<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 1)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Financial Institutions Insurance Group, Ltd.
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
Financial Institutions Insurance Group, Ltd.
------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2).
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
Common Stock
-----------------
2) Aggregate number of securities to which transaction applies:
3,210,584 shares of common stock; options to acquire 295,056 shares
---------------------------------------------------------------------
of common stock.
----------------
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11:*
3,210,584 (outstanding shares)
x $16.00 (merger consideration
per share) = $51,369,344
-----------
Aggregate cash payment equal to
difference between $16.00 and
exercise price of outstanding
stock options = $ 2,770,586
-----------
Total Consideration $54,139,930
x .0002
-----------
Filing Fee $ 10,827.97
4) Proposed maximum aggregate value of transaction: $54,139,930
-----------
- ---------------
* Set forth the amount on which the filing fee is calculated and state how
it was determined.
[X] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid: 10,827.97
----------------------------------------------------------------
2) Form, Schedule or Registration Statement No.: Schedule 14A
----------------------------------------------------------------
3) Filing Party: Financial Institutions Insurance Group., Ltd.
----------------------------------------------------------------
4) Date Filed: May 22, 1996
----------------------------------------------------------------
<PAGE> 2
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 September 5, 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
August 12, 1996
<PAGE> 3
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS ON SEPTEMBER 5, 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 September 5, 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
August 12, 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> 4
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 September 5, 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, and certain other officers and employees
of the Company will own shares and options aggregating approximately 1% 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 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
August 12, 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> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY................................................................... 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-3
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-5
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............................................ 6
The Board of Directors' Reasons for the Merger; Recommendation of the
Company's Board of Directors.......................................... 13
Voting Agreements....................................................... 16
Interest of John A. Dore and Management in the Merger................... 16
Dore's Belief as to the Fairness of the Merger.......................... 17
CHP II's Belief as to the Fairness of the Merger........................
Purpose and Certain Effects of the Merger............................... 18
Interests of Certain Persons in the Merger.............................. 20
Stock Option Plan and Directors' Incentive Plan....................... 20
Acceleration of Stock Options......................................... 21
Employment Agreements................................................. 21
Indemnification and Insurance......................................... 21
Certain Federal Income Tax Consequences of the Merger to the Company's
Stockholders.......................................................... 22
THE MERGER................................................................ 23
Effects of the Merger................................................... 24
</TABLE>
- i -
<PAGE> 6
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Effective Time........................................................... 24
Procedures for Exchange of Certificates.................................. 24
Accounting Treatment..................................................... 25
Source and Amount of Funds............................................... 25
Plans or Proposals After the Merger...................................... 26
Rights of Dissenting Stockholders........................................ 27
Regulatory Approvals..................................................... 29
Connecticut Insurance Laws............................................... 30
THE MERGER AGREEMENT....................................................... 30
General.................................................................. 30
Effective Time........................................................... 31
Consideration to be Received by Stockholders of the Company.............. 31
Representations and Warranties........................................... 32
Covenants................................................................ 33
Termination Fee.......................................................... 38
Amendments and Waivers................................................... 38
Expenses................................................................. 38
Conditions to Consummation of the Merger................................. 39
Termination.............................................................. 40
STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS................ 40
OTHER MATTERS.............................................................. 43
PROPOSALS BY HOLDERS OF COMPANY SHARES..................................... 44
EXPENSES OF SOLICITATION................................................... 44
INDEPENDENT PUBLIC ACCOUNTANTS............................................. 44
AVAILABLE INFORMATION...................................................... 44
BUSINESS, FINANCIAL INFORMATION AND
MANAGEMENT'S DISCUSSION AND ANALYSIS..................................... 45
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</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
Appendix E - Budget
- ii -
<PAGE> 7
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 September 5, 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 sole general
partner of CHP II is Castle Harlan Associates, L.P., a Delaware limited
partnership ("CHALP"). The principal business of CHALP is serving as general
partner of CHP II. The sole general partner of CHALP is Castle Harlan Partners
II GP, Inc., a Delaware Corporation ("CHALP GP"). The principal business of
CHALP GP is serving as general partner of CHALP. CHALP GP is controlled by John
K. Castle. 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 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 CHP II is an affiliate of the Company or its officers or
directors.
<PAGE> 8
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
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 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
S-2
<PAGE> 9
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."
Accounting Treatment
The Merger will be accounted for under the purchase method of accounting
by Buyer. See "THE MERGER--Accounting Treatment."
S-3
<PAGE> 10
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."
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
S-4
<PAGE> 11
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."
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
---- ---
<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
Third Quarter (through August 6, 1996). 15.75 15.38
</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 August 6, 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 $15.75.
DIVIDENDS
Since January 1, 1994, the Company has paid the following cash and common
stock dividends to holders of record of Common Stock:
S-5
<PAGE> 12
<TABLE>
<CAPTION>
Dividend
Stockholder Paid Per
1996 Payment Date Record Date Common Share
------------------------------------------------------
<S> <C> <C>
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
<CAPTION>
Dividend
Stockholder Paid Per
1995 Payment Date Record Date Common Share
------------------------------------------------------
<S> <C> <C>
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
<CAPTION>
Dividend
Stockholder Paid Per
1994 Payment Date Record Date Common Share
------------------------------------------------------
<S> <C> <C>
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
</TABLE>
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
S-6
<PAGE> 13
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.
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-7
<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-8
<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 Thursday, September 5, 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
August 12, 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 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.
2
<PAGE> 17
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 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 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 an acquisition context. Based upon a review
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.
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,
3
<PAGE> 18
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. 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 to 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. It further was noted that the Company has been experiencing a trend of
declining net income growth. See Appendix E. 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.
4
<PAGE> 19
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 August 2, 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. A copy
of the 1996 budget prepared by management is attached hereto as Appendix E. Net
income for 1996 was projected by management to be $4.7 million. Management has
indicated that based upon currently available information, 1996 net income will
be greater than $4.7 million due to approximately $2.1 million in net gains on
investments being realized in the first quarter of 1996. The Company indicated
that it repositioned its investment portfolio in the first quarter in order to
secure investment gains and avoid the potential negative effect that investment
losses could have on the proposed acquisition of the Company. Absent this
nonrecurring increase in net realized gains on investments, management indicated
that 1996 net income would be projected to be at or slightly below $4.7 million.
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 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 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. The forecasted income statements were one of several factors
considered by William Blair as noted in its opinion attached hereto as
Appendix C.
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.
5
<PAGE> 20
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; (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 techiques 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. Because 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 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 investing 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
6
<PAGE> 21
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: 1.29x book value,
with a range from .59x to 2.72x book value, 11.2x last twelve months adjusted
earnings, with a range from 8.0x to 33.7x last twelve months adjusted earnings,
9.5x last twelve months adjusted operating income, with a range from 5.8x to
84.3x last twelve months adjusted operating income, and 9.6x 1996 earnings
estimate, with a range from 1.4x to 14.2x 1996 earnings estimate). These
adjusted multiples were then applied to Company data, and resulted in a public
market reference value of $41.0 million (or $12.25 per share). William Blair
derived an acquisition reference value for the Company of $53.0 million (or
$15.67 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 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
7
<PAGE> 22
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 transaction
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.
Rather, William Blair may have given various 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.
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
8
<PAGE> 23
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 (approximately $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 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 analyses 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
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.
9
<PAGE> 24
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 letter agreements dated January 4, 1996 with Castle Harlan, Inc.
("CH"), the investment manager of CHP II ("Dore Agreement") pursuant to which
Mr. Dore and CHP II agreed to make a joint proposal to acquire the Company and
to cooperate generally with respect to such acquisition. The Dore Agreement
provides, among other things, that Mr. Dore will not negotiate or enter into
any agreement with the Company or an affiliate of the Company, or any other
party, to be employed by the Company or any such other party in the event of
the purchase of the Company by such other party. Such exclusivity provision
can only be modified with the mutual consent of CHP II and Mr. Dore. The Dore
Agreement also states 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 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 August 12, 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 August 12, 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. It is anticipated that the investment by such individuals would be
made by rolling over a portion of the Company Shares owned by them which would
be effectuated by contributing such Company Shares to Buyer prior to the Merger
in exchange for shares of Buyer. Buyer had also 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, all of its subsidiaries, as well as another insurance company
controlled by CHP II after the Merger. See "THE MERGER--Plans or Proposals
after the Merger." Mr. Dore is expected to enter into a three year employment
agreement with the Company 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 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 projections set forth at Appendix E which show a trend of
declining net income growth and 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. Management has indicated that, based upon currently
available information, 1996 net income is expected to be greater than the
original forecast of $4.7 million, due to the Company's realization of
approximately $2.1 million in gains on investments in the first quarter of 1996.
The Company restructured its portfolio in the first quarter to secure gains on
investments and to avoid the potential negative effect that investment losses
could have on the proposed acquisition of the Company. Absent this nonrecurring
gain, net income would be projected to be at or slightly under budget for 1996.
Premiums earned are expected to be below the budgeted amount of $16.3 million by
approximately 3-5%. Mr. Dore also reviewed the following forecasts of
underwriting results which were prepared by management:
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
UNDERWRITING RECAP
<TABLE>
<CAPTION>
==========================================================================================================
PROJECTED BUDGET FORECAST FORECAST FORECAST FORECAST
1995 1996 1997 1998 1999 2000
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Premium Earned $11,114,468 $16,332,751 $19,344,028 $21,062,430 $22,952,674 $25,031,941
Losses 5,029,325 9,235,804 11,387,006 13,063,707 15,858,078 17,281,885
Acquisition Cost 2,669,727 3,859,946 4,377,636 4,557,226 4,907,654 5,288,563
UW Profit 3,415,416 3,237,001 3,579,386 3,441,497 2,186,942 2,461,493
Loss Ratio 45.3% 56.5% 58.9% 62.0% 69.1% 69.0%
Acquisition
Ratio 24.0% 23.6% 22.6% 21.6% 21.4% 21.1%
Combined loss
and Acquisition
Ratio 69.3% 80.2% 81.5% 83.7% 90.5% 90.2%
==========================================================================================================
</TABLE>
After considering the foregoing, Mr. Dore has indicated that he believes the
Merger Consideration to be fair to the Company's stockholders. 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 the 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.
CHP II'S BELIEF AS TO THE FAIRNESS OF THE MERGER
CHP II has indicated that it believes the Merger to be 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 arms-length nature of the negotiations with respect to the
Merger; (iii) 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;
(iv) the approval of the Merger by all the directors of the Company (with the
exception of Mr. Dore, who did not participate in such discussions) and the fact
that 11 of the 12 directors are independent of management and will have no
continuing interest in the Company; and (v) the opinion of William Blair that
the Merger Consideration is fair to the Company's stockholders from a financial
point of view. CHP II 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 reviewed
the same projections that had been provided to William Blair which show a
declining trend in the increases in net income, and 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. Management has indicated that,
based upon currently available information, 1996 net income is expected to be
greater than the original forecast of $4.7 million, due to the Company's
realization of approximately $2.1 million in gains on investments in the first
quarter of 1996. CHP II has been advised that the Company restructured its
portfolio in the first quarter to secure gains on investments and to avoid the
potential negative effect that investment losses could have on the proposed
acquisition of the Company. Absent this nonrecurring gain, management has
indicated that net income would be projected to be at or slightly under budget
for 1996. Management further has indicated that premiums earned are expected to
be below the budgeted amount of $16.3 million by approximately 3-5%. After
considering the foregoing, CHP II has indicated that it believes the Merger
Consideration to be fair to the Company's stockholders. See Appendix E. 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 CHP II in determining the fairness of the Merger. However, in CHP
II'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. In reaching its
determination as to fairness, CHP II did not assign specific weights to
particular factors and considered all factors as a whole, but relied principally
on the factors cited above.
CHP II 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. Buyer intends to 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 CHP II.
CHP II received an executive summary draft report (the "Report") prepared
by Am-Re Consultants, Inc. ("Am-Re Consultants") dated February 28, 1996, as
supplemented on March 4, 1996, which summarized in preliminary form the due
diligence review of the Company performed by Am-Re Consultants. Am-Re
Consultants is a nationally recognized consultant in the insurance industry,
specializing in due diligence, and was selected by CHP II based on Am-Re
Consultants' experience and reputation as well as its prior relationship with
CHP II in having performed a similar due diligence review and co-invested with
CHP II in connection with another insurance company acquisition. The Am-Re
Consultants due diligence review was performed over a four-day period, both
on-site at the office of the Company's subsidiaries in Chicago as well as
further analyses performed off-site. In addition to its general due diligence
observations, Am-Re Consultants concluded in the Report that the Company's
gross loss and allocated loss adjustment expense reserves as of December 31,
1995 were projected to be "redundant", or in excess of actuarially determined
amounts by up to $6.7 million. The Am-Re Consultants analysis employed
traditional actuarial methodologies including incurred loss projections,
Bornhuetter-Ferguson, and loss ratio selection techniques. Am-Re Consultants
also relied in part on an actuarial analysis performed by the Company's
accountants. Am-Re Consultants stated in the Report that estimates of loss
reserves are subject to potential errors of estimation, since ultimate
liability for claims is subject to the outcome of future events, and that thus
there can be no assurance as to the adequacy of projected reserve levels.
Am-Re Consultants' analysis was further based on the Company's historical
experience, supplemented by industry data and other qualitative information
where appropriate. Am-Re Consultants stated in the Report that this historical
data may not be a prediction of future experience for the Company, that Am-Re
Consultants did not anticipate any extraordinary changes to the legal, social
and economic environment which might affect the cost and frequency of claims,
and further stated in the Report that future loss emergence will likely
deviate, perhaps substantially, from its estimates. The Report was prepared
for internal use by CHP II only and was not intended to be disclosed or
distributed to any other person. A copy of the Report with respect to the
Company's loss reserves will be made available for inspection and copying at
CHP II's offices at 150 East 58th Street, 37th Floor, New York, New York 10022
during regular business hours for any interested equity security holder of the
Company or its representative so designated in writing. Reliance on the
Report by persons other than CHP II is expressly prohibited by the Report and
by the terms of the engagement of Am-Re Consultants by CHP II.
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
10
<PAGE> 25
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."
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. Accordingly, neither Mr. Dore nor CHP II will
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:
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
Wiliam 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 $821,949.
Employment Agreements
Currently, four key executives of the Company are parties to employment
agreements. Under the terms of these agreements, if employment is terminated
by the executive within six months immediately following the Merger, the
executive may elect to receive (i) a monthly termination payment equal to the
executive's base salary for the month immediately preceding the effective date
of termination, and continuing for a period consisting of one month for each
full year and final fraction of a year of employment (subject to a 6-month
minimum payment period, and in the case of Mr. Dore, subject to a 12-month
minimum payment period), or (ii) the present value of the monthly termination
payments described above. Mr. Dore is expected to enter into an employment
agreement with Buyer after the Merger. See "SPECIAL FACTORS -- Interest of
John A. Dore and Management in the Merger" for a description of available
information on Mr. Dore's proposed employment arrangement.
Pursuant to his employment agreement with the Company, Mr. Dore has
received the following compensation from the Company and its subsidiaries in
the last two fiscal years:
11
<PAGE> 26
<TABLE>
<CAPTION>
Year Annual Bonus Stock Awards Securities Exercise
- ---- Salary ----- (# Shares) Underlying Price
------ ------------ Options ($/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>
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
12
<PAGE> 27
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
13
<PAGE> 28
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.
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.
14
<PAGE> 29
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) a 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.
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,
15
<PAGE> 30
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 May 8, 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 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
16
<PAGE> 31
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 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.
17
<PAGE> 32
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 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
18
<PAGE> 33
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 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
19
<PAGE> 34
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
29, 1996. The 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 was
held on July 26, 1996, and it is expected that the Connecticut Commissioner
will issue a ruling within 30 days of the date of the hearing.
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.
20
<PAGE> 35
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 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
21
<PAGE> 36
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;
(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.;
22
<PAGE> 37
(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;
(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;
23
<PAGE> 38
(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 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
24
<PAGE> 39
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;
(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
25
<PAGE> 40
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 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)
the 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) any 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) any 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) any 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) any 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) any 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) any 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) any 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) provide to Buyer
a monthly management report in scope and detail reasonably satisfactory to
Buyer; (b) timely prepare, and
26
<PAGE> 41
promptly deliver to Buyer, monthly financial statements in scope and
detail reasonably satisfactory to Buyer; (c) provide 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 purporses 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.
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
27
<PAGE> 42
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 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:
<TABLE>
<S> <C>
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
</TABLE>
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
28
<PAGE> 43
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 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 September 30, 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;
29
<PAGE> 44
(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.
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:
<TABLE>
<CAPTION>
Amount and Nature Percent of
Name and Address of Beneficial Ownership Class(1)
- ---------------- ----------------------- -----------
<S> <C> <C>
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
</TABLE>
30
<PAGE> 45
<TABLE>
<S> <C> <C>
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
</TABLE>
__________
(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.
(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:
<TABLE>
<CAPTION>
Amount and Nature
Name of Beneficial Ownership(1) Percent of Class (2)
---- -------------------------- --------------------
<S> <C> <C>
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 (*)
</TABLE>
31
<PAGE> 46
<TABLE>
<S> <C> <C> <C>
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%
</TABLE>
(*) Less than one percent.
- ---------------
(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:
32
<PAGE> 47
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
33
<PAGE> 48
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.
34
<PAGE> 49
BUSINESS, FINANCIAL INFORMATION AND MANAGEMENT'S
DISCUSSION AND ANALYSIS
GENERAL
The Company is an insurance holding company which, through its subsidiaries,
underwrites insurance and reinsurance. The principal lines of business
include professional liability, directors and officers liability, property
catastrophe reinsurance and other lines of property and casualty reinsurance.
The Company conducts its business by operating an insurance company and
managing insurance and reinsurance assumptions through two underwriting
agencies.
First Re is the largest subsidiary. Incorporated in 1911, First Re was the
first reinsurance company formed in the United States. First Re is domiciled
in the State of Connecticut and currently maintains direct licenses in 20
states. First Re has reinsurance authorities in an additional 14 states. A
second insurance company, Financial Institutions Insurance Fund, Incorporated
("FIIF"), was sold in the third quarter of 1994, after all of its business and
unrestricted net assets were transferred to First Re.
The principal underwriting activity of the group is managed by a wholly-owned
subsidiary, Oakley Underwriting Agency, Inc. ("Oakley"). Formed in 1993,
Oakley underwrites directors and officers liability insurance and professional
liability insurance coverages on behalf of First Re and Virginia Surety
Company, Inc. ("VSC"). VSC is an unaffiliated insurance company that maintains
an underwriting contract with Oakley.
Oakley produces its business through independent insurance agents and brokers.
In 1994, Oakley became the major source of premium revenue for the Registrant,
providing 78.5% of the net written premium revenue and 66.1% of the earned
premium revenue. In 1995 Oakley premiums increased to 88.3% and 84.4%
respectively of the Registrant's total net written and earned premium.
First Re provides reinsurance behind VSC on the Oakley produced premium. The
agreement with VSC permits First Re to retain approximately 70.0% of the gross
premium revenue paid by the insureds. The remaining 30.0% of the premium is
ceded to approximately 15 other reinsurance companies. First Re assumes a
maximum net exposure of $500,000 per risk under the current reinsurance program
that expires April 1, 1996.
The non-Oakley reinsurance activities of First Re depend on agreements
("reinsurance treaties") that have been entered into with non-affiliated ceding
insurance companies that market and underwrite policies of insurance. First Re
has entered into reinsurance treaties whereby companies cede a portion of their
premiums, commissions and related incurred losses to First Re.
These agreements consist of both quota share and excess of loss treaties with
the ceding companies. The principal distinction between these two types of
agreements is that in quota-share treaties, the reinsurer usually takes a pro
rata portion of the risk and receives that pro rata portion of the premium
revenues. Under the excess of loss treaty, for a specified rate, a portion of
the liability is assumed in excess of a specific retention and up to the agreed
reinsurance limit.
The treaties are usually for a one year duration and cover policies attaching
during that period. The policies covered by the agreements are normally for a
one year term. Most of the premiums written in 1995 were for quota share
treaties. These treaties with ceding companies were the primary source of
non-investment related income during 1995. The loss of revenues from any one
treaty or cedant would not affect the Company's ability to remain a going
concern.
35
<PAGE> 50
GENERAL (CONTINUED)
First Re recognizes premium revenues according to the terms of the reinsurance
treaties and the insurance contracts it issues. Premiums assumed under the
terms of quota share treaties are earned by the cedant on a pro rata basis,
whereas premiums assumed on excess of loss treaties are calculated by applying
the respective rate and participation percentages to the subject premiums. In
both kinds of treaties, the premiums earned are based on the terms and the
periods of the underlying insurance contracts.
In addition, First Re exercises the right to periodically review ceding
companies' records to evaluate their compliance with such matters as premium
accounting, underwriting standards and claims handling. Reports on the
performance of the ceding companies are reviewed by the Company's
affiliates.
The Company's subsidiaries have 25 full-time employees and 6
part-time employees and maintained offices in Chicago, Illinois and Avon,
Connecticut.
PRODUCTS AND COMPETITORS
Oakley operates as an insurance underwriting agency, writing professional
liability and directors and officers liability insurance policies under
contracts with First Re and VSC. The producers of this business are both
retail and wholesale insurance brokers who represent the insureds. Oakley
underwrites, issues and maintains the policies on behalf of First Re and VSC.
First Re assumes a portion (approximately 70.0%) of the gross written premium
that VSC cedes to its reinsurers after deductions for acquisition costs. In
1995, 40.6% of the premiums written through the Oakley operation were written
directly for First Re. First Re, when acting as the insurer, shares the same
reinsurance protections as are arranged for VSC. The Oakley operation gives
First Re a larger degree of control over the risk selection at reduced
commission terms than it could expect as a quota-share reinsurer.
A directors and officers liability policy indemnifies its directors and
officers for claims made against the directors and officers for wrongful acts.
The policy is written on a claims made basis and provides coverage to insureds,
not for profit entities, public entities, and educational entities. The
professional liability policy provides selected lines of business with
insurance for errors and omissions in the conduct of the insureds professional
activities. The majority of the professional liability business written covers
lawyers, architects and engineers, consultants and insurance agents. These
policies are also written on a claims made basis.
First Re also operates as a reinsurer in the intermediary segment of the
reinsurance market. Business is produced by non-affiliated reinsurance
intermediaries (brokers) who represent various ceding companies in the purchase
of quota-share and excess of loss reinsurance.
First Re assumes various lines of property and casualty reinsurance. These
exposures are typically less than 10.0% of any one reinsurance program. The
property exposures are excess of loss and quota share coverages. The liability
lines are professional liability, directors and officers liability, municipal
liability and auto exposures. First Re competes with other reinsurance
companies within the intermediary market and with direct marketing reinsurers.
A direct market reinsurer does not use intermediaries, but instead markets its
reinsurance through an employed production staff.
Factors that affect First Re's ability to compete in the insurance and
reinsurance marketplace are: (1) approval by various state regulatory
authorities, brokers, reinsurance intermediaries and ceding companies which
would enable other companies to transact business with First Re, (2) First Re's
"A-" rating by A.M. Best Company, the traditional rating agency for the
reinsurance (insurance) industry, and (3) the size of the surplus of First Re.
The agreement structured between Oakley and VSC allows Oakley to utilize a
company that has in place the filings necessary to compete in the current
marketplace until First Re can gain its own approvals by various state
insurance departments. VSC is rated A+ (Superior) by A.M. Best Company. There
is no one dominant company that can be identified as a major competitor of
First Re. The insurance industry is a competitive marketplace where no one
insurer or reinsurer dominates the industry.
36
<PAGE> 51
PRODUCTS AND COMPETITORS (CONTINUED)
The competitive marketplace for products changes with cycles in the insurance
industry. At any given time there are a number of insurance carriers competing
for professional liability, property-casualty reinsurance programs, and
directors and officers liability insurance. Over the last three years, First
Re has reduced its dependence on VSC production by expanding First Re's ability
to write insurance business and by expanding into new lines of reinsurance from
other insurance companies. It is management's intent to continue to build the
Oakley/First Re facilities. See further discussion under "Customers."
For further discussion of these products and their inherent risks, see the
General Business section of the Management's Discussion and Analysis.
LICENSING AND REGULATION
Insurance and reinsurance companies must comply with laws and regulations of
the jurisdictions in which they do business. These regulations are designed to
ensure financial solvency of insurance and reinsurance companies and to require
fair and adequate service for policyholders. The regulations are enforced in
the United States and certain other countries through the granting and revoking
of licenses to do business. Licensing of agents, monitoring of trade
practices, policy form approval, maximum premium and commission rates,
investment parameters, underwriting limitations, minimum reserve and capital
requirements, transactions with affiliates, dividend limitations, changes in
control and a variety of other financial and non-financial components of an
insurance company's business are also regulated under the various regulatory
jurisdictions. These regulations and procedures are administered by individual
state insurance departments by means of regular reporting procedures and
periodic examinations. The quarterly and annual financial reports to the
regulators in the various states utilize accounting principles (statutory
accounting principles), which are different from the generally accepted
accounting principles used in stockholder reports. The statutory accounting
principles, in keeping with the intent to assure policyholder protection, are
primarily based on a solvency concept, while generally accepted accounting
principles are based on a going concern concept. The Company believes that
more, rather than less, regulation is likely in the future.
In particular, the National Association of Insurance Commissioners ("NAIC") has
adopted systems of assessing risk based capital and establishing statutory
capital requirements based on levels of risk assumed by insurance companies.
Based on the formulas adopted by the NAIC in 1994, the capital of First Re
exceeds required levels by a significant margin. The Company does not
foresee any regulatory impediments to its planned operations.
CUSTOMERS
The Company's principal source of revenue, other than that which it derives
from its investment portfolio, is now produced by Oakley. The Oakley business
has increased from 16.5% in 1993 to 66.4% in 1994, and to 84.4% in 1995, of the
total premiums earned. The other reinsurance business provided 15.3%, 23.0% and
27.0% in 1995, 1994, and 1993 respectively of premiums earned. These are the
two main components of the Company's current business.
The VSC financial institutions blanket bond and directors and officers sources
of business, were approximately 0.2%, 10.5% and 54.3%, of the premiums earned
in 1995, 1994, and 1993 respectively.
Oakley markets its products through a network of producers who represent the
insureds. Approximately 50 independent producers account for 90% of the Oakley
business. Additionally, the Oakley staff visits producers, advertises in trade
publications and participates in industry seminars and conferences to promote
its products and further its relationships with the producers.
First Re is continuing to develop its insurance and reinsurance sources of
income as opportunities present themselves.
37
<PAGE> 52
PROPERTIES
No properties are owned by the Company that are material to its business.
