<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Rule 13e-3 Transaction Statement
(Pursuant to Section 13(e) of the Securities Exchange Act of 1934 and
Rule 13e-3 Section 240.13e-3) thereunder)
CALIFORNIA CASUALTY MANAGEMENT COMPANY
- --------------------------------------------------------------------------------
(Name of the Issuer)
CALIFORNIA CASUALTY MANAGEMENT COMPANY
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Statement)
Series B Common Stock, no par value
- --------------------------------------------------------------------------------
(Title of Class of Securities)
N/A
- --------------------------------------------------------------------------------
(CUSIP Number of Class of Securities)
James M. Sevey, Esq. 1900-2000 Alameda de las Pulgas,
San Mateo, CA 94403-1298 (650) 574-4000
- --------------------------------------------------------------------------------
(Name, Address and Telephone Number of Person Authorized to Receive Notices
and Communications on Behalf of Person(s) Filing Statement)
This statement is filed in connection with (check the appropriate box):
a. [ ] The filing of solicitation materials or an information statement subject
to Regulation 14A , Regulation 14C or Rule 13e-3(c) under the Securities
Exchange Act of 1934.
b. [ ] The filing of a registration statement under the Securities Act of 1933.
c. [X] A tender offer.
d. [ ] None of the above.
Check the following box if the soliciting materials or information statement
referred to in checking box (a) are preliminary copies: [ ]
Calculation of Filing Fee
Transaction valuation* Amount of filing fee
$92,650 $18.53
*Transaction valuation assumes maximum number of shares acquired pursuant to
this offer of 1,853 shares of Series B Common Stock at a purchase price of
$50.00 per share.
[ ] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form or
Schedule and the date of its filing.
Amount Previously Paid: None
Form or Registration No.: N/A
Filing Party: N/A
Date Filed: N/A
-----------------------------------
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY
IS UNLAWFUL.
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SPECIAL FACTORS
ITEM 7. PURPOSE(S), ALTERNATIVES, REASONS AND EFFECTS.
(a) The purpose of this tender offer (the "Tender Offer" or the "Rule 13e-3
transaction") is to achieve cost savings for California Casualty Management
Company (the "Company") with respect to expenses the Company would be required
to incur in connection with complying with the registration and reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") with respect to the Company's no par value Series B Common Stock (the
"Series B Common Stock"). At present, the shares of Series B Common Stock are
subject to the registration requirements of Section 12(g) and the reporting
requirements of Section 13 of the Exchange Act. Compliance with the registration
and reporting requirements of the Exchange Act would require, among other
things, that the Company file a registration statement with respect to the
Series B Common Stock and thereafter file periodic reports with the Securities
and Exchange Commission (the "Commission"), such as Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.
Management and the Board of Directors have determined that it is in the
best interests of the Company that the Company undertake the Tender Offer.
Management is of the view that the Company has a disproportionate number of
small Series B Common Stock shareholder accounts in relation to the total number
of shareholders of the Company. As of December 31, 1997, 332 of the Company's
563 total shareholders of record were holders of less than 10 shares of the
Series B Common Stock, holding an aggregate of 1,853 shares of Series B Common
Stock. Therefore, 59% of the total number of shareholders of record of the
Company's Common Stock owned as of December 31, 1997 less than 0.14% of the
outstanding shares of the Company's Common Stock. The time and expenses
associated with servicing the accounts of these holders in the future would
cause a disproportionate burden on the Company in relation to the aggregate
number of shares owned by such holders.
The ongoing direct expenses of being a reporting company would include
filing, printing, legal and accounting fees incurred in connection with the
preparation of periodic reports filed with the Commission. Management estimates
that the annual costs of such filings and reports would exceed $40,000. Further,
management of the Company and certain employees in the Company's Finance
Department would be required to allocate significant resources (primarily time)
in connection with Commission filings. The above dollar estimate does not
include any allocation of the expenses of management or employee time devoted to
such matters.
(b) The Company has not considered alternative means to accomplish such
purposes, since only a repurchase program of this type could eliminate
the expense incident to being subject to the registration and reporting
requirements of Sections 12(g) and 13 of the Exchange Act.
(c) The Rule 13e-3 transaction is structured as stated herein to enable
the Company to reduce its base of Series B Common Stock holders and
terminate its obligation to register the Series B Common Stock and to file
periodic reports with the Commission pursuant to the Exchange Act in
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the most efficient and cost-effective manner. The timing of the transaction is
designed to bring about the anticipated beneficial results without further
delays.
(d) The Company will benefit from the Rule 13e-3 transaction because of the
avoidance of costs associated with being a public company which will be achieved
if a sufficient number of holders of Series B Common Stock tender their shares.
There then will be no ongoing requirement for the Company to prepare and file
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports
on Form 8-K with the Commission. This will enable the Company to avoid incurring
legal, accounting and filing expenses it would otherwise be required to incur,
as well as saving the management time associated with the preparation of such
documents by Company employees. The Company estimates these cost savings to be
in excess of $40,000 on an annual basis.
The holders of the Series B Common Stock will have the opportunity to
tender and sell their shares to the Company in the absence of any other market
for such shares. They will receive a premium of approximately 33% over the
current book value per share of the Series B Common Stock. The remaining
shareholders of the Company should benefit from this transaction by receiving
the indirect benefit of the cost savings to be derived by the Company from this
transaction. The remaining shareholders of the Company will suffer no diminution
in the liquidity of their stock since there is no public market for the
Company's stock.
The corporate advantages to the Company described above will benefit
both the affiliates of the Company and the Company's non-affiliate shareholders
alike. There should be no tax consequences to the Company as a result of this
transaction. Each shareholder that participates in the Tender Offer would
realize capital gain on the sale of any shares held as a capital asset if (1)
the transaction completely terminates the shareholder's stock interest in the
Company; (2) the transaction is "substantially disproportionate" to the
shareholder (which generally requires that the shareholder's percentage interest
in the Company after the transaction be less than 80% of the shareholder's
percentage interest before the transaction); or (3) the transaction is not
"essentially equivalent to a dividend." Each of these tests is determined by
taking into account "attribution rules" for tax purposes. If the transaction
qualifies for capital gain treatment, a shareholder would realize gain equal to
the excess of the price of $50.00 per share to be paid by the Company over his
or her basis in the shares, which was $19.92 per share and which was included in
the respective shareholder's income in 1989 when the shares were issued.
However, if the transaction does not meet one of the foregoing tests, the
transaction would be treated as a dividend to the extent of the Company's
current or accumulated earnings and profits.
ITEM 8. FAIRNESS OF THE TRANSACTION.
(a) The Company, as the issuer filing this schedule, reasonably believes that
the transaction is fair to unaffiliated shareholders.
(b) As noted above, no established public market exists or has ever existed for
the Company's Series B Common Stock and no such market is expected to exist in
the future. Accordingly, the Board of Directors considered the current net book
value of the Company's Series B Common
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Stock as providing the best available gauge of the underlying value of the
shares. The Board determined that setting a price that included an approximately
33% premium over the current net book value per share offered the holders of the
Series B Common Stock the sufficient incentive to tender their shares, thereby
better ensuring the success of the Tender Offer which, if successful, will
ultimately benefit all remaining shareholders. The Board of Directors of the
Company determined that general shareholder liquidity would be unaffected by
this transaction since there is no liquidity in the shares other than provided
by the Company.
(c) The Tender Offer is structured so that each eligible shareholder may
voluntarily accept or reject the Tender Offer. The transaction is not structured
so that approval of at least a majority of unaffiliated security holders is
required.
(d) A majority of directors who are not employees of the issuer have not
retained an unaffiliated representative to act solely on behalf of unaffiliated
security holders for the purposes of negotiating the terms of the Rule 13e-3
transaction and/or preparing a report concerning the fairness of such
transaction.
(e) The Rule 13e-3 transaction was approved by a majority of the directors of
the issuer who are not employees of the issuer.
(f) No firm offer has been made to the Company by any unaffiliated person,
during the preceding eighteen months for (A) the merger or consolidation of the
Company into or with such person or of such person into or with the Company, (B)
the sale or other transfer of all or any substantial part of the assets of the
Company or (C) securities of the Company which would enable the holder thereof
to exercise control of the Company.
ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS.
(a) The Company has not received any report, opinion (other than an opinion of
counsel) or appraisal from an outside party which is materially related to the
Rule 13e-3 transaction.
(b) Not Applicable.
(c) Not Applicable.
OTHER DISCLOSURES
ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION.
(a) This issuer's name and address of its principal executive offices is:
California Casualty Management Company
1900-2000 Alameda de las Pulgas
San Mateo, CA 94403-1298
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(b) The subject of the Rule 13e-3 transaction is the Company's Series B Common
Stock. At the close of business on December 31, 1997 the Company had outstanding
8,429 shares of Series B Common Stock and such shares were held of record by
approximately 503 holders.
(c) There is currently no established trading market for the Series B Common
Stock. All shares of Series B Common Stock have been held in escrow since
issuance pursuant to agreements with the Company which reserve to the Company
the right to repurchase such shares in the event that the holder thereof
proposes to sell such shares to a third party.
(d) The Company has paid dividends during the past three years as set forth
below:
<TABLE>
<CAPTION>
Calendar Period Dividends per Share
--------------- -------------------
<S> <C> <C>
1997: First Quarter $0.55
Second Quarter $0.15
Third Quarter $0.15
Fourth Quarter $0.15
1996: First Quarter $1.55
Second Quarter $0.15
Third Quarter $0.15
Fourth Quarter $0.15
1995: First Quarter $0.70
Second Quarter $0.10
Third Quarter $0.10
Fourth Quarter $0.10
</TABLE>
(e) The Company has made no underwritten public offerings of the Series B Common
Stock for cash during the past three years.
(f) Information concerning purchases of the Series B Common Stock by the Company
or any affiliate of the Company since January 1, 1995 is set forth below:
<TABLE>
<CAPTION>
Number of Range of Purchase Average Purchase
Calendar Period Shares Purchased Prices Paid per Share Price Paid per Share
--------------- ---------------- --------------------- --------------------
<S> <C> <C> <C> <C>
1997: First Quarter 85 $33.97 (All) $33.97
Second Quarter 170 $34.40 (All) $34.40
Third Quarter 15 $34.40 (All) $34.40
Fourth Quarter 126 $37.07 (All) $37.07
1996: First Quarter 189 $31.58 to $31.99 $31.78
Second Quarter 157 $31.42 to $31.78 $31.44
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Third Quarter 440 $31.42 to $32.62 $31.50
Fourth Quarter 316 $32.94 (All) $32.94
1995 First Quarter 135 $26.86 to $29.29 $28.12
Second Quarter 125 $29.29 to $30.13 $29.84
Third Quarter 107 $29.58 to $30.34 $30.02
Fourth Quarter 16 $31.58 (All) $31.58
</TABLE>
ITEM 2. IDENTITY AND BACKGROUND.
