<PAGE> 1
DRAFT 7/25/96
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
300 DELAWARE AVENUE
SUITE 1704
WILMINGTON, DELAWARE 19801
(302) 427-5800
Dear Stockholder:
You are cordially invited to attend a Special Meeting of the Stockholders
of Financial Institutions Insurance Group, Ltd. ("FIIG" or the "Company"), to
be held at the offices of Schulte Roth & Zabel, 900 Third Avenue, New York, New
York on _____________, 1996, at 9:00 a.m., Eastern Daylight Saving Time. A
notice of the Special Meeting, a proxy statement and related information about
the Company and a proxy card are enclosed. All holders of the Company's
outstanding shares of Common Stock as of July 17, 1996 (the "Record Date") will
be entitled to notice of and to vote at the Special Meeting.
At the Special Meeting, you will be asked to consider and to vote upon a
proposal to approve and adopt a Merger Agreement, dated as of April 12, 1996
(the "Merger Agreement"), by and among the Company, FIIG Holding Corp., a
Delaware corporation ("Buyer"), and FIIG Merger Corp., a Delaware corporation
and a wholly-owned subsidiary of Buyer ("Buyer Sub"), pursuant to which Buyer
Sub will be merged with and into the Company (the "Merger"). Buyer currently
is a wholly-owned subsidiary of Castle Harlan Partners II, L.P. It is expected
that John A. Dore, President and Chief Executive Officer of the Company, will
receive options to acquire approximately 7% of the outstanding shares of Buyer
(of which approximately 3% will be issued in exchange for the cancellation of
certain of his options in the Company). If the Merger Agreement is approved
and the Merger becomes effective, each outstanding share of Common Stock of the
Company (other than dissenting shares) will be converted into the right to
receive $16.00 in cash. Approval of the Merger requires the affirmative vote
of the holders of a majority of all outstanding shares of the Company's Common
Stock. Certain executive officers and members of the Board of Directors of the
Company have entered into Voting Agreements pursuant to which such stockholders
have agreed to vote shares representing approximately 20 percent of the
Company's outstanding shares of Common Stock in favor of the Merger.
Details of the proposed Merger and other important information are set
forth in the accompanying Proxy Statement, and you are urged to read it
carefully.
YOUR BOARD OF DIRECTORS HAS APPROVED THE MERGER AND RECOMMENDS THAT YOU
VOTE FOR APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
Whether or not you plan to attend the Special Meeting, please complete,
sign and date the accompanying proxy card and return it in the enclosed prepaid
envelope. If you attend the Special Meeting, you may revoke such proxy and
vote in person if you wish, even if you have previously returned your proxy
card. Your prompt cooperation will be greatly appreciated.
R. Keith Long
Chairman of the Board
___________, 1996
<PAGE> 2
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS ON ______________, 1996
To Stockholders of Financial Institutions Insurance Group, Ltd.:
A special meeting of the stockholders of Financial Institutions Insurance
Group, Ltd. ("FIIG" or the "Company"), will be held at the offices of Schulte
Roth & Zabel, 900 Third Avenue, New York, New York on _____________, 1996 at
9:00 a.m. Eastern Daylight Saving Time (the "Special Meeting"), to consider and
act upon the following matters:
1. To consider and vote upon a proposal to approve and adopt a Merger
Agreement dated as of April 12, 1996 (the "Merger Agreement"), by and among
the Company, FIIG Holding Corp., a Delaware corporation ("Buyer"), and FIIG
Merger Corp., a Delaware corporation and a wholly-owned subsidiary of Buyer
("Buyer Sub"), pursuant to which, among other things (i) Buyer Sub will be
merged with and into the Company (the "Merger"); and (ii) each outstanding
share of common stock, par value $1.00 per share, of the Company (other than
dissenting shares), will be converted into the right to receive $16.00 in
cash. A copy of the Merger Agreement is attached as Appendix A to the
accompanying Proxy Statement; and
2. The transaction of such other business as properly may come before
the Special Meeting or any adjournment or adjournments thereof.
Your attention is called to the Proxy Statement and other materials
concerning the Company which are mailed with this Notice for a more complete
statement regarding the matters to be acted upon at the Special Meeting. THE
BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
By Order of the Board of Directors
Lana J. Braddock, Secretary
_____________, 1996
YOUR VOTE IS IMPORTANT. ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND
THE SPECIAL MEETING. WHETHER OR NOT YOU PLAN TO ATTEND, PLEASE MARK, SIGN AND
DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE. YOU
MAY NEVERTHELESS VOTE IN PERSON IF YOU ATTEND THE SPECIAL MEETING.
<PAGE> 3
PROXY STATEMENT
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
300 DELAWARE AVENUE
SUITE 1704
WILMINGTON, DELAWARE 19801
(302) 427-5800
This Proxy Statement is being furnished to the stockholders of Financial
Institutions Insurance Group, Ltd. ("FIIG" or the "Company") in connection with
the solicitation of proxies by the Company's Board of Directors for a Special
Meeting of Stockholders to be held on __________, 1996 at 9:00 a.m. Eastern
Daylight Saving Time, at the offices of Schulte Roth & Zabel, 900 Third Avenue,
New York, New York (the "Special Meeting"). At the Special Meeting, the
stockholders of the Company will consider and vote upon a proposal to approve
and adopt a Merger Agreement dated April 12, 1996 (the "Merger Agreement"),
among the Company, FIIG Holding Corp. ("Buyer") and FIIG Merger Corp. ("Buyer
Sub"). Buyer currently is a wholly-owned subsidiary of Castle Harlan Partners
II, L.P. ("CHP II"). It is expected that John A. Dore, President and Chief
Executive Officer of the Company, will receive options to acquire approximately
7% of the outstanding shares of Buyer (of which approximately 3% will be issued
in exchange for the cancellation of certain of his options in the Company), and
certain other officers and employees of the Company will own shares and options
aggregating approximately 1% of the outstanding shares of Buyer. If the Merger
is consummated, Buyer Sub will be merged into the Company, with the Company
being the surviving corporation (the "Surviving Corporation"). Pursuant to the
Merger Agreement, each outstanding share of the Company's common stock (other
than dissenting shares) will be converted into the right to receive $16.00 per
share in cash. Each outstanding share of Buyer Sub common stock will be
converted into one share of the common stock of the Surviving Corporation,
which will become a wholly-owned subsidiary of Buyer.
This Proxy Statement is first being sent to stockholders on or about
___________, 1996.
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.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
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SUMMARYS ..................................................................................... S-1
General .............................................................................. S-1
The Special Meeting .......................................................... S-1
Purpose of the Special Meeting; Quorum; Vote Required ........................ S-1
The Parties to the Transaction ............................................... S-1
The Merger ................................................................... S-2
Certain Effects of the Merger ................................................ S-2
Procedures for Exchange of Certificates ...................................... S-3
Recommendation of Board of Directors ......................................... S-3
Voting of Shares of Certain Holders .......................................... S-3
Interests of Certain Persons in the Merger ................................... S-3
Accounting Treatment ......................................................... S-4
Federal Income Tax Consequences .............................................. S-4
The Merger Agreement ................................................................. S-4
Effective Time of the Merger ................................................. S-4
Conditions to Consummation of the Merger ..................................... S-4
Termination of the Merger Agreement .......................................... S-4
Amendments to the Merger Agreement ........................................... S-5
Dissenters' Rights ........................................................... S-5
Comparative Market Price Data ........................................................ S-6
Dividends ............................................................................ S-6
Selected Consolidated Financial Data of the Company .................................. S-7
INTRODUCTION ................................................................................. 1
Proposal to be Considered at the Special Meeting ..................................... 1
Voting Rights; Vote Required for Approval ............................................ 1
Voting and Revocation of Proxies ..................................................... 2
Solicitation of Proxies ............................................................. 2
SPECIAL FACTORS .............................................................................. 2
Background of the Merger ............................................................. 2
Opinion of Investment Banker ......................................................... 7
The Board of Directors' Reasons for the Merger; Recommendation of the
Company's Board of Directors ................................................. 12
Voting Agreements .................................................................... 15
Interest of John A. Dore and Management in the Merger ................................ 15
Dore's Belief as to the Fairness of the Merger ....................................... 16
Purpose and Certain Effects of the Merger ............................................ 17
Interests of Certain Persons in the Merger .......................................... 17
Stock Option Plan and Directors' Incentive Plan .............................. 17
Acceleration of Stock Options ................................................ 18
Employment Agreements ........................................................ 18
Indemnification and Insurance ................................................ 19
Certain Federal Income Tax Consequences of the Merger to the Company's
Stockholders ................................................................. 19
</TABLE>
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<TABLE>
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THE MERGER ................................................................................... 20
Effects of the Merger ................................................................ 21
Effective Time ....................................................................... 21
Procedures for Exchange of Certificates .............................................. 22
Accounting Treatment ................................................................. 23
Source and Amount of Funds ........................................................... 23
Plans or Proposals After the Merger .................................................. 23
Rights of Dissenting Stockholders .................................................... 24
Regulatory Approvals ................................................................. 27
Connecticut Insurance Laws ........................................................... 27
THE MERGER AGREEMENT ......................................................................... 28
General .............................................................................. 28
Effective Time ....................................................................... 28
Consideration to be Received by Stockholders of the Company .......................... 28
Representations and Warranties ....................................................... 29
Covenants ............................................................................ 31
Termination Fee ...................................................................... 35
Amendments and Waivers ............................................................... 36
Expenses ............................................................................. 36
Conditions to Consummation of the Merger ............................................. 36
Termination .......................................................................... 37
STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS .................................. 38
OTHER MATTERS ................................................................................ 41
PROPOSALS BY HOLDERS OF COMPANY SHARES ....................................................... 41
EXPENSES OF SOLICITATION ..................................................................... 41
INDEPENDENT PUBLIC ACCOUNTANTS ............................................................... 42
AVAILABLE INFORMATION ........................................................................ 42
BUSINESS FINANCIAL INFORMATION AND MANAGEMENT'S DISCUSSION AND ANALYSIS ...................... 42
INDEX TO FINANCIAL STATEMENTS ................................................................ 42
</TABLE>
Appendix A - Merger Agreement
Appendix B - Section 262 of DGCL
Appendix C - Opinion of William Blair & Company L.L.C.
Appendix D - Form of Voting Agreement
-ii-
<PAGE> 6
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement. The following summary is not intended to be complete and
is qualified in its entirety by reference to the more detailed information
contained in this Proxy Statement, in the materials accompanying this Proxy
Statement and in the Appendices hereto. Stockholders are urged to review the
entire Proxy Statement and accompanying materials carefully.
GENERAL
The Special Meeting
The Special Meeting of Stockholders of Financial Institutions Insurance
Group, Ltd. ("FIIG" or the "Company") will be held on _____________, 1996 at
9:00 a.m. Eastern Daylight Saving Time, at the offices of Schulte Roth & Zabel,
900 Third Avenue, New York, New York (the "Special Meeting"). Only holders of
record of shares of $1.00 par value common stock of the Company (the "Common
Stock" or the "Company Shares") at the close of business on July 17, 1996 are
entitled to notice of and to vote at the Special Meeting. On that date, there
were approximately 281 holders of record of Common Stock and 3,210,584 shares
of Common Stock outstanding, with each share entitled to cast one vote at the
Special Meeting. See "INTRODUCTION--Voting Rights; Vote Required for
Approval."
Purpose of the Special Meeting; Quorum; Vote Required
At the Special Meeting, stockholders will consider and vote upon a
proposal to approve and adopt the Merger Agreement, a copy of which is attached
as Appendix A to this Proxy Statement (the "Merger Agreement"). The Merger
Agreement provides for the merger of FIIG Merger Corp. with and into the
Company (the "Merger"). The Company, as the surviving corporation (the
"Surviving Corporation"), would then become a wholly-owned subsidiary of FIIG
Holding Corp. (the "Buyer"). All of the issued and outstanding capital stock
of the Buyer currently is owned by Castle Harlan Partners II, L.P. ("CHP II").
It is expected that John A. Dore, President and Chief Executive Officer of the
Company, will receive options to acquire approximately 7% of the outstanding
shares of Buyer (of which approximately 3% will be issued in exchange for the
cancellation of certain of his options in the Company, and of which
approximately 4% will be issued in connection with his employment arrangement),
and certain other officers and employees of the Company will own shares and
options aggregating approximately 1% of the outstanding shares of Buyer. John
A. Dore has been President and Chief Executive Officer of the Company since
1990. See "INTRODUCTION--Proposal to be Considered at the Special Meeting" and
"SPECIAL FACTORS -- Interest of John A. Dore and Management in the Merger."
The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of Common Stock at the Special Meeting is necessary to
constitute a quorum at the Special Meeting. Approval of the Merger Agreement
requires the affirmative vote of the holders of a majority of the outstanding
Company Shares. See "INTRODUCTION--Voting Rights; Vote Required for Approval,"
and "THE MERGER AGREEMENT--Conditions to Consummation of the Merger."
The Parties to the Transaction
Castle Harlan Partners II, L.P. CHP II, which pursuant to the Merger will
become the ultimate parent of the Company, is a Delaware limited partnership
which invests in businesses for long-term appreciation. The principal
executive offices of CHP II are located at 150 East 58th Street, New York, NY
10155, and the telephone number is (212) 644-8600.
FIIG Holding Corp. and FIIG Merger Corp. FIIG Holding Corp. ("Buyer") and
FIIG Merger Corp., a wholly-owned subsidiary of Buyer ("Buyer Sub"), have been
formed solely for the purpose of the Merger. Neither company has engaged in
any business activity unrelated to the Merger. The principal
<PAGE> 7
executive offices of Buyer and Buyer Sub are located at 150 East 58th Street,
New York, NY 10155, c/o Castle Harlan, Inc., and the telephone number is
(212) 644-8600. Neither Buyer, Buyer Sub nor CHPEII is an affiliate of the
Company or its officers or directors.
Financial Institutions Insurance Group, Ltd. The Company is an insurance
holding company that, through its subsidiaries, underwrites insurance and
reinsurance. The principal lines of business include professional liability,
directors' and officers' liability, and other lines of property and casualty
insurance and reinsurance. The First Reinsurance Company of Hartford ("First
Re") is the Company's largest subsidiary. First Re is domiciled in the State
of Connecticut and maintains direct insurance licenses in 19 states and the
District of Columbia, with reinsurance approval or authority in 12 additional
states. The principal underwriting activity of the group is managed by the
Company's wholly-owned subsidiary, Oakley Underwriting Agency, Inc. ("Oakley").
Oakley underwrites directors' and officers' liability insurance and
professional liability insurance coverages on behalf of First Re and Virginia
Surety Company, Inc., an unaffiliated insurance company that maintains an
underwriting contract with Oakley. The insurance coverages underwritten by
Oakley on behalf of Virginia Surety Company, Inc. are generally reinsured by
First Re. First Re Management Company, Inc. ("FRM") is a wholly-owned
subsidiary of the Company which was organized to provide centralized management
and administrative service to the Company and its subsidiaries. F/I Insurance
Agency, Incorporated ("F/I Agency") is an Illinois-licensed insurance producer
and a wholly-owned subsidiary of the Company. The Company's Common Stock is
traded on The Nasdaq Stock Market under the symbol "FIRE." The principal
executive offices of the Company are located at 300 Delaware Avenue, Suite
1704, Wilmington, Delaware 19801, and the telephone number is (302) 427-5800.
The Merger
Pursuant to the Merger Agreement, Buyer Sub will merge into the Company,
with the Company being the Surviving Corporation. Each outstanding share of
Common Stock (except those shares held by the Company as treasury shares, or
held by Buyer or Buyer Sub, or shares as to which appraisal rights have been
properly exercised under the Delaware General Corporation Law ("DGCL")
("Dissenting Shares")) will be converted into the right to receive $16.00 in
cash, without interest thereon (the "Merger Consideration"). Holders of
Dissenting Shares will be entitled to receive from the Surviving Corporation a
cash payment in the amount of the "fair value" of such shares, determined in
the manner provided in Section 262 of the DGCL. Each of the outstanding stock
options of the Company issued to certain directors, officers and employees of
the Company will be converted into the right to receive a cash payment equal to
the difference between $16.00 and the exercise price of such options. Buyer
intends to fund payment of the Merger Consideration through third party debt
financing and equity contributions by CHP II and certain of its affiliates.
The Merger is not contingent upon the Buyer obtaining financing. The Buyer has
requested approval from the Commissioner of Insurance of the State of
Connecticut for First Re to pay a dividend to Buyer of $10,000,000 after the
consummation of the Merger. All shares of Common Stock held by the Company as
treasury shares and each share of Common Stock held by Buyer or Buyer Sub will
be canceled without consideration. Each outstanding share of Buyer Sub's
common stock will be converted into one share of common stock of the Surviving
Corporation. See "THE MERGER--Rights of Dissenting Stockholders." After the
Merger, Buyer will own 100% of the outstanding shares of the Company's Common
Stock. See "THE MERGER AGREEMENT."
Certain Effects of the Merger
As a result of the Merger, Buyer will acquire the entire equity interest
in the Company. Therefore, following the Merger, the present holders of the
Company Shares will no longer have an equity interest in the Company and will
no longer share in future earnings and growth of the Company, the risks
associated with achieving such earnings and growth, or the potential to realize
greater value for their
S-2
<PAGE> 8
Company Shares through divestitures, strategic acquisitions or other corporate
opportunities that may be pursued by the Company in the future. Instead, each
holder of Company Shares at the effective time of the Merger (the "Effective
Time") will have the right to receive the Merger Consideration (or, in the case
of Dissenting Shares, the statutorily determined "fair value") for each Company
Share. The Company Shares will no longer be listed or traded on The Nasdaq
Stock Market and the registration of the Company Shares under the Securities
Exchange Act of 1934 (the "Exchange Act") will be terminated. See "SPECIAL
FACTORS--Purpose and Certain Effects of the Merger," and "THE MERGER--Effects
of the Merger."
Procedures for Exchange of Certificates
As soon as practicable after the Effective Time, a letter of transmittal
and instructions for surrendering stock certificates evidencing shares of the
Company's Common Stock will be mailed to each holder of the Company's Common
Stock for use in exchanging such holder's stock certificates for the Merger
Consideration to which such holder is entitled as a result of the Merger.
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS.
See "THE MERGER--Procedures for Exchange of Certificates."
Recommendation of Board of Directors
The Board of Directors has determined that the Merger and the Merger
Consideration are fair to, and in the best interests of, the Company's
stockholders. The Board of Directors has approved the Merger Agreement and
recommends that stockholders vote FOR the proposal to approve and adopt the
Merger Agreement. See "SPECIAL FACTORS--The Board of Directors' Reasons for
the Merger; Recommendation of the Company's Board of Directors."
Voting of Shares of Certain Holders
Certain stockholders of the Company, including certain executive officers
and members of the Board of Directors of the Company, have entered into Voting
Agreements with Buyer and Buyer Sub pursuant to which such stockholders have
agreed to vote in favor of the Merger at the Special Meeting. Pursuant
thereto, it is expected that shares representing approximately 20 percent of
the Company's outstanding shares of Common Stock will be voted in favor of the
Merger. See "SPECIAL FACTORS--The Voting Agreements."
Interests of Certain Persons in the Merger
In considering the recommendation of the Board of Directors of the Company
with respect to the Merger Agreement and the transactions contemplated thereby,
stockholders should be aware that certain members of management of the Company
and the Board of Directors of the Company have certain interests in the Merger
that are in addition to the interests of stockholders of the Company generally.
See "SPECIAL FACTORS--Interests of Certain Persons in the Merger; Interest of
John A. Dore and Management in the Merger."
The Company's financial advisor, William Blair & Company L.L.C. ("William
Blair"), will receive a fee equal to 1.2 percent of the Merger Consideration,
or approximately $650,000, if the Merger is consummated. Total fees and
expenses payable to the financial advisor are expected to be approximately
$685,000. In the event the Merger is not consummated, fees and expenses
payable to William Blair are expected to be approximately $255,000 - $280,000.
