No other classes of
capital stock have been authorized.
-49-
<PAGE> 61
DIVIDENDS
The Company paid its first annual dividend on January 15, 1988 and has
increased it in each of the ensuing seven years as follows:
<TABLE>
<CAPTION>
DECLARATION PAYMENT ANNUAL
DATE DATE DIVIDEND*
---- ---- --------
<S> <C> <C>
March 10, 1995 April 8, 1995 $.16
February 14, 1994 March 24, 1994 $.15
March 11, 1993 March 25, 1993 $.13
February 14, 1992 March 11, 1992 $.12
January 29, 1991 February 25, 1991 $.10
January 12, 1990 February 6, 1990 $.09
January 18, 1989 February 13, 1989 $.08
December 31, 1987 January 15, 1988 $.07
</TABLE>
*Adjusted for all stock splits and stock dividends through May 1995.
If the Merger is approved, existing shareholders will no longer own
shares of Common Stock and will no longer be entitled to further dividends from
the Company when and if declared.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND CERTAIN SIGNIFICANT
EMPLOYEES
The directors and executive officers of the Company and certain
significant employees and their respective position, age and the year they
began their positions are as follows:
<TABLE>
<S> <C> <C> <C>
Herbert W. Kaufman 70 1969 President, Chief Executive
Officer, Director
Gerald W. Horton 51 1986 Executive Vice President, General
Manager, Director
Alan J. Kaufman 47 1970 Treasurer, Director
Steven D. Kaufman 45 1979 Director
Neal F. Zalenko 50 1980 Director
Jeffery W. Barry 56 1988 Director
Alan H. Barry 52 1989 Director
Gerald F. Wesolowski 49 1990 Chief Financial Officer
Brooke Bothe 50 1991 Corporate Secretary
George S. Allen 46 1992 Senior Vice President,
Burns & Wilcox Ltd.
</TABLE>
The directors of the Company are elected at each annual meeting of
shareholders and serve until their successors are duly elected and qualified.
Officers of the Company serve at the pleasure of the Board of Directors except
that Herbert W. Kaufman is employed in his present capacity pursuant to the
terms of a three-year employment agreement which began January 1, 1992; on
December 6, 1994 this agreement was extended for three additional years. Mr.
-50-
<PAGE> 62
Horton is employed in his present capacity pursuant to the terms of a
year-to-year employment agreement, dated August 2, 1985.
Herbert W. Kaufman has been a Director, President and Chief Executive
Officer of the Company since 1969. Mr. Kaufman serves on the Board of Trustees
of Walsh College. Mr. Kaufman serves on the Management, Long Range Planning,
and Stock Option Compensation Committees.
Gerald W. Horton, Executive Vice President, General Manager and a
Director, joined the Company in 1980 as Casualty Manager and has since 1987
served as General Manager of Burns & Wilcox. He was appointed as a Director in
1986 by the Board of Directors. Mr. Horton serves on the Management, and Long
Range Planning Committees.
Alan J. Kaufman has served as Treasurer and Director of the Company
since 1970. He is not employed by the Company. Mr. Kaufman is the Senior
Principal of the law firm of Kaufman and Payton, P.C. He has been engaged
full-time in the practice of law since 1973 and is the elder son of Mr. Herbert
W. Kaufman, President of the Company, and the brother of of Steven D. Kaufman,
also a Director. Kaufman and Payton, P.C. acts as the Company's general and
litigation counsel. Mr. Kaufman serves on the Management, Long Range Planning,
and Stock Option Compensation Committees.
Steven D. Kaufman has been a Director of the Company since 1979 and
since 1981, has owned and operated Universal Seminars, Inc., located in
Toronto, Ontario, Canada. He is the son of Mr. Herbert W. Kaufman and the
brother of Alan J. Kaufman.
Neal F. Zalenko has been a Director of the Company since 1980 and has
been a Certified Public Accountant since 1971. Since 1973, he has been
President of Zalenko and Associates, P.C., Certified Public Accountants. Mr.
Zalenko also serves on the Audit and Finance, Management, Stock Option
Compensation, Compensation, and Long Range Planning Committees.
Jeffery W. Barry has served as a Director since 1988. Mr. Barry served
as President of Walsh College of Accounting and Business Administration from
1969 to 1991, at which time he retired. He now serves on the Walsh College
Board of Trustees (as does Herbert W. Kaufman). A 1963 graduate of the
University of Michigan School of Law, he is both an attorney and a CPA. Mr.
Barry serves on the Company's Audit and Finance, Compensation, and Long Range
Planning Committees.
Alan H. Barry has served as a Director since 1989. Mr. Barry since 1972
served in various management positions in finance, operations and
administration with Brass-Craft Manufacturing Co. and in 1988 was elected its
President and Chief Executive Officer. Mr. Barry, a CPA, is a 1966 graduate of
the University of Toledo. Mr. Barry serves on the Audit and Finance, Long
Range Planning, Compensation, and Management Committees.
Gerald F. Wesolowski joined the Company on June 15, 1987 as Corporate
Controller. Mr. Wesolowski was appointed Assistant Treasurer in 1990.
-51-
<PAGE> 63
Brooke Bothe was appointed Acting Corporate Secretary in November 1991.
She was elected as Corporate Secretary by the Board of Directors in January
1992. She joined the Company in September 1987 as Corporate Administrator and
Director of Personnel. Ms. Bothe is a 1985 graduate of the School of Business
Administration at the University of Michigan.
George S. Allen was appointed Senior Vice President of Burns & Wilcox,
the Company's principal operating subsidiary, in 1992. Mr. Allen has been a
Vice President of Burns & Wilcox since 1990, and served as the Branch Manager
of its Charlotte, North Carolina office from 1987 to March 1992.
Jeffery W. Barry and Alan H. Barry are not related.
-52-
<PAGE> 64
COMMON STOCK OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of June 30, 1995 regarding (i) each
person who is known by the Company to be the beneficial owner of more than five
percent of the Company's Common Stock, (ii) each Director of the Company, (iii)
each executive officer of the Company, and (iv) all Directors and executive
officers of the Company as a group. Unless otherwise indicated, the Company
believes that the individuals listed each have sole voting and investment power
with respect to such shares. Unless otherwise indicated, the address of each
individual listed is c/o H. W. Kaufman Financial Group, Inc., 30833
Northwestern Highway, Suite 220, Farmington Hills, Michigan 48334.
<TABLE>
<CAPTION>
AMOUNT PERCENT
BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
---------------- ------------------ --------
<S> <C> <C>
Alan J. Kaufman (1)(5) 15,311 *
Herbert W. Kaufman (1) 2,636,115(3) 76.62%
Steven Kaufman (1)(6) 10,620(4) *
Neal F. Zalenko (2)(7) 101,937 2.97%
Jeffery W. Barry (2)(8) 8,228(4) *
Alan H. Barry (9) 8,167(4) *
George S. Allen 1,066 *
Gerald W. Horton (2) 8,343(4) *
Gerald F. Wesolowski 1,814 *
Brooke Bothe 86 *
All officers and directors
as a group (11 persons) 2,791,925 81.24%
</TABLE>
*less than 1%
_____________________/
(1) Alan J. Kaufman, Treasurer and a Director, and Steven Kaufman, a
Director, are brothers and Herbert W. Kaufman, the Company's President, Chief
Executive Officer and a Director, is their father. Each of them disclaims
beneficial ownership of the others' shares of Common Stock.
(2) Held jointly with his wife.
(3) Pursuant to a Judgment of Divorce entered in November 1985, Herbert W.
Kaufman transferred to Lillian Kaufman, his former wife, the ownership interest
in one-third of the shares of Common Stock in the Company registered in his
name. Pursuant to the Judgment, Mr. Kaufman has the sole right to vote all
such shares on all matters and sole investment powers including the right to
sell such shares during his lifetime. In the event Mr. Kaufman should sell or
exchange any or all the shares, Mrs. Kaufman has the right, but not the
obligation to consider one-third of said shares as sold by her and to receive
the proceeds therefrom. (Upon the closing of the Merger, Mrs. Kaufman will
receive one-third of the gross Merger Consideration otherwise payable to
Herbert W. Kaufman.)
(4) Includes presently exercisable options granted November 1, 1993 for
6,050 shares (at an exercise price of $4.96 per share).
-53-
<PAGE> 65
(5) Includes an aggregate of 6,600 shares owned under the Uniform Gifts to
Minors Act ("UGMA") for the benefit of his three children gifted by Herbert W.
Kaufman on December 20, 1994. Alan J. Kaufman's address is 30833 Northwestern
Highway, Suite 200, Farmington Hills, Michigan 48334.
(6) Steven Kaufman's address is 719 Yonge Street, 3rd Floor, Toronto,
Ontario, Canada M4Y 2B5.
(7) Neal F. Zalenko's address is 26211 Central Park Boulevard, Suite 200,
Southfield, Michigan 48076.
(8) Jeffery W. Barry's address is 116 Rhododendron Court, Chapel Hill, North
Carolina 24514.
(9) Alan H. Barry's address is 39600 Orchard Hill Drive, Novi, Michigan
48376.
Transactions by Company Officers or Directors in Common Stock Within the
Last 24 Months
Form 4's and Form 5's filed by certain officers and directors with the
Securities and Exchange Commission indicate Herbert W. Kaufman made gifts in
December 1994 and January 1995 aggregating 18,000 shares to children and
grandchildren. Of that amount, Alan J. Kaufman's three children received a
gift on December 20, 1994 under the UGMA of 2,200 shares (as adjusted for the
May 1995 stock dividend) each and Alan J. Kaufman is the custodian.
Steven Kaufman received gifts of 6,600 of such shares (as adjusted for
the May 1995 stock dividend) from his father, 3,300 on December 20, 1994 and
3,300 in January 1995. In February 1995, Steven Kaufman sold 3,000 shares at a
price of $4.75 each.
Neal F. Zalenko made a gift of 500 shares on October 13, 1994.
Messrs. Alan H. Barry, Jeffery W. Barry, Gerald W. Horton and Steven
Kaufman were each granted stock options under the Company's 1989 Stock Option
Plan for 6,050 shares (as adjusted for stock dividends) on November 1, 1993.
On January 1, 1995, certain officers were issued shares pursuant to
payroll deductions under the Company's Employee Stock Purchase Plan at the
price determined by the last prior trading day's closing price of $4.625 per
share: George S. Allen, 309; Gerald W. Horton, 309; Brooke Bothe, 61 (as
adjusted for the April 1995 10% stock dividend).
On June 30, 1995, pursuant to the Employee Stock Purchase Plan,
additional shares were issued at $7.6875: Mr. Allen 169, Mr. Horton 169 and
Ms. Bothe 25. The Plan is to terminate on June 30, 1995 assuming approval by
Company shareholders of the Merger.
-54-
<PAGE> 66
DESCRIPTION OF ACQUISITION
AJK Acquisition Company is a Michigan corporation, wholly owned by Mr.
Alan J. Kaufman, which was formed on May 24, 1995 for the sole purpose of
effecting the Merger. Acquisition maintains its principal executive offices at
30833 Northwestern Highway, Suite 200, Farmington Hills, Michigan 48334.
Acquisition currently has nominal assets and no liabilities, no operating
history and will cease to exist when it is merged into the Company in
connection with the Merger. Accordingly, no selected financial data, pro forma
financial information or equivalent share information with regard to
Acquisition is presented in this Proxy Statement since such information is not
meaningful to a shareholder's appraisal of the Merger.
TRANSACTION OF OTHER BUSINESS
Management of the Company is not aware of any matters to be presented
for action at the Special Meeting, except for matters discussed in this Proxy
Statement. If any other matters properly come before the meeting, it is
intended that the shares represented by proxies will be voted in accordance
with the judgment of the person voting the proxies.
INDEPENDENT AUDITORS
BDO Seidman has served as independent auditors for the Company for in
excess of five years. Representatives of BDO Seidman are expected to be
present at the Special Meeting to make a statement, if they desire to do so,
and will be available to respond to appropriate questions. The financial
statements as of December 31, 1994 and 1993 and for each of the three years
ended December 31, 1994 have also been included in reliance on the report of
BDO Seidman, independent certified public accountants, which is included
herein.
SHAREHOLDER PROPOSALS
In the event the Merger is not completed as proposed, the Company will
schedule an Annual Meeting of Shareholders to be held in the fall of 1995.
Proposals of shareholders intended to be presented at the Annual Meeting in
1995 must be submitted to the Company in appropriate written form on or before
September 1, 1995.
-55-
<PAGE> 67
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange
Act and in accordance therewith file reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information filed with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1025, 450 Fifth
Street, N.W., Washington, D.C. 20549 and the following Regional Offices of the
Commission: Suite 1400, Northwestern Atrium Center, 500 West Madison, Chicago,
Illinois 60661-2511; and Room 1400, 75 Park Place, New York, New York 10007.
Copies of such material can be obtained at prescribed rates from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549. If the Merger Agreement is approved and the Merger consummated, the
Company will no longer be subject to the informational requirements of the
Exchange Act.
-56-
<PAGE> 68
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by the Company (File
No. 1-7228) pursuant to the Exchange Act are incorporated by reference in this
Proxy Statement.
1. The Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994; and
2. The Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995.
3. The Company's 8-K Reports submitted June 2, 1995 and June 28,
1995.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Proxy Statement and prior
to the date of the Special Meeting shall be deemed to be incorporated by
reference into this Proxy Statement and to be a part hereof from the date of
filing of such documents. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes hereof to the extent that a statement contained
herein (or in any other subsequently filed document that is or is deemed to be
incorporated by reference herein) modifies or supersedes such previous
statement. Any statement so modified or superseded shall not be deemed to
constitute a part hereof except as so modified or superseded. All information
appearing in this Proxy Statement is qualified in its entirety by the
information and financial statements (including the notes thereto) appearing in
the documents incorporated herein by reference.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER THAN CERTAIN
EXHIBITS THERETO) ARE AVAILABLE WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST BY
ANY PERSON TO WHOM THIS PROXY STATEMENT HAS BEEN DELIVERED, IN THE CASE OF
DOCUMENTS RELATING TO THE COMPANY, FROM BROOKE BOTHE, 30833 NORTHWESTERN
HIGHWAY, SUITE 220, FARMINGTON HILLS, MI 48334, ATTENTION: CORPORATE SECRETARY
(TELEPHONE: (810) 932-9000). IN ORDER TO ENSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUEST SHOULD BE MADE BY AUGUST 5, 1995.