California Casualty Management Company, a California corporation whose
principal office is at 1900-2000 Alameda de las Pulgas, San Mateo, CA
94403-1298, and whose principal business is acting as the attorney-in-fact for
California Casualty Indemnity Exchange, a reciprocal insurance exchange, is the
issuer whose Series B Common Stock is the subject of this transaction and is the
person filing this Schedule 13e-3.
(a)(b) Information with respect to each of the Company's executive officers and
directors is set forth below.
<TABLE>
<CAPTION>
Ownership of Shares of
Series B Common Stock
---------------------
Number of Shares Percent of
Positions and Offices Held of Series B Series B
Directors and Executive Officers With the Company Common Stock Common Stock
- -------------------------------- ---------------- ------------ ------------
<S> <C> <C> <C>
Carl G. Brown, Jr. Director and Honorary 0 N/A
1900-2000 Alameda de las Pulgas Chairman
San Mateo, CA 94403-1298
Thomas R. Brown Chairman of the Board, 522 6.2%
1900-2000 Alameda de las Pulgas Chief Executive Officer and
San Mateo, CA 94403-1298 Director
Marston Nauman Director 386 4.6%
1900-2000 Alameda de las Pulgas
San Mateo, CA 94403-1298
Kenneth G. Berry Director 0 N/A
901 Mariner's Island Blvd., Ste. 375
San Mateo, CA 94403-1298
Peter Goldberg Director and President 728 8.6%
1900-2000 Alameda de las Pulgas
San Mateo, CA 94403-1298
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C>
John G. Vidosh Director and Executive Vice 340 4.0%
1900-2000 Alameda de las Pulgas President, Managing
San Mateo, CA 94403-1298 Director
Kai G.E. Anderson Director and Executive Vice 224 2.6%
1900-2000 Alameda de las Pulgas President, Managing
San Mateo, CA 94403-1298 Director
John J. Schultz III Director and Executive Vice 391 4.6%
1900-2000 Alameda de las Pulgas President, Managing
San Mateo, CA 94403-1298 Director
Jerrol L. Harris Senior Vice President - 152 1.8%
1900-2000 Alameda de las Pulgas Corporate Development
San Mateo, CA 94403-1298
Franklin Jones Executive Vice President - 137 1.6%
1900-2000 Alameda de las Pulgas Marketing
San Mateo, CA 94403-1298
Donald Fey Senior Vice President - 117 1.4%
1900-2000 Alameda de las Pulgas Calco
San Mateo, CA 94403-1298
Robert Hall Senior Vice President - 119 1.4%
1900-2000 Alameda de las Pulgas Director of Human
San Mateo, CA 94403-1298 Resources and Corporate
Services
James M. Sevey Senior Vice President - 202 2.4%
1900-2000 Alameda de las Pulgas General Counsel and
San Mateo, CA 94403-1298 Secretary
Frank Walter Senior Vice President - 48 0.6%
P.O. Box 39700 Field Operations Manager
Colorado Springs, CO 80949-9700
John Jung Senior Vice President - 0 N/A
1900-2000 Alameda de las Pulgas Chief Information Officer
San Mateo, CA 94403-1298
</TABLE>
(c)(d) The principal occupation of each director and executive officer of the
Company during the last five years is as follows:
Carl G. Brown, Jr., Honorary Chairman of the Company's Board of
Directors since his retirement on May 1, 1978, has been a Director of the
Company since 1946.
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Thomas R. Brown has served as the Company's Chairman of the Board since
May 1, 1978. He has been a Director of the Company since March 17, 1969. He has
been Chairman of the Advisory Board of California Casualty Indemnity Exchange
since May 1, 1978. Mr. Brown also served as Chairman of the Board of California
Casualty Insurance Company, California Casualty & Fire Insurance Company and
California Casualty General Insurance Company from May 1, 1978 until March 1,
1996. He has served as a director of Pillar Point Capital Management,
Incorporated, a wholly-owned subsidiary of the Company which operates as an
investment advisor to the Company and others ("PPCM"), since June 1, 1993, and
as a Director of Calco Insurance Brokers & Agents, Incorporated, a wholly-owned
subsidiary of the Company which operates as a commercial insurance broker and
agent ("Calco"), since January 3, 1994.
Marston Nauman served as the Company's Vice Chairman of the Board from
April 1, 1993 until his retirement on March 1, 1996. Prior to that time, Mr.
Nauman served as President from May 1, 1978 until March 31, 1993, and has served
as a Director of the Company since March 16, 1967. Mr. Nauman became a director
of PPCM on June 1, 1993 and continues to serve in that capacity. Mr. Nauman also
served as President of California Casualty Insurance Company, California
Casualty & Fire Insurance Company and California Casualty General Insurance
Company from May 1, 1978 until March 1, 1996.
Kai G.E. Anderson has served as Executive Vice President, Managing
Director of the Company since January 1, 1997. Previously, Mr. Anderson was
Executive Vice President, Division Manager of the Business Insurance Division of
the Company from April 1, 1993 through December 31, 1996. Prior to that time,
Mr. Anderson served as Senior Vice President, Division Manager of the Business
Insurance Division of the Company from September 1, 1985 until March 31, 1993.
Mr. Anderson has served as a Director and Vice Chairman of the Board of Calco
since January 13, 1994 and as a Director and as Chairman of the Board of Calco
Medical Management Corporation, a wholly-owned subsidiary of the Company and a
health insurance software development and administration company, since August
1, 1994.
Kenneth G. Berry has been a Director of the Company since August 24,
1970. He also has served as Chairman of the Board of Directors, Chief Executive
Officer and a Director of PPCM since June 1, 1993. Mr. Berry was a partner in
the investment counseling firm of Berry, Hartell, Evers & Osborne from January
1, 1984 until May 31, 1993.
Peter Goldberg was appointed to the Company's Board of Directors on
September 7, 1982 and was elected President of the Company effective April 1,
1993. He served as Executive Vice President-Operations from January 1, 1980
until March 31, 1993. Mr. Goldberg has also been a director and Chairman of the
Board of Calco since January 3, 1994 and a director of PPCM since June 1, 1993.
John G. Vidosh was appointed to the Company's Board of Directors
and has served as Treasurer of the Company since September 7, 1982. He has
served as Executive Vice President, Managing Director since January 1, 1997. Mr.
Vidosh was Executive Vice President of Finance and Administration of the Company
from April 1, 1981 through December 31, 1996. Mr. Vidosh has also served as
Chief Financial Officer and a director of PPCM since June 1, 1993.
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John J. Schultz III has served as Executive Vice President, Managing
Director since January 1, 1997. Previously, he served as Senior Vice
President-Information and Actuarial Services from March 18, 1986 until March 31,
1993 and as Executive Vice President-Information and Actuarial Services from
April 1, 1993 through December 31, 1996.
Jerrol L. Harris has served as a Senior Vice President of the Company
since March 18, 1986 and a Senior Vice President - Corporate Development since
July 1, 1991.
Franklin Jones has served as Executive Vice President - Marketing since
June 1, 1997. He served as Senior Vice President - Marketing from June 1, 1993
to June 1, 1997. Prior to that time he served as Personal Insurance Division
Group Marketing Director from January 1, 1991 to May 31, 1993.
Donald Fey became a Senior Vice President of the Company on April 15,
1994. He has served as President of Calco since December 1, 1994 after serving
as Business Insurance Division - Operations Manager from April 15, 1994 through
November 30, 1994. Prior to joining the Company, Mr. Fey was employed by CIGNA
Insurance Company as its Western Region Senior Vice President from 1977 to
October of 1993, when he retired from that company.
Robert G. Hall became a Senior Vice President of the Company on June 1,
1994 and has served as the Company's Director of Human Resources and Corporate
Services since January 1, 1992.
James M. Sevey became a Senior Vice President of the Company on June 1,
1994 and has served as the Company's General Counsel since January 1, 1989 and
as Secretary since October 1, 1995.
Frank Walter became a Senior Vice President of the Company on June 6,
1995 and has served as Senior Vice President - Field Operations since June 1,
1997 and as Senior Vice President - Regional Manager from June 15, 1995 to June
1, 1997. Prior to that time, Mr. Walter was District Manager of the Company's
Personal Insurance Division from January 1, 1977 until June 15, 1995.
John Jung became the Company's Senior Vice President - Chief
Information Officer on December 30, 1996. Prior to joining the Company, Mr. Jung
held the office of Vice President Systems Manager for Chubb & Son, Inc. from
1984 until 1996.
(e) Neither the Company nor, to the best of the Company's knowledge or
belief, any of the persons listed in Item 2 hereof, during the last five years
has been convicted in a criminal proceeding (excluding traffic violations or
similar misdemeanors).
(f) Neither the Company nor, to the best of the Company's knowledge or
belief, any of the persons listed in Item 2 hereof, during the last five years
has been a party to a civil proceeding of a judicial or administrative body of
competent jurisdiction and as a result of such proceeding was or
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is subject to a judgment, decree or final order enjoining further violations of,
or prohibiting activities subject to, federal or state securities laws or
finding any violation of such laws.
(g) All of the persons listed in Item 2 hereof are U.S. citizens.
ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS.
(a) This item is not applicable because this schedule is not filed by an
affiliate of the Company, but by the Company itself, the issuer of the
securities which is the subject of the Rule 13e-3 transaction.
(b) Not Applicable.
ITEM 4. TERMS OF THE TRANSACTION.
(a) The material terms of the Rule 13e-3 transaction are as follows:
The Company is making a tender offer to purchase shares of its Series B
Common Stock at $50.00 cash per share, but only from persons who as of December
31, 1997 own, in the aggregate, no more than 9 shares of Series B Common Stock
(the "Tender Offer"). There were 332 such shareholders of record holding an
aggregate of 1,853 shares of Series B Common Stock as of December 31, 1997. The
Company will buy the Series B Common Stock tendered directly from tendering
holders and will retire the shares purchased. The Tender Offer will remain open
until February 27, 1998 (or for such further time as may by authorized by the
Board of Directors of the Company).