38
<PAGE> 53
SELECTED CONSOLIDATED FINANCIAL DATA
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
<TABLE>
<CAPTION>
STATEMENTS OF INCOME
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 (losses) 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
====================================================================
NET INCOME . . . . . . . . . . . . . . . . . . . $ 4,321,799 $ 3,738,818 $ 3,211,945 $ 2,945,764 $ 2,409,818
====================================================================
PER SHARE(**) . . . . . . . . . . . . . . . . . . . $ 1.30 $ 1.13 $ 0.99 $ 0.81 $ 0.61
====================================================================
DIVIDENDS DECLARED PER SHARE(*) . . . . . . . . . . $ 0.22 $ 0.18 $ 0.17 $ 0.16 $ 0.12
====================================================================
</TABLE>
(**) As of 12/10/93 a 2-for-1 stock split to shareholders of record on January
20, 1994 was recorded.
As of 6/7/95 a 20% stock dividend was declared payable to stockholders of
record on July 27, 1995.
As of 12/6/95 a 20% stock dividend was declared payable to stockholders of
record on January 26, 1996.
Earnings per share were restated to reflect the stock dividend dilution.
(*) As of 12/6/95 $.075 of dividends were declared payable to stockholders of
record on January 26, 1996 and were accrued by FIIG as part of the other
liabilities.
<TABLE>
<CAPTION>
BALANCE SHEET DATA
December 31,
-------------------------------------------------------------------
1995 1994 1993 1992 1991
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assets
Investments . . . . . . . . . . . . . . . $75,184,832 $65,235,902 $63,968,135 $49,763,479 $53,474,614
Other assets . . . . . . . . . . . . . . 19,015,441 20,892,630 19,242,906 29,368,699 28,456,009
-------------------------------------------------------------------
TOTAL ASSETS . . . . . . . . . . . . . $94,200,273 $86,128,532 $83,211,041 $79,132,178 $81,930,623
===================================================================
Liabilities and stockholders' equity
Reserves for unpaid losses and loss
adjustment expenses . . . . . . . . . $32,455,874 $32,967,809 $33,502,333 $33,179,237 $24,686,811
Other liabilities . . . . . . . . . . . 15,781,277 14,377,067 12,136,749 11,135,083 18,666,723
-------------------------------------------------------------------
TOTAL LIABILITIES . . . . . . . . . . . . 48,237,151 47,344,876 45,639,082 44,314,320 43,353,534
Stockholders' equity . . . . . . . . . . 45,963,122 38,783,656 37,571,959 34,817,858 38,577,089
-------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY . . . . . . . . $94,200,273 $86,128,532 $83,211,041 $79,132,178 $81,930,623
===================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
Certain balance sheet amounts have been reclassified for prior years to
conform with 1995 presentations.
39
<PAGE> 54
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL BUSINESS
The profitability of the property-casualty business is dependent on competitive
influences, the efficiency and costs of operations, investment results between
the time premiums are collected and losses are paid, the level of ultimate
losses paid, and the ability to estimate each of these factors in setting
premium rates. Investment results are dependent on the selection of investment
vehicles, the ability to project ultimate loss payments, and the timing of the
loss payments. Ultimate loss payments are dependent on the types of coverages
provided, results of litigation, the geographic areas of the country covered
and the quality of underwriting.
The major product lines the Registrant reinsures are professional liability,
directors & officers ("D&O") liability, other reinsurance lines, and run-off
reinsurance exposures acquired in the First Re acquisition. These product
lines and their unique risk characteristics are discussed below.
OAKLEY PROFESSIONAL LIABILITY COVERAGES
Oakley was formed in April 1993 to underwrite professional liability and D&O
coverages. The underlying business had been managed by an experienced staff
and established systems at VSC. Oakley agreed to hire certain staff from VSC
and entered into an arrangement that compensates VSC for its costs with an
override related to the renewal of policies and the use of VSC as the issuing
carrier until First Re can gain the necessary approvals to insure these
coverages. The exclusive portion of the contract with VSC was extended until
September 1996. In 1995 84.4% of First Re's premiums earned came from Oakley,
up from 66.1% in 1994 and 16.5% in 1993.
ASSUMED REINSURANCE
Since 1991, First Re has expanded its reinsurance business by writing
participating coverages brokered by reinsurance intermediaries. As a result of
these efforts, First Re has been able to increase existing business lines in
casualty, professional liability and property catastrophe. These exposures are
typically less than $500,000 per insured exposure of each reinsurance program
ceded and have different risk characteristics from the Company's insurance
program.
The property exposures are significant natural disaster coverages where First
Re reinsures the insureds losses in excess of underlying retentions and
reinsured coverages. The losses on this class are reported and settled in a
shorter time frame than First Re's traditional business. Catastrophe losses
are sporadic, difficult to predict and vary depending on the cedent's
underwriting exposures.
Because of the sporadic nature of the insured catastrophes, in any one year the
losses incurred can exceed the premiums for that year. The underwriters for
this class typically attempt to recoup this shortfall of premiums in excess of
losses over a period of time.
The professional liability and casualty reinsurance components of this business
are typically claims-made policies that reimburse injured third parties or
defend insureds for wrongful acts.
At December 31, 1995, 1994 and 1993 these programs accounted for 15.3%, 23.0%
and 27.0% respectively of First Re's earned premium.
40
<PAGE> 55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
FINANCIAL INSTITUTIONS REINSURANCE
The Company was originally formed to support reinsurance of financial
institutions blanket bond and directors and officers liability insurance
coverages. First Re reinsured two companies, Virginia Surety Company, Inc. and
Dearborn Insurance Company ("DIC"), both affiliates of Aon Corporation ("Aon").
Effective July 1, 1993, VSC withdrew from the market for these coverages.
The financial institutions reinsurance was approximately 0.2%, 10.5% and 54.3%,
of the premiums earned in 1995, 1994, and 1993 respectively. All of the
policies expired by June 30, 1994.
First Re continues to reserve and pay claims on these lines of business.
BLANKET BOND COVERAGE ("BOND")
The Bond policy issued by VSC/DIC, which was marketed by Aon affiliates and in
part reinsured by First Re, is based on a Surety Association of America
standard form. This program was terminated when VSC withdrew from the market
on July 1, 1993. The policy provides for indemnification of the insured
financial institution for any losses discovered during the period of coverage.
Bonds policies issued as a result of the treaties had limits up to $5,000,000,
of which First Re reinsured 50% of the first $500,000 limit and 11% of the
limits between $500,000 and $5,000,000.
DIRECTORS AND OFFICERS LIABILITY COVERAGES
The D&O liability coverages issued by VSC/DIC and other ceding companies, and
reinsured in part by First Re, is a Directors and Officers and Company
Indemnity Policy form ("Policy"). The policy was marketed by Aon Corporation
affiliates until the program terminated July 1, 1993, when VSC withdrew from
the market for this coverage.
Policies issued from this treaty coverage had limits up to $3,000,000, of which
First Re reinsured $600,000 (in 1993) and amounts up to $1,000,000 in earlier
years.
CLAIMS INCURRED AND RESERVES
The reinsurance contracts generally have customary clauses which bind First Re
to pay its share of claims and claim settlement costs. First Re reviews and
monitors all aspects of the reinsurance relationships based on the monthly or
quarterly reports it receives as part of the contract terms.
Oakley claims are adjusted by an affiliate of Aon for VSC, First Re and its
reinsurers. The claims are typically reported to the insured's broker who in
turn reports them to Oakley or VSC. VSC reports the claims to reinsurers as
per terms of the reinsurance agreements in place. Some of the claims reported
will be notification of an incident or potential claim that will ultimately be
closed without payment or indemnity. Legal counsel is assigned to significant
claims.
First Re establishes reserves for its loss and loss adjustment expense
liabilities. These liabilities consist of accruals for reported claims and
estimates for incurred but not reported claims ("IBNR"). First Re utilizes
ceding company actuarial reports, industry experience, independent legal
counsel and its own experience to establish IBNR reserves.
41
<PAGE> 56
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
CLAIMS INCURRED AND RESERVES (CONTINUED)
The following table outlines the respective reserve components and their
balances at December 31, 1994 and at quarterly intervals through the period to
March 31, 1996:
<TABLE>
<CAPTION>
RESERVES ON
REPORTED IBNR
DATE RESERVES % CLAIMS % RESERVES %
DIRECT AND ASSUMED
<S> <C> <C> <C> <C> <C> <C>
12/31/94 32,967,809 100% 12,814,155 38.87% 20,153,654 61.13%
3/31/95 33,048,655 100% 13,551,763 41.01% 19,496,892 58.99%
6/30/95 33,794,332 100% 13,106,992 38.78% 20,687,340 61.22%
9/30/95 34,546,320 100% 12,486,310 36.14% 22,060,010 63,86%
12/31/95 32,455,874 100% 11,688,406 36.01% 20,767,468 63.99%
3/31/96 32,280,982 100% 13,201,167 40.89% 19,079,815 59.11%
CEDED
12/31/94 6,424,110 100% 4,006,925 62.37% 2,417,185 37.63%
3/31/95 6,228,220 100% 4,282,499 68.76% 1,945,721 31.24%
6/30/95 6,712,578 100% 5,503,357 81.99% 1,209,221 18.01%
9/30/95 6,598,823 100% 5,058,984 76.66% 1,539,839 23.34%
12/31/95 4,181,349 100% 2,199,000 52.59% 1,982,349 47.41%
3/31/96 3,199,588 100% 2,510,388 78.46% 689,200 21.54%
NET RESERVES
12/31/94 26,543,699 100% 8,807,230 33.18% 17,736,469 66.82%
3/31/95 26,820,435 100% 9,269,264 34.56% 17,551,171 65.44%
6/30/95 27,081,754 100% 7,603,635 28.08% 19,478,119 71.92%
9/30/95 27,947,497 100% 7,427,326 26.58% 20,520,171 73.42%
12/31/95 28,274,525 100% 9,489,406 33,56% 18,785,119 66.44%
3/31/96 29,081,394 100% 10,690,779 36.76% 18,390,615 63.24%
</TABLE>
First Re regularly monitors the relative proportions of its gross reserves to
ensure that they are adequate. In the event such reserves are deemed to be
either redundant or deficient, adjustments are made at the time of such
determination. Such adjustments were recorded as reductions in losses and loss
adjustment expenses in the consolidated income statement for 1995, 1994 and
1993 in the amounts of $4,883,000, $3,352,436, and $1,648,000, respectively.
Management considers the Company's current capitalization, investments and
net reserves to be adequate to meet the Company's operating needs and to
support the level of insurance and reinsurance premiums currently being
written.
LIQUIDITY & CASH FLOWS
The extended development period on claims permits First Re to invest the
reserves from the associated premiums and then realize investment income. Such
extended periods may also cause temporary and possibly significant pressure on
liquidity due to unanticipated requests for claim payments.
The Company engages the firms of Asset Allocation and Management Company
("AAM") and Otter Creek Management, Inc. ("OCM") to provide investment
portfolio management services under the Board of Directors' approved
guidelines, which in turn are conformed to the insurance laws of Connecticut.
The investment portfolio remains at investment grade quality. No investment in
a single security or issuer exceeds 5.0% of the total investment portfolio.
OCM began managing $5,000,000 of the portfolio January 1, 1994 and the
portfolio had a market value of approximately $6,700,000 at December 31, 1995.
OCM is controlled by a director of the Company who manages portfolios for a
variety of clients seeking investments in certain segments of the market that
are perceived as undervalued. In January 1995, the Company invested
$1,000,000 in PSCO Partners Limited Partnership ("PSCO"), a limited
partnership, that invests in publicly held financial services stocks. The
partnership is recorded as part of the common stock investments of the
Company.
42
<PAGE> 57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY & CASH FLOWS(CONTINUED)
The Company's investment portfolio historically has been structured such
that the average expected maturity of the portfolio is approximately three and
one half years. In the first three months of 1996, the average duration of
the fixed portfolio was reduced to approximately two years. This action was
taken to protect the market value of the fixed portfolio from the potential
effect of rising interest rates. The Company also reduced its market risk
exposure to common stock and convertible securities during this period. The
Company believes that the current investment market risk justifies a
defensive posture. Following this policy, the Company realized $2,119,748 of
capital gains from the held for sale portfolio in the first three months of
1996 by selling longer term fixed securities and equity investments and
reinvesting the proceeds into short-term investments.
The Company and its investment advisors believe that, given the current
uncertainties in the fixed income market, it was appropriate to realize these
gains. This activity increased the liquidity and quality of the portfolio. The
length of time needed to settle claims from contracts or policies is influenced
by the type of coverage involved, the complexity of the individual loss
occurrence and the early determination of ultimate liability. Management
believes that it has positioned the Company's investment portfolio to ensure
that it can meet its obligations without adverse deviation from its current
investment objectives. It is also believed that the Company's current
investment policies permit it to continue to take advantage of favorable changes
that might occur in the investment marketplace. The Company has also reduced
exposure to duration risk and maintains an investment grade portfolio with an
average credit rating of "A" as determined by Moodys.
At January 1, 1994, First Re had capital loss carryforwards of approximately
$404,000, which were utilized in 1994 to offset taxes due on the realized
capital gains of $570,231. Approximately $778,000 of the $1,275,142 gains
recorded in 1993 were free of taxes paid, due to the utilization of capital
loss carryforwards. The capital gains realized in 1995 were fully taxed.
As part of its revised investment policy, the Company elected, beginning in
1991, to segregate its securities held for investment from those which are held
for trading. Fixed maturities held for investment were carried at amortized
cost, because the Company had the ability and intent to hold such
investments to maturity. As of December 31, 1993, the Registrant adopted
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." SFAS No. 115 allows the
Registrant to classify its portfolio of fixed maturities and equity securities
as available for sale and to report them at market value. The market value of
the non-redeemable preferred equities at December 31, 1995 was $6,091,931.
Fixed maturities held for sale had a market value of $58,834,592 as of December
31, 1995. Common stocks had an aggregate market value of $4,148,237 at
December 31, 1995.
The unrealized gain or loss on these securities in the held for sale portfolio
is recorded directly to stockholders' equity less the applicable capital gains
tax. The unrealized gain net of taxes on these securities was $1,542,730 at
December 31, 1995. Short-term investments are carried at the lower of amortized
cost or market value, which was $6,110,072 and $4,673,778, as of December 31,
1995 and 1994 respectively.
The Company believes that it will not have to sell invested assets to meet
its obligations ahead of their scheduled maturities. There are no equity
investments with an unrealized loss position that represent a permanent
impairment to the Company's fixed capital structure.
Cash balances at year end were $3,782,536 in 1995 as compared to $3,251,227 in
1994.
Cash flow provided from operations was $5,368,018 in 1995 as compared to
$2,933,553 in 1994 and $1,014,343 in 1993. Investing activities used cash in
the amount of $4,413,500 in 1995 and $3,981,220 in 1994 as compared to a
contribution of $3,266,013 in 1993.
Financing activities used cash amounting to $423,209, $564,822 and $517,825 in
1995, 1994 and 1993 respectively. Receipt of shareholder loans and proceeds
from stock options totaling $270,754 offset an increase in stockholder
dividends of $129,141 in 1995. Payment of cash dividends was the sole financing
activity in 1994 and 1993.
The Oakley operations of the Company generated most of the cash increase
from operations in 1995 and 1994. Oakley collects premiums from producers and
invests them in short-term investments until settlement with the issuing
company (VSC or First Re) is required. Oakley invests these funds in short-term
investments that are matched to quarterly settlement dates. First Re, as a
reinsurer and an insurer, receives its contractual portion of these funds and
invests them in fixed income securities that match the anticipated loss payout
term. Oakley completed its second full year of operation in 1995.
In 1993, operating activities included the release of funds held by VSC which
provided $14,101,348 of cash. A decrease of $607,932 related to the
utilization of other assets, and accrued liabilities provided additional cash
in 1994. Purchases of fixed maturities held for trading in 1993 totaled
$16,727,247. These purchases were the principal use of the cash.
43
<PAGE> 58
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY & CASH FLOWS(CONTINUED)
Investing activities in 1995 reflect a net use of cash totaling $4,413,500
compared to $3,981,220 in 1994. The Company increased its short-term
investments $1,437,064 to fund the contractual settlement requirements of
Oakley. It also invested $1,000,000 in an investment partnership (PSCO) in
January 1995. PSCO invests in publicly traded financial services company
common stocks and this investment is carried as part of common stocks. The
year end value of PSCO was $1,379,000.
Sales of fixed term investments and other securities were completed in 1993 and
1994 as part of a strategy to utilize all of a long term capital loss
carryforward that would have expired on December 31, 1994. The realized gains
of $570,231 were utilized in the remaining balance of that capital loss
carryforward. The investing activity in 1993 was also directed at utilizing
the long term capital loss and investing for the highest after tax total return
possible.
The Company's cash flow in the first three months of 1996 reflects a
decrease in net cash of $1,350,931. The net cash outflow is comprised of
$2,591,346 related to cash used for purchasing of investments, cash inflow of
$1,411,428 related to operations and a cash outflow of $171,013 related to the
payments of dividends less stock options being exercised. The prior year 1995
reflects a net cash decrease of $923,240 comprised of the purchases of
investments of $2,528,549, cash provided by operations of $1,744,062 and cash
used to pay dividends less cash received on stock options in the amount of
$138,753. The decrease in cash provided by operations is primarily due to the
increase in loss adjustment expenses and operating expenses.
As of April 1, 1995, First Re increased its net participation in the lower
layer of the Oakley treaties and eliminated its participations in the two upper
layers. The net exposure per risk increased by less than 1% (from $495,000 to
$500,000) but was concentrated in the first layer of coverage rather than
spread among the policy limits of up to $5,000,000. The net premium writings
increased from approximately 44% of the gross premiums, to approximately 70% of
the gross premiums. This change in participation created a proportional
increase in the commission expenses and incurred losses on the program.
The Company is unaware of any other trends or uncertainties that have had,
or that the Company reasonably expects will have, a material effect on its
liquidity, capital resources or operations. Management feels that the
Company's liquidity and capital resources are adequate to meet future needs.
CAPITAL RESOURCES
Prior to risk based capital standards, general convention in the insurance
industry established an informal guideline ratio of premiums to capital that
was deemed appropriate. Typically, this ratio provided that written premiums
be no greater than three times the capital and surplus of First Re. The
Company has maintained a ratio of less than $ .40 of premium written for
each $1.00 of its capital and surplus since its inception. On the basis of
these results, management believes that it has available insurance capacity to
increase its writings should the opportunity present itself. Additionally,
the Company must file certain reports with various regulatory agencies.
These reports measure the liquidity, capital resources and profitability of
the Company to insurance industry standards. Based on these reports, for
the years 1994 and 1995, and the first three months of 1996, the liquidity
and capital resources of the Company exceed the insurance industry standards.
Payments of future cash dividends are reviewed and voted on at regularly
scheduled Board of Directors' meetings of the Company and its subsidiaries.
In declaring the most recent dividend, the Company considered its current
financial condition with special attention to current income and retained
earnings, and its Stockholder Dividend Policy. These decisions, further, are
based upon the subsidiaries' performance, taking into account regulatory
restrictions on the payment of dividends by such subsidiaries, which are
discussed in more detail in the footnotes to the financial statements.
In September 1994, the Company made a formal offer to acquire, in a cash
transaction, AmerInst Insurance Group, Inc. ("AIIG"), a publicly held
reinsurer of accountants professional liability insurance. This offer was
rejected by the AmerInst board as being insufficient. The Company
increased its offer to purchase AIIG in January, 1995 and this offer too was
rejected as being insufficient.
The Company announced in March, 1995 plans to repurchase up to three million
dollars of its common stock in open market purchases, but to date has not
acquired any stock through this program.
Management considers the Company's capitalization and net reserves to be
adequate to meet current operating and financing needs. The Company is
unaware of any other trends or uncertainties that have had, or it reasonably
expects will have, a material effect on its liquidity, and capital resources or
operations.
44
<PAGE> 59
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
The Company's financial position and results of operations are subject to
fluctuations due to a variety of factors. Abnormally high severity or
frequency of claims in any period could have a material adverse effect on the
Company. Additionally, re-evaluations of the Company's loss reserves
could result in an increase or decrease in these reserves and a corresponding
adjustment to earnings. The historical results of operations are not
necessarily indicative of future results.
The Company has replaced its financial institutions' reinsurance business
with Oakley's professional liability and D&O policies and other reinsurance
writings that may not match the historical experience the Registrant recorded
on its financial institutions' business. Oakley is an insurance underwriter
who can write a broad range of professional liability and D&O policies produced
by the marketing efforts of insurance producers. This underwriting will likely
cost less in commission expense but will increase operating costs as the risk
analysis is performed by company staff for each submission for an insurance
policy. The other assumed reinsurance writings will depend on First Re's
ability to participate in the brokered reinsurance market.
Net income per share in 1995 amounted to $1.30 as compared to $1.13 for 1994.
This represents an increase of 15.0% for the year. In 1994, earnings per
share were 14.1% higher than 1993 ($1.13 vs $.99). Earnings per share are
calculated on a primary basis and have been adjusted to reflect the 20.0%
stock dividends declared in June 1995 and December 1995.
Net income in 1995 is 15.6% higher than 1994 ($4,321,799 vs $3,738,818) and
1994 was 16.4% higher than 1993 ($3,738,818 vs $3,211,945).
Earnings per share in the three months ended March 31, 1996 and 1995
amounted to $.68 and $0.36 respectively. This represents an increase of 89%
from the comparable period of 1995. Earnings per share are calculated on a
diluted basis.
Net income for the three months ended March 31, 1996 is 96% higher than for the
same period in 1995 ($2,292,538 vs. $1,169,420).
Premiums earned and realized capital gains caused the total revenue to increase
by $3,071,139 or 82% for the three months. Incurred losses and commission
expenses increased proportionally to the premium increase, but favorable
development in losses in the financial institution reinsurance programs
continued to contribute significantly to the Company's net income.
The major factors influencing performance are:
1. NET INVESTMENT INCOME AND NET REALIZED CAPITAL GAINS
Net investment income and net realized gains on investments in 1995 increased
by 36.3% to $5,244,382 from $ 3,848,095. Capital gains increased $623,549 due
to improvement in the stock and bond markets. Investment income increased
principally due to increased investment funds from underwriting operations.
Net investment income and net realized gains on investments in 1994 decreased
from 1993 by 18.9% from $4,745,344 to $3,848,095. This decrease is attributable
to reduced capital gains and lower short-term interest rates that were
available in the first six months of 1994.
The pre-tax average yields on mean invested assets for the years 1995 and 1994
were 5.5% and 5.1%, respectively. Improvement in short term rates was the
major reason for the increase in yield.
The Company's investments at December 31, 1995 had an unrealized after-tax
gain of $1,542,730 as compared to a loss of $1,562,822 at December 31, 1994.
In 1994, the Company utilized the $404,000 remaining unrealized capital
loss carry forward from December 31, 1993 to offset taxes that would
otherwise be paid on its capital gains.
Net investment income in the three months ended March 31, 1996 decreased
approximately 20% ($939,676 vs. $1,170,565). This was due to a greater
proportion of the portfolio being invested into shorter duration securities
yielding lower interest rates.
Net realized gains on investments in the three months ended March 31 increased
approximately 2,425%, ($2,119,748 vs. $83,962). The gains earned in 1996
represented repositioning of the total portfolio. The Company secured these
gains due to the uncertainties in the investment market and the potential
negative effect that investment losses could have on the impending acquisition
of the Company.
Future realized gains will be dependent on portfolio positions and market
conditions. Consistent with its investment guidelines adjusted as discussed
above, the Company will continue to invest for the highest total return
possible while maintaining its portfolio's current liquidity and credit
characteristics.
Uncertainty exists about the future direction of investment yields and
realization of capital gains, making forecasts regarding future interest income
difficult.
2. PREMIUMS EARNED AND COMMISSION EXPENSES
Premiums earned increased 45.2% in 1995 (to $11,356,083) as compared to a 5.2%
growth in 1994 (to $7,819,784) as First Re continued its expansion into other
reinsurance lines and finished its second full year of the Oakley operation
(the 1993 results reflected nine months of Oakley). These increases offset the
loss of revenue from the financial institutions program due to the withdrawal
of VSC as an underwriter of this coverage in the third quarter of 1993. The
financial institutions' program represented less than 0.2% of total earned
premium in 1995, as compared to 10.5% in 1994 and 54.3% in 1993.
Premiums earned for the three months ended March 31, 1996 increased 57%
($3,610,824 vs. $2,305,776) over 1995. This increase is primarily due to earned
premiums from business produced by the Company's Oakley subsidiary and is
largely related to an increase in retention of gross premium written from
approximately 44% to 70% of the gross premium, which occurred in the second
quarter of 1995.
Gross premiums written increased approximately 7% for the first three months of
1996 when compared to 1995.
45
<PAGE> 60
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
2. PREMIUMS EARNED AND COMMISSION EXPENSES(CONTINUED)
The Oakley operation produced professional liability and D&O net written
premiums of approximately $12,500,000 for 1995, $7,038,954 for 1994 and
$3,256,991 in the last three quarters of 1993. The increase was due to an
increase in gross written premiums and to a change in participation of the
underlying risk premium (gross premium) from approximately 37.0% to 47.0% in
the second quarter of 1994 and to 70.0% in the second quarter of 1995.
Commission expense increased 70.3% to $3,042,719 in 1995. The 1995 commissions
paid include contractual contingent commissions of $416,000 on financial
institutions' business for the prior underwriting year results. The remainder
of the 1995 commission expense increase relates to the increase in premiums
written.
The three months ended March 31, 1996 had a commissions expense
increase of approximately 23% ($720,692 vs. $588,228) from the same period in
1995. The 1996 increase in commission expenses is proportional to the increased
premiums earned. The effective commission rate on premiums earned in 1996
decreased from 26% to 20% from the comparable period in 1995. The lower
acquisition cost relates to the change in retention levels on the Oakley
business at the April 1, 1995 treaty renewal date and the lower acquisition
costs associated with writing more business directly in First Re.
Commissions paid relate directly to premiums written as they follow
contractually set rates. The Oakley premiums have a lower commission rate due
to the use of ceded reinsurance programs. The average commission rate on
Oakley production is approximately 24.0%, as contrasted to 29.0% on the
discontinued financial institution business. The Company expects to lower
its commission rate as the Oakley premiums become an even larger proportion of
the total writings. The Company's premium writings for all sources of
business in 1995, 1994 and 1993 were approximately $14,140,000, $8,962,000 and
$7,425,000 respectively.
The Company believes that in the current environment, a conservative
underwriting philosophy is warranted. The Company, however, will take
advantage of opportunities which provide a reasonable return. It seeks to make
an underwriting profit on all lines and will withdraw from opportunities that
do not provide a reasonable return.