BY ORDER OF THE BOARD OF DIRECTORS
Brooke Bothe, Secretary
Southfield, Michigan
July ___, 1995
PLEASE COMPLETE AND RETURN YOUR PROXY CARD PROMPTLY IN THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.
-57-
<PAGE> 69
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Audited Financial Statements:
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1994 and 1993 F-2
Consolidated Statements of Income for each of the years
in the three-year period ended December 31, 1994 F-4
Consolidated Statements of Stockholders' Equity for each
of the years in the three-year period ended December 31, 1994 F-5
Consolidated Statements of Cash Flow for each of the years
in the three-year period ended December 31, 1994 F-6
Summary of Accounting Policies F-8
Notes to Consolidated Financial Statements F-11
Unaudited Quarterly Financial Statements:
Condensed Consolidated Balance Sheets as of March 31,
1995 and December 31, 1994 F-19
Condensed Consolidated Statements of Operations for each
of the three-month periods ended March 31, 1995 and
March 31, 1994 F-21
Condensed Consolidated Statements of Cash Flows for
each of the three-month periods ended March 31, 1995
and March 31, 1994 F-22
Note to Condensed Consolidated Financial Statements F-24
</TABLE>
-58-
<PAGE> 70
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
H.W. Kaufman Financial Group, Inc.
Southfield, Michigan
We have audited the accompanying consolidated balance sheets of H.W. Kaufman
Financial Group, Inc. and subsidiaries as of December 31, 1994 and 1993, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1994. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of H.W.
Kaufman Financial Group, Inc. and subsidiaries at December 31, 1994 and 1993,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1994 in conformity with
generally accepted accounting principles. As discussed in the Summary of
Accounting Policies, the Company changed its method of accounting for
marketable securities in 1994.
BDO SEIDMAN
Troy, Michigan
January 31, 1995
F-1
<PAGE> 71
H.W. KAUFMAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
December 31, 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 10,370,260 $ 9,296,749
Marketable securities (Note 1) 3,983,853 3,527,058
Receivables
Trade 23,575,263 19,560,167
Notes 2,456,921 2,528,779
Other 107,194 491,240
Prepaid expenses and other current assets (Note 10) 1,000,589 873,084
- ----------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 41,494,080 36,277,077
- ----------------------------------------------------------------------------------------------------------
IMPROVEMENTS AND EQUIPMENT
Furniture, fixtures and equipment 3,319,261 2,238,317
Improvements to leased premises 583,043 71,105
- ----------------------------------------------------------------------------------------------------------
3,902,304 2,309,422
Less accumulated depreciation and amortization 1,689,590 1,208,030
- ----------------------------------------------------------------------------------------------------------
NET IMPROVEMENTS AND EQUIPMENT 2,212,714 1,101,392
- ----------------------------------------------------------------------------------------------------------
OTHER
Goodwill, net of accumulated amortization of
$1,338,408 and $1,088,036 1,481,636 1,843,008
Covenants not to compete, net of accumulated
amortization of $418,892 and $403,626 174,108 370,083
Other intangible assets, net of accumulated
amortization of $819,106 and $1,034,098 1,692,848 781,927
Miscellaneous (Note 11) 849,047 892,130
- ----------------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS 4,197,639 3,887,148
- ----------------------------------------------------------------------------------------------------------
$ 47,904,433 $ 41,265,617
==========================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-2
<PAGE> 72
H.W. KAUFMAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
December 31, 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Payables
Insurance companies $31,559,820 $27,998,807
Customer advance payments 2,137,937 1,430,111
Other 598,603 574,174
Accruals
Taxes, other than on income 2,566,699 2,408,403
Compensation 2,097,202 1,770,699
Other 210,666 616,823
Current portion of long-term obligation (Note 4) 425,000 -
- ---------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 39,595,927 34,799,017
LONG TERM OBLIGATION, less current portion (Note 4) 425,000 -
- ---------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 40,020,927 34,799,017
- ---------------------------------------------------------------------------------------------------------
DEFERRED REVENUE 1,115,132 898,813
- ---------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 8)
STOCKHOLDERS' EQUITY (Notes 5, 6 and 7)
Common stock, $.0025 par - 7,500,000 shares
authorized; 3,123,043 outstanding in 1994
and 2,830,230 outstanding in 1993 7,808 7,075
Additional paid-in capital 501,509 459,329
Retained earnings 6,357,825 5,101,383
Net unrealized loss on marketable securities (98,768) -
- ---------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 6,768,374 5,567,787
- ---------------------------------------------------------------------------------------------------------
$47,904,433 $41,265,617
=========================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-3
<PAGE> 73
H.W. KAUFMAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMISSIONS AND FEES $52,363,586 $44,924,237 $39,131,000
COST OF COMMISSIONS AND FEES 22,745,536 19,878,228 17,088,265
- ---------------------------------------------------------------------------------------------------
GROSS PROFIT 29,618,050 25,046,009 22,042,735
- ---------------------------------------------------------------------------------------------------
DIVISIONAL OPERATING EXPENSES 20,766,008 18,123,092 15,791,950
GENERAL AND ADMINISTRATIVE EXPENSES 6,169,386 5,130,113 4,418,106
- ---------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 26,935,394 23,253,205 20,210,056
- ---------------------------------------------------------------------------------------------------
OPERATING INCOME 2,682,656 1,792,804 1,832,679
OTHER INCOME - NET (Note 9) 537,668 548,897 395,391
- ---------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME 3,220,324 2,341,701 2,228,070
TAXES ON INCOME (Note 10) 1,453,000 1,036,000 1,014,500
- ---------------------------------------------------------------------------------------------------
NET INCOME $ 1,767,324 $ 1,305,701 $ 1,213,570
===================================================================================================
EARNINGS PER SHARE $ .57 $ .42 $ .39
===================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-4
<PAGE> 74
H.W. KAUFMAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
================================================================================
<TABLE>
<CAPTION>
Common Stock Additional Unrealized Loss
------------------ Paid-In Retained on Marketable
Shares Amount Capital Earnings Securities TOTAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1992 2,827,230 $7,067 $449,586 $ 3,430,279 $ - $3,886,932
Less dividends paid ($.14 per
share of common stock) - - - (395,810) - (395,810)
Net income - - - 1,213,570 - 1,213,570
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1992 2,827,230 7,067 449,586 4,248,039 - 4,704,692
Less dividends paid ($.16 per
share of common stock) - - - (452,357) - (452,357)
Shares issued upon exercise of
stock options 3,000 8 9,743 - - 9,751
Net income - - - 1,305,701 - 1,305,701
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1993 2,830,230 7,075 459,329 5,101,383 - 5,567,787
Effect of adopting SFAS No. 115
as of January 1, 1994, net of
tax effect - - - - 125,883 125,883
Less dividends paid ($.18 per
share of common stock) - - - (509,459) - (509,459)
Shares issued in accordance with
employee stock purchase plan 7,720 20 35,685 - - 35,705
Shares issued upon exercise of
stock options 2,000 5 6,495 - - 6,500
10% stock dividend issued (Note 5) 283,093 708 - (1,423) - (715)
Net change in unrealized gain
(loss) on marketable securities,
net of tax effect - - - - (224,651) (224,651)
Net income - - - 1,767,324 - 1,767,324
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1994 3,123,043 $7,808 $501,509 $ 6,357,825 $ (98,768) $6,768,374
=========================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-5
<PAGE> 75
H.W. KAUFMAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,767,324 $ 1,305,701 $ 1,213,570
Adjustments to reconcile net income to net
cash provided by operating activities
Amortization of intangible assets 1,094,043 1,036,537 1,040,177
Depreciation and amortization 645,227 378,911 291,204
Deferred income taxes 46,700 (168,700) 5,000
Loss on disposition of equipment 22,430 3,617 18,618
Loss (gain) on sale of marketable securities 18,894 (96,128) (4,022)
Changes in assets and liabilities, net
of effects from purchase transactions
Increase in receivables (3,559,192) (3,516,612) (4,263,267)
Decrease (increase) in prepaid
expenses and other current assets (109,711) 77,548 (227,228)
Decrease (increase) in miscellaneous assets 43,083 (250,549) (145,914)
Increase in payables 4,293,268 4,152,267 7,278,448
Increase in accruals 78,642 601,160 1,732,946
Increase (decrease) in deferred revenue 216,319 794,492 (270,679)
- ---------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,557,027 4,318,244 6,668,853
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of marketable securities 183,587 309,953 304,140
Purchase of improvements and equipment (1,778,979) (542,214) (470,142)
Purchase of marketable securities (822,538) (836,425) (1,239,497)
Payments for purchase of books of business (597,617) (74,500) (664,632)
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (3,015,547) (1,143,186) (2,070,131)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
F-6
<PAGE> 76
H.W. KAUFMAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
Year Ended December 31, 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (510,174) (452,357) (395,810)
Proceeds from the issuance of common stock 42,205 9,751 -
Reduction of long-term obligations - (450,000) (950,000)
- ---------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (467,969) (892,606) (1,345,810)
- ---------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,073,511 2,282,452 3,252,912
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
beginning of year 9,296,749 7,014,297 3,761,385
- ---------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
end of year $ 10,370,260 $ 9,296,749 $ 7,014,297
===============================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to consolidated
financial statements.
F-7
<PAGE> 77
H.W. KAUFMAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
================================================================================
BUSINESS The Company and its subsidiaries sell specialty
insurance products and services as general agents
and brokers to independent insurance agents
through a network of branch offices located in a
number of states. In addition, through
subsidiaries, the Company provides premium
financing on insurance coverages.
PRINCIPLES OF The consolidated financial statements include
CONSOLIDATION the accounts of the Company and its subsidiaries,
all of which are wholly-owned. All significant
intercompany accounts have been eliminated.
MARKETABLE The Company has adopted Statement of Financial
SECURITIES Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity
Securities" as of January 1, 1994. In accordance
with SFAS No. 115, prior years' financial
statements have not been restated to reflect the
change in accounting method. The effect of
adopting SFAS No. 115, as of January 1, 1994, was
to increase stockholders' equity (net of income
taxes) by $125,883.
At January 1, 1994, marketable equity and debt
securities have been categorized as
available-for-sale and as a result are stated at
market value. At December 31, 1994 and 1993 all
marketable equity and debt securities are
classified as current assets. Unrealized gains or
losses, net of the tax effects, are included as a
component of stockholders' equity until realized.
At December 31, 1993, marketable equity securities
were stated at the lower of aggregate cost
or market. At December 31, 1993, marketable
securities included in current assets had a market
value of $3,736,863.
RECEIVABLES The Company considers all receivables to be
fully collectible; as a result, no allowance for
doubtful accounts is considered necessary. If
amounts become uncollectible, they are charged to
operations when that determination is made.
Notes receivable arise from the Company
offering short-term premium financing to insureds.
Interest rates on premium financing contracts
ranged from 8% to 18% (approximately 15% average
in 1994) and the related interest is included in
commissions and fees.
F-8
<PAGE> 78
H.W. KAUFMAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
================================================================================
IMPROVEMENTS, EQUIPMENT Improvements and equipment are stated at cost.
AND DEPRECIATION Depreciation is computed over the estimated useful
lives of assets ranging from three to ten years
using accelerated methods for both financial
reporting and income tax purposes.
OTHER ASSETS Other assets include amounts assigned to
goodwill, covenants not to compete, agency
contracts and policyholder lists obtained in the
acquisitions of "books of business." These
intangibles are being amortized on a straight-line
basis over two to five years, except for goodwill
which is amortized over various periods not to
exceed twelve years.
FIDUCIARY FUNDS Premiums receivable from agents are reported as
assets and premiums payable, net of commissions
earned, to the insurance carriers are reported as
liabilities. Premiums collected from agents and
not yet remitted to the carriers are held in a
fiduciary capacity and invested in short-term
investments until remitted.
Certain states require that funds be maintained
in segregated accounts for the payment of specific
liabilities. At December 31, 1994, cash and
certificates of deposit of approximately
$2,300,000 were restricted for the payment of such
liabilities.
REVENUE Commissions are recognized when the insurance
RECOGNITION agents are invoiced. Commissions relating to
return or additional premiums or adjustments are
recognized when they occur.
Profit-sharing commissions from insurance
carriers are recognized when earned and reasonably
estimatable. Some of the carriers may subsequently
adjust the commissions based on actual policy
experience. Adjustments resulting in overpayments
are applied to future commissions based on the
Company's agreement with individual carriers and
are reflected as deferred revenue in the financial
statements while underpayments from carriers are
recorded as a receivable.
F-9
<PAGE> 79
H.W. KAUFMAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
================================================================================
TAXES ON INCOME Beginning in 1993, the financial statements
reflect adoption of the liability method of
accounting for income taxes pursuant to Statement
of Financial Accounting Standards (SFAS) No. 109
"Accounting for Income Taxes." Financial
statements presented for 1992 reflect income taxes
under the deferral method previously required. The
cumulative effect as of January 1, 1993 of
adopting SFAS No. 109 was insignificant.
Deferred income taxes are recorded to reflect
the future tax consequences of temporary
differences between the financial reporting bases
and tax bases of the Company's assets and
liabilities.
EARNINGS PER SHARE Earnings per share are computed on the basis of
the weighted average number of common shares
outstanding during each year. The dilutive effect
of the outstanding common stock options is
included in the earnings per share calculation.
The weighted average number of common shares
outstanding was 3,114,867, 3,111,580 and 3,110,503
for the years ended December 31, 1994, 1993 and
1992, respectively.
Fully diluted earnings per share amounts are
not presented because they are not materially
dilutive.
STATEMENTS OF For purposes of the statements of cash flows,
CASH FLOWS the Company considers all money market funds and
certificates of deposit with an original maturity
of three months or less to be cash equivalents.
F-10
<PAGE> 80
H.W. KAUFMAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. MARKETABLE The following information pertains to marketable
SECURITIES equity securities and debt securities classified
as available for sale at December 31, 1994:
<TABLE>
<CAPTION>
Gross
Aggregate Unrealized Aggregate
Fair Holding Cost
Value Losses Basis
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Equities and Stock &
Bond Mutual Funds $ 3,271,739 $ 12,369 $ 3,284,108
Bonds and Bond Mutual Funds 712,114 152,245 864,359
----------------------------------------------------------------------------------
TOTAL $ 3,983,853 $ 164,614 $ 4,148,467
==================================================================================
</TABLE>
Proceeds, gross realized gains, and gross realized
losses from the sale of securities classified as
available for sale for the year ended
December 31, 1994, were $183,587, $3,601, and
$22,495, respectively. For the purpose of
determining gross realized gains and losses, the
cost of securities sold is based upon specific
identification method.