(b) Any person who holds of record 10 or more shares of Series B Common
Stock is prohibited from participating in the Tender Offer.
ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE.
The Company has no plan or proposal regarding activities or
transactions which are to occur after the Rule 13e-3 transaction which relate to
or would result in:
(a) An extraordinary corporate transaction, such as a merger,
reorganization or liquidation, involving the issuer or any of its subsidiaries;
(b) Any change in the present board of directors or management of the
issuer including, but not limited to, any plan or proposal to change the number
or term of directors, to fill any existing vacancy on the board or to change
any material term of the employment contract of any executive officer;
(c) Any material change in the present dividend rate or policy or
indebtedness or capitalization of the issuer; or
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(d) Any other material change in the issuer's corporate structure or
business.
The Company is in the process of negotiating a sale of its headquarters
office complex located at 1900 Alameda de las Pulgas, San Mateo, California, a
transaction that will involve a material amount of the Company's assets and is
anticipated to be completed early in 1998. The estimated proceeds from this sale
is $25 million. The estimated gain from this sale will be approximately $1
million, which will be deferred and recognized over ten years, starting in 1998.
The pro forma impact on the book value per share of common stock will be an
approximately $0.08 per share increase per year in each of the ten years
beginning January 1, 1998, assuming that the transaction closes when anticipated
at the price estimated above.
In the event that sufficient shares of Series B Common Stock are
tendered to and purchased by the Company to reduce the number of holders of
record of the Series B Common Stock below 300, the Series B Common Stock would
become eligible for termination of registration pursuant to Section 12(g)(4) and
of the reporting requirements of Section 13 of the Exchange Act.
ITEM 6. SOURCE AND AMOUNTS OF FUNDS OR OTHER CONSIDERATION.
(a) The funds to be used in this Rule 13e-3 transaction consist of cash
held by the Company and the total amount to be expended if all tender offers
should be accepted is estimated not to exceed $93,000.
(b) The following is an itemized statement of the expenses which are
expected to be incurred in connection with this Rule 13e-3 transaction and for
which the Company will be responsible for paying:
<TABLE>
<CAPTION>
<S> <C>
Filing Fees: $18.53
Legal: -0-
Accounting and Appraisal: -0-
Solicitation: -0-
Printing and Mailing $1,000
---------
Total Fees $1,018.53
=========
</TABLE>
(c) Not Applicable.
(d) Not Applicable.
ITEMS 7 THROUGH 9.
See "Special Factors" above.
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ITEM 10. INTEREST IN SECURITIES OF THE ISSUER.
(a) No shares of the Series B Common Stock is owned by any pension, profit
sharing or similar plan of the Company or affiliate of the Company. For other
information regarding beneficial ownership of Series B Common Stock by executive
officers and directors of the Company, see Item 2 hereof.
(b) Pursuant to the provisions of escrow agreements entered into between
the Company and the recipients of shares of Series B Common Stock under the
Company's 1989 Employee Stock Gift Program, upon termination of employment the
Company has the option to purchase all or any of said shares for cash, at the
adjusted book value per share, within 180 days of the date of such termination,
if the employee has not completed 20 years of employment with the Company as of
the date of such termination. Prior to commencement of this Tender Offer, 23
such employees, owning an aggregate of 126 shares of Series B Common Stock
terminated their employment with the Company. The Company exercised its option
and repurchased all shares of Series B Common Stock held by said employees at a
purchase price of $37.07 per share.
ITEM 11. CONTRACTS, ARRANGEMENTS OR UNDERSTANDINGS WITH RESPECT TO THE ISSUERS
SECURITIES.
The Company has made a commitment to shareholders that tender shares of
Series B Common Stock in the Tender Offer that, in the event a transaction is
consummated within two years after commencement of the Tender Offer pursuant to
which all shareholders of the Company are provided with an unqualified right to
sell their shares of Company common stock to a party other than the Company at a
price greater than $50.00 per share (a "Liquidity Event"), the Company will pay
to any shareholders that tender shares of Series B Common Stock in the Tender
Offer an amount equal to the difference between the price paid to Company
shareholders that sell their shares of Company common stock pursuant to such
Liquidity Event and $50.00.
Except for the foregoing, there is no contract, arrangement,
understanding or relationship (whether or not legally enforceable) in connection
with the Rule 13e-3 transaction between the Company and any person with respect
to any securities of the Company.
ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD
TO THE TRANSACTION.
(a) To the knowledge and belief of the Company, no executive officer,
director or affiliate of the Company intends to tender or sell any shares of
Series B Common Stock in this Rule 13e-3 transaction.
(b) Not Applicable.
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ITEM 13. OTHER PROVISIONS OF THE TRANSACTION.
(a) Since the Tender Offer being made by the Company may be voluntarily
accepted or rejected by the eligible shareholders, no appraisal or similar
rights are provided to such holders under applicable state law or under the
Company's Articles of Incorporation, nor will such rights be voluntarily
accorded by the Company to shareholders in connection with the Rule 13e-3
transaction.
(b) No provision has been made by the Company in connection with the Rule
13e-3 transaction to allow unaffiliated security holders to obtain access to the
corporate files of the Company or to obtain counsel or appraisal services at the
expense of the Company.
(c) Not Applicable.
ITEM 14. FINANCIAL INFORMATION.
(a) (1) The Company's audited financial statements for the Company's
fiscal years ended December 31, 1996 and 1995 (the most recent date as of which
audited financial statements of the Company are available) are attached as
Exhibit A.
(2) The Company's unaudited balance sheets and comparative
year-to-date income statements and statements of cash flows and related earnings
per share amounts for the quarters ended September 30, 1997 and 1996 are
attached as Exhibit B.
(3) The Company's ratio of earnings to fixed charges was 54
for the fiscal year ended December 31, 1996; 6 for the fiscal year ended
December 31, 1995; 23 for the quarter ended September 30, 1997; and 1,561 for
the quarter ended September 30, 1996.
(4) The book value per share as of December 31, 1997 and 1996
and as of the date of the latest interim balance sheet provided under Item
14(a)(2) are as follows:
December 31, 1997 $37.70 (Unaudited)
December 31, 1996 $33.97 September 30, 1997 $37.07 (Unaudited)
(b) No pro forma data is material since the maximum number of shares to be
acquired under the offer is expected to constitute less than 0.5% of the
outstanding stock of the Company at a purchase price that is above the book
value of the shares and will create savings to the Company and improve the value
of the remaining shares.
ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED.
(a) Except for certain financial analysts who supplied data and calculated
values used in this transaction statement, the Company's General Counsel, who
assisted in the preparation of this
-13-
<PAGE> 14
transaction statement, and the Company's General Counsel and his staff, who will
coordinate the Tender Offer process, the Company did not engage any officer,
employee, class of employees or corporate asset of the Company (other than the
consideration for purchases of shares tendered in response to the Tender Offer)
in connection with the Rule 13e-3 transaction.
(b) No persons (excluding officers, employees and class of employees who
have been identified in Item 15(a) of this Schedule) will be employed, retained
or compensated by the Company or by any person on behalf of the Company, to make
solicitations or recommendations in connection with the Rule 13e-3 transaction
and provide a summary of the material terms of such employment, retainer or
arrangement for compensation.
ITEM 16. ADDITIONAL INFORMATION.
None.
ITEM 17. MATERIAL TO BE FILED AS EXHIBITS.
(a) Not Applicable.
(b) Not Applicable.
(c) Not Applicable.
(d) The disclosure materials furnished to shareholders in connection with
this transaction are filed herewith with Exhibit C.
(e) Not Applicable.
(f) Not Applicable.
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
January 20, 1998
-------------------------------
(Date)
/s/ James M. Sevey
-------------------------------
(Signature)
James M. Sevey, Senior Vice President
-------------------------------------
(Name and Title)
-14-
<PAGE> 15
EXHIBIT A
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
California Casualty Management Company
San Mateo, California
We have audited the accompanying consolidated balance sheets of California
Casualty Management Company and Subsidiaries (CCMC) as of December 31, 1996 and
1995, and the related consolidated statements of income, shareholders' equity
and cash flows for each of the two years in the period ended December 31, 1996.
These financial statements are the responsibility of CCMC'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 an 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 September 1995, CCMC discontinued its life insurance segment which was
conducted as a wholly owned subsidiary, California Casualty & Life Insurance Co.
(CCLIC), through the sale of the subsidiary. Accordingly, CCLIC was reported as
a discontinued operation in 1995 through the date of sale. As explained further
in Note 5, the net assets and related gain on the sale in 1995 of CCLIC were
determined on a statutory basis, both of which, in our opinion, were at variance
from generally accepted accounting principles. The effect of these variances
from generally accepted accounting principles on CCMC's 1995 financial
statements has not been determined.