See "SPECIAL FACTORS--Opinion of Investment Banker."
S-3
<PAGE> 9
Accounting Treatment
The Merger will be accounted for under the purchase method of accounting
by Buyer. See "THE MERGER--Accounting Treatment."
Federal Income Tax Consequences
The receipt of $16.00 per share in cash for Company Shares pursuant to the
Merger will be a taxable transaction for federal income tax purposes under the
Internal Revenue Code of 1986, as amended, and also may be a taxable
transaction under applicable state, local, foreign and other tax laws. For
federal income tax purposes, a stockholder of the Company will realize taxable
gain or loss as a result of the Merger measured by the difference, if any,
between the per share tax basis of such stockholder's Company Shares and
$16.00. Each holder of an option to acquire Company Shares who receives a cash
payment equal to the difference between $16.00 and the exercise price per share
of such option will have ordinary income to the extent of the cash received.
See "SPECIAL FACTORS--Certain Federal Income Tax Consequences of the Merger to
the Company's Stockholders."
THE MERGER AGREEMENT
Effective Time of the Merger
The Merger will become effective upon the filing of a properly executed
Certificate of Merger with the Secretary of State of the State of Delaware or
at such later date specified in the Certificate of Merger. The filing will
occur after all conditions to the Merger contained in the Merger Agreement have
been satisfied or waived. The Company, Buyer and Buyer Sub anticipate that the
Merger will be consummated as promptly as practicable following the Special
Meeting. See "THE MERGER AGREEMENT--General" and "THE MERGER
AGREEMENT--Effective Time."
Conditions to Consummation of the Merger
The respective obligations of the Company, Buyer and Buyer Sub to effect
the Merger are subject to the satisfaction at or prior to the Effective Time of
various closing conditions. Such conditions include, among others, the
approval and adoption of the Merger Agreement by the holders of a majority of
the outstanding Company Shares, the obtaining of regulatory approvals and the
correctness in all material respects of each of the representations and
warranties of the parties to the Merger Agreement. In addition, Buyer and
Buyer Sub are not obligated to consummate the Merger if the holders of 5% or
more of the outstanding Company Shares have delivered written notice of their
intent to seek dissenters' rights. See "THE MERGER AGREEMENT--Conditions to
Consummation of the Merger" and "THE MERGER AGREEMENT--Termination."
Termination of the Merger Agreement
The Merger Agreement may, under specified circumstances, be terminated and
the Merger abandoned at any time prior to the Effective Time, notwithstanding
approval of the Merger Agreement by the stockholders of the Company. The
Merger Agreement provides under certain circumstances for the payment of a cash
fee in the amount of $3,500,000 to CHP II in the event the Company executes an
agreement with a third party involving a merger or other business combination
or sale of a substantial portion of the assets or stock of the Company prior to
February 17, 1997. See "THE MERGER AGREEMENT--Termination" and "THE MERGER
AGREEMENT--Termination Fee."
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<PAGE> 10
Amendments to the Merger Agreement
The Merger Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties. After approval of the Merger
Agreement by the stockholders of the Company and without the further approval
of such stockholders, no amendment will be made in a manner which is materially
adverse, as reasonably determined by the Company, to the rights of the
stockholders of the Company. See "THE MERGER AGREEMENT--Amendments and
Waivers."
Dissenters' Rights
Pursuant to the DGCL, any holder of Common Stock of the Company (i) who files a
proper demand for appraisal in writing prior to the vote taken at the Special
Meeting and (ii) whose shares are not voted in favor of the Merger, shall be
entitled to appraisal rights under Section 262 of the DGCL. A copy of Section
262 of the DGCL is attached as Appendix B to this Proxy Statement. Voting
stockholders of the Company who desire to exercise their appraisal rights must
not vote in favor of the Merger Agreement or the Merger and must deliver a
separate written demand for appraisal to the Company prior to the vote by the
stockholders of the Company on the Merger Agreement and the Merger. A demand
for appraisal must be executed by or on behalf of the stockholder of record and
must reasonably inform the Company of the identity of the stockholder of record
and that such record stockholder intends thereby to demand appraisal of the
Company Shares. The written demand for appraisal should specify the
stockholder's name and mailing address, the number of shares of Common Stock
owned, and that the stockholder is thereby demanding appraisal of his or her
shares. Within 120 days after the Effective Time, either the Surviving
Corporation or any stockholder who has complied with the required conditions of
Section 262 may file a petition in the Delaware Court, with a copy served on
the Surviving Corporation in the case of a petition filed by a stockholder,
demanding a determination of the fair value of the shares of all dissenting
stockholders. If a petition for an appraisal is timely filed and assuming
appraisal rights are available, at the hearing on such petition, the Delaware
Court will determine which stockholders, if any, are entitled to appraisal
rights, and will appraise the shares of Common Stock owned by such
stockholders, determining the fair value of such shares exclusive of any
element of value arising from the accomplishment or expectation of the Merger,
together with a fair rate of interest, if any, to be paid upon the amount
determined to be the fair value. In such event, the Delaware Court's appraisal
may be more than, less than, or equal to the Merger Consideration. See "THE
MERGER--Rights of Dissenting Stockholders."
S-5
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COMPARATIVE MARKET PRICE DATA
The Company's Common Stock is traded on The Nasdaq Stock Market under the
symbol "FIRE." The following table sets forth the high and low sales price per
share of the Company's Common Stock on The Nasdaq Stock Market for the periods
indicated. All share amounts and per share prices set forth herein have been
adjusted to give effect to capital adjustments such as stock dividends and
stock splits.
<TABLE>
<CAPTION>
HIGH LOW
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<S> <C> <C>
1994
First Quarter . . . . . . . . . . . . . . . . . . $10.24 $ 8.68
Second Quarter . . . . . . . . . . . . . . . . . 9.72 8.33
Third Quarter . . . . . . . . . . . . . . . . . 9.54 7.99
Fourth Quarter . . . . . . . . . . . . . . . . . 9.20 8.33
- -----------------------------------------------------------------------------
1995
First Quarter . . . . . . . . . . . . . . . . . . $ 9.72 $ 9.03
Second Quarter . . . . . . . . . . . . . . . . . 12.84 9.20
Third Quarter . . . . . . . . . . . . . . . . . 13.75 11.46
Fourth Quarter . . . . . . . . . . . . . . . . . 14.48 12.92
- -----------------------------------------------------------------------------
1996
First Quarter . . . . . . . . . . . . . . . . . . $15.75 $12.25
Second Quarter . . . . . . . . . . . . . . . . . 16.25 15.31
=============================================================================
</TABLE>
On February 16, 1996 the last full day of trading prior to the
announcement by the Company of the execution of a letter of intent with respect
to the Merger, the reported high and low sales price per share of Common Stock
was $14.50. On ______________, 1996, the last full day of trading prior to the
printing of this Proxy Statement, the reported high and low sales prices per
share of Common Stock were $______________.
DIVIDENDS
Since January 1, 1994, the Company has paid the following cash and common
stock dividends to holders of record of Common Stock:
Dividend
Stockholder Paid Per
1996 Payment Date Record Date Common Share
-------------------------------------------------------
February 22, 1996 January 25, 1996 20% Common Stock
February 22, 1996 January 25, 1996 $0.075
May 23, 1996 April 18, 1996 $0.075
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<PAGE> 12
1995 Dividend
Stockholder Paid Per
Payment Date Record Date Common Share
------------------------------------------------------
February 23, 1995 January 26, 1995 $0.075
May 25, 1995 April 20, 1995 $0.075
August 24, 1995 July 27, 1995 $0.075
August 24, 1995 July 27, 1995 20% Common Stock
November 24, 1995 October 26, 1995 $0.075
Dividend
Stockholder Paid Per
1994 Payment Date Record Date Common Share
------------------------------------------------------
February 24, 1994 January 20, 1994 $0.065
May 26, 1994 April 21, 1994 $0.065
August 25, 1994 July 28, 1994 $0.065
November 25, 1994 October 27, 1994 $0.065
The State of Connecticut, under the statutes and regulations that govern the
operations and affairs of insurance companies that are domiciled in the state,
imposes a restriction on the amount of dividends that can be paid by First Re
to the Company without prior regulatory approval. The aggregate amount of
dividends that may be paid within a 12-month period by First Re without prior
regulatory approval is limited to the greater of (i) 10% of statutory
policyholders' surplus as of the preceding December 31 or (ii) 100% of net
income for the preceding fiscal year. Dividends also may not exceed earned
surplus. Dividends exceeding these limitations require regulatory approval.
SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY
Set forth below is a summary of certain consolidated selected financial
data with respect to the Company excerpted or derived from the information
contained in the Company's Annual Reports on Form 10-K for the fiscal years
ended December 31, 1995, 1994, 1993, 1992 and 1991, and Quarterly Reports on
Form 10-Q for the quarterly periods ended March 31, 1996 and 1995. More
comprehensive financial information is included in such reports and other
documents filed by the Company with the Securities and Exchange Commission (the
"Commission"), and the following summary is qualified in its entirety by
reference to such reports and other documents and all of the financial
information (including any related notes) contained therein. Such reports and
other documents may be inspected and copies may be obtained from the offices of
the Commission. See "AVAILABLE INFORMATION." See "BUSINESS FINANCIAL
INFORMATION AND MANAGEMENT'S DISCUSSION AND ANALYSIS" for more detailed
financial information.
S-7
<PAGE> 13
]
SELECTED FINANCIAL DATA OF THE COMPANY
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
---------------------------------------------------------------
1995 1994 1993 1992 1991
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Premiums earned . . . . . . . . . . . $11,356,083 $ 7,819,784 $ 7,433,716 $ 7,344,128 $ 8,872,195
- -----------------------------------------------------------------------------------------------------
Net investment income . . . . . . . . 4,050,602 3,277,864 3,470,202 3,344,198 3,936,098
- -----------------------------------------------------------------------------------------------------
Net realized gains on investments . . 1,193,780 570,231 1,275,142 1,031,977 830,722
- -----------------------------------------------------------------------------------------------------
Other income . . . . . . . . . . . . 556,941 742,546 582,465 427,072 138,896
- -----------------------------------------------------------------------------------------------------
Total revenue . . . . . . . . . . . . 17,157,406 12,410,425 12,761,525 12,147,375 13,777,911
- -----------------------------------------------------------------------------------------------------
Losses and loss adjustment expenses 4,843,484 2,613,394 4,923,662 4,597,056 5,622,158
- -----------------------------------------------------------------------------------------------------
Commission expenses . . . . . . . . . 3,042,719 1,786,664 1,864,320 1,762,197 2,605,405
- -----------------------------------------------------------------------------------------------------
Other operating and management
expenses . . . . . . . . . . . . . . 3,683,860 3,467,801 2,885,953 2,228,570 1,962,772
- -----------------------------------------------------------------------------------------------------
Total Losses and Expenses . . . . . . 11,570,063 7,867,859 9,673,935 8,587,823 10,190,335
- -----------------------------------------------------------------------------------------------------
Income Before Income Taxes and
Cumulative Effect of Change in
Accounting Principle . . . . . . . . 5,587,343 4,542,566 3,087,590 3,559,552 3,587,576
- -----------------------------------------------------------------------------------------------------
Provision for income taxes . . . . . 1,265,544 803,748 68,160 613,788 1,177,758
- -----------------------------------------------------------------------------------------------------
Income before cumulative effect of
change in accounting principle . . . 4,321,799 3,738,818 3,019,430 2,945,764 2,409,818
- -----------------------------------------------------------------------------------------------------
Cumulative effect of change in
accounting for income taxes . . . . . -- -- 192,515 -- --
- -----------------------------------------------------------------------------------------------------
Net Income . . . . . . . . . . . . . $ 4,321,799 $ 3,738,818 $ 3,211,945 $ 2,945,764 $ 2,409,818
=========== =========== =========== =========== ===========
- -----------------------------------------------------------------------------------------------------
Weighted average number of common
shares outstanding . . . . . . . . . 3,334,444 3,316,464 3,237,559 3,634,894 3,938,045
- -----------------------------------------------------------------------------------------------------
Income per share before offset of
change in accounting principle . . . $1.30 $1.13 $0.99 $0.81 $0.61
- -----------------------------------------------------------------------------------------------------
Cumulative effect of change in
accounting for income taxes . . . . . -- -- 0.09 -- --
Total Net Income Per Share . . . . . $1.30 $1.13 $1.08 $0.81 $0.61
=========== =========== =========== =========== ===========
- -----------------------------------------------------------------------------------------------------
Total Assets At End of Period . . . . $94,200,273 $86,128,532 $83,211,041 $79,132,178 $72,784,107
=========== =========== =========== =========== ===========
- -----------------------------------------------------------------------------------------------------
</TABLE>
S-8
<PAGE> 14
SELECTED FINANCIAL DATA OF THE COMPANY
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE For the three
MONTHS ENDED months ended
MARCH 31, 1996 March 31, 1995
-------------- --------------
<S> <C> <C>
Premiums earned . . . . . . . . . . . . . . $ 3,610,824 $ 2,305,776
- -------------------------------------------------------------------------
Net investment income . . . . . . . . . . . 939,676 1,170,565
- -------------------------------------------------------------------------
Net realized gains on investments . . . . . 2,119,748 83,962
- -------------------------------------------------------------------------
Other income . . . . . . . . . . . . . . . . 136,336 175,142
- -------------------------------------------------------------------------
Total revenue . . . . . . . . . . . . . . 6,806,584 3,735,445
- -------------------------------------------------------------------------
Losses and loss adjustment expenses . . . . 1,946,108 822,186
- -------------------------------------------------------------------------
Commission expenses . . . . . . . . . . . . 720,692 588,228
- -------------------------------------------------------------------------
Other operating and management expenses . . 936,588 850,955
- -------------------------------------------------------------------------
Total Losses and Expenses . . . . . . . . . 3,603,388 2,261,369
- -------------------------------------------------------------------------
Income Before Income Taxes and
Cumulative Effect of Change in
Accounting Principle . . . . . . . . . . . . 3,203,196 1,474,076
- -------------------------------------------------------------------------
Provision for income taxes . . . . . . . . . 910,658 304,656
- -------------------------------------------------------------------------
Income before cumulative effect of
change in accounting principle . . . . . . . 2,292,538 1,169,420
- -------------------------------------------------------------------------
Cumulative effect of change in
accounting for
income taxes . . . . . . . . . . . . . . . . -- --
Net Income . . . . . . . . . . . . . . . . . $ 2,292,538 $ 1,169,420
=========== ===========
- -------------------------------------------------------------------------
Weighted average number of common
shares outstanding . . . . . . . . . . . . . 3,371,480 3,258,068
- -------------------------------------------------------------------------
Income per share before offset of
change in accounting principle . . . . . . . $0.68 $0.36
- -------------------------------------------------------------------------
Cumulative effect of change in accounting
for income taxes . . . . . . . . . . . . . . -- --
- -------------------------------------------------------------------------
Total Net Income Per Share . . . . . . . . $0.68 $0.36
===== =====
- -------------------------------------------------------------------------
TOTAL ASSETS AT END OF PERIOD $94,461,064 $87,315,357
=========== ===========
- -------------------------------------------------------------------------
</TABLE>
S-9
<PAGE> 15
INTRODUCTION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Financial Institutions Insurance Group,
Ltd. ("FIIG" or the "Company") for a Special Meeting of Stockholders to be held
on _________, _____________, 1996 (the "Special Meeting"). Shares represented
by properly executed proxies received by the Company will be voted at the
Special Meeting or any adjournment thereof in accordance with the terms of such
proxies, unless revoked. Proxies may be revoked at any time prior to the
voting thereof either by written notice filed with the Secretary of the Company
or by oral notice to the presiding officers during the meeting.
PROPOSAL TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, the stockholders of the Company will consider and
vote upon a proposal to approve and adopt a Merger Agreement dated April 12,
1996 (the "Merger Agreement") among the Company, FIIG Holding Corp., a Delaware
Corporation ("Buyer"), and FIIG Merger Corp., a Delaware corporation and a
wholly-owned subsidiary of Buyer ("Buyer Sub").
The Merger Agreement provides for the merger (the "Merger") of Buyer Sub
into the Company, with the Company being the surviving corporation (the
"Surviving Corporation"). Pursuant to the Merger: (i) each outstanding share
of the common stock, $1.00 par value, of the Company (the "Common Stock" or
"Company Shares") (other than Company Shares held by the Company as treasury
shares, or held by Buyer or Buyer Sub, or shares as to which appraisal rights
have not been forfeited under the DGCL, if effective notice of exercise of
appraisal rights with respect to such shares under Section 262 of the DGCL was
required and given prior to the effective time of the Merger ("Dissenting
Shares")), will be converted into the right to receive $16.00 per share in
cash, without interest (the "Merger Consideration"); (ii) all Company Shares
held by the Company as treasury shares and each share of Common Stock held by
Buyer or Buyer Sub will be canceled without consideration; (iii) each
outstanding share of Buyer Sub common stock will be converted into one share of
common stock of the Surviving Corporation; and (iv) each of the outstanding
stock options of the Company issued to certain directors, officers and
employees of the Company will be converted into the right to receive a cash
payment equal to the difference between $16.00 and the exercise price per share
of such options. Holders of Dissenting Shares will be entitled to receive from
the Surviving Corporation a cash payment in the amount of the "fair value" of
such shares, determined in the manner provided in Section 262 of the DGCL, but
after the effective time of the Merger such shares will not represent any
interest in the Surviving Corporation other than the right to receive such cash
payment. See "THE MERGER--Rights of Dissenting Stockholders." A copy of the
Merger Agreement is attached as Appendix A to this Proxy Statement.
VOTING RIGHTS; VOTE REQUIRED FOR APPROVAL
The record date for the Special Meeting is the close of business on July
17, 1996. At that date, there were approximately 281 holders of record of
Common Stock and 3,210,584 Company Shares outstanding. Each Company Share
entitles its holder to one vote concerning all matters properly coming before
the Special Meeting. Any stockholder entitled to vote may vote either in
person or by duly authorized proxy. A majority of the shares entitled to vote,
represented in person or by proxy, will constitute a quorum. Abstentions and
broker non-votes (i.e., shares held by brokers in street name, voting on
certain matters due to discretionary authority or instructions from the
beneficial owner but not voting on other matters due to lack of authority to
vote on such matters without instructions from the beneficial owner) are
counted for the purpose of establishing a quorum. The Merger Agreement must be
approved by the holders of at least a majority of the outstanding Company
Shares. Abstentions and broker non-votes have the same effect as a vote
"AGAINST" the approval of the Merger. Votes will be tabulated by the Company's
transfer agent, First Chicago Trust Company of New York.
<PAGE> 16
The following directors and executive officers of the Company with
ownership of an aggregate of approximately 20 percent of the outstanding
Company Shares have entered into Voting Agreements with Buyer and Buyer Sub
pursuant to which each such stockholder has agreed to vote his shares of Common
Stock in favor of the Merger: R. Keith Long, John A. Dore, John B. Zellars,
Lonnie L. Steffen, W. Dean Cannon, Herschel Rosenthal, William B. O'Connell,
Joseph C. Morris, Dale C. Bottom and John P. Diesel. Accordingly, the
affirmative vote of holders of Common Stock representing approximately an
additional 30 percent of the outstanding Company Shares is required for
approval of the Merger. See "SPECIAL FACTORS--Voting Agreements."
VOTING AND REVOCATION OF PROXIES
All Company Shares represented by properly executed proxies received prior
to or at the Special Meeting and not revoked will be voted in accordance with
the instructions indicated in such proxies. IF NO INSTRUCTIONS ARE INDICATED,
SUCH PROXIES WILL BE VOTED FOR THE PROPOSAL TO APPROVE AND ADOPT THE MERGER
AGREEMENT AND, IN THE DISCRETION OF THE PERSONS NAMED IN THE PROXY, ON SUCH
OTHER MATTERS AS PROPERLY MAY BE PRESENTED AT THE SPECIAL MEETING.
A stockholder may revoke his or her proxy at any time prior to its use by
delivering to the Secretary of the Company a signed notice of revocation or a
later dated and signed proxy or by attending the Special Meeting and voting in
person. Attendance at the Special Meeting will not in itself constitute the
revocation of a proxy.