3. OTHER INCOME
Other income decreased 25.0% to $556,941 in 1995 from 1994. Other income
increased 27.5% to $742,546 in 1994 from 1993. The 1995 amount includes
amortization of the excess of acquired net assets over cost related to the
First Re purchase of $455,000 and the remainder is brokerage income from the
company's financial institution division of its Oakley subsidiary. This
division was terminated in the second quarter of 1995. The 1994 amount includes
amortization of the excess of acquired net assets over cost related to the
First Re purchase of $466,465 and the remainder is from management fees
related to First Re Management Company, Inc. activities and brokerage income
from the Oakley operation.
4. LOSSES AND LOSS ADJUSTMENT EXPENSES
Loss and loss adjustment expenses incurred in 1995 were $4,843,484. This is
$2,230,090 or 85.3% greater than 1994. The year 1994 losses incurred were
$2,310,268 or 46.9% less than in 1993. These changes vary in direct relation
to the volume of business underwritten for the subject year, the type of
business written, and the development of actual claims incurred for both the
subject year and re-estimations of prior year claims.
The incurred relationship between paid losses and reserves in the current and
prior periods is explained in Note K to the financial statements.
Favorable development in underlying claim settlements on the VSC financial
institutions' business created a favorable re-estimation of liabilities related
to claims that had been charged to prior year income statements. The reduction
in estimated ultimate losses on this and other non renewed programs for the
underwriting years 1988-1990 recorded in the 1995 income statement was
approximately $3,469,000. For 1994 these coverages represented 96.7% or
approximately $2,585,000 of the incurred claims and 36.3% or $1,771,442 for
1993. The Company continues to monitor these claims carefully and continually
re-estimates its ultimate losses based on evaluation of each underlying case
and advice from outside counsel and ceding companies' actuaries. The
Company believes its reserves are adequate to cover the remaining exposures
in its financial institutions' business.
46
<PAGE> 61
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
4. LOSSES AND LOSS ADJUSTMENT EXPENSES(CONTINUED)
The other reinsurance had incurred losses of approximately $1,167,000 in 1995
as compared to approximately $500,800 in 1994 and $2,022,000 in 1993. The
1994 losses reflected favorable re-estimations of approximately $1,100,000
related to property exposures on expired reinsurance contracts. The Company
records these reserves at values reported by the ceding companies plus
estimates for additional development.
Incurred losses and loss adjustment expenses for the quarter ended March 31,
1996 were $1,946,108, a 137% increase over the three month period ended March
31, 1995. The increase in premium earnings caused a increase in losses
incurred. The three months ended March 31, 1996 reflected a loss ratio of 54% as
compared to 36% in 1995. Favorable liability re-estimations of loss reserves on
First Re's reinsurance assumed contracts issued prior to 1993 provided
approximately $800,000 of reduction in incurred losses for the period.
Oakley loss estimates are recorded using a combination of the prior
underwriting history, industry experience and management judgment. Oakley
losses were $7,145,864 in 1995, $4,705,129 in 1994 and $1,052,453 in 1993. The
estimated ultimate losses are approximately 80.9% of the Oakley inception to
date earned premiums. The increase in the estimated ultimate losses on these
classes were due to the increase in premium revenues and its' related exposure.
Total losses incurred are shown in aggregate terms in the consolidated
statements of income in the financial statements. Losses are such that First Re
is not required to record premium deficiency reserves.
For income tax purposes, the liability for unpaid losses and loss adjustment
expenses is discounted to values less than those reported for accounting
purposes. The effect of the discounting is to increase the amount of taxable
income and current income tax liability. The tax based adjustments are more
fully explained in Notes A and D to the consolidated financial statements of
the Company for the year ended December 31, 1995.
5. OTHER OPERATING AND MANAGEMENT EXPENSES
A portion of the expenses of the Company are fixed and do not vary directly
in relation to the volume of operating activity.
The operating and management expenses increased 6.2 % to $3,683,860 in 1995
from 1994. The increase in general expenses relates to the increase in
premium revenues and the related expenses on Oakley business as compared to
other reinsurance that had been written by First Re. The operating and
management expenses increased 20.2 % to $3,467,801 in 1994 from 1993. This was
due to the full year of costs involving Oakley, which required more staff and
the corresponding expenses including additional office space.
Other operating and management expenses increased 10% for the three months
ending March 31, 1996 ($936,588 vs. $850,955) when compared to the same
periods of 1995. The increase relates to expenses incurred with the higher
levels of premium production and professional fees incurred in resolving
various acquisition issues.
The Company continues to identify and initiate expense saving strategies as
it becomes more efficient in operating its Oakley subsidiary and managing its
run-off liabilities.
6. TAXES
The Company incurred taxes of $1,265,544, $803,748, and $68,160 for the
years ended December 31, 1995, 1994 and 1993 respectively on net income before
taxes and cumulative effect of changes in accounting principles. The increase
in the tax provision from 1994 to 1995 is primarily due to the favorable
re-estimations of loss reserves as described more fully in Paragraph 4 above.
This contributed a higher proportion of fully taxable income to the total
income.
The effective tax rate was 22.7%, 17.7% and 2.4% for 1995, 1994 and 1993
respectively. The increase from 1993 to 1994 was primarily due to the full
recognition of the capital loss carry forward in 1993 due to the adoption of
FASB 109. The increase in the rate from 1994 to 1995 is the result of a lower
proportion of tax advantaged investment income to the total investment income.
The three months ended March 31, 1996 reflected a 28% effective tax rate as
compared to a 21% tax rate for the 1995 period. This increase is due to a
higher proportion of fully taxed realized capital gains in the total revenue.
7. REGULATORY ENVIRONMENT
The reinsurance (and insurance) industry is continually being scrutinized by
the Executive and Legislative branches of government, as well as by other
regulatory agencies for dividend paying ability and solvency.
Current statutes require prior approval by the Connecticut Insurance
Commissioner for any dividend distributions during a twelve-month period that
are in excess of the greater of (a) 10% of an insurer's surplus, or (b) net
income measured as of the preceding December 31. This will not have any
material effect on First Re's dividend paying ability.
The NAIC has established a new set of measurements for risk based capital
("RBC") requirements on 1994 financial statements. The tests correlate the
risk and uncertainty of the underwriting exposure with the quality of the
assets. Based on the RBC formulas adopted by the NAIC, capital of First Re
exceeded the required levels of capital. The Company does not foresee any
negative results of this requirement.
The Company will continue to monitor developments and respond as necessary
to the changing environment. Without an appropriate response, actions of
regulatory authorities could adversely affect the operations of the Company.
47
<PAGE> 62
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
7. REGULATORY ENVIRONMENT(CONTINUED)
The NAIC is currently conducting a project to codify statutory accounting
principles. The codification is not expected to be final until 1997. At this
time the impact on the financial statements of the Company cannot be
determined.
48
<PAGE> 63
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditor's Report...................................... PG. F-2
Consolidated Balance Sheets - December 31, 1995 and 1994.......... PG. F-3
Consolidated Statements of Income - Years ended
December 31, 1995, 1994 and 1993.................................. PG. F-4
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1995, 1994 and 1993.................................. PG. F-5
Consolidated Statements of Cash Flows - Years ended
December 31, 1995, 1994 and 1993.................................. PG. F-6
Notes to Consolidated Financial Statements........................ PG. F-7-20
Consolidated Interim Financial Statements (Unaudited)............. PG. F-21-24
</TABLE>
F-1
<PAGE> 64
[Coopers & Lybrand LOGO]
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Financial Institutions Insurance Group, Ltd.:
We have audited the consolidated balance sheets of Financial Institutions
Insurance Group, Ltd. as of December 31, 1995 and 1994, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1995 and the financial
statement schedules of Financial Institutions Insurance Group, Ltd. listed in
Item 14 (a) of this Form 10-K. These consolidated financial statements and
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Financial Institutions Insurance Group, Ltd. as of December 31, 1995 and 1994,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information required to be included therein.
As discussed in Note A to the consolidated financial statements, the Company
changed its method of accounting for income taxes and accounting and reporting
for debt and equity securities in 1993.
Hartford, Connecticut
March 28, 1996
COOPERS & LYBRAND L.L.P.
F-2
<PAGE> 65
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
INVESTMENTS
Fixed maturities held for sale at market . . . . . . . . . . . . . . . . . . . . . . . . . . . $58,834,592 $52,283,318
Non-redeemable preferred equities at market . . . . . . . . . . . . . . . . . . . . . . . . . 6,091,931 5,785,356
Common stocks at market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,148,237 2,493,450
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,110,072 4,673,778
----------- -----------
TOTAL INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,184,832 65,235,902
OTHER ASSETS
Cash and equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,782,536 3,251,227
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,601,312 2,831,922
Premiums receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,101,867 2,934,056
Reinsurance recoverable on losses paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347,620 330,210
Reinsurance recoverable on unpaid losses . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,181,349 6,424,110
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 757,395 594,748
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,583,607 974,751
Current federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271,298 --
Deferred federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,082,569 2,330,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,305,888 1,221,606
----------- -----------
TOTAL OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,015,441 20,892,630
----------- -----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $94,200,273 $86,128,532
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Reserves for unpaid losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . $32,455,874 $32,967,809
Unearned premium reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,146,302 5,244,747
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,874,970 4,322,792
Funds withheld from reinsurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,601,312 2,831,922
Current federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 363,051
Excess of acquired net assets over cost . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,158,693 1,614,555
----------- -----------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,237,151 47,344,876
STOCKHOLDERS' EQUITY
Preferred stock, $1,000 par value, 75,000 shares authorized; no shares issued
and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ --
Common stock, $1 par value, 6,000,000 shares authorized; 3,901,211 shares issued . . . . . . . 3,901,211 2,923,404
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,201,779 29,534,302
Treasury stock, at cost (1995 - 707,300 shares; 1994 - 746,700 shares) . . . . . . . . . . . . (6,471,628) (7,016,554)
Unrealized investment gains (losses), net of taxes . . . . . . . . . . . . . . . . . . . . . . 1,542,730 (1,562,822)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,789,030 14,905,326
----------- -----------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,963,122 38,783,656
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . $94,200,273 $86,128,532
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 66
p
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE
Premiums earned................................................................ $11,356,083 $ 7,819,784 $ 7,433,716
Net investment income.......................................................... 4,050,602 3,277,864 3,470,202
Net realized gains on investments.............................................. 1,193,780 570,231 1,275,142
Other income................................................................... 556,941 742,546 582,465
----------- ----------- -----------
TOTAL REVENUE................................................................. 17,157,406 12,410,425 12,761,525
LOSSES AND EXPENSES
Losses and loss adjustment expenses............................................ 4,843,484 2,613,394 4,923,662
Commission expenses............................................................ 3,042,719 1,786,664 1,864,320
Other operating and management expenses........................................ 3,683,860 3,467,801 2,885,953
----------- ----------- -----------
TOTAL LOSSES AND EXPENSES..................................................... 11,570,063 7,867,859 9,673,935
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE.......................................................... 5,587,343 4,542,566 3,087,590
Provision for income taxes..................................................... 1,265,544 803,748 68,160
----------- ----------- -----------
Income before cumulative effect of change in accounting principle............... 4,321,799 3,738,818 3,019,430
Cumulative effect of change in accounting for income taxes..................... - - 192,515
----------- ----------- -----------
NET INCOME...................................................................... $ 4,321,799 $ 3,738,818 $ 3,211,945
=========== =========== ===========
PER SHARE DATA
Income before cumulative effect of change in accounting principle.............. $ 1.30 $ 1.13 $ 0.93
Cumulative effect of change in accounting for income taxes..................... - - 0.06
----------- ----------- -----------
NET INCOME PER SHARE............................................................ $ 1.30 $ 1.13 $ 0.99
=========== =========== ===========
Weighted average number of shares outstandings after the 20% stock
dividend declared June 7, 1995 and December 6, 1995 3,334,444 3,316,464 3,237,559
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 67
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL TOTAL
------------------------------------------------- PAID-IN UNREALIZED RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL GAIN/(LOSS) EARNINGS EQUITY
- ------------------------------------------------------------------------- ----------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December
31, 1992 ............ 1,461,702 $1,461,702 388,150 $(7,332,925) $30,948,605 $ 668,386 $ 9,072,090 $34,817,858
Treasury shares issued
to officers and
directors ........... -- -- (8,000) 171,000 13,000 -- -- 184,000
Dividends on common
stock declared ...... -- -- -- -- -- -- (529,625) (529,625)
Stock Split
declared ............ 1,461,702 1,461,702 380,150 -- (1,461,702) -- -- --
Unrealized investment
losses, net of
taxes ............... -- -- -- -- -- (112,219) -- (112,219)
Net income ........... -- -- -- -- -- -- 3,211,945 3,211,945
--------- ---------- ------- ----------- ----------- ----------- ----------- -----------
Balance at December
31, 1993 ............ 2,923,404 $2,923,404 760,300 $(7,161,925) $29,499,903 $ 556,167 $11,754,410 $37,571,959
========= ========== ======= =========== =========== =========== =========== ===========
Treasury shares issued
to officers and
directors ........... -- -- (13,600) 145,371 34,399 -- -- 179,770
Dividends on common
stock declared ...... -- -- -- -- -- -- (587,902) (587,902)
Unrealized investment
losses, net of
taxes ............... -- -- -- -- -- (2,118,989) -- (2,118,989)
Net income ........... -- -- -- -- -- -- 3,738,818 3,738,818
--------- ---------- ------- ----------- ----------- ----------- ----------- -----------
Balance at December
31, 1994 ............ 2,923,404 $2,923,404 746,700 $(7,016,554) $29,534,302 $(1,562,822) $14,905,326 $38,783,656
========= ========== ======= =========== =========== =========== =========== ===========
Treasury shares issued
to officers and
directors ........... -- -- (15,800) 168,902 83,098 -- -- 252,000
Stock options
exercised ........... -- -- (23,600) 252,274 (131,520) -- -- 120,754
Shareholder loan
received ............ -- -- -- 123,750 26,250 -- -- 150,000
Dividends on common
stock declared ...... 977,807 977,807 -- -- 13,689,649 -- (15,438,095) (770,639)
Unrealized investment
gains, net of
taxes ............... -- -- -- -- -- 3,105,552 -- 3,105,552
Net income ........... -- -- -- -- -- -- 4,321,799 4,321,799
--------- ---------- ------- ----------- ----------- ----------- ----------- -----------
Balance at December
31, 1995 ............ 3,901,211 $3,901,211 707,300 $(6,471,628) $43,201,779 $ 1,542,730 $ 3,789,030 $45,963,122
========= ========== ======= =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 68
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1994 1993
------------ ----------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income.............................................................. $ 4,321,799 $ 3,738,818 $ 3,211,945
Adjustments to reconcile net income to net cash provided
by operating activities (net of effects of acquisitions)
Fixed maturities held for trading, net.................................. -- -- (16,727,247)
Increase in premiums receivable......................................... (167,811) (1,430,215) (886,819)
(Increase) Decrease in reinsurance recoverable on paid loss............. (17,410) 8,627 (32,040)
Increase in funds on deposit with reinsured companies................... -- -- 14,101,348
(Increase) Decrease in accrued investment income........................ (162,647) 147,317 (224,335)
Amortization of deferred acquisition costs.............................. (608,856) (301,415) 172,032
Decrease in current federal income taxes................................ (634,349) (127,446) (228,842)
Amortization of excess of acquired net assets over cost................. (455,862) (466,138) (477,465)
Increase (Decrease) in deferred federal income taxes.................... (100,107) 239,193 (395,514)
Net amortization of premium on investments.............................. 110,454 336,872 361,623
Gain on dispositions of investments..................................... (1,193,780) (531,680) (1,275,142)
Gain on sale of subsidiary.............................................. -- (50,000) --
Increase in other assets and accrued liabilities........................ (598,794) 607,932 1,877,288
Increase (Decrease) in unearned premium reserves........................ 2,901,555 1,142,625 (7,904)
Increase (Decrease) in reserves for unpaid losses and loss adjustment
expenses............................................................. 1,730,826 (560,707) 1,361,415
Issuance of common stock as compensation................................ 243,000 179,770 184,000
----------- ------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............................. 5,368,018 2,933,553 1,014,343
INVESTING ACTIVITIES
Proceeds on the sale of subsidiary...................................... -- 1,575,241 --
Short term investments, sales net....................................... (1,437,064) (3,126,644) 1,449,199
Purchases of investments
Fixed maturities held for sale........................................ (41,077,681) (33,567,488) --
Fixed maturities held for investment.................................. -- -- (5,692,142)
Non-redeemable preferred equities..................................... (4,256,203) (4,011,746) (4,045,318)
Common stocks......................................................... (5,155,652) (5,787,122)
Proceeds on sales of investments
Fixed maturities held for sale........................................ 39,071,486 21,866,175 --
Fixed maturities held for investment.................................. -- -- 2,719,755
Non-redeemable preferred equities..................................... 3,897,707 947,093 1,631,743
Common stocks......................................................... 4,508,907 3,659,271
Proceeds on maturities of investments................................... 35,000 14,464,000 7,202,776
----------- ------------ -----------
NET CASH PROVIDED BY (USED IN) IN INVESTING ACTIVITIES................ (4,413,500) (3,981,220) 3,266,013
FINANCING ACTIVITIES
Shareholder loans received.............................................. 150,000 -- --
Stock options exercised................................................. 120,754 -- --
Payment of cash dividends............................................... (693,963) (564,822) (517,825)
----------- ------------ -----------
NET CASH USED IN FINANCING ACTIVITIES.................................. (423,209) (564,822) (517,825)
Increase (Decrease) in cash............................................... 531,309 (1,612,489) 3,762,531
CASH AND EQUIVALENTS AT BEGINNING OF YEAR.............................. 3,251,227 4,863,716 1,101,185
----------- ------------ -----------
CASH AND EQUIVALENTS AT END OF YEAR....................................... $3,782,536 $3,251,227 $4,863,716
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 69
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
THE REGISTRANT
Financial Institutions Insurance Group, Ltd. ("the Registrant") is an insurance
holding company, which through its subsidiaries underwrites insurance and
reinsurance. The principal lines of business include professional liability,
directors and officers liability, fidelity, property catastrophe reinsurance
and other lines of property and casualty reinsurance.
The Registrant conducts its business by owning and operating an insurance
company and underwriting insurance and reinsurance assumptions through two
wholly owned underwriting agencies.
The First Reinsurance Company of Hartford ("First Re") is the insurance
company. First Re is domiciled in the State of Connecticut and maintains direct
licenses in 20 states. First Re has reinsurance authorities in an additional
14 states. A second insurance company, Financial Institutions Insurance Fund,
Incorporated ("FIIF"), was sold at book value plus legal fees in the third
quarter of 1994, after all of the liabilities and the net unrestricted assets
were transferred to First Re during 1993 and 1994.
The Registrant's primary business from its inception in 1986 through July 1,
1993 was reinsurance of Directors and Officers liability and Blanket Bond
coverage for banks and savings institutions that were insured by an
unaffiliated insurer, Virginia Surety Company ("VSC"). These reinsurance
contracts were assumed by FIIF.
On August 23, 1991, FIIF completed the acquisition of all the outstanding
common stock of JBR Holdings, Inc. ("JBR") and its wholly-owned subsidiary, The
First Reinsurance Company of Hartford. JBR's only operation is as the holding
company for First Re.
First Re had stopped writing new business in April 1990, was running-off its
discontinued underwriting operations and commuting, where possible, its
underwriting liabilities since that time. The run-off of this book of business
has continued since the acquisition and has been combined with the Registrant's
primary business. Liabilities on contracts issued prior to November, 1987 were
assumed by the former owners of First Re.
In 1992 the Registrant formed an underwriting management company, First Re
Management Company "FRM" and began to write reinsurance through the reinsurance
intermediary market. FRM typically assumed for First Re 5.0% or less of a
company's reinsurance exposure on terms set by the reinsurance market. The
premiums are typically related to property catastrophe coverages, professional
liability and other liability coverages.
On April 1, 1993, the Registrant acquired the renewal rights from VSC for a
book of professional liability and non-financial institutions directors and
officers liability insurance and further entered into a management agreement
pursuant to which the Registrant will perform underwriting and administrative
services with respect to such business. The Registrant organized a
wholly-owned subsidiary, Oakley Underwriting Agency, Inc. ("Oakley"), to act as
an underwriting management company and hired staff involved with this program
from VSC to underwrite these lines of business. First Re assumes, as
reinsurance, a portion of the premiums and liabilities from these programs.
First Re also issues direct insurance policies in Oakley and reinsures them
with non-affiliated reinsurers.
Nearly all of the premiums written by the Registrant are produced by Oakley.
Should changes be made to the Oakley program, the revenues of the Registrant
could change significantly. In addition, the Registrant writes reinsurance for
catastrophe coverage. The Registrant believes its portfolio is
well-diversified so that any catastrophic event would not have a material
impact on its financial position.
F-7
<PAGE> 70
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and include the
accounts, after inter-company eliminations, of the Registrant and its
subsidiaries, JBR, First Re, FIIF (through September 21, 1994), FRM, Oakley,
and F/I Insurance Agency("F/I Agency"), Incorporated (collectively "the
Registrant").
RECOGNITION OF EARNED PREMIUM AND RELATED ACQUISITION COSTS
Premiums are recognized as revenue over the term of the related reinsurance
contracts or policies and are net of deductions for retrocessions to other
reinsurers. Unearned premium reserves are established for the unexpired
portion of policy premiums.
Acquisition costs, which consist primarily of commissions, are deferred and
amortized pro rata over the contract periods in which the related premiums are
earned. Future investment income attributable to related premiums is taken
into account in measuring the carrying value of this asset. All other
acquisition expenses are charged to operations as incurred.
CEDED REINSURANCE
Ceded reinsurance premiums, commissions, expense reimbursements, and reserves
related to ceded reinsurance business are accounted for on a basis consistent
with that used in accounting for the assumed business. Premiums ceded to other
companies have been reported as a reduction of premium income. Loss and loss
adjustment expense payments ceded to other companies have been reported as a
reduction of those items. A provision for doubtful or uncollectable
reinsurance ceded of approximately $171,000 is recorded net of ceded
reinsurance recoverable.
INCOME TAXES
The provision for federal and state income taxes gives effect to permanent
differences between income before taxes and taxable income. Deferred income
taxes are provided for certain transactions which are reported in different
periods for financial reporting than for income tax purposes. The deferred
federal income tax asset is recognized to the extent that future realization of
the tax benefit is more likely than not, with a valuation allowance for the
portion that is not likely to be realized.
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes" was adopted by the Registrant during the first quarter of 1993
retroactive to January 1, 1993. SFAS No. 109 establishes an asset and
liability approach for financial reporting of income taxes. The adoption of
SFAS No. 109 resulted in a one time increase to earnings of $192,515 or $0.08
per share, in the first quarter of 1993. This increase in earnings was
principally due to the recognition of a portion of previously unrecognized
deferred tax assets.
EXCESS OF ACQUIRED NET ASSETS OVER COST
The excess of acquired net assets over cost relating to the acquisition of
First Re during 1991, is being amortized on a straight-line basis over a seven
year period, which is the estimated time period over which the purchased
liabilities will be settled. The amortization is recorded as other income in
the consolidated statement of income.
F-8
<PAGE> 71
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
At December 31, 1993, the Registrant adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The Registrant classified
its entire portfolio of fixed maturities and equity securities as available for
sale and reported them at market value. The unrealized gain or loss on the
securities is recorded directly to stockholders' equity, less the applicable
capital gains tax. The adoption of SFAS No. 115 had an immaterial effect on
the unrealized capital gains of the Registrant, because most of the portfolio
had been marked to market prior to December 31, 1993 as part of the trading
portfolio. During 1993, before the adoption of SFAS No. 115, the Registrant's
fixed maturities portfolio was segregated into two classifications: securities
held for trading and securities held for investment. All securities held for
trading were previously reported at estimated market values, whereas the
securities held for investment were reported at amortized cost.
Non-redeemable preferred equities are carried at estimated market value in 1995
and 1994. The Registrant reports short-term investments at amortized cost,
which approximates current market value. Realized gains and losses on
investments are determined on the basis of specific identification. The
Registrant classifies its portfolio as available for sale, as it has the
ability but not the intent to hold these securities to maturity.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
As most of the Registrant's business is written on a claims-made form of
coverage, the liability for unpaid losses and loss adjustment expenses consists
of an aggregation of the estimated liability for incurred losses and loss
adjustment expenses on claims that are known to the Registrant as of the
reporting date and an aggregate estimate of the liability for losses and loss
adjustment expenses incurred, but not reported to the Registrant, as of the
same date. Although such reserves are based on estimates, management believes
that the recorded reserves for loss and loss adjustment expenses are adequate
in the aggregate to cover the ultimate resolution of reported and incurred but
not reported claims. These estimates are continually reviewed, and any
required adjustments are reflected in current operations.
The Registrant's estimates are developed from its own experience using
independent actuarial analysis and advice from its ceding reinsurers.
Additionally, the Registrant uses available industry information on similar
lines of insurance coverage to establish its reserves. The Registrant believes
that the combined liability reflected in the accompanying consolidated
financial statements is a reasonable estimate of unpaid losses and loss
adjustment expenses (See Note K).
STATEMENTS OF CASH FLOWS
Cash equivalents include short term, highly liquid investments that are readily
convertible to known amounts of cash.
Due to the nature of the Registrant's operations, none of the short-term
investments are considered to be cash equivalents for purposes of the
statements of cash flows. Restricted cash is also not considered to be cash
for the statements of cash flows, as such cash is not available for general
corporate purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Certain balances in the
prior years' financial statements have been reclassified to conform to current
presentation.
F-9
<PAGE> 72
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - INVESTMENTS AND INVESTMENT INCOME
Effective December 31, 1993, the Registrant adopted SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." The Registrant
classified its entire portfolio of fixed maturities and equity securities as
available for sale and reported them at market value. During 1993, before the
adoption of SFAS No. 115, the Registrant's portfolio was segregated into two
classifications: securities held for trading and securities held for
investment. All securities held for trading were previously reported at
estimated market values, whereas the securities held for investment were
reported at amortized cost. The investment portfolio consisted of securities
for which the Registrant had the intention and ability to hold until maturity.
The trading portfolio arose primarily because investment assets exceed the
amounts needed to match against liabilities, and because the Registrant
intended to generate realized gains so the tax benefits of capital loss carry
forwards obtained through the purchase of JBR could be realized.