In our opinion, the consolidated balance sheet presents fairly, in all material
respects, the consolidated financial position of California Casualty Management
Company and Subsidiaries as of December 31, 1996 and 1995, and except for the
effects of accounting for CCLIC in the manner described in the previous
paragraph in 1995, the results of their operations and their cash flows for each
of the two years ended December 31, 1996 in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
March 28, 1997
<PAGE> 16
CALIFORNIA CASUALTY MANAGEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
ASSETS 1996 1995
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $13,797 $15,883
Insurance premium trust funds 2,804 3,466
Investment securities available-for-sale 17,970 22,804
Receivables 5,935 5,264
Prepaid and other 1,842 2,242
Deferred income taxes 1,017 3,143
------- -------
Total current assets 43,365 52,802
Property and equipment, at cost, less accumulated depreciation 32,028 20,059
Deferred income taxes 3,244 2,129
Other assets 99 139
------- -------
Total assets $78,736 $75,129
======= =======
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses $17,366 $15,617
Notes payable 6,000 115
Accrued restructuring costs 1,749 4,676
Other current liabilities 2,040 1,489
------- -------
Total current liabilities 27,155 21,897
Note payable -- 5,402
Other noncurrent liabilities 233 328
Employee benefit plans 7,960 6,238
------- -------
Total liabilities 35,348 33,865
------- -------
Commitments and Contingency (Notes 9, 10, and 18)
SHAREHOLDERS' EQUITY
Capital stock - no par value 4,359 4,029
Unrealized gain on investment securities (net of income tax) 1,740 1,268
Retained earnings 37,289 35,967
------- -------
Total shareholders' equity 43,388 41,264
------- -------
Total liabilities and shareholders' equity $78,736 $75,129
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 17
CALIFORNIA CASUALTY MANAGEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the years ended December 31, 1996 and 1995
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Management fees and reimbursements $ 120,889 $ 110,683
Brokerage operations:
Commissions 13,018 10,494
Management fees 7,052 8,576
----------- -----------
Total brokerage 20,070 19,070
Self-insurance fees 478 821
Investment advisory fees 2,540 2,422
----------- -----------
Total revenue 143,977 132,996
Operating expenses 141,288 132,399
----------- -----------
Operating income 2,689 597
Investment income 3,543 2,177
----------- -----------
Income from continuing operations, before provision for income taxes 6,232 2,774
Provision for (benefit from) income taxes:
Current 592 3,998
Deferred 975 (3,098)
----------- -----------
1,567 900
----------- -----------
Income from continuing operations 4,665 1,874
Income from discontinued operations (net of income tax benefit of $61) -- 729
Gain from sale of discontinued operations (net of income tax benefit of $402) -- 2,188
----------- -----------
Net income $ 4,665 $ 4,791
=========== ===========
Earnings per share:
From continuing operations $ 3.63 $ 1.46
From discontinued operations -- 2.27
----------- -----------
Net income $ 3.63 $ 3.73
=========== ===========
Weighted average shares outstanding 1,286,758 1,284,625
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 18
CALIFORNIA CASUALTY MANAGEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
for the years ended December 31, 1996 and 1995
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
UNREALIZED
GAIN ON
CAPITAL INVESTMENT RETAINED
STOCK SECURITIES EARNINGS TOTAL
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Balances, December 31, 1994 $ 3,653 $ 98 $ 32,717 $ 36,468
Net income, 1995 -- -- 4,791 4,791
Capital stock retired (9,476 shares) (12) -- (112) (124)
Dividends paid to shareholders ($1.00 per share) -- -- (1,284) (1,284)
Stock options exercised (14,598 shares) 388 -- (145) 243
Change in unrealized appreciation in investments,
net of income taxes of $783 -- 1,170 -- 1,170
-------- -------- -------- --------
Balances, December 31, 1995 4,029 1,268 35,967 41,264
Net income, 1996 -- -- 4,665 4,665
Capital stock retired (25,865 shares) (74) -- (588) (662)
Dividends paid to shareholders ($2.00 per share) -- -- (2,577) (2,577)
Stock options exercised (13,586 shares) 404 -- (178) 226
Change in unrealized appreciation in investments, net of income
taxes of $46 -- 472 -- 472
-------- -------- -------- --------
Balances, December 31, 1996 $ 4,359 $ 1,740 $ 37,289 $ 43,388
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 19
CALIFORNIA CASUALTY MANAGEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996 and 1995
(dollars in thousands)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,665 $ 4,791
-------- --------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,230 5,559
Gain on sale of property and equipment (61) (166)
Write-down of building improvements -- 2,564
Gain on sale of bonds and stocks (1,423) (526)
Gain on sale of discontinued operations -- (2,188)
Provision for deferred income taxes 975 (3,098)
Changes in:
Insurance premium trust funds 662 196
Receivables and other assets (281) (375)
Investment in discontinued operations -- (846)
Accrued restructuring costs (2,773) 4,756
Payables, accrued expenses, and other liabilities 4,007 3,381
-------- --------
Total adjustments 8,336 9,257
-------- --------
Net cash provided by operating activities 13,001 14,048
-------- --------
Cash flows from investing activities:
Proceeds from sale of property and equipment 221 549
Purchase of property and equipment (19,481) (10,194)
Proceeds from sale of investment securities 11,299 3,892
Purchase of investment securities (4,596) (6,551)
Proceeds from sale of discontinued operations -- 11,584
-------- --------
Net cash used in investing activities (12,557) (720)
-------- --------
Cash flows from financing activities:
Proceeds from short-term borrowings 6,000 --
Repayments of notes payable (5,517) (105)
Capital stock (436) 119
Dividends paid to shareholders (2,577) (1,284)
-------- --------
Net cash used in financing activities (2,530) (1,270)
-------- --------
Net increase (decrease) in cash and cash equivalents (2,086) 12,058
Cash and cash equivalents, beginning of year 15,883 3,825
-------- --------
Cash and cash equivalents, end of year $ 13,797 $ 15,883
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 20
CALIFORNIA CASUALTY MANAGEMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
1. AFFILIATIONS:
California Casualty Management Company (CCMC) is the attorney-in-fact for the
California Casualty Indemnity Exchange (CCIE) and manager for CCIE's wholly
owned subsidiaries under various management agreements. CCMC has three wholly
owned subsidiaries: Pillar Point Capital Management, Inc. (PPCM), Calco
Insurance Brokers & Agents, Inc. (Calco) and Calco Medical Management
Corporation (CMMC). CCIE and its subsidiaries are collectively referred to as
the California Casualty Group (CCG).
PPCM is an investment advisor and earns its revenue by charging an
asset-based management fee. A significant portion of its revenues are derived
from investment advisory services performed for affiliates including CCMC, Calco
and CCG. Calco is a commercial insurance broker and agent, and derives a
significant portion of its revenues in the form of commissions. CMMC is a health
insurance software development and administration company. CMMC's revenue is
derived from services provided to CCMC. CCLIC was a wholly owned life insurer
which was sold in September 1995 and was reported as a discontinued operation
through the date of sale (see Note 5).
These financial statements include the accounts of CCMC, PPCM, Calco and
CMMC on a consolidated basis. All intercompany accounts and transactions have
been eliminated in consolidation.
Some directors and officers of CCMC are members of the Boards and/or are
officers of CCIE and subsidiaries, PPCM, Calco and/or CMMC.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Although these estimates are based on management's knowledge of current events
and actions it may undertake in the future, they may ultimately differ from
actual amounts.
CCMC defines cash equivalents as short-term, highly liquid debt
investments that are both readily convertible to known amounts of cash and are
so near their maturity that they present insignificant risk of changes in value
because of changes in interest rates.
Net cash provided by operating activities reflects cash payments for
interest expense and income taxes as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Interest expense $ 61 $ 543
Income taxes $2,009 $3,562
</TABLE>
Bonds and stocks are carried at market value using published quotes as
of the close of business at the end of each month. Unrealized gains and losses
(net of tax impact) related to investment securities are excluded from earnings
and reported as a separate component of shareholders' equity, until realized.
Realized gains and losses on investment securities are recognized on a first-in,
first-out basis.
The cost of EDP equipment, office equipment, and automobiles is
depreciated over their estimated service lives of three to ten years.
Depreciation is computed using the straight-line method for all assets. The
building is depreciated over forty-two years using the straight-line method.
Leasehold improvements are amortized over the term of the lease (up to a maximum
of ten years) using the straight-line method.
The cost of assets disposed of and the related amounts of accumulated
depreciation is eliminated from the accounts in the year of disposition, and the
resulting gain or loss is included in operations. The cost of purchased software
is amortized over three to five years using the straight-line method. The
internal cost of developing or implementing purchased software is expensed when
incurred.
Brokerage commissions are recognized as income as of the effective date
of insurance coverage or the billing date, whichever is later. Premium
adjustments, including policy cancellations, are recorded as they occur.
Contingent commissions are recognized as revenue when received. Insurance
premium trust funds are comprised of cash and cash equivalents held in trust for
insurance carriers.
Self-insurance fees are for services provided to administer workers'
compensation insurance claims and are recognized as services are provided.
Income tax expense is based on the reported earnings before income taxes
and includes both currently payable and deferred income taxes. The deferred
income taxes reflect the impact of temporary differences between amounts of
assets and liabilities recognized for financial reporting purposes and such
amounts recognized for tax purposes. Deferred taxes are measured by applying the
currently enacted tax rates for the years in which the temporary differences are
expected to reverse. CCMC will establish a deferred tax asset valuation
allowance if it is more likely than not that a benefit will not be realized.
6
<PAGE> 21
CALIFORNIA CASUALTY MANAGEMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
CCMC adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), in 1996. Under the
provisions of SFAS 123, companies can elect to account for stock-based
compensation plans using a fair-value based method or continue measuring
compensation expense for those plans using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). As permitted, under SFAS 123, CCMC has elected, at this
time, to continue to apply APB 25 for its nonqualified stock option plan. (See
Note 11).
Certain amounts in 1995 financial statements have been reclassified to
conform to the 1996 financial statement presentation.
3. RELATED PARTY TRANSACTIONS:
CCMC is the attorney-in-fact for CCIE and manager for CCIE's wholly owned
subsidiaries and is paid a fee of up to 125% of expenses incurred on behalf of
CCG. An annual incentive fee of up to 10% of CCG's calendar year pre-tax income,
calculated after giving effect to such incentive fee, may also be paid to CCMC.
No incentive fees were paid for the years ended December 31, 1996 and 1995.
Fees paid to CCMC were as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Expenses incurred $ 117,097 $ 109,898
Markup taken 12,330 9,361
--------- ---------
Total management fee $ 129,427 $ 119,259
========= =========
Maximum markup allowed
(25% of expenses incurred) $ 29,274 $ 27,475
Markup taken (12,330) (9,361)
--------- ---------
Markup allowed but not taken $ 16,944 $ 18,114
========= =========
</TABLE>
In accordance with California statutory requirements CCMC must remit to
CCG the benefit CCMC receives for its exemption from state tax on earnings from
managing CCG operations. This attorney-in-fact benefit to CCG reduced the CCMC
management fee above by $730 and $313 for 1996 and 1995, respectively. In
addition, the CCMC management fee above was reduced by $1,485 in 1996 resulting
from additional tax benefits received for attorney-in-fact deductions claimed
for prior years (see Note 7).
CCG provides workers' compensation insurance to CCMC. A bank has issued
an irrevocable standby letter of credit in the amount of $284 and $171, for the
1996 and 1995 policy years, respectively, in favor of CCG, to secure balances
due on workers' compensation programs. The letter of credit is secured and
collateralized by bonds of CCMC. Workers' compensation premiums expense for CCMC
was $563 and $462 for the years ended December 31, 1996 and 1995, respectively.