The unrealized gain (loss) on available-for-sale
securities decreased by $374,418 (before the
effect of income taxes) for the year ended
December 31, 1994.
2. LINE OF CREDIT The Company has a $500,000 unsecured line of
AGREEMENTS credit available with a bank. Agreements
Borrowings under the line of credit are due on
demand and bear interest at the bank's variable
base rate. During the years ended
December 31, 1994 and 1993, there were no
borrowings under this agreement.
One of the Company's subsidiaries has a
$2,500,000 line of credit available with the bank
to be utilized for insurance premium financing.
Borrowings under the line of credit are due on
demand, bear interest at the bank's variable base
rate plus 1/4 percent, and are secured by
substantially all of the Company's assets.
During the years ended December 31, 1994 and 1993,
there were no borrowings under this agreement.
F-11
<PAGE> 81
H.W. KAUFMAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. EMPLOYEE BENEFIT The Company has established a retirement plan
PLAN which allows employees to contribute a portion of
their salaries under section 401(k) of the
Internal Revenue Code. The Company has agreed to
match 50% of the contributions of each employee up
to 6% of the employee's salary with an annual cap
of $3,000 per employee. In addition, the Company
can make an additional contribution to the plan in
an amount determined by the Board of Directors.
These contributions are discretionary but may not
exceed 12 percent of the annual aggregate
compensation (as defined) paid to all
participating employees. The expense for this plan
for the years ended December 31, 1994, 1993 and
1992 was $243,784, $220,548, and $183,813,
respectively.
4. LONG-TERM OBLIGATION In connection with the acquisition of all the
assets and book of business of a broker in 1994,
the Company entered into a promissory note payable
for $850,000. This promissory note is non-interest
bearing and requires payments of $425,000 in 1995
and 1996.
5. STOCKHOLDERS' EQUITY On April 5, 1994, the Company declared a 10%
common stock dividend to stockholders of record on
April 19, 1994, distributed on May 5, 1994. The
transaction resulted in a transfer of $708 from
retained earnings to the common stock account.
Retained earnings was charged for $715 as a result
of cash paid in lieu of fractional shares. The
weighted average number of shares outstanding and
per share amounts have been restated for periods
prior to the stock dividend.
6. EMPLOYEE STOCK On July 1, 1994 the Company initiated an
PURCHASE PLAN employee stock purchase plan whereby all full-time
employees may withhold up to 10% of their earnings
to purchase Company common stock. On each June 30
and December 31, the Company uses the withheld
funds to purchase shares of stock at the then
current market price. Accordingly, no compensation
expense is recorded in connection with the plan.
The shares to be sold to participants under this
plan are authorized and unissued shares of the
Company's common stock.
F-12
<PAGE> 82
H.W. KAUFMAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The maximum number of shares available under
this plan during all offerings is 300,000 shares.
Since the inception of the plan, employees had
purchased a total of 7,720 shares at $4.625 per
share. Total receipts to the Company were
$35,705.
7. STOCK OPTIONS On July 25, 1989, the stockholders approved the
Company's 1989 Stock Option and Incentive Plan
("1989 Stock Option Plan") for the granting of
incentive and non-qualified stock options and
restricted stock awards to the officers, key
employees and directors of the Company. A total of
412,500 shares of the Company's common stock has
been reserved for issuance under the 1989 Stock
Option Plan. Stock options may be granted under
the plan at a price not less than the fair market
value of the stock on the date the option is
granted and must be exercisable by the date fixed
by the Company, but not later than ten years after
the date of grant. Stock options granted under
the 1989 Stock Option Plan are not generally
exercisable until one year after they are granted,
and the restrictions attached to the restricted
stock awards do not normally expire until at least
one year after the award is made.
Changes in stock options outstanding are
summarized as follows:
<TABLE>
<CAPTION>
Shares Option Price
==================================================================================
<S> <C> <C>
BALANCE, January 1, 1992 16,500 $ 2.95
Granted - -
Exercised - -
Expired or terminated (1,100) 2.95
----------------------------------------------------------------------------------
BALANCE, December 31, 1992 15,400 2.95
Granted 22,000 5.45
Exercised (3,300) 2.95
Expired or terminated (1,100) 2.95
----------------------------------------------------------------------------------
BALANCE, December 31, 1993 33,000 2.95 and 5.45
----------------------------------------------------------------------------------
</TABLE>
F-13
<PAGE> 83
H.W. KAUFMAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
Shares Option Price
---------------------------------------------------------------------------------
<S> <C> <C>
BALANCE, December 31, 1993 33,000 2.95 and 5.45
Granted - -
Exercised (2,200) 2.95
Expired or terminated - -
---------------------------------------------------------------------------------
BALANCE, December 31, 1994 30,800 $2.95 and 5.45
=================================================================================
EXERCISABLE, December 31, 1994 30,800 $2.95 and 5.45
=================================================================================
</TABLE>
8. COMMITMENTS AND LITIGATION
CONTINGENCIES
At December 31, 1994, the Company is a defendant
in several lawsuits. To the extent that the
lawsuits may be found in favor of the plaintiffs,
and to the extent that these matters may not be
covered by the Company's errors and omissions
insurance policy, the Company may be liable in
these matters. In the opinion of management, such
liabilities would not have a significant affect on
the financial position of the Company.
EMPLOYMENT AGREEMENTS
The Company has certain agreements with branch
managers, key employees and officers to award
bonuses based upon earnings. Expenses incurred
under these bonus arrangements approximated
$1,306,000, $1,102,000 and $867,000 during the
years ended December 31, 1994, 1993 and 1992,
respectively.
F-14
<PAGE> 84
H.W. KAUFMAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
OPERATING LEASES
The Company operates in leased office
facilities in various locations under operating
leases with terms ranging from one to seven years
with renewal options for additional periods.
Office equipment and vehicles are also leased for
terms of up to four years. Many leases provide
that the Company shall pay for real estate and
personal property taxes, maintenance, insurance
and other expenses. Future minimum rentals under
non-cancelable operating leases as of December 31,
1994 are as follows: 1995 - $1,655,000; 1996 -
$1,223,000; 1997 - $1,103,000; 1998 - $895,000;
and 1999 - $753,000.
Rent expense for the years ended December 31,
1994, 1993 and 1992 was $1,797,597, $1,831,356 and
$1,452,440, respectively.
9. OTHER INCOME - NET Other income - net is comprised of the following:
<TABLE>
<CAPTION>
Year Ended December 31, 1994 1993 1992
-----------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income $ 556,562 $ 452,322 $ 388,603
Net realized gains (losses) on the
sale of marketable securities (18,894) 96,128 4,022
Miscellaneous - 447 2,766
-----------------------------------------------------------------------------------
TOTAL OTHER INCOME - NET $ 537,668 $ 548,897 $ 395,391
===================================================================================
</TABLE>
F-15
<PAGE> 85
H.W. KAUFMAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. TAXES ON INCOME Provisions for federal and state income taxes
in the consolidated statements of income are
comprised of the following components:
<TABLE>
<CAPTION>
Year Ended December 31, 1994 1993 1992
----------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT TAX EXPENSE
Federal $ 1,179,000 $ 1,062,000 $ 855,000
State and local 227,300 142,700 154,500
----------------------------------------------------------------------------------
TOTAL CURRENT 1,406,300 1,204,700 1,009,500
DEFERRED TAX (BENEFIT)
EXPENSE - federal 46,700 (168,700) 5,000
----------------------------------------------------------------------------------
TOTAL TAXES ON INCOME $ 1,453,000 $ 1,036,000 $ 1,014,500
==================================================================================
</TABLE>
Deferred tax assets are included with other
current assets and are comprised of the following:
<TABLE>
<CAPTION>
December 31, 1994 1993 1992
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Accrued compensation $ 123,000 $ 117,000 $ 31,300
Unrealized loss on marketable
securities 56,000 - -
Intangibles 54,000 - -
Accrued lease termination fee - 60,000 -
Accrued self-insured health
expenses - 37,000 14,000
----------------------------------------------------------------------------------
GROSS DEFERRED TAX ASSETS 233,000 214,000 45,300
----------------------------------------------------------------------------------
Deferred tax assets valuation
allowance - - -
----------------------------------------------------------------------------------
$ 233,000 $ 214,000 $ 45,300
==================================================================================
</TABLE>
F-16
<PAGE> 86
H.W. KAUFMAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The provision for income taxes differs from the
amount of income tax determined by applying the
applicable U.S. statutory federal income tax rate
to pretax income as a result of the following
differences:
<TABLE>
<CAPTION>
Year Ended December 31, 1994 1993 1992
----------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME TAXES AT STATUTORY
RATE $1,095,000 $796,000 $758,000
INCREASE IN TAXES RESULTING FROM
State and local taxes, net of
federal income tax benefit 150,000 94,000 102,000
Amortization of goodwill 123,000 123,000 141,000
Other 85,000 23,000 13,500
----------------------------------------------------------------------------------
TOTAL TAXES ON INCOME $1,453,000 $1,036,000 $1,014,500
==================================================================================
EFFECTIVE TAX RATE 45.1% 44.2% 45.5%
==================================================================================
</TABLE>
11. RELATED PARTY At December 31, 1994 and 1993 the Company had a
TRANSACTIONS non-interest bearing receivable of $697,663 and
$614,029 due from a stockholder/officer's
irrevocable trust. The receivable represents
premium payments on split dollar life insurance
policies on the stockholder/officer. The Company
has a security interest in the policies to the
extent of premiums advanced.
12. MAJOR CUSTOMERS The Company acts as an intermediary between
insurance carriers and independent insurance
agents who use the Company to find insurance
coverage for the agents' customers. No one
insurance agent accounts for over ten percent of
the Company's commissions and fees. However, the
Company placed a significant amount of insurance
coverage with one insurance carrier. Approximately
26%, 29% and 33% of the Company's commissions and
fees for the years ended December 31, 1994, 1993
and 1992 were attributable to insurance placed with
one insurance carrier.
F-17
<PAGE> 87
H.W. KAUFMAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
13. SUPPLEMENTAL DISCLOSURES Year Ended December 31, 1994 1993 1992
OF CASH FLOW INFORMATION -----------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PAID DURING THE YEAR FOR
Taxes on income $1,683,299 $1,086,216 $ 721,052
Interest 10,224 36,313 63,477
===================================================================================
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES
In 1994, the Company purchased all of the assets
and book of business of a broker for
$1,200,000. In conjunction with the
acquisition, the Company issued a promissory
note payable for $850,000 (see Note 4).
14. SELECTED QUARTERLY
FINANCIAL DATA
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------
March 31, June 30, September 30, December 31,
-------------------------------------------------------------------------------------
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
1994
Commissions and fees $ 12,262 $13,442 $ 13,561 $ 13,099
Gross profit 6,794 7,651 7,916 7,257
Net income 93 433 832 409
Earnings per share .03 .14 .26 .13
====================================================================================
1993
Commissions and fees $ 10,288 $11,318 $ 11,616 $ 11,702
Gross profit 5,727 6,188 6,545 6,586
Net income 62 269 460 515
Earnings per share .02 .09 .15 .17
====================================================================================
</TABLE>
F-18
<PAGE> 88
H. W. KAUFMAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,*
1995 1994
----------- -------------
ASSETS
------
<S> <C> <C>
CURRENT:
Cash and cash equivalents $ 8,531,644 $10,370,260
Marketable securities,
market value, Available-for-sale 4,242,742 3,983,853
Receivables:
Trade 23,477,556 23,575,263
Notes 2,897,740 2,456,921
Other 37,080 107,194
Prepaid expenses and other current
assets 916,591 1,000,589
----------- -----------
TOTAL CURRENT ASSETS 40,103,353 41,494,080
----------- -----------
IMPROVEMENTS AND EQUIPMENT:
Furniture, fixtures and equipment 3,621,771 3,319,261
Improvements to leased premises 588,520 583,043
----------- -----------
4,210,291 3,902,304
Less accumulated depreciation and
amortization (1,883,189) (1,689,590)
----------- -----------
NET IMPROVEMENTS AND EQUIPMENT 2,327,102 2,212,714
----------- -----------
OTHER ASSETS:
Goodwill, net of accumulated
amortization of $1,415,789
and $1,338,408 1,499,255 1,481,636
Covenants not to compete, net of
accumulated amortization of
$459,983 and $418,892 429,017 174,108
Other intangible assets, net of
accumulated amortization of
$947,904 and $819,106 2,522,050 1,692,848
Miscellaneous 946,696 849,047
----------- -----------
TOTAL OTHER ASSETS 5,397,018 4,197,639
----------- -----------
$47,827,473 $47,904,433
=========== ===========
</TABLE>
* Condensed from the 1994 Audited Financial Statements
F-19
<PAGE> 89
H. W. KAUFMAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,*
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
- ----------- --- ------------- ------ ----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable:
Insurance companies $30,757,597 $31,559,820
Customer advance payments 2,628,123 2,137,937
Other 650,620 598,603
Accruals:
Taxes, other than on income 1,543,378 2,566,699
Compensation 868,623 2,097,202
Other 468,237 210,666
Dividend Payable 562,165 -0-
Current portion of long-term debt 1,100,000 425,000
----------- -----------
TOTAL CURRENT LIABILITIES 38,578,743 39,595,927
NOTE PAYABLE - LONGTERM DEBT 475,000 425,000
----------- -----------
TOTAL LIABILITIES 39,053,743 40,020,927
DEFERRED REVENUE 2,266,501 1,115,132
STOCKHOLDERS' EQUITY:
Common stock, $.0025 par - 7,500,000
shares authorized; 3,123,043
outstanding in 1995 and 3,123,043
outstanding in 1994 7,808 7,808
Additional paid-in capital 501,509 501,509
Retained earnings 5,951,089 6,357,825
Securities valuation 46,823 (98,768)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 6,507,229 6,768,374
----------- -----------
$47,827,473 $47,904,433
=========== ===========
</TABLE>
* Condensed from the 1994 Audited Financial Statements
F-20
<PAGE> 90
H. W. KAUFMAN FINANCIAL GROUP INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1995 1994
----------- -----------
<S> <C> <C>
COMMISSIONS AND FEES $13,355,797 $12,261,510
COST OF COMMISSIONS AND FEES 5,750,676 5,467,569
----------- -----------
Gross profit 7,605,121 6,793,941
----------- -----------
DIVISIONAL OPERATING EXPENSES 5,529,814 5,011,630
GENERAL & ADMINISTRATIVE 1,747,020 1,593,970
----------- -----------
Total operating expenses 7,276,834 6,605,600
----------- -----------
Operating income 328,287 188,341
OTHER INCOME 184,936 109,535
----------- -----------
Income before taxes
on income 513,223 297,876
TAXES ON INCOME 357,792 205,000
----------- -----------
NET INCOME $ 155,431 $ 92,876
=========== ===========
EARNINGS PER SHARE:
NET INCOME $ .05 $ .03
=========== ===========
*WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING 3,435,347 3,424,961
</TABLE>
Interim results are not necessarily indicative of the results of operations for
a full year.
