<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________
FORM 8-K/A/2
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
June 13, 1995
-------------
Date of Report (Date of earliest event reported)
SIERRA HEALTH SERVICES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada
(State or Other Jurisdiction of Incorporation)
1-8865 88-0200415
(Commission File Number) (IRS Employer Identification No.)
2724 NORTH TENAYA WAY 89128
LAS VEGAS, NEVADA (Zip Code)
(Address of principal executive offices)
(702) 242-7000
Registrant's Telephone Number, Including Area Code
================================================================================
<PAGE>
Item 5. Other Events.
- ------- ------------
On June 13, 1995, the Registrant, its wholly-owned subsidiary, Health
Acquisition Corp., and CII Financial, Inc. ("CII") entered into an Agreement and
Plan of Merger, dated as of June 12, 1995, pursuant to which Health
Acquisition Corp. will be merged with and into CII. As a result of the
transaction, each outstanding share of common stock of CII will be converted
into 0.37 of a share of common stock of the Registrant and CII will become a
wholly-owned subsidiary of the Registrant. The consideration for the transaction
was determined by the negotiation of the parties. Except for cash payments in
respect of fractional shares, no other consideration will be paid to the
shareholders of CII. The transaction is subject to shareholder approval, receipt
of regulatory approvals and certain other closing conditions. The transaction is
expected to close later this year.
CII is a holding company primarily engaged in writing workers'
compensation insurance through its wholly-owned subsidiaries. CII also has two
operating insurance agencies and an insurance premium finance business. CII
writes workers' compensation insurance primarily in the state of California and
also in the states of Colorado, Nebraska, New Mexico and Utah. Following the
transaction, the Registrant intends to continue the business of CII. The common
stock of CII is listed on the American Stock Exchange.
Joseph Havlick, Chairman of the Board, Chief Executive Officer and
President of CII, and Lee Spitler, Senior Vice President and Treasurer of CII,
have agreed to enter into new three-year employment agreements with CII upon
consummation of the transaction which agreements will supersede their existing
employment agreements, with provisions for base and bonus compensation and
certain other benefits. The Registrant is negotiating with other employees who
currently have employment agreements with CII concerning new employment
agreements which would, if entered into, supersede their existing agreements.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
- ------ ------------------------------------------------------------------
The Registrant is herewith filing the financial statements and pro
forma financial information with respect to the proposed transaction.
(a) Financial Statements of CII Financial, Inc. and
Subsidiaries:
CII Financial, Inc.:
Report of BDO Seidman, Independent Certified
Public Accountants
Consolidated Balance Sheets at December 31, 1994
and 1993
Consolidated Financial Statements for Years ended
December 31, 1994, 1993 and 1992:
Statements of Operations
Statements of Shareholders' Equity
Statements of Cash Flows
Summary of Accounting Policies
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
on Financial Statement Schedules
Schedule I - Summary of Investments - Other Than Investments in
Related Parties at December 31, 1994
Schedule II - Condensed Financial Information of Registrant:
<PAGE>
Condensed Balance Sheet Information
Condensed Statements of Operations Information
Condensed Statements of Cash Flows
Note to Condensed Financial Information
Condensed Consolidated Balance Sheets at March 31, 1995
and December 31, 1994
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 1995 and 1994
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1995 and 1994
Notes to Condensed Consolidated Financial Statements
(b) Unaudited Consolidated Condensed Pro Forma Financial Information:
Financial Data
Balance Sheet at March 31, 1995
Statement of Operations for the Three Months Ended March 31, 1995
Statement of Operations for the Years Ended December 31, 1994,
1993 and 1992
Notes to Financial Data
(c) Exhibits:
Exhibit 2 - Agreement and Plan of Merger dated as of June 12, 1995
among the Registrant, Health Acquisition Corp. and CII Financial, Inc.
The Exhibits and the Disclosure Schedules relating to the Agreement
have not been filed herewith. The Company agrees to furnish
supplementally a copy of the Exhibits and the Disclosure Schedules or
any schedule contained therein to the Securities and Exchange
Commission upon its request.
Exhibit 23 - Consent of BDO Seidman, LLP
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIERRA HEALTH SERVICES, INC.
(Registrant)
Dated: July 10, 1995 By: James L. Starr
-----------------------------
James L. Starr
Treasurer, Vice President of
Finance and Chief Financial
Officer (Principal Financial
and Accounting Officer)
<PAGE>
Index to Financial Statements
-----------------------------
<TABLE>
<CAPTION>
Financial
Statement
Page
---------
<S> <C>
(a) Financial Statements of CII Financial, Inc. and
Subsidiaries:
CII Financial, Inc.:
Report of BDO Seidman, Independent Certified
Public Accountants ............................ F-1
Consolidated Balance Sheets at December 31,
1994 and 1993 ................................. F-2
Consolidated Financial Statements for Years
ended December 31, 1994, 1993 and 1992:
Statements of Operations.................. F-3
Statements of Shareholders' Equity........ F-4
Statements of Cash Flows.................. F-5
Summary of Accounting Policies................ F-7
Notes to Consolidated Financial Statements.... F-10
Report of Independent Certified Public
Accountants on Financial Statement
Schedules..................................... F-24
Schedule I - Summary of Investments - Other
Than Investments in Related
Parties at December 31, 1994.... F-25
Schedule II - Condensed Financial Information
of Registrant:
Condensed Balance Sheet
Information................... F-26
Condensed Statements of
Operations Information........ F-27
Condensed Statements of
Cash Flows.................... F-28
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Note to Condensed
Financial Information......... F-29
Condensed Consolidated Balance Sheets at
March 31, 1995 and December 31, 1994.......... F-30
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 1995
and 1994...................................... F-31
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1995
and 1994...................................... F-32
Notes to Condensed Consolidated Financial
Statements.................................... F-33
(b) Unaudited Consolidated Condensed Pro Forma
Financial Information:
Financial Data................................ F-35
Balance Sheet at March 31, 1995............... F-36
Statement of Operations for the Three Months
Ended March 31, 1995.......................... F-37
Statement of Operations for the Years Ended
December 31, 1994, 1993 and 1992.............. F-38
Notes to Financial Data....................... F-41
(c) Exhibits:
Exhibit 2 - Agreement and Plan of Merger
dated as of June 12, 1995 among the
Registrant, Health Acquisition Corp.
and CII Financial, Inc. The Exhibits
and the Disclosure Schedules relating
to the Agreement have not been filed
herewith. The Company agrees to
furnish supplementally a copy of the
Exhibits and the Disclosure Schedules
or any schedule contained therein to
the Securities and Exchange Commission
upon its request ..............................
Exhibit 23 - Consent of BDO Seidman, LLP .......
</TABLE>
<PAGE>
Report of Independent Certified Public Accountants
--------------------------------------------------
To the Board of Directors
CII Financial, Inc.
Pleasanton, California
We have audited the accompanying consolidated balance sheets of CII
Financial, Inc. and Subsidiaries as of December 31, 1994 and 1993 and the
related consolidated statements of operations, shareholders' 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
CII Financial, 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.
BDO SEIDMAN
Los Angeles, California
February 17, 1995
F-1
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
====================================
<TABLE>
<CAPTION>
December 31,
-------------------------------
1994 1993
------------ ------------
<S> <C> <C>
ASSETS
------
Investments (Note 2):
Held to maturity, at amortized cost (fair value $107,535,000) $107,751,000 $ -
Available for sale, at fair value (amortized cost $109,311,000) 108,125,000 -
Trading portfolio, at fair value which approximates cost - 10,921,000
Bonds, at amortized cost (fair value $178,133,000) - 168,991,000
Equity securities, at fair value (cost $1,768,000) - 1,659,000
Short-term investments, at amortized cost which approximates fair value - 19,935,000
Relocation mortgage loans from employees (Note 11) 5,841,000 5,981,000
------------ ------------
Total investments 221,717,000 207,487,000
Cash (Note 6) 6,936,000 10,232,000
Reinsurance recoverable (Note 3) 29,407,000 26,012,000
Premiums receivable, less allowances of $2,192,000 and $2,222,000 for possible losses 12,789,000 18,918,000
Financed premiums receivable, less allowance of $100,000 and $0 for possible losses 15,576,000 12,873,000
Investment income receivable 3,170,000 2,813,000
Deferred policy acquisition costs 2,285,000 2,022,000
Earned but unbilled receivable 2,244,000 2,095,000
Federal income taxes receivable - 5,272,000
Deferred income taxes (Note 7) 4,000,000 -
Property and equipment, less accumulated depreciation of $2,307,000 and $1,621,000 4,122,000 3,529,000
Other assets 5,581,000 5,252,000
------------ ------------
TOTAL ASSETS $307,827,000 $296,505,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Losses and loss adjustment expenses (Note 4) $190,962,000 $200,356,000
Unearned premiums 8,940,000 10,641,000
Ceded reinsurance premiums payable 543,000 842,000
Convertible subordinated debentures (Note 5) 56,800,000 56,800,000
Note payable to bank (Note 6) 8,000,000 -
Federal income taxes payable (Note 7) 291,000 -
Other liabilities (Note 5) 13,756,000 10,540,000
------------ ------------
TOTAL LIABILITIES 279,292,000 279,179,000
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 3, 9, 13 & 14)
SHAREHOLDERS' EQUITY (Notes 1 and 8):
Common stock: Stated value $.50 per share; shares authorized-
100,000,000; issued and outstanding-7,187,000 and 7,170,000 3,593,000 3,585,000
Additional paid-in capital 58,563,000 58,523,000
Unrealized losses on marketable securities (1,187,000) (109,000)
Accumulated deficit (32,434,000) (44,673,000)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 28,535,000 17,326,000
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $307,827,000 $296,505,000
============ ============
</TABLE>
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-2
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
=====================================
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Direct written premiums $ 92,983,000 $113,954,000 $103,226,000
Changes in direct unearned premiums 1,701,000 71,000 4,088,000
------------ ------------ ------------
Direct earned premiums 94,684,000 114,025,000 107,314,000
Less: reinsurance (Note 3) 3,884,000 4,411,000 4,148,000
------------ ------------ ------------
Net earned premiums 90,800,000 109,614,000 103,166,000
Net investment income (Note 2) 12,506,000 11,635,000 11,815,000
Net realized gains (losses) (Note 2) 286,000 2,196,000 (69,000)
Other income 4,723,000 2,757,000 1,591,000
------------ ------------ ------------
Total revenues 108,315,000 126,202,000 116,503,000
------------ ------------ ------------
COSTS AND EXPENSES:
Losses and loss adjustment expenses (Note 4) 58,307,000 88,841,000 124,382,000
Reinsurance recoveries (Note 3) (4,618,000) (6,089,000) (4,886,000)
------------ ------------ ------------
Net loss and loss adjustment expenses 53,689,000 82,752,000 119,496,000
Policy acquisition costs 23,238,000 21,582,000 20,671,000
General and administrative 22,844,000 17,070,000 17,560,000
------------ ------------ ------------
Total costs and expenses 99,771,000 121,404,000 157,727,000
------------ ------------ ------------
INCOME (LOSS) BEFORE FEDERAL INCOME TAX
EXPENSE (BENEFIT) AND EXTRAORDINARY GAIN 8,544,000 4,798,000 (41,224,000)
Federal income tax expense (benefit) (Note 7) (3,695,000) 196,000 1,355,000
------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN 12,239,000 4,602,000 (42,579,000)
Extraordinary gain (Note 5) - - 457,000
------------ ------------ ------------
NET INCOME (LOSS) $ 12,239,000 $ 4,602,000 $(42,122,000)
============ ============ ============
NET INCOME (LOSS) PER SHARE (Note 12)
Income (loss) before extraordinary gain $1.70 $0.64 $(5.94)
Extraordinary gain - - 0.06
------------ ------------ ------------
NET INCOME (LOSS) PER SHARE $1.70 $0.64 $(5.88)
============ ============ ============
</TABLE>
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-3
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
==============================================
<TABLE>
<CAPTION>
Unrealized
Gains (Losses)
Additional on
Number Common Paid-in Accumulated Marketable
Of Shares Stock Capital Deficit Securities Total
---------- ---------- ----------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1992 7,216,000 $3,608,000 $58,754,000 $ (7,153,000) $ (847,000) $ 54,362,000
Stock option activity 12,000 6,000 (44,000) - - (38,000)
Shares repurchased and retired (115,000) (57,000) (348,000) - - (405,000)
Unrealized gains on marketable
equity securities - - - - 256,000 256,000
Net loss for the year ended
December 31, 1992 - - - (42,122,000) - (42,122,000)
---------- ---------- ----------- ------------ ----------- ------------
Balance, December 31, 1992 7,113,000 3,557,000 58,362,000 (49,275,000) (591,000) 12,053,000
Stock option activity 58,000 28,000 164,000 - - 192,000
Shares repurchased and retired (1,000) - (3,000) - - (3,000)
Unrealized gains on marketable
equity securities - - - - 482,000 482,000
Net income for the year ended
December 31, 1992 - - - 4,602,000 - 4,602,000
---------- ---------- ----------- ------------ ----------- ------------
Balance, December 31, 1993 7,170,000 3,585,000 58,523,000 (44,673,000) (109,000) 17,326,000
Stock option activity 17,000 8,000 40,000 - - 48,000
Unrealized losses on marketable
securities - - - - (1,078,000) (1,078,000)
Net income for the year ended
December 31, 1994 - - - 12,239,000 - 12,239,000
---------- ---------- ----------- ------------ ----------- ------------
Balance, December 31, 1994 7,187,000 $3,593,000 $58,563,000 $(32,434,000) $(1,187,000) $ 28,535,000
========== ========== =========== ============ =========== ============
</TABLE>
See accompanying summary of accounting policies
and notes to consolidated financial statements.
F-4
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
=====================================
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 12,239,000 $ 4,602,000 $(42,122,000)
------------ ------------ ------------
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,356,000 950,000 602,000
Provision for losses on premiums receivable 76,000 (327,000) 331,000
Extraordinary gain - - (457,000)
Loss (gain) on the sale of investments (286,000) (2,196,000) 69,000
Loss on the sale of fixed assets 14,000 - 64,000
Compensatory stock options - - (78,000)
Purchase of trading investments (130,172,000) (222,914,000) (20,385,000)
Disposal of trading investments 141,279,000 223,563,000 9,772,000
Increase (decrease) in cash from changes in:
Premiums receivable 6,159,000 (2,233,000) 2,262,000
Investment income receivable (357,000) (101,000) (41,000)
Deferred policy acquisition costs (263,000) 46,000 605,000
Earned but unbilled receivable (149,000) (426,000) 2,969,000
Reinsurance recoverable on unpaid losses (3,501,000) (5,634,000) -
Reinsurance recoverable on paid losses 106,000 (37,000) (94,000)
Federal income taxes, net 5,563,000 (108,000) 3,790,000
Deferred income taxes (4,000,000) - 4,458,000
Other assets (1,090,000) 956,000 121,000
Loss and loss adjustment expense reserves (9,394,000) 21,896,000 45,503,000
Unearned premiums (1,701,000) (73,000) (4,088,000)
Accrued policyholders' dividends (656,000) - (560,000)
Ceded reinsurance payable (299,000) (91,000) (190,000)
Other liabilities 3,872,000 2,165,000 607,000
------------ ------------ ------------
Total adjustments 6,557,000 15,436,000 45,260,000
------------ ------------ ------------
Net cash provided by operating activities 18,796,000 20,038,000 3,138,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available for sale investments (1,517,923,000) - -
Purchase of held to maturity investments (17,605,000) - -
Disposal of available for sale investments 1,502,298,000 - -
Disposal of held to maturity investments
upon call or maturity 7,027,000 - -
Purchase of short-term investments - (2,454,649,000) (969,548,000)
Disposal of short-term investments - 2,452,900,000 1,026,004,000
Purchase of other investments - (56,730,000) (41,639,000)
Disposal of other investments upon call or maturity - 9,063,000 9,364,000
Disposal of other investments prior to call or maturity - 25,061,000 2,152,000
Financed premiums receivable (2,809,000) (1,095,000) (4,907,000)
Mortgage loans funded - (200,000) (7,050,000)
Mortgage loan payments received 140,000 545,000 225,000
Purchase of property and equipment (1,276,000) (811,000) (1,680,000)
Proceeds on disposal of property and equipment 8,000 38,000 64,000
------------ ------------ ------------
Net cash provided by (used in) investing activities (30,140,000) (25,878,000) 12,985,000
------------ ------------ ------------
</TABLE>
(Continued next page)
F-5
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Concluded)
=====================================
Increase (Decrease) in Cash
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the exercise
of stock options $ 48,000 $ 193,000 $ 40,000
Repurchase and retire common stock - (3,000) (405,000)
Repurchase of subordinated debentures - - (993,000)
Borrowing/(payment) of notes payable 8,000,000 - (34,000)
Other obligations - - (139,000)
----------- ----------- -----------
Net cash (used in) provided
by financing activities 8,048,000 190,000 (1,531,000)
----------- ----------- -----------
Net increase (decrease) in cash (3,296,000) (5,650,000) 14,592,000
CASH, beginning of period 10,232,000 15,882,000 1,290,000
----------- ----------- -----------
CASH, end of period $ 6,936,000 $10,232,000 $15,882,000
=========== =========== ===========
</TABLE>
See accompanying summary of accounting policies
and notes to consolidated financial statements
F-6
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
==============================
BASIS OF PRESENTATION AND BUSINESS
CII Financial, Inc. ("CII Financial") was incorporated in the State of
California on September 15, 1988. CII Financial is a holding company primarily
engaged in writing workers' compensation insurance in California through its
wholly-owned subsidiaries, California Indemnity Insurance Company ("California
Indemnity") and Commercial Casualty Insurance Company ("Commercial Casualty").
CII Financial is also engaged in the business of issuing insurance premium
finance loans for commercial insurance policies through its wholly-owned
subsidiary, CII Premium Finance Company ("CIIPF") which commenced operations in
February 1991 and in the door lock manufacturing business through its 80% owned
subsidiary, InteLock Technologies, which was acquired in June 1993. In addition,
CII Financial has two operating insurance agencies, neither of which are
significant to the consolidated financial statement.
CII Financial acquired California Indemnity through an exchange of
common stock during November 1989, and then acquired Commercial Casualty during
November 1990 in consideration for 211,201 shares of CII Financial's Common
Stock. Following the later acquisition, CII Financial contributed the shares of
Commercial Casualty to California Indemnity as a surplus contribution. These
transactions were accounted for as a "pooling of interests" and therefore the
financial statements have been prepared as if the transactions were completed at
January 1, 1988.
The consolidated financial statements of CII Financial for 1994, 1993
and 1992 include the accounts of all of its wholly-owned subsidiaries, including
California Indemnity, Commercial Casualty and CIIPF and its 80% owned
subsidiary, InteLock Technologies. All material intercompany transactions and
balances are eliminated.
As used herein, the term the "Company" means CII Financial, Inc. and
its subsidiaries, and the term "CII Financial" means CII Financial, Inc.,
exclusive of such subsidiaries.
INVESTMENTS
Total fixed maturities, consisting entirely of bonds, have been
segregated between held to maturity, which is carried at amortized cost because
the Company has the ability and intends to hold these securities until maturity,
available for sale which are carried at fair value with the unrealized gains or
losses shown as a separate component of shareholders' equity, and trading which
are carried at fair value, with the unrealized gains or losses reflected in the
operating statement.
Equity security investments are reported at fair value and for 1994 are
part of the available for sale portfolio. The net unrealized gains and losses on
equity securities are credited or charged directly to shareholders' equity.
The fair values for fixed maturities and equity securities are based on
quoted market prices.
In 1994, short-term investments are reported as part of the available
for sale portfolio. Prior to 1994, short-term investments were reported at cost
which approximated fair value. Relocation mortgage loan receivables are carried
at the unpaid principal balance which approximates fair value. Net realized
investment gains and losses, based on specific identification of securities
sold, are reported separately on the Statements of Operation.
INCOME TAXES
Deferred federal income taxes are provided for temporary differences
between the financial reporting and tax return bases of the Company's assets and
liabilities.
F-7
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
(Continued)
==============================
REVENUE AND EXPENSE RECOGNITION
Earned premiums
Earned premiums and the liability for unearned premiums are calculated
by formula such that the premium written is earned pro rata over the term of the
policy. The insurance policies currently written by California Indemnity and
Commercial Casualty are for one year or less. Premiums earned include an
estimate for earned but unbilled audit premiums.
Premium finance income
Finance charges on loans are initially charged to unearned finance
charges and are recognized over the life of the loan using the effective
interest method. A loan is typically repaid in nine (9) monthly installments.
The loans earn interest at rates between 7% and 24%. Late charges are assessed
for delinquent payments and are generally collected within one month.
Policy acquisition costs
Policy acquisition costs consist of commissions, premium taxes and
other underwriting costs, which are directly related to the production and
retention of new and renewal business and are deferred and amortized as the
related premiums are earned. When it is determined that future policy revenues
on existing insurance contracts are not adequate to cover related costs and
expenses, deferred policy acquisition costs are written off. Earnings on
invested funds between the time of premium receipts and related claim payments
are considered in determining whether this condition exists.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed on
a straight-line method over the estimated useful lives of the assets which
generally range from five to ten years.
Reinsurance
In the normal course of business, the Company seeks to reduce the loss
that may arise from events that cause unfavorable underwriting results by
reinsuring certain levels of risk with other insurance enterprises or
reinsurers. Amounts recoverable from reinsurers are estimated in a manner
consistent with the claim liability associated with the reinsured policy and
reported separately on the balance sheets.
Reinsurance premiums, commissions, expense reimbursements and reserves
related to reinsured business are accounted for on bases consistent with those
used in accounting for the original policies issued and the terms of the
reinsurance contracts. Premiums ceded to other companies, which are calculated
based on direct earned premiums, are reported as a reduction of direct earned
premiums. Amounts applicable to reinsurance ceded for loss and loss adjustment
expenses are reported as a reduction of this item on the statements of
operations.
Liability for loss and loss adjustment expenses
The liability for loss and loss adjustment expenses is based upon the
accumulation of cost estimates for each unpaid loss and claim reported prior to
the close of the accounting period. In addition, the liability contains a
F-8
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
(Concluded)
==============================
REVENUE AND EXPENSE RECOGNITION (Continued)
Liability for loss and loss adjustment expenses (Continued)
provision for the current estimate of the probable cost of losses that have
occurred but have not yet been reported. This estimate includes loss adjustment
expenses. The methods for making such estimates and for establishing the
resulting liabilities, which include actuarial method evaluations, are
continually reviewed and updated, and any adjustments resulting therefrom are
reflected in current operations.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, the Company considers
cash to be only cash on hand and in banks.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 119, Disclosure about
Derivative Financial Instruments and Fair Value of Financial Instruments,
increases the disclosures about derivative financial instruments which include
futures, forward, swap, or option contracts or other financial instruments with
similar characteristics. The Statement is effective for financial statements
issued for fiscal years ending after December 15, 1994.
The Company does not have any significant investments in derivative
financial instruments. The Company does not invest in futures, forward, swap, or
option contracts nor does the Company invest in hedging or risk adjustment
financial instruments. In addition, there are no off-balance sheet instruments.
Statement of Financial Accounting Standards No. 114, Accounting by
Creditors for Impairment of a Loan, requires that impaired loans be measured at
the present value of anticipated future cash flows, discounted at the loan's
effective interest rate. Statement of Financial Accounting Standards No. 118,
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure, amends the disclosure requirements in Statement No. 114 to require
information on certain impaired loans and how a creditor recognizes income on
these impaired loans. Both Statements are effective for fiscal years beginning
after December 15, 1994. The financial impact to the Company from implementing
these pronouncements will be immaterial.
RECLASSIFICATION OF PRIOR AMOUNTS
Certain amounts in the accompanying financial statements for the years
ended December 31, 1993 and 1992 have been reclassified to conform to those
classifications used in 1994.
F-9
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
==========================================
NOTE 1 - SHAREHOLDERS' EQUITY
During 1992, CII Financial repurchased 115,000 shares of its Common
Stock on the open market at prices averaging $3.52 per share. These shares were
cancelled pursuant to the California Corporations Code.