Realized investment gains and losses for the years ended December 31, 1995,
1994 and 1993 are summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Fixed maturities held for sale
Realized Gains $ 1,178,480 $ 258,644 $ -
Realized Losses (408,145) (283,432) -
Fixed maturities held for trading
Realized Gains - - 1,030,003
Realized Losses - - (108,705)
Fixed maturities held for investment
Realized Gains - - 122,664
Realized Losses - -
Nonredeemable preferred equities
Realized Gains 265,626 233,542 231,180
Realized Losses (52,954) (123,748)
Common Stocks
Realized Gains 217,819 495,960 -
Realized Losses (6,311) (10,735) -
Short Term Realized Losses (735) - -
----------- ------------ --------------
Net realized Gains on Investments $ 1,193,780 $ 570,231 $ 1,275,142
=========== ============ ==============
</TABLE>
The proceeds from the sale of investments held for sale were $39,071,486 and
$21,866,175 during 1995 and 1994 respectively.
The proceeds from the sale of investment account securities were $2,719,755,
in 1993.
Net purchases and sales activity related to fixed maturities held for trading
are reflected in the operating activities section of the consolidated statement
of cash flows.
F-10
<PAGE> 73
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B INVESTMENTS AND INVESTMENT INCOME (CONTINUED)
<TABLE>
<CAPTION>
COMPARATIVE NET INVESTMENT INCOME 1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Fixed maturities $3,343,499 $3,169,403 $1,767,929
Short term investments 383,887 14,740 98,555
Non redeemable preferred equities 466,554 318,461 928,585
Common Stocks 104,329 32,207 -
---------- ---------- ----------
Total investment income on investments 4,298,269 3,534,811 2,795,069
Investment expenses 247,667 256,947 158,216
---------- ---------- ----------
Net investment income on investments 4,050,602 3,277,864 2,636,853
Funds on deposit - - 833,349
---------- ---------- ----------
Net investment income $4,050,602 $3,277,864 $3,470,202
========== ========== ==========
</TABLE>
The carrying values of investments held for sale at market value at December
31, 1995 and 1994 are summarized below.
<TABLE>
<CAPTION>
HELD FOR SALE AT MARKET VALUE AT DECEMBER 31, 1995
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
DESCRIPTION COST GAINS LOSSES VALUE
----------- ------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
Fixed maturity securities:
U.S. Government $ 5,147,262 $ 130,942 $ - $ 5,278,204
Foreign 1,925,593 204,349 - 2,129,942
Municipal Bonds 27,116,990 323,456 10,399 27,430,047
Corporate 23,123,336 1,153,417 280,355 23,996,399
------------- -------------- ------------- ---------------
Total fixed maturity securities as of December 31, 1995 $ 57,313,181 $ 1,812,164 $ 290,754 $ 58,834,592
============= ============== ============= ===============
Non-redeemable preferred equities $ 5,985,937 $ 222,019 $ 116,025 $ 6,091,931
============= ============== ============= ===============
Common stock $ 3,438,930 $ 819,706 $ 110,399 $ 4,148,237
============= ============== ============= ===============
</TABLE>
Included in the above, at December 31, 1995, are mortgage backed securities
with a market value of $12,292,889 and amortized cost of $12,116,499. The gross
unrealized gains and losses are $183,335 and $6,945 respectively.
HELD FOR SALE AT MARKET VALUE AT DECEMBER 31, 1994
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
DESCRIPTION COST GAINS LOSSES VALUE
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Fixed maturity securities:
U.S. Government $ 1,457,365 $ 380 $ 43,108 $ 1,414,637
Foreign 1,151,053 14,199 - 1,165,252
Municipal Bonds 20,974,787 70,036 696,557 20,348,266
Corporate 30,325,983 96,188 1,067,008 29,355,163
------------- -------------- ------------- -------------
Total fixed maturity securities as of December 31, 1994 $ 53,909,188 $ 180,803 $ 1,806,673 $ 52,283,318
============= ============= ============= =============
Non-redeemable preferred equities $ 6,189,589 $ 960 $ 405,193 $ 5,785,356
============= ============= ============= =============
Common stock $ 2,578,971 $ 69,050 $ 154,571 $ 2,493,450
============= ============= ============= =============
</TABLE>
F-11
<PAGE> 74
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B INVESTMENTS AND INVESTMENT INCOME (CONTINUED)
INVESTMENT MATURITIES
The amortized cost and estimated market value of fixed income securities at
December 31, 1995, by contractual maturity are shown below. Expected
maturities will differ from contractual maturities, because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
AMORTIZED MARKET
COST VALUE
<S> <C> <C>
Due one year or less $ 1,910,939 $ 1,933,166
Due after one year through five years 25,050,465 25,562,079
Due after five years through ten years 13,590,682 14,134,108
Due after ten years 16,761,095 17,205,239
----------- -----------
Total fixed maturities $57,313,181 $58,834,592
=========== ===========
</TABLE>
RESTRICTIONS ON SECURITIES AND ASSETS
First Re has certain invested assets on deposit with state insurance regulatory
authorities at December 31, 1995, with an amortized cost of $2,189,091. These
deposits are required to maintain the licenses and allow the writing of
insurance and reinsurance in those states. Market value of these securities is
$2,236,000.
Some of First Re's existing contracts require letters of credit in the amount
of the premium paid to be held by the reinsured. First Re collateralized the
letter of credit with a U.S. treasury bond totaling approximately $351,000 and
has collateralized these with an interest bearing investment of approximately
the same amount.
During 1992, First Re drew down a letter of credit from a reinsurer for
approximately $3,200,000 in response to the reinsurer's financial condition.
The current $2,601,312 balance of restricted cash and funds withheld from
reinsurers represents the projected ultimate reinsurance recoverable due to
First Re based on expected loss development. On a quarterly basis, the
restricted cash is reduced by the amount of losses paid by the Registrant on
behalf of the reinsurer, and the remaining balance is not available for general
use.
Prior to December 1993, there was an agreement between the principal ceding
companies, VSC and First Re, which called for funds to be held by VSC. During
the fourth quarter of 1993, the Registrant negotiated the release of these
funds by establishing a trust agreement between First Re and VSC. The trust,
which is the property of First Re, has been funded with securities with a
current estimated market value of approximately $6,606,000 and $13,768,000 for
1995 and 1994 respectively which is included as investments in the consolidated
balance sheet. Investments must be maintained in the trust until certain
reinsurance assumed obligations are settled.
F-12
<PAGE> 75
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - INCOME TAXES
A reconciliation of the expected federal income tax on income before tax
expense using the 34% statutory rate to the provision for income taxes is as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- ------------
<S> <C> <C> <C>
Income tax provision at statutory tax rate $ 1,899,696 $ 1,544,472 $ 1,049,781
Nontaxable investment income (458,809) (478,055) (441,047)
Change in the valuation allowance - - (192,675)
Amortization of excess of acquired net assets
over cost (154,993) (158,487) (162,338)
Adjustment to prior year estimate (30,110) (120,000) (140,692)
Other, net 9,760 15,818 (44,869)
-------------- -------------- ------------
Provision for income taxes $ 1,265,544 $ 803,748 $ 68,160
============== ============== ============
</TABLE>
The net deferred tax asset comprised the tax effects of the temporary
differences relating to the following assets and liabilities:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- ------------
<S> <C> <C> <C>
Current tax provision $ 1,365,651 $ 564,555 $ 271,160
Deferred tax (benefit) provision (100,107) 239,193 (203,000)
-------------- -------------- ------------
$ 1,265,544 $ 803,748 $ 68,160
============== ============== ============
</TABLE>
The net deferred tax asset comprised the tax effects of the temporary
differences relating to the following assets and liabilities:
<TABLE>
<CAPTION>
December 31, December 31,
---------------- ----------------
1995 1994
---------------- ----------------
<S> <C> <C>
Deferred Tax Assets
Reserves for unpaid losses and loss
adjustment expense $ 1,922,668 $ 1,804,972
Unearned premium reserves 477,202 287,895
Unrealized investment losses - 719,314
Other 15,865 15,551
---------------- ----------------
Total Deferred Tax Assets 2,415,735 2,827,732
Deferred Tax Liabilities
Unrealized investment gains (794,739) -
Deferred acquisition costs (538,427) (331,415)
---------------- ----------------
Total Deferred Tax Liabilities (1,333,166) (331,415)
Total Net Deferred Tax assets
Before Valuation Allowance 1,082,569 2,496,317
Valuation allowance for deferred tax assets - (166,317)
---------------- ----------------
Net Deferred Tax Assets $ 1,082,569 $ 2,330,000
================ ================
</TABLE>
The Registrant files a consolidated federal income tax return. The Registrant
had available a capital loss carryforward of approximately $404,000 as of
January 1, 1994, which resulted from former activities of JBR. The loss
carryforward is less than the annual limitation prescribed by the Internal
Revenue Code and was fully utilized during 1994.
F-13
<PAGE> 76
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C INCOME TAXES (CONTINUED)
Upon adoption of SFAS No. 109, a valuation allowance of $192,675 was
established to reduce the net deferred tax asset to an amount that, based on
all available evidence, would more likely than not be realized. During 1993,
this allowance was reduced, allowing full recognition of the deferred tax asset
as there were unrealized gains on investments in the balance sheet against
which the tax deduction giving rise to the asset could be taken.
The valuation allowance established in 1994 is with respect to the tax effect
of the unrealized losses on equity securities. There was no valuation
allowance established on the tax effect of the fixed maturities in 1994
because, although they were held for sale, management would hold them until
maturity to avoid non-deductible losses.
Actual income tax payments made amounted to approximately $2,000,000, $692,000
and $500,000 in 1995, 1994 and 1993, respectively.
NOTE D - REINSURANCE CEDED
First Re had immaterial amounts of ceded premiums earned and incurred losses
and loss adjustment expenses for the year ended 1993 as related to the
1987-1993 underwriting years. For the years ended 1995 and 1994, the following
schedule shows the components of First Res' underwriting results.
<TABLE>
<CAPTION>
Premiums Written 1995 1994
------ ------
<S> <C> <C>
Direct $ 5,744,722 $ 829,586
Assumed 10,737,730 9,759,699
Ceded (2,342,441) (1,626,877)
-------------- --------------
Net Premiums Written $ 14,140,011 $ 8,962,408
============== ==============
Premiums Earned
Direct $ 3,054,758 $ 238,741
Assumed 10,526,138 8,196,920
Ceded (2,224,813) (615,877)
-------------- --------------
Net Premiums Earned $ 11,356,083 $ 7,819,784
============== ==============
Losses Incurred
Direct $ 2,228,928 $ 1,178,632
Assumed 1,349,634 1,920,910
Ceded 1,264,922 (486,148)
-------------- --------------
Net Losses Incurred $ 4,843,484 $ 2,613,394
============== ==============
</TABLE>
At December 31, 1995, $4,181,349 represented reinsurance recoverable related
to the reserves. First Re is liable to pay the claims even if this is not
collected from the reinsurers who are liable under their ceded contracts. The
ceded contracts allow First Re to collateralize the reinsurance recoverable to
a certain extent with letters of credit and other collateral balances.
Accordingly, First Re has received collateral of approximately $1,441,000 which
came from a formerly affiliated insurance company in the form of a letter of
credit from Citibank of New York. In addition, as discussed in Note B, First Re
has restricted cash of $2,601,312, which is drawn upon to pay losses on behalf
of a former affiliated reinsurer.
The Registrant released its former affiliated reinsurer of its reinsurance
obligation on February 7, 1996, to reduce handling costs and agreed to release
$1,340,000 of the funds held and retain $1,261,314 of funds.
F-14
<PAGE> 77
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - DIVIDENDS FROM SUBSIDIARY
The State of Connecticut, under the statutes and regulations that govern the
operations and affairs of insurance companies that are domiciled in the state,
impose a restriction on the amount of dividends that can be paid by First Re to
the Registrant without prior regulatory approval. The maximum amount of
dividends that may be paid by First Re without prior regulatory approval, is
limited to the greater of 10% of statutory surplus (stockholders' equity
determined on a statutory basis) or 100% of net income for the preceding fiscal
year. There is also a further limitation to earned surplus. Dividends
exceeding these limitations require regulatory approval. The maximum dividends
that could be paid in 1996 by First Re is equal to 10% of the company's surplus
or $4,226,588.
NOTE F - RECONCILIATION OF NET INCOME AND STOCKHOLDERS' EQUITY
The following reconciles the consolidated statutory net income and
stockholders' equity of FIIG and its subsidiaries, determined in accordance
with accounting practices prescribed or permitted by the Insurance Department
of the State of Connecticut, with such amounts determined in conformity with
generally accepted accounting principles (GAAP):
F-15
<PAGE> 78
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - RECONCILIATION OF NET INCOME AND STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- ------------
<S> <C> <C> <C>
Statutory net income, as filed $ 3,537,110 $ 4,050,035 $ 3,264,732
cumulative effect of change in
accounting for income taxes - - 192,515
Deferred and other federal
income taxes 103,167 (239,193) 284,207
Contingent commissions - - (258,161)
Amortization of excess of
acquired net assets over cost 455,862 466,139 477,465
Net loss from parent and
its non-insurance affiliates (383,185) (857,580) (638,635)
Deferred acquisition cost 608,856 301,415 (172,032)
Other (11) 18,002 61,854
-------------- -------------- ------------
GAAP net income $ 4,321,799 $ 3,738,818 $ 3,211,945
============== ============== ============
<CAPTION>
December 31,
1995 1994
-------------- --------------
<S> <C> <C>
Statutory capital and surplus $ 42,265,879 $ 40,112,320
add: Deferred and other federal
income taxes 1,082,569 2,330,000
Deferred acquisition costs 1,583,607 974,750
Unrealized investment gains (losses) 817,168 (1,244,360)
GAAP stockholders' equity (deficit)
of parent and its non-insurance
Subsidiaries after elimination
of investment in insurance
subsidiaries 445,471 (1,872,040)
Excess of acquired net assets over
cost (1,158,693) (1,614,555)
Penalty of unauthorized reinsurance 128,000 262,502
Statutory non-admitted assets 416,642 -
Other 382,479 (164,961)
-------------- --------------
GAAP stockholders' equity $ 45,963,122 $ 38,783,656
-------------- --------------
</TABLE>
NOTE G - LEASE COMMITMENTS
In June 1993, the Registrant entered into a lease for office space in Chicago
with an annual rent of approximately $112,000. The lease is due to terminate
on May 31, 1996. On a month to month basis, the Registrant also leases space in
Avon, Connecticut to service the run-off operation that it assumed in
conjunction with the purchase of JBR and First Re. The annual cost of this is
approximately $40,000.
F-16
<PAGE> 79
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - PENSIONS, EMPLOYEE BENEFIT OBLIGATIONS
The Registrant has a 401 (k) retirement savings plan which commenced in 1992.
All employees are eligible to participate in the plan after completing six
months of service. Participants may make contributions on a pre-tax basis of
up to 15% of annual compensation subject to IRS limitations. The Registrant
matches 50% of the employee's contribution (up to 6%). The Registrant's
contributions were approximately $111,000, $120,000, and $95,000 in 1995, 1994
and 1993, respectively.
The Registrant has no other significant pension or other post-retirement
programs in place for the benefit of its employees as of December 31, 1995.
NOTE I - STOCK OPTIONS AND STOCK GRANTS
In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 is effective
for fiscal years beginning after December 15, 1995. SFAS No. 123 introduces a
preferable fair value-based method of accounting for stock-based compensation.
SFAS No. 123 encourages, but does not require, companies to recognize
compensation expense for grants of stock, stock options, and other equity
instruments to employees based on the new fair value accounting rules. The
Company intends to continue applying the existing accounting rules contained in
Accounting Principles Board Opinion No. 25, " Accounting for Stock Issued to
Employees," and disclose net income and earnings per share on a pro forma
basis, based on the new fair value methodology.
Mr. Dore received a loan from the Registrant in 1991 in the amount of $150,000
in order to finance the purchase of 43,200 shares of common stock from the
Registrant at a price of $3.48 per share. Mr. Dore purchased the 43,200 shares
from the Registrant on January 2, 1991, and executed a Promissory Note in the
amount of $150,000 payable to the Registrant. The Promissory Note provided
that payment of the amounts due thereunder was secured by the 43,200 shares so
purchased by Mr. Dore. The principal amount bore interest at a rate equal to
the average yield on five year Treasury obligations, and interest was due and
payable annually. The $150,000 principal amount plus accrued interest was paid
in full by Mr. Dore in 1995.
The Board of Directors in 1990 approved plans for stock options and stock
grants for certain key officers, directors, and employees.
At December 31, 1995, stock options for an adjusted total of 310,896 shares
were outstanding with exercise prices ranging from $3.13-$10.70 per share. Of
this total, 180,504 stock options were exercisable. During 1995 there were
23,600 stock options exercised for a total of $120,754. During 1995, stock
options for an adjusted total of 51,120 shares were granted with market values
$9.20 and $12.32.
In addition, at December 31, 1995, the Registrant had allocated for future
grants a total of 3,600 shares after adjusting for the stock dividend. The
Registrant granted in 1994 and issued in 1995, 7,200 shares with a market value
of $9.20 and in addition the Registrant granted in 1994 and 1995 7,776 shares
and issued during 1995 15,552 with a market value of $12.32 per share.
NOTE J - STOCK SPLIT AND STOCK DIVIDENDS
At the December 10, 1993 Board of Directors' Meeting, the Registrant declared
a split of the common stock to be effected by a distribution on February 24,
1994 of one fully paid and non-assessable share of common stock for each share
of stock outstanding with shareholders of record on January 20, 1994. The
Registrant submitted to its shareholders at the June 1994 annual meeting a
proposal to increase its authorized shares of stock from 3,000,000 to 6,000,000
which was approved.
At the June 7, 1995 meeting of the Board of Directors, a 20% stock dividend was
declared payable on August 24, 1995 to stockholders of record on July 27, 1995.
At the December 6, 1995 board meeting, the Registrant declared another 20%
stock dividend payable February 22, 1996 to stockholders of record on January
25, 1996. Information set forth herein has been adjusted to reflect the stock
split and dividends.
F-17
<PAGE> 80
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - REINSURANCE RISK
When a reinsured company reports a claim, the Registrant establishes a reserve
equal to that report. It also evaluates the circumstance of that claim based on
the judgment of management and reserving practices for the type of business, it
establishes additional case reserves sufficient to settle the estimated
ultimate liability given the current information. In many cases, several years
may elapse between the reporting of a claim and its final settlement. These
estimates are difficult to quantify, as the outcome may depend on multi-party
litigation and other factors not readily predictable.
The Federal Deposit Insurance Corporation the success of to The Resolution Trust
Corporation can be a party to claims in the discontinued financial institution
business which tends to lengthen the claims settlement period. The other
reinsurance exposures typically would involve property catastrophe events
which tend to be more easily quantified, as the claims would likely be notified
quickly, and they do not usually involve litigation.
The Registrant, with the help of consulting actuaries and the advice from its
reinsured companies, establishes incurred but not reported "IBNR" reserves in
addition to the reserves reported by the reinsureds. These reserves are
estimates based on company and industry data that estimate claims that may
occur against the policy coverage. Reserves are estimates involving actuarial
and statistical projections of the ultimate settlement and administration of
claims, based on facts and circumstances then known, predictions of future
events, estimates of future trends in severity and other variable factors such
as new concepts of liability. Future revisions of the estimated claims
liability have occurred and are likely to continue to occur. These revisions
are recorded on the statement of income in the period in which they occur. The
following table displays the effect of those revisions for 1995, 1994, and
1993.
<TABLE>
<CAPTION>
DECEMBER 31,
(000 omitted)
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Balance at January 1 $ 32,968 $ 33,502 $ 33,179
Less reinsurance recoverables 6,424 6,398 7,436
---------- ---------- ---------
Net reserves for unpaid losses and loss adjustment
expenses beginning of period 26,544 27,104 25,743
Incurred losses and loss adjustment expense:
Provision of losses of the current period 9,726 6,166 6,572
Provision (savings) for losses of prior period (4,883) (3,553) (1,648)
---------- ---------- ---------
Total incurred losses and loss adjustment expenses 4,843 2,613 4,924
Payments:
Loss of the current period 668 687 153
Losses and loss adjustment expenses attributable
to losses of prior periods 2,444 2,486 3,410
---------- ---------- ---------
Total payments 3,112 3,173 3,563
---------- ---------- ---------
Net reserves for unpaid losses and loss adjustment
expenses, end of period 28,275 26,544 27,104
Reinsurance recoverable on unpaid losses 4,181 6,424 6,398
---------- ---------- ---------
Gross reserves for unpaid losses and loss adjustment
expenses per the Balance Sheet $ 32,456 $ 32,968 $ 33,502
========== ========== =========
</TABLE>
F-18
<PAGE> 81
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - REINSURANCE RISK (CONTINUED)
Included in the table on the prior page are reserves with respect to contracts
on programs no longer renewed. While this business is not a separate segment
or operation, the loss behavior patterns are unique. While no premium is
currently being earned on these programs, the continual adjustment of reserves
on this business is charged to current operations and has had a material effect
on net income. The following table displays the changes in those reserves in
1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
(000 OMITTED)
1995 1994
---------- ----------
<S> <C> <C>
Total net reserves, beginning of year . . . $ 26,544 $ 27,104
Net reserves on renewed business . . . . . 7,687 3,526
---------- ----------
Net reserves on non-renewed business,
beginning of year . . . . . . . . . . . . 18,857 23,578
Provision (savings) on losses . . . . . . . (3,469) (2,585)
Payments . . . . . . . . . . . . . . . . . (1,398) (2,136)
---------- ----------
Net reserves on non-renewed business,
end of year . . . . . . . . . . . . . . . 13,990 18,857
Net reserves on renewed business . . . . . 14,285 7,687
---------- ----------
Total net reserves, end of year . . . . . . $ 28,275 $ 26,544
========== ==========
</TABLE>
NOTE L - SUBSEQUENT EVENTS
On February 19, 1996 the Registrants entered into a letter agreement to be
sold to a new company to be formed by Castle Harlan Partners II and John Dore,
the President of the Registrant. This event will not have a material effect on
the affairs of the Registrant.
F-19
<PAGE> 82
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
ASSETS (unaudited)
INVESTMENTS
<S> <C> <C>
Fixed maturities held for sale at market............................................ $ 50,366,461 $ 58,834,592
Non-redeemable preferred equities at market......................................... 3,868,225 6,091,931
Common stocks at market............................................................. 2,386,702 4,148,237
Short-term investments.............................................................. 24,644,880 6,110,072
------------ ------------
Total investments............................................................... 81,266,268 75,184,832
OTHER ASSETS
Cash and equivalents................................................................ 2,431,605 3,782,536
Restricted cash..................................................................... -- 2,601,312
Premiums receivable................................................................. 1,747,742 3,101,867
Reinsurance recoverable on paid losses.............................................. 310,255 347,620
Reinsurance recoverable on unpaid losses............................................ 3,199,588 4,181,349
Accrued investment income........................................................... 716,519 757,395
Deferred federal income taxes....................................................... 2,134,627 1,082,569
Other assets........................................................................ 2,654,460 3,160,793
------------ ------------
Total other assets.............................................................. 13,194,796 19,015,441
------------ ------------
Total assets.................................................................... $ 94,461,064 $ 94,200,273
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Reserves for unpaid losses and loss adjustment expenses............................. $ 32,280,982 $ 32,455,874
Unearned premium reserves........................................................... 8,172,167 8,146,302
Accrued liabilities................................................................. 5,910,341 3,874,970
Funds withheld from reinsurers...................................................... -- 2,601,312
Excess of acquired net assets over cost............................................. 1,046,561 1,158,693
------------ ------------
Total liabilities............................................................... 47,410,051 48,237,151
STOCKHOLDERS' EQUITY
Preferred stock, $1,000 par value. 75,000 shares authorized; no shares issued
and outstanding................................................................... $ -- $ --
Common stock, $1 par value, 6,000,000 shares authorized; 3,901,204 shares issued.... 3,901,204 3,901,211
Additional paid-in capital.......................................................... 43,125,115 43,201,779
Treasury stock, at cost (1996 - 690,620; shares; 1995 - 707,300 shares)............. (6,325,388) (6,471,628)
Unrealized investment gains net of taxes............................................ 509,309 1,542,730
Retained earnings................................................................... 5,840,773 3,789,030
------------ ------------
Total stockholders' equity...................................................... 47,051,013 45,963,122
------------ ------------
Total liabilities and stockholders' equity...................................... $ 94,461,064 $ 94,200,273
============ ============
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
F-20
<PAGE> 83
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1996 MARCH 31, 1995
-------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
REVENUE
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 EXPENSES
Losses and loss adjustment expenses....................... 1,946,108 822,186
Commissions 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........................................ 3,203,196 1,474,076
Provision for income taxes........................................ 910,658 304,656
---------- ---------
Net income........................................................ 2,292,538 1,169,420
========== =========
Net income per common share....................................... 0.68 0.36
========== =========
Weighted average number of shares outstanding
for the entire period............................................. 3,371,480 3,258,068
---------- ---------
</TABLE>
See the accompanying notes to the condensed consolidated financial statement
F-21
<PAGE> 84
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1995 1995
---------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES........................... $ 1,744,062 $ 3,243,561
INVESTING ACTIVITIES
Net purchases of short term investments..................... (108,648) (500,158)
Purchases of fixed maturities............................... (4,814,230) (10,150,663)
Dispositions of fixed maturities............................ 2,926,157 14,821,942
Net (purchases) dispositions of preferred equities.......... 459,484 (954,293)
Net purchases of common stock............................... (991,312) (2,255,075)
------------ -------------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (2,528,549) 961,753
FINANCING ACTIVITIES
Stock options exercised..................................... 25,250 -
Payments of cash dividends.................................. (164,003) (140,927)
------------ -------------
NET CASH USED BY FINANCING ACTIVITIES (138,753) (140,927)
------------ -------------
INCREASE (DECREASE) IN CASH..................................... $ (923,240) $ 4,064,387
============ =============
</TABLE>
See the accompanying notes to the condensed consolidated financial statements
F-22
<PAGE> 85
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
(unaudited)
A. BASIS OF PRESENTATION
The condensed consolidated financial statements included herein have been
prepared by the Registrant without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission and reflect all
adjustments, consisting of normal recurring accruals, which are, in the
opinion of management, necessary for a fair presentation of the results of
operations for the periods shown. These statements are condensed and do
not include all information required by generally accepted accounting
principles to be included in a full set of financial statements. It is
suggested that these financial statements be read in conjunction with the
consolidated financial statements at, and for the year ended, December 31,
1995 and notes thereto, included in the Registrant's annual report on form
10K as of that date. Certain prior year amounts have been reclassified to
conform with the 1996 presentation.