The Board of Directors of the Company is not currently aware of any
business to be brought before the Special Meeting other than that described
herein. If, however, other matters are properly brought before the Special
Meeting, or any adjournments or postponements thereof, the persons appointed as
proxies will have discretionary authority to vote the shares represented by
duly executed proxies in accordance with their discretion and judgment as to
the best interest of the Company.
SOLICITATION OF PROXIES
Expenses in connection with the solicitation of proxies will be borne by
the Company. Upon request, the Company will reimburse brokers, dealers and
banks, or their nominees, for reasonable expenses incurred in forwarding copies
of the proxy material to the beneficial owners of Company Shares which such
persons hold of record. Solicitation of proxies will be made principally by
mail. Proxies may also be solicited in person, or by telephone or telegraph,
by officers and regular employees of the Company.
Although the Company has no present plans to retain any outside firm to
aid in the solicitation of proxies, the Company reserves the right to do so if
necessary to facilitate the Company's receipt of proxies. It is not
anticipated that the aggregate cost for any outside assistance will be material
in amount, or will exceed customary charges.
This proxy material is being mailed to stockholders commencing on or about
___________, 1996.
SPECIAL FACTORS
BACKGROUND OF THE MERGER
On August 18, 1995, the Company received an unsolicited offer from its
Chairman of the Board, R. Keith Long, to acquire the Company for a cash price
of $13.33 per share of Common Stock by means of a merger with a company to be
organized by Mr. Long. The price of $13.33 per share represented
2
<PAGE> 17
an 8.4% premium over the market price for the Common Stock at the close of
business on August 14, 1995 (one week prior to the announcement of Mr. Long's
proposal). The proposal was contingent on financing, stockholder and regulatory
approval and the negotiation of a definitive agreement. The proposal further
required each member of the Board of Directors of the Company to enter into a
Standstill and Lock-up Agreement and required that the Company deal exclusively
with Mr. Long.
At a meeting of the Executive Committee of the Board of Directors of the
Company on September 12, 1995, it was determined to recommend to the Board of
Directors that a Special Committee be appointed to evaluate Mr. Long's proposal
as well as other alternative strategic actions for the Company. The Executive
Committee of the Company is comprised of John B. Zellars (Chairman), John A.
Dore, William B. O'Connell and R. Keith Long. Mr. Long did not participate in
the discussions regarding his proposal or the appointment of a Special
Committee. The Executive Committee also recommended that the Special Committee
be given authority to hire a financial advisor to assist in its evaluation.
Accordingly, John A. Dore, at the request of the Executive Committee, contacted
eight potential financial advisors and obtained information from each on the
services to be performed and the related costs. The Executive Committee met
with representatives of seven of the firms.
At a meeting of the Board of Directors of the Company on September 20,
1995, the Board authorized the formation of a Special Committee of
disinterested directors to evaluate the proposal received from Mr. Long. The
Board of Directors of the Company is comprised of 12 members: R. Keith Long,
Richard P. Ackerman, Dale C. Bottom, W. Dean Cannon, Jr., John P. Diesel, John
A. Dore, Gerald J. Levy, Joseph C. Morris, William B. O'Connell, Herschel C.
Rosenthal, Thad Woodard and John B. Zellars. Messrs. Zellars, O'Connell,
Bottom, Morris and Cannon were appointed to the Special Committee. The
membership of the Special Committee remained unchanged throughout the
evaluation. The Board of Directors believed that given the size of the full
Board of Directors, as a practical matter, and in light of Mr. Long's offer, it
was advisable to delegate the duties of evaluation and analysis to a smaller
group of directors. The Special Committee was not given authority to make a
decision to sell the Company, nor was the Special Committee authorized to
negotiate any sale. In addition to evaluating Mr. Long's proposal, the Special
Committee was authorized to explore various alternative actions to position the
Company for the future, including internal growth, the acquisition of other
companies, and the potential acquisition of the Company by other companies.
The Special Committee was charged with evaluating the future direction of the
Company and considering the best alternatives for maximizing stockholder value.
The Special Committee further was authorized by the Board of Directors to
engage financial and other advisors deemed necessary in connection with its
consideration of strategic alternatives. Mr. Dore and the Executive Committee
presented the Special Committee with the information they had obtained on
financial advisors. The Special Committee met with representatives of William
Blair & Company, L.L.C. ("William Blair") on September 28, 1995, and on
September 29, 1995 engaged William Blair as its financial advisor.
On October 10, 1995, John A. Dore requested that the Executive Committee
of the Company grant him permission to pursue the development of a friendly
proposal to acquire the Company. Permission was granted by the Executive
Committee and subsequently ratified by the Board of Directors.
Because of the appointment of the Special Committee, the engagement of
William Blair as independent financial advisor, and the fact that, with the
exception of Mr. Dore, and, during the pendency of his offer, Mr. Long, all of
the members of the Board of Directors were independent of management, and had
no financial interest in any acquiring party, the Board of Directors did not
consider it necessary to retain any other unaffiliated representative to act
solely on behalf of the public stockholders
3
<PAGE> 18
for the purpose of negotiating the Merger Agreement or preparing a report
concerning the fairness to stockholders of the Merger.
The Special Committee of the Company met with William Blair on October 18,
1995, November 8, 1995 and November 30, 1995 to receive reports from William
Blair of the results of its analysis of the Company. On October 18, 1995,
William Blair discussed generally the various strategic and financial
alternatives that might be available to the Company, including a stock
repurchase, the pursuit of acquisitions, internal growth, the sale of segments
of the Company's business, or the sale of the Company as a whole. William
Blair also explained to the Special Committee the various approaches that would
be utilized in undertaking a valuation of the Company, including comparable
company analysis, precedent transaction analysis and an acquisition premium
analysis. At its meeting on November 8, 1995, William Blair discussed Mr.
Long's offer with the Special Committee members and informed the Committee that
preliminary informal indications of interest in a potential acquisition of the
Company had been received from a number of parties. The financial advisor
again discussed the various valuation approaches with the Committee members,
noting that they were continuing to obtain information from the Company for
their analysis. On November 30, 1995, the Special Committee met with William
Blair to discuss Blair's ongoing analysis. William Blair reviewed the stock
price movement of the Company, noting that the market price exceeded the price
offered by Mr. Long, and updated the Special Committee with regard to inquiries
by interested parties. The Special Committee inquired as to whether William
Blair had any information about the capacity of any of the interested parties
to finance a transaction. William Blair indicated that certain of the parties
were large institutions with adequate capital, but that it would be difficult
to predict whether any proposed offers would be contingent on financing.
William Blair again reviewed various approaches to valuing the Company, noting
in particular that the Company's non-loss related operating expenses relative
to premium writings were fairly high relative to comparable companies, and
that certain economies of scale could be achieved by larger companies.
William Blair also presented the various strategic and financial alternatives
that might be available to the Company, including a stock repurchase, the
pursuit of acquisitions, internal growth, the sale of segments of the Company's
business and the sale of the Company as a whole. It was noted that the Company
had in recent years attempted to look for appropriate acquisition candidates,
but that such attempts had not proved successful. Further, although the Company
had attempted to engage in open market stock repurchases, such attempts also had
limited success due in part to the low volume of trading in the Company's
shares. The business of the Company is such that "segments" likely could not be
sold. Finally, it was noted that the Company faced some obstacles with respect
to internal growth, including the following: (i) the fact that as a small
company, the Company's expenses are high relative to premiums written; (ii) as a
public company, the Company incurred substantial accounting, legal and internal
costs; and (iii) the fact that the insurance and reinsurance industries are very
competitive, with premiums growing very slowly or remaining flat and premium
rates declining. In its presentation to the Special Committee, William Blair
had discussed premiums paid for companies believed to be comparable to the
Company, noting that a premium over market price of approximately 28.8% might be
an appropriate reference. In the exercise of their fiduciary duties to the
stockholders, the Special Committee members believed that it was appropriate to
attempt to determine the value that might be available to the stockholders in a
AN acquisition context. Based upon a review of all information available to it,
including the information presented by William Blair, the Special Committee
concluded that it was appropriate for the Company to explore alternatives to
maximize stockholder value, including the potential sale of the Company.
William Blair therefore was authorized to undertake a review of potential
strategic opportunities for the Company. In addition, because the analysis of
William Blair was ongoing, and because the market price of the Company's Common
Stock then exceeded the price offered by Mr. Long, no action was taken on the
proposal of Mr. Long. The conclusions of the Special Committee were discussed
and ratified by the Board of Directors at a meeting on December 6, 1995.
4
<PAGE> 19
On December 28, 1995, Mr. Long revoked his offer of $13.33 per share. On
January 5, 1996, the Company received a joint proposal from CHP II and John A.
Dore to acquire the Company for $15.00 per share of Common Stock in cash, an
18.8% premium over the market price at the close of business on January 4,
1996, and a 22.1% premium over the market price at the close of business on
August 14, 1995 (one week prior to the announcement of Mr. Long's offer). The
Special Committee met on January 8, 1996 to discuss the CHP II offer. For the
reasons stated above, the Special Committee was concerned about whether the
Company's stockholders could realize as much value if the Company continued
its present business as might be realized in an acquisition context. The
Special Committee members believed that their fiduciary duties required that
the Company give serious consideration to the CHP II offer. Nevertheless, the
Special Committee believed that in order to attempt to achieve maximum value
for the stockholders, it was advisable to determine if greater value could be
obtained in a transaction with another party. The Special Committee discussed
with William Blair the preparation of a confidential selling memorandum, and
received an update from William Blair on indications of interest it had
received. The Special Committee instructed William Blair to contact the 24
parties who had been identified as potential purchasers, either because such
parties had previously contacted the Company or William Blair, or because
William Blair had identified the parties as those that might have an interest
in purchasing the Company. The parties contacted consisted primarily of
insurance companies and private investment firms. Of the 24 parties contacted,
15 expressed interest in receiving a package of publicly-available information
on the Company, which William Blair forwarded on January 10, 1996. Between
January 18, 1996 and January 24, 1996, William Blair distributed a confidential
selling memorandum to eight of the interested parties who had expressed further
interest and who had executed confidentiality agreements. Those parties were
requested to respond with a written indication of interest in a potential
transaction. On January 26, 1996, Danielson Holding Corporation ("DHC")
submitted an offer to acquire the Company at a price of $17.19 per share. The
offer was contingent upon satisfactory due diligence, obtaining financing and
the making of satisfactory arrangements with management. No other offers were
received. The Company then entered into negotiations with the two parties that
had submitted a written indication of interest.
In the Company's negotiations with CHP II, CHP II insisted that the
Company enter into a letter of intent that provided, among other things, (i)
for the Company to deal exclusively with CHP II and Mr. Dore for a period of 45
days, and (ii) for a termination fee of $3,500,000 to be paid to CHP II in the
event the Company executed an agreement with a third party involving a merger
or other business combination or sale of a substantial portion of the assets or
stock of the Company prior to February 17, 1997. The Board of Directors
discussed the two proposals and the ongoing negotiations with both parties at
meetings on February 5-6, 1996, February 8, 1996 and February 14, 1996.
Further negotiations were conducted with CHP II in which CHP II indicated it
would increase its offer to $16.00 per share of Common Stock if the Company
entered into a letter of intent containing the exclusive period of 45 days and
the termination fee of $3,500,000 described above. On February 15, 1996, the
Company was notified by DHC that as a result of certain internal corporate
constraints, it was unable to pursue its outstanding indication of interest
with the Company at that time. The Special Committee discussed this
notification as well as the CHP II proposal at a meeting on February 16, 1996,
and determined to recommend that the Board accept the CHP II proposal. The
Company later learned that DHC had entered into an agreement in late February,
1996 to acquire all of the outstanding stock of Midland Financial Group, Inc.
No further meetings of the Special Committee were held, and all subsequent
evaluations and actions were taken by the full Board of Directors (with the
exception of John A. Dore who did not participate).
On February 17, 1996, CHP II submitted a written proposal to acquire the
Company at a cash price of $16.00 per share of Common Stock, a 6.7% premium
over its prior offer, a 30.1% premium over the market price at the close of
business on August 14, 1995 (one week prior to the announcement of Mr.
5
<PAGE> 20
Long's offer), a 31.3% premium over the market price on January 4, 1996 (one
day prior to CHP II's first offer), and a 10.3% premium over the market price
on February 16, 1996 (the day prior to the receipt of the revised CHP II
offer). The proposal included the exclusive period of 45 days and the
termination fee of $3,500,000 described above. At a meeting of the Board of
Directors of the Company on February 19, 1996, the Board of Directors discussed
in detail the CHP II proposal, including the termination fee, and determined
that acceptance of the exclusive period and the termination fee was necessary in
order to achieve the increase in price from $15.00 to $16.00 per share and thus
obtain greater value for the Company's stockholders. The Board noted that the
obligation to pay the termination fee existed only until February 17, 1997.
The Board noted further that various strategic and financial alternatives
for the Company had been considered, including a stock repurchase, the pursuit
of acquisitions, internal growth and the sale of the Company. It was noted that
the Company had not been successful in finding acquisition candidates, and that
attempts to engage in open market stock repurchases also had had limited
success. In considering prospects for internal growth, it was noted that the
Company's expenses are high relative to premiums written, that the insurance and
reinsurance industries are very competitive, with flatness in the growth of
premiums and premium rates declining, and that as a small public Company, the
Company incurred substantial legal, accounting, internal and other related
costs. Accordingly, the Board of Directors determined that Acceptance of the
CHP II offer was the best alternative available for the Company at this time,
and authorized the execution of a letter of intent with CHP II. The Board of
Directors asked the representatives of William Blair whether they believed that
the offer of $16.00 per share was a fair price. William Blair indicated that
they believed that the offer was fair from a financial point of view. The
letter of intent was executed and delivered by the Company on February 19, 1996.
CHP II conducted its due diligence evaluation of the Company through March
4, 1996, and on March 4, 1996 delivered to the Company written evidence of its
satisfactory conclusion of due diligence. During the next several weeks,
representatives of the Company and CHP II negotiated and prepared the Merger
Agreement. The Board of Directors of the Company reviewed the terms and
conditions of the Merger and Merger Agreement at meetings on March 20, 1996,
March 27, 1996 and March 29, 1996. On March 20, 1996, William Blair also
presented certain information for consideration by the Board of Directors and
advised the Board of Directors that it was the opinion of William Blair that
the Merger Consideration to be received by the stockholders of the Company
pursuant to the Merger was fair from a financial point of view to the Company's
stockholders. See "SPECIAL FACTORS - Opinion of Investment Banker." The
report presented to the Board of Directors included a summary of the strategic
alternatives considered, background and review of the Special Committee's role
and the analysis performed by the Special Committee, a review of CHP II and the
terms of its offer and a discussion of the valuation analyses utilized. In
preparing its opinion, William Blair considered the DHC indication of interest
in reaching its determination that the CHP II offer was fair to the
stockholders from a financial point of view. In reviewing the DHC indication
of interest, William Blair noted that such indication of interest was the only
other proposal received, was subject to a variety of conditions and had been
withdrawn. In light of the factors set forth above, the Board of Directors
believed that acceptance of the CHP II offer was in the best interests of, and
provided maximum value to, the stockholders. At a meeting of the Board of
Directors on April 10, 1996, by the unanimous vote of the nine directors
participating in the meeting (Messrs. Long, Ackerman, Cannon, Rosenthal,
Woodard, O'Connell, Zellars, Bottom and Levy), the Merger and Merger Agreement
were approved, and it was determined to submit the Merger Agreement to a vote
of the Company's stockholders. Messrs. Diesel and Morris, who were not present
at the meeting on April 10, 1996 due to prior conflicting engagements, later
ratified and approved all actions taken by the Board. John A. Dore did not
participate in any of the discussions by the Board of Directors relating to the
Merger. The Merger Agreement was executed by the Company, Buyer and Buyer Sub
on April 12, 1996, and a public announcement of the execution of the Merger
Agreement was made on April 15, 1996.
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OPINION OF INVESTMENT BANKER
On March 20, 1996, William Blair delivered its written opinion to the
Board that, as of such date, the Merger Consideration to be received by the
stockholders in the Merger was fair, from a financial point of view. The amount
of such consideration was determined pursuant to extensive negotiations between
the Company and CHP II. No limitations were imposed by the Company with
respect to the investigations made or the procedures followed by William Blair
in rendering its opinion. William Blair subsequently updated such opinion in
writing as of ________________July 19, 1996.
The full text of the opinion of William Blair, which sets forth certain
assumptions made, matters considered and limitations on the reviews undertaken,
is attached as Appendix C to this Proxy Statement, and is incorporated herein
by reference. Stockholders are urged to read the opinion in its entirety. The
summary of the opinion of William Blair set forth in this Proxy Statement is
qualified in its entirety by reference to the full text of the opinion.
William Blair's opinion is directed only to the consideration to be received by
the stockholders and does not constitute a recommendation to any stockholder as
to how such stockholder should vote at the Special Meeting. William Blair's
opinion does not address the likely tax consequences of the Merger to any
stockholder.
In arriving at its opinion, William Blair reviewed and analyzed, among
other data: (i) the audited financial statements of the Company for the years
1990 through 1995; (ii) the 10-K and 10-Q reports for the Company for the years
1990 through 1995 and the first quarter of 1996; (iii) the statutory financial
statements for First Re for the years 1991 through 1995; (iv) other financial
and operating information which was provided to William Blair by the Company;
(v) publicly available information regarding the performance of certain other
property and casualty insurance companies whose business activities William
Blair believed to be generally comparable with the Company; (vi) the reported
price and trading activity of the Company's Common Stock and the dividends
historically paid with respect thereto, as well as the prices and sales
activity for comparable companies; (vii) the financial performance and
condition of the Company compared with that of certain other comparable
companies; (viii) the financial terms, to the extent publicly available, of
certain comparable transactions; (ix) the Merger Agreement; and (x) other
information William Blair deemed relevant. In addition, William Blair: (i)
discussed the past and current operations and financial condition and the
prospects of the Company with senior executives of the Company; and (ii)
participated in discussions and negotiations among representatives of the
Company, CHP II and certain other parties and their financial and legal
advisors.
William Blair assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by it for the purposes of
its opinion. William Blair did not make any independent valuation or appraisal
of the assets or liabilities of the Company. William Blair assumed without
independent verification that the reserves for unpaid losses and loss
adjustment expenses of the Company are adequate to cover such losses. William
Blair's opinions were necessarily based on economic, market and other
conditions as in effect on, and the information made available to it as of, the
dates of such opinions.
In preparing its opinion, William Blair reviewed certain financial
forecasts for the Company prepared by the Company's senior management. William
Blair assumed that the financial projections provided to it were reasonably
prepared on bases reflecting the best currently available estimates and
judgements of the future financial performance of the Company. William Blair
relied on the Company's forecasted income statements, as well as its
discussions with senior management of the Company to ascertain the
reasonableness of such forecasts. William Blair did not, however,
independently verify the completeness or accuracy of such information. It is
not possible to quantify the extent to which William Blair relied on any
particular forecast. The Company does not, as a matter of course, publicly
disclose its management's internal financial analyses and forecasts of the type
provided to William Blair. Such
7
<PAGE> 22
analyses and forecasts were not prepared with a view towards public disclosure.
Such analyses and forecasts were based on numerous variables and assumptions
which are inherently uncertain, including, among others, factors related to
general economic and competitive conditions. Accordingly, actual results could
vary significantly from those projected by such analyses and forecasts.
In addition, William Blair considered the DHC indication of interest
($17.19 per share) in reaching its determination that the Merger was fair to
the stockholders from a financial point of view. In reviewing the DHC
indication of interest, William Blair noted that such indication of interest
was the only other proposal received, was subject to a variety of
conditions and had been withdrawn.
The following is a summary of the analyses William Blair utilized in
arriving at its opinion as to the fairness of the Merger Consideration to be
received by the stockholders in the Merger and that William Blair discussed
with the Special Committee and the Board.