In addition, CCG directly reimburses CCMC for certain other charges
incurred on behalf of CCG policyholders. These certain other charges were $6,313
and $6,118 for the years ended December 31, 1996 and 1995, respectively. At
December 31, 1996, CCMC had a payable to CCG of $1,353. At December 31, 1995,
CCMC had a receivable from CCG of $321.
Investment advisory fees earned from CCG were $2,006 and $1,954 for the
years ended December 31, 1996 and 1995, respectively. At December 31, 1996 and
1995, CCMC had an outstanding receivable due from CCG of $168 and $175,
respectively.
The Home Office complex facilities are comprised of two buildings
located at 1900 and 2000 Alameda de las Pulgas. They are referred to as the
"1900 Building" and the "2000 Building," respectively. CCMC purchased the 1900
Building from CCIE in 1984 and leases space in the 2000 Building from CCIE under
a lease which expires in May 1998 (see Note 9). In January 1996, CCMC paid in
full the remaining balance of a $5,517 note payable to CCIE related to its
purchase of the 1900 Building (see Note 8). Surviving provisions of the June
1984 purchase and sale agreement state that CCG retains an interest in profit
sharing provisions if CCMC transfers title or refinances the 1900 Building prior
to June 30, 1999. If at any time prior to June 30, 2034, CCMC proposes to sell
all or any portion of the 1900 Building, CCG shall have the right of first
refusal as to purchasing the property.
4. INVESTMENT SECURITIES:
The amortized cost and market value of investment in bonds and stocks are as
follows:
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gain Loss Value
------- ------- ------- -------
<S> <C> <C> <C> <C>
Bonds $ 9,975 $ 273 $ (18) $10,230
Stocks 5,358 2,629 (247) 7,740
------- ------- ------- -------
Total $15,333 $ 2,902 $ (265) $17,970
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
--------------------------------------------------------
Amortized Unrealized Unrealized Market
Cost Gain Loss Value
------- ------- ------- -------
<S> <C> <C> <C> <C>
Bonds $13,863 $ 424 $ (36) $14,251
Stocks 6,823 2,002 (272) 8,553
------- ------- ------- -------
Total $20,686 $ 2,426 $ (308) $22,804
======= ======= ======= =======
</TABLE>
7
<PAGE> 22
CALIFORNIA CASUALTY MANAGEMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Bonds consist of investments in state and municipal securities which
potentially subject CCMC to concentrations of credit risk. The market value of
California municipal bonds totaled $3,226 and $4,856 as of December 31, 1996 and
1995, respectively. The concentration in California municipal bonds is entirely
investment grade quality, and issuers of securities are dispersed throughout
many California agencies. CCMC also has investments in municipal securities of
several other states, none of which presents a concentration of credit risk.
The maturities of the bonds, at market value, as of December 31, 1996
are as follows:
<TABLE>
<S> <C>
Within one year $ 251
One to five years 3,935
Five to ten years 4,283
Over ten years 1,761
-------
$10,230
=======
</TABLE>
Realized gains and losses from sales of securities are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Gross gains:
Proceeds $10,532 $ 2,818
Gain $ 1,584 $ 712
Gross losses:
Proceeds $ 767 $ 1,074
Losses $ 161 $ 186
</TABLE>
CCMC has pledged $952 in bonds (at market value) as collateral under
letters of credit (see Note 3). In addition, CCMC has a $193 bond (at market
value) on deposit with a state.
5. DISCONTINUED OPERATION:
Effective September 29, 1995, CCMC sold all of the outstanding shares of CCLIC.
The net assets and related gain on the sale in 1995 of CCLIC were determined on
a statutory basis. The accounting treatment for net assets of the discontinued
operation, the income from the discontinued operations and the gain on sale of
CCLIC are all at variance from generally accepted accounting principles, and the
effects of these variances on the financial statements have not been determined.
6. PROPERTY AND EQUIPMENT:
A summary of property and equipment at December 31 follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Land $ 1,625 $ 1,625
1900 Building 2,358 2,358
EDP equipment and software 20,393 18,619
Improvements 21,128 6,502
Office equipment 9,324 9,649
Automobiles 4,577 4,681
------- -------
59,405 43,434
======= =======
Less accumulated depreciation
and amortization 27,377 23,375
------- -------
$32,028 $20,059
======= =======
</TABLE>
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Depreciation and amortization
expense $ 7,117 $ 5,460
======= =======
</TABLE>
7. INCOME TAXES:
A reconciliation of CCMC's effective income tax rates included in the
consolidated statements of income with the U.S. federal statutory tax rate is as
follows:
<TABLE>
<CAPTION>
1996 1995
-------------------- --------------------
Amount % Amount %
------- ---- ------- ----
<S> <C> <C> <C> <C>
Tax at U.S. federal
statutory rate $ 2,119 34.0 $ 943 34.0
State taxes net of federal
income tax benefit 6 0.1 (43) (1.6)
Dividends received deduction (31) (0.5) (30) (1.1)
Tax-exempt interest income (234) (3.8) (227) (8.2)
Attorney-in-fact deduction (619) (10.0) -- --
Non-deductible business meals
and entertainment 148 2.4 145 5.2
All other items 178 2.9 112 4.1
------- ---- ------- ----
Provision for income taxes $ 1,567 25.1 $ 900 32.4
======= ==== ======= ====
</TABLE>
During the year, CCMC received California franchise tax refunds for
prior years (1988 to 1994) related to the benefit of recognizing additional
attorney-in-fact deductions (AIFD) for California state taxes of $1,698. CCMC
also recognized a favorable true up of 1995 state franchise/income taxes of $511
and recorded prior years' tax refunds (1991 to 1994) due from other states of
$65 for additional AIFD tax benefits. In accordance with California statutory
requirements, the benefit of the AIFD tax refunds, as well as the related
interest income of $589, and the 1995 AIFD state tax true-up was provided to CCG
through a decrease in management fee.
8
<PAGE> 23
CALIFORNIA CASUALTY MANAGEMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
CCMC has also written off the CCG related California deferred tax assets of
$879, as the use of the AIFD in future years will prevent CCMC from realizing
the benefits of these assets.
The significant components of the deferred income tax (benefit) for each
year are summarized below:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Current:
Restructuring expenses $ 1,277 $(1,807)
Employee benefits 436 (321)
State taxes 163 (108)
Other 29 (32)
------- -------
1,905 (2,268)
------- -------
Noncurrent:
Employee benefits (378) (177)
Depreciation (572) (635)
Other 20 (18)
------- -------
(930) (830)
------- -------
Totals $ 975 $(3,098)
======= =======
</TABLE>
The significant components of the deferred tax assets recorded on the
balance sheet as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Employee benefits $ 4,180 $ 3,911
Restructuring expenses 330 1,807
Depreciation 572 (29)
State taxes 3 172
Unrealized gain on investments (896) (850)
Other 72 261
------- -------
Net deferred tax assets $ 4,261 $ 5,272
======= =======
</TABLE>
Realization of these assets is dependent upon generating sufficient
future taxable income to utilize these assets.
8. CREDIT AND BORROWING ARRANGEMENTS:
In June 1984, the 1900 Building was purchased from CCIE. In 1995, CCMC made a
mortgage loan payment to CCG for $104 in principal. In January 1996, CCMC paid
the remaining balance of the mortgage note payable to CCG in the amount of
$5,517. Interest expense charged to operations in 1996 and 1995 was $44, and
$531, respectively.
In 1996, CCMC established a $10 million unsecured credit facility with
Union Bank of California to meet ongoing cash flow requirements. As of December
31, 1996, $6 million had been drawn on the facility. The terms of the agreement
stipulate that the borrower may elect to convert outstanding draws to loans
anytime up through April 15, 1998 (at which time the facility expires) and repay
the borrowings in equal quarterly installments over a three year period. The
interest rate is LIBOR plus an applicable margin based on the ratio of total
debt to total capitalization. The current applicable interest rate is 5.8%.
9. LEASE COMMITMENT - HOME OFFICE COMPLEX:
Rental expense for the 2000 Building paid to CCIE is as follows:
<TABLE>
<CAPTION>
Operating
Minimum Expenses Total
------- -------- -----
<S> <C> <C> <C>
1996 $1,906 $ 371 $2,277
1995 $1,845 $ 359 $2,204
</TABLE>
CCMC's consolidated minimum rental commitments under the terms of all
leases at December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 $ 1,714
To May 15, 1998 640
--------
Through May 15, 1998 $ 2,354
========
</TABLE>
Included in these minimum future lease rentals is approximately $1,512
in 1997 and $567 in 1998 representing a lease commitment to CCIE.
10. OTHER LEASE COMMITMENTS:
CCMC has long-term operating lease commitments on office buildings and data
processing equipment. Certain office leases contain escalation clauses
contingent on property taxes and normal operating costs. Also, certain leases
contain renewal options ranging from one to ten years. The minimum rental
commitments under the terms of these noncancelable leases at December 31, 1996
are as follows:
<TABLE>
<S> <C>
1997 $ 2,939
1998 1,877
1999 1,613
2000 1,451
2001 1,498
-------
$ 9,378
=======
</TABLE>
Lease commitments include certain offices that were closed due to
restructuring. Lease termination costs of $214 and $760 were accrued at December
31, 1996 and 1995, respectively.
Rental expense is $6,579 and $5,682 for December 31, 1996 and 1995,
respectively.
9
<PAGE> 24
CALIFORNIA CASUALTY MANAGEMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
In November 1996, CCMC entered into an agreement to lease an office
building, to be constructed by the lessor on property located in Colorado
Springs, Colorado, that will become the permanent site for the Colorado Service
Center. The lease term is for ten years with two five year options to extend the
lease. The agreement provides for base monthly rent of approximately $108,000
for the initial year with a provision for annual escalations in subsequent
years. Additionally, CCMC has two options to purchase the land and building at
various times during the lease term. In connection with this project, CCMC
expects to spend $5.5 million for capital improvements and project management
costs. Construction is scheduled to commence in April 1997 and CCMC intends to
occupy the office building by July 1, 1998.