NOTE 2 - INVESTMENTS
Net investment income is summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Bonds $11,693,000 $10,907,000 $10,258,000
Short-term investments 1,037,000 971,000 1,881,000
Relocation mortgage
loans from employees 216,000 254,000 91,000
----------- ----------- -----------
12,946,000 12,132,000 12,230,000
Investment expenses (440,000) (497,000) (415,000)
----------- ----------- -----------
Net investment income $12,506,000 $11,635,000 $11,815,000
=========== =========== ===========
</TABLE>
The amortized cost and estimated fair values of investments in
financial instruments held by the Company as of December 31, 1994 are as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Estimated
cost gains losses fair value
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Fixed Maturities Held To Maturity
- ---------------------------------
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 21,988,000 $ 74,000 $ 813,000 $ 21,249,000
Obligations of states and political subdivisions 80,538,000 2,514,000 1,457,000 81,595,000
Corporate securities 5,225,000 - 534,000 4,691,000
------------ ---------- ---------- ------------
Total Fixed Maturities Held to Maturity 107,751,000 2,588,000 2,804,000 107,535,000
------------ ---------- ---------- ------------
Securities Available for Sale
- -----------------------------
Fixed Maturities
U.S. Treasury securities and obligations of
U.S. government corporations and agencies 49,522,000 535,000 533,000 49,524,000
Obligations of states and political subdivisions 33,919,000 774,000 197,000 34,496,000
Corporate securities 24,105,000 18,000 497,000 23,626,000
------------ ---------- ---------- ------------
Total Fixed Maturities Available for Sale 107,546,000 1,327,000 1,227,000 107,646,000
------------ ---------- ---------- ------------
Equity Securities 1,765,000 - 1,286,000 479,000
Total Securities Available for Sale 109,311,000 1,327,000 2,513,000 108,125,000
------------ ---------- ---------- ------------
Total $217,062,000 $3,915,000 $5,317,000 $215,660,000
============ ========== ========== ============
</TABLE>
F-10
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 2 - INVESTMENTS (Continued)
The amortized cost and estimated fair values of investments in
financial instruments held by the Company as of December 31, 1993 are as
follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
------------ ----------- ---------- ------------
<S> <C> <C> <C> <C>
Fixed maturities
including short-term:
- ----------------------
U.S. Treasury securities and obligations of
U.S. government corporations and agencies $ 64,928,000 $ 1,511,000 $ 7,000 $ 66,432,000
Obligations of states and
political subdivisions 111,548,000 8,459,000 1,211,000 118,796,000
Corporate securities 12,450,000 409,000 19,000 12,840,000
------------ ----------- ---------- ------------
Total bonds 188,926,000 10,379,000 1,237,000 198,068,000
Trading portfolio 10,921,000 - - 10,921,000
------------ ----------- ---------- ------------
Total fixed maturities 199,847,000 10,379,000 1,237,000 208,989,000
------------ ----------- ---------- ------------
Equity securities:
- ------------------
Common stock 1,768,000 - 109,000 1,659,000
------------ ----------- ---------- ------------
Total $201,615,000 $10,379,000 $1,346,000 $210,648,000
============ =========== ========== ============
</TABLE>
Realized gains and losses are summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1994 1993 1992
---------- ---------- ---------
<S> <C> <C> <C>
Realized gain (loss):
Fixed maturities $ 283,000 $2,135,000 $ 179,000
Equity securities 3,000 61,000 (248,000)
---------- ---------- ---------
Net gain (loss) $ 286,000 $2,196,000 $ (69,000)
========== ========== =========
</TABLE>
The change in unrealized gains and losses on fixed maturity and equity
security investments is summarized as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1994 1993 1992
------------ ---------- ----------
<S> <C> <C> <C>
Fixed maturities $ (9,258,000) $2,886,000 $1,539,000
Equity securities (1,177,000) 482,000 256,000
------------ ---------- ----------
$(10,435,000) $3,368,000 $1,795,000
============ ========== ==========
</TABLE>
F-11
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 2 - INVESTMENTS (Continued)
Individual financial investments, excluding investments in bonds and
notes of the United States government and United States government agencies,
which exceed ten percent of total shareholders' equity at December 31, 1994 are
as follows:
<TABLE>
<S> <C>
Fixed maturities:
Oklahoma City, OK General Obligation $3,073,000
Cargill Financial Services Corp 3,194,000
----------
$6,267,000
==========
</TABLE>
Individual financial investments, excluding investments in bonds and
notes of the United States government and United States government agencies,
which exceed ten percent of total shareholders' equity at December 31, 1993 are
as follows:
<TABLE>
<S> <C>
Fixed maturities:
Michigan State ESG Dev Auth $ 7,904,000
Illinois State Toll Hwy Auth Rev 1,834,000
Salt Lake City UT Rdv Agy Rev 1,800,000
Oklahoma City OK G/O Ref 1,745,000
-----------
$13,283,000
===========
</TABLE>
The amortized cost and estimated fair value of debt securities at
December 31, 1994, by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
------------ ------------
<S> <C> <C>
Debt Securities Held to Maturity
- --------------------------------
Due in one year or less $ - $ -
Due after one year through five years 24,270,000 24,107,000
Due after five years through ten years 55,746,000 55,335,000
Due after ten years through fifteen years 26,462,000 26,791,000
Due after fifteen years 1,273,000 1,302,000
------------ ------------
Total Held to Maturity 107,751,000 107,535,000
------------ ------------
Debt Securities Available for Sale
- ----------------------------------
Due in one year or less 48,469,000 48,268,000
Due after one year through five years 16,278,000 16,564,000
Due after five years through ten years 22,550,000 22,307,000
Due after ten years through fifteen years 13,085,000 13,155,000
Due after fifteen years 7,164,000 7,352,000
------------ ------------
Total Available for Sale 107,546,000 107,646,000
------------ ------------
Total Debt Securities $215,297,000 $215,181,000
============ ============
</TABLE>
NOTE 3 - REINSURANCE
The Company has reinsurance treaties in effect with unrelated entities.
The reinsurers assume the liability
F-12
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
on that portion of workers' compensation claims between $250,000 and $60,000,000
per occurrence for 1994, 1993 and 1992.
Reinsurance contracts do not relieve the Company from its obligations
to policyholders. Failure of reinsurers to honor their obligations could result
in losses to the Company. Consequently, allowances are established for amounts
deemed uncollectible which at December 31, 1994 and 1993 were none. The Company
evaluates the financial condition of its reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies. At December 31, 1994 and 1993,
the amount of reinsurance recoverable for unpaid losses and loss adjustment
expenses was $29,342,000 and $25,841,000, respectively. The amount of
reinsurance receivable for paid losses and loss adjustment expenses was $65,000
and $171,000, respectively.
NOTE 4 - LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table provides a reconciliation of the beginning and
ending reserve balances for unpaid losses and loss adjustment expenses ("LAE").
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
(In thousands)
Net beginning loss and LAE reserve $174,515 $158,253 $112,749
Net provision for:
Insured events incurred in current period 67,642 86,617 91,430
Insured events incurred in prior periods (13,953) (3,865) 28,066
-------- -------- --------
Total net provision 53,689 82,752 119,496
-------- -------- --------
Net payments for losses and LAE:
Attributable to insured events incurred in current year 16,374 16,130 16,381
Attributable to insured events incurred in prior years 50,210 50,360 57,611
-------- -------- --------
Total net payments 66,584 66,490 73,992
-------- -------- --------
Net ending loss and LAE reserve 161,620 174,515 158,253
Reinsurance recoverable 29,342 25,841 20,207
-------- -------- --------
Gross ending loss and LAE reserve $190,962 $200,356 $178,460
======== ======== ========
</TABLE>
In 1994, the Company experienced a favorable loss development trend on
prior accident years 1992 and 1993 which resulted in a net reduction in the
prior accident years' reserves of $13,953,000. The favorable development on the
1992 accident year was primarily due to the Company's aggressive actions to
settle claims. The favorable development on the 1993 accident year appears to be
aided in part by the legislative reforms that were enacted in July 1993. In
1993, a favorable development on the prior accident years resulted in a net
reduction to the incurred losses of $3,865,000. There can be no assurances that
such favorable development, nor the magnitude of any favorable development, will
continue in the future.
During the first and second quarters of 1992 and the fourth quarter of
1991, the Company significantly
F-13
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 4 - LOSSES AND LOSS ADJUSTMENT EXPENSES (Continued)
increased its loss reserves for 1991 and prior accident years. This was
primarily due to the increased frequency and severity of stress and strain
claims and the increased use of forensic medical examinations associated with
litigation of claims.
The increase in reinsurance recoverables are all due to increases in
claims exceeding the Company's retention levels.
NOTE 5 - 7 1/2% CONVERTIBLE SUBORDINATED DEBENTURES
In September 1991, CII Financial sold $58,250,000 of its 7 1/2%
Convertible Subordinated Debentures due September 15, 2001, currently traded on
the American Stock Exchange. Each $1,000 in principal amount of Debentures is
convertible into 45.733 shares of Common Stock, at a conversion price of $21.866
per share. The unamortized issuance costs of $1,427,000 are included in the
other assets caption on the balance sheet and are being amortized over the life
of the Debentures. Accrued interest on the 7 1/2% Convertible Subordinated
Debentures as of December 31, 1994, 1993 and 1992 is $1,243,000, $1,243,000 and
$1,259,000, respectively, and is included in the other liabilities caption on
the balance sheet.
The debentureholders may require CII Financial to repurchase the
Debentures, in whole or in part, in certain circumstances involving a change in
control of CII Financial prior to September 15, 2001.
The Debentures are redeemable at the option of CII Financial in whole
or in part, commencing any time after September 15, 1994. The Debentures are
redeemable at the following redemption prices equal to the percentage of the
principal amount plus accrued interest for the 12 month period beginning
September 15 of the years indicated:
<TABLE>
<CAPTION>
Redemption
Year Price
-------- ----------
<S> <C>
1994 105.25%
1995 104.50%
1996 103.75%
1997 103.00%
1998 102.25%
1999 101.50%
Thereafter 100.75%
</TABLE>
The net proceeds from the offering of approximately $56,147,000 were
used principally to make contributions to the capital and surplus of CII
Financial's insurance and premium finance subsidiaries and for general corporate
purposes.
In December 1991, CII Financial approved the implementation of a
program to purchase up to $10,000,000 of its Convertible Subordinated Debentures
and/or Common Stock, at fair value, pursuant to applicable law. During 1992, CII
Financial repurchased $1,450,000 of its Convertible Subordinated Debentures at a
$457,000 gain.
The fair value of the 7 1/2% Convertible Subordinated Debentures at
December 31, 1994 was $38,624,000, which was determined based on the quoted
market price at December 31, 1994.
NOTE 6 - NOTE PAYABLE TO BANK
The Company has a $12,000,000 revolving line of credit agreement with a
bank which expires on August
F-14
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
1, 1995. During the term of the agreement, the Company can borrow at the bank's
prime rate plus one-half percent or a fixed LIBOR rate plus two and a half
percent, payable monthly. Advances are available up to 80% of eligible loans
receivable, and are collateralized by installment loans receivable. A commitment
fee of one-tenth percent per annum is payable on the $12,000,000. The Company is
required to maintain a compensating balance of fifteen percent of the revolving
line of credit Under this agreement, the Company borrowed $8,000,000, at the
LIBOR rate plus two and one-half percent (8.5% at December 31, 1994), maturing
on June 12, 1995.
The revolving line of credit agreement requires compliance with certain
loan covenants including, but not limited to, minimum tangible net worth, debt
leverage ratio, and current ratio. The revolving line of credit of $12,000,000
is guaranteed by CII Financial, Inc. (the "Parent Company"). In addition, the
Parent Company subordinated $2,000,000 of its debt. As of December 31, 1994,
the Company was in compliance with all financial and non-financial covenants,
however at September 30, 1994, the Company obtained a waiver for noncompliance
with the debt leverage ratio covenant.
NOTE 7 - FEDERAL INCOME TAXES
As required by Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes, effective January 1, 1993, the Company changed its
method of accounting for income taxes from the deferred to the liability method.
Deferred income tax balances are determined based on the difference between
financial statement and tax return bases using current tax rates. Accordingly,
the impact of a change in tax rates on deferred tax balances is recognized in
income in the period that the change is enacted. As permitted, prior years'
financial statements have not been restated. The cumulative effect of this
change in accounting for income taxes was immaterial.
Provision for taxes on income consists of:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1994 1993 1992
----------- -------- -----------
<S> <C> <C> <C>
Current provision
(benefit) $ 305,000 $196,000 $(3,103,000)
Deferred provision (4,000,000) - 4,458,000
----------- -------- -----------
Total federal income
tax (benefit) $(3,695,000) $196,000 $ 1,355,000
=========== ======== ===========
</TABLE>
The current provision for the year ended December 31, 1994 is net of a
$799,000 tax benefit of alternative minimum tax net operating loss
carryforwards.
At December 31, 1994 and 1993, temporary differences between the
financial statement carrying amounts and tax bases of assets and liabilities
that cause deferred tax assets (liabilities) consist of the following:
F-15
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 7 - FEDERAL INCOME TAXES (Continued)
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Discount on loss reserves $ 13,790,000 $ 15,062,000
Net operating loss carryforward 6,814,000 6,163,000
Provisions for doubtful accounts 796,000 755,000
Alternative minimum tax credits 780,000 -
Unearned premiums 608,000 724,000
Supplemental benefit plans 723,000 348,000
Policyholders' dividends - 223,000
Other 427,000 401,000
------------ ------------
Gross deferred asset 23,938,000 23,676,000
------------ ------------
Deferred policy acquisition costs (777,000) (687,000)
Unamortized original issue discount (490,000) -
Excess tax depreciation over book (478,000) (400,000)
Other (154,000) (255,000)
------------ ------------
Gross deferred liability (1,899,000) (1,342,000)
------------ ------------
Net deferred asset before valuation allowance 22,039,000 22,334,000
Valuation allowance (18,039,000) (22,334,000)
------------ ------------
$ 4,000,000 $ -
============ ============
</TABLE>
For the year ended December 31, 1993, the Company established a
valuation allowance equal to the net deferred asset as the Company could not
conclude that it was more likely than not that the entire net deferred asset
could be realized. For the year ended December 31, 1994, the Company
re-evaluated the valuation allowance taking into consideration, for the next
three years, projected operating results and the establishment and reversal of
permanent and temporary tax differences. As a result, the Company reduced its
valuation allowance by $4,000,000.
At December 31, 1994, the Company has a net operating loss carryforward
of $20,041,000 available to offset future taxable income until December 31,
2008. The Company has no alternative minimum tax net operating loss
carryforwards.
For the years ended December 31, 1994, 1993 and 1992, deferred taxes
resulted from temporary differences in recognition of certain revenue and
expense for tax and financial reporting purposes. The sources of these temporary
differences and the related tax effects are as follows:
F-16
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 7 - FEDERAL INCOME TAXES (Continued)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1994 1993 1992
----------- ----------- ----------
<S> <C> <C> <C>
Discount on loss reserves $(1,272,000) $ 1,525,000 $3,957,000
Net operating loss 651,000 - -
Provisions for doubtful accounts 41,000 (111,000) 339,000
Alternative minimum tax credits 780,000 - -
Unearned premiums (116,000) (5,000) 442,000
Supplemental benefit plans 375,000 348,000 -
Policyholders' dividends (223,000) - 181,000
Deferred policy acquisition costs (90,000) 16,000 (399,000)
Unamortized original issue discount (490,000) - -
Valuation allowance 4,295,000 (1,424,000) -
Other 49,000 (349,000) (62,000)
----------- ----------- ----------
$ 4,000,000 $ - $4,458,000
=========== =========== ==========
</TABLE>
A reconciliation of the federal statutory income tax rates to the
effective tax rates in the Consolidated Statements of Operations is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Income tax provision (benefit) at statutory rate 34.0 % 34.0 % (34.0)%
Tax exempt income (29.4)% (53.4)% (6.7)%
Proration adjustment on tax exempt income 4.4 % 7.9 % 1.0 %
Discount on loss reserves (10.5)% 33.9 % 10.4 %
Tax loss producing no current tax benefit 3.8 % - 31.6 %
Utilization of net operating loss carryforward - (9.0)% -
Alternative minimum tax 3.6 % 4.1 % 0.7 %
Compensation related to below market loans (5.7)% - -
Decrease in valuation allowance (46.8)% - -
Other 3.4 % (13.4)% 0.3 %
--------- --------- ---------
Effective income tax provision (benefit) rate (43.2)% 4.1 % 3.3 %
========= ========= =========
</TABLE>
In lieu of state franchise and corporate income taxes, California
Indemnity and Commercial Casualty pay premium taxes based upon direct written
premiums to the states in which they write business. Premium tax expense is
included in policy acquisition costs in the consolidated statements of
operations.
NOTE 8 - DIVIDEND RESTRICTIONS - INSURANCE SUBSIDIARIES
Under California insurance company statutes and regulations, California
Indemnity and Commercial Casualty are restricted as to the amount of dividends
they may pay on their common stock to their parent companies. No dividends may
be paid without at least ten business days prior notice to the Insurance
Commissioner. Unless specially approved by the Insurance Commissioner prior to
payment, dividends may be paid only out of accumulated earned surplus, excluding
any earned surplus attributable to unrealized appreciation in assets or an
exchange of assets.
F-17
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 8 - DIVIDEND RESTRICTIONS - INSURANCE SUBSIDIARIES (Continued)
If a dividend or other distribution is contemplated which, along with
all other dividends or distributions made within the preceding twelve months,
exceeds the greater of 10% of the insurance company's policyholders' surplus as
of the end of the prior calendar year or net income for such calendar year, at
least 30 days prior notice to the Commissioner must be given, and no payment of
the dividend or distribution may be made unless and until (i) the Commissioner
has approved it or (ii) the 30 days have elapsed and the Commissioner has not
disapproved the proposed payment.
Based on its financial position as of December 31, 1994, California
Indemnity cannot pay any shareholder dividend to CII Financial during 1995
without the prior approval of the California Insurance Commissioner as
California Indemnity has no accumulated earned surplus. Commercial Casualty, on
the other hand, may pay up to $1,874,000 in shareholder dividends to California
Indemnity in 1995 without prior approval from the California Insurance
Commissioner.
Policyholders' surplus of California Indemnity and Commercial Casualty
on a consolidated statutory accounting basis at December 31, 1994 and 1993 was
$61,821,000 and $51,459,000, respectively. Consolidated statutory net income
(loss) was $12,199,000, $7,174,000 and $(32,162,000) for the periods ended
December 31, 1994, 1993 and 1992, respectively.
The National Association of Insurance Commissioners adopted risk-based
capital guidelines for property-casualty insurance companies whereby required
statutory surplus would be based, in part, on a formula based risk assessment of
the individual investments held in the insurance company's portfolio. These
regulations became effective in 1995 and are applied to the statutory Annual
Statement for the year ended December 31, 1994. The Company's risk-based capital
results for the year ended December 31, 1994 exceeded the minimum surplus
required under the regulations.
NOTE 9 - EMPLOYEE COMPENSATION
PROFIT SHARING, 401(k) AND SUPPLEMENTAL BENEFIT PLANS
The Company maintains a qualified profit sharing plan that covers all
eligible employees. It also maintains a 401(k) Plan that is available to all
eligible employees. A nonqualified supplemental benefit plan is maintained for
certain officers and key employees of the Company.
During the years ended December 31, 1994, 1993 and 1992, the Company
expensed: (i) $1,841,000, $1,199,000 and zero, respectively, for the profit
sharing plan; (ii) $359,000, $244,000 and $178,000, respectively, under the
401(k) Plan; and (iii) $114,000, $45,000 and $42,000, respectively, for the
supplemental benefit plan.
EXECUTIVE RETIREMENT PLANS
The Company maintains a Supplemental Executive Retirement Plan and a
Supplemental Senior Executive Retirement Plan. Eligibility for participation in
both plans is limited to officers and key employees selected and approved by the
Board of Directors. During the years ended December 31, 1994, 1993 and 1992, the
Company expensed $530,000, $279,000 and $279,000, respectively, under these
plans.
F-18
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 9 - EMPLOYEE COMPENSATION (Continued)
EMPLOYEE INCENTIVE PLAN
The Company maintains a nonqualified cash bonus plan pursuant to which
certain officers and key employees are eligible to receive cash bonuses based
upon individual and Company performance. During the years ended December 31,
1994, 1993 and 1992, the Company expensed $849,000, $689,000 and $21,000,
respectively, for the employee incentive plan.
EMPLOYMENT CONTRACTS
As of December 31, 1994, the Company has employment contracts with ten
employees expiring December 1995 through March 2001. Minimum aggregate cash
compensation obligations under these contracts are: 1995 - $1,713,000; 1996 -
$1,652,000; 1997 - $1,652,000; 1998 - $1,652,000; 1999 - $1,502,000 and
thereafter - $1,753,000.
NOTE 10- STOCK OPTION PLANS
EMPLOYEES
In 1993, 1991, 1989 and 1988 CII Financial adopted various incentive
and non-qualified stock option plans. Options are issued to officers and key
employees for the purchase of CII Financial Common Stock. All of the outstanding
options were granted at 100% of the market price of CII Financial's Common Stock
on the date of grant. Subject to certain conditions, such as continued
employment, the exercise of the options is not restricted and the options expire
ten to twenty years from the date of grant unless accelerated under certain
conditions, such as termination of employment. Substantial portions of the
options vest ratably over five to ten years and may become fully vested under
certain circumstances, such as a change in control.
Additional information with respect to options issued under these plans
is as follows:
<TABLE>
<CAPTION>
Option Price
Number of ---------------------------------
Shares Per Share Total
---------- --------------- ----------
<S> <C> <C> <C>
Outstanding at January 1, 1993 622,000 $ 3.330-$10.000 $2,183,000
Granted 904,000 $ 5.750-$ 6.750 5,680,000
Cancelled (123,000) $ 3.330-$ 3.350 (412,000)
Exercised (58,000) $ 3.330-$ 3.500 (193,000)
---------- ----------
Outstanding at December 31, 1993 1,345,000 $ 3.330-$10.000 7,258,000
Granted 97,000 $ 5.375-$ 5.750 557,000
Cancelled (3,000) $ 3.330-$ 3.500 (12,000)
Exercised (16,000) $ 3.330-$ 3.500 (57,000)
---------- ----------
Outstanding at December 31, 1994 1,423,000 $ 3.500-$10.000 $7,746,000
========== ==========
</TABLE>
As of December 31, 1994, there were 751,000 options that could have
been exercised. The remainder of the outstanding options first become
exercisable as follows: 1995 - 84,000; 1996 - 104,000; 1997 -77,000; 1998 -
58,000; 1999 - 76,000 and thereafter 273,000. At December 31, 1994 there were a
total of 484,000 options available to grant under the four plans.
F-19
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 10- STOCK OPTION PLANS (Continued)
DIRECTORS
In November 1994, CII Financial adopted the CII Financial, Inc. Non-
Employee Director Stock Option Plan ("Director Plan") which provides for the
grant of nonqualified stock options to non-employee directors who have a minimum
of two years of continuance service on the Board of CII Financial, Inc. Under
the Director Plan, each eligible non-employee director will automatically
receive, on each of the second through fifth anniversaries of the date the
director joined the board, an annual nonqualified stock option to purchase a
specified number of shares of CII Financial's Common Stock, ranging from 750 to
6,750 shares, depending on such non-employee director's years of continuance
service on the board. Options were granted at a price equal to the market price
of CII Financial's Common Stock on the date of grant. Subject to certain
conditions, such as continued service as a director, the exercise of the options
is not restricted and the options expire ten years from date of grant. For each
year of service on the board, 20% of the options are exercisable.
In addition, CII Financial adopted the CIIC Non-Employee Director Stock
Option Plan ("CIIC Plan") in November 1994 which provides for the grant of
nonqualified stock options to purchase shares of CII Financial Common Stock to
non-employee directors of California Indemnity Insurance Company and Commercial
Casualty Insurance Company who have a minimum of two years of continuance
service on the CIIC board of directors. The CIIC Plan is similar to the Director
Plan described above except that the number of shares of CII Financial Common
Stock subject to options granted each year range from 500 to 4,500.
As of December 31, 1994, for both plans, there were 97,300 options
granted, outstanding and presently exercisable at prices ranging from $5.375 to
$5.750. There were 112,000 options available for grant as of December 31, 1994.
NOTE 11- RELATED PARTY TRANSACTIONS
The Company leases two automobiles from an entity which is owned by two
of the Company's officers, who are also directors, in lieu of a car allowance.
Lease rental costs for the years ended December 31, 1994, 1993 and 1992 were
$16,000 each. See Note 6.
A director of CII Financial was an employee of a company that, in 1991,
assumed certain investment management responsibilities with respect to
California Indemnity's investment portfolio. For the years ended December 31,
1994, 1993 and 1992, California Indemnity expensed approximately $381,000,
$361,000 and $352,000 related to such services. The aforementioned agreement was
terminated in December 1994.
In connection with CII Financial's relocation of its principal
executive offices to Pleasanton, California in July 1992, to retain certain key
officers and employees, California Indemnity extended mortgage loans for the
purchase of such officers' and employees' principal residences. In March, 1994,
the terms of the loans were changed for those borrowers who were still actively
employed. The interest rate was reduced to a fixed rate of 3% per annum; the
maturity date was fixed to March 2009; and the loan was made assumable, one
time, by a qualified purchaser of the employee's residence. The amendments
resulted in substantial amounts of unintended imputed income to the employees
for the year ended December 31, 1994 which resulted in significant adverse
personal income tax consequences to the employees.
The present value of future cash flows of the relocation mortgage loans
at December 31, 1994, approximates the unpaid principal balance.
F-20
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 12- EARNINGS PER SHARE
Earnings per share are based upon the weighted average number of
common shares outstanding during each period. The number of shares used in the
years ended December 31, 1994, 1993 and 1992 in the computation of both primary
and fully diluted earnings per share are 7,181,000, 7,142,000 and 7,168,000,
respectively. The Company's outstanding options and Convertible Subordinated
Debentures were excluded from the fiscal 1992 computation due to their anti-
dilutive effect.
NOTE 13- COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities under noncancellable operating
leases expiring through October 1999. Gross minimum rental commitments of the
leases as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ----------
<S> <C>
1995 $2,027,000
1996 1,877,000
1997 1,731,000
1998 1,390,000
1999 572,000
----------
Total $7,597,000
==========
</TABLE>
Rent expense consists of:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Office $1,831,000 $1,387,000 $1,172,000
Automobiles 16,000 16,000 16,000
---------- ---------- ----------
Total rent expense $1,847,000 $1,403,000 $1,188,000
========== ========== ==========
</TABLE>
NOTE 14- OFF-BALANCE-SHEET AND CREDIT RISK
The Company controls credit risk through adequate deposits, credit
approvals, limits and monitoring procedures.
The Company's investment portfolio of debt securities consists of
investment grade securities.
At December 31, 1994 and 1993, the Company had reinsurance contracts
with unrelated insurers amounting to $29,342,000 and $25,841,000, respectively,
for reinsurance recoverables on unpaid losses. The Company performs due
diligence to ensure that amounts due from reinsurers are collectible.
F-21
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
==========================================
NOTE 15- SUPPLEMENTAL DISCLOSURES FOR CONSOLIDATED STATEMENTS OF CASH FLOWS
Supplemental disclosures for the consolidated statements of cash flows
are:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------
1994 1993 1992
----------- ---------- ----------
<S> <C> <C> <C>
Cash paid for:
Income taxes $ 100,000 $ 330,000 $ -
=========== ========== ==========
Interest $ 4,458,000 $4,260,000 $4,209,000
=========== ========== ==========
</TABLE>
NOTE 16- BUSINESS SEGMENT INFORMATION
Information concerning the Company's business segments is presented
below. Corporate and other includes the interest expense on the Convertible
Subordinated Debentures. There were no reportable business segments for the
years ended December 31, 1993 and 1992.
<TABLE>
<CAPTION>
Workers'
Compensation Door Lock Corporate
Total Insurance Manufacturing and other
-------- ------------ ------------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
For the year ended December 31, 1994
Revenue $108,315 $103,536 $ 2,035 $ 2,744
Income (loss) before income taxes 8,544 15,831 (2,501) (4,786)
Amortization and depreciation expense 1,356 - 547 809
Capital expenditures 1,276 - 44 1,232
Identifiable assets as of December 31, 1994 307,827 281,044 146 26,637
</TABLE>
NOTE 17- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table sets forth the unaudited data regarding operations
for each quarter of 1994 and 1993. In the opinion of management, such unaudited
data includes all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the information presented. The Company's operating
results for any quarter are not necessarily indicative of the operating results
for any future period.