Overview. William Blair reviewed certain financial information for the
Company prepared in accordance with generally accepted accounting principles
("GAAP") including net premiums earned, total revenues, operating earnings and
common book equity as well as the relationships between certain financial data,
including premiums earned to common equity and operating earnings to total
revenue. In addition, William Blair reviewed certain statutory financial
information, including loss ratio, expense ratio, combined ratio and the ratio
of net premiums written to surplus. William Blair reviewed the trading volume
and price history of the Common Stock since December 31, 1993. In reviewing
such price history, William Blair noted that the increases and decreases in
the Company's stock price from August, 1995 through the present appear to
track the Company's public announcements of the progress of its strategic
analysis and acquisition negotiations.
William Blair noted that $16.00 per share of Common Stock, the
consideration to be received by stockholders in the Merger, represented a 31.3%
premium over the closing market price on January 4, 1996, which was the day
before the CHP II offer was received and a 30.1% premium over the closing
market price on August 14, 1995, which was one week prior to the announcement
of Mr. Long's proposal. William Blair noted that the total consideration of
$54,139,952 ($16.00 X 3,210,586 shares plus the aggregate Spread of $2,770,576
for the outstanding options) to be received by stockholders in the Merger,
represented multiples of 1.15x GAAP book value as of March 31, 1996 and 9.9x
net income for the twelve months ended March 31, 1996 calculated in accordance
with GAAP. Furthermore, William Blair noted that such total consideration
represented multiples of 1.26x adjusted book value as of March 31, 1996 (as
adjusted to reflect a similar capital structure to that of the comparable
companies) and 30.5x projected 1996 "core" net income (as adjusted to remove
the effect of non-recurring revenue and expense items).
William Blair, for purposes of its analyses, subtracted $20,000,000 from
the GAAP book value of the Company after considering the following: (i) the
amount of capital that management of the Company indicated was required to
operate its business;
8
<PAGE> 23
(ii) the amount of capital that could be paid as a dividend to the Company from
its insurance subsidiary without special regulatory approval; (iii) the ratio
of common equity to total assets of comparable publicly traded companies; and
(iv) the ratio of premiums earned to common equity of comparable publicly
traded companies. William Blair did not give specific weights to these four
techniques in its analysis. The adjustment to book value was made to reflect
the over-capitalized position of the Company relative to other, comparable
insurance companies. Many valuation techniques utilize multiples from
comparable companies and/or comparable transactions to assist in calculating
values for the entity to be valued. An important component of the derivation
and application of such multiples is that the relative financial positions of
the comparable companies and the entity to be valued should be similar. When
the financial position of the entity to be valued differs significantly from the
comparable companies (as it does in this case whereby the Company has
significantly more capital relative to the comparable companies in terms of the
capital to assets ratio and the premiums earned to capital ratio), it is
necessary to make adjustments to either the multiple or to the financial data of
the entity to be valued in order for the calculation of value (the multiple
times the financial data) to incorporate this difference. Assuming $20,000,000
of excess capital, it is important to note that excess capital is also excess
cash or securities ("Excess Cash") on the asset side of the balance sheet. This
Excess Cash has a value equal to its face value of $20,000,000 - it does not
receive a premium. Therefore, when applying multiples to arrive at a value, the
$20,000,000 of excess capital/Excess Cash is excluded from the financial data to
which the multiple is applied (the "multiple calculation"), and then added to
the result of the multiple calculation.
The after-tax adjustments William Blair made to arrive at core net income
were: (i) security gains and losses were eliminated; (ii) the income statement
benefit of the release of excess reserves into income were eliminated; and
(iii) the investment income on excess capital was eliminated.
William Blair did not evaluate the $10,000,000 dividend proposed to be
paid to Buyer following the Effective Date. Post-closing transactions
undertaken by the Buyer have no effect on the value to be received by the
Company's stockholders. If the Merger is consummated, stockholders will
receive $16.00 per share regardless of whether a dividend is paid by First Re to
Buyer. Becuase the Company has excess capital of approximately $20,000,000,
if a dividend of $10,000,000 had been paid by First Re to the Company, and by
the Company to its stockholders, the value of the Company would be decreased
by $10,000,000. Stockholders therefore would receive a dividend of
$10,000,000 ($3.11 per share), but the consideration to be received in an
acquisition would correspondingly decrease by $10,000,000 ($3.11 per share).
Absent tax considerations, the value to be received by stockholders, therefore,
would not be affected.
Valuation Analysis. William Blair arrived at a range of values for the
Company by utilizing three principal valuation methodologies: (i) a comparable
company analysis; (ii) a precedent transactions analysis; and (iii) an
acquisition premium analysis. A comparable company analysis focuses upon a
company's operating performance and outlook relative to a group of publicly
traded peers to determine an implied market trading value (without distortion
from merger speculation). A precedent transactions analysis provides a
valuation range based upon amounts paid for companies in the same or similar
industries which have been acquired in selected recent transactions. An
acquisition premium analysis provides a valuation range based upon the amounts
paid in excess of the market price for the stock of publicly traded companies in
the same or similar industries which have been acquired in selected recent
transactions.
No company used in the comparable company analysis described below is
identical to the Company and no transaction used in the precedent transactions
analysis or acquisition premium analysis described below is identical to the
Merger. Accordingly, an analysis of the results of analyses described below
necessarily involves complex considerations and judgements concerning
differences in financial and
9
<PAGE> 24
operating characteristics of the companies and other factors that could affect
the public trading value or the acquisition value of, or the premium paid for
the companies to which they are being compared.
In accordance with accepted valuation practices, William Blair made
certain adjustments to the Company's financial data before applying the
multiples determined from the above-described valuation methodologies. These
adjustments primarily consisted of removing non-recurring revenue and expense
items from both historical and projected financial data, and adjusting the
Company's capital structure to that of the comparable companies. Management's
forecast included net income in 1996 of $4.7 million. William Blair adjusted
this figure as follows: (i) it eliminated the net realized gains of $0.5
million; (ii) it eliminated the negative goodwill amortization of $0.5 million;
(iii) it eliminated the $2.5 million of favorable reserve development; and (iv)
it eliminated the $1.0 million of investment income assumed to have been earned
on the excess capital.
Comparable Company Analysis. William Blair compared certain financial and
other information of the Company with similar information for the following
group of companies that William Blair believed to be appropriate for
comparison: Acceptance Insurance Company, Inc.; Capsure Holdings Corp.;
Executive Risk, Inc.; Exstar Financial Corp.; Gainsco, Inc.; Gryphon Holdings,
Inc.; Guaranty National Corp.; Markel Corp.; MMI Companies; and Titan Holdings
Inc. The information compared included current market price, market
capitalization, premiums earned and investment income growth over the last
three years, return on assets for 1994 and 1995, return on equity for 1994 and
1995, price/earnings ratio for the twelve months ended March 31, 1996 and
projected for calendar 1996, reported 1995 GAAP expense ratio, loss ratio and
combined ratio, 1995 statutory expense ratio, loss ratio and combined ratio,
latest twelve months operating expenses plus commissions relative to premiums
earned, the ratio of 1995 net premiums to statutory surplus, price/book ratio,
common equity/assets ratio, dividend yield and market capitalization/operating
income. In order to arrive at a public market reference range for the Company,
William Blair derived the multiples for the comparable companies, including
price as a multiple of: (i) book value per share; (ii) last twelve months
earnings per share; (iii) last twelve months operating income per share; and
(iv) 1996 estimated earnings per share. The earnings per share estimates used
were based upon several independent data services that monitor and publish
compilations of earnings estimates produced by selected research analysts.
William Blair then derived from this and other data (based on the
relative comparability of the comparable companies to that of the Company) the
median multiples deemed most meaningful for its analysis. These multiples were
then adjusted for a 10% marketability discount (to reflect the Company's
smaller size and very low trading volume relative to the comparable publicly
traded companies). The median adjusted multiples were as follows: 1.27x book
value, with a range from .59x To 2.76x book value, 11.3 last twelve months
adjusted earnings, with a range from 8.2x to 33.4x LAST twelve months adjusted
earnings, 9.7x last twelve months adjusted operating income, with a range from
5.8x to 83.6x last twelve months adjusted operating income, and 9.6x 1996
earnings estimate, with a range from 1.4x to 15.4x 1996 earnings estimate).
These adjusted multiples were then applied to Company. This analysis DATA,
AND resulted in a an implied public market reference value of $41.0 million
(or $12.25 per share). William Blair derived an acquisition reference value
for the Company of $52.8 million (or $15.60 per share) by applying a premium
of approximately 28.8% (the premium that William Blair believed, based on an
analysis of comparable industry transactions, to be the most appropriate) to
the public market reference value above. Note that the per share values assume
the cashless exercise (pursuant to the Merger Agreement) of the 295,056 options
outstanding as of March 20, 1996.
Precedent Transactions Analysis. William Blair analyzed certain financial
data regarding selected acquisitions of companies which it deemed to be
comparable to the Company. The transactions used in
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<PAGE> 25
the analysis included: Unitrin, Inc.'s acquisition of Milwaukee Insurance
Group, Inc.; Zurich Reinsurance Centre Holdings, Inc.'s acquisition of Re
Capital Corp.; Home State Holdings, Inc.'s acquisition of Pinnacle Insurance
Co.; Acceptance Insurance Companies, Inc.'s acquisition of Redland Group, Inc.;
Foundation Health Corp.'s acquisition of Business Insurance Corp.; Vik
Brothers International, U.S.A.'s acquisition of American Reliance-Ins Business;
Selective Insurance Group, Inc.'s acquisition of Niagara Exchange Corp.; and
Vista Resources, Inc.'s acquisition of American Southern Insurance Co. In order
to arrive at an acquisition reference value for the Company, William Blair
derived multiples for the precedent transactions, including the price paid for
the acquired company as a multiple of: (i) book value; (ii) last twelve months
net income; and (iii) last twelve months operating earnings. William Blair then
derived from this data the multiples deemed most meaningful for its analysis
(which were 1.41x book value, 15.6x net income, and 14.4x operating earnings)
and applied these multiples to the Company. Applying the multiples derived from
the precedent transactions resulted in a reference value for the Company of
$49.0 million (or $14.55 per share). Note that the per share value assumes the
cashless exercise (pursuant to the Merger Agreement) of the 295,056 options
outstanding as of March 20, 1996.
Acquisition Premium Analysis. William Blair analyzed premiums paid for
companies which it believed to be comparable to the Company. The transactions
used in the analysis included: Michigan Physicians Mutual Liability Company's
acquisition of Kentucky Medical Insurance Co.; Unitrin, Inc.'s acquisition of
Milwaukee Insurance Group, Inc.; Sierra Health Services, Inc.'s acquisition of
CII Financial, Inc.; First Financial Management Corp.'s acquisition of Employee
Benefits Plans, Inc.; USF&G Corp.'s acquisition of Victoria Financial Corp.;
Beverly Enterprises, Inc.'s acquisition of Pharmacy Management Services;
Wellpoint Health Networks, Inc.'s acquisition of UniCare Financial Corp.; and
Foundation Health Corp.'s acquisition of National Health Care Systems. William
Blair compared the prices paid for the companies relative to their market price
one week prior to the announcement of the acquisition of the respective
company. Accordingly, William Blair determined that the comparable premium for
use in its analysis was 28.8%. Applying this premium to the Company's market
price one week prior to the announcement of the first offer resulted in a
reference value of $53.0 million (or $15.67 per share).
William Blair used different transactions in the precedent transactions
and acquisition premium analysis because only two of the companies identified
in the precedent transaction analysis met the size criteria utilized for the
acquisition premium analysis and had a public market prior to the acquisition.
Accordingly, William Blair expanded the search from close comparables of the
Company to a broader range of insurance companies in order to get a larger
sample of public insurance company merger premiums. Nevertheless, the
acquisition premium analysis included one of the precedent transactions
companies (Milwaukee Insurance), and excluded the other (Niagara Exchange) due
to the 21-month time frame from initial announcement to closing in that
transaction. This significant delay from announcement to closing effectively
eliminates the usefulness of the premium data, as economic, industry and
market conditions could all have had implications on the stock price, in
addition to any price variation related to the merger.
The summary set forth does not purport to be a complete description of the
review and analyses performed by William Blair. William Blair reviewed various
financial data and performed several valuation analyses, including: (i) a
comparable company analysis; (ii) a precedent transaction analysis; and (iii)
an acquisition premium analysis. William Blair did not assign specific weights
or probabilities to particular analyses. William Blair noted that the
preparation of a fairness opinion is a complex undertaking and is not
necessarily susceptible to partial analysis or summary description. Rather,
William Blair believes that its analyses must be considered as a whole.
William Blair may have given various
11
<PAGE> 26
analyses more or less weight than other analyses, and may have deemed various
assumptions more or less probable than other assumptions.
In performing its analyses, William Blair made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of the Company. Among the
assumptions made by William Blair are the following: (i) for the forecasted
income statements, William Blair assumed a 25% average tax rate based upon a
blending of the average tax rate for the Company through the first three
quarters of 1995 of approximately 20% and the statutory corporate income tax
rate of 34%, and the trend in 1995 of proportionately less tax-advantaged
investment income; (ii) for forecasted interest rates, William Blair assumed no
change in rates due to the impossibility of predicting future interest rates;
and (iii) for forecasted interest income, William Blair assumed that $20
million of excess capital was not available for investment. For general
economic factors considered, William Blair noted that stock prices were near
all-time highs and had experienced recent volatility, concern existed regarding
the effect of rising interest rates, interest rates were rising due to strong
economic indicators, consumer debt was at an all-time high, election-related
uncertainty existed, and volatility in retail sales existed (very weak year-end
1995 followed by strong January, 1996). For industry-specific factors
considered, William Blair noted that the property/casualty insurance industry
was experiencing a very competitive market, "soft" pricing since the late
1980s, narrowing margins, excess capacity, excess capital, consolidation and
restructuring, and a volatile interest rate environment. Such analyses were
prepared solely as part of William Blair's analysis of the fairness, from a
financial point of view, of the Merger Consideration to be received by the
Company's stockholders, and were presented to the Special Committee and the
Board in connection with the delivery of William Blair's opinion and should not
be used for any other purpose. The term "fair from a financial point of view"
is a standard phrase contained in the fairness opinions of investment banks and
refers to the fact that William Blair's opinion as to the fairness of the terms
of the Merger Agreement are addressed solely to the financial attributes of the
Merger Agreement.
As described above, William Blair's opinion and presentation to the Board
was one of many factors taken into consideration by the Board in making its
determination to approve the Merger Agreement. Consequently, the William Blair
analysis described above should not be viewed as determinative of the Board's
conclusions with respect to the value of the Company or of the decision of the
Board to agree to the Merger.
Pursuant to the Special Committee's engagement of William Blair on
September 29, 1995, the Company agreed to pay William Blair the following for
its services: (i) an engagement fee of $50,000; (ii) quarterly retainer fees of
$25,000; (iii) an opinion fee of $100,000 payable upon the rendering of such
opinion; (iv) a success fee equal to 1.2% of the total consideration received
by the Company and its stockholders, less certain amounts previously paid; and
(v) reimbursement for out-of-pocket expenses, up to $50,000, reasonably
incurred by it in connection with its engagement.
William Blair and the Company entered into a separate letter agreement,
dated September 29, 1995, by which the Company agreed to indemnify William
Blair against certain liabilities, including liabilities which may arise under
the securities laws.
William Blair is a full service investment banking firm headquartered in
Chicago, Illinois, with over 60 years of experience in investment banking. In
particular, William Blair has extensive experience in middle market mergers and
acquisitions. William Blair also acts as a market maker in the Company Shares.
12
<PAGE> 27
THE BOARD OF DIRECTORS' REASONS FOR THE MERGER; RECOMMENDATION OF THE
COMPANY'S BOARD OF DIRECTORS
Each member of the Board of Directors of the Company (with the exception
of Mr. Dore who did not participate in any discussions of the Board regarding
the Merger) has determined that the Merger is fair from a financial and
procedural point of view and is in the best interests of the Company's
stockholders, has approved the Merger Agreement and the transactions
contemplated by the Merger Agreement, and has resolved to recommend that the
Company's stockholders vote for adoption of the Merger Agreement. Although the
Merger is not structured so that the approval of a majority of the unaffiliated
stockholders is required, in light of (i) the arms-length nature of all
negotiations with respect to the Merger, (ii) the fact that 11 of the Company's
12 directors are independent of management and will have no continuing interest
in Buyer and (iii) the engagement of William Blair, the Company and John Dore
believe that the manner in which the Merger was considered was procedurally
fair to the unaffiliated stockholders. The Board of Directors of the Company
held meetings on January 30, 1996, February 5-6, 1996, February 8, 1996,
February 14, 1996, February 19, 1996, March 20, 1996, March 27, 1996, March 29,
1996 and April 10, 1996 to receive advice and presentations from its financial
advisor and the Company's legal counsel concerning the then current status of
negotiations and the evolving terms of the Merger. The presentations by the
Company's financial and legal advisors described and explained: (i) the terms
and conditions of the proposed Merger and Merger Agreement; (ii) the terms of
the proposed Voting Agreement (discussed below); and (iii) the fiduciary duties
applicable to the Company's Board of Directors in the evaluation of the
proposed transaction. The Board of Directors, in discussing the Merger, was
aware of the special interests of John A. Dore in the transaction and
considered those interests and/or conflicts in making its evaluation. See
"Interest of John A. Dore and Management in the Merger" and "Interests of
Certain Persons in the Merger."
In reaching its conclusion to approve the Merger Agreement and to
recommend adoption of the Merger Agreement by the Company's stockholders, the
Company's Board of Directors considered a number of factors, including, without
limitation, the following:
(1) The condition, prospects and strategic direction of the Company's
business, including the following factors which could affect future earnings
and therefore the value of the Shares: the fact that publicly available
insurance industry information indicates that the Company's expenses are
high relative to premiums written when compared to other insurance
companies; the current "softness" and the overall competitiveness in the
property and casualty insurance and reinsurance industry, as reflected by
flatness in the growth of premiums, a decline in premium rates and favorable
policy terms; and the significant legal, accounting, internal and director
and other costs incurred by the Company as a small public company totalling
approximately $500,000 - $750,000 per year (approximatly $60,000 - $120,000
in professional fees (legal, accounting), $250,000 - $350,000 in director
fees and expenses, which would be substantially reduced or eliminated if
the Company were not public, $40,000 - $80,000 in filing, printing and
mailing costs, and $150,000 - $200,000 in allocation of internal costs) ;
(2) Current market conditions and historical market prices, volatility
and trading information with respect to the Company Shares, noting that the
price of $16.00 per share exceeds historical market prices (see
"SUMMARY--Comparative Market Price Data"), and considering the probable
range of prices at which the Company Shares could be expected to trade if
the CHP II offer were not accepted, which the Board of Directors believed
would be less than $16.00 per share;
(3) The consideration to be received by the stockholders in the Merger,
including the fact that the Merger Consideration represents a substantial
premium over the market price of the Company Shares preceding announcement
of a proposed transaction, and the relationship between the Merger
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<PAGE> 28
Consideration and the Company's reported earnings and certain other
measures, including the fact that the per share price of $16.00 exceeded
book value both at December 31, 1995 which was $14.32 per share and at March
31, 1996 which was $14.65 per share;
(4) The fact that Buyer's offer did not have a financing contingency,
thus increasing the likelihood of consummation of the transaction and
eliminating the necessity to discount the Merger Consideration for such
uncertainty;
(5) The terms and conditions of the Merger and the Merger Agreement,
including the amount and form of the consideration, as well as the parties'
mutual representations, warranties and covenants, and the conditions to
their respective obligations, which eliminate future obligations of the
stockholders;
(6) The fact that the Company, through its financial advisor, contacted
several prospective purchasers which executed confidentiality agreements and
reviewed due diligence materials resulting in one other expression of
interest, which was subsequently withdrawn; and
(7) The presentation and analysis of the Company made by William Blair
and its opinion that the proposed consideration to be received by the
Company's stockholders was fair from a financial point of view (which
analyses were relied upon but not adopted by the Board of Directors).