11. CAPITAL STOCK:
Authorized, issued, and outstanding shares at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Authorized 2,800,000 2,800,000
Issued and outstanding 1,277,494 1,289,773
</TABLE>
As part of Employee Stock Gift plan, 1,000,000 shares of Series B
(nonvoting) stock have been authorized, of which 5,232 and 6,334 are included in
issued and outstanding at December 31, 1996 and 1995, respectively. CCMC has the
option of repurchasing these shares upon termination of employment. After 20
years of employment, the employee may elect to keep the shares after
termination.
CCMC has a nonqualified stock option plan which provides for granting
to key executives options to purchase an aggregate of 200,000 shares of Series A
common stock. CCMC applies APB 25 to account for this plan (see Note 2). SFAS
123 requires companies electing to continue using the APB 25 to make certain pro
forma disclosures. However, CCMC does not believe the implementation of SFAS 123
would have a material affect on its results of operations, accordingly, proforma
results of operations have not been disclosed.
Compensation expense under stock option plan at December 31, 1996 and
1995 was $25,431 and $33,736.
<TABLE>
<CAPTION>
Exercise
Year of Year of Options Options Price
Grant Exercise Granted Exercised Per Share
----- -------- ------- --------- ---------
<S> <C> <C> <C> <C>
1996 1997 18,372 -- $ 28.79
1995 1996 26,426 13,586 $ 26.36
1994 1995 22,796 14,598 $ 24.70
</TABLE>
CCMC is required to repurchase the shares issued under its stock option
plans upon termination of employment. After 20 years of employment, the employee
may elect to keep the shares.
The benefits realized by CCMC for tax deductions in excess of
compensation expense under the nonqualified stock option plan are treated as
additional paid-in-capital and credited to the capital stock account.
12. INCENTIVE COMPENSATION PLANS:
Performance Share Plan:
In 1992, CCMC implemented a Performance Share Plan for key full-time sales
employees, who were subject to a change in commission scales. Under this plan,
these employees were granted a total of 31,471 Units which have monetary
benefits that parallel the benefits provided by ownership of shares of CCMC's
stock. These Units have no voting rights, vest over time and generally have none
of the rights of stock ownership. The Units are convertible to cash, at a value
equivalent to the most recent quarter end's adjusted book value of CCMC's stock,
when exercisable.
CCMC accrues the expense related to the vesting of the shares ratably
over the period from grant to full vesting. The additional compensation payment
related to the vested shares is accrued when earned. Full vesting of these Units
resulted in 21,225 Units with a value of $760 being vested at December 31, 1996.
The expense for this plan in 1996 and 1995 was $214 and $227, respectively, for
the vested shares which includes $42 and $19, respectively, for the related
payment of additional compensation.
Long-Term Executive Incentive Plan:
In 1994, the Board of Directors approved a long-term executive incentive plan
for key officers. This Plan provides participants with common stock and cash
compensation based on the attainment of certain profitability and other measures
over a three-year period. The Plan has been submitted to the California
Department of Insurance for approval and 300,000 shares of Series B common stock
have been reserved for issuance under this plan.
13. SAVINGS INVESTMENT PLAN EXPENSE:
CCMC offers an employees' investment plan and a 401(k) plan. Employees are not
taxed on their contributions to the 401(k) plan, subject to limitation, until
distributions are made from the plan. Under both plans, CCMC's matching
10
<PAGE> 25
CALIFORNIA CASUALTY MANAGEMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
percentages vary from 0.75% to 3.00% of gross compensation based on employee
participation from 1% to 6%.
Net costs relating to these plans of $1,368 and $1,334 at December 31,
1996 and 1995, respectively, are charged to earnings in the years incurred.
14. PENSION PLAN:
CCMC sponsors a noncontributory pension plan (the Plan) covering substantially
all employees. Benefits are based on the employee's compensation during the five
years before retirement. CCMC's funding policy for the pension plan is to
contribute an amount annually that is not less than the minimum funding
requirement under the Employee Retirement Income Security Act of 1974 (ERISA).
At December 31, 1996, the assets are invested primarily in bonds and stocks with
4.0% invested in insurance contracts with an unrelated party. CCLIC holds a
group annuity contract which was acquired by Seaboard Life Insurance Company
(USA) subsequent to the sale of CCLIC, covering certain retired employees,
totaling $265 and $290 at December 31, 1996 and 1995, respectively.
CCMC also sponsors a Supplemental Executive Retirement Plan (SERP),
covering certain key executives who have been with CCMC for a limited period of
time and an excess plan covering employees with earnings which exceed the
limitations set out in the pension plan and/or Internal Revenue Code Section
415. Benefits are based on formulas similar to the pension plan's. The SERP and
excess plan are not subject to ERISA and are not currently being funded.
The following table sets forth the funded status of the pension plan
and SERP and excess plan and the amounts recognized in the balance sheet at
December 31:
<TABLE>
<CAPTION>
1996 1995
------------------------ ------------------------
SERP & SERP &
Pension Excess Pension Excess
Plan Plan Plan Plan
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $ 41,832 $ 6,378 $ 40,058 $ 5,128
======== ======== ======== ========
Accumulated benefits $ 44,502 $ 6,509 $ 42,615 $ 5,180
======== ======== ======== ========
Projected benefits $ 55,015 $ 9,205 $ 53,371 $ 8,288
Plan assets at fair value 51,581 -- 44,258 --
-------- -------- -------- --------
Projected benefit obligation more than plan assets 3,434 9,205 9,113 8,288
Unrecognized prior service cost 773 (1,651) 896 (1,919)
Unrecognized net loss (4,623) (1,455) (10,062) (1,369)
Unrecognized net asset/(obligation) at January 1, 1996 -- (28) 289 (35)
-------- -------- -------- --------
Accrued pension expense/(benefit) (416) 6,071 236 4,965
Additional liability -- 438 -- 215
-------- -------- -------- --------
Pension liability recognized -- 6,509 -- 5,180
Intangible asset offsetting additional liability -- (438) -- (215)
-------- -------- -------- --------
Pension asset/(liability) recognized in the balance sheet $ (416) $ 6,071 $ 236 $ 4,965
======== ======== ======== ========
</TABLE>
11
<PAGE> 26
CALIFORNIA CASUALTY MANAGEMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
The following table sets forth the rates used to compute the pension
plan obligation at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Discount rate 7.50% 7.00%
Average rate of increase in
compensation levels 5.00% 5.00%
</TABLE>
Net pension expense includes the following components:
<TABLE>
<CAPTION>
1996
----------------------
SERP &
Pension Excess
Plan Plan
------- -------
<S> <C> <C>
Service cost - benefits earned
during the period $ 2,407 $ 307
Interest cost on projected benefit
obligation 3,935 653
Actual loss (return) on assets (6,373) --
Net amortization and deferral 2,500 414
Special early retirement cost -- --
------- -------
Net pension expense $ 2,469 $ 1,374
======= =======
</TABLE>
<TABLE>
<CAPTION>
1995
----------------------
SERP &
Pension Excess
Plan Plan
------- -------
<S> <C> <C>
Service cost - benefits earned
during the period $ 1,904 $ 266
Interest cost on projected benefit
obligation 3,524 543
Actual loss (return) on assets (8,820) --
Net amortization and deferral 5,863 275
Special early retirement cost 422 108
------- -------
Net pension expense $ 2,893 $ 1,192
======= =======
</TABLE>
The additional cost of $530 recognized in 1995 was due to a special
early retirement offering made to several employees, in conjunction with the
restructuring actions discussed in Note 16. This special early retirement
offering requires a lower retiree contribution for pre-65 coverage.
The following table sets forth the rates used to calculate the net
periodic pension plan expenses for the year ended December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Discount rate 7.00% 8.50%
Average rate of increase in compensation levels 5.00% 5.50%
Long-term rate of return on assets 9.00% 9.00%
</TABLE>
15. POSTRETIREMENT HEALTH CARE BENEFITS:
CCMC currently offers postretirement benefit other than pensions (postretirement
benefits) which are primarily retiree health care benefits. Substantially all of
CCMC's employees can purchase health care through CCMC's plan when they become
eligible for the retirement pension plan. Retirees pay the full premium cost of
their coverage. The liability results from CCMC paying a group rate which
includes retirees who are not yet eligible for Medicare. The amount contained in
the group rate for early retirees is considered a postretirement benefit which
must be recognized in the year earned.
The Company uses the accrual method of accounting for postretirement
benefits other than pensions based upon an actuarially determined cost to be
recognized over the period that the employee provides services to CCMC. CCMC
amortizes the accumulated postretirement benefit obligation (APBO) in the amount
of $790 recognized prior to adoption of SFAS 106 on a delayed basis over twenty
years. CCMC estimates its December 31, 1996 and 1995 unrecognized liability to
be approximately $896 and $788, respectively. The assumed health care trend rate
for 1996 is 10.5%. This trend rate reduces by 0.5% per year until it reaches an
ultimate level of 5.0% in the year 2007. Increasing the assumed healthcare cost
trend rates by one percentage point in each year would have resulted in an
increase in the APBO as of December 31, 1996 of $203 and an increase in the
aggregate of the service cost and interest cost components of net periodic
postretirement benefit cost for 1996 of $28. The weighted average of the assumed
discount rate of 7.5% was used to determined the APBO. The postretirement
benefits are not currently being funded.
The following sets forth the status of postretirement benefits
reconciled with amounts reported in CCMC's December 31, 1996 and 1995 balance
sheets.
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligations:
Retirees $ 908 $ 747
Fully eligible active plan participants 218 140
Other active participants 637 628
------- -------
Total 1,763 1,515
Plan assets at fair value -- --
------- -------
Accrued postretirement benefit liability, in
excess of plan assets 1,763 1,515
Unrecognized net loss (231) (81)
Unrecognized transition obligation (665) (707)
------- -------
Accrued postretirement benefit cost $ 867 $ 727
======= =======
</TABLE>
12
<PAGE> 27
CALIFORNIA CASUALTY MANAGEMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
The net periodic postretirement benefit cost for 1996 and 1995 included the
following components:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Service cost for benefits earned during the year $ 82 $ 65
Interest cost 124 68
Amortization of unrecognized transition
obligation over twenty years 42 42
Special or contractual termination benefits -- 371
Net amortization and deferral 9 (6)
----- -----
Net periodic postretirement benefit cost $ 257 $ 540
===== =====
</TABLE>
The additional cost of $371 in 1995 for providing special or
contractual termination benefits was pursuant to CCMC's restructuring actions
discussed in Note 16. These benefits require a lower retiree contribution for
pre-65 coverage.