*See page one
F-21
<PAGE> 91
H. W. KAUFMAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1995 1994
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 155,431 $ 92,876
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation expense 193,599 107,634
Amortization of intangible assets 247,270 248,345
Deferred income taxes ( 77,392) 21,001
Decrease (increase) in accounts
receivable ( 272,998) (2,929,922)
Decrease (increase) in prepaid
expenses and other current assets 64,330 171,020
Decrease (increase) in miscellaneous
assets ( 97,649) 97,437
Increase (decrease) in accounts
payable ( 260,023) 1,874,989
Increase (decrease) in accrued
expenses (1,994,328) (2,244,043)
Increase (decrease) in deferred
revenue 1,151,369 1,115,132
Gain on the sale of marketable
securities -0- ( 2,538)
Abandonment of leasehold improvements -0- 23,678
---------- ------------
Net cash provided (used) by
operating activities ( 890,391) (1,424,391)
---------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES;
Proceeds from the sale of marketable
securities -0- 52,538
Purchase of marketable securities ( 16,238) (134,016)
Purchase of books of business (199,000) (349,000)
Purchase of improvements and equipment (307,987) (504,509)
----------- ----------
Net cash provided (used) by
investing activities (523,225) (934,987)
---------- ----------
</TABLE>
F-22
<PAGE> 92
H. W. KAUFMAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Concluded)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1995 1994
--------- -----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from incentive stock options -0- 3,247
Dividends paid -0- (509,459)
Reduction of long-term debt ( 425,000) -0-
------------ -----------
Net cash provided (used) by
financing activities ( 425,000) (506,212)
------------ -----------
NET INCREASE (DECREASE) IN CASH EQUIVALENTS (1,838,616) (2,865,590)
CASH AND CASH EQUIVALENTS,
beginning of year 10,370,260 9,296,749
------------ -----------
CASH AND CASH EQUIVALENTS,
end of period $8,531,644 $6,431,159
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the quarter for:
Income taxes $ -0- $ 330,000
Interest $ 1,044 $ -0-
</TABLE>
F-23
<PAGE> 93
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
The consolidated Financial Statements included herewith have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in the Consolidated Financial Statements prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations, although the Company
believes that the disclosures are adequate to make the information presented
not misleading.
In the opinion of the Company's Management, the Financial Statements for three
months ended March 31, 1995 and 1994 reflect all adjustments for normal
recurring accruals which are necessary to present a fair statement of the
results for the period then ended. It is suggested that these Financial
Statements be read in conjunction with the audited, consolidated Financial
Statements and notes thereto submitted in the Company's Form 10-K filing for
the year ended December 31, 1994.
The results for the three months ended March 31, 1995, are not necessarily
indicative of the results of the entire year of 1995.
On April 17, 1995, the Company reported a 10% Stock Dividend payable to
shareholders of record as of May 1, 1995. Approximately 311,977 additional
shares of Common Stock will be issued. These transactions will be treated for
accounting purposes as stock splits effected in the form of dividends. The
weighted average number of shares outstanding on the Consolidated Statements of
Income only, have been adjusted to reflect the May 1, 1995 Stock Dividend.
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AGREEMENT AND PLAN OF MERGER dated as of May 26, 1995, among AJK
ENTERPRISES, INC., a Michigan corporation ("Parent"), AJK ACQUISITION COMPANY,
a Michigan corporation and a wholly owned subsidiary of Parent ("Sub"), and H.
W. KAUFMAN FINANCIAL GROUP, INC., a Michigan corporation (the "Company").
WHEREAS the respective Boards of Directors of Parent, Sub and the
Company have approved the merger of Sub into the Company (the "Merger"), upon
the terms and subject to the conditions set forth in this Agreement, whereby
each issued and outstanding share of common stock, par value $.0025 per share,
of the Company ("Company Common Stock"), not owned directly or indirectly by
Parent or the Company, will be converted into the right to receive $8.20 in
cash;
WHEREAS the Merger requires the approval by an affirmative vote of the
holders of a majority of the outstanding shares of Company Common Stock
entitled to vote thereon ("Company Shareholder Approval"); and
WHEREAS Parent, Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
The Merger
SECTION 1.01. The Merger. Upon the terms and subject to the
conditions set forth in this Agreement, and in accordance with the Michigan
Business Corporation Act (the "MBCA"), Sub shall be merged with and into the
Company at the Effective Time (as defined in Section 1.03). Following the
Merger, the separate corporate existence of Sub shall cease and the Company
shall continue as the surviving corporation (the "Surviving Corporation") and
shall succeed to and assume all the rights and obligations of Sub in accordance
with the MBCA. Notwithstanding the foregoing, Parent may elect at any time
prior to the mailing of the Proxy Statement (as defined herein), instead of
merging Sub into the Company as provided above, to merge the Company with and
into Sub; provided, however, that the Company shall not be deemed to have
breached any of its representations, warranties, covenants or agreements set
forth in this Agreement solely by reason of such election; provided, further,
that no such election may be made if it would alter or change the amount or
kind of Merger Consideration (as defined in Section 2.01(c)) to be received by
holders of Company Common Stock pursuant to Article II, or be reasonably likely
to materially delay or impede consummation of the transactions contemplated
hereby. In such event, the parties agree to execute an appropriate amendment
to this Agreement in order to reflect the foregoing and, where appropriate, to
provide that Sub shall be the Surviving Corporation and shall continue under
the name "H. W. Kaufman Financial Group, Inc."
SECTION 1.02. Closing. The closing of the Merger (the "Closing")
will take place at 10:00 a.m. on a date to be specified by the parties, which
shall be no later than the later of (i) the third business day or (ii) the
first business day of the month, in either case following the satisfaction (or
waiver) of all the conditions set forth in Article VI (the "Closing Date"), at
the offices of the Company, unless another time, date or place is agreed to in
writing by the parties hereto.
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SECTION 1.03. Effective Time. Subject to the provisions of this
Agreement, as soon as practicable on the Closing Date, a certificate of merger
or other appropriate documents (in any such case, the "Certificate of Merger")
shall be duly prepared, executed, acknowledged and filed by the parties in
accordance with the relevant provisions of the MBCA with the Department of
Commerce of the State of Michigan. The Merger shall become effective upon the
filing of the Certificate of Merger with the Department of Commerce of the
State of Michigan or at such time thereafter as is provided in the Certificate
of Merger (the time the Merger becomes effective being hereinafter referred to
as the "Effective Time").
SECTION 1.04. Effects of the Merger. The Merger shall have the
effects set forth in Section 724 of the MBCA.
SECTION 1.05. Articles of Incorporation and By-Laws. (a) The
articles of incorporation of the Company as in effect immediately prior to the
Effective Time shall be the articles of incorporation of the Surviving
Corporation, until thereafter changed or amended as provided therein or by
applicable law.
(b) The by-laws of the Company as in effect immediately prior to
the Effective Time shall be the by-laws of the Surviving Corporation, until
thereafter changed or amended as provided therein or by applicable law.
SECTION 1.06. Directors. The directors of Sub at the Effective Time
shall become the directors of the Surviving Corporation, until the earlier of
their resignation or removal or until their respective successors are duly
elected and qualified, as the case may be.
SECTION 1.07. Officers. The officers of the Company immediately
prior to the Effective Time shall be the officers of the Surviving Corporation,
until the earlier of their resignation or removal or until their respective
successors are duly elected and qualified, as the case may be.
ARTICLE II
Effect of the Merger on the Capital Stock of the
Constituent Corporations; Exchange of Certificates
SECTION 2.01. Effect on Capital Stock. As of the Effective Time, by
virtue of the Merger and without any action on the part of the holder of any
shares of Company Common Stock or any shares of capital stock of Sub:
(a) Capital Stock of Sub. Each issued and outstanding
share of capital stock of Sub shall be converted into and become one
fully paid and nonassessable share of Common Stock, par value $.0025
per share, of the Surviving Corporation.
(b) Cancellation of Company and Parent Owned Stock. Each
share of Company Common Stock that is owned by the Company or by any
subsidiary of the Company and each share of Company Common Stock that
is owned by Parent, Sub or any other subsidiary of Parent (other than,
in each case, shares in trust accounts, managed accounts, custodial
accounts and the like that are beneficially owned by third parties
(any
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such shares, "Trust Account Shares")) shall be automatically cancelled
and retired and shall cease to exist, and no consideration shall be
delivered in exchange therefor.
(c) Conversion of Company Common Stock. Each issued and
outstanding share of Company Common Stock (other than shares to be
cancelled in accordance with Section 2.01(b)) shall be converted into
the right to receive from the Surviving Corporation in cash, without
interest, $8.20 (the "Merger Consideration"). As of the Effective
Time, all such shares of Company Common Stock shall no longer be
outstanding and shall automatically be cancelled and retired and shall
cease to exist, and each holder of a certificate previously
representing any such shares shall cease to have any rights with
respect thereto, except the right to receive the Merger Consideration,
without interest.
SECTION 2.02. Exchange of Certificates. (a) Paying Agent. Prior to
the Effective Time, Parent shall designate a bank or trust company reasonably
acceptable to the Company, to act as paying agent (the "Paying Agent") for the
payment of the Merger Consideration upon surrender of certificates representing
Company Common Stock.
(b) Parent To Provide Funds. Parent shall take all steps
necessary to enable and cause Sub, or the Surviving Corporation, to provide to
the Paying Agent on a timely basis, as and when needed on and after the
Effective Time, funds necessary to pay for the shares of Company Common Stock
as part of the Merger pursuant to Section 2.01.
(c) Exchange Procedures. As soon as reasonably practicable (and
in any event no later than 10 days) after the Effective Time, Parent shall
cause the Paying Agent to mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding shares of Company Common Stock (the "Certificates") whose shares
were converted into the right to receive the Merger Consideration pursuant to
Section 2.01 (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Paying Agent and shall be in such
form and have such other customary provisions as Parent may reasonably specify)
and (ii) instructions for use in effecting the surrender of the Certificates in
exchange for the Merger Consideration. Upon surrender of a Certificate for
cancellation to the Paying Agent or to such other agent or agents as may be
appointed by Parent, together with such letter of transmittal, duly executed,
and such other customary documents as may be reasonably required by the Paying
Agent, the holder of such Certificate shall be entitled to receive in exchange
therefor the amount of cash into which the shares of Company Common Stock
theretofore represented by such Certificate shall have been converted pursuant
to Section 2.01, and the Certificate so surrendered shall forthwith be
cancelled. In the event of a transfer of ownership of Company Common Stock
which is not registered in the transfer records of the Company, payment may be
made to a person other than the person in whose name the Certificate so
surrendered is registered, if such Certificate shall be properly endorsed or
otherwise be in proper form for transfer and 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 such Certificate or establish to the
satisfaction of the Surviving Corporation that such tax has been paid or is not
applicable. Until surrendered as contemplated by this Section 2.02, each
Certificate shall be deemed at any time after the Effective Time to represent
only the right to receive upon such surrender the amount of cash, without
interest, into which the shares of Company Common Stock theretofore represented
by such
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Certificate shall have been converted pursuant to Section 2.01. No interest
shall be paid or will accrue on the cash payable upon the surrender of any
Certificate.
(d) No Further Ownership Rights in Company Common Stock. All
cash paid upon the surrender of Certificates in accordance with the terms
hereof shall be deemed to have been paid in full satisfaction of all rights
pertaining to the shares of Company Common Stock theretofore represented by
such Certificates, and there shall be no further registration of transfers on
the stock transfer books of the Surviving Corporation of the shares of Company
Common Stock which were outstanding immediately prior to the Effective Time.
If, after the Effective Time, Certificates are presented to the Surviving
Corporation for any reason, they shall be cancelled and exchanged as provided
in this Article II.
(e) No Liability. None of Parent, Sub, the Company or the Paying
Agent shall be liable to any person in respect of any cash delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law. If any Certificates shall not have been surrendered prior to
seven years after the Effective Time (or immediately prior to such earlier date
on which any payment pursuant to this Article II would otherwise escheat to or
become the property of any Governmental Entity (as defined in Section 3.0l(c)),
the cash payment in respect of such Certificate shall, to the extent permitted
by applicable law, become the property of the Surviving Corporation, free and
clear of all claims or interests of any person previously entitled thereto.
ARTICLE III
Representations and Warranties
SECTION 3.01. Representations and Warranties of the Company. Except
as set forth on the Disclosure Schedule delivered by the Company to Parent
prior to the execution of this Agreement (the "Company Disclosure Schedule"),
the Company represents and warrants to Parent and Sub as follows:
(a) Organization and Authority. Each of the Company and its
subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation or organization,
has all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as now being conducted and is duly
qualified and in good standing to do business in each jurisdiction in which the
nature of its business or the ownership or leasing of its properties makes such
qualification necessary except where the failure so to qualify would not have a
Material Adverse Effect (as defined in Section 8.03(a)) on the Company or such
subsidiary.
(b) Capital Structure. (i) The authorized capital stock of the
Company consists of 7,500,000 shares of Company Common Stock. At the close of
business on the date preceding the date of this Agreement, (1) 3,435,114 shares
of Company Common Stock were outstanding, (2) 10,890 shares of Company Common
Stock were reserved for issuance with respect to outstanding options issued
under the Company's 1989 Stock Option and Incentive Plan ("1989 Stock Option
Plan"), (3) 447,700 shares of Company Common Stock were reserved for issuance
in connection with the 1989 Stock Option Plan, and (4) shares of Company Common
Stock were reserved for issuance on June 30, 1995 in connection with the
Company's Employee Stock Purchase Plan ("Employee Stock Purchase Plan").
Except as set forth above, at the close of
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business on the date preceding the date of this Agreement, no shares of capital
stock or other voting securities of the Company were issued, reserved for
issuance or outstanding.
(ii) All outstanding shares of the Company capital stock
are, and any shares of Company Common Stock which may be issued upon exercise
of Company Stock Options (as defined in Section 5.04) or on June 30, 1995
pursuant to the Employee Stock Purchase Plan, will be, validly issued, fully
paid and nonassessable and will be delivered free and clear of all claims,
liens, encumbrances, charges, pledges or security interests of any kind or
nature whatsoever (collectively, "Liens") and not subject to preemptive rights.