<TABLE>
<CAPTION>
1994
-----------------------------------------------------------
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net earned premiums $21,503,000 $23,378,000 $22,202,000 $23,717,000
Net investment income 3,261,000 3,352,000 3,034,000 3,145,000
Other revenues 1,497,000 1,116,000 1,053,000 1,057,000
----------- ----------- ----------- -----------
Total revenues 26,261,000 27,846,000 26,289,000 27,919,000
Costs and expenses 22,939,000 24,882,000 25,048,000 26,902,000
----------- ----------- ----------- -----------
Income before federal income tax benefit 3,322,000 2,964,000 1,241,000 1,017,000
Federal income tax benefit (3,695,000) - - -
----------- ----------- ----------- -----------
Net income $ 7,017,000 $ 2,964,000 $ 1,241,000 $ 1,017,000
=========== =========== =========== ===========
</TABLE>
(Continued on next page)
F-22
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Concluded)
==========================================
NOTE 17- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (Continued)
<TABLE>
<CAPTION>
1994
-----------------------------------------------------------
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income per share:
Primary $ 0.98 $ 0.41 $ 0.17 $ 0.14
=========== =========== =========== ===========
Fully diluted $ 0.81 $ 0.41 $ 0.17 $ 0.14
=========== =========== =========== ===========
</TABLE>
In the fourth quarter, the Company re-evaluated its valuation allowance
on the deferred tax asset in light of the operating results for the year and
considering projected operating results for the next three years. As a result,
the valuation allowance was reduced by $4,000,000. Also in the fourth quarter,
due to operating losses at InteLock, the Company reduced the number of years for
amortizing the goodwill in InteLock to reflect a more realistic period. Along
with other valuation allowances and expense accruals, total adjustments recorded
in the fourth quarter for InteLock were approximately $600,000.
<TABLE>
<CAPTION>
1993
--------------------------------------------------------------
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net earned premiums $29,133,000 $30,194,000 $26,003,000 $24,284,000
Net investment income 3,168,000 3,170,000 3,833,000 3,660,000
Other revenues 1,118,000 689,000 492,000 458,000
----------- ----------- ----------- -----------
Total revenues 33,419,000 34,053,000 30,328,000 28,402,000
Costs and expenses 31,187,000 33,046,000 29,104,000 28,067,000
----------- ----------- ----------- -----------
Income before federal
income tax expense 2,232,000 1,007,000 1,224,000 335,000
Federal income tax
expense 196,000 - - -
----------- ----------- ----------- -----------
Net income $ 2,036,000 $ 1,007,000 $ 1,224,000 $ 335,000
=========== =========== =========== ===========
Net income per share
Primary and fully diluted $ 0.28 $ 0.14 $ 0.17 $ 0.05
=========== =========== =========== ===========
</TABLE>
F-23
<PAGE>
Report of Independent Certified Public Accountants on
-----------------------------------------------------
Financial Statement Schedules
-----------------------------
To the Board of Directors
CII Financial, Inc.
Pleasanton, California
The audits referred to in our report dated February 17, 1995 relating
to the consolidated financial statements of CII Financial, Inc. and
Subsidiaries, which is contained in Item 8 of this Form 10-K included the audits
of the financial statement schedules listed in the accompanying index. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based upon our audit.
In our opinion, such financial statement schedules present fairly, in
all material respects, the information set forth therein.
BDO SEIDMAN
Los Angeles, California
February 17, 1995
F-24
<PAGE>
CII FINANCIAL, INC. AND SUBSIDIARIES
SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER
THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1994
===========================================
<TABLE>
<CAPTION>
Amount at
which
shown in
Amortized Market the balance
Type of Investment Cost Value sheet
- ------------------ --------- --------- -----------
(In thousands)
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States government and government agencies
and authorities $ 69,111 $ 68,373 $ 69,112
State, municipalities and political subdivisions 114,456 116,090 115,033
All other corporate bonds 17,241 16,229 16,763
--------- --------- --------
Total fixed maturities 200,808 200,692 200,908
Relocation mortgage loans
from employees 5,841 4,456 5,841
Equity securities 1,765 479 479
Short-term investments including trading portfolio 14,490 14,489 14,489
--------- --------- --------
Total investments $ 222,904 $ 220,116 $221,717
========= ========= ========
</TABLE>
F-25
<PAGE>
CII FINANCIAL, INC. (PARENT ONLY)
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEET INFORMATION
=============================================
<TABLE>
<CAPTION>
December 31,
-------------------------------
1994 1993
----------- -----------
<S> <C> <C>
ASSETS
------
Cash $ 1,631,000 $ 61,000
Investment in subsidiaries 74,183,000 58,530,000
Investments 479,000 6,903,000
Property and equipment, less accumulated depreciation of
$1,979,000 and $1,399,000 2,690,000 3,357,000
Net receivable from subsidiaries 11,489,000 10,737,000
Other assets 1,496,000 1,725,000
----------- -----------
Total assets $91,968,000 $81,313,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Convertible subordinated debentures $56,800,000 $56,800,000
Interest payable 1,243,000 1,243,000
Accounts payable and accrued expenses 1,673,000 1,064,000
Deferred federal income taxes payable 1,081,000 517,000
Federal income taxes payable 2,636,000 4,363,000
----------- -----------
Total liabilities 63,433,000 63,987,000
----------- -----------
CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Common stock, stated value $.50 per share; shares authorized -
100,000,000; outstanding - 7,187,000 and 7,113,000 3,593,000 3,585,000
Additional paid-in capital 58,563,000 58,523,000
Unrealized losses on marketable equity securities (1,187,000) (109,000)
Accumulated deficit (32,434,000) (44,673,000)
----------- -----------
Total shareholders' equity 28,535,000 17,326,000
----------- -----------
Total liabilities and shareholders' equity $91,968,000 $81,313,000
=========== ===========
</TABLE>
See accompanying note to condensed financial information.
F-26
<PAGE>
CII FINANCIAL, INC. (PARENT ONLY)
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENT OF OPERATIONS INFORMATION
=============================================
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------
1994 1993 1992
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Investment income $ 32,000 $ 213,000 $ 312,000
Other 1,567,000 1,581,000 1,204,000
------------ ------------ ------------
Total revenues 1,599,000 1,794,000 1,516,000
------------ ------------ ------------
EXPENSES:
Interest 4,260,000 4,260,000 4,274,000
Administrative and other 2,204,000 1,163,000 1,995,000
------------ ------------ ------------
Total expenses 6,464,000 5,423,000 6,269,000
------------ ------------ ------------
LOSS BEFORE FEDERAL INCOME TAX EXPENSE,
EXTRAORDINARY GAIN AND EQUITY IN NET
INCOME (LOSS) OF SUBSIDIARIES (4,865,000) (3,629,000) (4,753,000)
FEDERAL INCOME TAX EXPENSE (BENEFIT) (2,074,000) (512,000) 1,231,000
EXTRAORDINARY GAIN - - 457,000
EQUITY IN NET INCOME (LOSS) OF
SUBSIDIARIES 15,030,000 7,719,000 (36,595,000)
------------ ------------ ------------
NET INCOME (LOSS) 12,239,000 4,602,000 (42,122,000)
ACCUMULATED DEFICIT, beginning of period (44,673,000) (49,275,000) (7,153,000)
------------ ------------ ------------
ACCUMULATED DEFICIT, end of period $(32,434,000) $(44,673,000) $(49,275,000)
============ ============ ============
</TABLE>
See accompanying note to condensed financial information.
F-27
<PAGE>
CII FINANCIAL, INC. (PARENT ONLY)
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
=============================================
Increase (decrease) in cash
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------
1994 1993 1992
------------ ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 12,239,000 $ 4,602,000 $(42,122,000)
------------ ----------- ------------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Equity in net (income) loss of subsidiaries (15,030,000) (7,719,000) 36,595,000
Depreciation and amortization 828,000 793,000 664,000
Extraordinary gain - - (457,000)
Loss on the sale of investments (3,000) - 248,000
Loss on the sale of property and equipment 14,000 - 64,000
Compensatory stock options (8,000) - (78,000)
Increase (decrease) in cash from changes in:
Other assets 56,000 (34,000) 70,000
Accounts payable and accrued expenses 609,000 (180,000) 1,024,000
Federal income tax, net (1,163,000) (842,000) 7,579,000
------------ ----------- ------------
Total adjustments (14,697,000) (7,982,000) 45,709,000
------------ ----------- ------------
Net cash provided by (used in) operating activities (2,458,000) (3,380,000) 3,587,000
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available for sale investments (130,338,000) - -
Disposal of available for sale investments 135,587,000 - -
Purchase of short-term investments - (538,833,000) (177,035,000)
Disposal of short-term investments - 533,452,000 190,344,000
Increase in investment in subsidiaries (525,000) - -
Purchase of property and equipment - (536,000) (1,680,000)
Disposal of property and equipment 8,000 22,000 64,000
------------ ----------- ------------
Net cash provided by (used in) investing activities 4,732,000 (5,895,000) 11,693,000
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from the exercise of stock options 48,000 193,000 40,000
Repurchase and retire common stock - (3,000) (405,000)
Repurchase of subordinated debentures - - (993,000)
Net transfers to subsidiaries (752,000) (535,000) (4,331,000)
------------ ----------- ------------
Net cash provided by (used in) financing activities (704,000) (345,000) (5,689,000)
------------ ----------- ------------
NET INCREASE (DECREASE) IN CASH 1,570,000 (9,620,000) 9,591,000
CASH, beginning of period 61,000 9,681,000 90,000
------------ ----------- ------------
CASH, end of period $ 1,631,000 $ 61,000 $ 9,681,000
============ =========== ============
</TABLE>
See accompanying note to condensed financial information.
F-28
<PAGE>
CII FINANCIAL, INC. (PARENT ONLY)
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE TO CONDENSED FINANCIAL INFORMATION
=============================================
The parent only financial statements present CII Financial's balance
sheets, operations and cash flows by accounting for the investment in its
consolidated subsidiaries on the equity method.
The accompanying condensed financial information should be read with
the consolidated financial statements and notes to consolidated financial
statements.
F-29
<PAGE>
PART I- FINANCIAL INFORMATION
CII FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNT)
<TABLE>
<CAPTION>
March 31, December 31
1995 1994
---------- ----------
(Unaudited)
<S> <C> <C>
ASSETS:
Investments:
Held to maturity, at amortized cost
(fair value $113,075 and $107,535) 109,744 $ 107,751
Available for sale, at fair value
(amortized cost $104,517 and $109,311) 104,162 108,125
Relocation mortgage loans from employees 5,787 5,841
---------- ----------
Total investments 219,693 221,717
Cash 7,019 6,936
Reinsurance recoverable 30,497 29,407
Premiums receivable, less allowances of
$1,825 and $2,192 for possible losses 13,447 12,789
Financed premiums receivable, less allowance
of $84 and $100 for possible losses 13,128 15,576
Investment income receivable 3,490 3,170
Deferred policy acquisition costs 2,702 2,285
Earned but unbilled receivable 1,925 2,244
Deferred income taxes 4,503 4,000
Property and equipment, less accumulated
depreciation of $2,430 and $2,307 4,144 4,122
Other assets 7,227 5,581
---------- ----------
TOTAL ASSETS $ 307,775 $ 307,827
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
LIABILITIES:
Loss and loss adjustment expenses $ 187,967 $ 190,962
Unearned premiums 10,250 8,940
Ceded reinsurance premiums payable 1,042 543
Convertible subordinated debentures 56,800 56,800
Note payable to bank 8,000 8,000
Federal Income tax payable 796 291
Other liabilities 12,120 13,756
---------- ----------
TOTAL LIABILITIES 276,975 279,292
---------- ----------
SHAREHOLDERS' EQUITY:
Common stock:
Stated value $.50 per share; authorized -
100,000; issued and outstanding - 7,188 and 7,187 3,594 3,593
Additional paid-in capital 58,566 58,563
Unrealized gains (losses) on securities (355) (1,187)
Accumulated deficit (31,005) (32,434)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 30,800 28,535
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 307,775 $ 307,827
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-30
<PAGE>
PART I--FINANCIAL INFORMATION
CII FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1995 1994
-------- --------
(Unaudited)
<S> <C> <C>
REVENUES:
Net earned premiums $ 20,284 $ 23,717
Net investment income 3,501 3,145
Other income 1,399 1,057
-------- --------
Total revenues 25,184 27,919
-------- --------
COSTS AND EXPENSES:
Net loss and loss adjustment expense 11,852 17,274
Policy acquisition, general and administrative 11,904 9,628
-------- --------
Total costs and expenses 23,756 26,902
-------- --------
INCOME BEFORE FEDERAL INCOME TAX 1,428 1,017
Federal income tax expense 0 0
-------- --------
NET INCOME $1,428 $1,017
======== ========
PRIMARY EARNINGS PER SHARE: $0.20 $0.14
======== ========
FULLY DILUTED EARNINGS PER SHARE: $0.19 $0.14
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-31
<PAGE>
PART I- FINANCIAL INFORMATION
CII FINANCIAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1995 1994
-------- --------
(Unaudited)
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES: ($4,511) $6,837
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (186,229) (619,403)
Disposal of investments 189,071 608,350
Financed premium receivable 2,463 (2,077)
Mortgage loan payments received from employees 54 33
Purchase of property and equipment (270) (119)
Proceeds on disposal of property and equipment 0 1
-------- --------
Net cash provided by (used in)
investing activities 5,089 (13,215)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from stock options exercised 4 26
Payment of notes payable 0 (20)
Other obligations 1 (156)
-------- --------
Net cash (used in) provided by
financing activities 5 (150)
-------- --------
Net increase (decrease) in cash 583 (6,528)
CASH, beginning of period 6,436 10,159
-------- --------
CASH, end of period $7,019 $3,631
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-32
<PAGE>
PART I - FINANCIAL INFORMATION
CII FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
============================================
The information furnished in this report reflects all adjustments which are, in
the opinion of management, necessary to a fair statement of the results for the
interim periods presented.
NOTE 1 - INTERIM FINANCIAL STATEMENTS
The interim financial statements for the three months ended March 31, 1995 and
1994 are unaudited. In the opinion of management, such statements reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the results of such periods. The results of operations for
the three months ended March 31, 1995 are not necessarily indicative of the
results for the entire year.
NOTE 2 - INVESTMENTS
The Company implemented Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" on January 1,
1994. The investment portfolio was classified into three categories -- held to
maturity, available for sale, and trading -- based on the ratings of the
security and other factors. Held to maturity investments are reported at
amortized cost. Available for sale investments are reported at fair values and
the net unrealized gain or loss, net of deferred taxes, is included in
shareholders' equity. Trading investments are also reported at fair values but
the net unrealized gain or loss is included in net investment income. As of
March 31, 1995, the available for sale portfolio had a net unrealized loss of
$355,000.
NOTE 3 - NOTE PAYABLE TO BANK
The Company has a $12,000,000 revolving line of credit agreement with a bank
which expires on August 1, 1995. During the term of the agreement, the Company
can borrow at the bank's prime rate plus one-half percent or a fixed LIBOR rate
plus two and a half percent, payable monthly. Advances are available up to 80%
of eligible loans receivable, and are collateralized by installment loans
receivable. A commitment fee of one-tenth percent per annum is payable on the
$12,000,000. The Company is required to maintain a compensating balance of
fifteen percent of the revolving line of credit Under this agreement, the
Company borrowed $8,000,000, at the LIBOR rate plus two and one-half percent
(8.5% at December 31,
F-33
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
1994), maturing on June 12, 1995.
The revolving line of credit agreement requires compliance with certain loan
covenants including, but not limited to, minimum tangible net worth, debt
leverage ratio, and current ratio. The revolving line of credit of $12,000,000
is guaranteed by CII Financial, Inc. (the "Parent Company"). In addition, the
Parent Company subordinated $2,000,000 of its debt. As of December 31, 1994,
NOTE 4 - FEDERAL INCOME TAXES
The current tax provision for the three months ended March 31, 1995 was
$503,000. It was offset by a deferred tax benefit for the same amount. The
current tax provision reflects estimated alternative minimum taxes as the
Company is still in a loss carryforward position. The deferred tax asset has
been evaluated to determine its probability of being realized in the future. As
a result, a valuation allowance has been established for the majority of the
deferred tax assets. There was no tax provision for the months ended March 31,
1994 because of tax exempt interest income, utilization of loss carryforwards
and other tax credits.
NOTE 5 - NET EARNINGS PER COMMON SHARE
Earnings per common share has been calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Common
stock equivalents for the three months ended March 31, 1995 are not included in
the calculation as their effect is immaterial. Convertible subordinated
debentures for the three month periods ended March 31, 1995 and 1994 are
excluded from the calculations of fully diluted earnings per share as their
inclusion would be antidilutive. The number of common shares used for computing
primary and fully diluted net earnings per share were as follows:
<TABLE>
<CAPTION>
Three months ended March 31, 1995 1994
--------- ---------
<S> <C> <C>
Primary.................. 7,187,014 7,170,355
Fully diluted............ 7,496,628 7,170,355
</TABLE>
NOTE 6 - RECLASSIFICATION OF PRIOR AMOUNTS
Certain amounts in the accompanying Condensed Consolidated Balance Sheets at
December 31, 1994 have been reclassified to conform to those classifications
used in 1995.
F-34
<PAGE>
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA FINANCIAL DATA
The accompanying unaudited consolidated condensed pro forma balance sheet
presents the consolidated financial position of Sierra and CII at March 31,
1995, assuming that the proposed Merger had occurred as of March 31, 1995.
Such pro forma information is based upon the historical balance sheet data of
the respective companies, at that date, giving effect to the proposed Merger
using the pooling-of-interests method of accounting and the discontinued
operations adjustments described in the accompanying notes to unaudited
consolidated condensed pro forma financial data.
The accompanying unaudited consolidated condensed pro forma statements of
operations give effect to the proposed Merger by consolidating the results of
operations of Sierra and CII for the three months ended March 31, 1995 and for
each of the years in the three-year period ended December 31, 1994 using the
pooling-of-interests method of accounting and by giving effect to the
discontinued operations adjustments described in the accompanying notes to
unaudited consolidated condensed pro forma financial data.
In the second quarter of 1995, CII determined that it would dispose of
InteLock. The accompanying unaudited consolidated condensed pro forma
financial data contain adjustments to eliminate the operations of InteLock
from continuing operations and to segregate and combine, in the balance sheet,
the net assets and liabilities of InteLock.
Certain reclassifications have been made to the historical financial data of
Sierra for certain periods to conform to its current presentation. Certain
reclassifications have been made to the historical financial data of CII to
conform to Sierra's current presentation. CII's historical balance sheets were
previously unclassified. For purposes of the pro forma presentation, judgments
were made as to expected maturities of assets and liabilities.
The accompanying unaudited consolidated condensed pro forma financial data
should be read in conjunction with the separate historical financial
statements and notes thereto of Sierra and CII. The following unaudited
consolidated condensed pro forma financial data is presented for information
purposes only and is not necessarily indicative of the results of future
operations of the consolidated entity or the actual results that would have
been achieved had the Merger been consummated on the dates presented.
F-35
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA BALANCE SHEET
MARCH 31, 1995
<TABLE>
<CAPTION>
HISTORICAL DISCONTINUED POOLING-OF-
-------------------------- OPERATIONS INTERESTS PRO FORMA
SIERRA CII ADJUSTMENTS ADJUSTMENTS CONSOLIDATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and Cash
Equivalents........... $ 28,014,000 $ 7,019,000 $ (308,000)(c) $ 34,725,000
Short-term Securities.. 90,024,000 37,488,000 127,512,000
Accounts Receivable.... 6,340,000 15,372,000 21,712,000
Reinsurance
Recoverable........... 1,827,000 1,827,000
Financed Premiums
Receivable............ 13,128,000 13,128,000
Prepaid Expenses and
Other Assets.......... 8,352,000 12,148,000 (4,017,000)(c) $ 3,200,000 (d) 19,683,000
------------ ------------ ------------ ------------ ------------
Total Current Assets. 132,730,000 86,982,000 (4,325,000) 3,200,000 218,587,000
------------ ------------ ------------ ------------ ------------
Land, Building and
Equipment.............. 91,239,000 6,574,000 (162,000)(c) 97,651,000
Accumulated Deprecia-
tion.................. (24,309,000) (2,430,000) 58,000 (c) (26,681,000)
------------ ------------ ------------ ------------ ------------
Land, Building and
Equipment-Net....... 66,930,000 4,144,000 (104,000) 70,970,000
------------ ------------ ------------ ------------ ------------
Other Assets:
Funds Withheld by
Ceding Insurance
Company............... 9,855,000 9,855,000
Long-term Securities... 12,626,000 170,360,000 182,986,000
Restricted Cash and
Securities............ 4,184,000 6,058,000 10,242,000
Reinsurance
Recoverable .......... 28,670,000 28,670,000
Net Assets of
Discontinued
Operations............ 2,926,000 (c) 2,926,000
Other.................. 5,963,000 11,561,000 17,524,000
------------ ------------ ------------ ------------ ------------
Total Other Assets... 32,628,000 216,649,000 2,926,000 252,203,000
------------ ------------ ------------ ------------ ------------
TOTAL ASSETS....... $232,288,000 $307,775,000 $ (1,503,000) $ 3,200,000 $541,760,000
============ ============ ============ ============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Accrued Liabilities.... $ 8,193,000 $ 12,007,000 $(1,503,000)(c) $ 10,500,000 (b) $ 29,197,000
Accrued Payroll and
Taxes................. 8,715,000 1,951,000 10,666,000
Medical Claims
Payable............... 30,574,000 30,574,000
Current Portion of
Loss and Loss
Adjustment Expense.... 47,706,000 47,706,000
Unearned Premiums
Revenue............... 9,714,000 10,250,000 19,964,000
Current Portion of
Long-term Debt........ 2,186,000 8,000,000 10,186,000
------------ ------------ ------------ ------------ ------------
Total Current Liabil-
ities............... 59,382,000 79,914,000 (1,503,000) 10,500,000 148,293,000
Future Policy Benefits.. 9,855,000 9,855,000
Loss and Loss Adjustment
Expense................ 140,261,000 140,261,000
Long-term Debt.......... 18,688,000 56,800,000 75,488,000
Minority Interests...... 457,000 457,000
------------ ------------ ------------ ------------ ------------
Total Liabilities.... 88,382,000 276,975,000 (1,503,000) 10,500,000 374,354,000
------------ ------------ ------------ ------------ ------------
Shareholders' Equity:
Common Stock........... 74,000 3,594,000 (3,581,000)(a) 87,000
Additional Paid-in
Capital............... 81,866,000 58,566,000 3,581,000 (a) 144,013,000
Treasury Stock......... (130,000) (130,000)
Unrealized Loss on
Available-for-Sale
Securities............ (889,000) (355,000) (1,244,000)
Retained Earnings (Ac-
cumulated Deficit).... 62,985,000 (31,005,000) (10,500,000)(b) 24,680,000
3,200,000 (d)
------------ ------------ ------------ ------------ ------------
Total Shareholders'
Equity.............. 143,906,000 30,800,000 (7,300,000) 167,406,000
------------ ------------ ------------ ------------ ------------
TOTAL LIABILITIES &
SHAREHOLDERS'
EQUITY............ $232,288,000 $307,775,000 $ (1,503,000) $ 3,200,000 $541,760,000
============ ============ ============ ============ ============
</TABLE>
See the accompanying notes to unaudited consolidated
condensed pro forma financial data
F-36
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1995
<TABLE>
<CAPTION>
HISTORICAL
------------------------ PRO FORMA PRO FORMA
SIERRA CII ADJUSTMENTS CONSOLIDATED
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Premiums................ $75,548,000 $ 75,548,000
Specialty Product Reve-
nues................... 2,791,000 $20,284,000 23,075,000
Professional Fees....... 3,818,000 3,818,000
Investment and Other
Revenues............... 1,472,000 4,900,000 $ (541,000)(c) 5,831,000
----------- ----------- ----------- ------------
Total............... 83,629,000 25,184,000 (541,000) 108,272,000
----------- ----------- ----------- ------------
OPERATING EXPENSES:
Medical Expenses........ 57,720,000 57,720,000
Specialty Product
Expenses............... 1,600,000 11,852,000 13,452,000
General, Administrative
and Other.............. 15,109,000 11,904,000 ( (1,504,000)(c) 24,279,000
( (1,230,000)(e)
----------- ----------- ----------- ------------
Total............... 74,429,000 23,756,000 (2,734,000) 95,451,000
----------- ----------- ----------- ------------
OTHER INCOME (EXPENSE):
Minority Interests...... 501,000 501,000
Interest Expense and
Other, Net............. (307,000) (1,230,000)(e) (1,537,000)
----------- ----------- ----------- ------------
Total............... 194,000 (1,230,000) (1,036,000)
----------- ----------- ----------- ------------
INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES........... 9,394,000 1,428,000 963,000 11,785,000
PROVISION FOR INCOME
TAXES.................. 3,147,000 3,147,000
----------- ----------- ----------- ------------
INCOME FROM CONTINUING
OPERATIONS............. $ 6,247,000 $ 1,428,000 $ 963,000 $ 8,638,000
=========== =========== =========== ============
INCOME PER SHARE FROM
CONTINUING OPERATIONS.. $ 0.43 $ 0.19 $ 0.50 (f)
=========== =========== ============
</TABLE>
See the accompanying notes to unaudited consolidated
condensed pro forma financial data
F-37
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
HISTORICAL
-------------------------- PRO FORMA PRO FORMA
SIERRA CII ADJUSTMENTS CONSOLIDATED
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Premiums................ $269,382,000 $269,382,000
Specialty Product Reve-
nues................... 10,487,000 $ 90,800,000 101,287,000
Professional Fees....... 12,331,000 12,331,000
Investment and Other
Revenues............... 3,601,000 17,515,000 $(2,035,000)(c) 19,081,000
------------ ------------ ----------- ------------
Total............... 295,801,000 108,315,000 (2,035,000) 402,081,000
------------ ------------ ----------- ------------
OPERATING EXPENSES:
Medical Expenses........ 200,229,000 200,229,000
Specialty Product Ex-
penses................. 5,823,000 53,689,000 59,512,000
General, Administrative
and Other.............. 53,671,000 46,082,000 ( (4,536,000)(c) 90,759,000
( (4,458,000)(e)
------------ ------------ ----------- ------------
Total............... 259,723,000 99,771,000 (8,994,000) 350,500,000
------------ ------------ ----------- ------------
OTHER INCOME (EXPENSE):
Minority Interests...... (113,000) (113,000)
Interest Expense and
Other, Net............. (1,830,000) (4,458,000)(e) (6,288,000)
------------ ------------ ----------- ------------
Total............... (1,943,000) (4,458,000) (6,401,000)
------------ ------------ ----------- ------------
INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES........... 34,135,000 8,544,000 2,501,000 45,180,000
PROVISION (BENEFIT) FOR
INCOME TAXES........... 11,931,000 (3,695,000) 8,236,000
------------ ------------ ----------- ------------
INCOME FROM CONTINUING
OPERATIONS............. $ 22,204,000 $ 12,239,000 $ 2,501,000 $ 36,944,000
============ ============ =========== ============
INCOME PER SHARE FROM
CONTINUING OPERATIONS.. $ 1.71 $ 1.70 $ 2.36 (f)
============ ============ ============
</TABLE>
See the accompanying notes to unaudited consolidated
condensed pro forma financial data
F-38
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
HISTORICAL
-------------------------- PRO FORMA PRO FORMA
SIERRA CII ADJUSTMENTS CONSOLIDATED
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Premiums................ $240,691,000 $240,691,000
Specialty Product Reve-
nues................... 4,100,000 $109,614,000 113,714,000
Professional Fees....... 11,254,000 11,254,000
Investment and Other
Revenues............... 2,032,000 16,588,000 $ (849,000)(c) 17,771,000
------------ ------------ ----------- ------------
Total............... 258,077,000 126,202,000 (849,000) 383,430,000
------------ ------------ ----------- ------------
OPERATING EXPENSES:
Medical Expenses........ 178,526,000 178,526,000
Specialty Product Ex-
penses................. 2,977,000 82,752,000 85,729,000
General, Administrative
and Other.............. 50,715,000 38,652,000 ( (1,253,000)(c) 83,854,000
( (4,260,000)(e)
------------ ------------ ----------- ------------
Total............... 232,218,000 121,404,000 (5,513,000) 348,109,000
------------ ------------ ----------- ------------
OTHER INCOME (EXPENSE):
Minority Interests...... (179,000) (179,000)
Interest Expense and
Other, Net............. 2,000 (4,260,000)(e) (4,258,000)
------------ ------------ ----------- ------------
Total............... (177,000) (4,260,000) (4,437,000)
------------ ------------ ----------- ------------
INCOME FROM CONTINUING
OPERATIONS BEFORE
INCOME TAXES........... 25,682,000 4,798,000 404,000 30,884,000
PROVISION FOR INCOME
TAXES.................. 8,239,000 196,000 8,435,000
------------ ------------ ----------- ------------
INCOME FROM CONTINUING
OPERATIONS............. $ 17,443,000 $ 4,602,000 $ 404,000 $ 22,449,000
============ ============ =========== ============
INCOME PER SHARE FROM
CONTINUING OPERATIONS.. $ 1.42 $ 0.64 $ 1.50 (f)
============ ============ ============
</TABLE>
See the accompanying notes to unaudited consolidated
condensed pro forma financial data
F-39
<PAGE>
SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1992
<TABLE>
<CAPTION>
HISTORICAL
-------------------------- PRO FORMA PRO FORMA
SIERRA CII ADJUSTMENTS CONSOLIDATED
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Premiums................ $217,624,000 $217,624,000
Specialty Product Reve-
nues................... 4,063,000 $103,166,000 107,229,000
Professional Fees....... 10,206,000 10,206,000
Investment and Other
Revenues............... 2,060,000 13,337,000 15,397,000
------------ ------------ ----------- ------------
Total............... 233,953,000 116,503,000 350,456,000
------------ ------------ ----------- ------------
OPERATING EXPENSES:
Medical Expenses........ 166,495,000 166,495,000
Specialty Product Ex-
penses................. 2,451,000 119,496,000 121,947,000
General, Administrative
and Other.............. 44,176,000 38,231,000 $(4,136,000)(e) 78,271,000
------------ ------------ ----------- ------------
Total............... 213,122,000 157,727,000 (4,136,000) 366,713,000
------------ ------------ ----------- ------------
OTHER INCOME (EXPENSE):
Minority Interests...... (249,000) (249,000)
Interest Expense and
Other, Net............. (505,000) (4,136,000)(e) (4,641,000)
Litigation Settlement... (784,000) (784,000)
------------ ------------ ----------- ------------
Total............... (1,538,000) $(4,136,000) (5,674,000)
------------ ------------ ----------- ------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES.... 19,293,000 (41,224,000) (21,931,000)
PROVISION FOR INCOME
TAXES.................. 5,690,000 1,355,000 7,045,000
------------ ------------ ----------- ------------
INCOME (LOSS) FROM
CONTINUING OPERATIONS.. $ 13,603,000 $(42,579,000) $(28,976,000)
============ ============ =========== ============
INCOME (LOSS) PER SHARE
FROM CONTINUING
OPERATIONS............. $ 1.14 $ (5.94) $ (1.98)(f)
============ ============ ============
</TABLE>
See the accompanying notes to unaudited consolidated
condensed pro forma financial data
F-40
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED CONDENSED PRO FORMA FINANCIAL DATA
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed pro forma balance sheet
presents the consolidated financial position of Sierra and CII as of March 31,
1995, assuming that the proposed Merger had occurred as of March 31, 1995, and
records the effects of the decision to dispose of InteLock. The accompanying
unaudited consolidated condensed pro forma statements of operations give
effect to the proposed Merger by consolidating the results of operations of
the respective companies for the three months ended March 31, 1995 and for
each of the years in the three-year period ended December 31, 1994 assuming
that the proposed Merger had occurred as of January 1, of each period
presented.