16. RESTRUCTURING ACTIONS:
In 1995, CCMC announced a major restructuring plan which resulted in existing
sales, service, claims, and administration functions performed at California
branches and home office departments being consolidated and relocated to a new
regional service center in Colorado Springs, Colorado (CSC). In 1996, the
decision was made to consolidate certain business insurance offices and reduce
other administrative positions as an extension of this original restructuring
plan. Approximately 450 positions have been affected by these restructuring
actions.
Costs associated with the shutdown of affected California operations
have been accrued and charged to expense in 1996 and 1995. These shutdown costs
include the costs of involuntary employee termination benefits, facility
closures and related costs associated with restructuring actions. Startup costs,
which include expenses for new employee hiring and training, relocation of
current employees, business travel and related expenses, have been charged to
expense as incurred.
A summary of the accrued restructuring costs for the years ended
December 31, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
Dec. 31, Dec. 31,
1996 1995
------- -------
<S> <C> <C>
Balance, beginning of year $ 4,676 --
------- -------
Accrued and charged to operations:
Employee termination costs 1,801 $ 3,654
Lease termination costs 214 760
Write down of operating assets -- 368
Other (75) --
Expenditures:
Employee termination costs (4,138) (106)
Lease termination costs (380) --
Disposal of operating assets (317) --
Other (32) --
------- -------
Balance, end of year $ 1,749 $ 4,676
======= =======
</TABLE>
Startup costs charged to operations in 1996 and 1995 were $3,994 and
$1,441, respectively.
Employee termination costs charged to operations in 1995 include $691
for the costs of an early retirement option offered to and accepted by several
employees. This amount includes pension benefits of $372 (SFAS No. 87) and
postretirement benefits of $319 (SFAS No. 106) (see Notes 14 and 15). In 1996
these costs were reclassified from accrued restructuring to employee benefit
plan liabilities.
17. HOME OFFICE RENOVATION:
CCMC commenced the renovation of the 1900 Building in the third quarter of 1995
and completed the project in January 1997. The 1900 building has been renovated
to upgrade the ability to handle new computer and telecommunication technology,
to improve the heating, ventilation and air conditioning systems, and to comply
with the Americans With Disabilities Act of 1990.
During 1996, CCMC commenced making capital improvements to the space it
leases at the 2000 Building. The total tenant improvements to be made including
furniture and equipment, are estimated to be $3,100. This project is scheduled
to be completed in the second quarter of 1997.
In 1996 and 1995, CCMC incurred operating expenses of $2,709 and $5,047
and capital costs of $13,656 and $3,522, respectively, which are associated with
this project. The 1995 operating expenses included the write-off of $2,564 of
building improvements.
13
<PAGE> 28
CALIFORNIA CASUALTY MANAGEMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
Under the management fee agreements, since these facilities are
primarily used to conduct the business of CCG, operating expenses are
substantially reimbursable when the expenses are incurred by CCMC. Those capital
improvement costs which are associated with CCG's business, will also be
recovered as management fees as the assets are depreciated over their useful
lives.
18. CONTINGENCY:
CCMC is party to various claims and lawsuits arising in the normal
course of business. It is the opinion of management, after consultation with
legal counsel, that the disposition of these matters will not have a material
adverse affect on the financial position or results of operations of CCMC.
14
<PAGE> 29
EXHIBIT B
FINANCIAL HIGHLIGHTS
(unaudited), (dollars in thousands, except per share data)
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED STATEMENTS OF OPERATIONS DATA
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
------- ------- -------- --------
<S> <C> <C> <C> <C>
Management fees and reimbursements $29,574 $31,671 $ 91,862 $ 96,118
Commissions 3,204 2,999 10,243 9,584
Others 792 728 2,336 2,336
------- ------- -------- --------
Total revenue 33,570 35,398 104,441 108,038
Operating expenses 32,127 34,029 100,440 105.028
------- ------- -------- --------
Operating income 1,443 1,369 4,001 3,010
Investment income 584 398 1,928 2,509
Net income $ 1,253 $ 1,184 $ 3,856 $ 3,470
PER SHARE DATA:
Earning per share: $ 0.98 $ 0.92 $ 3.02 $ 2.70
Dividends declared $ 0.15 $ 0.15 $ 0.85 $ 1.85
</TABLE>
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
1997 1996
--------- ---------
<S> <C> <C>
Cash and cash equivalents $10,128 $13,797
Insurance premium trust funds 1,715 2,804
Short-term investments 21,790 17,970
Accounts receivable 10,259 5,935
Other current assets 3,682 2,859
------- -------
Total current assets 47,574 43,365
Property and equipment, net 31,589 32,028
Other assets 3,976 3,343
------- -------
Total assets $83,139 $78,736
======= =======
Current liabilities $26,631 $27,155
Long-term liabilities 9,237 8,193
Shareholders' equity 47,271 43,388
------- -------
Total liabilities and shareholders' equity $ 83,139 $78,736
======= =======
Adjusted book value $37.07 $33.97
</TABLE>
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED CASH FLOW COMPONENTS
<TABLE>
<CAPTION>
Sept. 30, Sept. 30,
1997 1996
--------- ---------
<S> <C> <C>
Net cash flows $(3,669) $ (8,862)
Depreciation and amortization 5,943 5,305
Accrued restructuring costs (798) (2,254)
Net change in receivables (4,324) (3,045)
Net change in payables 1,318 5,376
Capital expenditures (5,621) (15,685)
Repayment of note payable 0 (5,517)
</TABLE>
<PAGE> 30
EXHIBIT C
January 20, 1998
TO ALL SERIES A AND SERIES B SHAREHOLDERS:
We are in the process of making a tender offer to those shareholders who own
less than 10 shares of Series B Common Stock of California Casualty Management
Company ("CCMC"). I am sending this letter to all shareholders so that you will
understand why only those persons owning less than 10 shares are being given an
opportunity to participate.
In 1989, we gave a small number of Series B Common Stock of California Casualty
Management Company ("CCMC") to our employees. The number of shares given was
based upon the number of years they had been employed by us. That gift was made
in commemoration of the company's 75th anniversary and was intended to give our
employees a stake in the company's future. We now need to ask some recipients of
that gift to surrender their shares and receive a purchase price which
represents a substantial premium over the current book value which is the value
we use for all other repurchases of our stock.
We recently became aware that we have had an obligation to register with the
United States Securities and Exchange Commission ("SEC") due to the increased
number of CCMC shareholders being greater than 500. Unfortunately, this
requirement was overlooked by the attorney we retained to counsel CCMC at the
time of the gift of shares. The registration and reporting requirement involves
substantial additional current and future expense. We do not think that such
expense is warranted in light of our continuing efforts to become a lower cost
provider of our products. We can eliminate our reporting obligation and avoid
the expense of compliance by repurchasing the stock of those shareholders who
own less than 10 shares. This will reduce the number of CCMC shareholders to
less than 300 which is the current SEC requirement if we are to avoid future
registration and reporting.
The offer being made to those shareholders who own less than 10 shares is to
purchase their entire holding at $50.00 per share. This represents a premium of
approximately 33% over the current book value, an incentive we hope will
encourage all of them to accept our offer.
<PAGE> 31
January 20, 1998
Page 2
I have long desired to find ways to give our employees a greater ownership
interest in CCMC. In the future we may consider establishing an Employee Stock
Ownership Program or ESOP which would allow those employee/shareholders who
accept our current offer and all other employees to become participants in the
ESOP and benefit directly from their efforts which contribute to our success.
In June 1997, I wrote to you and advised of the possibility of a future
"liquidity event" whereby you and other CCMC shareholders might be given an
opportunity to sell a portion of your stock and realize a price greater than
book value. We are still evaluating the options discussed in that letter and
have not yet developed any definitive plans. I want to assure all of our
shareholders that the current offer to repurchase shares is not that "liquidity
event."
The course of action we select may be significantly influenced by the business
plans adopted as a result of our current strategic planning project. If plans
are finalized regarding such a transaction, we will communicate with all
shareholders regarding the options available to them at that time. Those
employees selling their shares back to CCMC as a result of this offer will be
paid the amount in excess of $50.00 per share, if the "liquidity event" does
take place before December 31, 1999, and the price offered at that time exceeds
the current offering price.
Very truly yours,
Thomas R. Brown
Chairman of the Board
TRB:mjr
<PAGE> 32
January 20, 1998
TO: ALL HOLDERS OF LESS THAN 10 SHARES OF SERIES B COMMON STOCK OF
CALIFORNIA CASUALTY MANAGEMENT COMPANY
In 1989, we gave you a small number of Series B Common Stock of California
Casualty Management Company ("CCMC"). That gift was made in commemoration of the
company's 75th anniversary and was intended to give you a stake in the company's
future. Due to some unforeseen events, we must now ask you to surrender your
shares and receive a purchase price which represents a substantial premium over
the current book value which is the value we use for all other repurchases of
our stock.
We recently became aware that we have had an obligation to register with the
United States Securities and Exchange Commission ("SEC") due to the number of
CCMC shareholders exceeding 500. Unfortunately, this requirement was overlooked
by the attorney we retained to counsel CCMC at the time of the gift of shares.
The registration and reporting requirement involves substantial additional
current and future expense. We do not think that such expense is warranted in
light of our continuing efforts to become a lower cost provider of our products.
We can eliminate our reporting obligation and avoid the expense of compliance by
repurchasing the stock of those shareholders who own less than 10 shares. This
will reduce the number of CCMC shareholders to less than 300 which is the
current SEC requirement if we are to avoid future registration and reporting.
The enclosed materials constitute an offer by CCMC to purchase all of your
shares of Series B Common Stock at $50.00 per share (the "Offer to Purchase").
This represents a premium of approximately 33% over the current book value. We
encourage you to accept the Offer to Purchase. To do so, you must return the
enclosed Letter of Transmittal to us by February 27, 1998. We will then be able
to send you the proceeds by March 10, 1998. A self-addressed postage-paid
envelope is enclosed for your convenience.
Please note that when you accept the Offer to Purchase, you will most likely
have a reportable long term taxable gain in 1998. We reported taxable income of
$19.92 per share in 1989 which is your "basis" for tax purposes. Fortunately,
Congress has recently reduced the tax rate for long term gains so that your tax
obligation will be less than it might otherwise have been. You should consult
your tax advisor, if you have one, regarding the consequence of this
transaction.