(iii) Except for this Agreement, the 1989 Stock Option
Plan, and the Employee Stock Purchase Plan, there are no outstanding
securities, options, warrants, calls, rights, commitments, agreements,
arrangements or undertakings of any kind to which the Company or any subsidiary
of the Company is a party or by which it is bound obligating the Company or any
subsidiary of the Company to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock of the Company or of any
subsidiary of the Company or obligating the Company or any subsidiary of the
Company to issue, grant, extend or enter into any such security, option,
warrant, call, right, commitment, agreement, arrangement or undertaking. There
are no outstanding contractual obligations (A) of the Company or any of its
subsidiaries to repurchase, redeem or otherwise acquire any shares of capital
stock of the Company or any of its subsidiaries, or (B) of the Company to vote
or to dispose of any shares of the capital stock of any of its subsidiaries.
(c) Authorization. (i) The Company has all requisite corporate
power and authority to enter into this Agreement and, subject in the case of
this Agreement to the Company Shareholder Approval, to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action on the part
of the Company, subject in the case of this Agreement to the Company
Shareholder Approval. This Agreement has been duly executed and delivered by
the Company and constitutes a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms.
(ii) The execution and delivery of this Agreement does
not, and the consummation of the transactions contemplated hereby will not, and
compliance by the Company with any of the provisions hereof will not, (A)
conflict with, or result in any breach or violation of, or default (with or
without notice or lapse of time or both) under, or result in the termination
of, or accelerate the performance required by, or give rise to a right of
termination, cancellation or acceleration of any obligation or the loss of a
material benefit under, or the creation of a Lien (any such conflict, breach,
violation, default, termination, acceleration, right of termination,
cancellation or acceleration, loss or creation, a "Violation") pursuant to, any
provision of the articles of incorporation or by-laws of the Company, or any
subsidiary of the Company or (B) result in any Violation of any loan or credit
agreement, note, mortgage, indenture, lease, or other agreement, obligation,
instrument, permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to the Company, or any
subsidiary of the Company or their respective properties or assets, which
Violation under this clause (B) could reasonably be expected to have,
individually or in the aggregate with other such Violations, a Material Adverse
Effect on the Company or such subsidiary.
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(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency or
commission or other governmental authority or instrumentality, domestic or
foreign (a "Governmental Entity"), is required by or with respect to the
Company or any subsidiary of the Company in connection with the execution and
delivery of this Agreement by the Company, or the consummation by the Company
of the transactions contemplated hereby, the failure to obtain which could,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect on the Company, except for (A) the filing with the Securities
and Exchange Commission ("SEC") of (1) a proxy statement in definitive form (as
amended or supplemented from time to time, the "Proxy Statement") relating to
the meeting of the Company's shareholders at which a vote is held on the Merger
(the "Company Shareholders Meeting") and (2) such reports under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as may be required in
connection with this Agreement, and the transactions contemplated hereby and
the obtaining from the SEC of such orders as may be required in connection
therewith, (B) the filing of the Certificate of Merger with the Department of
Commerce of the State of Michigan and appropriate documents with the relevant
authorities of other states in which the Company is qualified to do business,
(C) notices, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), and (D) filings, notifications and approvals,
if any, under state insurance laws and regulations.
(d) SEC Documents; Financial Statements; Reports. (i) The
Company has made available to Parent a true and complete copy of each report,
schedule, registration statement and definitive proxy statement filed by the
Company with the SEC since January 1, 1993 (the "Company SEC Documents"), which
are all the documents (other than preliminary material and reports required
pursuant to Section 13(d) or 13(g) of the Exchange Act) that the Company was
required to file with the SEC since such date. As of their respective dates,
the Company SEC Documents complied in all material respects with the
requirements of the Securities Act of 1933, as amended (the "Securities Act"),
or the Exchange Act, as the case may be, and the rules and regulations of the
SEC thereunder applicable to such Company SEC Documents. All material
agreements, contracts and other documents required to be filed as exhibits to
any of the Company SEC Documents have been so filed. Except to the extent that
information contained in any Company SEC Document has been revised or
superseded by a later filed Company SEC Document, none of the Company SEC
Documents contains any untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(ii) The financial statements of the Company included in
the Company SEC Documents comply as to form in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis ("GAAP")
during the periods involved (except as may be indicated in the notes thereto
or, in the case of the unaudited statements, as permitted by Form 10-Q of the
SEC) and fairly present the consolidated financial position of the Company and
its consolidated subsidiaries as at the dates thereof and the consolidated
results of their operations and cash flows for the periods then ended.
(e) Information Supplied. None of the information supplied or to
be supplied by the Company for inclusion or incorporation by reference in the
Proxy Statement will, at the date of mailing to shareholders and at the time of
the Company Shareholders Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they
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were made, not misleading. The Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations thereunder, except that no representation or warranty is made by
the Company with respect to statements made or incorporated by reference
therein based on information supplied by Parent or Sub specifically for
inclusion or incorporation by reference therein.
(f) Compliance with Applicable Laws. (i) The Company and its
subsidiaries hold all permits, licenses, variances, exemptions, authorizations,
orders and approvals of all Governmental Entities (the "Company Permits") that
are required for them to own, lease or operate their properties and assets and
to carry on their businesses as presently conducted, and there has occurred no
default under any such Company Permit which individually or in the aggregate
would have a Material Adverse Effect on the Company or such subsidiary. The
Company and its subsidiaries are in compliance in all material respects with
all applicable statutes, laws, ordinances, rules, orders and regulations of any
Governmental Entity.
(ii) Neither the Company nor any of its subsidiaries has
received any written notification or communication which has not been fully and
finally resolved from any Regulatory Authorities asserting that the Company or
any of its subsidiaries is not in substantial compliance with any of the
statutes, regulations, ordinances or guidelines which such Regulatory Authority
enforces or administers.
(iii) Each of the Company and its subsidiaries is, and has
been, and each of the Company's former subsidiaries, while subsidiaries of the
Company, was in compliance with all applicable Environmental Laws (as defined
below), except for possible noncompliance which individually or in the
aggregate would not have a Material Adverse Effect on the Company or such
subsidiary. The term "Environmental Laws" means any Federal, state, local or
foreign statute, ordinance, rule, regulation, policy, permit, consent,
approval, license, judgment, order, decree, injunction or other authorization
relating to: (A) Releases (as defined in 42 U.S.C. Section 9601(22)) or
threatened Releases of Hazardous Material (as defined below) into the
environment; or (B) the generation, treatment, storage, disposal, use,
handling, manufacturing, transportation or shipment of any Hazardous Material.
The term "Hazardous Material" means (1) hazardous substances (as defined in 42
U.S.C. Section 9601(14)), (2) petroleum, including crude oil and any fractions
thereof, (3) natural gas, synthetic gas and any mixtures thereof, (4) asbestos
and/or asbestos-containing material and (5) polychlorinated biphenyls ("PCBs"),
or materials containing PCBs in excess of 50 ppm. Neither the Company nor any
of its subsidiaries has any contingent liabilities in connection with any
Hazardous Materials, including claims of liability for cleanup of Hazardous
Materials related to any of the Company, its subsidiaries or any of the
Company's former subsidiaries that, individually or in the aggregate, would
have a Material Adverse Effect on the Company or such subsidiary.
(g) Litigation. Except as disclosed in the Company Filed SEC
Documents, there is no suit, action or proceeding pending or, to the knowledge
of the Company or any subsidiary of the Company, threatened, against or
affecting the Company or any subsidiary of the Company (including any such
suit, action or proceeding under the Securities Act or the Exchange Act, or by
any shareholder or former shareholder of the Company or any subsidiary of the
Company) that could reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on the Company or such subsidiary or that
could reasonably be expected to threaten, impede or delay the consummation of
the Merger. There is no judgment, decree, injunction, rule or order of any
Governmental Entity or arbitrator outstanding against the Company or any
subsidiary of
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the Company having, or which could reasonably be expected to have, individually
or in the aggregate, a Material Adverse Effect on the Company or such
subsidiary or that could reasonably be expected to threaten, impede or delay
the consummation of the Merger.
(h) Taxes. (i) (A) The Company and its subsidiaries have filed,
been included in or sent all returns, declarations and reports and information
returns and statements required to be filed or sent (including in each case
extensions) by or relating to any of them relating to any taxes with respect to
any income, properties or operations of the Company or any such subsidiary
prior to the Effective Time (collectively, "Company Returns"), (B) as of the
time of filing, the Company Returns correctly reflected in all material
respects the facts regarding the income, business, assets, operations,
activities and status of the Company and its subsidiaries and any other
information required to be shown therein, (C) the Company and its subsidiaries
have timely paid or made provision for all taxes that have been shown as due
and payable on the Company Returns that have been filed, (D) the Company and
its subsidiaries have made or will make provision for all taxes payable for any
periods that end before the Effective Time for which no Company Returns have
yet been filed and for any periods that begin before the Effective Time and end
after the Effective Time to the extent such taxes are attributable to the
portion of any such period ending at the Effective Time, (E) the charges,
accruals and reserves for taxes reflected on the books of the Company and its
subsidiaries are adequate to cover the tax liabilities accruing or payable by
the Company and its subsidiaries in respect of periods prior to the date
hereof, (F) neither the Company nor any subsidiary is delinquent in the payment
of any taxes or has requested any extension of time within which to file or
send any Company Return, which Company Return has not since been filed or sent,
(G) no deficiency for any taxes has been proposed, asserted or assessed in
writing against the Company or any of its subsidiaries other than those taxes
being contested in good faith, (H) the Federal income tax returns of the
Company or any consolidated group to which it belongs have been examined by and
settled with the United States Internal Revenue Service (the "IRS") for all
years through December 31,1991, (I) neither the Company nor any subsidiary has
granted any extension of the limitation period applicable to any tax claims
(which period has not since lapsed), other than those taxes being contested in
good faith, and (J) neither the Company nor any subsidiary has any contractual
obligations under any tax sharing agreement with any corporation which, as of
the Effective Time, is not a member of a consolidated group of which all of and
only the Company and its subsidiaries are members.
(ii) The disallowance of a deduction under Section 162(m)
of the Code for employee remuneration will not apply to any amount paid or
payable by the Company or any subsidiary of the Company under any contract,
plan, program, arrangement or understanding.
(iii) For the purpose of this Agreement, the term "tax"
(including, with correlative meaning, the terms "taxes" and "taxable") shall
include, except where the context otherwise requires, all Federal, state, local
and foreign income, profits, franchise, gross receipts, payroll, sales,
employment, use, property, withholding, excise, occupancy and other taxes,
duties or assessments of any nature whatsoever (including the Michigan single
business tax), together with all interest, penalties and additions imposed with
respect to such amounts.
(i) Certain Agreements. (i) Except as disclosed in the Company
Filed SEC Documents, as of the date of this Agreement, neither the Company nor
any of its subsidiaries is a party or subject to, or has amended or waived any
rights under, any of the following (whether written or oral, express or
implied):
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(A) any agreement, arrangement or commitment not
made in the ordinary course of business that is material to the
Company or such subsidiary, or any contract, agreement or
understanding relating to the sale or disposition by the Company or
any of its subsidiaries of any significant assets or businesses of the
Company or any of its subsidiaries; or
(B) any other contract or agreement that would be
required to be disclosed as an exhibit to the Company's annual report
on Form 10-K and which has not been so disclosed.
(ii) Neither the Company nor any of its subsidiaries is in
default under any material agreement, commitment, arrangement, lease, contract
with any insurance carrier or insurance agency, insurance policy or other
instrument, whether entered into in the ordinary course of business or
otherwise and whether written or oral, and there has not occurred any event
that, with the giving of notice or the lapse of time or both, would constitute
such a default, except in all cases where such default would not, individually
or in the aggregate, have a Material Adverse Effect on the Company or such
subsidiary.
(j) Absence of Changes in Benefit Plans. Except as disclosed in
the Company Filed SEC Documents, since the date of the most recent audited
financial statements included in the Company Filed SEC Documents, there has not
been any adoption or amendment in any material respect by the Company or any of
its subsidiaries of any bonus, pension, profit sharing, deferred compensation,
incentive compensation, stock ownership, stock purchase, stock option, phantom
stock, retirement, vacation, severance, disability, death benefit,
hospitalization, medical or other plan, arrangement or understanding (whether
or not legally binding) providing benefits to any current or former employee,
officer or director of the Company or any of its subsidiaries. Except as
disclosed in the Company Filed SEC Documents, there exist no employment,
consulting, severance, termination or indemnification agreements, arrangements
or understandings between the Company or any of its subsidiaries and any
current or former employee, officer or director of the Company or any of its
subsidiaries.
(k) ERISA Compliance. (i) The Company Disclosure Schedule
contains a list of each "employee pension benefit plan" (as defined in Section
3(2) of the Employee Retirement Income Security Act of 1974, as amended
('ERISA')), each "employee welfare benefit plan" (as defined in Section 3(1) of
ERISA) and each stock option, stock purchase, deferred compensation plan or
arrangement and each other employee fringe benefit plan or arrangement
maintained, contributed to or required to be maintained or contributed to by
the Company, any of its subsidiaries or any other person or entity that,
together with the Company, is treated as a single employer under Section
414(b), (c), (m) or (o) of the Internal Revenue Code of 1986, as amended (the
"Code"), for the benefit of any current or former employees, officers, agents,
directors or independent contractors of the Company or any of its subsidiaries
(collectively, "Company Benefit Plans").
(ii) Each Company Benefit Plan has been administered in
all material respects in accordance with its terms. The Company, its
subsidiaries and all the Company Benefit Plans are all in compliance in all
material respects with the applicable provisions of ERISA and the Code. To the
best knowledge of the Company, there are no investigations, proceedings or
other claims by the IRS, the Department of Labor, or any other Governmental
Entity involving any Company Benefit Plan that could give rise to any material
liability.
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(iii) No employee of the Company or any subsidiary of the
Company will be entitled to any additional benefits or any acceleration of the
time of payment or vesting of any benefits under any Company Benefit Plan as a
result of the transactions contemplated by this Agreement.
(l) Subsidiaries. The Company Disclosure Schedule sets forth all
of the subsidiaries of the Company as of the date of this Agreement and
indicates for each such subsidiary as of such date the jurisdiction of
incorporation. All the shares of capital stock of each of the subsidiaries of
the Company are fully paid and nonassessable and (except for directors'
qualifying shares, if any) are owned by the Company or another subsidiary of
the Company free and clear of all Liens. Except for the capital stock of its
subsidiaries, the Company does not own, directly or indirectly, any capital
stock or other ownership interest in any corporation, partnership, joint
venture or other entity except for its investment of cash reserves made in the
ordinary course of business.