NOTE 2--PRO FORMA ADJUSTMENTS
(a) To reflect the issuance of approximately 2,660,000 shares of Sierra Common
Stock in exchange for 100% of the shares of outstanding CII Common Stock
based upon applying the Exchange Ratio fixed at 0.37 to the number of
shares of CII Common Stock outstanding at March 31, 1995.
(b) Nonrecurring costs estimated to be $10,500,000 will be recorded in
connection with the Merger. These costs consist primarily of professional
fees. Because such costs are nonrecurring, they have not been recorded in
the accompanying unaudited consolidated condensed pro forma statements of
operation. However, such costs will be charged to income in the first
period following the consummation of the Merger.
(c) In June 1995, CII signed a definitive agreement to sell InteLock, its
majority-owned subsidiary engaged in the electronic door lock
manufacturing business for a combination of common stock, warrants and
cash. Losses on discontinued operations were $963,000, $2,501,000 and
$404,000 for the three-month period ended March 31, 1995 and the years
ended December 31, 1994 and 1993, respectively. In the three month period
ended June 30, 1995, CII will report a charge to income and a reduction of
shareholders' equity of approximately $5,637,000 for a total loss of
$6,600,000 in 1995.
(d) Subsequent to the Merger, CII will be included in Sierra's consolidated
tax return. CII has loss reserves that were expensed for financial
reporting purposes but not deducted for income tax purposes resulting in a
deferred tax asset. Because of the unlikelihood that CII would be able to
utilize the benefit of the deferred tax asset, a valuation reserve was
recorded to reduce the deferred tax asset. As a result of including CII in
the consolidated tax return with Sierra, it is more likely than not that
$3,200,000 of the benefit of the deferred tax asset will be utilized.
Consequently, in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("FAS 109"), $3,200,000
of the valuation allowance related to the net deferred tax asset will be
reduced and will be recorded as an increase in the amount of the
adjustment to the cumulative effect of adopting FAS 109, effective January
1, 1993, and will be reported in the statement of operations below income
from continuing operations.
(e) To conform CII's financial statement presentation to that of Sierra's,
interest expense which has historically been classified by CII as general,
administrative and other has been reclassified to interest expense and
other, net.
(f) Pro forma consolidated earnings per share calculations are based upon the
weighted average common shares outstanding for Sierra for each period plus
CII's weighted average common shares outstanding multiplied by the
Exchange Ratio fixed at 0.37. The pro forma weighted average common shares
outstanding were 17,413,000, 15,678,000, 14,939,000 and 14,601,000 for the
period ended March 31, 1995 and the years ended December 31, 1994, 1993
and 1992, respectively.
F-41
<PAGE>
EXHIBIT 2
EXECUTION COPY
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
AMONG
SIERRA HEALTH SERVICES, INC.
HEALTH ACQUISITION CORP.
AND
CII FINANCIAL, INC.
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I
THE MERGER................................................................ 1
1.1. Effective Time of the Merger......................................... 1
1.2. Closing.............................................................. 1
1.3. Effects of the Merger................................................ 1
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT
CORPORATIONS; EXCHANGE OF CERTIFICATES................................... 2
2.1. Effect on Capital Stock.............................................. 2
(a) Capital Stock of Sierra Sub...................................... 2
(b) Cancellation of Sierra-Owned Stock............................... 2
(c) Exchange Ratio for CII Common Stock.............................. 2
(d) Shares of Dissenting Holders..................................... 3
2.2. Exchange of Certificates............................................. 3
(a) Exchange Agent................................................... 3
(b) Exchange Procedures.............................................. 3
(c) Distributions with Respect to Unexchanged Shares................. 4
(d) Lost, Stolen or Destroyed Certificates........................... 4
(e) No Further Ownership Rights in CII Common Stock.................. 4
(f) No Fractional Shares............................................. 4
(g) Termination of Exchange Fund..................................... 4
(h) No Liability..................................................... 4
ARTICLE III
REPRESENTATIONS AND WARRANTIES............................................ 5
3.1. Representations and Warranties of CII................................ 5
(a) Organization, Standing and Power................................. 5
(b) Capital Structure................................................ 5
(c) Authority........................................................ 5
(d) SEC Documents.................................................... 6
(e) Information Supplied............................................. 6
(f) Compliance with Applicable Laws.................................. 7
(g) Financial Statements of Subsidiaries............................. 8
(h) Litigation....................................................... 8
(i) Labor and Employment Matters..................................... 9
(j) Absence of Certain Changes....................................... 9
(k) Material Contracts............................................... 10
(l) Officers and Directors and Employees............................. 11
(m) Title to and Condition of Properties and Assets.................. 12
(n) Patents, Copyrights, Service Marks and Trademarks................ 12
(o) Employee Benefit Plans........................................... 12
(p) Transactions with Officers, Directors and Others................. 13
(q) Insurance Agents................................................. 14
(r) Policyholders.................................................... 14
(s) Insurance Matters................................................ 14
(t) Taxes............................................................ 14
(u) Opinion of Financial Advisor..................................... 18
(v) Section 1203 of the CGCL Not Applicable.......................... 18
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(w) Vote Required.................................................... 18
(x) Accounting Matters............................................... 18
(y) No Change in Capital Structure................................... 18
(z) Investment Company Act........................................... 18
3.2. Representations and Warranties of Sierra and Sierra Sub.............. 18
(a) Organization; Standing and Power.................................. 18
(b) Capital Structure................................................. 19
(c) Authority......................................................... 19
(d) SEC Documents..................................................... 20
(e) Information Supplied.............................................. 20
(f) Compliance with Applicable Laws................................... 20
(g) Litigation........................................................ 21
(h) Absence of Certain Changes or Events.............................. 21
(i) Opinions of Financial Advisors.................................... 21
(j) Accounting Matters................................................ 21
(k) Ownership of CII Common Stock..................................... 21
(l) Interim Operations of Sierra Sub.................................. 21
(m) No Change in Capital Structure.................................... 21
(n) Investment Company Act............................................ 21
(o) Representations Relating to Tax-Free Reorganization............... 21
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS.................................. 22
4.1. Covenants of CII...................................................... 22
(a) Ordinary Course................................................... 22
(b) Dividends; Changes in Stock....................................... 22
(c) Issuance of Securities............................................ 22
(d) Governing Documents............................................... 23
(e) No Solicitations.................................................. 23
(f) No Acquisitions................................................... 23
(g) No Dispositions................................................... 23
(h) Indebtedness...................................................... 24
(i) Other Actions..................................................... 24
(j) Advice of Changes; SEC Filings.................................... 24
(k) Access to Information............................................. 24
(l) Affiliates........................................................ 24
ARTICLE V
ADDITIONAL AGREEMENTS...................................................... 24
5.1. Preparation of S-4 and the Proxy Statement............................ 24
5.2. Letter of CII's Accountants........................................... 25
5.3. Meetings.............................................................. 25
5.4. Legal Conditions to Merger............................................ 25
5.5. Stock Exchange Listing................................................ 25
5.6. Employee Benefit Plans................................................ 25
5.7. Stock Options......................................................... 25
5.8. Brokers or Finders.................................................... 26
5.9. Access to Sierra Records.............................................. 26
5.10. Employment Agreements................................................ 26
5.11. Indemnification; Directors' and Officers' Insurance.................. 27
5.12. Additional Agreements; Reasonable Efforts............................ 28
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
5.13. Pooling............................................................... 28
5.14. No Actions Inconsistent With Tax-Free Reorganization.................. 28
ARTICLE VI
CONDITIONS PRECEDENT........................................................ 28
6.1. Conditions to Each Party's Obligation To Effect the Merger............ 28
(a)Approval........................................................... 28
(b)NYSE Listing....................................................... 28
(c)Other Approvals.................................................... 28
(d)S-4................................................................ 28
(e)No Injunctions or Restraints....................................... 28
(f)Tax Returns........................................................ 28
(g)Supplemental Indenture............................................. 29
6.2. Conditions of Obligations of Sierra and Sierra Sub.................... 29
(a)Representations and Warranties..................................... 29
(b)Performance of Obligations of CII.................................. 29
(c)Letter from CII Affiliates......................................... 29
(d)Tax Opinion........................................................ 29
(e)Consents Under Agreements.......................................... 29
(f)No Amendments to Resolutions....................................... 29
6.3. Conditions of Obligations of CII...................................... 29
(a)Representations and Warranties..................................... 29
(b)Performance of Obligations of Sierra and Sierra Sub................ 30
(c)Tax Opinion........................................................ 30
(d)Consents Under Agreements.......................................... 30
(e)No Amendments to Resolutions....................................... 30
ARTICLE VII
TERMINATION AND AMENDMENT................................................... 30
7.1. Termination........................................................... 30
7.2. Effect of Termination................................................. 31
7.3. Amendment............................................................. 31
7.4. Extension; Waiver..................................................... 31
7.5. Fees and Expenses..................................................... 31
ARTICLE VIII
GENERAL PROVISIONS.......................................................... 32
8.1. Nonsurvival of Representations, Warranties and Agreements............. 32
8.2. Notices............................................................... 32
8.3. Interpretation........................................................ 33
8.4. Counterparts.......................................................... 33
8.5. Entire Agreement; No Third Party Beneficiaries; Rights of Ownership... 33
8.6. Governing Law......................................................... 33
8.7. No Remedy in Certain Circumstances.................................... 34
8.8. Publicity............................................................. 34
8.9. Assignment............................................................ 34
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER dated as of June 12, 1995, among Sierra Health
Services, Inc., a Nevada corporation ("Sierra"), Health Acquisition Corp., a
California corporation and a wholly owned subsidiary of Sierra ("Sierra Sub"),
and CII Financial, Inc., a California corporation ("CII").
WHEREAS the respective Boards of Directors of Sierra, Sierra Sub and CII have
approved the merger of CII and Sierra Sub;
WHEREAS, to effect such transaction, the respective Boards of Directors of
Sierra, Sierra Sub and CII, and Sierra acting as the sole shareholder of Sierra
Sub, have approved the merger of CII and Sierra Sub (the "Merger"), pursuant to
the terms and conditions of this Agreement, whereby each issued and outstanding
share of Common Stock, stated value $.50 per share, of CII ("CII Common Stock")
not owned directly or through a wholly-owned Subsidiary by Sierra or directly
by CII will be converted into the right to receive Common Stock, par value
$.005 per share, of Sierra ("Sierra Common Stock"), all as provided herein;
WHEREAS Sierra, Sierra Sub and CII desire to make certain representations,
warranties and agreements in connection with the Merger and also to prescribe
various conditions to the Merger;
WHEREAS, for Federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization under the provisions of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a "pooling of interests";
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement, the parties agree as follows:
ARTICLE I
THE MERGER
1.1. Effective Time of the Merger. Subject to the provisions of this
Agreement, the respective officers certificate of each of Sierra Sub and CII
required by Section 1103 of the California General Corporation Law (the "CGCL")
shall be duly prepared, executed and acknowledged by Sierra Sub or CII, as
appropriate, and this Agreement, having been duly executed, with such officers'
certificates attached (such documents and any other documents necessary to
effect the Merger in accordance with the CGCL shall be referred to as the
"Merger Filings") shall be delivered by the Surviving Corporation (as defined
in Section 1.3) to the Secretary of State of the State of California for
filing. The Merger shall become effective upon the filing of the Merger Filings
with the Secretary of State of the State of California (the "Effective Time").
1.2. Closing. The closing of the Merger (the "Closing") will begin at 10:00
a.m. on a date to be specified by the parties, which shall be no later than the
fifth business day after satisfaction of the latest to occur of the conditions
set forth in Sections 6.1, 6.2(b) (other than the delivery of the officers'
certificates referred to therein), 6.2(e), 6.3(b) (other than the delivery of
the officers' certificates referred to therein) and 6.3(e) (provided that the
other closing conditions set forth in Article VI have been met or waived as
provided in Article VI at or prior to the Closing) (the "Closing Date"), at the
offices of Morgan, Lewis & Bockius, 801 South Grand Avenue, Los Angeles, CA
90017-4615 unless another date or place is agreed to in writing by the parties
hereto.
1.3. Effects of the Merger. (a) At the Effective Time, (i) the separate
existence of Sierra Sub shall cease and Sierra Sub shall be merged with and
into CII (Sierra Sub and CII are sometimes referred to herein as the
"Constituent Corporations" and CII is sometimes referred to herein as the
"Surviving Corporation"), (ii) the Articles of Incorporation of CII shall be
amended by filing a Certificate of Amendment pursuant to Sections 900 and 907
of the CGCL, substantially in the form attached as Exhibit 1.3(a)(ii), so that
Article IV of such Articles of Incorporation shall read in its entirety as
follows: "The corporation is authorized to issue only one class of
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shares of stock which shall be designated as "Common Stock;" and the total
number of shares which this Corporation is authorized to issue is one thousand
(1,000)," and, as so amended, the Articles shall be the Articles of
Incorporation of the Surviving Corporation and (iii) the By-laws of CII as in
effect immediately prior to the Effective Time shall be the By-laws of the
Surviving Corporation.
(b) At and after the Effective Time, in accordance with Section 1107 of the
CGCL, the Surviving Corporation shall possess all the rights and property of
the Constituent Corporations and be subject to all the debts and liabilities of
the Constituent Corporations as if the Surviving Corporation had itself
incurred them; all rights of creditors and all liens upon any property of
either of the Constituent Corporations shall be preserved unimpaired, provided
that such liens upon property of a disappearing corporation shall be limited to
the property affected thereby immediately prior to the Effective Time; and any
action or proceeding pending by or against any disappearing corporation may be
prosecuted to judgment, which shall bind the Surviving Corporation, or the
Surviving Corporation may be proceeded against or substituted in its place.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
2.1. 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 CII
Common Stock or capital stock of Sierra Sub:
(a) Capital Stock of Sierra Sub. Each issued and outstanding share of the
capital stock of Sierra Sub shall be converted into and become one fully
paid and nonassessable share of Common Stock, stated value $.50 per share,
of the Surviving Corporation.
(b) Cancellation of Sierra-Owned Stock. All shares of CII Common Stock
that are owned by Sierra, Sierra Sub or any other wholly-owned Subsidiary
of Sierra shall be canceled and retired and shall cease to exist and no
stock of Sierra or other consideration shall be delivered in exchange
therefor. As used in this Agreement, the word "Subsidiary" means any
corporation or other organization, whether incorporated or unincorporated,
of which a party to this Agreement or any other Subsidiary of such a party
(i) is a general partner (in the case of a partnership), or (ii) holds
directly or indirectly at least a majority of the securities or other
interests having by their terms ordinary voting power to elect a majority
of the Board of Directors or others performing similar functions with
respect to such corporation or other organization.
(c) Exchange Ratio for CII Common Stock. (i) Subject to Section 2.2(f),
each issued and outstanding share of CII Common Stock (other than shares to
be canceled in accordance with Section 2.1(b)) shall be converted into the
right to receive .370 (the "Conversion Number") of a fully paid and
nonassessable share of Sierra Common Stock, including the corresponding
percentage of a right (the "Right") to purchase shares of Series A Junior
Participating Preferred Stock of Sierra (the "Sierra Series A Preferred")
pursuant to the Rights Agreement dated as of June 14, 1994, between Sierra
and Continental Stock Transfer & Trust Company, as Rights Agent (the
"Rights Agreement"). Prior to the Distribution Date (as defined in the
Rights Agreement) all references in this Agreement to the Sierra Common
Stock to be received pursuant to the Merger shall be deemed to include the
Rights. All such shares of CII Common Stock shall no longer be outstanding
and shall automatically be canceled and retired and shall cease to exist,
and each holder of a certificate representing any such shares shall cease
to have any rights with respect thereto, except the right to receive the
shares of Sierra Common Stock to be issued in consideration therefor upon
the surrender of such certificate in accordance with Section 2.2, without
interest.
(ii) With respect to CII's 7 1/2% Convertible Subordinated Debentures Due
2001 (the "CII Debentures") issued pursuant to the Indenture (the
"Indenture") dated as of September 15, 1991 between CII and Manufacturers
Hanover Trust Company, as Trustee (the "Trustee"), and pursuant to an
indenture
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supplemental thereto to be executed by CII, Sierra and the Trustee as of
the Closing Date, at the Effective Time, the CII Debentures will no longer
be convertible into CII Common Stock and will be convertible into Sierra
Common Stock. The price at which such shares of Sierra Common Stock shall
be delivered upon conversion of the CII Debentures shall be the quotient of
the "conversion price" (as defined in the Indenture) in effect immediately
prior to the Effective Time divided by the Conversion Number, subject to
further adjustment as provided in the Indenture.
(d) Shares of Dissenting Holders. (i) Notwithstanding anything to the
contrary contained in this Agreement, any holder of CII Common Stock with
respect to which dissenters' rights, if any, are granted by reason of the
Merger under the CGCL and who does not vote in favor of the Merger and who
otherwise complies with Chapter 13 of the CGCL ("CII Dissenting Shares"),
shall not be entitled to receive shares of Sierra Common Stock pursuant to
Section 2.1(c) hereof, unless such holder fails to perfect, effectively
withdraws or loses his right to dissent from the Merger under the CGCL.
Such holder shall be entitled to receive only the payment provided for by
Chapter 13 of the CGCL. If any such holder so fails to perfect, effectively
withdraws or loses his dissenters' rights under the CGCL, his CII
Dissenting Shares shall thereupon be deemed to have been converted, as of
the Effective Time, into the right to receive shares of Sierra Common Stock
pursuant to Section 2.1(c).
(ii) Any payments relating to CII Dissenting Shares shall be made solely
by the Surviving Corporation and no funds or other property have been or
will be provided by Sierra Sub or any of its other direct or indirect
Subsidiaries for such payment.
2.2. Exchange of Certificates. (a) Exchange Agent. As of the Effective Time,
Sierra shall deposit with Continental Stock Transfer & Trust Company, or
another bank or trust company designated by Sierra and reasonably acceptable to
CII (the "Exchange Agent"), for the benefit of the holders of shares of CII
Common Stock, for exchange in accordance with this Article II, through the
Exchange Agent: (i) certificates representing the appropriate number of shares
of Sierra Common Stock and (ii) cash to be paid in lieu of fractional shares of
Sierra Common Stock (such shares of Sierra Common Stock and such cash are
hereinafter referred to as the "Exchange Fund") issuable pursuant to Section
2.1 in exchange for outstanding shares of CII Common Stock.
(b) Exchange Procedures. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of CII Common Stock (the "Certificates") whose
shares were converted into the right to receive shares of Sierra Common Stock
pursuant to Section 2.1 and whose shares are not CII Dissenting Shares: (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 Exchange Agent and shall be in such form and have such
other provisions as Sierra and CII may reasonably specify) and (ii)
instructions for use in effecting the surrender of the Certificates in exchange
for certificates representing shares of Sierra Common Stock. Upon surrender of
a Certificate for cancellation to the Exchange Agent or to such other agent or
agents as may be appointed by Sierra and Sierra Sub, together with such letter
of transmittal, duly executed, the holder of such Certificate shall be entitled
to receive in exchange therefor a certificate representing that number of whole
shares of Sierra Common Stock and, if applicable, a check representing the cash
consideration to which such holder may be entitled on account of a fractional
share of Sierra Common Stock, which such holder has the right to receive
pursuant to the provisions of this Article II, and the Certificate so
surrendered shall forthwith be canceled. In the event of a transfer of
ownership of CII Common Stock which is not registered in the transfer records
of CII, a certificate representing the proper number of shares of Sierra Common
Stock may be issued to a transferee if the Certificate representing such CII
Common Stock is presented to the Exchange Agent, accompanied by all documents
required to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 2.2, each Certificate shall be deemed at any time
after the Effective Time to represent only the right to receive upon such
surrender the certificate representing shares of Sierra Common Stock and cash
in lieu of any fractional shares of Sierra Common Stock as contemplated by this
Section 2.2.
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(c) Distributions with Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the Effective Time with respect to Sierra
Common Stock with a record date after the Effective Time shall be paid to the
holder of any unsurrendered Certificate with respect to the shares of Sierra
Common Stock represented thereby and no cash payment in lieu of fractional
shares shall be paid to any such holder pursuant to Section 2.2(f) until the
holder of record of such Certificate shall surrender such Certificate. Subject
to the effect of applicable laws, following surrender of any such Certificate,
there shall be paid to the record holder of the certificates representing whole
shares of Sierra Common Stock issued in exchange therefor, without interest,
(i) at the time of such surrender, the amount of any cash payable in lieu of a
fractional share of Sierra Common Stock to which such holder is entitled
pursuant to Section 2.2(f) and the amount of dividends or other distributions
with a record date after the Effective Time theretofore paid with respect to
such whole shares of Sierra Common Stock, and (ii) at the appropriate payment
date, the amount of dividends or other distributions with a record date after
the Effective Time but prior to surrender and a payment date subsequent to
surrender payable with respect to such whole shares of Sierra Common Stock.
(d) Lost, Stolen or Destroyed Certificates. In the event that any certificate
for CII Common Stock shall have been lost, stolen or destroyed, the Exchange
Agent shall issue in exchange therefor, upon the making of an affidavit of that
fact by the holder thereof such shares of Sierra Common Stock and cash in lieu
of fractional shares, if any, as may be required pursuant to this Agreement
provided, however, that Sierra may, in its discretion, require the delivery of
a suitable bond or indemnity.