<PAGE> 33
January 20, 1998
Page 2
I have long desired to find ways to give our employees a greater ownership
interest in CCMC. In the future we may consider establishing an Employee Stock
Ownership Program or ESOP which would allow you to become a participant in the
ESOP and again benefit directly from your efforts which contribute to our
success. In the meantime, it would be very much appreciated if you would accept
the enclosed Offer to Purchase so that we may attain compliance with the SEC
regulation.
In June 1997, I wrote to you and advised of the possibility of a future
"liquidity event" whereby you and other CCMC shareholders might be given an
opportunity to sell a portion of your stock and realize a price greater than
book value. We are still evaluating the options discussed in that letter and
have not yet developed any definitive plans.
The course of action we select may be significantly influenced by the business
plans adopted as a result of our current strategic planning project. If we
implement any such plan prior to December 31, 1999, and if that plan would have
allowed you a greater value for your shares, we will make sure that you receive
the difference. In other words, if you accept our Offer to Purchase now, you
will not lose out on any opportunity for realizing greater value through a
"liquidity event" occurring before January 1, 2000 which would otherwise not be
available to you as a result of your accepting our Offer to Purchase.
If you have any questions regarding this Offer to Purchase, you may contact Pat
Persse (Assistant Vice President - Finance) at extension 4437 or Jim Englese
(Assistant Vice President - Legal) at extension 4539. If you are calling from
outside the home office complex, you may call them at 1-800-288-7765.
Thank you for your attention to this important matter.
Very truly yours,
Thomas R. Brown
Chairman of the Board
TRB:mjr
<PAGE> 34
CALIFORNIA CASUALTY MANAGEMENT COMPANY
OFFER TO PURCHASE SERIES B COMMON STOCK
TO CERTAIN HOLDERS OF SHARES OF SERIES B COMMON STOCK OF CALIFORNIA CASUALTY
MANAGEMENT COMPANY:
California Casualty Management Company, a California corporation, ("CCMC"),
hereby makes an offer (the "Offer") to all shareholders of record as of December
31, 1997 who hold in the aggregate less than 10 shares of Series B Common Stock
of CCMC upon the terms and conditions set forth herein and in the attached
Schedule 13e-3, to purchase at $50.00 per share (the "Purchase Price") in cash
all shares of Series B Common Stock (the "Shares") held by such shareholders.
The Offer will expire at midnight, San Francisco time, on Friday, February 27,
1998, unless extended by CCMC, in its sole discretion in accordance with
applicable law and regulations.
The Purchase Price will be payable by check made payable to the tendering
shareholder as provided for hereinafter. The Shares are not currently publicly
traded.
- --------------------------------------------------------------------------------
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS
THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF THIS
TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION
TO THE CONTRARY IS UNLAWFUL.
- --------------------------------------------------------------------------------
Except as provided herein, CCMC has made no arrangements for and has no
understanding with any dealer, salesman or other person regarding the
solicitation hereunder, and no person has been authorized by CCMC to give any
information or to make any representations in connection with this Offer other
than those contained herein and, if given or made, such other information or
representations must not be relied upon as having been authorized. The delivery
of this Offer shall not, under any circumstances, create any implication that
the information herein is correct as of any time subsequent to the date hereof.
The Offer is not being made to, nor will CCMC accept the tender from, holders of
Shares in any jurisdiction in which the Offer or the acceptance thereof would
not be in compliance with the securities or Blue Sky laws of such jurisdiction.
January 20, 1998
<PAGE> 35
LETTER OF TRANSMITTAL
TO TENDER SHARES OF SERIES B COMMON STOCK
OF
CALIFORNIA CASUALTY MANAGEMENT COMPANY
PURSUANT TO THE OFFER TO PURCHASE
DATED JANUARY 20, 1998
BY
CALIFORNIA CASUALTY MANAGEMENT COMPANY
THE OFFER EXPIRES AT 12:00 MIDNIGHT, SAN FRANCISCO TIME, ON
FRIDAY FEBRUARY 27, 1998, UNLESS THE OFFER IS EXTENDED.
<PAGE> 36
DESCRIPTION OF SHARES TENDERED
NAME AND ADDRESS OF REGISTERED HOLDER: SHARES TENDERED:
______________________________________ _____SHARES OF CCMC SERIES B
COMMON STOCK
______________________________________
______________________________________
Ladies and Gentlemen:
The undersigned hereby tenders to California Casualty Management
Company, a California corporation ("CCMC"), the above-described shares of Series
B Common Stock of CCMC (the "Shares"), constituting all of the Shares owned by
the undersigned, pursuant to CCMC's offer to purchase all Shares held by each
shareholder who, as of December 31, 1997, owned in the aggregate, less than 10
Shares, at a price of $50.00, net to the seller in cash, upon the terms and
subject to the conditions set forth in the Offer to Purchase and Schedule 13e-3
dated January 20, 1998 (the "Offer to Purchase"), receipt of which is hereby
acknowledged, and in this Letter of Transmittal (which, together with any
amendments or supplements thereto or hereto, collectively constitute the
"Offer").
Subject to and effective upon acceptance for payment of the Shares
tendered hereby in accordance with the terms and subject to the conditions of
the Offer, the undersigned hereby sells, assigns and transfers to, or upon the
order of, CCMC all right title and interest in and to all Shares tendered hereby
and irrevocably constitutes and appoints the Secretary of CCMC the true and
lawful agent and attorney-in-fact of the undersigned with respect to such
Shares, with full power of substitution (such power of attorney being deemed to
be an irrevocable power coupled with an interest), to (a) deliver certificates
for such Shares held in escrow by CCMC, together with all accompanying evidences
of transfer and authenticity, to or upon the order of CCMC; and (b) present such
Shares for transfer or cancellation on the books of CCMC, all in accordance with
the terms of the Offer.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Shares
tendered hereby and that when the same are accepted for payment by CCMC, CCMC
will acquire good and unencumbered title thereto, free and clear of all liens,
restrictions, charges and encumbrances and not subject to any adverse claims.
The undersigned will, upon request, execute and deliver any additional documents
deemed by CCMC to be necessary or desirable to complete the sale, assignment and
transfer of the Shares tendered hereby.
All authority herein transferred or agreed to be conferred in this
Letter of Transmittal shall not be affected by, and shall survive, the death or
incapacity of the undersigned, and any
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<PAGE> 37
obligation of the undersigned shall be binding upon the heirs, personal
representatives, successors, assigns, administrators, trustees in bankruptcy,
personal and legal representatives of the undersigned.
Date:__________________
____________________________________
Signature
____________________________________
Printed Name
_____________________________________
Social Security Number
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<PAGE> 38
PAYER'S NAME: CALIFORNIA CASUALTY MANAGEMENT COMPANY
<TABLE>
<S> <C> <C>
SUBSTITUTE FORM W-9 Part 1 - PLEASE PROVIDE YOUR Social Security Number:
TIN ON THE LINE AT RIGHT
AND CERTIFY BY SIGNING AND _______________________
DATING BELOW
Department of the Treasury Internal Part 2 - Certification - Under penalties of
Revenue Service perjury, I certify that:
(1) The number shown on this form is
my correct Taxpayer Identification
Payer's Request for Taxpayer Number (or I am waiting for a number
to be issued to me) and
Identification Number ("TIN")
(2) I am not subject to backup withholding
because (a) I am exempt from backup
withholding, or (b) I have not been
notified by the Internal Revenue
Service (the "IRS") that I am subject
to backup withholding as a result of
a failure to report all interest or
dividends, or (c) the IRS has
notified me that I am no longer
subject to backup withholding.
Certification Instructions - You must cross
out Item 2 above if you have been notified by
the IRS that you are currently subject to
backup withholding because of under-reporting
interest or dividends on your tax return.
However, if after being notified by the IRS
that you were subject to backup withholding
you received another notification from the
IRS that you are no longer subject to backup
withholding, do not cross out Item (2).
Part 3 - Awaiting TIN ____ SIGNATURE___________________________________
DATE: ___________________, 1998
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE LINE IN
PART 3 OF SUBSTITUTE W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (1) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office, or (2) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of payment, 31% of all
reportable payments made to me will be withheld.
Signature __________________________ Date ___________________, 1998
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<PAGE> 39
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER
1. Delivery of Letter of Transmittal. This Letter of Transmittal is to be
completed in full and returned to the Company in the enclosed envelope on or
before 12:00 Midnight, San Francisco time, February 27, 1998 (the "Expiration
Date") unless the Expiration Date is extended by the Company, in its sole
discretion. No tender of Shares will be accepted by the Company unless it covers
all Shares held of record by the tendering shareholder, as set forth in the
Offer. No alternative, conditional or contingent tenders will be accepted. By
executing this Letter of Transmittal (or facsimile thereof), the tendering
shareholder waives any right to receive any notice of the acceptance for payment
of the Shares.
2. Signatures on Letter of Transmittal. If this Letter of Transmittal is signed
by the registered holder(s) of the Shares tendered hereby, the signature(s) must
correspond with the name(s) as set forth in the share records of the Company
without alteration, enlargement or any change whatsoever.
If any of the Shares tendered hereby is held of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If this Letter of Transmittal is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, or other person acting in a fiduciary
or representative capacity, such person should so indicate when signing, and
proper evidence satisfactory to the Company of the authority of such person so
to act must be submitted.
3. Backup Withholding. Under U.S. Federal income tax law, a shareholder whose
tendered Shares are accepted for payment is required to provide the Company with
such shareholder's correct taxpayer identification number ("TIN") which, for
individual taxpayers is the taxpayer's Social Security Number on Substitute Form
W-9 above. If the Company is not provided with the correct TIN, the Internal
Revenue Service ("IRS") may subject the shareholder to a penalty imposed by the
IRS. In addition, payments that are made to such shareholder with respect to
Shares purchased pursuant to the Tender Offer may be subject to 31% backup
withholding.
If backup withholding applies, the Company is required to withhold 31%
of any such payments made to the shareholder. Backup withholding is not an
additional tax. Rather, the tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund may be obtained from the IRS,
provided that the required information is given to the IRS.
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A FACSIMILE COPY HEREOF MUST
BE RECEIVED BY THE COMPANY ON OR BEFORE THE EXPIRATION DATE.
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