Because CHP II has not indicated any plans to liquidate the Company, and the
Board of Directors has no plans to liquidate the Company, liquidation value was
not considered by the Board of Directors in analyzing the Merger. However, in
the Board's judgment, a liquidation of the Company in the near future would not
result in net proceeds greater than $16.00 per share given the costs that would
be incurred in a liquidation and because the Company does not hold assets that
have appreciated in excess of book value. William Blair performed a valuation
analysis for the company in connection with the Merger based upon certain
valuation approaches (see "SPECIAL FACTORS - Opinion of Investment Banker"),
but did not perform a going concern valuation. Consequently, the Board did not
consider going concern value in its fairness analysis.
In addition to considering the Merger, the Board of Directors and the
Special Committee had considered other alternatives to maximize stockholder
value, including internal growth and the acquisition of other companies. While
these alternatives might or might not lead to increased value for the Company's
stockholders over the long term due to significant contingencies outside of the
Company's control (e.g., competitiveness of the insurance industry, general
economic conditions, availability of other appropriate companies to acquire),
the receipt of the CHP II offer presented a near-term opportunity for the
stockholders to receive a fair cash price on terms not subject to those
contingencies. Although one preliminary indication of interest was received by
the Company at a price higher than the Merger Consideration (i.e., the DHC
proposal at $17.19 per share), that offer was preliminary, was subject to due
diligence and the making of satisfactory arrangements with management, and was
contingent on financing. The indication of interest had been withdrawn, and
no other proposals or offers were received. The Board of Directors
accordingly determined that the acceptance of a definitive offer at $16.00 per
share was in the best interests of the Company and its stockholders.
The Board of Directors did not consider in its analysis the fact that the
Buyer had requested approval for payment by First Re of a $10,000,000 dividend
to Buyer after the Effective Date because the Board was not aware of Buyer's
plan to request such approval. After becoming aware of such proposed dividend,
the Board does not believe that it has any effect on the fairness of the Merger
14
<PAGE> 29
Consideration. In conjunction with the analysis performed by William Blair,
the Board of Directors of the Company determined that the Company has
approximately $20,000,000 in excess capital on a consolidated basis. The
Board therefore believes that if a dividend of $10,000,000, or $3.11 per share,
were paid by First Re to the Company and by the Company to its stockholders,
the consideration to be paid to the stockholders in the Merger would be reduced
by $3.11 per share. In addition, if approved, the payment by First Re of a
dividend of $10,000,000 to the Buyer after the Merger would not affect the
consideration to be received by the stockholders - i.e., if the Merger is
consummated, the stockholders will receive $16.00 per share regardless of
whether or when First Re pays a dividend to Buyer. See "SPECIAL FACTORS -
Opinion of Investment Banker." The Board of Directors did not consider whether
the Buyer may have discounted the Merger Consideration in order to take into
account the uncertainty of whether the dividend would be approved by the
Connecticut Commissioner.
In view of the wide variety of factors considered in connection with its
evaluation of the terms of the Merger, the Company's Board of Directors did not
find it practicable to, and did not, quantify or otherwise attempt to assign
relative weights to the specific factors considered in reaching its
conclusions. Based on the factors described above, the Company's Board of
Directors determined that the Merger is in the best interests of the Company's
stockholders and preferable to the other alternatives considered, approved the
Merger Agreement and the transactions contemplated by the Merger Agreement and
certain related agreements and resolved to recommend that the stockholders of
the Company vote for adoption of the Merger Agreement.
VOTING AGREEMENTS
The following executive officers and directors of the Company with
ownership of an aggregate of approximately 20 percent of the outstanding
Company Shares have entered into Voting Agreements, pursuant to which each
such stockholder has agreed to vote his shares of Common Stock in favor of the
Merger: R. Keith Long, John A. Dore, John B. Zellars, Lonnie L. Steffen, W.
Dean Cannon, Jr., Herschel Rosenthal, William B. O'Connell, Joseph C. Morris,
Dale C. Bottom and John P. Diesel.
A copy of the form of Voting Agreement is attached hereto as Appendix D.
In addition, each of the other directors of the Company has indicated that he
intends to vote his Company Shares in favor of the Merger. See "The Board of
Directors' Reasons for the Merger; Recommendation of the Company's
Board of Directors."
INTEREST OF JOHN A. DORE AND MANAGEMENT IN THE MERGER
In response to the receipt of the offer by Keith Long to acquire the
Company at a price of $13.33 per share, and the subsequent appointment of a
Special Committee to review strategic actions for the Company, in October,
1995, John A. Dore, President and Chief Executive Officer of the Company,
requested permission from the Executive Committee of the Company to pursue the
development of a friendly proposal to acquire the Company. Mr. Dore did not
participate in the discussions of the Board of Directors or Special Committee
regarding the sale of the Company in general, or the sale of the Company to CHP
II. Given that the Board had decided to explore the value that might be
achieved in connection with the sale of the Company, and given the interest of
CHP II in acquiring the Company, Mr. Dore believed the time was appropriate to
explore the acquisition of the Company with CHP II. Accordingly, Mr. Dore
executed a letter agreement dated January 4, 1996 with Castle Harlan, Inc.
("CH"), the investment manager of CHP II ("Dore Agreement"). The Dore
Agreement states, among other things, that Mr. Dore is prepared to invest in
Buyer (which will own the Company after the Merger). In order to effectuate
such investment, Mr. Dore currently intends to roll over a portion of his
options in the Company through the cancellation of options
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<PAGE> 30
for approximately 91,953 Shares held by Mr. Dore in the Company. Mr. Dore
will cancel options in the Company with an aggregate spread of $1,000,000
in exchange for the issuance by Buyer, after the Merger, of options in the
Buyer having an aggregate spread of $1,000,000. It is expected that, as a
result of such cancellation and issuance, Mr. Dore will hold options for
approximately 3% of the shares of Buyer after the Merger. As of
__________________, 1996, Mr. Dore owned, directly or indirectly, 181,108
Company Shares, valued at $2,897,728 ($16.00 x 181,108), all of which Shares
will be cashed out in the Merger. As of ____________, 1996, Mr. Dore also held
options to acquire 115,200 Company Shares. As a result of the Merger, in
addition to the $2,897,728 for his Company Shares, Mr. Dore will receive a cash
payment of $156,750 equal to the difference between $16.00 per share and the
exercise price of Mr. Dore's remaining options for 23,247 Shares. Subsequent
to the execution of the Merger Agreement, certain officers and employees of the
Company also were offered the opportunity to invest in Buyer. Lonnie L.
Steffen, Chief Financial Officer, Robert E. Wendt, Senior Vice President, Lana
J. Braddock, Secretary, Renee Engman, Vice President, and Vernon Suckerman,
Assistant Vice President, are expected to own, in the aggregate, shares and
options aggregating approximately 1% of the outstanding shares of Buyer after
the Merger. Buyer has agreed to provide loans to such officers and employees
up to an aggregate amount of $500,000 in order to finance the acquisition of
shares of Buyer. A portion of the investment by Mr. Steffen may also be made
by a rollover of his options in the Company which would be effectuated through
the cancellation of a portion of his options in the Company prior to the Merger
and the issuance by Buyer of new options on stock of Buyer. Neither Mr. Dore
nor any of the other officers or employees of the Company participated in any
of the negotiations regarding the Merger on behalf of any party.
The Dore Agreement further provides that it is contemplated that Mr. Dore
will serve as Chief Executive Officer and as a director of Buyer, the Surviving
Corporation, and all of its subsidiaries after the Merger. Mr. Dore is
expected to enter into a three year employment agreement providing for an
annual salary of $300,000. Mr. Dore will also be granted additional options to
acquire approximately 4% of the stock of the Buyer. The options will be
exercisable at a price per share equal to the price per share which will be
paid by CHP II. Although the terms of such options have not yet been finally
determined, it is currently contemplated that the options will vest over a
three year period and will be exercisable for 10 years. The employment
agreement would provide Mr. Dore with a severance payment equal to two times
his annual base salary in the event he is terminated prior to the end of the
contract term for any reason other than death, disability or cause. All
members of senior management of the Surviving Corporation would be eligible to
participate in an incentive - based bonus plan.
DORE'S BELIEF AS TO THE FAIRNESS OF THE MERGER
Mr. Dore has indicated that he believes the Merger to be financially and
procedurally fair to the Company's stockholders based upon numerous factors,
including the following factors: (i) the fact that the Merger Consideration
represents a substantial premium over the market price of Company Shares
preceding the announcement of a possible transaction and exceeds historical
market prices of the Company Shares (see "SUMMARY--Comparative Market Price
Data") and the net book value of the Company Shares, which was $14.32 as of
December 31, 1995 and $14.65 as of March 31, 1996; (ii) the approval of the
Merger by all the directors of the Company (with the exception of Mr. Dore, who
did not participate in any discussions of the Board regarding the Merger), each
of whom is an independent non-employee director of the Company; (iii) the
opinion of William Blair that the Merger Consideration is fair to the Company's
stockholders from a financial point of view; and (iv) the fact that the Merger
Agreement was extensively negotiated on an arms-length basis between
representatives of the Company and CHP II. Although William Blair was engaged
by the Special Committee and Board of Directors of the Company, and not by Mr.
Dore, the fact that a qualified financial advisor rendered an opinion as to the
fairness of the Merger Consideration from a financial point of view,
nevertheless was a relevant factor in a determination that the Merger is fair
to the stockholders of the Company. Although Mr. Dore did
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<PAGE> 31
not specifically quantify the going concern value of the Company, Mr. Dore
also generally analyzed the value of the Company as a going concern, as
evidenced by the Company's historical and current earnings (see "SUMMARY -
Comparative Market Price Data") and anticipated future earnings, and determined
that $16.00 represented a fair price for the Company Shares. In performing his
analysis, Mr. Dore reviewed the same projections which had been provided to
William Blair, which forecasted total revenue and net income for the year ended
December 31, 1996 to be approximately $22.5 million and $4.7 million,
respectively. In reaching his determination as to fairness, Mr. Dore did not
assign specific weights to particular factors and considered all factors as a
whole, but relied primarily on an analysis of book value and historical stock
prices, and less on a going concern valuation. CHP II has indicated that it
does not have any plans to liquidate the Company following the Merger.
Accordingly, liquidation value of the Company Shares was not considered by Mr.
Dore in determining the fairness of the Merger. However, in Mr. Dore's
judgment, a liquidation of the Company in the near future would not result in
net proceeds greater than the $16.00 per share Merger Consideration, given the
costs that would be incurred in effecting a liquidation, and because the
Company does not hold assets that have appreciated in excess of book value.
Mr. Dore did not consider the DHC indication of interest at $17.19 per
share in performing his analysis, as Mr. Dore was not aware of the terms of
that offer. After learning of the DHC indication of interest, Mr. Dore
nevertheless believes that the Merger Consideration is fair to the
stockholders. It is Mr. Dore's understanding that the DHC indication of
interest was preliminary, was subject to a number of contingencies and was
subsequently withdrawn.
Mr. Dore does not believe that the $10,000,000 dividend to be paid to
Buyer, if approved by the Connecticut Commissioner, would affect the fairness
of the consideration to the stockholders. The dividend is to be paid by First
Re after the Merger to Buyer. It is Mr. Dore's understanding that Buyer will
utilize the funds for part of the Merger Consideration. No part of the
$10,000,000 dividend is expected to be paid out to the stockholders of Buyer,
including Mr. Dore.
Mr. Dore did not receive any reports, opinions or appraisals from any
outside party relating to the Merger or the fairness of the consideration to be
received by the stockholders.
PURPOSE AND CERTAIN EFFECTS OF THE MERGER
The purpose of the Merger is for Buyer and its owners, including CHP II
and John A. Dore and certain other officers and employees of the Company, to
acquire the entire equity interest in the Company. No alternative methods were
considered for achieving this purpose as the Merger is the most direct and
efficient means for CHP II to acquire all of the outstanding shares of the
Company. As a result of the Merger, the Company will no longer be a
publicly-held company, its shares will not be traded on The NASDAQ Stock Market
and the Company will not be subject to the reporting requirements of the
Securities Exchange Act of 1934. Consummation of the Merger will eliminate any
opportunity of the stockholders of the Company to share in any future earnings
and growth of the Company and any potential to realize greater value for their
Company Shares. The opportunity to hold a continuing equity interest in the
Company, which is available to Mr. Dore and certain other officers and
employees of the Company, is not available for other stockholders of the
Company. Because the Surviving Corporation will not be a public company, costs
and expenses associated with SEC compliance and reporting and maintaining
stockholder relations would be reduced or eliminated. In addition, it may be
possible for the Surviving Corporation to achieve some economies of scale by
combining certain operations with another insurance company affiliate of CHP
II. See "THE MERGER--Plans or Proposals After the Merger." See also "THE
MERGER--Effects of the Merger."
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<PAGE> 32
CHP II has applied to the Connecticut Commissioner for approval for First
Re to pay a dividend to Buyer after the Merger in the amount of $10,000,000.
If approved and paid, the dividend will have no effect on the consideration to
be received by the stockholders of the Company. See "SPECIAL FACTORS -
Opinion of Investment Banker ," and "SPECIAL FACTORS - The Board of Directors'
Reasons for the Merger; Recommendation of the Company's Board of Directors."
If approved, the Buyer will receive $10,000,000 from First Re after the Merger,
and the Company understands that Buyer will utilize such proceeds to fund part
of the Merger Consideration. It is the Company's understanding that Buyer is
not expected to pay out any of the $10,000,000 as a dividend to its
stockholders. Mr. Dore accordingly will not receive any part of the dividend.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the Board of Directors of the Company
with respect to the Merger Agreement and the transactions contemplated thereby,
stockholders should be aware that, in addition to the matters discussed above,
certain members of both management and the Board of Directors of the Company
have interests in the Merger in addition to the interests of stockholders of
the Company generally.
Stock Option Plan and Directors' Incentive Plan
Pursuant to the Merger Agreement, each of the outstanding stock options of
the Company issued to certain directors, executive officers and other employees
of the Company under the Company's Stock Option Plan and Directors' Incentive
Plan (collectively, the "Plans") will be converted into the right to receive a
cash payment equal in amount to the difference between $16.00 and the exercise
price per share of such option (the "Spread"). At the date of this Proxy
Statement, stock options covering a total of 295,056 Company Shares with
exercise prices ranging from $3.13 to $10.70 per share were outstanding under
the Plans (including unvested options as described below under "Acceleration of
Stock Options"). The aggregate Spread on all stock options under the Plans
payable pursuant to the Merger is $2,770,586 (less the Spread on any options
which are rolled over by Mr. Dore and Mr. Steffen, as discussed above). The
Company, Buyer and Buyer Sub have agreed that, with respect to all stock
options outstanding under the Plans at the Closing, Buyer or the Surviving
Corporation will pay out at the Effective Time the Spread on each stock option
outstanding at the Closing. See "STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN
BENEFICIAL OWNERS." The following directors, executive officers and employees
hold stock options that will be converted into the right to receive the Spread:
18
<PAGE> 33
Directors Officers and Employees
--------- ----------------------
R. Keith Long John A. Dore
Richard P. Ackerman Lonnie L. Steffen
Dale C. Bottom Robert E. Wendt
W. Dean Cannon, Jr. David Konar
John P. Diesel Lana J. Braddock
Gerald J. Levy Renee Engman
Joseph C. Morris Vernon Suckerman
William B. O'Connell Sheila Armour Cunningham
Herschel C. Rosenthal Chad Gaizutis
Thad Woodard Dennis Leigh
John B. Zellars Christel Lobbins
Richard Nowell
Gayle Rutter
Patricia Tallungan
Acceleration of Stock Options
The Stock Option Agreements executed by the officers and employees of the
Company provide for the accelerated vesting of any unvested options outstanding
under the Stock Option Plan at the Closing. Currently there are 94,896 options
outstanding under the Plans which have not yet vested through the passage of
time, with an aggregate Spread of $821,949.
Employment Agreements
Currently, four key executives of the Company are parties to employment
agreements. Under the terms of these agreements, if employment is terminated
by the executive within six months immediately following the Merger, the
executive may elect to receive (i) a monthly termination payment equal to the
executive's base salary for the month immediately preceding the effective date
of termination, and continuing for a period consisting of one month for each
full year and final fraction of a year of employment (subject to a 6-month
minimum payment period, and in the case of Mr. Dore, subject to a 12-month
minimum payment period), or (ii) the present value of the monthly termination
payments described above. Mr. Dore is expected to enter into an employment
agreement with Buyer after the Merger. See "SPECIAL FACTORS -- Interest of
John A. Dore and Management in the Merger" for a description of available
information on Mr. Dore's proposed employment arrangement.
Pursuant to his employment agreement with the Company, Mr. Dore has
received the following compensation from the Company and its subsidiaries in
the last two fiscal years:
<TABLE>
<CAPTION>
Year Annual Bonus Stock Awards Securities Exercise
Salary (# Shares) Underlying Price
Options ($/Share)
Granted
- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 $217,658 $50,000 7,200 21,600 $9.22
- -----------------------------------------------------------
1995 $217,658 $40,000 7,200 14,400 $9.28
- -----------------------------------------------------------
</TABLE>
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<PAGE> 34
In addition, pursuant to the Thrift Plan ("401(k) Plan") available to employees
of the Company, supplemental and matching contributions of $13,500 were made to
Mr. Dore's 401(k) account in 1994 and 1995.
It is the Company's understanding that the current executive officers (John
Dore, President and Chief Executive Officer, Lonnie L. Steffen, Executive Vice
President and Chief Financial Officer, Robert E. Wendt, Senior Vice President,
Daniel S. Konar, Controller, and Lana J. Braddock, Secretary) of the Company
will remain executive officers of the Surviving Corporation. Except as
described above with respect to Mr. Dore, no information has been provided to
the Company regarding the terms of any employment arrangements that Buyer
and/or CHP II may make with any such officers or any employees of the Company.
Indemnification and Insurance
The Merger Agreement provides that Buyer will cause the Surviving
Corporation to maintain the current directors' and officers' liability and
corporate indemnification insurance policy for all directors and officers of
the Company and its subsidiaries prior to the Merger for a period of at least
36 months (provided that the Surviving Corporation shall not be required to pay
an annual premium for any such policy in excess of 125% of the current
premium), and maintain in effect the provisions of the certificate of
incorporation and bylaws of the Surviving Corporation and its subsidiaries and
cause the Surviving Corporation to comply with all agreements between the
Company and its directors and officers providing for corporate indemnification
of all such persons.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO THE COMPANY'S
STOCKHOLDERS
Set forth below is a description of certain federal income tax aspects of
the Merger to holders of Company Shares disposed of in the Merger under current
law and regulations. The discussion is based on the Internal Revenue Code of
1986, as amended. Although the Company has not sought any rulings from the
Internal Revenue Service ("IRS") or obtained an opinion of counsel or other tax
expert with respect to the transactions contemplated hereby, the Company
believes that the Merger will have the federal income tax consequences
described below.
The following discussion is limited to the material federal income tax
aspects of the Merger for a holder of Company Shares who is a citizen or
resident of the United States, and who, on the date of disposition of such
holder's Company Shares, holds such shares as capital assets. All holders are
urged to consult their own tax advisors regarding the federal, foreign, state
and local tax consequences of the disposition of Company Shares in the Merger.
The following discussion does not address potential foreign, state, local and
other tax consequences, nor does it address taxpayers subject to special
treatment under the federal income tax laws, such as life insurance companies,
tax-exempt organizations, S corporations and taxpayers subject to alternative
minimum tax.
A holder of Company Shares will realize gain or loss upon the surrender of
such holder's Company Shares pursuant to the Merger in an amount equal to the
difference, if any, between the amount of cash received and such holder's
aggregate adjusted tax basis in the Company Shares surrendered therefor.
In general, any gain or loss recognized by a stockholder in the Merger
will be eligible for capital gain or loss treatment. Any capital gain or loss
recognized by stockholders will be long-term capital gain or loss if the
Company Shares giving rise to such recognized gain or loss have been held for
more than one year; otherwise, such capital gain or loss will be short term.