B. DIVIDENDS PAID
The Registrant has paid the following cash and common share dividends in
1996 to outstanding stockholders of record:
<TABLE>
<CAPTION>
Payment Stockholder Dividend Paid
Date Record Date Per Common Share
----------------- ---------------- ----------------
<S> <C> <C>
February 22, 1996 January 25, 1996 20% Common Stock
February 22, 1996 January 25, 1996 $0.075
</TABLE>
In addition, the Registrant has declared the following cash dividends in
1996 to outstanding stockholders of record:
<TABLE>
<CAPTION>
Payment Stockholder Dividend Paid
Date Record Date Per Common Share
------------ --------------- ----------------
<S> <C> <C>
May 23, 1996 April 18, 1996 $0.075
</TABLE>
F-23
<PAGE> 86
<TABLE>
<S><C>
X Please mark your
votes as in this
example.
The Board of Directors recommends a vote FOR Item 1.
1. To approve and adopt the Merger Agreement dated as of April 12, FOR AGAINST ABSTAIN
1996 by and among Financial Institutions Insurance Group, Ltd., / / / / / /
FIIG Holding Corp. and FIIG Merger Corp., as described in the
Proxy Statement for the Special Meeting and attached thereto as
Appendix A.
2. In their discretion, the Proxies are authorized to vote upon such other business as properly may come before the meeting.
IMPORTANT: This Proxy must be signed in order to be valid.
</TABLE>
SIGNATURE(S)______________________________________________
DATE_______________________________________________, 1996
NOTE: Please sign exactly as name appears hereon.
Joint owners each should sign. When signing as attorney,
executor, administrator, trustee or guardian, please give
full title as such. If a corporation, please sign in full
corporate name by President or other authorized officer.
If a partnership, please sign in partnership name by
authorized person.
<PAGE> 87
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
PROXY FOR SEPTEMBER 5, 1996 SPECIAL MEETING OF STOCKHOLDERS
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS.
The undersigned hereby appoints John B. Zellars and R. Keith Long or
P either of them, the attorneys and agents of the undersigned, each
with powers of substitution, as proxies for the undersigned to vote
R all the Common Shares the undersigned may be entitled to vote at the
Special Meeting of Stockholders of Financial Institutions Insurance
O Group, Ltd. called to be held at 9:00 a.m. Eastern Daylight Saving
Time, Thursday, September 5, 1996, at the offices of Schulte Roth &
X Fabel, 900 Third Avenue, New York, New York, or any adjournment
thereof in the manner indicated on the reverse side of this proxy,
Y and upon such other business as lawfully may come before the
meeting. IF NO DIRECTION AS TO THE MANNER OF VOTING THE PROXY IS
MADE, THE PROXY WILL BE VOTED FOR ITEM 1 AS DESCRIBED ON THE REVERSE
SIDE HEREOF.
YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES ON
THE REVERSE SIDE. IF YOU DO NOT MARK ANY BOXES, YOUR PROXY WILL BE VOTED IN
ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS. THE PROXIES CANNOT
VOTE YOUR SHARES UNLESS YOU SIGN AND RETURN THIS CARD.
-----------
SEE REVERSE
SIDE
-----------
<PAGE> 88
APPENDIX A
MERGER AGREEMENT
<PAGE> 89
MERGER AGREEMENT
by and among
FIIG HOLDING CORP.,
FIIG MERGER CORP.
and
FINANCIAL INSTITUTIONS INSURANCE GROUP, LTD.
Dated as of: April 12, 1996
<PAGE> 90
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
RECITALS ................................................................... 1
ARTICLE I DEFINITIONS ..................................................... 1
SECTION 1.1. Definitions 1
ARTICLE II THE MERGER ..................................................... 3
SECTION 2.1. Merger 3
SECTION 2.2. Effective Time 3
SECTION 2.3. Certificate of Incorporation 3
SECTION 2.4. By-Laws 3
SECTION 2.5. Officers and Directors 3
SECTION 2.6. Effect of Merger 4
ARTICLE III CONVERSION .................................................... 5
SECTION 3.1. Conversion 5
SECTION 3.2. Exchange of Certificates; Paying Agent 6
SECTION 3.3. Letter of Transmittal 6
SECTION 3.4. Exchange Procedures 6
SECTION 3.5. No Further Ownership Rights in Common Stock 7
SECTION 3.6. Payment Fund 7
SECTION 3.7. Options 8
ARTICLE IV DISSENTING STOCKHOLDERS ........................................ 8
SECTION 4.1. Election 8
SECTION 4.2. Payment 8
ARTICLE V THE CLOSING ..................................................... 9
SECTION 5.1. Closing 9
SECTION 5.2. Certificate of Merger 9
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF THE COMPANY .................. 9
SECTION 6.1. Incorporation; Qualification and Standing 9
</TABLE>
-i-
<PAGE> 91
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 6.2. Subsidiaries 10
SECTION 6.3. Authority 10
SECTION 6.4. Absence of Conflicts 11
SECTION 6.5. Consents and Approvals 11
SECTION 6.6. Directors and Officers 12
SECTION 6.7. Charter and By-Laws 12
SECTION 6.8. Capitalization 12
SECTION 6.9. Compliance; Insurance Regulatory Licenses 13
SECTION 6.10. SEC Reports 15
SECTION 6.11. Financial Statements 15
SECTION 6.12. Reinsurance 17
SECTION 6.13. Written Insurance Policies; Regulatory Filings 17
SECTION 6.14. Producers: Fronting 18
SECTION 6.15. Premium Balances Receivable 18
SECTION 6.16. Certain Business Practices 19
SECTION 6.17. Tax Matters 19
SECTION 6.18. Employee Benefit Plans; Employment and Labor Agreements 20
SECTION 6.19. Investments 23
SECTION 6.20. Intangible Property 23
SECTION 6.21. Tangible Property 23
SECTION 6.22. Real Property; Leases 24
SECTION 6.23. Assets 24
SECTION 6.24. Agreements for Borrowed Money, Etc. 24
SECTION 6.25. Contracts and Commitments 25
SECTION 6.26. Litigation 26
SECTION 6.27. Environmental Matters 27
SECTION 6.28. Brokers and Finders 28
SECTION 6.29. Banks 28
SECTION 6.30. Maintenance of Insurance 28
SECTION 6.31. Legislation 29
SECTION 6.32. Operations of the Company and its Subsidiaries 29
SECTION 6.33. Potential Conflicts of Interest 31
SECTION 6.34. Guaranty Funds, Pools and Associations 32
SECTION 6.35. Full Disclosure 32
</TABLE>
-ii-
<PAGE> 92
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE VII REPRESENTATIONS AND WARRANTIES OF BUYER
AND BUYER SUB ......................................................................... 33
SECTION 7.1. Organization and Standing 33
SECTION 7.2. Certificate of Incorporation and By-Laws 33
SECTION 7.3. Authority 33
SECTION 7.4. Absence of Conflicts 33
SECTION 7.5. Consents and Approvals 34
SECTION 7.6. Brokers and Finders 34
SECTION 7.7 SEC Filings 34
ARTICLE VIII COVENANTS AND AGREEMENTS OF THE COMPANY ................................... 35
SECTION 8.1. Conduct of Business 35
SECTION 8.2. Access to Properties, Books and Records; Confidentiality 36
SECTION 8.3. Insurance 36
SECTION 8.4. Litigation 37
SECTION 8.5. Advice of Changes 37
SECTION 8.6. Subsequent Financial Statements; SEC Documents; and Insurance 37
Filings
SECTION 8.7. No Solicitation 38
SECTION 8.8. Proxy Statement; Approval by the Company's Stockholders 39
SECTION 8.9. Options 39
ARTICLE IX ADDITIONAL COVENANTS ........................................................ 40
SECTION 9.1. HSR Act 40
SECTION 9.2. Insurance Regulatory Approvals 40
SECTION 9.3. Filings and Approvals 40
SECTION 9.4. Continued Effectiveness of Representations and Warranties 41
SECTION 9.5. Advice of Changes 41
SECTION 9.6. Proxy Statement 41
SECTION 9.7. Further Assurances 41
SECTION 9.8. Directors' and Officers' Insurance 41
ARTICLE X CONDITIONS TO OBLIGATIONS OF BUYER AND BUYER SUB ............................. 42
SECTION 10.1. Compliance with Agreements 42
SECTION 10.2. Representations and Warranties 42
</TABLE>
-iii-
<PAGE> 93
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 10.3. Opinion of Counsel for the Company 42
SECTION 10.4. Approvals 43
SECTION 10.5. Legislation 43
SECTION 10.6. Absence of Preventative Litigation 43
SECTION 10.7. Secretary's Certificate; Certified Copies 44
SECTION 10.8. Resignations 44
SECTION 10.9. Dissenting Stock 44
SECTION 10.10. No Material Adverse Effect 44
SECTION 10.11. Stock Option Plan and Directors' Incentive Plan; Options 44
ARTICLE XI CONDITIONS TO OBLIGATIONS OF THE COMPANY .................................... 45
SECTION 11.1. Compliance with Agreement 45
SECTION 11.2. Representations and Warranties 45
SECTION 11.3. Opinion of Counsel for Buyer 45
SECTION 11.4. Approvals 45
SECTION 11.5. Secretary's Certificate 45
SECTION 11.6. Absence of Preventative Litigation 46
SECTION 11.7. Good Standing 46
ARTICLE XII TERMINATION, AMENDMENT, WAIVERS ............................................ 46
SECTION 12.1. Termination 46
SECTION 12.2. Effect of Termination 47
SECTION 12.3. Amendments, Modifications, Etc. 47
SECTION 12.4. Waivers 48
ARTICLE XIII MISCELLANEOUS PROVISIONS .................................................. 48
SECTION 13.1. Publicity 48
SECTION 13.2. Certain Expenses 48
SECTION 13.3. Notices 48
SECTION 13.4. Entire Agreement 50
SECTION 13.5. No Third Party Beneficiaries 50
SECTION 13.6. No Assignment 50
SECTION 13.7. Governing Law 50
SECTION 13.8. Counterparts 50
SECTION 13.9. Headings 50
</TABLE>
-iv-
<PAGE> 94
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 13.10. Severability 51
SECTION 13.11. Survival of Representation and Warranties 51
</TABLE>
-v-
<PAGE> 95
SCHEDULES
Schedule 3.7 - Options
Schedule 6.1 - Jurisdictions where Company Qualified to do Business
Schedule 6.2 - Subsidiaries' Jurisdictions of Incorporation and where
Qualified to do Business
Schedule 6.4 - Conflicts
Schedule 6.5 - Consents and Approvals
Schedule 6.6 - Officers and Directors
Schedule 6.8 - Capitalization
Schedule 6.9 - Permits
Schedule 6.11 - NAIC IRIS Ratios; Liabilities not Reserved Against
Schedule 6.12 - Reinsurance Agreements
Schedule 6.13 - Underwriting Management Agreements
Schedule 6.14 - Producers; Fronting Agreements
Schedule 6.16 - Pending Claims
Schedule 6.17 - Tax
Schedule 6.18 - Employee Benefit Plans
Schedule 6.19 - Investments
Schedule 6.20 - Intangible Property
Schedule 6.21 - Tangible Property
Schedule 6.22 - Real Property
Schedule 6.24 - Agreements for Borrowed Money
Schedule 6.25 - Contracts
Schedule 6.26 - Litigation
Schedule 6.29 - Banks
Schedule 6.30 - Insurance
Schedule 6.32 - Operations
Schedule 6.33 - Potential Conflicts
Schedule 7.4 - Conflicts
Schedule 7.5 - Consents
Schedule 8.1 - Conduct of Business
-vi-
<PAGE> 96
EXHIBITS
Exhibit A - Voting Agreement
Exhibit B - Opinion of Company's Counsel
Exhibit C - Opinion of Buyer's Counsel
-vii-
<PAGE> 97
MERGER AGREEMENT
MERGER AGREEMENT, dated as of April 12, 1996 (this "Agreement"), by and
among FIIG Holding Corp. ("Buyer"), a Delaware corporation, FIIG Merger Corp.,
a wholly-owned subsidiary of Buyer and a Delaware corporation ("Buyer Sub"),
and Financial Institutions Insurance Group, Ltd., a Delaware corporation (the
"Company").
RECITALS:
WHEREAS, subject to the terms and conditions of this Agreement, each of
the boards of directors of Buyer, Buyer Sub and the Company have approved the
merger (the "Merger") of Buyer Sub into the Company, in accordance with the
Delaware General Corporation Law (the "DGCL") and subject to the terms and
conditions set forth in this Agreement;
WHEREAS, holders in excess of, in the aggregate, 20% of the issued and
outstanding Common Stock (as hereinafter defined) have contemporaneously
herewith entered into voting agreements in the form of Exhibit A hereto (the
"Voting Agreement"), pursuant to which such stockholders agree to vote all of
their shares of Common Stock to approve the Merger and the transactions
contemplated hereby; and
WHEREAS, in furtherance of the consummation of the Merger and transactions
contemplated herein, the parties hereto desire to enter into this Agreement;
NOW, THEREFORE, in consideration of and premised upon the various
representations, warranties, covenants and other agreements and undertakings of
Buyer, Buyer Sub and the Company contained in this Agreement, and other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, Buyer, Buyer Sub and the Company agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. Definitions. (a) The following terms shall have the meaning
specified in the indicated section of this Agreement:
<PAGE> 98
<TABLE>
<CAPTION>
Term Section Term Section
---- ------- ---- -------
<S> <C> <C> <C>
Acquisition Proposal ............... Section 8.7.
Acquiror Approvals ................. Section 7.5.
Affiliated Group ................... Section 6.17.
Agreement .......................... Recitals.
Annual Convention Statements ....... Section 6.11.
Annual Financial Statements ........ Section 6.11.
Applicable Insurance Law ........... Section 6.11.
Benefit Plan ....................... Section 6.18.
Buyer .............................. Recitals.
Buyer Related Agreements ........... Section 7.3
Buyer Sub .......................... Recitals.
Buyer Sub Common Stock ............. Section 3.1.
Cash Consideration Per Option ...... Section 3.7
Cash Consideration Per Share ....... Section 3.1.
CHPII .............................. Section 8.2.
Closing ............................ Section 5.1.
Closing Date ....................... Section 5.1.
Code ............................... Section 6.17.
Common Stock ....................... Section 3.1.
Company ............................ Recitals.
Confidentiality Agreement .......... Section 8.2.
Connecticut Approval ............... Section 9.3.
Connecticut Waiver ................. Section 9.3.
Constituent Corporations ........... Section 2.1.
DGCL ............................... Recitals.
Dissenting Stockholder ............. Section 4.1.
Effective Date ..................... Section 2.2.
Effective Time ..................... Section 2.2.
Environmental Actions .............. Section 6.27.
Environmental Laws ................. Section 6.27.
ERISA .............................. Section 6.18.
ERISA Affiliate .................... Section 6.18.
Exchange Act ....................... Section 6.10.
FRH ................................ Section 6.5.
Governmental Entity ................ Section 6.9.
Hazardous Substances ............... Section 6.27.
HSR Act ............................ Section 6.5.
Merger ............................. Recitals.
Insurance Regulatory Approvals ..... Section 6.5. NAIC ............................... Section 6.11.
Investments ........................ Section 6.19. Options ............................ Section 3.7.
IRS ................................ Section 6.18. Paying Agent ....................... Section 3.2.
IRIS ............................... Section 6.11. Payment Fund ....................... Section 3.2.
Letter of Transmittal .............. Section 3.3. Payment Fund Investment ............ Section 3.6.
Lien ............................... Section 6.4. Permits ............................ Section 6.5.
Loss Reserves ...................... Section 6.11. Preventative Litigation ............ Section 10.6.
Material Adverse Effect ............ Section 6.1. Producer ........................... Section 6.14
</TABLE>
-2-
<PAGE> 99
<TABLE>
<S> <C>
Proxy Statement .................... Section 8.8.
Quarterly Convention Statements .... Section 6.11.
Reinsurance Agreements ............. Section 6.12.
Related Agreements ................. Section 6.3.
Rights ............................. Section 6.8.
SEC ................................ Section 6.5.
SEC Documents ...................... Section 6.10.
SEC Filing ......................... Section 8.6.
Securities Act ..................... Section 6.10.
Sellers Approvals .................. Section 6.5.
Subsidiary ......................... Section 6.2
Surviving Corporation .............. Section 2.1.
Surviving Corporation By-laws ...... Section 2.4.
Surviving Corporation Certificate .. Section 2.3.
Surviving Corporation Common Stock Section 3.1.
Tangible Property .................. Section 6.21.
Tax ................................ Section 6.17.
Third Party Consents ............... Section 6.5.
Unsolicited Sale ................... Section 8.7.
Voting Agreement ................... Recitals.
</TABLE>
(b) All references herein to dollars or "$" shall be to United States
dollars.
(c) As used herein, the phrase "to the Company's knowledge", or "to the
best knowledge of the Company" or other similar phrase refers to the knowledge
of the officers of the Company and its Subsidiaries.
ARTICLE II
THE MERGER
SECTION 2.1. Merger. Upon the terms and subject to the conditions set
forth in this Agreement and in accordance with the DGCL, at the Effective Time,
Buyer Sub shall be merged with and into the Company, whereupon the Company
shall continue as the surviving corporation (sometimes referred to herein as
the "Surviving Corporation") and the separate corporate existence of Buyer Sub
shall cease. The Company and Buyer Sub are sometimes referred to herein,
collectively, as the "Constituent Corporations".
SECTION 2.2. Effective Time. (a) The Merger shall be effective when a
properly executed certificate of merger setting forth the information required
by Section 251 of the DGCL, (together with any other documents, certificates
and instruments required by law to effectuate and consummate the Merger) shall
be filed with the Secretary of State of the State of Delaware (or at such other
time as shall be specified in such certificate of merger), which filing shall
be made as soon as practicable after satisfaction (or waiver) of the conditions
set forth in Articles X and XI.
-3-
<PAGE> 100
(b) When used herein, the term "Effective Time" shall mean the date and
time at which the Merger becomes effective and the term "Effective Date" shall
mean the date upon which the Effective Time occurs.
SECTION 2.3. Certificate of Incorporation. The Certificate of
Incorporation of the Company in effect immediately prior to the Effective Time
shall be the Certificate of Incorporation of the Surviving Corporation (the
"Surviving Corporation Certificate"), unless and until amended as provided by
the Surviving Corporation Certificate or by law.
SECTION 2.4. By-Laws. The by-laws of the Company in effect immediately
prior to the Effective Time shall be the by-laws of the Surviving Corporation
(the "Surviving Corporation By-laws") unless and until altered, amended or
repealed as provided by law, the Surviving Corporation Certificate or the
Surviving Corporation By-laws.
SECTION 2.5. Officers and Directors. The officers of the Company
immediately prior to the Effective Time shall be the officers of the Surviving
Corporation until their successors shall have been duly elected and qualified,
or as otherwise provided in the Surviving Corporation By-laws. The directors
of the Surviving Corporation shall be the directors of Buyer Sub until their
successors shall have been duly elected and qualified, or as otherwise provided
in the Surviving Corporation Certificate, the Surviving Corporation By-laws or
as otherwise provided by applicable law.
SECTION 2.6. Effect of Merger. (a) At the Effective Time, the Merger
shall have the effects set forth in Section 259 of the DGCL. Without limiting
the generality of the foregoing, and subject thereto: (i) the Surviving
Corporation shall possess all the rights, privileges, powers and franchises, of
a public and private nature, and shall be subject to all the restrictions,
disabilities and duties of each of the Constituent Corporations; (ii) all
property, real, personal and mixed, and all debts due to either Constituent
Corporation on whatever account, including all choses in action and other
things belonging to the Constituent Corporations, shall be vested in the
Surviving Corporation; (iii) all property, rights, privileges, powers and
franchises, and every other interest of each of the Constituent Corporations
shall be, from and after the Effective Date, the property of the Surviving
Corporation and the title to any real estate vested by deed or otherwise in the
Constituent Corporations shall not revert or be impaired in any way by this
Agreement or the Merger provided for herein, but all rights of creditors and
all liens upon any property of either Constituent Corporation shall be
preserved unimpaired, and all debts, liabilities and duties of the Constituent
Corporations shall, from and after the Effective Time, attach to and become the
debts, liabilities and duties of the Surviving Corporation, and may be enforced
against the Surviving Corporation to the same extent as if said debts,
liabilities and duties had been incurred or contracted by the Surviving
Corporation; and (iv) all transfers vesting in the Surviving
-4-
<PAGE> 101
Corporation referred to herein shall be deemed to occur by operation of
law and no consent or approval of any other person shall be required in
connection with any such transfer or vesting unless such consent or approval is
specifically required in the event of merger or consolidation by law or express
provision of any contract, agreement, decree, order or other instrument to
which either or both of the Constituent Corporations is a party or is bound.
(b) The Surviving Corporation shall assume and be liable for all the
liabilities, obligations and penalties of each of the Constituent Corporations.
No liability or obligation due or to become due, claim or demand for any cause
existing against either Constituent Corporation, or any stockholder, officer or
director thereof, shall be released or impaired by the Merger. No action or
proceeding, whether civil or criminal, then pending by or against either
Constituent Corporation, or any stockholder, officer or director thereof, shall
abate or be discontinued by the Merger, but may be enforced, prosecuted,
settled or compromised as if the Merger had not occurred, or the Surviving
Corporation may be substituted in such action or special proceeding in place of
either Constituent Corporation.
(c) All corporate acts, plans, policies, approvals and authorizations of
the Constituent Corporations and their respective Boards of Directors,
committees appointed by such Boards of Directors and their officers and agents,
which were valid and effective immediately prior to the Effective Time, shall
be taken for all purposes as the acts, plans, policies, approvals and
authorizations of the Surviving Corporation and shall be as effective and
binding thereon as the same were with respect to the Company and Buyer Sub.
ARTICLE III
CONVERSION
SECTION 3.1. Conversion. The manner and basis of converting the shares
of common stock of each of the Constituent Corporations, and the consideration
that the holders of such shares shall receive, are as follows:
(a) At the Effective Time, by virtue of the Merger and without any action
on the part of the holder thereof, each share of the common stock, par value
$1.00 per share, of the Company ("Common Stock") issued and outstanding
immediately prior to the Effective Time (other than shares held by Buyer or
Buyer Sub or shares as to which appraisal rights have not been forfeited under
the DGCL, if an 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) shall be converted into the right to receive $16
cash (the "Cash Consideration Per Share") without interest thereon, after the
date when such holder satisfies the procedures contemplated by
-5-
<PAGE> 102
Section 3.4, in accordance with the provisions of this Agreement.
Following the Effective Time, all certificates or other instruments
representing shares of Common Stock outstanding immediately prior to the Merger
(other than shares held by Buyer or Buyer Sub or shares as to which appraisal
rights have not been forfeited under the DGCL, if an 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) shall thereafter
only represent the right to receive, upon surrender thereof and conversion of
such shares in accordance with this Agreement, the Cash Consideration Per
Share. At and after the Effective Time, a holder of Common Stock, other than
Buyer or Buyer Sub, shall cease to have any rights as a stockholder of the
Company, except for the right to surrender the certificate or certificates
representing such holder's Common Stock in exchange for the payments required
to be made under this Agreement or to perfect such holder's right, if any, to
receive payment with respect to the Common Stock for which such holder has
validly demanded appraisal rights in accordance with the DGCL (which demand has
not been withdrawn). As of the Effective Time, the stock transfer books of the
Company shall be closed and there shall be no further registration of transfers
on the records of the Company of shares of Common Stock and, if a certificate
formerly representing such shares is presented to the Company or the Surviving
Corporation, it shall be canceled and exchanged for cash, as herein provided.
At the Effective Time, each share of Common Stock issued and outstanding prior
to the Effective Time (which shares will be converted into the right to receive
the Cash Consideration Per Share (other than shares held by Buyer or Buyer Sub
or shares as to which appraisal rights have not been forfeited under the DGCL,
if an 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)) shall be canceled and retired and shall cease to exist.
(b) Each share of Common Stock which shall be held by Buyer or Buyer Sub
or in the treasury of the Company, at the Effective Time, shall, by virtue of
the Merger and without further action, be canceled and retired and shall cease
to exist.
(c) At the Effective Time, each share of common stock, par value $.01 per
share, of Buyer Sub (the "Buyer Sub Common Stock"), issued and outstanding
immediately prior to the Effective Time, shall be converted into and become one
(1) share of the common stock, par value $1.00 per share, of the Surviving
Corporation (the "Surviving Corporation Common Stock"), by virtue of the Merger
and without any action on the part of the holder thereof. Immediately upon
such conversion into shares of Surviving Corporation Common Stock, each share
of Buyer Sub Common Stock shall be canceled and retired and shall cease to
exist.
SECTION 3.2. Exchange of Certificates; Paying Agent. As of the Effective
Time, Buyer shall deposit, or shall cause to be deposited, with or for the
account of a bank or trust company designated by the Company and reasonably
acceptable to Buyer (the "Paying Agent"), for the benefit of the holders of
shares of Common Stock, funds in an aggregate amount equal to
-6-
<PAGE> 103
the Cash Consideration Per Share multiplied by the number of shares of
Common Stock issued and outstanding (other than those shares held by Buyer or
Buyer Sub) and for which appraisal rights were not effectively exercised (the
"Payment Fund").
SECTION 3.3. Letter of Transmittal. As soon as practicable after the
Effective Time but in no event more than 20 days after the Effective Date, the
Company shall mail to each record holder of certificates that, immediately
prior to the Effective Time, shall represent shares of Common Stock which shall
be converted pursuant to Section 3.1 hereof, a notice and letter of transmittal
(the "Letter of Transmittal") advising such stockholder of the Merger and the
procedure for surrendering such certificates and receiving the consideration to
which such holder shall be entitled therefor pursuant to the terms thereof or
Section 3.1 hereof.
SECTION 3.4. Exchange Procedures. As soon as practicable after the
Effective Time, each holder of an outstanding certificate or certificates
which, prior thereto, represented shares of Common Stock shall, upon surrender
no later than 180 days after the Effective Date to the Paying Agent of such
certificate or certificates, together with a duly executed and completed
transmittal form, and acceptance thereof by the Paying Agent, be entitled to
the Cash Consideration Per Share for each share of Common Stock represented by
such certificate or certificates so surrendered. The Paying Agent shall accept
such certificates (or an indemnity in form reasonably satisfactory to Buyer and
the Paying Agent, if such certificate is lost, stolen or destroyed) upon
compliance with such terms and conditions as is reasonably necessary for the
Paying Agent to effect an orderly exchange thereof in accordance with normal
exchange practices. If the Cash Consideration Per Share is to be paid to any
person other than the person in whose name the certificate representing shares
of Common Stock surrendered in exchange therefor is registered, it shall be a
condition to such exchange that the certificate so surrendered shall be
properly endorsed or be accompanied by appropriate stock powers or otherwise be
in proper form for transfer and that the person requesting such payment shall
pay to the Paying Agent any transfer or other taxes required by reason of the
payment of such consideration to a person other than the registered holder of
the certificate surrendered, or shall establish to the reasonable satisfaction
of the Paying Agent that such tax has been paid or is not applicable. Until
surrendered as contemplated by this Section 3.4, each certificate representing
shares of Common Stock (other than certificates representing shares held by
Buyer or Buyer Sub, shares to be canceled in accordance with Section 3.1 hereof
or shares of Common Stock of Dissenting Stockholders), shall be deemed at any
time after the Effective Time to represent only the right to receive upon such
surrender the Cash Consideration Per Share, as contemplated by Section 3.1(a)
hereof. No interest will be paid or will accrue on any cash payable as Cash
Consideration Per Share.