(e) No Further Ownership Rights in CII Common Stock. All shares of Sierra
Common Stock issued upon the surrender for exchange of shares of CII Common
Stock in accordance with the terms hereof (including any cash paid pursuant to
Section 2.2(c) or 2.2(f)) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of CII Common Stock,
subject, however, to the Surviving Corporation's obligation to pay any
dividends or make any other distributions with a record date prior to the
Effective Time which may have been declared or made by CII on such shares of
CII Common Stock in accordance with the terms of this Agreement or prior to the
date hereof and which remain unpaid at the Effective Time, and there shall be
no further registration of transfers on the stock transfer books of the
Surviving Corporation of the shares of CII 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 canceled and exchanged as provided in this Article II.
(f) No Fractional Shares. No fractions of a share of Sierra Common Stock
shall be issued in the Merger, but in lieu thereof each holder of shares of CII
Common Stock otherwise entitled to a fraction of a share of Sierra Common Stock
shall, upon surrender of his certificate or certificates, be entitled to
receive an amount of cash (without interest) determined by multiplying the
closing price for Sierra Common Stock as reported on the New York Stock
Exchange ("NYSE") Composite Transactions on the business day two days prior to
the Effective Date by the fractional share interest to which such holder would
otherwise be entitled. The parties acknowledge that payment of the cash
consideration in lieu of issuing fractional shares was not separately bargained
for consideration but merely represents a mechanical rounding off for purposes
of simplifying the corporate and accounting problems which would otherwise be
caused by the issuance of fractional shares.
(g) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the shareholders of CII for six months after the
Effective Time shall be delivered to Sierra, upon demand, and any shareholders
of CII who have not theretofore complied with this Article II shall thereafter
look only to Sierra for payment of their claim for Sierra Common Stock, as the
case may be, any cash in lieu of fractional shares of Sierra Common Stock and
any dividends or distributions with respect to Sierra Common Stock.
(h) No Liability. Neither Sierra nor CII shall be liable to any holder of
shares of CII Common Stock, or Sierra Common Stock, as the case may be, for
such shares (or dividends or distributions with respect thereto) or cash from
the Exchange Fund delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1. Representations and Warranties of CII. CII represents and warrants to
Sierra and Sierra Sub as follows:
(a) Organization, Standing and Power. Each of CII and its Subsidiaries is
a corporation, duly organized, validly existing and in good standing under
the laws of its jurisdiction of organization, has all requisite power and
authority to own, lease and operate its properties and to carry on its
business, including in the case of California Indemnity Insurance Company,
a California corporation, Commercial Casualty Insurance Company, a
California corporation, Financial Assurance Company, Ltd., a Cayman Islands
corporation (collectively, the "Insurance Subsidiaries"), their respective
insurance businesses, 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 when the failure to be so qualified would
not have a material adverse effect on such entity. As used in this
Agreement, any reference to any event, change or effect being material with
respect to any entity means an event, change or effect having a material
effect on the condition (financial or otherwise), properties, assets,
liabilities, businesses or operations of such entity.
(b) Capital Structure. As of the date hereof, the authorized capital
stock of CII consists of 100,000,000 shares of CII Common Stock. At the
close of business on June 9, 1995: (i) 7,187,721 shares of CII Common Stock
were outstanding, 1,480,560 shares of CII Common Stock were reserved for
issuance upon the exercise of outstanding stock options or pursuant to
CII's other benefit plans (such stock options and such benefit plans,
collectively, the "CII Stock Plans"), (ii) 2,597,641 shares of CII Common
Stock were reserved for issuance upon conversion of the outstanding
$56,800,000 principal amount of CII Debentures, (iii) no shares of CII
Common Stock were held by its wholly-owned Subsidiaries, and (iv) except as
set forth on Schedule 3.1(b), no warrants, bonds, debentures, notes or
other indebtedness or other security having the right to vote (or, except
for the CII Debentures, convertible into or exercisable for securities
having the right to vote) on any matters on which shareholders may vote
("Voting Debt"), were issued or outstanding. All outstanding shares of CII
capital stock are validly issued, fully paid and nonassessable and not
subject to preemptive rights. As of the date of this Agreement, except for
this Agreement, the CII Stock Options (as defined in Section 5.7) and the
CII Debentures, there are no options, warrants, calls, rights, or
agreements to which CII or any Subsidiary of CII is a party or by which it
or any such Subsidiary is bound obligating CII or any Subsidiary of CII to
issue, deliver or sell, or cause to be issued, delivered or sold,
additional shares of capital stock or any Voting Debt of CII or of any
Subsidiary of CII or obligating CII or any Subsidiary of CII to grant,
extend or enter into any such option, warrant, call, right or agreement.
Assuming compliance by Sierra with Section 5.7 after the Effective Time,
there will be no option, warrant, call, right or agreement obligating CII
or any Subsidiary of CII to issue, deliver or sell, or cause to be issued,
delivered or sold, any shares of capital stock or any Voting Debt of CII or
any Significant Subsidiary of CII, or obligating CII or any Subsidiary of
CII to grant, extend or enter into any such option, warrant, call, right or
agreement.
(c) Authority. CII has all requisite corporate power and authority to
enter into this Agreement and subject to approval of this Agreement and the
Merger by the shareholders of CII, 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 CII, subject to
such approval of this Agreement by the shareholders of CII. This Agreement
has been duly executed and delivered by CII and, subject to such approval
of this Agreement by the shareholders of CII, constitutes a valid and
binding obligation of CII enforceable against it in accordance with its
terms. The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby will not, conflict
with, or result in any violation of, or default (with or without notice or
lapse of time, or both) under, 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, pledge,
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security interest or other encumbrance on assets (any such conflict,
violation, default, right of termination, cancellation or acceleration,
loss or creation, a "Violation"), pursuant to any provision of the Articles
of Incorporation or By-laws of CII or any Subsidiary of CII or, except (i)
as set forth on Schedule 3.1(c) hereto or (ii) as contemplated by the next
sentence hereof, result in any Violation of any loan or credit agreement,
note, mortgage, indenture, lease, Designated Plan (as defined in Section
3.1(o)) or other agreement, obligation, instrument, permit, concession,
franchise, license, judgment, order, decree, statute, law, ordinance, rule
or regulation applicable to CII or any Subsidiary of CII or their
respective properties or assets which Violation would have a material
adverse effect on CII and its Subsidiaries taken as a whole. 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 CII or any of its Subsidiaries
in connection with the execution and delivery of this Agreement by CII, or
the consummation by CII of the transactions contemplated hereby, the
failure to obtain which would have a material adverse effect on CII and its
Subsidiaries taken as a whole, except for (i) the filing of a premerger
notification report by CII under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), (ii) the filing with
the SEC of (A) a proxy statement in definitive form relating to the meeting
of CII's shareholders, and, if required, a meeting of Sierra's
shareholders, to be held in connection with the Merger (the "Proxy
Statement") and (B) such reports under Sections 13(a), 13(d) and 16(a) of
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, (iii) the filing of the Merger Filings and appropriate
documents with the relevant authorities of other states in which CII is
qualified to do business, (iv) such filings, authorizations, orders and
approvals (the "Insurance Approvals") as may be required by foreign, state
or local governmental authorities including those in connection with CII's
insurance business and (v) such filings, authorizations, orders and
approvals (the "State Takeover Approvals") as may be required by state
takeover laws.
(d) SEC Documents. CII has delivered or made available to Sierra a true
and complete copy of each material report, schedule, registration statement
and definitive proxy statement filed by CII with the SEC since January 1,
1992 (as such documents have since the time of their filing been amended,
the "CII SEC Documents") which are all the documents (other than
preliminary material) that CII has been required to file with the SEC since
such date. As of their respective dates, the CII 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 CII
SEC Documents and none of the CII SEC Documents contained any untrue
statement of a material fact or omitted 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. The
consolidated financial statements of CII included in the CII 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 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 (subject, in the case of the unaudited statements, to
normal, recurring audit adjustments) the consolidated financial position of
CII 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 CII for inclusion or incorporation by reference in (i) the
registration statement on Form S-4 to be filed with the SEC by Sierra in
connection with the issuance of shares of Sierra Common Stock in the Merger
(the "S-4") will, at the time the S-4 is filed with the SEC and at the time
it becomes effective under the Securities Act, contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and
(ii) the Proxy Statement will, at the date mailed to shareholders and at
the times of the meeting or meetings of shareholders to be held in
connection with the Merger, contain any untrue statement of a material fact
or omit to state any material fact required to be
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stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are 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.
(f) Compliance with Applicable Laws. Except as set forth on Schedule
3.1(f), the businesses of CII and each of its Subsidiaries have been and
are being conducted in compliance with all applicable laws, rules,
ordinances, regulations, licenses, judgments, orders or decrees of federal,
state, local and foreign governmental authorities, including, but not
limited to, the California Insurance Code, except for possible violations
which individually or in the aggregate do not, and, insofar as reasonably
can be foreseen, in the future will not, have a material adverse effect on
CII and its Subsidiaries taken as a whole. CII and each of its Subsidiaries
hold all certificates of authority, franchises, grants, permits, licenses,
easements, consents, certificates, variances, exemptions, orders and
approvals from all Governmental Entities (collectively, "CII Permits")
which are necessary to own, lease and operate the assets and properties
they currently own, lease and operate and to conduct their respective
businesses and operations in the manner heretofore conducted and as
proposed to be conducted, except for those CII Permits, the absence of
which would not have a material adverse effect on CII and its Subsidiaries
taken as a whole. Schedule 3.1(f) contains a list of all CII Permits which
are material to CII and any of its Subsidiaries, including the
jurisdictions in which CII or one or more of its Subsidiaries hold a
license or are otherwise authorized to conduct insurance business and the
types or lines of insurance which CII or one of its Subsidiaries is
permitted to write in such jurisdictions. Except as described on Schedule
3.1(f), neither CII nor any of its Subsidiaries conducts any insurance
business in any other jurisdiction nor does CII or any such Subsidiary
write any other type or line of insurance in any jurisdiction other than
that or those in or for which it or any such Subsidiary is currently
licensed or otherwise authorized, except such activities as would not have
an material adverse effect on CII and its Subsidiaries taken as a whole.
Each of the Insurance Subsidiaries has filed all statements and reports
with insurance regulatory authorities required by the laws, regulations,
licensing requirements and orders administered or issued by such regulatory
authorities, except where the failure to so file would not, individually or
in the aggregate, materially and adversely affect the condition (financial
or otherwise), operations (present or prospective), business (present or
prospective), properties, assets or liabilities of such Insurance
Subsidiary. Within the last five years, neither of the Insurance
Subsidiaries has been involved in any voluntary proceeding to revoke,
restrict or suspend any of the licenses or other qualification in any
jurisdiction of such Insurance Subsidiary, nor are there any proceedings
pending which could have that effect. Schedule 3.1(f) sets forth the most
recent date of the last completed insurance regulatory examination and
audit, as to CII and of its Subsidiaries for the jurisdictions listed
therein, and copies of the most recent reports of such examinations have
heretofore been delivered or made available to Sierra. Except as set forth
on Schedule 3.1(f), neither of the Insurance Subsidiaries is aware of any
material violations reported upon by any insurance examiner in respect of
the activities of such Insurance Subsidiary which could, individually or in
the aggregate, materially and adversely affect the condition (financial or
otherwise), operations, business, properties, assets or liabilities of such
Insurance Subsidiary. Except as set forth on Schedule 3.1(f), there are no
outstanding orders applicable to CII or any of its Subsidiaries issued by
any regulatory authority (other than regulations generally applicable to
companies in the same line of business as CII or any of its Subsidiaries)
that restrict CII or such Subsidiaries' ability to pay dividends on its
capital stock or regulate or establish levels of reserves or other
financial ratios. After due inquiry of management, no event has occurred
with respect to any of such CII Permits which would permit revocation,
termination or suspension of any such CII Permits or would result in any
material impairment of the rights of the holder of any such CII Permits.
Except as set forth on Schedule 3.1(f), no notice has been received and,
after due inquiry of management, no investigation or review is pending or,
to CII's knowledge, threatened by any Governmental Entity with regard to
(i) any alleged violation by CII or any of its Subsidiaries of any law,
rule, regulation, ordinance, CII Permit, judgment, order or decree or (ii)
any alleged failure to have or any violation of any CII Permit, which
violation or failure would have a material adverse effect on CII and its
Subsidiaries taken as a whole. Neither CII nor any of its Subsidiaries nor
to CII's knowledge any of its or their respective executive officers,
directors or employees (in their capacities as such) has engaged in any
activity constituting fraud or abuse under the laws relating to health
care, insurance or the regulation of professional corporations.
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(g) Financial Statements of Subsidiaries. (A) CII has delivered, or (if
not yet available) will promptly deliver when available (and in any event
prior to the Effective Time), to Sierra complete and correct copies of (i)
the balance sheets of CII and each of its then-existing Subsidiaries as at
December 31, 1994, 1993, 1992, 1991, 1990, and the related audited
statements of income and shareholders' equity and cash flows, for the
fiscal years ended on those dates, together with all footnotes and (ii) the
unaudited interim financial statements for CII and each of its Subsidiaries
as at, and for the fiscal periods ended on March 31, 1995 and 1994 and each
subsequent quarterly reporting date. All of such financial statements
fairly present or when delivered will fairly present, as the case may be
(subject, in the case of unaudited interim financial statements, to normal,
recurring adjustments) which are not expected to be, individually or in the
aggregate, materially adverse to CII and its Subsidiaries taken as a whole
the financial position, results of operations and cash flows of CII and
each of its Subsidiaries as at the respective dates of such balance sheets
and for each of the respective periods then ended, in conformity with (A)
in the case of InteLock Technologies ("InteLock"), generally accepted
accounting principles prevailing in the United States ("U.S. GAAP") and (B)
in the case of each of the Insurance Subsidiaries, statutory or other
accounting practices prescribed or permitted by the insurance regulatory
authorities in the State of California or the Cayman Islands, as
appropriate, in each case applied on a basis consistent throughout the
reported periods.
(B) Except as set forth on Schedule 3.1(g), neither such financial
statements nor the financial statements of CII included in the CII SEC
Documents (i) contain or when delivered will contain, as the case may be,
any item of extraordinary or non-recurring income or expense (except as
specified therein); (ii) reflect or when delivered will reflect, as the
case may be, uncollectible accounts receivable without a reserve fairly
stated for uncollectible amounts; and (iii) reflect or when delivered will
reflect, as the case may be, any write-off or revaluation of assets (except
as specified therein). As at the respective dates of the balance sheets
included in all such financial statements, there was no liability,
indebtedness or obligation of any nature or in any amount that should
properly be reflected or provided for in financial statements prepared in
conformity with U.S. GAAP or statutory accounting practices prescribed or
permitted by the insurance regulatory authorities in the State of
California, whichever is appropriate, applied on a basis consistent with
that for prior periods, which was not fully reflected in such financial
statements.
(C) Reserves. The reserves recorded in the accounting records of each of
the Insurance Subsidiaries for insurance policy benefits, losses, claims
and expenses and any other reserves were prepared in accordance with the
statutory or other accounting practices prescribed or permitted by the
insurance regulatory authorities of the State of California and of all the
jurisdictions in which the Insurance Subsidiaries are licensed to transact
an insurance business and make good and sufficient provisions for all
insurance obligations of CII and its Subsidiaries. Such reserves have been
opined upon as reasonable and adequate as of December 31, 1994, and have
been reviewed as of March 31, 1995, by Timothy B. Perr, a duly qualified
actuary who is a member in good standing in the American Academy of
Actuaries.
(h) Litigation. Except (i) as set forth on Schedule 3.1(h), (ii) as
disclosed in the SEC Documents and (iii) for actions and suits arising in
the ordinary course of the insurance business, none of which if decided
adversely to CII or its Subsidiaries would have a material adverse effect
on CII or any such Subsidiary, there is no action, suit, proceeding or
investigation, either at law or in equity, at or before any commission or
other administrative authority in any domestic or foreign jurisdiction, of
any kind now pending or, to CII's knowledge, threatened, involving CII, any
of its Subsidiaries or any of the respective properties or assets of CII or
any Subsidiary of CII that (i) if asserted and decided adversely to CII or
any such Subsidiary could, individually or in the aggregate, materially and
adversely affect the condition (financial or otherwise), operations,
business, properties, assets or liabilities of CII and its Subsidiaries
taken as a whole, (ii) questions the validity of this Agreement or (iii)
seeks to delay, prohibit or restrict in any manner the Merger or any action
taken or to be taken by CII or any of its Subsidiaries under this
Agreement. Except as set forth on Schedule 3.1(h), none of CII nor any of
its Subsidiaries, nor any of their respective properties or assets, is
subject to any continuing order of, consent decree, settlement agreement or
other similar written agreement (other than agreements related to the
settlement of insurance claims in the ordinary course of business),
continuing investigation (other than regularly scheduled audits) by any
court, Governmental Entity, or any judicial, administrative or arbitral
judgment, order, writ, decree, injunction, restraint, or award
8
<PAGE>
of any court Governmental Entity or arbitrator, including without
limitation cease-and-desist or other orders. Neither CII nor any of its
Subsidiaries has agreed to, or is bound by, any extension or waiver of the
statute of limitations relating to any pending or potential action, suit,
claim, proceeding or investigation involving CII or any of its Subsidiaries
(other than extensions or waivers in connection with the settlement of
insurance claims in the ordinary course of business).
(i) Labor and Employment Matters. Neither CII nor any of its Subsidiaries
has employees who are represented by a labor union or organization, no
labor union or organization has been certified or recognized as a
representative of any such employees, and neither CII nor any of its
Subsidiaries is a party to or has any obligation under any collective
bargaining agreement or other contract or agreement with any labor union or
organization. There are no pending or, to CII's knowledge, threatened,
representation campaigns, elections or proceedings or questions concerning
union representation involving any employees of either CII or any of its
Subsidiaries. Neither CII nor any of its Subsidiaries has any knowledge of
any activities or efforts of any labor union or organization (or
representatives thereof) to organize any of its employees, any demands for
recognition or collective bargaining, any strikes, slowdowns, work
stoppages or lock-outs of any kind, or threats thereof, by or with respect
to any employees of CII or any of its Subsidiaries, and no such activities,
efforts, demands, strikes, slowdowns, work stoppages or lock-outs occurred
during a three-year period preceding the date hereof. Neither CII nor any
of its Subsidiaries has engaged in, admitted committing, or been held in
any administrative or judicial proceeding to have committed any unfair
labor practice under the National Labor Relations Act, as amended. Except
as set forth on Schedule 3.1(i), neither CII nor any of its Subsidiaries is
involved in any industrial or trade dispute or any dispute or negotiation
regarding a claim of material importance with any labor union or
organization concerning its employees, and there are no controversies,
claims, demands or grievances of material importance pending or, so far as
CII is aware, threatened, between CII or any of its Subsidiaries and any of
their respective employees.
(j) Absence of Certain Changes. Since December 31, 1994, except (i) as
set forth in Schedule 3.1(j), (ii) for the execution and delivery of this
Agreement and changes in its properties or business attributable to the
transactions contemplated by this Agreement, (iii) as disclosed in CII's
financial statements or in the CII SEC Reports previously delivered or made
available to Sierra and Sierra Sub and (iv) sales and purchases of
investment securities in the ordinary course, neither CII nor any of its
Subsidiaries:
(i) had any change in its condition (financial or otherwise),
operations, business, properties, assets or liabilities, other than
changes in the ordinary course of business, none of which has been,
individually or in the aggregate, materially adverse to CII or any such
Subsidiary;
(ii) suffered any damage, destruction or loss of physical property
(not adequately covered by insurance) that, individually or in the
aggregate, materially and adversely affects the condition (financial or
otherwise), operations, business, assets or liabilities of CII and its
Subsidiaries taken as a whole;
(iii) issued, sold or otherwise disposed of, or redeemed, purchased
or otherwise acquired, or agreed to issue, sell or otherwise dispose
of, redeem, purchase or otherwise acquire, any capital stock or any
other security of CII or any of its Subsidiaries or granted or agreed
to grant any option, warrant or other right to subscribe for or to
purchase any capital stock or any other security of CII or any of its
Subsidiaries;
(iv) incurred or agreed to incur any material indebtedness for
borrowed money or any other liabilities;
(v) paid or obligated itself to pay in excess of $1,000,000 in the
aggregate for any fixed assets;
(vi) suffered any material loss or waived any material right, other
than in the ordinary course of its insurance business;
(vii) sold, transferred, leased or otherwise disposed of, or agreed
to sell, transfer, lease or otherwise dispose of, (A) any properties or
assets to any director, officer or of CII or of any Subsidiary of CII
or any member of the family or any other affiliate of any of the
foregoing or (B) any properties or assets having a fair market value of
$250,000 or agreed to sell, transfer, lease or otherwise dispose
9
<PAGE>
of, any assets (other than securities) having a fair market value at
the time of sale, transfer or disposition of $250,000;
(viii) mortgaged, pledged or subjected to any charge, lien, claim or
encumbrance, or agreed to mortgage, pledge or subject to any charge,
lien, claim or encumbrance, any of its material properties or assets;
(ix) declared, set aside or paid any dividend or made any
distribution (whether in cash, property or stock) with respect to any
of its capital stock;
(x) (A) increased, or agreed to increase, the compensation or bonuses
or special compensation of any kind of any of its directors, officers,
employees, (other than insurance agents or independent contractors)
over the rate being paid to them on December 31, 1994, as set forth in
CII's Proxy Statement for the 1995 Annual Meeting of Shareholders
("CII's 1995 Proxy Statement"), other than normal merit and cost-of-
living increases pursuant to customary arrangements consistently
followed, or (B) since December 31, 1994, paid or made provision for
the payment of any bonus or similar compensation to any director,
officer, employee (other than any insurance agent or independent
contractor) of CII or any subsidiary of CII, or (C) entered into any
employment, consulting or severance agreement or arrangement with any
director, officer, employee (other than any agent or independent
contractor) or adopted or increased any benefit under any insurance,
pension or other employee benefit plan, payment or arrangement made to,
for or with any director, officer, employee (other than any agent or
independent contractor);
(xi) except as otherwise required or provided for in this Agreement
and except in the ordinary course of business, made or permitted any
material amendment or termination of any material contract, lease,
concession, franchise, license, indenture, instrument, mortgage, note,
loan or credit agreement or other obligation to which it is a party;
(xii) had any resignation or termination of employment of any of its
key officers or employees, or become aware of any impending or
threatened termination of employment, that would, individually or in
the aggregate, have a material adverse effect on its condition
(financial or otherwise), operations (present or prospective), business
(present or prospective), properties, assets or liabilities;
(xiii) had any labor trouble or concerted work stoppage or knows of
any impending or threatened labor trouble or concerted work stoppage;
(xiv) cancelled, or agreed to cancel, any debts or claims over
$250,000 in the aggregate or $50,000 individually other than in the
ordinary course of business;
(xv) made any material change in its accounting methods or practices
with respect to its condition, operations, business, or practices with
respect to its condition, operations, business, properties, assets or
liabilities;
(xvi) conducted its business or entered into any transaction not in
the ordinary course of its business;
(xvii) made any charitable or political contribution or pledge in
excess of $100,000 in the aggregate;
(xviii) agreed or committed to do, or authorized or approved any
action looking to, any of the foregoing;
(xix) paid aggregate commissions to insurance agents and independent
contractors for policies issued in 1995 and with normal anniversary
dates of January 1, 1995 or subsequent thereto in excess of 12% of
direct premiums written; or
(xx) made any material cash payments to insurance agents, independent
contractors or brokers other than pursuant to a Producer Profit Share
Agreement.
(k) Material Contracts. Except as set forth in Schedule 3.1(k), neither
CII nor any of its Subsidiaries is a party to any written or oral:
10
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(i) collective bargaining agreement or other agreement or
understanding with any labor organization;
(ii) employment or consulting contract or other contract for services
involving a payment of more than $250,000 annually and that is not
terminable without cost upon thirty (30) days' prior written notice;
(iii) material lease, franchise or concession [providing for a
payment by any person of more than $250,000 annually];
(iv) loan agreement, mortgage, indenture, promissory note, financing
lease or other instrument relating to any debt (in excess of $25,000
and which in the aggregate, do not amount to more than $250,000);
(v) contract of purchase or sale involving more than $50,000 and that
is not in the ordinary course of business;
(vi) partnership, joint venture, material license or similar
agreement;
(vii) stand-by letter of credit, guarantee or performance bond;
(viii) contract restricting the ability of any person from freely
engaging in any business or competing anywhere in the world;
(ix) other material contract or commitment not made in the ordinary
course of business;
(x) other contract, except contracts for inventories, supplies or
services not involving more than $250,000 and which can be terminated
within one year without cost;
(xi) any plan or contract or arrangement, written or oral, providing
for bonuses, pensions, deferred compensation, retirement payments,
profit-sharing or the like.
Except as set forth on Schedule 3.1(k), neither CII nor any of its
Subsidiaries is a party to any contract that, individually or in the
aggregate, materially and adversely affects, nor the performance of which
will likely so affect, the condition (financial or otherwise), operations,
business, properties, assets or liabilities of CII and its Subsidiaries
taken as a whole. Each contract or other agreement listed in schedules
hereto is in full force and effect and is valid and enforceable by CII or a
Subsidiary of CII, as the case may be, in accordance with its terms.
Neither CII nor any of its Subsidiaries is in default in the observance or
the performance of any term or obligation to be performed by it under any
contract listed in the schedules hereto except the effect of which defaults
singly or in the aggregate would not have a material adverse effect on CII
and its Subsidiaries taken as a whole. To the knowledge of CII, no other
person is in default in the observance or the performance of any term or
obligation to be performed by it under any contract listed in the schedules
hereto. There is currently no outstanding bid or contract proposal by CII
or any of its Subsidiaries which, if accepted or entered into, might
reasonably be expected to result in a loss to either CII or any of its
Subsidiaries, except with respect to losses occurring in the ordinary
course of the insurance business. CII has delivered or made available to
Sierra and Sierra Sub copies of all contracts listed in the schedules
hereto.