(m) Absence of Certain Changes or Events. Except as disclosed in
the Company Filed SEC Documents, since December 31, 1993, the Company and its
subsidiaries have conducted their businesses only in the ordinary course of
business consistent with past practice and have not incurred any material
liability, except in the ordinary course of their business consistent with
their past practices, nor has there been any change, or any event involving a
prospective change, in the business, assets, financial condition or results of
operations of the Company or any of its subsidiaries, which in any such case
has had, or is reasonably likely to have, a Material Adverse Effect on the
Company or such subsidiary.
(n) State Takeover Statutes. The Board of Directors of the
Company has approved the Merger and this Agreement and/or has taken such other
action, and such approval and/or actions sufficient, to render inapplicable to
the Merger, this Agreement, and the transactions contemplated by this Agreement
the provisions of Chapters 7A and 7B of the MBCA. To the best of the Company's
knowledge, no other state takeover statute or similar statute or regulation
applies or purports to apply to the Merger, this Agreement, and the
transactions contemplated by this Agreement.
(o) Vote Required. The Company Shareholder Approval is the only
vote of the holders of any class or series of the Company capital stock
necessary to approve this Agreement and the transactions contemplated hereby.
(p) Material Interests of Certain Persons. Except as disclosed in
the Company Filed SEC Documents, no officer or director of the Company or any
"associate" (as such term is defined in Rule 14a-1 under the Exchange Act) of
any such officer or director has any material interest in any material contract
or property, real or personal, tangible or intangible, that is used in or
pertains to the business of the Company or any of its subsidiaries.
(q) Brokers and Finders; Schedule of Fees and Expenses. No
broker, investment banker, financial advisor or other person is entitled to any
broker's, finder's, financial advisor's or other similar fee or commission in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of the Company other than Roney & Company.
The estimated fees and expenses incurred and to be incurred by the Company in
connection with this Agreement and the transactions contemplated by this
Agreement (including
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the fees of the Company's advisors and legal counsel) are set forth in the
Company Disclosure Schedule.
(r) Opinion of Financial Advisor. The Company has received the
opinion of Roney & Company dated the date of this Agreement to the effect that,
as of such date, the Merger Consideration to be received by the Company's
shareholders is fair to the Company's shareholders from a financial point of
view, and a signed copy of such opinion has been delivered to Parent.
SECTION 3.02. Representations and Warranties of Parent and Sub.
Parent and Sub represent and warrant to the Company as follows:
(a) Organization and Authority. Each of Parent and Sub is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Michigan and has the requisite power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted. Sub is a wholly owned subsidiary of Parent.
(b) Authorization. (i) Parent and Sub have all requisite
corporate power and authority to enter into this Agreement and to consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of Parent
and Sub. This Agreement has been duly executed and delivered by Parent and Sub
and constitutes a valid and binding obligation of Parent and Sub, enforceable
against Parent and Sub in accordance with its terms.
(ii) The execution and delivery of this Agreement does
not, and the consummation of the transactions contemplated hereby will not, and
compliance by Parent and Sub with any of the provisions hereof will not, (A)
result in any Violation pursuant to any provision of the articles of
incorporation or by-laws of Parent or Sub, (B) result in any Violation of any
loan or credit agreement, note, mortgage, indenture, lease, benefit plan or
other agreement, obligation, instrument, permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to Parent or Sub or any other subsidiary of Parent or their
respective properties or assets, which Violation under this clause (B) could
reasonably be expected to have, individually or in the aggregate with other
such Violations, a Material Adverse Effect on Parent or Sub.
(c) Information Supplied. None of the information supplied or to
be supplied by Parent or Sub for inclusion or incorporation by reference in the
Proxy Statement will, at the date of mailing to shareholders and at the time of
the Company Shareholders Meeting, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, no misleading. The Proxy Statement
will comply as to form in all material respects with the provisions of the
Exchange Act and the rules and regulations thereunder, except that no
representation or warranty is made by Parent or Sub with respect to statements
made or incorporated by reference therein based on information supplied by the
Company specifically for inclusion or incorporation by reference therein.
(d) Brokers and Finders. No broker, investment banker, financial
advisor or other person, other than Coopers & Lybrand, L.L.P., the fees and
expenses of which will be paid by
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Parent, is entitled to any broker's, finder's, financial advisor's or other
similar fee or commission in connection with the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of Parent and Sub.
(e) Financing. Parent has received assurances from unaffiliated
lending institutions that Parent will have sufficient funds to consummate the
Merger on the terms contemplated by this Agreement at the Effective Time.
ARTICLE IV
Covenants Relating to Conduct of the Company's Business
SECTION 4.01. Covenants of the Company. During the period from the
date of this Agreement until the Effective Time, the Company agrees as to
itself and its subsidiaries that (except as expressly contemplated or permitted
by this Agreement or as set forth in the Company Disclosure Schedule or except
as approved in writing by Parent):
(a) Ordinary Course. The Company and its subsidiaries
shall carry on their respective businesses in the usual, regular and
ordinary course and use their best efforts to preserve intact their
present business organizations, maintain their rights and franchises,
keep available the services of their current officers and employees
and preserve their relationships with insurance agents, insurance
carriers, customers, suppliers and others having business dealings
with them to the end that their goodwill and ongoing businesses shall
not be impaired in any material respect at the Effective Time. The
Company shall not, nor shall it permit any of its subsidiaries to, (i)
enter into any new material line of business; (ii) except as required
by law, regulation, GAAP or regulatory policies or guidelines, change
its or its subsidiaries' accounting practices or policies, liability
management and insurance practices in any respect which is material to
the Company or such subsidiary; or (iii) incur or commit to any
capital expenditures, or any obligations or liabilities in connection
therewith, other than capital expenditures and obligations or
liabilities incurred or committed to that are approved in accordance
with the Company capital expenditure approval policies as adopted by
the Company's board of directors, and that are not (A) individually in
excess of $1,000,000 and (B) in the aggregate in excess of the amount
identified as capital expenditures in the Company's 1995 operating
budget as in effect on the date hereof, which budget shall not be
amended without the prior written consent of Parent and which amount
shall in no event exceed $2,000,000.
(b) Dividends; Changes in Stock. The Company shall not,
nor shall it permit any of its subsidiaries to, nor shall it propose
to, (i) declare, set aside or pay any dividends (whether in cash,
shares of stock or otherwise) on or make other distributions in
respect of, directly or indirectly, any of its capital stock other
than the annual cash dividend declared in the first fiscal quarter of
each year, (ii) adjust, split, combine or reclassify any of its
capital stock or issue or authorize or propose the issuance of any
other securities in respect of, in lieu of or in substitution for
shares of its capital stock or (iii) repurchase, redeem or otherwise
acquire, or permit any subsidiary to purchase or otherwise acquire,
any shares of its capital stock.
(c) Issuance of Securities. The Company shall not, nor
shall it permit any of its subsidiaries to, issue, deliver or sell, or
authorize or propose the issuance, delivery or
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sale of, any shares of its or any of its subsidiaries' capital stock
of any class, or any rights, warrants or options to acquire, any such
shares, or enter into any agreement with respect to any of the
foregoing other than pursuant to the existing stock options under the
1989 Stock Option Plan and shares to be issued on June 30, 1995
pursuant to the Employee Stock Purchase Plan.
(d) Governing Documents. The Company shall not amend or
propose to amend, nor shall it permit any of its subsidiaries to
amend, the articles of incorporation (or similar constitutive
documents) or by-laws of the Company or any of its subsidiaries,
except as required by Section 3.01(n).
(e) No Acquisitions. The Company shall not, nor shall it
permit any of its subsidiaries to, acquire or agree to acquire by
merging or consolidating with, or by purchasing a substantial equity
interest in or a substantial portion of the assets of, or by any other
manner, any business or any corporation, partnership, association or
other business organization or division thereof or otherwise acquire
or agree to acquire any assets, in each case which exceed $1,000,000
individually or $2,000,000 in the aggregate. Without limiting the
generality of the foregoing, the Company shall not, nor shall it
permit any of its subsidiaries to, make any investment either by
purchase or stock or securities, contributions to capital, property
transfers or purchase, of any property or assets of any other
individual, corporation or other entity, except for transactions in
the ordinary course of business consistent with Company's practice of
investing excess cash in marketable equity securities and debt
securities.
(f) No Dispositions. The Company shall not, nor shall it
permit any of its subsidiaries to, sell, lease, mortgage, encumber or
otherwise dispose of, any of its assets (including capital stock of
subsidiaries), which are material, individually or in the aggregate,
to the Company or such subsidiary.
(g) Indebtedness. The Company shall not, nor shall it
permit any of its subsidiaries to, incur any indebtedness for borrowed
money or guarantee any such indebtedness or issue or sell any debt
securities or warrants or rights to acquire any debt securities of the
Company or any of its subsidiaries or guarantee any debt securities of
others, other than short-term indebtedness incurred to refinance
existing short-term indebtedness and other than indebtedness in
connection with an acquisition permitted under Section 4.01(e).
(h) Other Actions. The Company shall not, nor shall it
permit any of its subsidiaries to, take any action that would, or
reasonably could be expected to, result in any of its representations
and warranties set forth in this Agreement that are qualified as to
materiality, being or becoming untrue.
(i) Advice of Changes; Filings. The Company shall confer
on a regular and frequent basis with Parent, report on operational
matters and promptly advise Parent orally and in writing of any change
or event having, or which, insofar as can reasonably be foreseen,
could have, individually or in the aggregate a Material Adverse Effect
on the Company or any subsidiary, or which would cause or constitute a
material breach of any of the representations, warranties or covenants
of the Company contained herein. The Company shall file all reports
required to be filed by it with the SEC or American Stock
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Exchange between the date of this Agreement and the Effective Time and
shall deliver to Parent copies of all such reports promptly after the
same are filed.
(j) Compensation; Benefit Plans. Neither the Company nor
any of its subsidiaries shall (i) enter into, adopt, amend or
terminate any Company Benefit Plan or any other employee benefit plan
or any agreement, arrangement, plan or policy between such party and
one or more of its directors or officers, in each case so as to
increase benefits thereunder, or (ii) increase in any manner the
compensation or fringe benefits of any of its directors, officers or
employees or provide any other benefit not required by any plan and
arrangement as in effect as of the date hereof (including the granting
of stock options, stock appreciation rights, restricted stock,
restricted stock units or performance units or shares), except for
normal salary compensation increases, benefit changes or cash bonus
payments in the ordinary course of business consistent with past
practice and except as provided in Section 6.03(c). Notwithstanding
the foregoing, the Company's Board of Directors shall terminate the
Employee Stock Purchase Plan, effective at the close of business on
June 30, 1995.
(k) Tax Matters. From the date hereof until the
Effective Time, (i) the Company and its subsidiaries shall file all
Company Returns required to be filed with any taxing authority in
accordance with all applicable laws, and (ii) the Company and its
subsidiaries shall timely pay all taxes shown as due and payable on
the respective Company Returns that are so filed and as of the time of
filing, the Company Returns shall correctly reflect the facts
regarding the income, business, assets, operations, activities and the
status of the Company and its subsidiaries in all material respects.
(l) Settlements, etc. The Company shall not, nor shall
it permit any of its subsidiaries to, pay, discharge, settle or
satisfy any claims, liabilities or obligations (absolute, accrued,
asserted or unasserted, contingent or otherwise), other than the
payment, discharge, settlement or satisfaction, in the ordinary course
of business consistent or in accordance with their terms, of
liabilities reflected or reserved against in, or contemplated by, the
most recent consolidated financial statements (or the notes thereto)
of the Company included in the Company Filed SEC Documents or incurred
since the date of such financial statements in the ordinary course of
business.
(m) Material Contracts. Except in the ordinary course of
business, the Company shall not, nor shall it permit any of its
subsidiaries to, modify, amend or terminate any material contract,
lease or agreement to which the Company or any subsidiary is a party
or waive, release or assign any materials rights or claims thereunder.
SECTION 4.02. No Solicitation. (a) The Company shall not, nor shall
it permit any of its subsidiaries to, nor shall it authorize or permit any
officer, director or employee of, or any investment banker, attorney or other
advisor or representative of, the Company or any of its subsidiaries to, (i)
solicit or initiate the submission of any takeover proposal or (ii) participate
in any discussions or negotiations regarding, or furnish to any person any
non-public information with respect to, or take any other action to facilitate
any inquiries or the making of any proposal that constitutes, or may reasonably
be expected to lead to, any takeover proposal; provided, however, that prior to
receipt of the Company Shareholder Approval, to the extent required by the
fiduciary obligations of the Board of Directors of the Company, as determined
in good faith by the Board of Directors based on the advice of independent
counsel, the Company may, (A)
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in response to an unsolicited takeover proposal and subject to compliance with
Section 4.02(c), furnish information with respect to the Company and its
subsidiaries to any person pursuant to a customary confidentiality agreement
(as determined by the Company's independent counsel) and discuss such
information with such person and (B) upon receipt by the Company of an
unsolicited takeover proposal and subject to compliance with Section 4.02(c),
participate in negotiations regarding such takeover proposal. For purposes of
this Section 4.02, an unsolicited takeover proposal shall mean a proposal not
solicited or initiated after the date of this Agreement by the Company or any
subsidiary or any officer, director or employee of, or any investment banker,
attorney or other advisor or representative of, the Company or any of its
subsidiaries. Without limiting the foregoing, it is understood that any
violation of the restrictions set forth in the preceding sentence by any
director, executive officer or employee of the Company or any of its
subsidiaries or any investment banker, attorney or other advisor or
representative of the Company or any of its subsidiaries, whether or not such
person is purporting to act on behalf of the Company or any of its subsidiaries
or otherwise, shall be deemed to be a breach of this Section 4.02(a) by the
Company. For purposes of this Agreement, "takeover proposal" means any
inquiry, proposal or offer from any person relating to any direct or indirect
acquisition or purchase of a substantial amount of the assets of the Company or
any of its subsidiaries, other than the transactions contemplated by this
Agreement, or of 20% or more of the equity securities of the Company or any of
its subsidiaries or any tender offer or exchange offer that if consummated
would result in any person beneficially owning 20% or more of any class of
equity securities of the Company or any of its subsidiaries, or any merger,
consolidation, business combination, sale of substantially all assets,
recapitalization, liquidation, dissolution or similar transaction involving the
Company or any of its subsidiaries other than the transactions contemplated by
this Agreement.