An individual's long-term capital gain is subject to federal income tax at a
maximum rate of 28% while any capital loss can be offset only against
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<PAGE> 35
other capital gains plus $3,000 of other income in any tax year. Any
unutilized capital loss will carry over as a capital loss to succeeding years
for an unlimited time until the loss is exhausted.
For corporations, a capital gain is subject to federal income tax at a
maximum rate of 35% while any capital loss can be offset only against other
capital gains. Any unutilized capital loss can be carried back three years and
forward five years to be offset against net capital gains generated in such
years.
Each holder of an option to acquire Company Shares who receives a cash
payment equal to the Spread on such stock option will have ordinary income to
the extent of the cash received.
Under the federal income tax backup withholding rules, unless an exemption
applies, the Paying Agent (as defined below) will be required to withhold, and
will withhold, 31% of all cash payments to which a holder of Company Shares or
other payee is entitled pursuant to the Merger Agreement, unless the
stockholder or other payee provides a tax identification number (social
security number, in the case of an individual, or employer identification
number, in the case of other Company stockholders) and certifies that such
number is correct. Each Company stockholder, and, if applicable, each other
payee, should complete and sign the Substitute Form W-9 included as part of the
letter of transmittal to be returned to the Paying Agent in order to provide
the information and certification necessary to avoid backup withholding, unless
an applicable exemption exists and is proved in a manner satisfactory to the
Paying Agent.
THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE ARE FOR GENERAL
INFORMATION ONLY. EACH HOLDER OF COMPANY SHARES IS URGED TO CONSULT HIS OR HER
OWN TAX ADVISOR TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH
STOCKHOLDER OF THE MERGER (INCLUDING THE APPLICABILITY AND EFFECT OF FOREIGN,
STATE, LOCAL AND OTHER TAX LAWS).
THE MERGER
The following information describes certain material aspects of the
Merger. This description does not purport to be complete and is qualified in
its entirety by reference to the appendices hereto, including the Merger
Agreement, which is attached to this Proxy Statement as Appendix A and is
incorporated herein by reference. All stockholders are urged to read Appendix
A in its entirety. See also "THE MERGER AGREEMENT."
The Board of Directors of the Company has approved the Merger Agreement
and recommended approval of the Merger Agreement by the stockholders and has
determined that the transactions contemplated by the Merger Agreement are fair
to and in the best interests of the Company's stockholders. See "SPECIAL
FACTORS--The Board of Directors' Reasons for the Merger;
Recommendation of the Company's Board of Directors."
THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS A VOTE FOR APPROVAL OF THE
MERGER AGREEMENT.
EFFECTS OF THE MERGER
Upon consummation of the Merger: (i) Buyer Sub will merge with and into
the Company, which will be the Surviving Corporation; (ii) the Company will
become a wholly-owned subsidiary of Buyer (and therefore, an indirect
subsidiary of CHP II); and (iii) each Company Share outstanding immediately
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<PAGE> 36
prior to the Effective Time (other than Dissenting Shares, shares held by the
Company as treasury shares, and shares held by Buyer or Buyer Sub) will be
converted, in a taxable transaction, into the right to receive $16.00 in cash,
without interest.
As of the record date, there were 3,210,584 Company Shares outstanding and
295,056 Company Shares reserved for future issuance pursuant to currently
outstanding stock options. Assuming that no additional Company Shares or stock
options are outstanding at the Effective Time, then, upon consummation of the
Merger, holders of Company Shares and stock options would be entitled to
receive, in the aggregate, $54,139,930. Because John A. Dore and certain
officers and employees of the Company are expected to exchange certain of their
Company Shares and options for shares and options of the Buyer, the net
consideration to be paid by Buyer is approximately $52,639,930.
Each certificate previously representing Company Shares will thereafter
represent only the right to receive the Merger Consideration (or, in the case
of Dissenting Shares, the statutorily determined "fair value" of such shares).
Certificates previously representing Company Shares may be exchanged for the
Merger Consideration as provided below, without interest. All Company Shares
held as treasury shares by the Company and each share of Common Stock held by
Buyer or Buyer Sub will be canceled and no payment will be made with respect
thereto.
The "fair value" of Dissenting Shares will be determined and paid as
described in "Rights of Dissenting Stockholders."
For a description of the procedures for exchanging certificates
representing Company Shares, see "Procedures for Exchange of Certificates."
EFFECTIVE TIME
If the Merger Agreement is adopted by the requisite vote of the Company's
stockholders and the other conditions to the Merger are satisfied (or waived to
the extent permitted), the Merger will be consummated and become effective at
the time the Certificate of Merger is filed with the Secretary of State of the
State of Delaware or at such later date as is specified in the Certificate of
Merger (the "Effective Time").
The Merger Agreement provides that the parties will cause the Effective
Time to occur as promptly as practicable, but in any event within 5 days, after
the adoption of the Merger Agreement by the stockholders of the Company and the
satisfaction (or waiver, if permissible) of the other conditions set forth in
the Merger Agreement. The Merger Agreement may be terminated prior to the
Effective Time by either party in certain circumstances, whether before or
after the adoption of the Merger Agreement by the Company's stockholders. See
"THE MERGER AGREEMENT--Termination."
PROCEDURES FOR EXCHANGE OF CERTIFICATES
As of the Effective Time, Buyer will deposit, or will cause to be
deposited, with First Chicago Trust Company of New York (the "Paying Agent"),
for the benefit of the holders of Company Shares for exchange in accordance
with the terms of the Merger Agreement, net consideration of approximately
$52,639,930 (the "Payment Fund") issuable pursuant to the Merger Agreement in
exchange for outstanding Company Shares. The Paying Agent will, pursuant to
irrevocable instructions, deliver to the holders of Company Shares their
respective portions of the Payment Fund according to the procedure summarized
below.
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<PAGE> 37
After the Effective Time there will be no further transfers on the stock
transfer books of the Company of Company Shares which were outstanding
immediately prior to the Effective Time.
As soon as practicable after the Effective Time, but in no event more than
20 days after the date upon which the Effective Time occurs (the "Effective
Date"), the Company will mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding Company Shares (the "Certificates") (i)Ea notice and letter of
transmittal (which will specify that delivery will be effected, and risk of
loss and title to the Certificates will pass, only upon proper delivery of the
Certificates to the Paying Agent); and (ii) instructions for use in effecting
the surrender of the Certificates in exchange for the Merger Consideration.
Upon surrender of a Certificate for cancellation to the Paying Agent together
with a letter of transmittal, duly executed, and any other documents as may be
required pursuant to such instructions, the holder of a Certificate will be
entitled to receive in exchange therefor the Merger Consideration. The
Certificate so surrendered will forthwith be canceled. In the event of a
transfer of ownership of Company Shares which is not registered in the stock
transfer records of the Company, it shall be a condition to such exchange that
a Certificate representing the proper number of Company Shares be presented by
a transferee to the Paying Agent, accompanied by all documents required to
evidence and effect such transfer and by evidence that any applicable stock
transfer taxes have been paid. Until surrendered, each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive the Merger Consideration upon surrender.
STOCKHOLDERS OF THE COMPANY SHOULD NOT FORWARD THEIR STOCK CERTIFICATES TO
THE PAYING AGENT WITHOUT A LETTER OF TRANSMITTAL, AND SHOULD NOT RETURN THEIR
STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
Any portion of the Payment Fund remaining undistributed 180 days after the
Effective Time will be returned to the Surviving Corporation upon demand, and
any holders of theretofore unsurrendered Company Shares will thereafter be able
to look only to the Surviving Corporation and only as general creditors thereof
for any portion of the Payment Fund to which they are entitled without interest
thereon. Neither Buyer, Buyer Sub, the Surviving Corporation nor the Paying
Agent will be liable to any person in respect of any cash, shares, dividends or
distributions payable from the Payment Fund delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law. If any
certificates representing shares of Common Stock have not been surrendered
prior to five (5) years after the Effective Date (or immediately prior to such
earlier date on which any Merger Consideration in respect of any such
certificate would otherwise escheat to or become the property of any
Governmental Entity), any such cash, shares, dividends or distributions payable
in respect of such certificates shall, to the extent permitted by applicable
law, become the property of the Surviving Corporation, free and clear of all
claims or interest of any person previously entitled thereto.
ACCOUNTING TREATMENT
The Merger will be accounted for under the purchase method of accounting
under which the total consideration paid in the Merger will be allocated among
the Surviving Corporation's consolidated assets and liabilities based on the
fair values of the assets acquired and liabilities assumed. At the Effective
Time, the Company will become a wholly-owned subsidiary of Buyer.
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<PAGE> 38
SOURCE AND AMOUNT OF FUNDS
Buyer intends to fund payment of the Merger Consideration through third
party debt financing and equity contributions by CHP II. John A. Dore and
certain other officers and employees of the Company will contribute Company
Shares and options valued at approximately $1,500,000 to Buyer in exchange for
shares and options aggregating approximately 4% of Buyer. The Merger is not
contingent upon the Buyer obtaining financing. Subject to the terms of a
commitment letter between CHP II and ING Capital Corporation dated June 4,
1996, ING Capital Corporation has agreed to act as agent to provide to the
Company an $11,500,000 seven year senior secured amortizing term loan (the
"Tranche A Loan"), a $4,000,000 seven and one-half year senior secured
amortizing term loan (the "Tranche B Loan"), and a $5,000,000 two and one-half
year revolving credit facility (the "Revolver"). Interest will accrue at
either (a) the higher of the Federal Funds Rate plus one-half of one percent or
the prime commercial lending rate of ING Capital Corporation, as announced from
time to time ("Base Rate Loans") or (b) the Eurodollar Rate ("LIBOR Based
Loans"), plus in either case an applicable margin. The margins for LIBOR Based
Loans would be +2.50% for the Revolver and the Tranche A Loan, and +2.75% for
the Tranche B Loan. The margin for Base Rate Loans would be +1.00% for the
Revolver and the Tranche A Loan and +1.25% for the Tranche B Loan. The loans
would be secured by the assets of the Company, including the capital stock of
its directly owned subsidiaries. It is anticipated that dividends paid by
First Re to the Company would be the principal source of funds to repay the
loans. ING Capital Corporation's obligation to provide financing is subject to
the execution of definitive documentation and there is no assurance that a
definitive agreement will be reached. If a definitive agreement is not
reached, CHP II will seek other senior financing sources to replace ING Capital
Corporation and in its discretion, may provide bridge financing on an interim
basis. The aggregate net cost to Buyer of acquiring all of the Company Shares
in the Merger, making required payments to holders of stock options (see
"SPECIAL FACTORS--Interests of Certain Persons in the Merger") and payment of
its fees and expenses will be approximately $55,029,930.
The Buyer has requested approval from the Commissioner of Insurance of the
State of Connecticut for First Re to pay a dividend of $10,000,000 to Buyer
after the Effective Date. The Company was informed of the Buyer's intention to
request payment of the dividend after the execution of the Merger Agreement.
The Merger Agreement does not provide for the Merger Consideration to be
adjusted if the dividend is not approved. An initial application on Form A for
approval of the Merger and all related transactions was submitted by CHP II,
Buyer and Buyer Sub to the Connecticut Commissioner on MayE8, 1996 and was
supplemented on June 12, 1996 and June 26, 1996. A waiver of Connecticut
General Statute Section 38a-136(i)(2)(A) which requires the approval of the
Connecticut Commissioner for the payment of dividends for a period of two years
following a change-in-control also has been requested, and the granting of such
waiver is a condition to Buyer's obligation to close.
PLANS OR PROPOSALS AFTER THE MERGER
Following the Merger, the Company will be a wholly-owned subsidiary of
Buyer, the Company Shares will no longer be traded on The Nasdaq Stock Market
and the registration of the Company Shares under the Exchange Act will be
terminated. Except as set forth herein, it is expected that the Company and
its subsidiaries will continue to engage in insurance and reinsurance
activities on a basis substantially consistent with current operations.
It is contemplated that at some future date (i) the Company and Buyer may
merge and (ii) JBR Holdings, Inc., a Delaware corporation ("JBR") which is a
wholly-owned subsidiary of the Company and the parent company of First Re, may
merge with the Company so that the subsidiaries of the Buyer would be First Re,
Oakley, FRM and F/I Agency. CHP II currently is the owner of Homestead
National Corporation, a Delaware corporation ("HNC"). HNC is the parent
company of Homestead Insurance
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Company, a Pennsylvania property and casualty insurer ("HIC"). It is
contemplated that at some future date HNC may be combined with the Company, and
First Re, HIC and their affiliates will become subsidiaries of the combined
entity. There are, however, no definitive plans for such a combination at the
present time. HIC and First Re may also enter into a pooling arrangement
whereby the companies would share the premiums, losses and expenses of certain
insurance business based on proportions equivalent to the percentage of
capital/surplus of each company to their combined capital/surplus. It is
anticipated that some of the programs currently written in HIC will be written
in First Re. In addition, it is anticipated that management agreements between
certain affiliates of the Company and certain affiliates of HNC will be entered
into for the purpose of underwriting and marketing insurance products.
John A. Dore will continue to be a member of the board of directors of the
Company and its subsidiaries. See also "SPECIAL FACTORS--Interest of John A.
Dore and Management in the Merger." None of the other persons currently
serving on the Board of Directors of the Company will continue as a director.
It is expected that, to the extent permissible under Connecticut insurance
law, dividends will continue to be paid by First Re to the Company. See
"SUMMARY--Dividends." The Company in turn will pay dividends to Buyer in order
to, among other things, support principal and interest payments on any third
party debt financing obtained by Buyer to finance the Merger.
Other than as set forth herein, the Buyer has not indicated any present
plans or proposals that would result in an extraordinary corporate transaction
or other material change in the present business of the Company. It is
expected, however, that the Buyer will continue to review the business and
operations of the Company and may propose or develop additional plans or
proposals which it considers to be in the best interests of the Company and its
then stockholders.
RIGHTS OF DISSENTING STOCKHOLDERS
Pursuant to the DGCL, any holder of Company Shares (i) who properly files
a demand for appraisal in writing prior to the vote taken at the Special
Meeting and (ii) whose shares are not voted in favor of the Merger, shall be
entitled to appraisal rights under Section 262 of the DGCL.
SECTION 262 IS REPRINTED IN ITS ENTIRETY AS APPENDIX B TO THIS PROXY
STATEMENT. THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW
RELATING TO APPRAISAL RIGHTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
APPENDIX B. THIS DISCUSSION AND APPENDIX B SHOULD BE REVIEWED CAREFULLY BY ANY
HOLDER WHO WISHES TO EXERCISE STATUTORY APPRAISAL RIGHTS OR WHO WISHES TO
PRESERVE THE RIGHT TO DO SO, AS FAILURE TO COMPLY WITH THE PROCEDURES SET FORTH
HEREIN OR THEREIN WILL RESULT IN THE LOSS OF APPRAISAL RIGHTS.
A holder of record of Company Shares as of the Record Date who makes the
demand described below with respect to such shares, who continuously is the
record holder of such shares through the Effective Time, who otherwise complies
with the statutory requirements of Section 262 and who neither votes in favor
of the Merger Agreement nor consents thereto in writing may be entitled to an
appraisal by the Delaware Court of Chancery (the "Delaware Court") of the fair
value of his or her shares of stock ("Dissenting Shares").
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, as in the Special Meeting, not less than 20 days prior
to the meeting each constituent corporation must notify each of the holders of
its stock for which appraisal rights are available that such appraisal rights
are
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available and include in each such notice a copy of Section 262. This
Proxy Statement shall constitute such notice to the record holders of Company
Shares.
Voting stockholders of the Company who desire to exercise their appraisal
rights must not vote in favor of the Merger Agreement or the Merger and must
deliver a separate written demand for appraisal to the Company prior to the
vote by the stockholders of the Company on the Merger Agreement and the Merger.
A stockholder who signs and returns a proxy without expressly directing by
checking the applicable boxes on the reverse side of the proxy card enclosed
herewith that his or her shares of Common Stock be voted against the proposal
or that an abstention be registered with respect to his or her shares of Common
Stock in connection with the proposal will effectively have thereby waived his
or her appraisal rights as to those shares of Common Stock because, in the
absence of express contrary instructions, such shares of Common Stock will be
voted in favor of the proposal. (See "Voting and Revocation of Proxies.")
Accordingly, a stockholder who desires to perfect appraisal rights with respect
to any of his or her shares of Common Stock must, as one of the procedural
steps involved in such perfection, either (i) refrain from executing and
returning the enclosed proxy card and from voting in person in favor of the
proposal to approve the Merger Agreement or (ii) check either the "Against" or
the "Abstain" box next to the proposal on such card or affirmatively vote in
person against the proposal or register in person an abstention with respect
thereto. A demand for appraisal must be executed by or on behalf of the
stockholder of record and must reasonably inform the Company of the identity of
the stockholder of record and that such record stockholder intends thereby to
demand appraisal of the Company Shares. A person having a beneficial interest
in shares of Common Stock that are held of record in the name of another
person, such as a broker, fiduciary or other nominee, must act promptly to
cause the record holder to follow the steps summarized herein properly and in a
timely manner to perfect whatever appraisal rights are available. If the
shares of Common Stock are owned of record by a person other than the
beneficial owner, including a broker, fiduciary (such as a trustee, guardian or
custodian) or other nominee, such demand must be executed by or for the record
owner. If the shares of Common Stock are owned of record by more than one
person, as in a joint tenancy or tenancy in common, such demand must be
executed by or for all joint owners. An authorized agent, including an agent
for two or more joint owners, may execute the demand for appraisal for a
stockholder of record; however, the agent must identify the record owner and
expressly disclose the fact that, in exercising the demand, such person is
acting as agent for the record owner.
A record owner, such as a broker, fiduciary or other nominee, who holds
shares of Common Stock as a nominee for others, may exercise appraisal rights
with respect to the shares held for all or less than all beneficial owners of
shares as to which such person is the record owner. In such case, the written
demand must set forth the number of shares covered by such demand. Where the
number of shares is not expressly stated, the demand will be presumed to cover
all shares of Common Stock outstanding in the name of such record owner.
A stockholder who elects to exercise appraisal rights, if available,
should mail or deliver his or her written demand to: Financial Institutions
Insurance Group, Ltd., 300 Delaware Avenue, Suite 1704, Wilmington, DE, 19801,
Attention: Corporate Secretary.
The written demand for appraisal should specify the stockholder's name and
mailing address, the number of shares of Common Stock owned, and that the
stockholder is thereby demanding appraisal of his or her shares. A proxy or
vote against the Merger Agreement will not by itself constitute such a demand.
Within ten days after the Effective Time, the Surviving Corporation must
provide notice of the Effective Time to all stockholders who have complied with
Section 262.
Within 120 days after the Effective Time, either the Surviving Corporation
or any stockholder who has complied with the required conditions of Section 262
may file a petition in the Delaware Court, with
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<PAGE> 41
a copy served on the Surviving Corporation in the case of a petition filed
by a stockholder, demanding a determination of the fair value of the shares of
all dissenting stockholders. Accordingly, stockholders of the Company who
desire to have their shares appraised should initiate any petitions necessary
for the perfection of their appraisal rights within the time periods and in the
manner prescribed in Section 262. The Buyer does not have any present
intentions as to whether it would file any such petition in the event a
stockholder makes a written demand. If appraisal rights are available, within
120 days after the Effective Time, any stockholder who has theretofore complied
with the applicable provisions of Section 262 will be entitled, upon written
request, to receive from the Surviving Corporation a statement setting forth
the aggregate number of shares of Common Stock not voting in favor of the
Merger Agreement and with respect to which demands for appraisal were received
by the Company, and the aggregate number of holders of such shares. Such
statement must be mailed within 10 days after the written request therefor has
been received by the Surviving Corporation.