SECTION 3.5. No Further Ownership Rights in Common Stock. The Cash
Consideration Per Share paid upon the surrender for exchange of certificates
representing shares
-7-
<PAGE> 104
of Common Stock in accordance with the terms of this Article III shall
be deemed to be full satisfaction of all rights pertaining to the shares of
Common Stock theretofore represented by such certificates.
SECTION 3.6. Payment Fund. (a) Any portion of the Payment Fund which
remains undistributed to the holders of Common Stock for 180 days after the
Effective Time shall be delivered to the Surviving Corporation upon demand, and
any such holders that have not theretofore complied with the provisions of this
Article III, shall thereafter look only to the Surviving Corporation and only
as general creditors thereof for payment of their claim for any Cash
Consideration, without any interest thereon.
(b) None of Buyer, Buyer Sub, the Surviving Corporation nor the Paying
Agent shall 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 shall not have been
surrendered prior to five (5) years after the Effective Date (or immediately
prior to such earlier date on which any Cash Consideration Per Share 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.
(c) The Paying Agent shall invest the Payment Fund, as directed by Buyer,
in: (i) direct obligations of the United States of America; (ii) obligations
for which the full faith and credit of the United States of America is pledged
to provide for the payment of principal and interest; or (iii) commercial paper
rated the highest quality by both Moody's Investors Services, Inc. and Standard
& Poor's Corporation (each a "Payment Fund Investment"); provided, however,
that any such investment or any such payment of earnings shall not delay the
receipt by holders of shares of Common Stock of the Cash Consideration or
otherwise impair such holders' respective rights hereunder. In the event the
Payment Fund shall realize a loss on any such Payment Fund Investment, Buyer
shall promptly thereafter deposit in the Payment Fund on behalf of the
Surviving Corporation cash or a Payment Fund Investment in an amount sufficient
to enable the Payment Fund to satisfy all remaining obligations originally
contemplated to be paid out of the Payment Fund.
(d) Any portion of the Payment Fund for which appraisal rights have been
perfected shall be returned to the Surviving Corporation, upon demand.
SECTION 3.7. Options. On the Effective Date, Buyer shall pay or cause to
be paid to each of the persons listed on Schedule 3.7 hereto with respect to
the outstanding options
-8-
<PAGE> 105
for Common Stock (the "Options") set forth opposite such person's name
on Schedule 3.7 hereto an amount per share of Common Stock subject to an Option
equal to the excess of the Cash Consideration Per Share over the exercise price
per share of such Option, as set forth on Schedule 3.7 hereto (the "Cash
Consideration Per Option"). Concurrently with the payment of the Cash
Consideration Per Option, each holder of an Option shall deliver to Buyer
evidence satisfactory to Buyer of the cancellation of such Option. At the
Effective Time, each Option shall be canceled and retired and shall cease to
exist and shall be deemed to represent only the right to receive the Cash
Consideration Per Option. Payment of the Cash Consideration Per Option in
accordance with this Section 3.7 shall be deemed to be full satisfaction of all
rights pertaining to the Options. All amounts payable under this Section 3.7
shall be subject to any required withholding of taxes and shall be paid without
interest.
ARTICLE IV
DISSENTING STOCKHOLDERS
SECTION 4.1. Election. Any shares of Common Stock as to which the holder
thereof shall have properly demanded appraisal in accordance with the
requirements of Section 262 of the DGCL (any holder duly making such demand is
referred to herein as a "Dissenting Stockholder") shall not be converted into
the right to receive the Cash Consideration Per Share, unless and until such
holder shall have failed to perfect, or shall have effectively withdrawn or
lost, the right to appraisal of and payment for such shares of Common Stock
under the DGCL. The Company shall give Buyer prompt notice of any demands for
appraisal with respect to shares of Common Stock which shall have been made in
accordance with the DGCL, and Buyer shall have the right to participate in all
negotiations and proceedings with respect to such demands. The Company shall
not, except with the prior written consent of Buyer, make any payment with
respect to, or settle or offer to settle or otherwise negotiate, any such
demands. In the event that a notice of exercise of appraisal rights under
Section 262 of the DGCL was not required prior to the Effective Time, at such
time as a holder of shares of Common Stock subsequently properly demands
appraisal rights, certificates for shares of Common Stock as to which such
appraisal rights are properly demanded shall thereupon cease to represent the
right to receive the Cash Consideration Per Share, and shall represent only the
right to receive payment for such shares under Section 262 of the DGCL.
SECTION 4.2. Payment. Each Dissenting Stockholder who becomes entitled,
pursuant to the provisions of Section 262 of the DGCL, to payment of the value
of its shares of Common Stock shall receive payment therefor from the Surviving
Corporation (but only after the value thereof shall have been agreed upon or
finally determined pursuant to such provisions). If a Dissenting Stockholder
fails to perfect, or effectively withdraws or loses the right to receive
-9-
<PAGE> 106
payment for such shares of Common Stock, pursuant to Section 262 of the DGCL,
such Dissenting Stockholder shall be entitled to convert such shares of Common
Stock as provided in Section 3.1 hereof.
ARTICLE V
THE CLOSING
SECTION 5.1. Closing. The closing of the transactions provided for
herein (the "Closing") shall take place at the offices of Schulte Roth & Zabel,
900 Third Avenue, New York, New York 10022 at 10 a.m., New York City time, as
promptly as practicable, and in any event within 5 days of the date on which
the conditions to Closing set forth in Articles X and XI hereof have been
waived or satisfied, or at such other time and place as the Buyer and the
Company mutually agree in writing. The date upon which the Closing occurs is
hereinafter referred to as the "Closing Date".
SECTION 5.2. Certificate of Merger. If this Agreement and the Merger has
been duly approved and adopted by the affirmative vote or consent of the
holders of at least a majority of all outstanding shares of Common Stock
entitled to vote thereon as provided in Section 8.8 hereof, and upon the
satisfaction (or waiver in writing) of the conditions precedent to the
consummation of the Merger as provided for herein, including those set forth in
Articles X and XI hereof (and if this Agreement has not been terminated and the
Merger has not been abandoned as permitted by the provisions of this
Agreement), at the Closing the Certificate of Merger shall be executed and
delivered on behalf of Buyer Sub and the Company and submitted to the Secretary
of State of the State of Delaware for filing in accordance with Sections 103
and 251 of the DGCL.
-10-
<PAGE> 107
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to and agrees with Buyer and Buyer Sub
that:
SECTION 6.1. Incorporation; Qualification and Standing. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of its state of incorporation and has all requisite corporate power and
authority to own, operate and lease its assets and properties and to carry on
its business as now being conducted and to enter into and, subject to receipt
of all Seller Approvals, to perform its obligations under this Agreement and
under the other agreements and instruments provided for herein to which it is a
party. The Company is duly qualified and licensed to do business as a foreign
corporation and is in good standing in each jurisdiction where the properties
owned, leased or operated or the business conducted by it requires such
qualification or licensing, each of which jurisdictions is listed on Schedule
6.1 hereto, except where the failure to be so qualified, licensed or in good
standing, individually or in the aggregate, is not reasonably likely to have a
material adverse effect on the business, operations, assets, condition
(financial or otherwise) or prospects of the Company and its Subsidiaries taken
as a whole or the ability to consummate the transactions contemplated by this
Agreement (a "Material Adverse Effect").
SECTION 6.2. Subsidiaries. Schedule 6.2 contains a list of all of the
Company's Subsidiaries, their jurisdictions of incorporation and the
jurisdictions in which they are qualified to do business as a foreign
corporation. Each of the Company's Subsidiaries is a corporation duly
organized, validly existing and in good standing under the laws of its
respective jurisdiction of incorporation as set forth on Schedule 6.2 hereto,
and has the requisite corporate power and lawful authority to own, lease and
operate its respective assets, properties and business and to carry on its
respective business as it is now being conducted and, subject to receipt of all
Seller Approvals, to perform its obligations under this Agreement and to enter
into and perform its obligations under the other agreements and instruments
provided for herein to which it is a party. Each of the Company's Subsidiaries
is duly qualified or licensed to do business as a foreign corporation and is in
good standing in each jurisdiction where the properties owned, leased or
operated or the business conducted by it requires such qualification or
licensing, each of which jurisdiction is listed on Schedule 6.2 hereto, except
where the failure to be so qualified, licensed or in good standing,
individually or in the aggregate, is not reasonably likely to have a Material
Adverse Effect. Except for shares of capital stock of the Company's
Subsidiaries and as set forth on Schedule 6.19 hereto, the Company does not,
directly or indirectly, own or control or have any capital or other equity
interest or participation, or any interest convertible, exchangeable or
exercisable for, any capital or other equity interest or participation in, nor
is the Company, directly
-11-
<PAGE> 108
or indirectly, subject to any obligation or requirement to provide
funds to or invest in, any person. The term "Subsidiary" shall mean any person
as to which the Company directly or indirectly owns or has the power to vote,
or to exercise a controlling influence with respect to, fifty percent (50%) or
more of the securities of any class of such person, the holders of which class
are entitled to vote for the election of directors (or persons performing
similar functions) of such person.
SECTION 6.3. Authority. The Company has the full legal right and power
and all authority required to enter into, execute and deliver this Agreement
and each other agreement entered into or to be entered into in connection
herewith (the "Related Agreements") to which the Company is or is to be a party
and, subject to receipt of all Seller Approvals, to perform fully its
obligations hereunder and thereunder. The execution, delivery and performance
of this Agreement and the Related Agreements and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action on the part of the Company and no
other corporate proceedings on the part of the Company are necessary to
authorize the execution, delivery and performance of this Agreement, the
Related Agreements, the Merger and the transactions contemplated hereby and
thereby, except for the approval of the stockholders of the Company as provided
in Sections 5.2 and 8.8 hereof. This Agreement has been, and each Related
Agreement will be, duly executed and delivered by the Company and this
Agreement and the Related Agreements each constitutes or will constitute the
legal, valid and binding obligation of the Company enforceable against it in
accordance with its terms except as enforcement may be limited by applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally and by the availability of equitable remedies (regardless of
whether a proceeding is considered at law or in equity).
SECTION 6.4. Absence of Conflicts. Neither the execution nor the
delivery of this Agreement nor any of the Related Agreements, nor the
consummation of the transactions and performance of the obligations
contemplated hereby or thereby will: (i) conflict with or result in a breach
or violation of any of the terms, conditions or provisions of the certificate
of incorporation or by-laws of the Company or any of its Subsidiaries; (ii)
except as set forth in Schedule 6.4 hereto, conflict with or result in a breach
or violation of, or default (or event which, with the giving of notice or the
passage of time or both, would constitute a breach, violation or default) or
loss of a benefit under, result in the termination or modification of or
creation of any lien, security interest, pledge, charge, option, right of first
refusal, claim, mortgage, lease, easement or any other encumbrance whatsoever
("Lien") under, or permit the acceleration or modification of any obligation
under any provision of any agreement, indenture, mortgage, lien, lease or other
instrument or restriction of any kind to which the Company or any of its
Subsidiaries is a party or by which any of their assets, properties or
securities are otherwise bound; or (iii) except as set forth on Schedule 6.4
hereto, conflict with or violate any permit, license, judgment, order, writ,
injunction, award, decree, statute, law, ordinance, code, rule or regulation
applicable to the
-12-
<PAGE> 109
Company or any of its Subsidiaries or any of their assets or
properties; except in the case of clauses (ii) and (iii) above, those which,
individually or in the aggregate, are not reasonably likely to have a Material
Adverse Effect.
SECTION 6.5. Consents and Approvals. The execution and delivery by the
Company of this Agreement and the Related Agreements, the performance by the
Company of its obligations hereunder and thereunder and the consummation by the
Company and its Subsidiaries of the transactions contemplated hereby and
thereby do not require the Company or any of its Subsidiaries to obtain any
permit, license, variance, waiver, exemption, franchise, order, consent,
approval, authorization or action of (including, without limitation, any
consent or approval of any insurance regulatory authority, debtholder, landlord
or mortgagee), or make any report to or filing with or give any notice to or
register with, any Governmental Entity (collectively, "Permits") or any third
party ("Third Party Consents") except (i) for the approval of the stockholders
of the Company as provided in Sections 5.2 and 8.8 hereof, (ii) filings made
with the Securities and Exchange Commission (the "SEC"), as listed in Schedule
6.5 hereto, and the receipt of clearance from the SEC with respect thereto,
(iii) the filings and termination of the applicable waiting period required
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
the rules and regulations promulgated thereunder (the "HSR Act"), as provided
in Section 9.1 hereof, (iv) the consents and approvals of the insurance
regulatory authorities in the State of Connecticut and other jurisdictions
where The First Reinsurance Company of Hartford ("FRH") conducts business and
as listed in Schedule 6.5 hereto ("Insurance Regulatory Approvals"), (v) the
filing of the Certificate of Merger under the DGCL, (vi) the other consents,
approvals, authorizations or notices set forth in Schedule 6.5 hereto, and
(vii) those which if not obtained, individually or in the aggregate, are not
reasonably likely to have a Material Adverse Effect. The consents, approvals,
authorizations, actions, filings and notices set forth in clauses (i) through
(vi), inclusive, of this Section 6.5 or in Schedule 6.5 hereto are referred to
herein as the "Sellers Approvals".
SECTION 6.6. Directors and Officers. Schedule 6.6 includes a list of the
officers and directors of the Company and its Subsidiaries. None of such
officers and none of the other key employees of the Company or its Subsidiaries
has indicated in writing to the Company or its Subsidiaries that he or she
intends to resign or retire as a result of the transactions contemplated hereby
or otherwise.
SECTION 6.7. Charter and By-Laws. Copies of the charter and by-laws of
the Company and its Subsidiaries have heretofore been delivered to Buyer or
Buyer's counsel and are true, accurate and complete and reflect all amendments
or changes in effect. Copies of the stock books and minute books of
the Company and its Subsidiaries have heretofore been delivered to Buyer or
Buyer's counsel and are true, accurate and complete, and such minute books
contain true, accurate and complete records of all meetings and consents in
lieu of meetings of their
-13-
<PAGE> 110
respective Board of Directors (and any committees thereof) and
stockholders, in the case of FRH and JBR Holdings, Inc., since August 23, 1991
and, in the case of the Company and its other Subsidiaries, since the time of
their respective organization, except for minutes of meetings of the Board of
Directors of the Company and the Special Committee thereof relating to the
proposed transaction between Buyer and the Company as contemplated hereby,
copies of which will be delivered to Buyer prior to the Closing.
SECTION 6.8. Capitalization. (a) The Company. As of the date hereof,
the authorized capital stock of the Company consists of 6,000,000 shares of
Common Stock, 3,210,591 shares of which are issued and outstanding, and 75,000
shares of preferred stock, par value $1,000 per share, of which no shares are
issued and outstanding. All of the issued and outstanding shares of capital
stock of the Company are duly authorized, validly issued, fully paid and
nonassessable. Except for the Options and except as set forth on Schedule 6.8
hereto, there are no other shares of capital stock of the Company authorized or
outstanding and no outstanding options, warrants, convertible or exchangeable
securities, subscriptions, rights (including any preemptive rights), stock
appreciation rights, calls or commitments of any character whatsoever
("Rights") requiring the issuance or sale by the Company of shares of any
capital stock of the Company, and there are no contracts or other agreements to
issue additional shares of capital stock of the Company or any Rights relating
to such shares. Except as set forth on Schedule 6.8 hereto, no shares of
capital stock of the Company are held in treasury.
(b) The Subsidiaries. Schedule 6.8 hereto sets forth a list of the
authorized and outstanding shares of capital stock of each Subsidiary of the
Company, together with the number of shares of each class of capital stock
owned by the Company or by its Subsidiaries. All of the issued and outstanding
shares of capital stock of the Company's Subsidiaries are duly authorized,
validly issued, fully paid and nonassessable; are owned, directly or indirectly
through another Subsidiary of the Company or by the Company, of record and
beneficially; and are free and clear of all Liens. There are no other shares
of capital stock of any of such Subsidiaries authorized or outstanding and no
outstanding Rights requiring the issuance or sale of shares by such Subsidiary
of any capital stock of any such Subsidiary, and there are no contracts or
other agreements to issue additional shares of capital stock of any such
Subsidiary or any Rights relating to such shares. No shares of capital stock
of any of the Company's Subsidiaries are held in treasury.
(c) Other Agreements. Except as set forth in the Schedule 6.8 hereto,
neither the Company nor any of its Subsidiaries is a party to any agreement or
understanding, including, without limitation, any stockholder or
shareholders, registration rights, voting trust, proxy or other agreement, with
respect to the capital stock or other securities of the Company or its
Subsidiaries, nor is there any proposed amendment to the charters of the
Company or its Subsidiaries for increasing the amount of authorized capital
stock of such corporation. To the best knowledge of the Company, except for
the Voting Agreement and as set forth on Schedule
-14-
<PAGE> 111
6.8 hereto, there are no shareholder or stockholder agreements, voting trusts
or voting agreements, proxies or other similar agreements or understandings
between or among stockholders of the Company or its Subsidiaries.
(d) Options. Schedule 3.7 hereto sets forth the number of outstanding
Options as of the date hereof, the name of the holder of each Option and the
exercise price for each Option. All such Options are currently exercisable by
the holder thereof or by the terms thereof will be exercisable by the holder
thereof on the Effective Date as a result of the Merger.
SECTION 6.9. Compliance; Insurance Regulatory Licenses. (a) No
Violations. Except as set forth on Schedule 6.9 hereto, the Company and its
Subsidiaries are in compliance in all material respects with all foreign,
federal, state, county and local laws, statutes, rules, regulations, ordinances
and governmental and administrative requirements applicable to the operation of
its business, including all Applicable Insurance Laws (other than Environmental
Laws and laws with respect to ERISA which are covered by Sections 6.27 and 6.18
hereto). Other than as included in any final examination report listed on
Schedule 6.9 hereto, there is no judgment, ruling, order, writ, injunction,
award or decree of any Governmental Entity applicable to the Company or any of
its Subsidiaries or to their respective assets, properties, businesses or
operations. Except as set forth in Schedule 6.9 hereto, no investigation or
review by any Governmental Entity with respect to the Company or its
Subsidiaries is pending, or, to the best knowledge of the Company, threatened
nor has any Governmental Entity indicated an intention to conduct the same.
The term "Governmental Entity" shall mean any nation or government, any state
or other political subdivision thereof, any entity exercising executive,
legislative, judicial, regulatory or administration functions of or pertaining
to government, including the SEC or any other government authority, agency,
department, board, commission or instrumentality of the United States, any
foreign government, any State of the United States or any political subdivision
thereof, and any court, tribunal or arbitrator(s) of competent jurisdiction,
and any governmental or non-governmental self-regulatory organization, agency
or authority.
(b) Permits. The Company and each of its Subsidiaries have obtained all
Permits required in connection with the conduct of the businesses of the
Company and its Subsidiaries as presently conducted, except as set forth on
Schedule 6.9 hereto. Such Permits are listed on Schedule 6.9 hereto. Schedule
6.9 hereto includes a true and complete list of the jurisdictions in which FRH
is licensed and authorized to engage in insurance and reinsurance
business either as a licensed, admitted carrier or as an approved unlicensed
reinsurer and the lines of insurance or types of business which it is licensed
to write or engage in each such jurisdiction and a true and complete list of
the jurisdictions in which credit is allowed for reinsurance without posting
security for such reinsurance. Neither the Company nor any of its Subsidiaries
other than FRH engages in any activity that requires it to be licensed as an
insurer or reinsurer. The Company has heretofore made available to Buyer true
and complete copies of all such Permits as
-15-
<PAGE> 112
are currently in effect or evidence that the Company otherwise has such
Permits. Neither the Company nor any of its Subsidiaries has received written
notice pursuant to which any other jurisdiction has claimed that the Company or
any of its Subsidiaries is required to qualify or otherwise be licensed to
transact any insurance or reinsurance business therein. All Permits are valid
and in full force and effect and neither the Company nor any of its
Subsidiaries are in violation of any Permit, except where such violation,
individually or in the aggregate, is not reasonably likely to have a Material
Adverse Effect and except as set forth on Schedule 6.9 hereto. No such Permit
is the subject of a proceeding for suspension or revocation or similar
proceedings. No violations are or have been recorded in respect of any Permit
and no proceeding is pending, or to the knowledge of the Company threatened, to
revoke or limit any Permit. Except as set forth on Schedule 6.9 hereto, none
of the Permits contain any terms, limitations or conditions which would,
following the consummation of the transactions contemplated hereby, prevent the
Company and its Subsidiaries from conducting their respective businesses as
currently conducted. No jurisdiction has demanded or requested that the
Company or any of its Subsidiaries qualify or become licensed as a foreign
corporation, except with respect to FRH's insurance or reinsurance business.
(c) Examination Report. Schedule 6.9 hereto includes a true and complete
list of all draft and final examination reports received by the Company and its
Subsidiaries since August 23, 1991. The Company has delivered true and
complete copies of each such report to Buyer. Except for generally applicable
legal requirements, there are no agreements or understandings between the
Company or its Subsidiaries, and any regulatory authority with respect to the
payment of dividends or the maintenance of any reserves.
(d) Dividends. FRH has not during the twelve months preceding the date
hereof declared or paid an "extraordinary dividend" within the meaning of
Connecticut General Statute Section 38a - 136(f) and all dividends paid by FRH
within the past twelve months did not contravene, or constitute a default under
any provision of applicable law or regulation, including without limitation,
Connecticut General Statute Section 38a - 136(f) and (h), or the certificate
of incorporation or by-laws of the Company or any of its Subsidiaries, or of
any agreement, judgment, injunction, order, decree or other instrument binding
upon the Company or any of its Subsidiaries or result in the creation or
imposition of any Lien on any asset of the Company or any of its Subsidiaries.
SECTION 6.10. SEC Reports. The Company has heretofore furnished the
Buyer with true and complete copies of (i) the Company's Annual Reports on Form
10-K for the years ended December 31, 1991 through December 31, 1995, as filed
with the SEC, (ii) the Company's Quarterly Reports on Form 10-Q for each
quarterly period from December 31, 1991 through the nine months ended September
30, 1995, and (iii) all other reports, including Current Reports on Form 8-K,
filed with, and other filings made with, the SEC since December 31, 1991 by any
of
-16-
<PAGE> 113
the Company or the Subsidiaries pursuant to the Securities Exchange Act of
1934, as amended (the "Exchange Act"), which are all the documents (other than
preliminary material) that the Company was required to file with the SEC since
such date. As of their respective dates, all such reports, statements and
filings (the "SEC Documents") complied in all material respects with the
Securities Act of 1933, as amended (the "Securities Act") and the Exchange Act,
as the case may be, and the rules and regulations of the SEC promulgated
thereunder applicable to such SEC Documents, and did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
SECTION 6.11. Financial Statements.
(a) GAAP Financial Statements. The audited consolidated balance sheets of
the Company and its Subsidiaries as of December 31, 1991, 1992, 1993, 1994 and
1995 and the related audited consolidated statements of income, stockholders'
equity and cash flows, together with all related notes and schedules thereto,
for the years then ended included in the SEC Documents (such 1995 financial
statements are hereinafter referred to as the "Annual Financial Statements"),
copies of all of which have been heretofore delivered to Buyer or Buyer's
counsel, comply as to form in all material respects with the applicable
published rules and regulations of the SEC with respect thereto and present
fairly the consolidated financial position and results of the operations of the
Company and its Subsidiaries as of the dates and for the periods indicated
therein in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods indicated, except as may otherwise be
specifically indicated in such financial statements. All material agreements,
contracts and other documents required to be filed as exhibits to any of the
SEC Documents have been so filed.
(b) Statutory Financial Statements. All annual convention statements
("Annual Convention Statements") required to be filed since January 1, 1992 and
the quarterly convention statements ("Quarterly Convention Statements")
required to be filed since January 1, 1992 with any insurance regulatory
agencies by FRH have been duly filed and, except where the failure to file in a
timely fashion, individually or in the aggregate, is not reasonably likely to
have a Material Adverse Effect, all such filings have been timely. Such Annual
Convention Statements for the fiscal years ended December 31, 1992,
1993, 1994 and 1995 (including the financial statements on a statutory basis
and the accompanying exhibits and schedules), copies of all of which have
heretofore been delivered to Buyer or Buyer's counsel, were prepared in
accordance with statutory accounting practices prescribed or permitted for
insurance companies by the Connecticut Insurance Department, applied on a
consistent basis throughout such periods except as otherwise stated therein or
required by the rules and regulations of the Connecticut Insurance Department,
and in accordance with the books and records of FRH, and present fairly, in
-17-
<PAGE> 114
accordance with such practices, the statutory financial position as at
the date of, and the statutory results of its operations for the periods
covered by, such Annual Convention Statements.
(c) Loss Reserves; Statutory Capital. The reserves of FRH including, but
not limited to, the reserves for incurred losses, incurred loss adjustment
expenses, incurred but not reported losses and loss adjustment expenses for
incurred but not reported losses (the "Loss Reserves") as set forth in each of
the Company's audited consolidated financial statements, the Company's
unaudited interim financial statements, and the Annual Convention Statements
and the Quarterly Convention Statements (i) are computed and are fairly stated
in accordance with generally accepted loss reserving standards and principles,
(ii) are based upon actuarial assumptions which are relevant to policy
provisions, (iii) are established using reserving techniques applied on a
consistent basis throughout the periods covered by such statements except as
otherwise stated therein or as required by the rules and regulations of the
Connecticut Insurance Department, (iv) are in compliance with the requirements
of the insurance laws, rules and regulations of the State of Connecticut
(collectively "Applicable Insurance Law") and (v) as of the date of such
statements made a reasonable provision for all unpaid loss and loss adjustment
expense obligations, including incurred but not reported losses and loss
adjustment expenses for incurred but not reported losses, under the terms of
the policies and agreements which FRH has incurred or to which it is subject.
Since December 31, 1995, there has been no material adverse change in the Loss
Reserves.
(d) Risk Based Capital. For the year ended December 31, 1995, FRH had a
ratio of total adjusted capital to authorized control level of 2.0 or more
pursuant to the risk based capital system of the National Association of
Insurance Commissioners ("NAIC").