(b) Except as set forth herein, neither the Board of Directors of
the Company nor any committee thereof shall (i) withdraw or modify, or propose
to withdraw or modify, in a manner adverse to Parent or Sub, the approval or
recommendation by such Board of Directors or any such committee of this
Agreement or the Merger, (ii) approve or recommend, or propose to approve or
recommend, any takeover proposal or (iii) enter into any agreement with respect
to any takeover proposal. Notwithstanding the foregoing, prior to the receipt
of the Company Shareholder Approval, the Board of Directors of the Company, to
the extent required by its fiduciary obligations, as determined in good faith
by the Board of Directors based on the advice of independent counsel, may
(subject to the following sentences) withdraw or modify its approval or
recommendation of this Agreement or the Merger, approve or recommend any
superior proposal (as defined below), enter into an agreement with respect to
such superior proposal or terminate this Agreement, in each case at any time
after the second business day following Parent's receipt of written notice
advising Parent that the Board of Directors has received a superior proposal,
specifying the material terms and conditions of such superior proposal and
identifying the person making such superior proposal (it being understood that
any amendment to a superior proposal shall necessitate an additional two
business day period). In addition, if the Company proposes to enter into an
agreement with respect to any takeover proposal, it shall concurrently with
entering into such agreement pay, or cause to be paid, to Parent the Expenses
(as defined in Section 5.05(b)). For purposes of this Agreement, "superior
proposal" means any bona fide takeover proposal made by a third party on terms
which the Board of Directors of the Company determines in its good faith
judgment (based on the advice of a financial advisor of recognized reputation)
to be more favorable to the Company's shareholders than the Merger and for
which financing, to the extent required, is then committed or which, in the
good faith judgment of such Board of Directors, is reasonably capable of being
financed by such third party.
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(c) In addition to the obligations of the Company set forth in
paragraph (b) above, the Company promptly shall advise Parent orally and in
writing of any request for information or of any takeover proposal, or any
inquiry with respect to or which could lead to any takeover proposal, the
material terms and conditions of such request, takeover proposal or inquiry and
the identity of the person making any such request, takeover proposal or
inquiry. The Company will keep Parent fully informed of the status and details
(including amendments or proposed amendments) of any such request, takeover
proposal or inquiry.
(d) Nothing contained in this Section 4.02 shall prohibit the
Company from taking and disclosing to its shareholders a position contemplated
by Rule 14e-2(a) promulgated under the Exchange Act or from making any
disclosure to the Company's shareholders if, in the good faith judgment of the
Board of Directors of the Company based on the recommendation of independent
counsel, failure to do so would be inconsistent with applicable laws; provided
that the Company does not, except as permitted by Section 4.02(b), withdraw or
modify, or propose to withdraw or modify, its position with respect to the
Merger or approve or recommend, or propose to approve or recommend, a takeover
proposal.
ARTICLE V
Additional Agreements
SECTION 5.01. Preparation of the Proxy Statement. The Company
shall, as soon as practicable following the date of this Agreement, prepare and
file a preliminary Proxy Statement with the SEC and shall use all reasonable
efforts to respond to any comments of the SEC or its staff and to cause the
Proxy Statement to be mailed to the Company shareholders as promptly as
practicable after responding to all such comments to the satisfaction of the
SEC or its staff. The Company shall notify Parent promptly of the receipt of
any comments from the SEC or its staff and of any request by the SEC or its
staff for amendments or supplements to the Proxy Statement or for additional
information and shall supply Parent with copies of all correspondence between
the Company or any of its representatives, on the one hand, and the SEC or its
staff, on the other hand, with respect to the Proxy Statement or the Merger.
If at any time prior to the Company Shareholders Meeting there shall occur any
event that should be set forth in an amendment or supplement to the Proxy
Statement, the Company shall promptly prepare and mail to its shareholders such
an amendment or supplement. The Company shall not mail any Proxy Statement, or
any amendment or supplement thereto, to which Parent reasonably objects.
SECTION 5.02. Access to Information. The Company shall, and shall
cause each of its subsidiaries to, afford to Parent and to the officers,
employees, accountants, lenders counsel and other representatives of Parent,
reasonable access, during normal business hours during the period prior to the
Effective Time, to all their respective properties, books, contracts,
commitments, personnel and records. Parent shall, and shall cause its advisors
and representatives to, hold any such information which is nonpublic in
confidence to the extent required by, and in accordance with, the terms of the
existing Confidentiality Agreement between the Company and Parent (the
"Confidentiality Agreement"). No investigation by either Parent or Sub shall
affect the representations and warranties of the Company, and each such
representation and warranty shall survive such investigation. Parent shall
promptly advise Company upon learning of any representations, warranties or
covenants of Company hereunder that could be deemed to be materially incorrect.
During the period from the date of this Agreement to the Effective Time, the
Company shall promptly furnish to Parent copies of all monthly and quarterly
interim
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financial statements (including any budgets and variances from budgets) as the
same become available.
SECTION 5.03. Company Shareholders Meeting. The Company shall duly
call, give notice of, convene and hold the Company Shareholders Meeting for the
purpose of obtaining the Company Shareholder Approval as soon as practicable
after the date on which the definitive Proxy Statement has been mailed to the
Company's shareholders. Subject to Section 4.02, the Company shall, through
its Board of Directors, recommend to its shareholders that they grant the
Company Shareholder Approval.
SECTION 5.04. Stock Options. (a) As soon as practicable following
the date of this Agreement the Board of Directors of the Company (or, if
appropriate, any committee administering the 1989 Stock Option Plan) shall
adopt such resolutions or take such other actions as are required to provide
for the cancellation of all outstanding employee stock options to purchase
shares of Company Common Stock ("Company Stock Options") heretofore granted
under the 1989 Stock Option Plan to provide that each Company Stock Option,
whether vested or not, outstanding immediately prior to the Effective Time,
shall be exchanged for a cash payment by the Company of an amount equal to (i)
the excess, if any of (x) the Merger Consideration per share over (y) the
exercise price per share of Company Common Stock subject to such Company Stock
Option, multiplied by (ii) the number of shares of Company Common Stock subject
to such Company Stock Options for which such Company Stock Option shall not
theretofore have been exercised. The Company shall use its best efforts to
obtain all consents of the holders of the Company Stock Options as shall be
necessary to effectuate the foregoing. Notwithstanding anything to the contrary
contained in this Agreement, payment shall, at Parent's request, be withheld in
respect of any Company Stock Option until all necessary consents with respect
to such Company Stock Options are obtained.
(b) All amounts payable pursuant to this Section 5.04 shall be
subject to any required withholding of taxes and shall be paid without
interest.
SECTION 5.05 Fees and Expenses. (a) Whether or not the Merger is
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party incurring
such expense, except (i) as otherwise provided below in this Section 5.05 and
(ii) that filing fees and legal and all other expenses incurred in connection
with the filing, printing and mailing of the Proxy Statement shall be borne by
the Company.
(b) If this Agreement is terminated pursuant to its terms, other
than by Parent or the Company pursuant to Section 7.01(b)(i) or (ii) or by the
Company pursuant to Section 7.01(b)(iv), and an Acquisition Event shall occur
after the date hereof and prior to the date that is 12 months after the date of
such termination of the Agreement, the Company shall upon demand by Parent,
promptly pay or cause to be paid, in same day funds to Parent all of Parent's
Expenses (as defined below). "Acquisition Event" shall mean any of the
following: (x) any person or group (as defined in Section 13(d)(3) of the
Exchange Act), other than Parent or any of its subsidiaries, shall have
consummated or completed a takeover proposal, or (y) the Company shall have
authorized, recommended, proposed or publicly announced an intention to
authorize, recommend or propose, or shall have entered into, an agreement with
any person (other than Parent or a subsidiary thereof) to effect a takeover
proposal. "Expenses" shall mean all reasonable out-of-pocket fees and expenses
incurred or paid by or on behalf of Parent or any of
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its affiliates in connection with the Merger or the consummation of the
transactions contemplated by this Agreement, including all fees and expenses
(including commitment, standby and related fees) of counsel, commercial banks,
other lenders, investment banking firms, accountants, experts and consultants
to Parent or any of its affiliates. The amount of Expenses so payable shall be
the amount set forth in an estimate delivered by Parent, subject to upward or
downward adjustment upon delivery of reasonable documentation therefor.
ARTICLE VI
Conditions Precedent
SECTION 6.01. Conditions to Each Party's Obligation To Effect the
Merger. The respective obligations of each party to effect the Merger and the
other transactions contemplated hereby shall be subject to the satisfaction or
waiver at or prior to the Effective Time of the following conditions:
(a) Company Stockholder Approval. The Company
Shareholder Approval shall have been obtained.
(b) Other Approvals. Other than the filing provided for
by Section 1.03, all authorizations, consents, orders or approvals of,
or declarations or filings with, and all expirations of waiting
periods imposed by, any Governmental Entity (all the foregoing,
"Consents") which are necessary for the consummation of the Merger
(including any notices under the HSR Act), other than Consents the
failure to obtain which would not, individually or in the aggregate,
have a Material Adverse Effect on the Surviving Corporation or which
would not, individually or in the aggregate, materially adversely
affect the consummation of the transactions contemplated hereby, shall
have been filed, occurred or been obtained (all such Consents and the
lapse of all such waiting periods being referred to as the "Requisite
Regulatory Approvals"), and all such Requisite Regulatory Approvals
shall be in full force and effect.
(c) No Injunctions or Restraints; Illegality. No
temporary restraining order, preliminary or permanent injunction or
other order or decree issued by any court of competent jurisdiction or
other legal restraint or prohibition preventing the consummation of
the Merger shall be in effect; provided, however, that each of the
parties shall have used reasonable efforts to prevent the entry of any
such injunction or other order or restraint and to appeal as promptly
as possible any injunction or other order or restraint that may be
entered. There shall not be any action taken, or any statute, rule,
regulation or order enacted, entered, enforced or deemed applicable to
the Merger, which makes the consummation of the Merger illegal.
SECTION 6.02. Conditions to Obligations of Parent and Sub. The
obligations of Parent and Sub to effect the Merger are subject to the
satisfaction of the following conditions unless waived by Parent and Sub:
(a) Representations and Warranties. The representations
and warranties of the Company set forth in this Agreement shall be
true and correct in all material respects as of the Closing Date, as
though made on and as of the Closing Date, except as otherwise
contemplated by this Agreement, and Parent shall have received a
certificate signed on
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behalf of the Company by its President or Senior Vice President and
its Chief Financial Officer or other executive performing duties
equivalent to those of a "chief financial officer" to such effect.
(b) Performance of Obligations of the Company. The
Company shall have performed in all material respects all obligations
required to be performed by it under this Agreement at or prior to the
Closing Date, and Parent shall have received a certificate signed on
behalf of the Company by its President or Senior Vice President and
its Chief Financial Officer or other executive officer performing
duties equivalent to those of a "chief financial officer" to such
effect.
(c) Financing. Parent shall have available all the funds
necessary to perform its obligations under this Agreement, including
consummating the Merger on the terms contemplated hereby.
(d) Company Stock Options and Employee Stock Purchase
Plan. The Company shall have duly effected, as of the Effective
Time, the cancellation of all outstanding Company Stock Options,
whether vested or not (the holders of which shall then be entitled to
receive from Parent the amounts determined in accordance with Section
5.04(a)), and the deletion of any provision in any other Company
Benefit Plan providing for the issuance, transfer or grant of any
capital stock of the Company or any subsidiary of the Company or any
interest in respect of any capital stock of the Company or any
subsidiary of the Company and the Company shall have terminated the
Employee Stock Purchase Plan so that no employee shall have any right
to purchase any shares of Company Common Stock thereunder.
SECTION 6.03. Conditions to Obligations of the Company. The
obligations of the Company to effect the Merger are subject to the satisfaction
of the following conditions unless waived by the Company:
(a) Representations and Warranties. The representations
and warranties of Parent and Sub set forth in this Agreement shall be
true and correct in all material respects as of the Closing Date as
though made on and as of the Closing Date, except as otherwise
contemplated by this Agreement, and the Company shall have received a
certificate signed on behalf of Parent and Sub by their respective
Presidents and their respective Chief Financial Officers or other
executive officers performing duties equivalent to those of a "chief
financial officer" to such effect.
(b) Performance of Obligations of Parent and Sub.
Parent and Sub shall have performed in all material respects all
obligations required to be performed by them under this Agreement at
or prior to the Closing Date, and the Company shall have received a
certificate signed on behalf of Parent and Sub by their respective
Presidents and their respective Chief Financial Officers or other
executive officers performing duties equivalent to those of a "chief
financial officer" to such effect.
(c) Employment Agreements. The Company and its
subsidiary, Burns & Wilcox, Ltd., shall have executed an amendment to
existing employment agreements with executives of the Company and such
subsidiary, which shall provide that the computation of any bonus or
profit sharing payment for such executives shall be determined
exclusive
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of amounts paid for debt service on any indebtedness incurred by
Parent or Company in connection with the Merger or the transactions
contemplated hereunder, and Parent and Sub shall have agreed to each
such amendment.
ARTICLE VII
Termination and Amendment
SECTION 7.01. Termination. This Agreement may be terminated at any
time prior to the Effective Time, whether before or after the Company
Shareholder Approval is received:
(a) by mutual written consent of Parent and the Company;
(b) by either Parent or the Company upon written notice to
the other party:
(i) if any Governmental Entity of competent
jurisdiction shall have issued a final permanent order
enjoining or otherwise prohibiting the consummation of the
Merger and the time for appeal or petition for reconsideration
of such order shall have expired without such appeal or
petition being granted;
(ii) if the Company, on the one hand, or Parent or
Sub, on the other hand, materially breaches any of its
representations, warranties, covenants or obligations
hereunder and such breach is not cured after 30 days' written
notice thereof is given to the party committing such breach by
the other party;
(iii) if, upon a vote at a duly held Company
Shareholders Meeting, the Company Shareholder Approval shall
not have been obtained; or
(iv) if the closing shall not have occurred within
30 days after Company Shareholder Approval.
(c) by either Parent or Sub upon written notice to the
Company:
(i) if, prior to the Company Shareholders Meeting, a
takeover proposal is commenced, publicly proposed, publicly
disclosed or communicated to the Company (or the willingness
of any person to make a takeover proposal is publicly
disclosed or communicated to the Company) and (A) the Company
Shareholder Approval is not obtained at the Company
Shareholders Meeting, (B) the Company Shareholders Meeting
does not occur prior to 150 days after the date of this
Agreement or (C) the Board of Directors of the Company or any
committee thereof shall have withdrawn or modified its
approval or recommendation of the Merger or this Agreement, or
approved or recommended any takeover proposal;
(ii) if the Company shall have entered into any
agreement with respect to any superior proposal in accordance
with Section 4.02(b); or
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<PAGE> 114
(iii) if Parent shall not have available all the
funds necessary to perform its obligations under this
Agreement, including consummating the Merger on the terms
contemplated hereby.