If a petition for an appraisal is timely filed and assuming appraisal
rights are available, at the hearing on such petition, the Delaware Court will
determine which stockholders, if any, are entitled to appraisal rights. The
Delaware Court may require the stockholders who have demanded an appraisal for
their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Delaware Court may dismiss the proceedings as to such
stockholder. Where proceedings are not dismissed, the Delaware Court will
appraise the shares of Common Stock owned by such stockholders, determining the
fair value of such shares exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair rate of
interest, if any, to be paid upon the amount determined to be the fair value.
In such event, the Delaware Court's appraisal may be more than, less than, or
equal to the Merger Consideration. In determining fair value, the Delaware
Court is to take into account all relevant factors. In relevant case law, the
Delaware Supreme Court discussed the factors that could be considered in
determining fair value in an appraisal proceeding, stating that "proof of value
by any techniques or methods which are generally considered acceptable in the
financial community and otherwise admissible in court" should be considered,
and that "fair price obviously requires consideration of all relevant factors
involving the value of a company." The Delaware Supreme Court stated that in
making this determination of fair value the court must consider market value,
asset value, dividends, earnings prospects, the nature of the enterprise and
any other facts ascertainable as of the date of the merger that throw light on
future prospects of the merged corporation. The Delaware Supreme Court also
stated that "elements of future value, including the nature of the enterprise,
which are known or susceptible of proof as of the date of the merger and not
the product of speculation, may be considered." Section 262, however, provides
that fair value is to be "exclusive of any element of value arising from the
accomplishment or expectation of the merger."
The cost of the appraisal proceeding may be determined by the Delaware
Court and taxed against the parties as the Delaware Court deems equitable in
the circumstances. Upon application of a dissenting stockholder of the
Company, the Delaware Court may order that all or a portion of the expenses
incurred by any dissenting stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, be charged pro rata against the value of all
shares of stock entitled to appraisal.
Any holder of Company Shares who has duly demanded appraisal in compliance
with Section 262 will not, after the Effective Time, be entitled to vote for
any purpose any shares subject to such demand or to receive payment of
dividends or other distributions on such shares, except for dividends or
distributions payable to stockholders of record at a date prior to the
Effective Time.
At any time within 60 days after the Effective Time, any stockholder will
have the right to withdraw such demand for appraisal; after this
period, the stockholder may withdraw such demand for appraisal
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only with the consent of the Surviving Corporation. If no petition for
appraisal is filed with the Delaware Court within 120 days after the Effective
Time, stockholders' rights to appraisal shall cease. Any stockholder may
withdraw such stockholder's demand for appraisal by delivering to the Surviving
Corporation a written withdrawal of his or her demand for appraisal and an
acceptance of the Merger, except that (i) any such attempt to withdraw made
more than 60 days after the Effective Time will require written approval of the
Surviving Corporation, and (ii) no appraisal proceeding in the Delaware Court
shall be dismissed as to any stockholder without the approval of the Delaware
Court, and such approval may be conditioned upon such terms as the Delaware
Court deems just.
ANY HOLDER WHO FAILS TO COMPLY FULLY WITH THE STATUTORY PROCEDURE
SUMMARIZED ABOVE WILL FORFEIT HIS OR HER RIGHTS OF DISSENT AND WILL RECEIVE THE
MERGER CONSIDERATION FOR HIS OR HER SHARES.
REGULATORY APPROVALS
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR
Act") and the rules promulgated thereunder by the Federal Trade Commission (the
"FTC"), certain acquisition transactions may not be consummated unless notice
has been given and certain information has been furnished to the Antitrust
Division of the United States Department of Justice (the "Antitrust Division")
and the FTC and certain waiting period requirements have been satisfied. The
Merger is subject to these requirements.
The Company and the Buyer each filed with the Antitrust Division and the
FTC a Notification and Report Form with respect to the Merger on June 13, 1996.
Under the HSR Act, the Merger may not be consummated until the expiration of a
waiting period of at least 30 days following the receipt of each filing, unless
the waiting period is earlier terminated by the FTC and the Antitrust Division,
or unless the waiting period is extended by a request for additional
information. The waiting period was terminated as of July 13, 1996.
State Attorneys General and private parties also may bring legal actions
under the federal or state antitrust laws under certain circumstances. There
can be no assurance that a challenge to the proposed Merger on antitrust
grounds will not be made or of the result if such a challenge is made.
CONNECTICUT INSURANCE LAWS
Under Section 38a-130 of the General Statutes of Connecticut and related
regulations, the direct or indirect acquisition of control of a Connecticut
domestic insurer such as First Re must receive prior approval by the
Commissioner of Insurance of the State of Connecticut ("Connecticut
Commissioner"). Section 38a-132 of the General Statutes of Connecticut
provides that the Connecticut Commissioner shall approve the transaction
unless, after a public hearing, he finds that (a) after the acquisition of
control, the Connecticut domestic insurer would not satisfy the requirements to
be licensed to write the lines of business for which it is presently licensed;
(b) the transaction would substantially lessen competition in the insurance
business in the State of Connecticut; (c) the financial condition of the
acquiring party might jeopardize the financial stability of the Connecticut
domestic insurer or prejudice the interests of its policyholders; (d) any plans
or proposals to make material changes in the Connecticut domestic insurer's
business, corporate structure or management are unfair and unreasonable to its
policyholders and not in the public interest; (e) the competence, experience
and integrity of the persons who would control the operation of the Connecticut
domestic insurer are such that the transaction would not be in the interest of
policyholders and the general public; or (f) the acquisition is likely to be
hazardous or prejudicial to those buying insurance. Protection of
stockholders is not a criterion of the Connecticut Commissioners's review of
change of control transactions. An application on Form A for approval of the
Merger and all related transactions was submitted by CHP II, Buyer and Buyer
Sub to the Connecticut Commissioner on May 8, 1996, and updated applications
were submitted on June 12, 1996 and June 26, 1996. The
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Form A includes a request for approval for First Re to pay a dividend to Buyer
of $10,000,000 after consummation of the Merger. A waiver of Connecticut
General Statute Section 38-136(i)(2)(A) which requires the approval of the
Connecticut Commissioner for the payment of dividends for a period of two years
following a change-in-control also has been requested. The approval of the
Form A and the granting of such waiver by the Connecticut Commissioner are
conditions to Buyer's obligation to close. The hearing has been scheduled for
July 26, 1996.
THE MERGER AGREEMENT
The following discussion of the Merger Agreement is qualified in its
entirety by reference to the complete text of the Merger Agreement, which is
included in this Proxy Statement as Appendix A (exclusive of all exhibits and
schedules) and is incorporated herein by reference.
GENERAL
The Merger Agreement provides for the merger of Buyer Sub into the
Company. The Company will be the Surviving Corporation of the Merger, and, as
a result of the Merger, Buyer will own all of the Surviving Corporation's
common stock. In the Merger, the stockholders of the Company (other than Buyer
and Buyer Sub and holders who perfect their dissenters' rights) will receive
the Merger Consideration described below. Pursuant to a letter agreement dated
as of April 12, 1996, CHP II has agreed to guaranty to the Company the full and
punctual payment and performance of all obligations of Buyer and Buyer Sub
under the Merger Agreement, provided that the liability of CHP II shall not
exceed $3,500,000.
EFFECTIVE TIME
The Effective Time of the Merger will occur upon the filing of the
Certificate of Merger with the Secretary of State of the State of Delaware as
required by the DGCL or at such later date as may be specified in the
Certificate of Merger. It is anticipated that such Certificate of Merger will
be filed promptly after the approval and adoption of the Merger Agreement by
the stockholders of the Company at the Special Meeting. The Merger Agreement
provides that the parties will cause the Effective Time to occur as promptly as
practicable, but in any event within 5 days, after the adoption of the Merger
Agreement by the stockholders of the Company and the satisfaction (or waiver,
if permissible) of the other conditions set forth in the Merger Agreement.
CONSIDERATION TO BE RECEIVED BY STOCKHOLDERS OF THE COMPANY
In connection with the Merger, each outstanding Company Share at the
Effective Time (except those Company Shares held by the Company as treasury
shares, or held by Buyer or Buyer Sub or shares as to which appraisal rights
have not been forfeited under the DGCL, if effective notice of exercise of
appraisal rights with respect to such Shares under Section 262 of the DGCL was
required and given prior to the Effective Time) will be converted into the
right to receive $16.00 in cash, without interest. All Company Shares held by
the Company as treasury shares and each share of Common Stock held by Buyer or
Buyer Sub will be canceled without consideration. Dissenting Shares will be
converted to cash in the manner described in "THE MERGER--Rights of Dissenting
Stockholders." Instructions with respect to the surrender of certificates
formerly representing Company Shares, together with the letter of transmittal
to be used for that purpose, will be mailed to stockholders as soon as
practicable after the Effective Time. As soon as practicable following
receipt from the stockholder of a duly executed letter of transmittal, together
with certificates formerly representing Company Shares and any other items
specified by the
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letter of transmittal, the Paying Agent will pay the Merger Consideration to
such stockholder, by check or draft.
Each of the outstanding shares of Buyer Sub will automatically be
converted into one share of common stock, par value $1.00 per share, of the
Surviving Corporation.
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES FOR COMPANY SHARES WITH
THE ENCLOSED PROXY CARD.
After the Effective Time, the holder of a certificate formerly
representing Company Shares will cease to have any rights as a stockholder of
the Company, and such holder's sole right will be to receive the Merger
Consideration with respect to such shares (or, in the case of Dissenting
Shares, the statutorily determined "fair value"). If payment is to be made to
a person other than the person in whose name the surrendered certificate is
registered, it will be a condition of payment that the certificates so
surrendered be properly endorsed or otherwise in proper form for transfer and
that the person requesting such payment shall pay any transfer or other taxes
required by reason of such payment or establish to the satisfaction of the
Surviving Corporation that such taxes have been paid or are not applicable. No
transfer of shares outstanding immediately prior to the Effective Time will be
made on the stock transfer books of the Surviving Corporation after the
Effective Time. Certificates formerly representing Company Shares presented to
the Surviving Corporation after the Effective Time will be canceled in exchange
for the Merger Consideration.
In no event will holders of Company Shares be entitled to receive payment
of any interest on the Merger Consideration to be distributed to them in
connection with the Merger.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
the Company relating to, among other things:
(a) corporate organization, existence, qualification and good standing
of the Company and corporate power and authority to own, operate and lease
its assets and properties and carry on its business and enter into and
perform its obligations under the Merger Agreement;
(b) organization, existence, qualification and good standing of the
Company's subsidiaries and corporate power and authority to own, lease and
operate their respective assets and properties and carry on their respective
business and perform their respective obligations under the Merger
Agreement;
(c) the right, power and authority of the Company to enter into,
execute and deliver the Merger Agreement and perform its obligations
thereunder, and the Merger Agreement being the legal, valid and binding
obligation of the Company;
(d) the absence of conflicts with the certificate of incorporation or
bylaws of the Company or any subsidiary or with any agreement to which the
Company or any of its subsidiaries is a party, and the absence of any
violations of permits, licenses or applicable law;
(e) consents and approvals of governmental entities;
(f) the directors and officers of the Company and its subsidiaries;
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(g) the charter, bylaws, and corporate records of the Company and its
subsidiaries;
(h) the capital structure of the Company and its subsidiaries;
(i) compliance with law and obtaining of permits and licenses;
(j) the proper filing by the Company with the Securities and Exchange
Commission of required documents and the accuracy of the information
contained in such documents;
(k) fair presentation of the financial statements and statutory
financial statements of the Company and its subsidiaries supplied by the
Company to the Buyer;
(l) reasonable provision for loss reserves;
(m) compliance with risk-based capital provisions and certain Insurance
Regulatory Information System guidelines;
(n) continuation of reinsurance agreements;
(o) policies and contracts of insurance and reinsurance being in
compliance in all material respects with applicable law;
(p) licensing of producers utilized by the Company and its
subsidiaries;
(q) reasonable provision for premium balances receivable and ownership
of admitted assets;
(r) insurance and reinsurance claims having been paid or provided for
in accordance with the terms of the policies or contracts under which they
arose;
(s) certain matters related to federal, state and local taxes;
(t) certain matters related to employee benefit plans and employment
and labor agreements;
(u) investments of the Company and its subsidiaries;
(v) ownership of patents, trademarks, service marks, etc.;
(w) ownership of tangible property, ownership and leasing of real
property, and title to assets;
(x) agreements for borrowed money;
(y) material contracts of the Company and its subsidiaries;
(z) absence of litigation;
(aa) certain environmental matters;
(bb) utilization of brokers and finders;
(cc) banking arrangements of the Company and subsidiaries;
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(dd) maintenance of insurance with respect to properties and conduct
of business;
(ee) knowledge of legislation limiting the business of the Company or
its subsidiaries;
(ff) operations of the Company and its subsidiaries since December 31,
1995;
(gg) absence of potential conflicts of interest;
(hh) membership in guaranty funds and pools; and
(ii) full disclosure of information by the Company.
COVENANTS
Each of the parties to the Merger Agreement has agreed to use its best
efforts to fulfill or obtain the fulfillment of the conditions precedent to the
consummation of the Merger, including cooperation in the preparation and
filing of this Proxy Statement, obtaining the termination of waiting period
requirements under the HSR Act, making filings and obtaining approvals of
insurance regulatory authorities, and the execution and delivery of any
documents, certificates, instruments or other papers that are reasonably
required for the consummation of the Merger.
Pursuant to the Merger Agreement, the Company has agreed that, except as
expressly contemplated by the Merger Agreement or consented to in writing by
Buyer, from the date of the Merger Agreement until the Effective Time of the
Merger, the Company will not and will not permit any of its subsidiaries to:
(i) declare or pay or set aside dividends or other distributions
(whether in cash, stock or property) on its capital stock or make any
direct or indirect redemption, retirement, purchase or other acquisition
of any shares of capital stock;
(ii) issue, redeem, sell or dispose of any shares of the capital
stock of the Company or any of its subsidiaries or any rights relating to
capital stock (whether authorized but unissued or held in treasury) or
issue any option, warrant or other right to acquire any shares of its
capital stock;
(iii) effect any stock split, reclassification or combination;
(iv) adopt a plan of, or resolutions providing for, complete or
partial liquidation, dissolution, restructuring, recapitalization or
other reorganization;
(v) amend or modify its certificate of incorporation or by-laws (or
equivalent charter documents);
(vi) merge or consolidate with any corporation or other entity
otherwise than as contemplated by the Merger Agreement or reclassify any
shares of its capital stock or change the character of its business;
(vii) enter into, adopt, modify or amend in any material respect any
written employment, severance, consulting, "change of control,"
"parachute payment," bonus, incentive compensation, deferred
compensation, profit sharing, stock option, stock purchase, employee
benefit, welfare benefit or other agreement, plan or arrangement
providing for compensation or benefits to
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employees or directors or stockholders which would have effect for
any employee of the Company or its subsidiaries after the Effective
Time;
(viii) incur or contract for any capital expenditures in excess of
$25,000 in the aggregate;
(ix) amend, terminate or waive any right of value material to the
business of the Company or any of its subsidiaries;
(x) make any change in its accounting methods, principles or
practices or make any change in depreciation or amortization policies or
rates adopted by it, except insofar as may be required by a change in
generally accepted accounting principles, or make any change in its
accounting policies with respect to loss reserves;
(xi) revalue any portion of its assets, properties or businesses
other than in the ordinary course of business in a manner consistent with
past practice;
(xii) materially change any of its business policies, including,
without limitation, advertising, marketing, pricing, purchasing,
personnel, sales or budget policies;
(xiii) make any wage or salary increase or bonus, or increase in any
other direct or indirect compensation, for or to any of its officers,
directors, employees, consultants or agents, other than to persons other
than its officers, directors or shareholders made in the ordinary course
of business in a manner consistent with past practice;
(xiv) make any loan or advance to any of its officers, directors,
employees, consultants, agents or other representatives (other than
travel advances made in the ordinary course of business in a manner
consistent with past practice) or make any other loan or advance;
(xv) make any payment or commitment to pay severance or termination
pay to any of its officers, directors, employees, consultants, agents or
other representatives;
(xvi) enter into any lease (as lessor or lessee); sell, abandon or
make any other disposition of any of its investments or other assets,
properties or businesses other than in the ordinary course of business
consistent with past practice; grant or suffer any lien on any of its
assets, properties or businesses or on any of the capital stock of the
Company (other than for taxes not yet due and payable); enter into or
amend any contract or other agreement to which it is a party or by or to
which it or its assets, properties or businesses are bound or subject,
except in the ordinary course of business in a manner consistent with
past practice; or enter into or amend any contract or other agreement
pursuant to which it agrees to indemnify any person or to refrain from
competing with any person (other than insurance policies and reinsurance
treaties and contracts entered into in the ordinary course of business);
(xvii) incur or assume any debt, obligation or liability, or issue
any debt securities or assume, guarantee, endorse or otherwise as an
accommodation become responsible for, liabilities of any other person or
make any loans or advances, individually or in the aggregate, material
to the business of the Company and its subsidiaries (other than
insurance policies and reinsurance treaties and contracts entered into
in the ordinary course of business);
(xviii) except for tangible property acquired in the ordinary course
of business in a manner consistent with past practice, make any
acquisition of all or any part of the assets, properties, capital stock
or business of any other person;
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(xix) except in the ordinary course of business in a manner
consistent with past practice, amend, terminate or enter into any
contract or other agreement or amend, terminate or enter into any other
material transaction; or
(xx) directly or indirectly solicit proposals from, or cooperate
with, or furnish any information concerning the business, financial
condition, properties or assets of the Company or any of its
subsidiaries, or continue or enter into any discussion, negotiation,
agreement or understanding with any person concerning any acquisition of
the Company or any of its subsidiaries, except to the extent required by
fiduciary obligations.