(l) Officers and Directors and Employees. Other than as set forth in
CII's 1995 Proxy Statement, Schedule 3.1(l) sets forth a list of:
(i) The names of all directors and officers of CII and each of its
Subsidiaries;
(ii) The name and current annual rate of compensation (including
bonuses and other forms of compensation) paid by CII and its
Subsidiaries to each of its respective officers, directors and
employees whose annual rate of base compensation exceeded $100,000 for
the year ended December 31, 1994; and
(iii) The names of all persons who have written employment,
consulting or severance agreements or arrangements with CII or any of
its Subsidiaries; and CII has provided complete and correct copies of
such agreements to Sierra.
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(m) Title to and Condition of Properties and Assets.
(i) CII and its Subsidiaries have good and marketable title to their
respective properties and assets, whether owned or leased, including,
without limitation, (A) all those used in their respective businesses,
and (B) those reflected in the consolidated balance sheet of CII and
its consolidated Subsidiaries as at March 31, 1995 most recently
delivered to Sierra (except as since sold or otherwise disposed of in
the ordinary course of business), in each case subject to no mortgage,
pledge, conditional sales contract, lien, security interest, right of
possession in favor of any third party, claim or other encumbrance
(collectively "Liens"), except for (x) the lien of current Taxes (as
hereinafter defined) not yet due and payable and (y) with respect to
leased property, the provisions of such leases. Except as described on
Schedule 3.1(m), subsequent to December 31, 1994, neither CII nor any
of its Subsidiaries has sold or disposed of any of their respective
properties or assets or obligated themselves to do so except in the
ordinary course of business. The facilities, machinery, furniture,
office and other equipment of CII and each of its Subsidiaries that are
used in their respective businesses are in good operating condition and
repair, subject only to the ordinary wear and tear of those businesses.
(ii) All of the real property owned or leased by CII or any
Subsidiary has been maintained by CII in compliance with all federal,
state and local environmental protection, occupational, health and
safety or similar laws, ordinances, restrictions, licenses and
regulations, except where the failure to so maintain the property would
not have a material adverse effect on CII and its Subsidiaries taken as
a whole.
(n) Patents, Copyrights, Service Marks and Trademarks. Neither CII nor
any of its Subsidiaries owns or licenses any patent, copyright, service
mark, trademark or other intellectual property right, other than such
patents, copyrights, service marks, trademarks and other intellectual
property rights as are described in Schedule 3.1(n). Except as set forth on
Schedule 3.1(n) and other than such as would have a material adverse effect
on CII and its Subsidiaries taken as a whole: (i) CII and its Subsidiaries
own or license all patents, copyrights, service marks, trademarks and other
intellectual property rights that are necessary to the conduct of their
respective businesses, (ii) all names under which CII or any of its
Subsidiaries have conducted or currently conducts business are set forth in
Schedule 3.1(n), (iii) no claim has been made, and to CII's knowledge no
basis for any such claim exists, that CII or any of its Subsidiaries has
infringed any patent, copyright, service mark, trademark or other
intellectual property right of any other person and (iv) no claim has been
made, and to CII's knowledge no basis for any such claim exists, that any
person has infringed on any patent, copyright, service mark, trademark or
other intellectual property right of CII or any of its Subsidiaries.
(o) Employee Benefit Plans.
(i) List of Plans. Except as disclosed on Schedule 3.1(o) (the
"Designated Plans"), neither CII nor any "Controlled Company" sponsors,
maintains or contributes to any employee benefit plan ("Plan"), as
defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), or any material benefit arrangement that
is not a Plan ("Benefit Arrangement"), including, but not limited to
(A) any employment or consulting agreement, (B) any incentive bonus or
deferred bonus arrangement, (C) any arrangement providing termination
allowance, severance or similar benefits, (D) any equity compensation
plan, and (E) any deferred compensation plan, for the benefit of any of
their employees or former employees. For purposes of this Section
3.1(o), "Controlled Company" shall mean any entity that, together with
CII as of the relevant determination date under ERISA, is or was
required to be treated as a single employer under Section 414 of the
Code and any reference to CII in this Section 3.1(o) shall also include
a reference to a Controlled Company.
(ii) No Title IV Plans. CII does not contribute to or have any
obligation or liability under or with respect to, any Plan (whether or
not terminated) regulated under Title IV of ERISA.
(iii) Disclosed Plans. With respect to any Designated Plans, CII has
delivered to Sierra, true and complete copies of (A) all written
documents comprising such Plans and Benefit Arrangements (including
amendments and individual agreements relating thereto); (B) the three
most recent Federal
12
<PAGE>
Form 5500 series (including all schedules thereto) filed with respect
to each such Plan; (C) the most recent financial statements, if any,
prepared with respect to such Plans and Benefit Arrangements; (D) any
currently effective Internal Revenue Service determination letter; and
(E) the summary plan description currently in effect and all material
modifications thereto, if any, for each such Plan. All information
provided by CII and its Subsidiaries to the individuals who prepared
any such financial statements was true, correct and complete in all
respects. Each financial or other report delivered to Sierra pursuant
hereto is accurate in all material respects, and there have been no
material adverse changes in the financial status of any Designated Plan
since the date of the most recent report provided with respect thereto.
(iv) Compliance with Law. CII has operated, and has caused its
appointees and nominees to operate, each Designated Plan in a manner
which is in material compliance with the terms thereof and with all
applicable law, regulations and administrative agency rulings and
requirements applicable thereto.
(v) Contributions. Full payment has been made of all amounts which
CII is required, under applicable law or under any Designated Plan or
any agreement related to any Designated Plan to which CII is a party,
to have paid as contributions thereto as of the last day of the most
recent fiscal year of each Designated Plan ended prior to the date
hereof. Benefits under all Designated Plans are as represented in the
governing instruments provided pursuant to (i) above, and have not been
increased subsequent to the date as of which documents have been
provided.
(vi) Tax Qualification. Each Designated Plan intended to be qualified
under Sections 401(a), 401(k) and 501(a) of the Code either has been
determined to be so qualified by the Internal Revenue Service or has
been submitted to the Internal Revenue Services for a determination
with respect to such qualified status. Each Designated Plan that has
been submitted to the Internal Revenue Service for a determination with
respect to its qualified status has been submitted in a timely manner
so that any amendments necessary to qualify the plan from its inception
can be made within the remedial amendment period established under
Section 401(b) of the Code. To the knowledge of CII, nothing has
occurred since such determination, or submission, as applicable, to
affect adversely the qualification of any such Plan.
(vii) Tax or Civil Liability. CII has not participated in any conduct
that could result in the imposition upon CII of any excise tax under
Section 4971 through 4980B of the Code or civil liability under Section
502(i) of ERISA with respect to any Designated Plan.
(viii) Claims Liability. There is no action, claim or demand of any
kind (other than routine claims for benefits) that has been brought or
threatened against any Designated Plan, or the assets thereof, against
any fiduciary of any such Designated Plan, or against CII with respect
to any Designated Plan, and CII has no knowledge of any pending
investigation or administrative review by any Governmental Entity that
could result in the imposition on CII of any penalty or assessment in
connection with any Designated Plan.
(ix) Retiree Welfare Coverage. Except as set forth in Schedule
3.1(o), no Designated Plan provides any health, life or other welfare
coverage to employees of CII beyond termination of their employment
with CII by reason of retirement or otherwise, other than coverage as
may be required under Section 4980B of the Code or Part 6 of ERISA, or
under the continuation of coverage provisions of the laws of any state
or locality.
(x) Reporting and Disclosure Obligations. CII has complied with all
applicable reporting and disclosure requirements of Title I of ERISA
with respect to all Designated Plans.
(p) Transactions with Officers, Directors and Others. Except as set forth
on Schedule 3.1(p), no director, officer or affiliate of CII, or any member
of the immediate family or any other affiliate of any of the foregoing, is
a party to business arrangements or relationships of any kind with CII or
its Subsidiaries, or, to the knowledge of CII, owns or has an ownership
interest in any corporation (in excess of 5% of any publicly traded
corporation) or other entity that is a party to, or in any property which
is the subject of any such business arrangements.
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(q) Insurance Agents. (i) Schedule 3.1(q) contains a list of all "key" or
"preferred" insurance agents of CII and its Subsidiaries as at December 31,
1994 and 1993 together with the amounts of premiums produced by each for
the years ended December 31, 1994 and 1993. CII has provided Sierra with
access to copies of such agency agreements and a list setting forth the
names of such agents and agencies is set forth in Schedule 3.1(q). The
current underwriting and binding authorities of insurance agents is set
forth on Schedule 3.1(q).
(r) Policyholders. Schedule 3.1(r) contains a list of each policyholder
(or related groups of policyholders) of CII and its Subsidiaries accounting
for $125,000 or more per annum in premium volume of the Insurance
Subsidiaries' proforma statutory direct premiums written for each such
policyholder (or group) for the years ended December 31, 1994 and 1993.
(s) Insurance Matters.
(i) Reinsurance and Coinsurance. Schedule 3.1(s) contains a list of
all reinsurance or coinsurance treaties or agreements to which CII or
any of its Subsidiaries is a party. All such treaties or agreements as
set forth in such Schedule are valid, binding and in full force and
effect in accordance with their terms (except as the enforceability
thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors'
rights generally or by the principles governing the availability of
equitable remedies); and neither CII nor its Insurance Subsidiaries
nor, to CII's knowledge, any other party thereto is in material default
as to any provision thereof, and none of such agreements contains any
provision (A) providing that any other party thereto may terminate such
agreement or declare a default or seek damages thereunder by reason of
the transactions contemplated by this Agreement or (B) which would be
altered or otherwise become applicable by reason of such transactions.
There is no reason to believe that the financial condition of any party
to any such agreement is impaired to such extent that a default
thereunder may reasonably be anticipated.
(ii) Premiums Receivable and Agents' Balances.
Not more than 33% of "premiums receivable and agents' balances" shown
on the combined balance sheet of California Indemnity Insurance Company
and Commercial Casualty Insurance Company will consist of "premiums
receivable and agents' balances" which on the Closing Date are more
than 90 days past due.
(iii) Statutory Statements.
CII has furnished Sierra with true and complete copies of each of the
Insurance Subsidiaries' Annual Statutory Financial Statements for the
years ended December 31, 1994 and 1993, and the first quarter ended
March 31, 1995, respectively (collectively, the "Statutory
Statements"). The Statutory Statements (A) have been prepared in
accordance with the books and records of each respective Insurance
Subsidiary, (B) are prepared in accordance with the statutory
provisions of the insurance law of California and the accounting
practices prescribed or permitted by the insurance law of California,
and (C) are consistent with prior periods, except, as provided for
therein and, for any changes required by the insurance law of
California or accounting practices referenced in clause (B) hereof.
Such Statutory Statements, when read in conjunction with the notes
thereto, present fairly in all material respects the statutory
financial condition of each Insurance Subsidiary at December 31, 1994
and 1993, and the first quarter ended March 31, 1995 respectively, and
the statutory results of their respective operations for the periods
then ended.
(t) Taxes.
(i) Definitions. For purposes of this Agreement:
(A) "Code" means the Internal Revenue Code of 1986, as amended.
(B) "Returns" means any returns, reports or statements (including
any information returns) required to be filed for purposes of a
particular Tax.
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(C) "Tax" or "Taxes" means all federal, state, local or foreign
net or gross income, gross receipts, net proceeds, premium, capital,
sales, use, ad valorem, value added, franchise, bank shares,
withholding, payroll, employment, disability, workers' compensation,
excise, property, alternative or add-on minimum, environmental or
other taxes, assessments, duties, fees, levies or other governmental
charges of any nature whatever, whether disputed or not, together
with any interest, penalties, additions to tax or additional amounts
with respect thereto.
(D) "Taxing Authority" means any governmental agency, board,
bureau, body, department or authority of any United States federal,
state or local jurisdiction, or any foreign jurisdiction, having or
purported to exercise jurisdiction with respect to any Tax.
(ii) Tax Representations. Except as set forth in Disclosure Schedule
3.1(t):
(A) All Returns required to have been filed by or with respect to
CII or any of its Subsidiaries or any affiliated, combined,
consolidated, unitary or similar group of which CII or its
Subsidiaries is or was a member (a "Relevant Group") with any Taxing
Authority have been duly and timely filed, and each such Return
correctly and completely reflects the income, franchise or other Tax
liability and all other material information required to be reported
thereon. All Taxes owed by CII or its Subsidiaries or any member of
a Relevant Group (whether or not shown on any Return) have been paid
or are duly reserved for in the financial statements of CII and its
Subsidiaries delivered to Sierra pursuant to Section 3.1(g) of this
Agreement.
(B) The reserves for Taxes due by CII and its Subsidiaries (as
opposed to any reserve for deferred Taxes established to reflect
timing differences between book and Tax income) in CII's financial
statements delivered to Sierra pursuant to Section 3.1(g) of this
Agreement are sufficient in all material respects for all unpaid
Taxes, whether or not disputed, of CII and its Subsidiaries.
(C) Neither CII nor any of its Subsidiaries is a party to an
agreement extending the time within which to file any Tax Return or
extending the statute of limitations for any period with respect to
any Tax to which CII or any of its Subsidiaries may be subject. No
claim has ever been made by any Taxing Authority in a jurisdiction
in which CII or any of its Subsidiaries does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction.
(D) CII and each of its Subsidiaries has withheld and paid all
Taxes required to have been withheld and paid in connection with
amounts paid or owing to any employee, creditor, independent
contractor or other third party.
(E) CII does not expect any Taxing Authority to propose or assess
any additional material Taxes against or in respect of it or any of
its Subsidiaries for any past period. There is no dispute or claim
concerning any Tax liability of CII or any of its Subsidiaries
either (1) claimed or raised by any Taxing Authority or (2)
otherwise known to CII or any of its Subsidiaries. No issues have
been raised in any examination by any Taxing Authority with respect
to CII or any of its Subsidiaries which, by application of similar
principles, reasonably could be expected to result in a material
deficiency for any other period not so examined. Schedule 3.1(t)
lists all federal, state, local and foreign income Tax Returns filed
by or with respect to CII and its Subsidiaries for all taxable
periods ended on or after December 31, 1989, indicates those
Returns, if any, that have been audited, and indicates those Returns
that currently are the subject of audit. CII has delivered to Sierra
complete and correct copies of all federal, state, local and foreign
income Tax Returns filed by, and all Tax examination reports and
statements of deficiencies assessed against or agreed to by, CII and
its Subsidiaries for all taxable periods ended on or after December
31, 1989.
(F) Neither CII nor any of its Subsidiaries has waived any statute
of limitations in respect of Taxes or agreed to any extension of
time with respect to any Tax assessment or deficiency.
(G) Neither CII nor any of its Subsidiaries has made any payments,
is obligated to make any payments, or is a party to any agreement
that under certain circumstances could require it to make any
payments, that are not deductible under Section 280G of the Code.
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(H) Neither CII nor any of its Subsidiaries is a party to any Tax
allocation or sharing agreement.
(I) There are no material Tax Liens on any assets of CII or any of
its Subsidiaries.
(J) None of the assets of CII or any of its Subsidiaries
constitutes tax-exempt bond financed property or tax-exempt use
property, within the meaning of Section 168 of the Code. Neither CII
nor any of its Subsidiaries is a party to any "safe harbor lease"
that is subject to the provisions of Section 168(f)(8) of the
Internal Revenue Code as in effect prior to the Tax Reform Act of
1986, or to any "long-term contract" within the meaning of Section
460 of the Code.
(K) Neither CII nor any of its Subsidiaries is a "consenting
corporation" within the meaning of Section 341(f)(1) of the Code, or
comparable provisions of any state statutes, and none of the assets
of CII or its Subsidiaries is subject to an election under Section
341(f) of the Code or comparable provisions of any state statutes.
(L) Neither CII nor any of its Subsidiaries is a party to any
joint venture, partnership or other arrangement that is treated as a
partnership for federal income Tax purposes.
(M) Neither CII nor any of its Subsidiaries has any material (1)
deferred gain or loss arising out of any deferred intercompany
transaction or (2) income which will be reportable in a period
ending after the Closing Date which is attributable to a transaction
occurring in, or a change in accounting method made for, a period
ending on or prior to the Closing Date.
(N) Neither CII nor any of its Subsidiaries has received or
requested any ruling of a Taxing Authority related to Taxes or
entered into any written or legally binding agreement with a Taxing
Authority relating to Taxes.
(O) CII and each of its Subsidiaries has disclosed (in accordance
with Section 6662(d)(2)(B)(ii) of the Code) on its federal income
Tax Returns all positions taken therein that could give rise to a
substantial understatement of federal income Tax within the meaning
of Section 6662(d) of the Code.
(P) Neither CII nor any of its Subsidiaries has any material
liability for Taxes of any person other than CII or its Subsidiaries
(1) under Section 1.1502-6 of the Treasury Regulations (or any
similar provision of state, local or foreign law), (2) as a
transferee or successor, (3) by contract or (4) otherwise.
(Q) Neither CII nor any of its Subsidiaries has participated in or
cooperated with an international boycott within the meaning of
Section 999 of the Code, the effect of which will be material to CII
or any of its Subsidiaries.
(R) Neither CII nor any of its Subsidiaries has been a United
States real property holding corporation within the meaning of
Section 897(c)(2) of the Code during any applicable period specified
in Section 897(c)(1)(A)(ii) of the Code.
(S) Neither CII nor any of its Subsidiaries (1) has or is
projected to have a material amount includable in its income for the
current taxable year under Section 951 of the Code, (2) has been a
passive foreign investment company within the meaning of Section
1296 of the Code, and neither CII nor any of its Subsidiaries is a
shareholder, directly or indirectly, in a passive foreign investment
company or (3) has a material unrecaptured overall foreign loss
within the meaning of Section 904(f) of the Code.
(T) Neither CII nor any of its Subsidiaries is, or at any time has
been, subject to (1) the dual consolidated loss provisions of
Section 1503(d) of the Code, (2) the overall foreign loss provisions
of Section 904(f) of the Code or (3) the recharacterization
provisions of Section 952(c)(2) of the Code.
(U) There currently are no limitations on the utilization of the
net operating losses, built-in losses, capital losses, tax credits
or other similar items of CII or any of its Subsidiaries
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(collectively, the "Losses") under (1) Section 382 of the Code, (2)
Section 383 of the Code, (3) Section 384 of the Code, (4) Section
269 of the Code, (5) Section 1.1502-15 and Section 1.1502-15A of the
Treasury regulations, (6) Section 1.1502-21 and Section 1.1502-21A
of the Treasury regulations or (7) Section 1.1502-91 through 1.1502-
99 of the Treasury regulations, in each case as in effect both prior
to and following the Tax Reform Act of 1986 and treating any
proposed provision as if it were in effect currently.
(V) There are no facts or circumstances that exist on the date of
this Agreement that could reduce the amount of the Tax attributes
referred to in Section 3.1(t)(iii) below and listed in Disclosure
Schedule 3.1(t) or could limit, restrict or eliminate their
availability as carryovers. There are no pending, or to the best
knowledge of CII and its Subsidiaries, threatened actions or
proceedings by any Taxing Authority challenging the amount or
availability as carryovers of any of the Tax attributes listed in
Disclosure Schedule 3.1(t).
(W) Neither CII nor any of its Subsidiaries is a party to any
written, oral or implied agreement or obligation to provide any
"covered employee," as defined in Section 162(m)(3) of the Code,
with remuneration in excess of $1 million, that would be disallowed
as a deduction for federal income tax purposes pursuant to Section
162(m) of the Code.
(iii) Carryover Tax Attributes. As of December 31, 1994, CII and its
Subsidiaries had aggregate Losses (as defined in Section 3.1(t)(ii)(U)
above) for federal and state income Tax purposes in the amounts, for
the years, with the expiration dates, and for the jurisdictions, as
accurately set forth in Disclosure Schedule 3.1(t).
(iv) Representations Relating to Tax-Free Reorganization.
(A) As of the Effective Time of the Merger, CII will hold at least
90 percent of the maximum fair market value of its net assets and at
least 70 percent of the maximum fair market value of its gross
assets held at any time during the period commencing on April 3,
1995 and ending immediately prior to the Merger (the "Transaction
Period"), such fair market values to exclude changes in fair market
values due solely to changes in the market value of CII's investment
portfolio during the Transaction Period and such fair market values
to include amounts (I) paid or payable with respect to CII
Dissenting Shares, (II) used by CII to pay reorganization expenses,
and (III) paid or payable in connection with any redemptions and
distributions (except regular and normal dividends) made by CII
during the Transaction Period.
(B) In the Merger, shares of CII Common Stock representing control
of CII, as defined in Section 368(c)(1) of the Code, will be
exchanged solely for voting stock of Sierra; for purposes of this
representation, shares of CII Common Stock exchanged for cash or
other property originating with Sierra will be treated as
outstanding CII Common Stock at the Effective Time of the Merger.
(C) CII is not an investment company within the meaning of Section
368(a)(2)(F)(iii) of the Code.
(D) Neither CII nor any of its Subsidiaries is under the
jurisdiction of a court in a Title 11 or similar case within the
meaning of Section 368(a)(3)(A) of the Code.
(E) Neither CII nor any of its Subsidiaries know of any plan or
intention on the part of CII shareholders to sell, exchange or
otherwise dispose of a number of shares of Sierra Common Stock
received by them for shares of CII Common Stock pursuant to the
Merger, nor to enter into any puts, calls, straddles, spreads or
similar transactions with respect to Sierra's Common Stock, that
would reduce CII shareholders' ownership for U.S. federal income tax
purposes of Sierra's Common Stock to a number of shares having a
value, as of the Effective Time of the Merger, of less than 50
percent of the value of all of the formerly outstanding stock of CII
as of the same date. For purposes of this representation, shares of
CII Common Stock exchanged for cash or other property, surrendered
by dissenters or exchanged for cash in lieu of fractional shares of
Sierra Common Stock are treated as outstanding shares of CII Common
Stock at the Effective Time of
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the Merger. Moreover, shares of CII Common Stock and shares of
Sierra Common Stock held by CII shareholders and otherwise sold,
redeemed, or disposed of during the Transaction Period are to be
considered in making this representation.
(F) At the Effective Time of the Merger, the fair market value of
the assets of CII will exceed the sum of its liabilities, plus the
amount of liabilities, if any, to which such assets are subject.
(G) At the Effective Time of the Merger, CII will not have
outstanding any warrants, options, convertible securities, or any
other type of right pursuant to which any person could acquire stock
in CII that, if exercised or converted, would affect Sierra's
acquisition or retention of control of CII as defined in Section
368(c)(1) of the Code.
(H) At the Effective Time of the Merger, and at no time prior to
such date, was there or will there be any intercorporate
indebtedness existing between Sierra and CII or between Sierra Sub
and CII.
(I) CII, CII shareholders and Subsidiaries will pay their own
respective expenses, if any, incurred in connection with the Merger.
(J) CII will not make any extraordinary dividend payments to its
shareholders prior to the Effective time of the Merger, or in
contemplation of the Merger.
(u) Opinion of Financial Advisor. CII has received the opinion of Vector
Securities International, Inc. dated the date hereof, to the effect that
the consideration to be received in the Merger by CII's shareholders is
fair to CII's shareholders from a financial point of view. CII has
delivered a true and complete copy of this opinion to Sierra.
(v) Section 1203 of the CGCL Not Applicable. The provisions of Section
1203 of the CGCL will, prior to the termination of this Agreement, assuming
the accuracy of the representations contained in Sections 3.2(b) and 3.2(k)
(without giving effect to the knowledge qualification thereof) do not apply
to this Agreement, the Merger or to the transactions contemplated hereby.
(w) Vote Required. The affirmative vote of a majority of the votes that
holders of the outstanding shares of CII Common Stock are entitled to cast
is the only vote of the holders of any class or series of CII capital stock
or Voting Debt necessary to approve this Agreement and the transactions
contemplated hereby (assuming the accuracy of the representations contained
in Sections 3.2(b) and 3.2(k), without giving effect to the knowledge
qualification thereof).
(x) Accounting Matters. Neither CII nor to the best of its knowledge, any
of its affiliates, has through the date of this Agreement, taken or agreed
to take any action that would prevent Sierra from accounting for the
business combination to be effected by the Merger as a pooling of
interests.
(y) No Change in Capital Structure. There has been no material change in
the information set forth in the second sentence of Section 3.1(b) between
the close of business on June 9, 1995, and the date hereof.
(z) Investment Company Act. Neither CII nor any of its Subsidiaries is an
"investment company", or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended.
3.2. Representations and Warranties of Sierra and Sierra Sub. Sierra and
Sierra Sub represent and warrant to CII as follows:
(a) Organization; Standing and Power. Each of Sierra and Sierra Sub and
any other Subsidiary of Sierra is a corporation duly organized, validly
existing and in good standing under the laws of its state of incorporation
or organization and has all requisite 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 of
leasing of its properties makes such qualification necessary, except where
the failure to be so qualified would not have a material adverse effect on
such entity.
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(b) Capital Structure. As of the date hereof, the authorized capital
stock of Sierra consists of 40,000,000 shares of Sierra Common Stock and
1,000,000 shares of Sierra Series A Preferred Stock. As of the close of
business on June 9, 1995: (i) 14,821,184 shares of Sierra Common Stock were
outstanding, (ii) 2,891,376 shares of Sierra Common Stock were reserved for
issuance pursuant to the Sierra stock option plans and Sierra restricted
stock plans (collectively, "Sierra Stock Plans"), (iii) 100,200 shares of
Sierra Common Stock were held by Sierra in its treasury, (iv) 177,126
shares of Sierra Series A Preferred were reserved for issuance upon
exercise of the Rights and (v) no warrants, bonds, debentures, notes or
other indebtedness or other security having the right to vote on any
matters on which shareholders may vote ("Voting Debt") were issued or
outstanding. All outstanding shares of Sierra capital stock are, and the
shares of Sierra Common Stock (x) to be issued pursuant to or as
specifically contemplated by this Agreement, and (y) when issued in
accordance with this Agreement, upon exercise of CII Stock Options, in
accordance with actions permitted by Section 4.1(c) and upon conversion of
CII Debentures, will be, validly issued, fully paid and nonassessable and
not subject to preemptive rights. As of the date of this Agreement, except
for this Agreement, the Sierra Stock Plans, and the Rights Agreement, there
are no options, warrants, calls, rights or agreements to which Sierra or
any Subsidiary of Sierra is a party or by which it or any such Subsidiary
is bound obligating Sierra or any Subsidiary of Sierra to issue, deliver or
sell, or cause to be issued, delivered or sold, additional shares of
capital stock or any Voting Debt of Sierra or of any Subsidiary of Sierra
or obligating Sierra or any Subsidiary of Sierra to issue, deliver or sell,
or cause to be issued, delivered or sold, additional shares of capital
stock of Sierra or of any Subsidiary of Sierra to grant, extend or enter
into any such option, warrant, call, right or agreement. As of the date
hereof, the authorized capital stock of Sierra Sub consists of 1,000 shares
of Common Stock, stated value $.50 per share, of which 100 shares are
issued and outstanding.