(d) by the Company in connection with entering into a
definitive agreement in accordance with Section 4.02(b), provided it
has complied with all provisions thereof, including the notice
provisions therein, and that it makes simultaneous payment of the
Expenses in accordance with Section. 5.05(b).
SECTION 7.02. Effect of Termination. In the event of termination
of this Agreement by either the Company or Parent as provided in Section 7.01,
this Agreement shall forthwith become void and have no effect, and there shall
be no liability or obligation on the part of Parent, Sub, the Company or
their respective officers or directors, except (a) with respect to Section
3.01(q), Section 3.02(d), the second sentence of Section 5.02, Section 5.05,
this Section 7.02 and Article VIII, and (b) to the extent that such termination
results from the material breach by the other party of any of its
representations, warranties, covenants or obligations set forth in this
Agreement.
SECTION 7.03. Amendment. This Agreement may be amended by the
parties hereto at any time before or after the Company Shareholder Approval is
received, but, after receipt of the Company Shareholder Approval, no amendment
shall be made which by law requires further approval by such shareholders
without such further approval. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto; provided,
however, that, notwithstanding anything to the contrary contained in this
Section 7.03, Parent may from time to time without the consent of the Company
increase the amount (but not change the nature) of the Merger Consideration,
and any provisions inconsistent with such right herein or in any agreement
referred to herein are hereby deemed superseded to the extent of such
inconsistency.
SECTION 7.04. Extension; Waiver. At any time prior to the Effective
Time, the parties hereto may, to the extent legally allowed, (a) extend the
time for the performance of any of the obligations or other acts of the other
parties hereto, (b) waive any inaccuracies in the representations and
warranties contained herein or in any document delivered pursuant hereto and
(c) subject to the proviso of Section 7.03, waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a
party hereto to any such extension or waiver shall be valid only if set forth
in a written instrument signed on behalf of such party. The failure of any
party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of those rights.
SECTION 7.05. Procedure for Termination, Amendment, Extension or
Waiver. A termination of this Agreement pursuant to Section 7.01, an amendment
of this Agreement pursuant to Section 7.03 or an extension or waiver pursuant
to Section 7.04 shall, in order to be effective, require, in the case of
Parent, Sub or the Company, action by its Board of Directors or the duly
authorized designee of its Board of Directors.
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<PAGE> 115
ARTICLE VIII
General Provisions
SECTION 8.01. Nonsurvival of Representations and Warranties. None
of the representations and warranties in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Effective Time. This
Section 8.01 shall not limit any covenant or agreement of the parties which by
its terms contemplates performance after the Effective Time.
SECTION 8.02. Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given if delivered
personally, telecopied (with confirmation) or mailed by registered or certified
mail (return receipt requested) to the parties at the following addresses (or
at such other address for a party as shall be specified by like notice):
(a) if to Parent or Sub, to: AJK Enterprises, Inc.
c/o Alan J. Kaufman, Esq.
Kaufman & Payton, P.C.
30833 Northwestern Highway
Farmington Hills, MI 48334-2551
with copies to: Mark Shaevsky, Esq.
Honigman Miller Schwartz
and Cohn
2290 First National Building
Detroit, MI 48226-3583
(b) if to the Company, to: H. W. Kaufman Financial Group,
Inc.
30833 Northwestern Highway
Farmington Hills, MI 48334-2551
Attn: Herbert W. Kaufman,
President and Chief
Executive Officer
with a copy to: Stuart Sinai, Esq.
Kemp Klein Umphrey &
Endelman, P.C.
201 W. Big Beaver Road,
Suite 600
P. O. Box 4300
Troy, MI 48084-4300
SECTION 8.03. Definitions; Interpretation. (a) As used in this
Agreement, (i) any reference to any event, change or effect being "material"
with respect to any entity means an event, change or effect which is material
in relation to the businesses, assets, properties, liabilities, results of
operations, financial condition or prospects of such entity, (ii) the term
"Material Adverse Effect" means, with respect to the Company, Parent or Sub, a
material adverse effect on the business, assets, properties, liabilities,
results of operations, financial condition or prospects of such party or on the
ability of such party to perform its obligations hereunder and (iii) the term
"person" means an individual, corporation, partnership, joint venture,
association, trust, unincorporated organization or other entity.
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<PAGE> 116
(b) When a reference is made in this Agreement to Articles,
Sections, Exhibits or Schedules, such reference shall be to an Article, Section
of or Exhibit or Schedule to this Agreement unless otherwise indicated. The
headings contained in this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement.
Whenever the words "include", "includes" or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation". The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement. All terms defined in this
Agreement shall have the defined meanings when used in any certificate or other
document made or delivered pursuant hereto unless otherwise defined herein.
The definitions contained in this Agreement are applicable to the singular as
well as the plural forms of such terms and to the masculine as well as to the
feminine and neuter genders of such term. Any agreement, instrument or statute
defined or referred to herein or in any agreement or instrument that is
referred to herein means such agreement, instrument or statute as from time to
time amended, modified or supplemented, including (in the case of agreements or
instruments) by waiver or consent and (in the case of statutes) by succession
of comparable successor statutes and references to all attachments thereto and
instruments incorporated therein. References to a person are also to its
permitted successors and assigns.
SECTION 8.04. Counterparts. This Agreement may be executed in one
or more counterparts, all of which shall be considered one and the same
agreement and shall become effective when one or more counterparts have been
signed by each of the parties and delivered to the other parties.
SECTION 8.05. Entire Agreement; No Third-Party Beneficiaries; Rights
of Ownership. This Agreement (including the documents and the instruments
referred to herein, including the Confidentiality Agreement, and any other
agreement among the parties entered into contemporaneously herewith) (a)
constitutes the entire agreement and supersedes all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof and of the Confidentiality Agreement, provided that the
Confidentiality Agreement shall survive the execution and delivery of this
Agreement, and (b) other than Section 5.04 is not intended to confer upon any
person other than the parties hereto any rights or remedies hereunder.
SECTION 8.06. Governing Law. This Agreement shall be governed and
construed n accordance with the laws of the State of Michigan, without regard
to any applicable principles of conflicts of law.
SECTION 8.07. Publicity. Except as otherwise required by law or the
rules of the American Stock Exchange, so long as this Agreement is in effect,
neither the Company nor Parent shall, or shall permit any of its subsidiaries
to, issue or cause the publication of any press release or other public
announcement with respect to the transactions contemplated by this Agreement
without the consent of the other party, which consent shall not be unreasonably
withheld. The parties agree that the initial press release to be issued with
respect to the transactions contemplated by this Agreement shall be in the form
heretofore agreed to by the parties. Following the closing, Roney & Company
and Coopers & Lybrand, L.L.P. may issue customary public announcments that they
have acted as investment advisors in connection with this transaction.
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<PAGE> 117
SECTION 8.08. Assignment. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned, in whole or in
part, by any of the parties hereto (whether by operation of law or otherwise)
without the prior written consent of the other parties, and any such assignment
that is not so consented to shall be null and void. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and assigns.
Parent, Sub and the Company have caused this Agreement to be signed by
their respective officers thereunto duly authorized, all as of the date first
above written.
H. W. KAUFMAN FINANCIAL GROUP, INC.
By: _____________________________________
Its: _______________________________
"Company"
AJK ENTERPRISES, INC.
a Michigan corporation
By: ___________________________________
Its: _____________________________
"Parent"
AJK ACQUISITION COMPANY,
a Michigan corporation
By: __________________________________
Its: ____________________________
"Sub"
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<PAGE> 118
RONEY & CO.
INVESTMENT BANKING
One Griswold
Detroit, Michigan 48226
May 26, 1995
The Board of Directors
H.W. Kaufman Financial Group, Inc.
30833 Northwestern Highway, Suite 220
Farmington Hills, MI 48334
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, of the proposed consideration to be received by the shareholders of H.W.
Kaufman Financial Group, Inc. ("H.W. Kaufman" or the "Company") in a proposed
buyout offer from Alan Kaufman more fully described in a draft Agreement and
Plan of Reorganization (the "Agreement"). Pursuant to the terms of the draft
Agreement, we understand that the shareholders of the Company would receive a
price of $8.20 per share, in cash, for each share of H.W. Kaufman owned by
them.
Roney & Co. is a regional investment banking firm of recognized standing. As
part of our investment banking services, we are regularly engaged in the
valuation of corporate securities in connection with public offerings,
valuations and merger and acquisition transactions.
In arriving at the opinion as set forth below, we have, among other things:
Reviewed a draft copy of the Agreement dated May 2, 1995;
Reviewed the Company's Annual Reports on form 10K and related financial
information for the five (5) fiscal years ended December 31, 1994 and
the quarterly Reports on Form 10-Q for the periods ended March 31,
1995, September 30, 1994, and June 30, 1994 and certain internal
financial information related thereto;
Reviewed the Company's Annual Reports to shareholders and related
financial information for the three years ended December 31, 1994;
Reviewed other selected financial information for the quarterly periods
ended March 31, 1995, December 31, 1994 and September 30, 1994;
Reviewed the relevant market information regarding the shares of common
stock of the Company including historical trading activity, prices and
volume;
Appendix B-1
<PAGE> 119
H.W. Kaufman Financial Group, Inc.
Page 2 of 2
Compared certain financial characteristics of the Company to other
publicly held companies in the insurance industry we deemed to be
relevant;
Reviewed selected information concerning current industry conditions
and trends relating to the valuation of recent mergers within the
insurance brokerage industry;
Compared the proposed terms of the offer contemplated in the draft
Agreement with the financial terms of certain other mergers and
acquisitions which we deemed to be relevant;
Conducted discussions with members of senior management of the Company
concerning the business, operations, recent financial condition and
future prospects of the Company;
Reviewed the Company's internal forecast for the fiscal years 1995
through 1999;
Prepared a discounted cash flow analysis of the Company and an estimate
of the value of the Company under three different scenarios;
Reviewed such other financial and industry data and performed such
other analysis and took into account such other matters as we deemed
appropriate.
In preparing our opinion, we have relied upon the accuracy and completeness of
all financial and other information supplied or otherwise made available to us
by the Company and we have not independently verified such information or
undertaken an independent evaluation or appraisal of the assets of the Company.
On the basis of, and subject to, the foregoing, we are of the opinion that, as
of the date hereof, the consideration to be received by the shareholders of the
Company, as proposed by the draft Agreement, is fair from a financial point of
view, to the shareholders of the Company.
Sincerely,
Roney & Co.
RONEY & CO.
<PAGE> 120
RONEY & CO.
INVESTMENT BANKING
One Griswold
Detroit, Michigan 48226
May 26, 1995
The Board of Directors
H.W. Kaufman Financial Group, Inc.
30833 Northwestern Highway, Suite 220
Farmington Hills, MI 48334
Gentlemen:
The Special Committee of the Board of Directors of H.W. Kaufman Financial
Group, Inc. (the "Company") has engaged Roney to prepare a Valuation as to the
fair market value of the common stock of the Company as of the date hereof. In
this capacity Roney was asked to advise the Special Committee of the Board of
Directors as to the value of the Company's shares if the company were to be
acquired.
Roney & Co. is a regional investment banking firm of recognized standing. As
part of our investment banking services, we are regularly engaged in the
valuation of corporate securities in connection with public offerings,
valuations and merger and acquisition transactions. Roney was chosen on the
basis of its familiarity with the financial services industry and its
qualifications, ability, previous experience, and reputation. No limitations
were imposed by the Company's Board of Directors upon Roney with respect to the
investigations made or procedures followed by Roney in preparing its Valuation.
In arriving at our Valuation we have considered a number of factors including
the trading values of publicly traded insurance brokerage stocks, the terms of
certain mergers and acquisitions within the insurance brokerage industry and a
discounted cash flow analysis of the Company. We have not placed any specific
weight to any one of the above methodologies.
Based on the foregoing, and our analysis as described in the Roney presentation
delivered to the Board of Directors dated May 26, 1995, it is our opinion that
the fair market value of the Company's common stock, as of the date hereof, is
$8.00 to $9.00 per share based on 3,435,347 shares issued and outstanding.
Sincerely,
Roney & Co.
RONEY & CO.
Appendix B-2
<PAGE> 121
H.W. KAUFMAN FINANCIAL GROUP, INC.
______________________
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD AUGUST 15, 1995
________________________
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Herbert W. Kaufman and Brooke Bothe, and
each of them, with full power of substitution, his or her Proxies to represent
and vote, as designated below, all shares of the Common Stock of H.W. Kaufman
Financial Group, Inc. ("Company") registered in the name of the undersigned and
held of record by the undersigned on July 7, 1995 at the Special Meeting of
Shareholders to be held at 10:00 a.m. on August 15, 1995 at the offices of the
Company, located at 30833 Northwestern Highway, Suite 220, Farmington Hills,
Michigan 48334, and at any adjournment thereof. The undersigned hereby revokes
all proxies previously granted with respect to such meeting.
The Board of Directors recommends that you vote "FOR" the proposal.
1. APPROVAL of the Agreement and Plan of Merger dated as of May 26,
1995, as amended, among the Company, AJK Enterprises, Inc. and AJK Acquisition
Company, and all required transactions pursuant thereto.
____ FOR ____ AGAINST ____ ABSTAIN
2. OTHER MATTERS: In their discretion, the Proxies are authorized to
vote upon such other business as may properly come before the Special Meeting
or any adjournment thereof that was not known to the Board of Directors of the
Company prior to the solicitation hereof.
This proxy may be revoked prior to the exercise of the powers conferred by
the proxy.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION
IS GIVEN, WILL BE VOTED FOR APPROVAL OF THE AGREEMENT AND PLAN OF MERGER.
Dated______________________, 1995
_________________________________
Signature
_________________________________
Signature if held jointly
[Sticker for name and PLEASE DATE AND SIGN ABOVE exactly as
address of Record Holder] name(s) appears at the left. Executors,
administrators, trustees, guardians, etc.
should indicate capacity when signing; For
stock held in joint tenancy, each joint
owner should sign. If executed by a
corporation, the proxy should be signed by a
duly authorized officer. If executed by a
partnership, please sign in the
partnership's name and by an authorized
person. Please make any address change at
left.