(e) NAIC IRIS Ratios. Except as set forth on Schedule 6.11(e) hereto, for
the year ended December 31, 1995, all of the relevant financial relationships
specified under the Insurance Regulatory Information System ("IRIS") of the
NAIC of FRH were all within the "usual ranges" specified in the NAIC guidelines
for using IRIS.
(f) Liabilities. Except as set forth on Schedule 6.11 hereto (i) as at
December 31, 1995, the Company and its Subsidiaries did not have any
liabilities or obligations (whether or not of a kind required by generally
accepted accounting principles to be set forth on a financial statement) that
were not fully and adequately reflected or reserved against on the Annual
Financial Statements and (ii) the Company and its Subsidiaries do not have any
liabilities or obligations other than those reflected on the Annual Financial
Statements (less liabilities or obligations that have been discharged in the
ordinary course of business since December 31, 1995) and those incurred since
December 31, 1995 in the ordinary course of business. The Company has no
knowledge of any circumstances, conditions, events or arrangements which may
hereafter give rise to any material liabilities, except in the ordinary course
of business.
-18-
<PAGE> 115
SECTION 6.12. Reinsurance. Schedule 6.12 sets forth a true and complete
list of all reinsurance treaties and contracts currently in effect under which
FRH cedes or retrocedes any business (individually a "Reinsurance Agreement"
and collectively the "Reinsurance Agreements"). None of the Reinsurance
Agreements will terminate because of a change in control of the Company or its
Subsidiaries. No other party to any Reinsurance Agreement has given written
notice that it intends to terminate or cancel any such Reinsurance Agreement as
a result of the Merger or the contemplated operations of the Company and its
Subsidiaries after the Merger is consummated.
SECTION 6.13. Written Insurance Policies; Regulatory Filings. (a) Except
as set forth on Schedule 6.9 hereto, all of FRH's policies and contracts of
insurance and reinsurance now in force are in compliance in all material
respects, and at their respective dates of issuance were in compliance in all
material respects, with all applicable laws and, to the extent required under
applicable law, are on forms approved by the appropriate Governmental Entities
in the jurisdictions where issued or have been filed with and not objected to
by such Governmental Entities within the period provided for objection. Any
premium rates with respect to FRH's insurance or reinsurance policies or
contracts now in force which are required to be filed with or approved by any
Governmental Entity have been so filed or approved in accordance with
applicable law, and such premiums charged thereon conform thereto.
(b) Schedule 6.13 hereto sets forth a true and complete list of all
underwriting management agreements to which the Company or its Subsidiaries are
a party.
(c) Each Reinsurance Agreement to which the Company or its Subsidiaries
are party is valid, binding and in full force and effect in accordance with its
terms. FRH is not in default in any respect with respect to any such
Reinsurance Agreement (other than defaults which, individually or in the
aggregate, are not reasonably likely to have a Material Adverse Effect or
result in termination of such Reinsurance Agreement) and no such Reinsurance
Agreement contains any provision providing that the other party thereto may
terminate the same by reason of the transactions contemplated by this Agreement
or any other provision which would be altered or otherwise become applicable by
reason of such transactions.
SECTION 6.14. Producers; Fronting. (a) Schedule 6.14 hereto sets forth a
true and complete list of all persons through whom FRH placed or sold insurance
under policies currently in force (each, a "Producer"). To the knowledge of
the Company, each Producer is duly licensed (to the extent that such licenses
are required) in the jurisdictions where the Producer places or sells such
insurance. Each Producer is duly authorized and appointed by FRH pursuant to
applicable insurance statutes if any and all contracts or agreements between
any Producer, on the one hand, and FRH, on the other hand, are in compliance
with such statutes, except where the
-19-
<PAGE> 116
failure to be so authorized and appointed or for such noncompliance which,
individually or in the aggregate, is not reasonably likely to have a Material
Adverse Effect. To the knowledge of the Company, no Producer is the subject of,
or party to, any disciplinary action or proceeding under applicable insurance
statutes.
(b) Except as set forth in the Schedule 6.14 hereto, no Producer
represented more than 5% of the gross premiums written by FRH, taken as a whole
during the year ended December 31, 1995.
(c) No Producers have advised the Company in writing that they intend to
terminate or materially change their relationships with the Company or any of
its Subsidiaries as a result of the Merger or the contemplated operations of
the Company and its Subsidiaries after the Merger is consummated.
(d) Except as set forth in the Schedule 6.14 hereto, FRH is not (i) a
party to any reinsurance agreement under which it assumes business written by a
licensed insurer in jurisdictions where FRH is not licensed, or (ii) acting as
a broker or reinsurance intermediary.
SECTION 6.15. Premium Balances Receivable. (a) The premium balances
receivable, as reflected in the Annual Financial Statements for the fiscal year
ended December 31, 1995, to the extent uncollected on the date hereof, and the
premium balances receivable reflected on the Company's and its Subsidiaries'
books as of the date hereof, are valid and existing and represent monies due,
and (x) as of the date of the Annual Financial Statements such Annual Financial
Statements made reasonable provision, (y) as of the date hereof the Company and
its Subsidiaries made reasonable provision on their books and (z) as of the
Closing Date the Company and its Subsidiaries will have made reasonable
provision on their books, for receivables not collectible in the ordinary course
of business and (subject to reserves for uncollectible receivables) the premium
balances receivable are (i) not disputed by the account debtor, (ii) not subject
to any prior sale, pledge or assignment and are free and clear of any Liens, and
(iii) are not subject to any adjustments, offset, counterclaim, defense or
credit in favor of the account debtor, except to the extent that any items set
forth in clauses (i), (ii) or (iii) above, individually or in the aggregate, are
not reasonably likely to have a Material Adverse Effect.
(b) FRH owns assets that qualify as admitted assets under Applicable
Insurance Law in an amount at least equal to the sum of its Loss Reserves,
other liabilities and its statutory capital and surplus as set forth on FRH's
Annual Convention Statement for the fiscal year ended December 31, 1995.
SECTION 6.16. Certain Business Practices. (a) Schedule 6.16 hereto
lists (i) all pending claims arising from insurance or reinsurance policies
issued by FRH for which amounts
-20-
<PAGE> 117
reserved exceed $25,000, and (ii) all pending litigation by or against FRH's
policyholder involving FRH in which damages are sought by or from FRH in excess
of $25,000.
(b) All insurance or reinsurance claims that have become payable by FRH,
and are not currently in the course of being settled in good faith by the
relevant party, have been paid, or provided for, in accordance with the terms
of the insurance or reinsurance policy or contract under which they arose.
SECTION 6.17. Tax Matters. Except as set forth in the Schedule 6.17
hereto:
(a) The Company, each of its Subsidiaries and each consolidated,
affiliated, combined or unitary group of which the Company or any of its
Subsidiaries is or has been a member (each such group, an "Affiliated Group")
have timely filed or caused to be filed all federal, state, local and foreign
Tax returns required to be filed prior to the date hereof and have paid or
caused to be paid, or have made adequate provision or set up an adequate
reserve on the books of the Company or applicable Subsidiary of the Company for
the payment of, all Taxes required to be paid in respect of the periods covered
by said returns, and has established an adequate reserve on the books of the
applicable Company or Subsidiary of the Company for the payment of all Taxes
payable by the Company, any such Subsidiary or any Affiliated Group in respect
of any period, including portions thereof, subsequent to the last of such
periods and will establish such reserves up to and including the close of the
Closing Date. For these purposes, the Tax attributable to the period up to and
including the close of the Closing Date shall be determined as if the taxable
year of the Company, its Subsidiaries and any Affiliated Group ended as of the
close of the Closing Date.
(b) No deficiency or dispute in respect of any Tax has been claimed,
proposed or assessed against the Company, any Subsidiary of the Company or any
Affiliated Group.
(c) No waiver or extension of time to assess any Taxes has been granted
by the Company, any Subsidiary of the Company or any Affiliated Group.
(d) Neither the Company, any Subsidiary of the Company nor any
Affiliated Group has made any consent under Section 341 of the Internal Revenue
Code of 1986, as amended (the "Code").
(e) The Company, each Subsidiary of the Company and each Affiliated
Group has in all material respects satisfied all Federal, state, local and
foreign withholding tax requirements including but not limited to income, social
security and employment tax withholding.
-21-
<PAGE> 118
(f) There is no contract, agreement or other understanding pursuant to
which the Company or any Subsidiary of the Company has or may at any time after
the Closing have any obligation in respect of Taxes of any person or entity
other than the Company or any Subsidiary of the Company.
(g) There have been no accounting method changes of any Company, its
Subsidiaries or any Affiliated Group that could give rise to an adjustment
under Section 481 of the Code for periods after the Closing Date.
(h) Neither the Company nor any of its of its Subsidiaries has made any
payments or is or may be obligated to make any payments that are or will be not
deductible for tax purposes as a result of the application of Section 162(m) or
280G of the Code.
(i) Neither the Company nor any of its Subsidiaries has any liability
for Taxes of any person other than the Company or any of its Subsidiaries (A)
under Section 1.1502-6 of the Treasury Regulations, (B) as transferee or
successor, or (C) otherwise.
For the purposes of this Agreement, the term "Tax" shall include all
taxes, charges, withholdings, fees, levies, penalties, additions, interest or
other assessments imposed by any federal, state, local, foreign or other taxing
authority including, but not limited to, those related to gross or net income
or receipts, sales, use, occupation, services, leasing, valuation, transfer,
license, customs duties or franchise.
SECTION 6.18. Employee Benefit Plans; Employment and Labor Agreements.
(a) (i) Schedule 6.18 hereto contains a true and complete list of all
employee benefit plans, agreements, arrangements, funds, and programs
(including, without limitation, all "employee benefit plans" within the
meaning of Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA")) (A) which are sponsored, maintained or
contributed to by the Company, its Subsidiaries or any trade or business
under common control with the Company or its Subsidiaries within the meaning
of Section 414 of the Code (an "ERISA Affiliate") for the benefit of current
or former employees, officers or directors of any of the Company, its
Subsidiaries or any ERISA Affiliate, or (B) with respect to which the
Company, its Subsidiaries or any ERISA Affiliate has any liability, whether
direct or indirect, actual or contingent (individually, a "Benefit Plan" and
collectively, the "Benefit Plans").
(ii) With respect to each Benefit Plan, the Company has provided to
Buyer: (A) descriptions of all Benefit Plans; (B) the two most recent annual
reports (Form 5500 series, including all schedules and attachments); (C) the
three most recent annual and
-22-
<PAGE> 119
periodic accountings of plan assets, if applicable; (D) the three most recent
actuarial valuations, if applicable; and (E) the most recent determination
letter received from the Internal Revenue Service ("IRS").
(iii) Except as set forth on Schedule 6.18 hereto, with respect to
each Benefit Plan: (A) such Benefit Plan has been administered in compliance
in all material respects with its terms and all applicable laws; (B) no actions,
suits or claims are pending or threatened in respect to any Benefit Plan or any
assets thereof other than routine claims for benefits and domestic relations
orders; and (C) if such Benefit Plan is intended to qualify under Section 401(a)
of the Code such Benefit Plan (and the trust created thereunder) so qualifies
and a determination letter has been received from the IRS indicating that such
Benefit Plan is qualified under the Code.
(iv) With respect to each Benefit Plan which is an "employee
welfare benefit plan" (as defined in Section 3(1) of ERISA): (A) the trust
relating thereto, if any, satisfies the requirements of Section 501(c)(9) of
the Code; (B) such Benefit Plan has been administered in compliance in all
material respects with all requirements imposed under Section 4980B of the Code
and Sections 601-608 of ERISA; and (C) no such Benefit Plan provides health or
death benefits to any individual beyond his retirement or other termination of
employment (other than statutorily mandated continuation coverage or conversion
rights to individual coverage).
(v) No Benefit Plan which is currently maintained or has been
maintained at any time within the six years preceding the date hereof is a
"multiemployer plan" defined in Section 3(37) or 4001 of ERISA and neither the
Company, its Subsidiaries nor any ERISA Affiliate has any liability or
obligation, whether actual or contingent, with respect to such a multiemployer
plan.
(vi) No Benefit Plan which is currently maintained or has been
maintained at any time during the six (6) years preceding the date hereof is
subject to Title IV of ERISA.
(vii) There has been no transaction involving any Benefit Plan which
is a "prohibited transaction" under ERISA or the Code in connection with which
the Company, its Subsidiaries or any ERISA Affiliate would be subject to
liability under ERISA or the Code, or which would subject such Benefit Plan, the
Company, its Subsidiaries or any ERISA Affiliates to a penalty under ERISA or
the Code.
-23-
<PAGE> 120
(viii) None of the Benefit Plans listed in Schedule 6.18 hereto
provides for additional or accelerated payments or other consideration to be
made on account of the transactions contemplated hereby.
(ix) All contributions or payments required to be made to such
Benefit Plans by their terms or by law, before or after the Closing Date, with
respect to all periods or events occurring prior to the Closing Date (including
all insurance premiums) will be properly paid or accrued on the books of account
of the Company, its Subsidiaries and the ERISA Affiliates prior to the Closing
Date (including, without limitation, a pro rata share with respect to any period
including the Closing Date based on the ratio of the number of days in such
period to the total number of days in the plan year).
(x) There were no Benefit Plans in effect at any time during the
three years preceding the Closing Date with respect to which the Company, its
Subsidiaries or any ERISA Affiliate has taken action during such period which
has or will result in termination of such Benefit Plans.
(b) To the best knowledge of the Company, no union has attempted to
organize or represent the labor force of the Company or any of its Subsidiaries
in the 24 months immediately prior to the date hereof. Neither the Company nor
any of its Subsidiaries has any knowledge of any present or threatened walkout,
strike or any other similar occurrence. The Company has provided Buyer with a
list of all of the unions that have entered into collective bargaining
agreements with respect to employees of the Company or its Subsidiaries that are
now certified or claiming to be certified as collective bargaining agents to
represent any such employees. Neither the Company nor any of its Subsidiaries
has (i) taken any action that would constitute a plant closing or mass layoff
(within the meaning of the Workers Adjustment and Retraining Notification Act)
or (ii) incurred any material liability or obligation under the Workers
Adjustment and Retraining Notification Act or similar state laws which remains
unpaid or unsatisfied.
(c) To the knowledge of the Company, the employer-employee relations of
the Company and its Subsidiaries are generally satisfactory. The employment
practices of the Company and each of its Subsidiaries comply with all applicable
anti-discrimination laws, including, without limitation, the Age Discrimination
in Employment Act and the Americans with Disabilities Act, except where the
failure to so comply, individually or in the aggregate, is not reasonably likely
to have a Material Adverse Effect.
(d) No person (including, but not limited to, any Governmental Entity) has
any claim or basis for any suit, action, claim, proceeding or investigation
against the Company or any of its Subsidiaries arising out of any statute, law,
ordinance, code, rule or regulation relating to
-24-
<PAGE> 121
discrimination in employment or employment practices or occupational safety
and health standards (including, without limitation, The Fair Labor
Standards Act, as amended, Title VII of the Civil Rights Act of 1964, as
amended, 42 U.S.C. Section 1981, the Rehabilitation Act of 1973, as amended,
the Age Discrimination in Employment Act of 1967, as amended, the Family and
Medical Leave Act of 1993 or the Americans with Disabilities Act) which, if
upheld, individually or in the aggregate, is reasonably likely to have a
Material Adverse Effect.
SECTION 6.19. Investments. Schedule 6.19 hereto contains a list of all
bonds, stocks, other securities and other investments (including, without
limitation, real estate and other partnership interests) of any type owned by
the Company or any of its Subsidiaries, including a list of investments held on
deposit pursuant to applicable law or subject to trust arrangements
("Investments"), other than shares of capital stock of the Company or any of
its Subsidiaries held by the Company or any of its Subsidiaries, as of the date
hereof, all of which Investments, comply with Applicable Insurance Law, except
to the extent that noncompliance, individually or in the aggregate, is not
reasonably likely to have a Material Adverse Effect. Schedule 6.19 hereto sets
forth for each such Investment the category to which it has been assigned by
the Company pursuant to Statement of Financial Accounting Standard No. 115.
Except to the extent that, taken in the aggregate, the failure of the
Investments of FRH to be admitted to the full extent of their carrying value is
not reasonably likely to have a Material Adverse Effect, all Investments of FRH
are admitted assets to the full extent of their carrying value under Applicable
Insurance Law and statutory accounting practices. Except as disclosed on
Schedule 6.19 hereto, the Company and its Subsidiaries have good and marketable
title to all of the Investments listed on Schedule 6.19 or acquired in the
ordinary course of business since the date hereof other than with respect to
those Investments which have been disposed of in the ordinary course of
business since such date, free and clear of all Liens except for Liens for
taxes not yet due and payable. Neither the Company nor any of its Subsidiaries
has received notice that any of the Investments listed on Schedule 6.19 hereto
or acquired in the ordinary course of business since the date hereof is
currently in default in the payment of principal or interest.
SECTION 6.20. Intangible Property. The Company and its Subsidiaries own,
have registered or have valid rights to use the patents, trademarks, service
marks, trade names, copyrights and other intellectual property listed on
Schedule 6.20 hereto, which are the only such rights, patents, trademarks,
service marks, copyrights or other intellectual property that are material to
the business of the Company or any of its Subsidiaries. Neither the Company
nor any of its Subsidiaries has received written notice that any of them is
infringing any patents, trademarks, service marks, trade names, copyrights or
any application pending therefor. Neither the Company nor any of its
Subsidiaries is a party to a proceeding asserting, and none is aware, that any
third party is infringing on its or their rights thereunder. Neither the
Company nor any of its Subsidiaries have any notice of any adversely held
patent, trademark, service mark, trade name, copyright or franchise of any
other person or notice of any claim of any other person relating to
-25-
<PAGE> 122
any of the property set forth on Schedule 6.20 hereto or any process or
confidential information of the Company or any of its Subsidiaries, and neither
the Company nor any of its Subsidiaries has any knowledge of any basis for any
such charge or claim.
SECTION 6.21. Tangible Property. Except for items with a book value of
less than $5,000, Schedule 6.21 hereto sets forth all interests owned or
claimed by the Company or any of its Subsidiaries (including, without
limitation, options) in or to the plant, machinery, equipment, furniture,
leasehold improvements, fixtures, vehicles, structures, any related capitalized
items and other tangible property and which is treated by the Company or any of
its Subsidiaries as depreciable or amortizable property (collectively, the
"Tangible Property"). The Tangible Property of the Company and its
Subsidiaries is in good operating condition and repair, ordinary wear and tear
excepted, and the Company has not received any written notice that any of the
Tangible Property is in violation of any existing statute, law, or any health,
safety or other ordinance, code, rule or regulation. The Tangible Property is
owned by the Company and its Subsidiaries free and clear of all Liens except
those that, individually or in the aggregate, are not reasonably likely to have
a Material Adverse Effect.
SECTION 6.22. Real Property; Leases. Neither the Company nor any of its
Subsidiaries owns any land, buildings or other interests of any kind in any
real property (regardless of where located). Schedule 6.22 hereto includes a
list of all leases and subleases of real property to which either the Company
or any of its Subsidiaries is a party and all leases of equipment to which
either any of the Company or any of its Subsidiaries is a party that obligate
the Company or any such Subsidiary to expend more than $25,000 during any
fiscal year. To the best knowledge of the Company, all of such leases to which
either the Company or any of its Subsidiaries is a party are legal, valid and
binding; and neither the Company nor any of its Subsidiaries nor, to the best
knowledge of the Company, any other party is in default thereunder, nor has the
Company or any of its Subsidiaries received any written notice of default or
written notice of any material claim of any sort that has been asserted by
anyone adverse to the rights of the Company or any of its Subsidiaries under
any such lease or sublease, or affecting or questioning the rights of such
corporation to the continued possession of such leased or subleased premises
under any such lease or sublease, except for claims that would not,
individually or in the aggregate, reasonably be expected to have a Material
Adverse Effect.
SECTION 6.23. Assets. Each of the Company and its Subsidiaries has good
and marketable title to all of its assets reflected in the Annual Financial
Statements or described in Sections 6.15, 6.19, 6.20, 6.21 and 6.22 hereof, in
each case, free and clear of any Liens, except for: (i) Liens specifically
described in the notes to the Annual Financial Statements; (ii) assets disposed
of in the ordinary course of business since the date of the Annual Financial
Statements; (iii) Liens securing taxes, assessments, governmental charges or
levies, or the claims of materialmen, carriers, landlords and like persons, all
of which are not yet due and payable or are
-26-
<PAGE> 123
being contested in good faith, so long as such contest does not materially
detract from the value of, or prohibit the use of, such assets as currently
used; (iv) minor imperfections of title and encumbrances, if any, which (a) do
not materially detract from the value of the properties subject thereto, (b) do
not interfere with either the present and continued use of such property or
the conduct of normal operations or (c) have arisen only in the ordinary course
of business; or (v) assets held or used pursuant to any lease listed on
Schedule 6.22 hereto. Each of the Company and its Subsidiaries own (or lease,
in the case of leased assets) all of the assets necessary for the operation of
its business as now operated.
SECTION 6.24. Agreements for Borrowed Money, Etc. Neither the Company
nor any of its Subsidiaries is a party to or bound by any agreement, instrument
or indenture with respect to indebtedness for borrowed money or obligations in
the nature of guarantees of the indebtedness of another person.
SECTION 6.25. Contracts and Commitments. There is no material contract
or document of a character required to be described in the SEC Documents or to
be filed as an exhibit to any SEC Document that is not described and filed as
required by the Securities Act or the Exchange Act. As of the Effective Date,
all contracts or documents described in or filed within an SEC Document shall
have been provided or made available to the Buyer by the Company. Other than
policies of insurance written in the ordinary course of business, Schedule
6.25 hereto sets forth a list of all agreements, contracts and instruments to
which the Company or any of the Subsidiaries is a party or by which it or its
assets or properties is bound which involve an amount in excess of $25,000 or
are otherwise material to the business of the Company or any of its
Subsidiaries. Except as set forth in Schedule 6.25 hereto, neither the Company
nor any of its Subsidiaries is a party to any written or oral:
(i) contracts or agreements containing covenants limiting the freedom
of the Company or any of its Subsidiaries in any material respect to engage
in any line of business in any geographic area or to compete with any
person;
(ii) employment agreements or contracts, including, without limitation,
contracts to employ executive officers and other contracts or arrangements
with officers or directors of the Company or any of its Subsidiaries;
(iii) management, management services, investment management or
consulting agreements (other than those which will be terminated prior to
the Closing) calling for annual payments in excess of $25,000;
(iv) contracts for the purchase or sale of personal property for a
purchase price in excess of $25,000;
-27-
<PAGE> 124
(v) leases of personal property requiring annual payments in excess of
$25,000 per year;
(vi) patent, trademark, service mark, trade name, and copyright and
franchise licenses, royalty agreements or similar contracts and other
agreements;
(vii) joint venture contracts and other agreements;
(viii) contracts and other agreements under which the Company or any of
its Subsidiaries has guaranteed the obligations of any person;
(ix) contracts and other agreements under which the Company or any of
its Subsidiaries agrees to indemnify any person or to share tax liability
with any person;
(x) representative, management, marketing, sales agency, printing or
advertising contracts material to the business;
(xi) contracts for the grant to any person of any preferential rights
to purchase any of the assets or properties material to the business;
(xii) contracts relating to the acquisition by the Company or any of
its Subsidiaries of any operating business or the capital stock of any
person;
(xiii) Benefit Plans; or
(xiv) any other contract, whether or not made in the ordinary course of
business, that is material to the business.
Neither the Company nor any of its Subsidiaries is (and to the best knowledge
of the Company, no other party is) in breach or violation of, or default under,
any of the contracts, commitments or agreements listed on Schedule 6.25 hereto,
and no event has occurred which, with the giving of notice or the passage of
time or both, would constitute a breach, violation or default by the Company or
its Subsidiaries (or, to the best knowledge of the Company, of any other party
thereto) of any of such contracts, commitments or agreements, nor has any
notice of default been received, except for such breaches, violations and
defaults which, individually or in the aggregate, are not reasonably like to
have a Material Adverse Effect. To the best knowledge of the Company, all of
the contracts, commitments or agreements listed on Schedule 6.25 hereto to
which the Company or its Subsidiaries is a party are legal, valid and binding.
There are no oral modifications to any of such contracts or other
agreements. None of the contracts or other
-28-
<PAGE> 125
agreements listed in Schedule 6.25 hereto provides for additional or
accelerated payments or other consideration to be made on account of the
transactions contemplated hereby. No Permit is needed in order that such
contracts, commitments or agreements continue in full force and effect (without
breach by the Company or any of its Subsidiaries, as the case may be, of, or
giving any contractual party a right to terminate or modify, any such contract,
commitment or agreement) following the consummation of the transactions
contemplated hereby. The Company and its Subsidiaries has paid in full or
accrued all amounts due under the contracts set forth on Schedule 6.25 hereto
and has satisfied in full or provided adequate reserves for all of their
liabilities thereunder.
SECTION 6.26. Litigation. Except as set forth on Schedule 6.26 hereto,
there are no actions, suits, proceedings, claims, investigations or
examinations (other than claims under insurance policies issued by the Company
or any of its Subsidiaries) pending or, to the best knowledge of the Company,
threatened against the Company or any of its Subsidiaries or any of their
respective businesses, properties, assets, or securities, at law or in equity,
before or by any Governmental Entity or before any private arbitration panel.
None of the actions, suits, proceedings, claims, investigations or examinations
set forth on Schedule 6.26 hereto, individually or in the aggregate,
will result in any judgment, ruling, order, writ, injunction, award or decree
of any court or any Governmental Entity or arbitral tribunal that is not
adequately reserved against in the Annual Financial Statements or covered by
insurance from unrelated third party insurers. There are no outstanding
judgments, rulings, orders, writs, injunctions, awards or decrees of any court
or Governmental Entity or arbitral tribunal against or involving the Company or
any of its Subsidiaries.
SECTION 6.27. Environmental Matters.
(a) The operations of the Company and its Subsidiaries are in compliance
with all applicable federal, state and local laws, rules, regulations and
ordinances imposing liability or establishing standards for the protection of
human health and the environment including, but not limited to the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended, the Resource Conservation and Recovery Act, as amended, the Clean
Air Act, as amended, the Clean Water Act, as amended, the Toxic Substances
Control Act, as amended, the Occupational Safety and Health Act, as amended and
any other federal, state, local or municipal laws, statutes, regulations, rules
or ordinances imposing liability or establishing standards of conduct for
protection of the environment (collectively, "Environmental Laws"), except
where failure to comply, individually or in the aggregate, is not reasonably
likely to have a Material Adverse Effect.
(b) The Company and its Subsidiaries have all permits, authorizations, and
approvals required under any applicable Environmental Laws and are each in
compliance with
-29-
<PAGE> 126
their respective requirements, except where failure to comply,
individually or in the aggregate, is not reasonably likely to have a Material
Adverse Effect.