(c) Authority. Sierra and Sierra 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
Sierra and Sierra Sub, except that the approval of Sierra's shareholders of
this Agreement and the Merger and the transactions contemplated hereby may
be required. This Agreement has been duly executed and delivered by Sierra
and Sierra Sub and each constitutes a valid and binding obligation of
Sierra and Sierra Sub enforceable against each in accordance with its
terms. The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby will not, conflict
with, or result in any Violation pursuant to any provision of the Articles
of Incorporation or By-laws of Sierra, except (i) as set forth on Schedule
3.2(c) hereto or (ii) as contemplated by the next sentence hereof, result
in any Violation of any material loan or credit agreement, note, mortgage,
indenture, lease, Designated Plan or other material agreement, obligation,
instrument, permit, concession, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to Sierra or
any Subsidiary of Sierra or their respective properties or assets, which
Violation would have a material adverse effect on Sierra and its
Subsidiaries taken as a whole. No consent, approval, order or authorization
of, or registration, declaration or filing with, any Governmental Entity is
required by or with respect to Sierra or any of its Subsidiaries in
connection with the execution and delivery of this Agreement by Sierra and
Sierra Sub or the consummation by Sierra and Sierra Sub of the transactions
contemplated hereby, the failure to obtain which would have a material
adverse effect on Sierra and its Subsidiaries, taken as a whole, except for
(i) the filing of a premerger notification report by Sierra under the HSR
Act, (ii) the filing with the SEC of the S-4, the Proxy Statement (if the
approval of Sierra's shareholders is required) and such reports under
Sections 13(a), 13(d) and 16(a) of 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 so required, (iii)
the filing of such documents with, and the obtaining of such orders from,
the various state authorities, including state securities authorities, that
are required in connection with the transactions contemplated by this
Agreement, (iv) the filing of the Merger Filings with the Secretary of
State of the State of California and appropriate documents with the
relevant authorities of other states in which Sierra is qualified to do
business and (v) the Insurance Approvals and State Takeover Approvals.
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(d) SEC Documents. Sierra has delivered or made available to CII a true
and complete copy of each material report, schedule, registration statement
and definitive proxy statement filed by Sierra with the SEC since January
1, 1992 (as such documents have since the time of their filing been
amended, the "Sierra SEC Documents") which are all the documents (other
than preliminary material) that Sierra was required to file with the SEC
since such date. As of their respective dates, the Sierra SEC Documents
complied in all material respects with the requirements of the Securities
Act or the Exchange Act, as the case may be, and the rules and regulations
of the SEC thereunder applicable to such Sierra SEC Documents, and none of
the Sierra SEC Documents contained any untrue statement of a material fact
or omitted 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. The consolidated financial
statements of Sierra and its consolidated Subsidiaries included in the
Sierra 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 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 (subject, in the case of the
unaudited statements, to normal, recurring audit adjustments) the
consolidated financial position of Sierra 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 Sierra or Sierra Sub for inclusion or incorporation by
reference in (i) the S-4 will, at the time the S-4 is filed with the SEC
and at the time it becomes effective under the Securities Act, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading and (ii) the Proxy Statement will, at the date mailed to
shareholders and at the times of the meeting or meetings of shareholders to
be held in connection with the Merger, 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 are 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,
and the S-4 will comply as to form in all material respects with the
provisions of the Securities Act and the rules and regulations thereunder.
(f) Compliance with Applicable Laws. Except as set forth on Schedule
3.2(f), the businesses of Sierra and each of its Subsidiaries have been and
are being conducted in compliance with all applicable laws, rules,
ordinances, regulations, licenses, judgments, orders or decrees of federal,
state, local and foreign governmental authorities, except for possible
violations which individually or in the aggregate do not, and, insofar as
reasonably can be foreseen, in the future will not, have a material adverse
effect on Sierra and its Subsidiaries taken as a whole. Sierra and each
Subsidiary of Sierra hold all certificates of authority, franchises,
grants, permits, licenses, easements, consents, certificates, variances,
exemptions, orders and approvals from all Governmental Entities
(collectively, "Sierra Permits") which are necessary to own, lease and
operate the assets and properties they currently own, lease and operate and
to conduct their respective businesses and operations in the manner
heretofore conducted and as proposed to be conducted, except for those
Sierra Permits, the absence of which would not have a material adverse
effect on Sierra and its Subsidiaries taken as a whole. Except as set forth
on Schedule 3.2(f), there are no outstanding orders applicable to Sierra or
any of its Subsidiaries issued by any regulatory authority (other than
regulations generally applicable to companies in the same line of business
as Sierra or any of its Subsidiaries) that restrict Sierra or such
Subsidiaries' ability to pay dividends on its capital stock or regulate or
establish levels of reserves or other financial ratios. After due inquiry
of management, no event has occurred with respect to any of such Sierra
Permits which would permit revocation, termination or suspension of any
such Sierra Permits or would result in any impairment of the rights of the
holder of any such Sierra Permits. No notice has been received and, after
due inquiry of management, no investigation or review is pending or, to
Sierra's knowledge, threatened by any Governmental Entity with regard to
(i) any alleged violation by Sierra or any of its Subsidiaries of any law,
rule, regulation, ordinance, Sierra Permit, judgment, order or decree or
(ii)
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any alleged failure to have or any violation of any Sierra Permit which
violation or failure would have a material adverse effect on Sierra and its
Subsidiaries taken as a whole.
(g) Litigation. Except (i) as set forth on Schedule 3.2(g), (ii) as
disclosed in the Sierra SEC Documents and (iii) for actions and suits
arising in the ordinary course of business, there is no action, suit,
proceeding or investigation, either at law or in equity, at or before any
commission or other administrative authority in any domestic or foreign
jurisdiction, of any kind now pending or, to the best of Sierra's or Sierra
Sub's knowledge, threatened, involving Sierra, Sierra Sub or any other
Subsidiary of Sierra, or any of the respective properties or assets of
Sierra or Sierra Sub that (i) if asserted and decided adversely to Sierra
or Sierra Sub, could, individually or in the aggregate, materially and
adversely affect the condition (financial or otherwise), operations,
business, properties, assets or liabilities of Sierra and its Subsidiaries,
taken as a whole, (ii) questions the validity of this Agreement, or (iii)
seeks to delay, prohibit or restrict in any manner any action taken or to
be taken by Sierra or Sierra Sub under this Agreement. None of Sierra nor
any Subsidiary of Sierra, nor any of their respective properties or assets
is subject to any material continuing order of, consent decree, settlement
agreement or other similar written agreement (other than agreements in the
ordinary course of business), continuing investigation (other than
regularly scheduled audits) by any court, Governmental Entity, or any
judicial administrative or arbitral judgment, order, writ, decree,
injunction, restraint, or award of any court, Governmental Entity or
arbitrator, including without limitation cease-and-desist or other orders.
(h) Absence of Certain Changes or Events. Except as disclosed in the
Sierra SEC Documents filed prior to or subsequent to the date of this
Agreement or in the audited consolidated balance sheets of Sierra and its
Subsidiaries and the related consolidated statements of income,
shareholders' equity and cash flows as of and for the period ended December
31, 1994 (the "Sierra 1994 Financials"), true and correct copies of which
have been delivered to CII, or except as contemplated by this Agreement,
since March 31, 1995, Sierra and its Subsidiaries have conducted their
respective businesses only in the ordinary and usual course, and, as of the
date of this Agreement, Sierra has not undergone or suffered any change in
its financial condition, properties, business or results of operations
which has been, individually or in the aggregate, materially adverse to
Sierra and its Subsidiaries, taken as a whole.
(i) Opinions of Financial Advisors. Sierra has received the opinion of
Bear, Stearns & Co., dated the date hereof, to the effect that the
financial terms of the Merger are fair to Sierra and its shareholders from
a financial point of view. Sierra has delivered or will deliver, promptly
after it receives the same, a true and complete copy of this opinion to
CII.
(j) Accounting Matters. Neither Sierra nor, to the best of its knowledge,
any of its affiliates, has through the date of this Agreement taken or
agreed to take any action that would prevent Sierra from accounting for the
business combination to be effected by the Merger as a pooling of
interests.
(k) Ownership of CII Common Stock. As of the date hereof, neither Sierra
nor, to the best of its knowledge, any of its affiliates or associates, (i)
beneficially owns, directly or indirectly, or (ii) are parties to any
agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of, in each case, shares of capital stock of
CII, which in the aggregate, represent 10% or more of the outstanding
shares of capital stock of CII entitled to vote generally in the election
of directors.
(l) Interim Operations of Sierra Sub. Sierra Sub was formed solely for
the purpose of engaging in the transactions contemplated hereby, has
engaged in no other business activities and has conducted its operations
only as contemplated hereby.
(m) No Change in Capital Structure. There has been no material change in
the information set forth in the second sentence of Section 3.2(b) between
the close of business on June 9, 1995, and the date hereof.
(n) Investment Company Act. Neither Sierra nor Sierra Sub is an
"investment company", or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended.
(o) Representations Relating to Tax-Free Reorganization. Prior to and at
the Effective Time, Sierra will be in "control" of Sierra Sub within the
meaning of Section 368(c) of the Code and Sierra has no plan
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or intention to cause CII to issue additional shares of capital stock
following the Effective Time that would result in Sierra losing "control"
(as so defined) of CII; Sierra has no plan or intention to reacquire any of
its stock issued pursuant to the Merger; Sierra has no plan or intention to
liquidate CII, to merge CII with or into another corporation including
Sierra or its affiliates, to sell, distribute or otherwise dispose of any
of the capital stock of CII (other than a transfer of such stock to a
corporation controlled by Sierra) or to cause CII to sell or otherwise
dispose of any material amount of its assets, except for dispositions made
in the ordinary course of business or payment of expenses, including
payments to holders of CII Dissenting Shares, incurred by CII pursuant to
the Merger; neither Sierra nor Sierra Sub is an "investment company" within
the meaning of Section 368(a)(2)(F)(iii) of the Code; neither Sierra nor
Sierra Sub is under the jurisdiction of a court in a Title 11 or similar
case within the meaning of Section 368(a)(3)(A) of the Code; the
liabilities of Sierra Sub assumed by CII and the liabilities to which the
transferred assets of Sierra Sub are subject were incurred by Sierra Sub in
the ordinary course of its business; following the Effective Time, Sierra
shall cause CII to either continue the historic business of CII or use a
significant portion of CII's historic business assets in a business; any
amounts paid with respect to CII Dissenting Shares will be paid by CII
solely from CII's pre-merger assets and without reimbursement therefor by
Sierra or Sierra Sub; neither Sierra nor any affiliate of Sierra owns, or
has owned during the past five (5) years, directly or indirectly, any
shares of CII's capital stock or the right to acquire or vote any such
shares; no shareholder of CII is acting as agent for Sierra in connection
with the Merger or the approval thereof; other than as specifically
provided in this Agreement, Sierra will not reimburse any shareholder of
CII for CII's capital stock such shareholder may have purchased or for
other obligations such shareholder may have incurred; no shares of Sierra
Sub (or, following the Effective Time, CII) have been or will be used as
consideration or issued to shareholders of CII pursuant to the Merger.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
4.1. Covenants of CII. During the period from the date of this Agreement and
continuing until the Effective Time, CII agrees as to itself and its
Subsidiaries that (except as expressly contemplated or permitted by this
Agreement, or to the extent that the other party shall otherwise consent in
writing and except with respect to employment and compensation arrangements
entered into by CII):
(a) Ordinary Course. CII and its Subsidiaries shall carry on their
respective businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted and use all
reasonable efforts to preserve intact their present business organizations,
keep available the services of their present officers and employees and
preserve their relationships with 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.
(b) Dividends; Changes in Stock. CII shall not, nor shall it permit any
of its Subsidiaries to, nor shall CII propose to, (i) declare or pay any
dividends on or make other distributions in respect of any of its capital
stock, except for dividends by a wholly-owned Subsidiary of CII or such
Subsidiary, (ii) 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 or otherwise acquire, or permit any Subsidiary to
purchase or otherwise acquire, any shares of its capital stock.
(c) Issuance of Securities. CII shall not, nor shall CII permit any of
its Subsidiaries to, issue, deliver or sell, or authorize or propose the
issuance, delivery or sale of, any shares of its capital stock or any
securities convertible into, or any rights, warrants or options to acquire,
any such shares, or convertible securities, other than the issuance of CII
Common Stock upon the exercise of outstanding stock options or stock grants
under CII Stock Plans, and the conversion of CII Debentures in each case in
accordance with their present terms.
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(d) Governing Documents. CII shall not amend nor shall it permit its
Subsidiaries (except, with the consent of Sierra, to the extent required by
relevant authorities to become admitted to engage in the insurance business
in the jurisdictions in which CII and its Subsidiaries are currently
admitted) to amend or propose to amend its Articles of Incorporation or By-
laws.
(e) No Solicitations. CII shall not, nor shall CII permit any of its
Subsidiaries to, nor shall it authorize or permit any of its or their
officers, directors or employees or any investment banker, financial
advisor (including the persons named in Sections 3.1(u)), attorney,
accountant or other representative retained by it or any of its
Subsidiaries to, solicit or encourage (including by way of furnishing
information), or take any other action to facilitate, any inquiries or the
making of any proposal which constitutes, or may reasonably be expected to
lead to, any takeover proposal, or agree to or endorse any takeover
proposal, or participate in any discussions or negotiations, or provide
third parties with any nonpublic information, relating to any such inquiry
or proposal. CII shall promptly advise Sierra orally and in writing of any
such inquiries or proposals. As used in this Agreement, "takeover proposal"
shall mean any tender or exchange offer, proposal for a merger,
consolidation or other business combination involving CII or any subsidiary
of CII or any proposal or offer to acquire in any manner a substantial
equity interest in, or a substantial portion of the assets of, CII or any
of its Insurance Subsidiaries other than the transactions contemplated by
this Agreement. Nothing contained in this Section 4.1(e) or in any other
provision of this Agreement shall, however, prohibit CII or its Board of
Directors from (i) taking and disclosing to CII's shareholders a position
with respect to a takeover proposal pursuant to Rules 14d-9 and 14e-2
promulgated under the Exchange Act or (ii) making such disclosures to CII's
shareholders as are required under applicable law. Subject to compliance
with the provisions of Section 7.1, nothing contained in this Section
4.1(e) shall prohibit the Board of Directors of CII from furnishing
information to, or entering into discussions or negotiations with, any
person or entity that makes a bona fide unsolicited offer to acquire the
Company pursuant to a merger, consolidation, tender offer, share exchange,
business combination, stock or asset purchase or other similar transaction
(a "Competing Offer") if: (A) the Board of Directors of CII, after
consultation with and receiving the advice of its legal counsel and
financial advisors, determines in good faith that such action is necessary
or required for the Board of Directors of CII to comply with its fiduciary
duties to CII's shareholders under applicable law, (B) before furnishing
such information to, or entering into discussions or negotiations with,
such person or entity, CII discloses to Sierra that it is furnishing
information to, or entering into discussions or negotiations with, such
person or entity, which notice shall describe the terms thereof (but need
not identify the person or entity making the offer), (C) prior to
furnishing such information to such person or entity, CII receives from
such person or entity an executed confidentiality agreement, with terms no
less favorable to CII than those contained in the Confidentiality Agreement
dated April 13, 1995, between Sierra and CII (the "Confidentiality
Agreement"), and (D) CII keeps Sierra informed promptly of the status
(including the terms, but any disclosure of terms shall be covered by the
Confidentiality Agreement) of any such discussions or negotiations
(provided that, CII shall not be required to disclose to Sierra
confidential information concerning the business or operations of the
person making the expression of interest). Subject to compliance with the
provisions of Section 7.1 and the preceding sentence, the Board of
Directors may approve and recommend to CII's shareholders a Competing
Offer.
(f) No Acquisitions. CII shall not, nor shall CII 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 are material, individually or in the aggregate, to CII or
any such Subsidiary.
(g) No Dispositions. Other than (i) the possible sale of InteLock, (ii)
as may be required by law to consummate the transactions contemplated
hereby or (iii) in the ordinary course of business consistent with prior
practice, CII shall not, nor shall CII permit any of its Subsidiaries to,
without the prior consent of Sierra, sell, lease, encumber or otherwise
dispose of, or agree to sell, lease, encumber or otherwise dispose of, any
of its assets, which are material, individually or in the aggregate, to CII
or any of its Subsidiaries
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taken as a whole. The transaction described in clause (i) above is not in
contemplation of the Merger and the Merger is not dependent upon the
consummation of such transaction.
(h) Indebtedness. CII shall not, nor shall CII permit any of its
Subsidiaries to, incur (which shall not be deemed to include entering into
credit agreements, lines of credit or similar arrangements until borrowings
are made under such arrangements) 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 such party or any of
its Subsidiaries or guarantee any debt securities of others other than (i)
in each case in the ordinary course of business consistent with prior
practice and (ii) refinancing of existing credit lines and borrowings
thereunder.
(i) Other Actions. CII shall not, nor shall CII permit any of its
Subsidiaries to, take any action that would or is reasonably likely to
result in any of its representations and warranties set forth in this
Agreement being untrue as of the date made (to the extent so limited), or
in any of the conditions to the Merger set forth in Article VI not being
satisfied.
(j) Advice of Changes; SEC Filings. CII shall confer with Sierra on a
regular and frequent basis and report on operational matters and promptly
advise Sierra of any change or event having, or which, insofar as can
reasonably be foreseen, could have, a material adverse effect on CII or any
of its Subsidiaries. CII shall promptly provide Sierra (or its counsel)
copies of all filings made by such party with any state or federal
Governmental Entity in connection with this Agreement and the transactions
contemplated hereby.
(k) Access to Information. Upon reasonable notice, CII shall (and shall
cause its Subsidiaries to) afford to the officers, employees, accountants,
counsel and other representatives of Sierra, access, during normal business
hours during the period prior to the Effective Time, to all its properties,
books, contracts, commitments and records and, during such period, CII
shall (and shall cause its Subsidiaries to) furnish promptly to Sierra (a)
a copy of each report, schedule, registration statement and other document
filed or received by it during such period pursuant to the requirements of
Federal securities laws and (b) all other information concerning its
business, properties and personnel as such other party may reasonably
request. Unless otherwise required by law, Sierra will hold any such
information which is nonpublic in confidence until such time as such
information otherwise becomes publicly available through no wrongful act of
either party, and in the event of termination of this Agreement for any
reason Sierra shall promptly return all nonpublic documents obtained from
CII or its Subsidiaries, and any copies made of such documents, to CII.
(l) Affiliates. Prior to the Closing Date, CII shall deliver to Sierra a
letter identifying all persons who are, at the time this Agreement is
submitted for approval to the shareholders of CII, "affiliates" of CII for
purposes of Rule 145 under the Securities Act. CII shall use its best
efforts to cause each such person to deliver to Sierra on or prior to the
Closing Date a written agreement, substantially in the form attached as
Exhibit 4.1(l) hereto.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1. Preparation of S-4 and the Proxy Statement. Sierra and CII shall
promptly prepare and file with the SEC the Proxy Statement and Sierra shall
prepare and file with the SEC the S-4, in which the Proxy Statement will be
included as a prospectus. Each of Sierra and CII shall use its best efforts to
have the S-4 declared effective under the Securities Act as promptly as
practicable after such filing. Sierra shall also take any action (other than
qualifying to do business in any jurisdiction in which it is now not so
qualified) required to be taken under any applicable state securities laws in
connection with the issuance of Sierra Common Stock in the Merger and upon the
exercise of CII Stock Options (as defined in Section 5.7), and CII shall
furnish all information concerning CII and the holders of CII Common Stock as
may be reasonably requested in connection with any such action.
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5.2. Letter of CII's Accountants. CII shall use its best efforts to cause to
be delivered to Sierra a letter of BDO Siedman, CII's independent auditors,
dated a date within two business days before the date on which the S-4 shall
become effective and addressed to Sierra, in form and substance reasonably
satisfactory to Sierra and customary in scope and substance for letters
delivered by independent public accountants in connection with registration
statements similar to the S-4.
5.3. Meetings. CII and, if required, Sierra shall call a meeting of its
respective shareholders to be held as promptly as practicable for the purpose
of voting upon this Agreement and related matters. CII and Sierra Sub and, if a
vote of Sierra's shareholders is required, Sierra will, through their
respective Boards of Directors, subject to their fiduciary duties to their
shareholders under applicable law, recommend to their respective shareholders
approval of such matters. CII and Sierra shall coordinate and cooperate with
respect to the timing of such meetings and shall use their best efforts to hold
such meetings on the same day and as soon as practicable after the date hereof.
5.4. Legal Conditions to Merger. Each of CII, Sierra and Sierra Sub will take
all reasonable actions necessary to comply promptly with all legal requirements
which may be imposed on itself with respect to the Merger (including furnishing
all information required under the HSR Act, in connection with the Approvals
and in connection with approvals of or filings with any other Governmental
Entity) and will promptly cooperate with and furnish information to each other
in connection with any such requirements imposed upon any of them or any of
their Subsidiaries in connection with the Merger. Each of CII, Sierra and
Sierra Sub will, and will cause its Subsidiaries to, take all reasonable
actions necessary to obtain (and will cooperate with each other in obtaining)
any consent, authorization, order or approval of, or any exemption by, any
Governmental Entity or other public or private third party, required to be
obtained or made by Sierra, CII or any of their Subsidiaries in connection with
the Merger or the taking of any action contemplated thereby or by this
Agreement.
5.5. Stock Exchange Listing. Sierra shall use all reasonable efforts to cause
the shares of Sierra Common Stock to be issued in the Merger and the shares of
Sierra Common Stock to be reserved for issuance upon exercise of CII Stock
Options and upon conversion of CII Debentures to be approved for listing on the
NYSE, subject to official notice of issuance, prior to the Closing Date.
5.6. Employee Benefit Plans. CII agrees to take all necessary steps at or
prior to the Closing to terminate effective as of the Closing, the following
Designated Plans (as disclosed on Schedule 3.1(o)): (i) the Profit Sharing
Plan, (ii) the Supplemental Benefit Plan, (iii) the Supplemental Executive
Retirement Plan, (iv) the Supplemental Senior Executive Retirement Plan, (v)
the Employee Incentive Plan, (vi) the Stock Purchase Match Plan and (vii) the
1993 Stock Option Plan, the Supplemental Executive Retirement Plan, the
Founders' Bonus Plan and the Phantom Stock Bonus Plan of InteLock. CII also
agrees that, on or after the date of this Agreement, it will not issue any
stock option or any other award pursuant to the 1988 Stock Option Plan, the
1989 Stock Option Plan, the 1991 Employee Stock Incentive Plan, the 1993
Employee Stock Incentive Plan, or the Non-Employee Directors Stock Option
Plans. Sierra and CII agree that the remaining Designated Plans will continue
subsequent to the Closing, but may be terminated at any time thereafter
provided that at such time the employees of CII are either covered under a
plan, if any, providing benefits of the same nature that is maintained by
either Sierra or a Subsidiary for its employees or by a plan comparable to any
such plan.
5.7. Stock Options. (a) At the Effective Time, each outstanding option to
purchase shares of CII Common Stock (a "CII Stock Option" or collectively, "CII
Stock Options") issued pursuant to the 1988 Stock Option Plan, the 1989
Employee Incentive Stock Option Plan, the 1991 Employee Stock Incentive Plan,
the 1993 Employee Stock Incentive Plan and the Non-Employee Director Stock
Option Plans (collectively, the "CII Plans"), whether vested or unvested, shall
be assumed by Sierra. Each CII Stock Option shall be deemed to constitute an
option to acquire, on the same terms and conditions as were applicable under
such CII Stock Option, the same number of shares of Sierra Common Stock as the
holder of such CII Stock Option would have been entitled to receive pursuant to
the Merger had such holder exercised such option in full immediately prior to
the Effective Time, at a price per share equal to (y) the aggregate exercise
price for the shares of CII Common Stock otherwise purchasable pursuant to such
CII Stock Option divided by (z) the number of full shares of Sierra
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Common Stock deemed purchasable pursuant to such CII Stock Option; provided,
however, that in the case of any option to which section 421 of the Code
applies by reason of its qualification under section 422 of the Code
("incentive stock options"), the option price, the number of shares purchasable
pursuant to such option and the terms and conditions of exercise of such option
shall be determined in order to comply with section 424(a) of the Code.
(b) As soon as practicable after the Effective Time, Sierra shall deliver to
the holders of CII Stock Options appropriate notices setting forth such
holders' rights pursuant to the respective CII Plans and the agreements
evidencing the grants of such Options shall continue in effect on the same
terms and conditions (subject to the adjustments required by this Section 5.7
after giving effect to the Merger). Sierra shall comply with the terms of the
CII Plans and ensure, to the extent required by, and subject to the provisions
of, such Plans, that CII Stock Options which qualified as incentive stock
options prior to the Effective Time continue to qualify as qualified stock
options after the Effective Time.
(c) Sierra shall take all corporate action necessary to reserve for issuance
a sufficient number of shares of Sierra Common Stock for delivery upon exercise
of CII Stock Options assumed in accordance with this Section 5.7. As soon as
practicable after the Effective Time, Sierra shall file a registration
statement on Form S-3 or Form S-8, as the case may be (or any successor or
other appropriate forms), or another appropriate form with respect to the
shares of Sierra Common Stock subject to such options and shall use its best
efforts to maintain the effectiveness of such registration statement or
registration statements (and maintain the current status of the prospectus or
prospectuses contained therein) for so long as such options remain outstanding.
With respect to those individuals who subsequent to the Merger will be subject
to the reporting requirements under Section 16(a) of the Exchange Act, where
applicable, Sierra shall administer CII Plans assumed pursuant to this Section
5.7 in a manner that complies with Rule 16b-3 promulgated under the Exchange
Act to the extent the applicable CII Plan complied with such rule prior to the
Merger.