In addition, the Merger Agreement provides that, except as expressly
contemplated by the Merger Agreement or consented to in writing by Buyer, the
Company has agreed that:
(i) the Company and each of its subsidiaries will conduct their
respective businesses in the ordinary course and consistent with past
practice and will use their reasonable best efforts to preserve intact
their business organization and goodwill, preserve the goodwill and
business relationships with all parties having business relationships
with each of them, keep available the services of their respective
present officers, employees, consultants and agents, defend and protect
their respective assets from infringement or usurpation, perform all of
their obligations under all contracts, leases and any and all other
agreements relating to or affecting its assets or its business, conduct
their respective businesses in such a manner so that the representations
and warranties contained in the Merger Agreement shall continue to be
true, complete and accurate on and as of the Effective Date with the same
force and effect as if made on and as of the Effective Date, and shall
maintain their books, accounts and records in the usual manner consistent
with past practice and comply in all material respects with all laws,
ordinances and regulations of governmental entities applicable to the
Company and any of its subsidiaries, including, without limitation, all
applicable insurance laws;
(ii) each of the Company and its subsidiaries will use accounting
policies in keeping its books and records and preparing its financial
statements in accordance with GAAP, applied consistently with the
application of such principles in preparing the annual financial
statements and in accordance with statutory accounting principles,
applied consistently with the application of such principles in preparing
the annual convention statements;
(iii) the Company shall, and shall cause each of its subsidiaries
to, use all reasonable efforts to afford Buyer and its authorized
representatives free and full access during normal business hours to the
Company and its subsidiaries and to the employees, properties, books and
records, and contracts and other agreements, documents and other papers,
and copies, extracts and summaries of each of the foregoing in order to
afford Buyer the opportunity to make such investigations of the affairs
of the Company and its subsidiaries as it deems desirable;
(iv) the Company and each of its subsidiaries shall furnish to Buyer
such information relating to their respective businesses and affairs (and
which is reasonably available to the Company and its subsidiaries) as
Buyer shall from time to time reasonably request and will cause their
officers, employees, agents and consultants to keep the officers of the
Buyer informed as to the affairs of the Company and its subsidiaries;
(v) the Company and its subsidiaries shall maintain in force
(including necessary renewals thereof) their insurance policies, except
to the extent that they may be replaced with equivalent policies
appropriate to insure the assets, properties and businesses of the
Company and
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<PAGE> 49
its subsidiaries to the same extent as currently insured at the same or
lower rates or at rates approved by Buyer;
(vi) the Company shall promptly notify Buyer of any suits, actions,
claims, proceedings or investigations which are commenced after the date
of the Merger Agreement or, to the Company's knowledge, threatened,
against the Company or any of its subsidiaries or against any officer,
director, employee, consultant, agent or stockholder with respect to the
affairs of the Company or any of its subsidiaries;
(vii) the Company shall give prompt written notice to Buyer of:
(a)Ethe occurrence, or failure to occur, of any event which would be
likely to cause any representation or warranty of the Company contained
in the Merger Agreement, to be untrue or inaccurate; (b)Eany failure of
the Company or any of its subsidiaries or of any officer, director,
employee, consultant or agent of the Company or any of its subsidiaries,
to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it or them under the Merger Agreement;
(c)Eany event of which they have knowledge which will result, or which
has a reasonable prospect of resulting, in the failure to satisfy the
conditions specified in the Merger Agreement; (d)Eany notice of, or other
communication relating to, a default (or event which, with notice or
lapse of time or both, would constitute a default), received by the
Company or any of its subsidiaries subsequent to the date of the Merger
Agreement and prior to the Closing Date, under any contract or other
agreement material to the business of the Company or any of its
subsidiaries; (e) the termination or cancellation of any reinsurance
agreement; (f)Eany notice or other communication from any person alleging
that the consent of such person is or may be required in connection with
the Merger; (g)Eany notice or other communication from any foreign,
federal, state, county or local government or any other governmental,
regulatory or administrative agency or authority in connection with the
Merger or any other material notice or other material communication from
any foreign, federal, state, county or local government or any other
governmental, regulatory or administrative agency or authority; (h)Eany
change which has a material adverse effect on the business, operations,
assets or prospects of the Company and its subsidiaries taken as a whole,
or the occurrence of any event which, so far as can be foreseen at the
time of its occurrence, would have such a material adverse effect; or
(i)Eany matter arising which, if existing, occurring or known at the date
of the Merger Agreement, would have been required to be disclosed to
Buyer;
(viii) the Company and its subsidiaries shall: (a)Eprovide to Buyer
a monthly management report in scope and detail reasonably satisfactory
to Buyer; (b)Etimely prepare, and promptly deliver to Buyer, monthly
financial statements in scope and detail reasonably satisfactory to
Buyer; (c)Eprovide to Buyer a monthly statement of investments in detail
reasonably satisfactory to Buyer; (d) provide to Buyer a monthly list of
all claims paid under any insurance or reinsurance policy issued by the
Company or any of its subsidiaries in excess of $50,000; (e) file with
the Securities and Exchange Commission all reports, schedules, forms,
statements and other documents required to be filed under the Securities
Exchange Act of 1934 (the "SEC Filings") and promptly provide Buyer with
a copy of such SEC Filing; and (f) file all reports, schedules, forms,
statements and other documents required to be filed under any applicable
insurance laws and promptly provide Buyer with a copy of any such filing;
and
(ix) the Company shall cause a special meeting of its stockholders
to be called and held for the purposes of acting on the Merger Agreement
and the Merger, and shall, through its Board of Directors, and subject to
its fiduciary duties, recommend to its stockholders approval of the
Merger.
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<PAGE> 50
Further, each of the Company and the Buyer have, pursuant to the Merger
Agreement, agreed to:
(i) promptly and timely file with the Federal Trade Commission and
the Department of Justice, all notifications, including responses to
requests for information, required by the HSR Act applicable to the
Company and Buyer;
(ii) use their respective best efforts to take all steps necessary
or appropriate to obtain the approval of the Connecticut Commissioner and
any other insurance regulatory approvals required for the consummation of
the Merger;
(iii) duly make all regulatory filings required to be made by each
in respect of the Merger Agreement or the transactions contemplated
thereby, including the filing of a Form A with the Connecticut
Commissioner for approval of the Merger and the filing of a request for a
waiver of Connecticut General Statute Section 38-136(i)(2)(A) which
requires the approval of the Connecticut Commissioner for the payment of
dividends for a period of two years following a change-in-control (the
"Connecticut Waiver");
(iv) comply as promptly as practicable with all governmental
requirements applicable to the Merger, and obtain promptly all necessary
permits, orders and other consents of governmental entities and consents
of third parties necessary for the consummation of the Merger; and
(v) execute such contracts and other agreements and documents and
other papers and take such further actions as may be reasonably required
or desirable to carry out the Merger, and use its best efforts to fulfill
or obtain the fulfillment of the conditions precedent to the consummation
of the Merger, including the execution and delivery of any documents,
certificates, instruments or other papers that are reasonably required
for the consummation of the Merger.
TERMINATION FEE
The Merger Agreement provides under certain circumstances for the payment
of a cash fee in the amount of $3,500,000 to CHP II, along with reimbursement
of expenses of Buyer up to $100,000, in the event the Company executes an
agreement with a third party involving a merger or other business combination
or sale of a substantial portion of the assets or stock of the Company prior to
February 17, 1997 (the "Termination Fee"). No Termination Fee shall be paid
if: (i) at any time Buyer lowers the cash consideration per share below
$16.00; (ii) the Merger is not consummated due to the failure by Buyer to
satisfy the terms and conditions of the Merger Agreement; (iii) Buyer for any
reason (other than due to the failure by the Company to satisfy the terms and
conditions of the Merger Agreement) determines not to pursue the transaction
with the Company; (iv) any regulatory approval required for the Merger is not
obtained; or (v) the Merger Agreement is terminated as a result of the
Connecticut Department denying the Connecticut Waiver. The Termination Fee is
the sole and exclusive remedy of Buyer upon any such termination of the Merger
Agreement.
AMENDMENTS AND WAIVERS
The Merger Agreement may not be amended except by an instrument in writing
signed on behalf of the Company, Buyer and Buyer Sub. By mutual written
consent, the parties may (a) extend the time for performance of obligations,
(b) waive inaccuracies in representations and warranties, (c) waive compliance
with covenants and agreements, or (d) make other modifications as agreed to by
the parties' Boards of Directors. After approval of the Merger Agreement by
the stockholders of the Company, the Board of Directors of the Company will
not, without first obtaining the further approval of the
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<PAGE> 51
stockholders, approve any amendment which is materially adverse, as reasonably
determined by the Company, to the rights of the stockholders of the Company.
EXPENSES
The Merger Agreement provides that, whether or not the Merger is
consummated, all costs and expenses incurred in connection with the Merger
Agreement and the transactions contemplated thereby shall be paid by the party
incurring such expenses, except for (i) the Termination Fee and (ii)
reimbursement to the Company for expenses of up to $50,000 if the Merger
Agreement is terminated as a result of the Connecticut Waiver being denied.
The following is an estimate of the costs and expenses incurred or
expected to be incurred by the Company in connection with the Merger:
Legal Fees and Expenses $250,000
Transfer Agent Fees $ 3,500
SEC and Other Filing Fees $ 10,830
Printing and Mailing Costs $ 12,000
Fees and Expenses to
Financial Advisor $685,000
--------
Total $961,330
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligations of the parties to effect the Merger are subject to the
satisfaction or waiver at or prior to the Effective Time of a number of
conditions typical in acquisition transactions, including: accuracy of
representations and warranties; performance of all covenants; receipt of all
necessary approvals, consents and clearances (including approval by the
Connecticut Commissioner of the Form A and the Connecticut Waiver); absence of
certain litigation; and approval by the holders of a majority of the Company's
outstanding Common Stock. In addition, Buyer's obligation to close is
conditioned upon:
(a) receipt of a legal opinion from Lord, Bissell & Brook, special
counsel for the Company, with respect to certain legal matters;
(b) receipt of all required approvals, none of which shall contain
any terms, limitations or conditions which Buyer determines in good faith
to be materially burdensome to Buyer or its affiliates or to the Company
or its subsidiaries taken as a whole, or which restrict Buyer's rights as
a controlling stockholder of the Company (including without limitation
its right to participate actively in the management of the Company or its
subsidiaries), which would prevent Buyer, its affiliates or the Company
and its subsidiaries from conducting their respective businesses in
substantially the same manner as currently conducted;
(c) no legislation shall have been proposed in bill form or enacted
and no statute, law, ordinance, code, rule or regulation shall have been
adopted, revised or interpreted by any
37
<PAGE> 52
governmental entity that would require the divestiture or cessation of
the conduct of any business presently conducted by the Company or any of
its subsidiaries or by Buyer or any of its affiliates, or which may
individually or in the aggregate have an adverse effect on Buyer or any
of its affiliates, or which, individually or in the aggregate, is
reasonably likely to have a material adverse effect on the Company or
any of its subsidiaries;
(d) resignation of certain directors and officers of the Company and
its subsidiaries;
(e) receipt of notices of intent to dissent from the holders of not
more than 5 percent of the Company Shares; and
(f) no material adverse effect on the business or operations of the
Company and its subsidiaries taken as a whole.
TERMINATION
The Merger Agreement may be terminated and the Merger abandoned at any
time before the Effective Time, notwithstanding approval of the Merger
Agreement by the stockholders of the Company:
(i) by mutual written consent of Buyer and the Company;
(ii) at the election of the Company, if Buyer or Buyer Sub has
breached or failed to perform or comply with in any material respect any
representation, warranty, covenant or agreement contained in the Merger
Agreement, and such breach or failure is not cured within 15 days;
(iii) at the election of Buyer, if the Company or any of its
Subsidiaries has breached or failed to perform or comply with in any
material respect any representation, warranty, covenant or agreement
contained in the Merger Agreement, and such breach or failure is not
cured within 15 days;
(iv) by Buyer or the Company if the Effective Date shall not be on
or before SeptemberE30, 1996 or such later date as the parties may agree
upon, unless the failure to consummate the Merger is the result of a
willful and material breach of the Merger Agreement by the party seeking
to terminate the Merger Agreement;
(v) at the election of the Company, in the event of receipt of an
unsolicited acquisition proposal, if the Board of Directors determines in
good faith pursuant to a written opinion of outside counsel that its
fiduciary duties require it to consider such proposal, and the Company
has paid the Termination Fee; or
(vi) by Buyer 45 days following the date on which the Company first
actively participates in any discussions or negotiations regarding, or
furnishes to any person any confidential information with respect to, any
unsolicited acquisition proposal, unless prior to the expiration of such
45 day period the Company notifies Buyer that such acquisition proposal
has been rejected and any such negotiations have been terminated.
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<PAGE> 53
STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
Since January 1, 1994, John A Dore has acquired 24,552 Company Shares at
prices ranging from $8.51 to $12.19. Of the 24,552 Company Shares so acquired,
6,552 were acquired in open market purchases and 18,000 were issued by the
Company to Mr. Dore pursuant to the terms of his employment agreement. In
addition, during such period, Mr. Dore received options to acquire 36,000
Company Shares pursuant to the terms of his employment agreement and as
incentive compensation awarded by the Executive Compensation Committee of the
Company. The average purchase price for the Company Shares acquired by John A.
Dore in open market purchases since January 1, 1994 is as follows:
<TABLE>
<CAPTION>
Average Purchase
Quarter Ended Price
------------- ----------------
<S> <C>
June 30, 1994 $9.03
September 30, 1994 $8.77
March 31, 1995 $9.38
</TABLE>
As of March 31, 1996 the following persons or entities were known by the
Company to be beneficial owners of 5 percent or more of the Company's Common
Shares:
Amount and Nature Percent of
Name and Address of Beneficial Ownership Class(1)
---------------- ----------------------- -------
R. Keith Long Direct - 285,004 Shares
400 Royal Palm Way Indirect - 113,184 Shares(2)
Suite 204 -------
Palm Beach, Florida 33480 398,188 Shares(3) 12.6%
Pierpont Morgan Ltd./
Scott J. Seligman Direct - 196,150 Shares(4) 6.0%
1760 S. Telegraph Rd.
Bloomfield Hills, Michigan 48302
Jane Marvel Garnett Direct - 171,936 Shares(5) 5.4%
David G. Booth Direct - 73,468 Shares(5) 2.3%
24 Monroe Place
Brooklyn, New York 11238
John F. Fyfe Direct - 248,745 Shares(6) 7.8%
630 W. Fullerton Parkway
Chicago, Illinois 60614
John A. Dore Direct - 107,114 Shares
First Re Management Company, Inc. Indirect - 73,994 Shares(7) 7.4% (8)
55 West Monroe Street --------------
Suite 2700 181,108 Shares
Chicago, Illinois 60603
William M. Toll Direct - 370,344 Shares(9) 11.5% (9)
1904 Lamington Road
Bedminster, New Jersey 07921
- ----------
(1) Calculated for each beneficial owner on the basis of shares outstanding
at March 31, 1996, plus shares subject to options exercisable by such
beneficial owner within 60 days of March 31, 1996.
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<PAGE> 54
(2) Owned directly by a limited partnership, the general partner of which is
a corporation owned by Mr. Long.
(3) Mr. Long also holds options to purchase 7,200 shares of the Company's
Common Stock.
(4) Schedule 13D dated June 26, 1992 filed with the Securities and Exchange
Commission reported ownership of 192,096 Common Shares. The Company's
records indicate an additional 4,054 shares subsequently were acquired.
(5) As reported in an Amendment to Schedule 13D dated March 8, 1995 filed
with the Securities and Exchange Commission. David G. Booth is the spouse
of Jane Marvel Garnett.
(6) As reported in a Schedule 13D dated December 16, 1994 filed with the
Securities and Exchange Commission.
(7) 6,336 shares of Common Stock are owned directly by the children of Mr.
Dore, and 67,658 shares of Common Stock are owned directly by the spouse
of Mr. Dore.
(8) Mr. Dore also holds options (currently exercisable or exercisable within
60 days of March 31, 1996) to acquire 59,040 shares of Common Stock.
(9) As reported in a Form 4 dated September 6, 1995 filed with the Securities
and Exchange Commission.
The amount and nature of beneficial ownership of Common Shares by the
directors and named executive officers of the Company as of March 31, 1996 is
set forth below:
Amount and Nature
Name of Beneficial Ownership(1) Percent of Class (2)
- -------------------- ---------------------------- -------------------
Richard P. Ackerman Direct - 0 Shares 0%
Dale C. Bottom Direct - 8,823 Shares (*)
W. Dean Cannon, Jr. Direct - 24,984 Shares (*)
John P. Diesel Direct - 7,200 Shares (*)
John A. Dore Direct - 107,114 Shares
Indirect - 73,994 Shares(3) 7.4%(3)
Gerald J. Levy Direct - 4,608 Shares (*)
R. Keith Long Direct - 285,004 Shares
Indirect - 113,184 Shares(4) 12.6%
Joe C. Morris Direct - 10,080 Shares
Indirect - 3,196 Shares(5) (*)
William B. O'Connell Direct - 4,176 Shares
Indirect - 10,137 Shares(6) (*)
Herschel Rosenthal Direct - 19,248 Shares
Indirect - 5,990 Shares(7) 1.2%
Thad Woodard Direct - 4,608 Shares (*)
John B. Zellars Direct - 54,062 Shares
Indirect - 720 Shares(7) 1.9%
Lonnie L. Steffen Direct - 30,624 Shares
Indirect - 3,168 Shares(8) 1.8%(8)
Robert E. Wendt Direct - 7,012 Shares (*)
--------------
All directors and named executive
officers as a group 777,932 Shares 27.9%
(*) Less than one percent.
- --------------------------
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<PAGE> 55
(1) The directors and named executive officers also hold certain options to
purchase shares of the Company's Common Stock as described below.
(2) Calculated for each beneficial owner on the basis of shares outstanding
at March 31, 1996, and including shares subject to options currently
exercisable or exercisable by such beneficial owner within 60 days of
March 31, 1996.
(3) 6,336 shares of Common Stock are owned directly by the children of Mr.
Dore and 67,658 shares of Common Stock are owned directly by the spouse of
Mr. Dore. Mr. Dore's ownership percentage of 7.4 percent is calculated by
including options held by Mr. Dore that are currently exercisable or
exercisable within 60 days of March 31, 1996. If the percentage ownership
is calculated by including all the options held by Mr. Dore, regardless of
whether such options are exercisable, Mr. Dore's percentage ownership
would be 8.9 percent.
(4) Owned directly by a limited partnership, the general partner of which is
a corporation owned by Mr. Long.
(5) Owned directly by a trust of which Mr. Morris is trustee.
(6) Owned directly by the estate of the spouse of the person whose ownership
is reported.
(7) Owned directly by the spouse of the person whose ownership is reported.
(8) Owned directly by the children of Mr. Steffen. Mr. Steffen's ownership
percentage of 1.8 percent is calculated by including options currently
exercisable or exercisable within 60 days of March 31, 1996. If the
percentage ownership is calculated by including all options held by Mr.
Steffen, regardless of whether such options are exercisable, Mr. Steffen's
ownership percentage would be 2.4 percent.
As used herein, "beneficially owned" means the sole or shared power to
vote or direct the voting of a security and/or sole or shared investment power
with respect to a security (i.e., the power to dispose or direct the
disposition of a security). Unless otherwise indicated, all directors and
executive officers have sole voting and sole investment power over the shares
listed.
As of March 31, 1996, the directors and named executive officers held
options to acquire the following Company Shares:
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<PAGE> 56
Amount of Securities
Name Subject to Options
---- ------------------
William B. O'Connell 12,960
W. Dean Cannon, Jr. 5,760
R. Keith Long 7,200
John B. Zellars 5,760
Joe C. Morris 7,200
Thad Woodward 12,960
Dale C. Bottom 12,960
Gerald J. Levy 12,960
Herschel Rosenthal 12,960
John A. Dore 115,200
Lonnie L. Steffen 43,200
Robert E. Wendt 7,920
See "SPECIAL FACTORS--Stock Option Plan and Directors' Incentive Plan" and
"SPECIAL FACTORS--Acceleration of Stock Options."
OTHER MATTERS
The Board of Directors of the Company is not aware of any matters to be
presented for action at the Special Meeting other than those described herein
and does not intend to bring any other matters before the Special Meeting.
However, if other matters should come before the Special Meeting, it is
intended that the holders of proxies solicited hereby will vote thereon in
their discretion.
PROPOSALS BY HOLDERS OF COMPANY SHARES
In the event the Merger is not consummated for any reason, proposals of
stockholders intended to be presented at the 1996 annual meeting of
stockholders must be received by the Company at its principal executive offices
a reasonable time prior to the Company's solicitation of proxies in order to be
included in the Company's Proxy Statement and form of proxy relating to that
meeting. Once the date of any such annual meeting is scheduled, stockholders
will be informed in a timely manner of the date by which such proposals must be
received. In addition, a stockholder who intends to present business at any
annual meeting must comply with the notice requirements set forth in the
Company's Bylaws. Stockholders should mail any proposals by certified
mail-return receipt requested.
EXPENSES OF SOLICITATION
The expenses in connection with solicitation of the enclosed form of proxy
will be paid by the Company. In addition to solicitation by mail, officers or
regular employees of the Company, who will receive no compensation for such
services other than their regular salaries, may solicit proxies personally or
by telephone or facsimile. Arrangements will be made with brokerage houses,
nominees, participants in central certificate depository systems and other
custodians and fiduciaries to supply them with solicitation material for
forwarding to their principals, and arrangements may be made with such persons
42
<PAGE> 57
to obtain authority to sign proxies. The Company may reimburse such persons
for reasonable out-of-pocket expenses incurred by them in connection therewith.
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements of the Company as of December 31,
1995, and for each of the years in the five-year period ended December 31,
1995, incorporated by reference have been audited by Coopers & Lybrand, LLP,
independent public accountants, as stated in their report.
It is not anticipated that a representative of Coopers & Lybrand will
attend the Special Meeting.
AVAILABLE INFORMATION
The Company is subject to the informational reporting requirements of the
Exchange Act and, in accordance therewith, files reports, proxy statements and
other information with the Commission. Such reports, proxy statements and
other information can be inspected and copies made at the Public Reference Room
of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and the
Commission's regional offices at 7 World Trade Center, New York, New York 10048
and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can also be obtained from the Public
Reference Section of Commission at its Washington address at prescribed rates.
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BUSINESS, FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
____________, 1996
44