5.8. Brokers or Finders. Each of Sierra and CII represents, as to itself, its
Subsidiaries and its affiliates, that no agent, broker, investment banker,
financial advisor or other firm or person is or will be entitled to any
broker's or finder's fee or any other commission or similar fee in connection
with any of the transactions contemplated by this Agreement, except Vector
Securities International, Inc. whose fees and expenses will be paid by CII in
accordance with CII's agreement with such firm (copies of which have been
delivered by CII to Sierra prior to the date of this Agreement), and Bear,
Stearns & Co., whose fees and expenses will be paid by Sierra in accordance
with Sierra's agreement with such firm (copies of which have been delivered by
Sierra to CII prior to the date of this Agreement), and each of Sierra and CII
respectively agree to indemnify and hold the other harmless from and against
any and all claims, liabilities or obligations with respect to any other fees,
commissions or expenses asserted by any person on the basis of any act or
statement alleged to have been made by such party or its affiliate.
5.9. Access to Sierra Records. Upon reasonable notice, Sierra shall (and
shall cause its Subsidiaries to) afford to the officers, employees,
accountants, counsel and other representatives of CII, access, during normal
business hours during the period prior to the Effective Time, to all its
properties, books, contracts, commitments and records and, during such period,
Sierra shall (and shall cause its Subsidiaries to) furnish promptly to CII (a)
a copy of each report, schedule, registration statement and other document
filed or received by it during such period pursuant to the requirements of
Federal securities laws and (b) all other information concerning its business,
properties and personnel as such other party may reasonably request. Unless
otherwise required by law, CII will hold any such information which is
nonpublic in confidence until such time as such information otherwise becomes
publicly available through no wrongful act of either party, and in the event of
termination of this Agreement for any reason CII shall promptly return all
nonpublic documents obtained from Sierra or its Subsidiaries, and any copies
made of such documents, to Sierra.
5.10. Employment Agreements. CII and Sierra shall, as of or prior to the
Effective Time, enter into employment contracts with the persons set forth on
Exhibit 5.10(x) on substantially the terms set forth in the form of Employment
Agreements agreed to as of the date hereof.
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5.11. Indemnification; Directors' and Officers' Insurance. (a) From and after
the Effective Time, Sierra and the Surviving Corporation shall indemnify,
defend and hold harmless each person who is now, or has been at any time prior
to the date hereof or who becomes prior to the Effective Time, an officer,
director or employee of CII or any of its Subsidiaries (the "Indemnified
Parties") against (i) all losses, claims, damages, costs, expenses (including
attorney's fees), liabilities or judgments or amounts that are paid in
settlement (which settlement shall require the prior written consent of Sierra,
which consent shall not be unreasonably withheld) of or in connection with any
claim, action, suit, proceeding or investigation (a "Claim") in which an
Indemnified Party is, or is threatened to be made, a party or a witness based
in whole or in part on or arising in whole or in part out of the fact that such
person is or was an officer, director or employee of CII or any of its
Subsidiaries, whether such Claim pertains to any matter or fact arising,
existing or occurring at or prior to the Effective Time (including, without
limitation, the Merger and other transactions contemplated by this Agreement),
regardless of whether such Claim is asserted or claimed prior to, at or after
the Effective Time (the "Indemnified Liabilities"), and (ii) all Indemnified
Liabilities based in whole or in part on, or arising in whole or in part out
of, or pertaining to this Agreement or the transactions contemplated hereby, in
each case to the full extent CII would have been permitted under California law
and its Articles of Incorporation and Bylaws to indemnify such person (and
Sierra shall pay expenses in advance of the final disposition of any such
action or proceeding to each Indemnified Party to the full extent permitted by
law and under such Articles of Incorporation or Bylaws, upon receipt of any
undertaking required by such Articles of Incorporation, Bylaws or applicable
law). Any Indemnified Party wishing to claim indemnification under this Section
5.11(a), upon learning of any Claim, shall notify Sierra (but the failure so to
notify Sierra shall not relieve it from any liability which Sierra may have
under this Section 5.11(a) except to the extent such failure prejudices Sierra)
and shall deliver to Sierra any undertaking required by such Articles of
Incorporation, Bylaws or applicable law. Sierra shall use its best efforts to
assure, to the extent permitted under applicable law, that all limitations of
liability existing in favor of the Indemnified Parties as provided in CII's
Articles of Incorporation and Bylaws, as in effect as of the date hereof, with
respect to claims or liabilities arising from facts or events existing or
occurring prior to the Effective Time (including, without limitation, the
transactions contemplated by this Agreement), shall survive the Merger. The
obligations of Sierra described in this Section 5.11(a) shall continue in full
force and effect, without any amendment thereto, for a period of not less than
six years from the Effective Time; provided, however, that all rights to
indemnification in respect of any Claim asserted or made within such period
shall continue until the final disposition of such Claim; and provided further
that nothing in this Section 5.11(a) shall be deemed to modify applicable
California law regarding indemnification of former officers and directors. The
Indemnified Parties as a group may retain only one law firm to represent them
with respect to each such matter unless there is, under applicable standards of
professional conduct, a conflict on any significant issue between the positions
of any two or more Indemnified Parties.
(b) Sierra and the Surviving Corporation shall cause to be maintained in
effect for not less than six years from the Effective Time the current policies
of directors' and officers' liability insurance maintained by CII and its
Subsidiaries (provided that Sierra and the Surviving Corporation may substitute
therefor policies of at least the same coverage containing terms and conditions
which are no less advantageous to the Indemnified Parties in all material
respects so long as no lapse in coverage occurs as a result of such
substitution) with respect to all matters, including the transactions
contemplated hereby, occurring prior to, and including, the Effective Time,
provided that, in the event that any Claim is asserted or made within such six-
year period, such insurance shall be continued in respect of any such Claim
until final disposition of any and all such Claims, provided further that,
Sierra shall not be obligated to make annual premium payments for such
insurance to the extent such premiums exceed 200% of the premiums paid as of
the date hereof by Sierra for such insurance. Notwithstanding anything to the
contrary contained elsewhere herein, Sierra's agreement set forth above shall
be limited to cover claims only to the extent that those claims are not covered
under CII's directors' and officers' insurance policies (or any substitute
policies permitted by this Section 5.11(b)).
(c) The obligations of Sierra and the Surviving Corporation under this
Section 5.11 are intended to benefit, and be enforceable against Sierra and the
Surviving Corporation directly by, the Indemnified Parties, and shall be
binding on all respective successors of Sierra and the Surviving Corporation.
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5.12. Additional Agreements; Reasonable Efforts. Subject to the terms and
conditions of this Agreement, each of the parties hereto agrees to use all
reasonable efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement, subject to the appropriate vote of shareholders
of Sierra, if such vote is required, and of CII described in Section 6.1(a),
including cooperating fully with the other party, including by provision of
information and making of all necessary filings in connection with, among other
things, the Insurance Approvals and under the HSR Act, and including assumption
by Sierra of the obligation to issue shares of Sierra Common Stock upon
conversion of CII Debentures. In case at any time after the Effective Time any
further action is necessary or desirable to carry out the purposes of this
Agreement or to vest the Surviving Corporation with full title to all
properties, assets, rights, approvals, immunities and franchises of either of
the Constituent Corporations, the proper officers and directors of each party
to this Agreement shall take all such necessary action.
5.13. Pooling. Sierra and CII each agrees that it will not knowingly take any
action which would have the effect of jeopardizing the treatment of the Merger
as a "pooling-of-interests" for accounting purposes.
5.14. No Actions Inconsistent With Tax-Free Reorganization. CII and each of
its Subsidiaries, Sierra and Sierra Sub shall (and, following the Effective
Time, Sierra shall cause the Surviving Corporation to) take no action with
respect to the capital stock, assets or liabilities of the Surviving
Corporation that would cause the Merger not to qualify as a "reorganization"
within the meaning of Sections 368(a)(1)(A) and (a)(2)(E) of the Code.
ARTICLE VI
CONDITIONS PRECEDENT
6.1. Conditions to Each Party's Obligation To Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to
the satisfaction prior to the Closing Date of the following conditions:
(a) Approval. This Agreement and the Merger shall have been approved and
adopted by the affirmative vote of a majority of the votes that the holders
of the outstanding shares of CII Common Stock are entitled to cast and, if
their approval is required, shall have been approved by the affirmative
vote of the requisite number of holders of the outstanding shares of Sierra
Common Stock. Not more than ten percent (10%) of the holders of the
outstanding shares of CII Common Stock shall have delivered to CII written
demands for appraisal of such shares prior to the taking of the vote by the
shareholders of CII on the Merger.
(b) NYSE Listing. The shares of Sierra Common Stock issuable to CII
shareholders pursuant to this Agreement and such other shares required to
be reserved for issuance in connection with the Merger shall have been
authorized for listing on the NYSE upon official notice of issuance.
(c) Other Approvals. The filings provided for by Section 1.1, the
Insurance Approvals and the State Takeover Approvals and all
authorizations, consents, orders or approvals of, or declarations or
filings with, or expirations of waiting periods imposed by, any
Governmental Entity the absence of which would have a material adverse
effect on Sierra, the Surviving Corporation or any Subsidiary of CII shall
have been filed, have occurred or been obtained.
(d) S-4. The S-4 shall have become effective under the Securities Act and
shall not be the subject of any stop order or proceedings seeking a stop
order.
(e) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an
"Injunction") preventing the consummation of the Merger shall be in effect.
(f) Tax Returns. CII and its Subsidiaries shall have filed all necessary
Returns (as defined in Section 3.1(t)(i)(B)) required to amend Returns
previously filed by CII and its Subsidiaries for the Tax year ended
December 31, 1991 with respect to an adjustment under Section 847 of the
Code (and any other related
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provision), prior to the earlier of (i) the date that is three years from
the day on which CII and its Subsidiaries filed their 1991 Tax Returns or
(ii) the Closing Date, subject to the approval of Sierra, which shall not
be unreasonably withheld, in order to properly reflect the taxable income
of CII and its Subsidiaries.
(g) Supplemental Indenture. Each of Surviving Corporation, CII, Sierra
and the Trustee shall have executed and delivered a supplemental indenture
pursuant to the provisions of the Indenture.
6.2. Conditions of Obligations of Sierra and Sierra Sub. The obligations of
Sierra and Sierra Sub to effect the Merger are subject to the satisfaction of
the following conditions unless waived by Sierra and Sierra Sub:
(a) Representations and Warranties. The representations and warranties of
CII set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement and (except to the extent such
representations and warranties speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date, except as
otherwise contemplated by this Agreement, and Sierra shall have received a
certificate signed on behalf of CII by the chief executive officer and by
the chief financial officer of CII to such effect.
(b) Performance of Obligations of CII. CII 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 Sierra shall have received a
certificate signed on behalf of CII by the chief executive officer and by
the chief financial officer of CII to such effect.
(c) Letter from CII Affiliates. Sierra shall have received from each
person named in the letter referred to in Section 4.1(l) an executed copy
of an agreement substantially in the form of Exhibit 4.1(l) hereto.
(d) Tax Opinion. The opinion of Morgan, Lewis & Bockius, counsel to
Sierra, to the effect that the Merger will be treated for Federal income
tax purposes as a reorganization within the meaning of Section 368(a) of
the Code, and that Sierra, Sierra Sub and CII will each be a party to that
reorganization within the meaning of Section 368(b) of the Code, dated on
or about the date that is two business days prior to the date the Proxy
Statement is first mailed to shareholders of CII and, if their approval is
required, to the shareholders of Sierra, shall not have been withdrawn or
modified in any material respect.
(e) Consents Under Agreements. CII shall have obtained the consent or
approval of each person whose consent or approval shall be required in
order to permit the succession by the Surviving Corporation pursuant to the
Merger to any obligation, right or interest of CII or any Subsidiary of CII
under any loan or credit agreement, note, mortgage, indenture, lease or
other agreement or instrument, except those for which failure to obtain
such consents and approvals would not, in the reasonable opinion of Sierra,
individually or in the aggregate, have a material adverse effect (x) on CII
and its Subsidiaries taken as a whole or (y) on the Surviving Corporation
and its Subsidiaries taken as a whole upon the consummation of the
transactions contemplated hereby.
(f) No Amendments to Resolutions. Neither the Board of Directors of CII
nor any committee thereof shall have amended, modified, rescinded or
repealed the resolutions adopted by the Board of Directors on June 12, 1995
(accurate and complete copies of which will be provided to Sierra) and
shall not have adopted any other resolutions in connection with this
Agreement and the transactions contemplated hereby inconsistent with such
resolutions.
6.3. Conditions of Obligations of CII. The obligation of CII to effect the
Merger is subject to the satisfaction of the following conditions unless waived
by CII:
(a) Representations and Warranties. The representations and warranties of
Sierra and Sierra Sub set forth in this Agreement shall be true and correct
in all material respects as of the date of this Agreement and (except to
the extent such representations speak as of an earlier date) as of the
Closing Date as though made on and as of the Closing Date, except as
otherwise contemplated by this Agreement, and CII shall have received a
certificate signed on behalf of Sierra by the Chief Executive Officer or
the President or the Vice Chairman or and by the chief financial officer of
Sierra to such effect.
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(b) Performance of Obligations of Sierra and Sierra Sub. Sierra and
Sierra 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 CII shall have received a certificate signed on behalf of
Sierra by the Chief Executive Officer or the President or the Vice Chairman
and by the chief financial officer of Sierra to such effect.
(c) Tax Opinion. The opinion of Gibson, Dunn & Crutcher, counsel to CII,
to the effect that the Merger will be treated for Federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the
Code, and that Sierra, Sierra Sub and CII will each be a party to that
reorganization within the meaning of Section 368(b) of the Code, dated on
or about the date that is two business days prior to the date the Proxy
Statement is first mailed to shareholders of CII and, if required, of
Sierra, shall not have been withdrawn or modified in any material respect.
(d) Consents Under Agreements. Sierra shall have obtained the consent or
approval of each person whose consent or approval shall be required in
connection with the transactions contemplated hereby under any loan or
credit agreement, note, mortgage, indenture, lease or other agreement or
instrument, except those for which failure to obtain such consents and
approvals would not, in the reasonable opinion of CII, individually or in
the aggregate, have a material adverse effect on Sierra and its
Subsidiaries, taken as a whole, or upon the consummation of the
transactions contemplated hereby.
(e) No Amendments to Resolutions. Neither the Board of Directors of
Sierra nor any committee thereof shall have amended, modified, rescinded or
repealed the resolutions adopted by the Board of Directors at a meeting
duly called and held on June 12, 1995 (accurate and complete copies of
which will be provided to CII), and shall not have adopted any other
resolutions in connection with this Agreement and the transactions
contemplated hereby inconsistent with such resolutions.
ARTICLE VII
TERMINATION AND AMENDMENT
7.1. Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval of the matters presented in
connection with the Merger by the shareholders of CII or, if their approval is
required, by the shareholders of Sierra:
(a) by mutual consent of Sierra and CII;
(b) by either Sierra or CII if there has been a material breach of any
representation, warranty, covenant or agreement on the part of the other
set forth in this Agreement which breach has not been cured within five
business days following receipt by the breaching party of notice of such
breach, or if any permanent injunction or other order of a court or other
competent authority preventing the consummation of the Merger shall have
become final and non-appealable;
(c) by either Sierra or CII if the Merger shall not have been consummated
before December 31, 1995;
(d) by either Sierra or CII if any required approval of the shareholders
of CII or of Sierra shall not have been obtained by reason of the failure
to obtain the required affirmative vote at a duly held meeting of
shareholders or at any adjournment thereof;
(e) by CII, if the Board of Directors of CII shall have adopted and
recommended a Competing Offer to its shareholders; or
(f) by Sierra, if (i) the Board of Directors of CII withdraws, modifies
or changes its recommendation of this Agreement or the Merger in a manner
adverse to Sierra or Sierra Sub or shall have resolved to do so, or (ii)
the Board of Directors of CII shall have recommended to the shareholders of
CII any Competing Transaction or resolved to do so, or (iii) a tender offer
or exchange offer for ten percent or more of the outstanding shares of
capital stock of CII is commenced, and the Board of Directors of CII,
within 10 business days after such tender offer or exchange offer is so
commenced, either fails to recommend against acceptance of such tender
offer or exchange offer by its shareholders or takes no position with
respect to the acceptance of such tender offer or exchange offer by its
shareholders.
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For purposes of this Agreement, "Competing Transaction" shall mean any of the
following involving CII or any of its Subsidiaries (other than the transactions
contemplated by this Agreement): (i) any merger, consolidation, share exchange,
business combination, or other similar transaction; (ii) any sale, lease,
exchange, mortgage, pledge, transfer or other disposition of twenty percent or
more of the assets of CII and its Subsidiaries, taken as a whole, in a single
transaction; (iii) any tender offer or exchange offer for ten percent or more
of the outstanding shares of capital stock of CII or the filing of a
registration statement under the Securities Act in connection therewith; (iv)
any solicitation of proxies in opposition to approval by CII's shareholders of
the Merger; (v) any person shall have acquired beneficial ownership or the
right to acquire beneficial ownership of, or any "group" (as such term is
defined under Section 13(d) of the Exchange Act) shall have been formed which
beneficially owns or has the right to acquire beneficial ownership of, ten
percent or more of the then outstanding shares of capital stock of CII; or (vi)
any agreement to, or public announcement by CII of a proposal, plan or
intention to, do, facilitate (including by way of providing information) or
recommend any of the foregoing.
7.2. Effect of Termination. In the event of termination of this Agreement by
either CII or Sierra as provided in Section 7.1, this Agreement shall forthwith
become void and there shall be no liability or obligation on the part of
Sierra, Sierra Sub or CII or their respective officers or directors except (y)
with respect to the last sentence of Section 4.1(k) and 5.9, and Sections 7.5
and 5.8, and (z) to the extent that such termination results from the willful
breach by a party hereto of any of its representations, warranties, covenants
or agreements set forth in this Agreement except as provided in Section 8.7.
7.3. Amendment. This Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors, at any time
before or after approval of the matters presented in connection with the Merger
by the shareholders of CII or, if their approval is required, the shareholders
of Sierra, but, after any such 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.
7.4. Extension; Waiver. At any time prior to the Effective Time, the parties
hereto, by action taken or authorized by their respective Board of Directors,
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) 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.
7.5. Fees and Expenses. (a) All costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby shall be paid by
the party incurring such expense, and, in connection therewith, each of Sierra
and CII shall pay, with its own funds and not with funds provided by the other
party, any and all property or transfer taxes imposed on such party or any real
property tax imposed by State of California on any holder of shares in such
party resulting from the Merger, except that expenses incurred in connection
with printing and mailing the Proxy Statement and the S-4 shall be shared
equally by Sierra and CII.
(b) CII agrees that (i) if CII shall terminate this Agreement pursuant to
Section 7.1(e), or (ii) if Sierra or CII shall terminate this Agreement
pursuant to Section 7.1(d) due to the failure of CII's shareholders to approve
and adopt this Agreement, and (A) at the time of such failure so to approve and
adopt this Agreement there shall exist a Competing Transaction and (B) prior to
such failure so to approve and adopt this Agreement the Board of Directors of
CII shall have withdrawn, modified or changed its recommendation of the
Agreement or the Merger in a manner adverse to Sierra and Sierra Sub, or shall
have resolved to do any of the foregoing, or shall have recommended to the
shareholders of CII any Competing Transaction or shall have resolved to do so,
or (iii) if Sierra terminates this Agreement pursuant to Section 7.1(f), then
on the Payment Date (as defined below), CII shall pay to Sierra an amount equal
to $5,000,000 plus all of Sierra's Expenses, including Sierra's share of the
Expenses described in Section 7.5(a), which sum CII and Sierra agree is
reasonable under the circumstances
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since it would be impracticable and extremely difficult to fix the actual
damage to Sierra in the case of such a termination. For purposes of this
Section 7.5(b), the "Payment Date" is the date 10 days following the earliest
of the following to occur: (1) the closing of any transaction resulting from a
Competing Transaction, (2) the date as of which CII publicly announces that the
Competing Transaction will not proceed, and (3) the date twelve months
following a termination of this Agreement by Sierra or CII giving rise to
payment under this Section 7.5(b). CII shall not be obligated to pay the
amounts set forth in the first sentence of this Section 7.5(b) if CII
terminates this Agreement pursuant to Section 7.1(b) or 7.1(c) due to the
failure of the conditions set forth in Section 6.1 or Section 6.3 to be
satisfied (unless the condition that is not satisfied is the condition set
forth in Section 6.1(a) and the events set forth in sub-clauses (A) and (B) of
clause (i) of this Section 7.5(b) have occurred).
(c) CII and Sierra each agree that (i) the payment provided for in Section
7.5(b) shall be the sole and exclusive remedy of Sierra upon any termination of
this Agreement as described in Section 7.5(b) and such remedies shall be
limited to the sum stipulated in Section 7.5(b) regardless of the circumstances
(including willful or deliberate conduct) giving rise to such termination, and
(ii) with respect to any termination of this Agreement pursuant to Section
7.1(b) as a direct result of a material, intentional breach by a party of any
of its representations, warranties, covenants or agreements contained in this
Agreement, all remedies available to the other party either in law or equity
shall be preserved and survive the termination of this Agreement.
(d) Any payment required to be made pursuant to Section 7.5(b) shall be made
to Sierra not later than two business days after delivery to CII of notice of
demand for payment and an itemization setting forth in reasonable detail all
Expenses of Sierra (which itemization maybe supplemented and updated from time
to time by Sierra until the 60th day after Sierra delivers such notice of
demand for payment), and shall be made by wire transfer of immediately
available funds to an account designated by Sierra in the notice of demand for
payment delivered pursuant to this Section 7.5(d).
ARTICLE VIII
GENERAL PROVISIONS
8.1. Nonsurvival of Representations, Warranties and Agreements. None of the
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Effective
Time, except for the agreements contained in Sections 2.1, 2.2, 5.6 through
5.12, the last sentence of Section 7.3 and Article VIII, 7.5 and the agreements
of the "affiliates" of CII delivered pursuant to Section 4.1(l).
8.2. Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopied (which is
confirmed) 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 Sierra or Sierra Sub, to
Sierra Health Services, Inc.
or
Health Acquisition Corp. 2724 North Tenaya Way
Las Vegas, NV 89128 Telecopy No. (702) 242-7915 Attention: Anthony M.
Marlon, M.D.
Chairman of the Board and
Chief Executive Officer
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with a copy to
Stephen P. Farrell, Esq.
Morgan, Lewis & Bockius
101 Park Avenue
New York, N.Y. 10178
Telecopy No. (212) 309-6273
and
(b) if to CII, to
CII Financial, Inc.
5627 Gibraltar Drive
P.O. Box 9025
Pleasanton, CA 94588
Telecopy No. (510) 460-8538
Attention: Joseph G. Havlick
Chairman, President and
Chief Executive Officer
with a copy to
Richard A. Strong, Esq.
Gibson, Dunn & Crutcher
333 South Grand Avenue
Los Angeles, CA 90071-3197
Telecopy No. (213) 229-7520
8.3. Interpretation. When a reference is made in this Agreement to Sections,
such reference shall be to a Section of this Agreement unless otherwise
indicated. The table of contents and 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 phrase "made available" in this Agreement
shall mean that the information referred to has been made available if
requested by the party to whom such information is to be made available. The
phrases "the date of this Agreement", "the date hereof", and terms of similar
import, unless the context otherwise requires, shall be deemed to refer to the
date set forth on the last page of this Agreement.
8.4. Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
8.5. Entire Agreement; No Third Party Beneficiaries; Rights of
Ownership. This Agreement (including the documents and the instruments
referred to herein) (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, (b) except as provided in Section
5.7, is not intended to confer upon any person other than the parties hereto
any rights or remedies hereunder. The parties hereby acknowledge that, except
as hereinafter agreed to in writing, no party shall have the right to acquire
or shall be deemed to have acquired shares of common stock of the other party
pursuant to the Merger until consummation thereof.
8.6. Governing Law. This Agreement, the transactions contemplated hereby and
the rights of the parties hereunder and under statutory and common law with
respect to the transactions contemplated hereby shall be governed and
construed in accordance with the laws of the State of California.
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8.7. No Remedy in Certain Circumstances. Each party agrees that, should any
court or other competent authority hold any provision of this Agreement or part
hereof or thereof to be null, void or unenforceable, or order any party to take
any action inconsistent herewith or not to take any action required herein, the
other party shall not be entitled to specific performance of such provision or
part hereof or thereof or to any other remedy, including but not limited to
money damages, for breach hereof or thereof or of any other provision of this
Agreement or part hereof or thereof as a result of such holding or order.
8.8. Publicity. Except as otherwise required by law or the rules of the NYSE
and the American Stock Exchange, so long as this Agreement is in effect,
neither CII nor Sierra 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 reviewing
the same with the other party.
8.9. Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto (whether
by operation of law or otherwise) without the prior written consent of the
other parties, except that Sierra Sub may assign, in its sole discretion, any
or all of its rights, interests and obligations hereunder to Sierra or to any
direct or indirect wholly owned Subsidiary of Sierra. 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.
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IN WITNESS WHEREOF, Sierra, Sierra Sub and CII have caused this Agreement to
be signed by their respective officers thereunto duly authorized, all as of
June 12, 1995.
Sierra Health Services, Inc.
/s/ Erin E. MacDonald
By __________________________________
ERIN E. MACDONALD
PRESIDENT
Attest:
/s/ Frank E. Collins
_____________________________________
FRANK E. COLLINS
SECRETARY
Health Acquisition Corp.
/s/ Erin E. MacDonald
By __________________________________
ERIN E. MACDONALD
PRESIDENT
Attest:
/s/ Frank E. Collins
_____________________________________
FRANK E. COLLINS
SECRETARY
CII Financial, Inc.
/s/ Joseph G. Havlick
By __________________________________
JOSEPH G. HAVLICK
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND
PRESIDENT
Attest:
/s/ Richard E. Dobson
_____________________________________
RICHARD E. DOBSON
SECRETARY
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Exhibit 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
---------------------------------------------------
We hereby consent to the inclusion of our reports dated February 17, 1995 with
respect to the financial statements and schedules of CII Financial, Inc. and its
subsidiaries, appearing in the Annual report on Form 10-K of CII Financial, Inc.
for the year ended December 31, 1994, in this Current Report on Form 8-K of
Sierra Health Services, Inc. and to the incorporation by reference of such
reports in Registration Statement Nos. 2-99954, 33-6920, 33-41542, 33-41543,
33-82474 and 33-60901 of Sierra Health Services, Inc. on Form S-8 and
Registration Statement Nos. 33-59187 and 33-60591 of Sierra Health Services,
Inc. on Form S-4.
/s/ BDO SEIDMAN, LLP
-----------------------------
BDO SEIDMAN, LLP
Los Angeles, California
July 6, 1995