(c) There are no petroleum products, asbestos-containing materials,
polychlorinated biphenyls, or other materials that are defined as hazardous
substances, hazardous wastes, extremely hazardous, special wastes, pollutants,
toxic substances or pollutants, or contaminants under Environmental Laws
("Hazardous Substances") stored, contained or disposed on any property owned or
operated by the Company or any of its Subsidiaries except in compliance with
Environmental Laws, except where failure to comply, individually or in the
aggregate, is not reasonably likely to have a Material Adverse Effect.
(d) To the knowledge of the Company, there has not been any release or
discharge of any Hazardous Substances at any facility owned or operated by the
Company or any of its Subsidiaries or by an insured or at any facility that
received Hazardous Substances generated by the Company or any of its
Subsidiaries.
(e) Neither the Company nor any of its Subsidiaries have received written
notice of or are a party to any proceeding, citation, summons, notice of
violation, administrative order or a notice of potential liability filed by a
Governmental Entity or third party involving the release of Hazardous
Substances or violation of Environmental Laws ("Environmental Actions").
(f) Neither the Company nor any of its Subsidiaries are subject to an
Environmental Action relating to a direct action statute authorizing recovery
against an insurance carrier for releases of Hazardous Substances by an insured
at a facility owned or operated by the insured or a facility which received
Hazardous Substances generated by the insured.
(g) The Company has received no written notice that any of the properties
owned or operated by an insured have been placed or proposed to be placed on
the National Priorities List or comparable state hazardous waste site registry.
(h) The Company has received no written notice that any insured is subject
to an Environmental Action that will likely result in a Material Adverse
Effect.
SECTION 6.28. Brokers and Finders. The Company and its Subsidiaries have
utilized the services of William Blair & Company, L.L.C. and the Company and
its Subsidiaries will be solely responsible for the expenses of such firm. No
other agent, broker, investment banker, person or firm acting on behalf of the
Company or its Subsidiaries, or under authority of any of them is or will be
entitled to any broker's, finder's or investment banker's fee or any other
commission or similar fee directly or indirectly from any of the other parties
hereto in connection with the negotiation of any of the transactions
contemplated hereby.
-30-
<PAGE> 127
SECTION 6.29. Banks. Schedule 6.29 hereto includes a true and complete
list of all banks or other financial institutions in which the Company or any
of its Subsidiaries has an account, letter of credit or a line of credit,
showing a description of each account, letter of credit or line of credit, or
in which the Company or any of its Subsidiaries has a safe deposit box or a
lock-box arrangement.
SECTION 6.30. Maintenance of Insurance. Schedule 6.30 hereto includes a
true and complete list of all policies or binders of insurance maintained by
the Company and its Subsidiaries with respect to their respective properties
and the conduct of their respective businesses, showing the insurer, the
subject matter, the policy number or covering note number with respect to
binders, the beneficiary and the amount of coverage for each policy, and
describing each pending claim thereunder of more than $5,000, and setting forth
the aggregate amounts paid out under each such policy through the date hereof
(which information may be updated as of the Closing Date provided that coverage
and premiums continue to be substantially similar to those reflected in
Schedule 6.30 hereto as of the date hereof). Such policies are valid and
binding in accordance with their terms and are in full force and effect and
insure against risks and liabilities customary for the businesses in which the
Company and its Subsidiaries are engaged. Neither the Company nor any of its
Subsidiaries have received a notice of cancellation or nonrenewal of any such
policy or binder or have any knowledge of any state of facts which might form
the basis for termination of any such insurance. Each of the Company and its
Subsidiaries has, or has made or will make provision for, insurance coverage
consistent with current practices through the Closing Date. None of the
insurance policies for the benefit of the Company and its Subsidiaries is in
default, and neither the Company nor its Subsidiaries has failed to give any
notice or present any claim thereunder in due or timely fashion or as required
by any of such insurance policies so as to jeopardize full recovery under such
policies. The Company and its Subsidiaries paid or will pay all premiums
payable for periods prior to the Closing Date with respect to such insurance
policies.
SECTION 6.31. Legislation. To the knowledge of the Company, since
December 31, 1995, there has not been any legislation, statute, law, ordinance,
code, rule or regulation, either proposed or adopted, by any foreign, federal,
state, county or local government or any other governmental, regulatory or
administrative agency or authority prohibiting or in any way limiting the
business, operations or prospects of the Company or any of its Subsidiaries
except for such prohibitions or limitations which, individually or in the
aggregate, would not have a Material Adverse Effect.
SECTION 6.32. Operations of the Company and its Subsidiaries.
-31-
<PAGE> 128
(a) Since December 31, 1995, the Company and its Subsidiaries have
conducted their respective businesses only in the ordinary course of business
in a manner consistent with past practice.
(b) Since December 31, 1995, there has not occurred any change or event
which, individually or in the aggregate, has or could reasonably be expected to
result in a Material Adverse Effect. Neither the Company nor any of its
Subsidiaries has any knowledge of any change or event which is threatened
which, individually or in the aggregate, could reasonably be expected to result
in a Material Adverse Effect.
(c) Except as set forth on Schedule 6.32 hereto, since December 31, 1995
neither the Company nor any of its Subsidiaries has:
(i) declared or paid or set aside dividends or other distributions
(whether in cash, stock or property) on its capital stock or made any
direct or indirect redemption, retirement, purchase or other acquisition
of any shares of capital stock;
(ii) issued, redeemed, sold or disposed of, or created any
obligation to 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 issued any option, warrant or other right to acquire any
shares of its capital stock;
(iii) effected any stock split, reclassification or combination;
(iv) adopted a plan of, or resolutions providing for, complete or
partial liquidation, dissolution, restructuring, recapitalization or
other reorganization;
(v) amended or modified its certificate of incorporation or by-laws
(or equivalent charter documents);
(vi) merged or consolidated with any corporation or other entity
otherwise than as contemplated by this Agreement or subdivided or in any
way reclassified any shares of its capital stock or changed or agreed to
change in any manner the rights of its outstanding capital stock or the
character of its business;
(vii) entered into, adopted, modified or amended 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
-32-
<PAGE> 129
providing for compensation or benefits to employees or directors or
stockholders which would have effect for any employee of the Company or
its Subsidiaries after the Closing Date;
(viii) incurred or contracted for any capital expenditures in excess
of $25,000 in the aggregate;
(ix) amended, terminated or waived any right of value material to
the business of the Company or any of its Subsidiaries;
(x) made any change in its accounting methods, principles or
practices or made any change in depreciation or amortization policies or
rates adopted by it, except insofar as may have been required by a
change in generally accepted accounting principles, or made any change in
its accounting policies with respect to Loss Reserves;
(xi) revalued 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 changed any of its business policies, including,
without limitation, advertising, marketing, pricing, purchasing,
personnel, sales or budget policies;
(xiii) made 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 or any accrual for or
contract or other agreement to make or pay the same, 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) made 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 made any other loan or advance;
(xv) made any payment or commitment to pay severance or termination
pay to any of its officers, directors, employees, consultants, agents or
other representatives;
(xvi) entered into any lease (as lessor or lessee); sold, abandoned
or made 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; granted or suffered any Lien on any of its
assets, properties or businesses or on any of the
-33-
<PAGE> 130
capital stock of the Company (other than for Taxes not yet due and
payable); entered into or amended 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 entered into or
amended 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) incurred or assumed any debt, obligation or liability, or
issued any debt securities or assumed, guaranteed, endorsed or otherwise
as an accommodation became responsible for, liabilities of any other
person or made 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, made any
acquisition of all or any part of the assets, properties, capital stock
or business of any other person;
(xix) except in the ordinary course of business in a manner
consistent with past practice, amended, terminated or entered into any
contract or other agreement or amended, terminated or entered into any
other material transaction; or
(xx) agreed to do any of the foregoing.
SECTION 6.33. Potential Conflicts of Interest. Except as set forth on
the Schedule 6.33, no officer or director of the Company or any of its
Subsidiaries, or any entity controlled by an officer or director of the
Company, or any member of the immediate family of an officer or director, nor
to the best knowledge of the Company, no stockholder of the Company and no
entity controlled by a stockholder of the Company, or any immediate family
member of any stockholder of the Company:
(i) owns, directly or indirectly, any interest in (excepting not
more than five percent stock holdings held solely for investment purposes
in securities of any person which are listed on any national securities
exchange or regularly traded in the over-the-counter market) or is an
owner, sole proprietor, shareholder, partner, director, officer,
employee, consultant or Producer of any person which is a competitor,
lessor, lessee, reinsurer, customer or supplier of the Company or any of
its Subsidiaries or any person which is party to any contract set forth
in Schedule 6.25 hereto;
-34-
<PAGE> 131
(ii) owns, directly or indirectly, in whole or in part, any Tangible
Property, patent, trademark, service mark, trade name, copyright,
franchise, invention, permit, license or secret or confidential
information which the Company or any of its Subsidiaries is using or the
use of which is necessary for the business of the Company or any of its
Subsidiaries; or
(iii) has any pending cause of action or other suit, action or claim
whatsoever against, or owes any amount to, the Company or any of its
Subsidiaries, except for claims in the ordinary course of business,
such as for accrued vacation pay, accrued benefits under Benefit Plans
and similar matters.
As used in this Section 6.33, a person's immediate family shall mean such
person's spouse, parents, children, siblings, mothers- and fathers-in-law,
sons- and daughters-in-law, and brothers- and sisters-in-law.
SECTION 6.34. Guaranty Funds, Pools and Associations. Except as required
by the laws of the jurisdiction in which it transacts business, neither the
Company nor any of its Subsidiaries is a member of any guaranty fund, pool,
joint underwriting association, assigned risk plan or similar entity or subject
to any present or known future assessment by any such entities.
SECTION 6.35. Full Disclosure. All documents delivered by or on behalf
of the Company in connection with this Agreement and the transactions
contemplated hereby are true, complete, accurate and authentic. The
information furnished by or on behalf of the Company to Buyer in connection
with this Agreement and the transactions contemplated hereby does not contain
any untrue statement of a material fact and does not omit to state a material
fact required to be stated therein or necessary to make the statements made, in
the context in which made, not false or misleading. There is no fact relating
to the operations of the Company and its Subsidiaries which the Company has not
disclosed to Buyer in writing which, individually or in the aggregate, has a
Material Adverse Effect, or so far as the Company can now foresee, individually
or in the aggregate, is reasonably likely to have a Material Adverse Effect.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF BUYER AND BUYER SUB
The Buyer and Buyer Sub represent and warrant to the Company as follows:
SECTION 7.1. Organization and Standing. Each of Buyer and Buyer Sub is a
corporation duly organized, validly existing and in good standing under the
laws of the state of its
-35-
<PAGE> 132
incorporation and has all requisite corporate power and authority to
enter into this Agreement and the other agreements provided for herein to which
it is a party and to perform its obligations hereunder and thereunder.
SECTION 7.2. Certificate of Incorporation and By-Laws. The copies of the
Certificate of Incorporation and by-laws of Buyer and Buyer Sub which have
heretofore been delivered to the Company are true, accurate and
complete and reflect all amendments or changes in effect.
SECTION 7.3. Authority. Buyer and Buyer Sub have the full legal right
and power and all authority required to enter into, execute and deliver this
Agreement and each other agreement entered into or to be entered into in
connection herewith to which Buyer or Buyer Sub is or is to be a party (the
"Buyer Related Agreements"), and subject to receipt of all Acquiror Approvals,
to perform fully their respective obligations hereunder and thereunder. The
execution, delivery and performance of this Agreement and the Buyer Related
Agreements and the consummation of the transactions contemplated hereby and
thereby have been duly and validly authorized by all necessary corporate action
on the part of Buyer and Buyer Sub and no other corporate proceedings on the
part of Buyer or Buyer Sub are necessary to authorize the execution, delivery
and performance of this Agreement, the Buyer Related Agreements, the Merger and
the transactions contemplated hereby and thereby. This Agreement has been, and
each Buyer Related Agreement will be, duly executed and delivered by Buyer and
Buyer Sub and this Agreement and the Buyer Related Agreements each constitutes
or will constitute the legal, valid and binding obligation of Buyer and Buyer
Sub enforceable against each of Buyer and Buyer Sub in accordance with its
terms except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally and by the availability of equitable remedies (regardless of whether
a proceeding is considered at law or in equity).
SECTION 7.4. Absence of Conflicts. Neither the execution nor the
delivery of this Agreement nor any of the Buyer Related Agreements, nor the
consummation of the transactions and performance of the obligations
contemplated hereby or thereby will: (i) conflict with or result in a breach
or violation of any of the terms, conditions or provisions of the certificate
of incorporation or by-laws of Buyer or Buyer Sub; (ii) except as set forth in
Schedule 7.4 hereto, conflict with or result in a breach or violation of, or
default (or event which, with the giving of notice or the passage of time or
both, would constitute a breach, violation or default) or loss of a benefit
under, result in the termination or modification of or creation of any Lien
under, or permit the acceleration or modification of any obligation under any
provision of any agreement, indenture, mortgage, lien, lease or other
instrument or restriction of any kind to which Buyer or Buyer Sub is a party or
by which any of their assets, properties or securities are otherwise bound; or
(iii) except as set forth on Schedule 7.4 hereto, conflict with or violate any
permit, license,
-36-
<PAGE> 133
judgment, order, writ, injunction, award, decree, statute, law, ordinance,
code, rule or regulation applicable to Buyer or Buyer Sub or any of their
assets or properties; except in the case of clauses (ii) and (iii) above,
those which, individually or in the aggregate, are not reasonably likely to
have a material adverse effect on the ability of Buyer and Buyer Sub to
consummate the transactions contemplated by this Agreement.
SECTION 7.5. Consents and Approvals. The execution and delivery by Buyer
and Buyer Sub of this Agreement and the Buyer Related Agreements, the
performance by Buyer and Buyer Sub of their obligations hereunder and
thereunder and the consummation by Buyer and Buyer Sub of the transactions
contemplated hereby and thereby do not require Buyer or Buyer Sub to obtain any
Permit or Third Party Consent, except for (i) the approval of the stockholders
of the Company as provided in Sections 5.2 and 8.8 hereof, (ii) the filings and
termination of the applicable waiting period required under the HSR Act, as
provided in Section 9.1 hereof, (iii) the Insurance Regulatory Approvals, (iv)
the filing of the Certificate of Merger under the DGCL, (v) the other consents,
approvals, authorizations or notices set forth in Schedule 7.5 hereto, and (vi)
those which if not obtained, individually or in the aggregate, are not
reasonably likely to have a material adverse effect on the ability of Buyer and
Buyer Sub to consummate the transactions contemplated by this Agreement. The
consents, approvals, authorizations, actions, filings and notices set forth in
clauses (i) through (v), inclusive, of this Section 7.5 or in Schedule 7.5
hereto are referred to herein as the "Acquiror Approvals".
SECTION 7.6. Brokers and Finders. CHPII has utilized the services of
Gill and Roeser, Inc. and CHPII will be solely responsible for the expenses of
such firm. No other agent, broker, investment banker, person or firm acting on
behalf of Buyer or Buyer Sub or under authority of Buyer or Buyer Sub is or
will be entitled to any broker's, finder's or investment banker's fee or any
other commission or similar fee directly or indirectly from the Company in
connection with the negotiation of any of the transactions contemplated hereby.
SECTION 7.7 SEC Filings. None of the written information supplied or to
be supplied by Buyer or Buyer Sub expressly provided by it for inclusion in the
Proxy Statement will, at the time of the first mailing thereof to the Company's
stockholders and on the date of the meeting of FIIG's stockholders referred to
in Section 8.8 hereof, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
-37-
<PAGE> 134
ARTICLE VIII
COVENANTS AND AGREEMENTS OF THE COMPANY
SECTION 8.1. Conduct of Business. From the date of this Agreement until
the earlier of the Effective Time of the Merger or the termination of this
Agreement in accordance with Article XII hereof (except with the prior written
consent of Buyer or except as expressly provided in other sections of this
Agreement or the Schedules hereto), the Company agrees that:
(i) the Company and each of its Subsidiaries will conduct their
respective business 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 suppliers, customers, licensees, licensors, agents, reinsurers and all
others 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 Article VI hereof shall continue
to be true, complete and accurate on and as of the Closing Date with the
same force and effect as if made on and as of the Closing Date in a manner
so as to satisfy the condition set forth in Section 10.2 hereof 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 Law;
(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 U.S. generally accepted accounting principles,
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 will not, and will not permit any of its Subsidiaries
to, pay any bonus to any employees of the Company or any of its Subsidiaries
without the prior written consent of Buyer (which consent shall not be
unreasonably withheld or delayed); and
-38-
<PAGE> 135
(iv) except as set forth in Schedule 8.1 hereto, the Company will not,
and will not permit any of its Subsidiaries to, undertake any of the actions
specified in Section 6.32 hereof.
SECTION 8.2. Access to Properties, Books and Records; Confidentiality.
From the date hereof through the Closing Date, the Company shall, and shall
cause each of its Subsidiaries to, use all reasonable efforts to cause to be
afforded upon reasonable notice to the officers, directors, employees,
attorneys, accountants, consultants and other authorized representatives of
Buyer including, without limitation, any banks, other financial institutions
and investment bankers arranging or providing for, or advising with respect to,
any financing, 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 thereof (certified, if requested) 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. 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. The Company and its Subsidiaries shall cause
their officers, employees, agents and consultants to meet with officers,
employees, agents and consultants and other authorized representatives of
Buyer, including, without limitation, any banks, other financial institutions
and investment bankers arranging or providing for, or advising with respect to,
any financing, from time to time upon Buyer's reasonable request. No
investigation pursuant to this Section 8.2 shall affect any representations or
warranties of the Company or the conditions to the obligations of the Company
hereunder. Notwithstanding any right of Buyer to fully investigate the affairs
of the Company and its Subsidiaries and notwithstanding any knowledge of facts
determined or determinable by Buyer pursuant to such investigation or right of
investigation, Buyer has the right to rely fully upon the representations,
warranties, covenants and agreements of the Company contained in this
Agreement. Buyer and Buyer Sub agree to be bound by and comply with the
provisions set forth in the Confidentiality Agreement, dated February 22, 1996
(the "Confidentiality Agreement"), between William Blair & Company, L.L.C. as
agent for the Company and Castle Harlan Partners II, L.P., a Delaware limited
partnership ("CHPII"), as if such provisions were set forth herein, and such
provisions are hereby incorporated herein by reference.
SECTION 8.3. Insurance. From the date hereof through the Closing Date,
the Company and its Subsidiaries shall maintain in force (including necessary
renewals thereof) the insurance policies listed in Schedule 6.30 hereto, except
to the extent that they may be replaced with equivalent policies
appropriate to insure the assets, properties and businesses of the
-39-
<PAGE> 136
Company and its Subsidiaries to the same extent as currently
insured at the same or lower rates or at rates approved by Buyer.
SECTION 8.4. Litigation. The Company shall promptly notify Buyer of any
suits, actions, claims, proceedings or investigations which after the date of
this Agreement are commenced or, to the Company's knowledge, threatened,
against the Company or any of its Subsidiaries or against any officer,
director, employee, consultant, agent or shareholder with respect to the
affairs of the Company or any of its Subsidiaries.
SECTION 8.5. Advice of Changes. The Company shall give prompt written
notice to Buyer of: (i) the occurrence, or failure to occur, of any event
which occurrence or failure would be likely to cause any representation or
warranty of the Company contained in this Agreement, if made on or as of the
date of such event or as of the Closing Date, to be untrue or inaccurate; (ii)
any 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 this Agreement; (iii) any
event of which they have knowledge which will result, or in the opinion of such
party, has a reasonable prospect of resulting, in the failure to satisfy the
conditions specified in Article X hereof; (iv) any 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 hereof and prior to the Closing Date,
under any contract or other agreement material to the business of the Company
or any of its Subsidiaries; (v) the termination or cancellation of any
Reinsurance Agreement; (vi) any notice or other communication from any person
alleging that the consent of such person is or may be required in connection
with the transactions contemplated hereby; (vii) any 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 transactions contemplated hereby 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; (viii) any change which has a Material Adverse Effect, or
the occurrence of any event which, so far as can be foreseen at the time of its
occurrence, would have a Material Adverse Effect; or (ix) any matter hereafter
arising which, if existing, occurring or known at the date hereof, would have
been required to be disclosed to Buyer; provided, however, that no such
notification shall affect the representations or warranties of the Company or
the conditions to the obligations of the Company hereunder.
SECTION 8.6. Subsequent Financial Statements; SEC Documents; and
Insurance Filings. (a) From the date hereof to and including the Closing Date,
the Company and its Subsidiaries shall: (i) provide to Buyer a monthly
management report in scope and detail reasonably satisfactory to Buyer; (ii)
timely prepare, and promptly deliver to Buyer, monthly
-40-
<PAGE> 137
financial statements in scope and detail reasonably
satisfactory to Buyer; (iii) provide to Buyer a monthly statement of
Investments in detail reasonably satisfactory to Buyer; and (iv) 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.
Each such report or statement shall present fairly the information set forth
therein in accordance with accounting policies and procedures consistent with
those historically used by the Company.
(b) The Company will file with the SEC all reports, schedules, forms,
statements and other documents required to be filed under the Exchange Act from
the date hereof through the Effective Date (the "SEC Filings") and promptly
provide Buyer with a copy of such SEC Filing. Each SEC Filing, as of its
respective date: (i) will comply in all material respects with the
requirements of the Exchange Act and the rules and regulations of the SEC
promulgated thereunder applicable to each such SEC Filing; (ii) will not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading; and (iii) in the case of the Annual Report on Form 10-K for the
year ended December 31, 1995, will be accompanied by a report of the Company's
independent accountants which report shall be unqualified except for references
therein to the adoption of new accounting policies.
(c) The Company will file all reports, schedules, forms, statements and
other documents required to be filed under any Applicable Insurance Law from
the date hereof through the Effective Date and promptly provide Buyer with a
copy of any such filing.
SECTION 8.7. No Solicitation. (a) During the term of this Agreement,
the Company and its Subsidiaries shall not, directly or indirectly, solicit any
Acquisition Proposal, or cooperate with, furnish or cause to be furnished any
information concerning the business, financial condition, properties or assets
of the Company or any of its Subsidiaries to, or continue or enter into any
discussion, negotiation, agreement or understanding concerning any Acquisition
Proposal with, any person making any Acquisition Proposal (other than any of
the parties hereto and their agents and representatives or any governmental or
regulatory authority whose consent is required in connection with the
transactions contemplated by this Agreement), except that the Company shall be
permitted to consider and negotiate any unsolicited Acquisition Proposal and
furnish information to and enter into an acquisition agreement with a third
party making an unsolicited Acquisition Proposal if the Board of Directors of
the Company determines in good faith, based upon a written opinion of outside
counsel, that its fiduciary duties require it to do so (an "Unsolicited Sale").
The Company shall promptly notify Buyer of any inquiry or proposal
received by the Company or any of its Subsidiaries with respect to any such
Acquisition Proposal. As used herein, the term "Acquisition Proposal" shall
mean any proposal, offer or indication of
-41-
<PAGE> 138
interest for a merger or other business combination or joint venture
involving the Company or for the acquisition of a substantial portion of the
assets or the stock of the Company.
(b) In the event that the Company enters into an agreement involving an
Unsolicited Sale prior to February 17, 1997, then the Company shall be
obligated concurrently with the execution of such agreement: (i) to reimburse
to Buyer, Buyer Sub and CHPII all of their out-of-pocket fees and expenses in
connection with the transactions contemplated by this Agreement in an amount
not to exceed $100,000 (a written itemization of which shall be delivered to
the Company); (ii) to pay to CHPII (or its designee) a cash fee of $3,500,000;
and (iii) to terminate this Agreement.
(c) In the event that the Company enters into an agreement involving a
merger or other business combination or joint venture involving the Company or
for the acquisition of a substantial portion of the assets or the stock of the
Company other than with Buyer at any time after the termination of this
Agreement pursuant to Article XII hereof and prior to February 17, 1997, then
the Company shall be obligated concurrently with the execution of such
agreement: (i) to reimburse to Buyer, Buyer Sub and CHPII all of their
out-of-pocket fees and expenses in connection with the transactions
contemplated by this Agreement in an amount not to exceed $100,000 (a written
itemization of which shall be delivered to the Company); and (ii) to pay to
CHPII (or its designee) a cash fee of $3,500,000.
(d) Upon payment of the amounts specified in clauses (i) and (ii) of
Section 8.7(b) or 8.7(c) of this Agreement, the Company shall have no further
liability or obligation whatsoever to Buyer, Buyer Sub or CHPII. The
provisions of Sections 8.7(b) and 8.7(c) hereof shall be of no force and effect
and no payment shall be made to CHPII 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 this
Agreement; (iii) Buyer for any reason (other than due to the failure by the
Company to satisfy the terms and conditions of this Agreement) determines not
to pursue the transaction with the Company; (iv) any regulatory approval
required for the Merger is not obtained; or (v) this Agreement is terminated
pursuant to clause (i) or (iv) of Section 12.1 hereof as a result of the
Connecticut Waiver being denied.
SECTION 8.8. Proxy Statement; Approval by the Company's Stockholders. The
Company shall cause a special meeting of its stockholders to be called and held
promptly following the date hereof for the purposes of acting on this Agreement
and the Merger and the transactions contemplated hereby. The Company shall,
through its Board of Directors, and subject to its fiduciary duties, recommend
to its stockholders approval of the Merger and the transactions contemplated
hereby. As soon as practicable after the date hereof, the Company shall prepare
(with the cooperation of, and reasonable approval by, Buyer and Buyer Sub) and
file with the SEC under the Exchange Act, and use all reasonable efforts to have
cleared by the SEC and
-42-
<PAGE> 139
promptly thereafter mail to the Company's stockholders, a proxy
statement and form of proxy with respect to the meeting of the Company's
stockholders (the "Proxy Statement"). Simultaneously herewith, stockholders of
the Company holding in excess of 20% of the outstanding Common Stock have
executed and delivered to Buyer the Voting Agreement.
SECTION 8.9. Options. The Company shall cause each of the persons listed
on Schedule 3.7 hereto to deliver to Buyer on or before the Effective Date
evidence satisfactory to Buyer of the cancellation of the Options set forth
next to the name of such person on Schedule 3.7 hereto.
ARTICLE IX
ADDITIONAL COVENANTS
SECTION 9.1. HSR Act. The Company and Buyer shall promptly and timely
after the date hereof file, or cause to be filed, 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 as the case may be, and each party shall request early
termination of the applicable waiting period thereunder. The Company and Buyer
will cooperate with one another to the extent necessary to prepare their
separate filings and to supply any additional information that may be submitted
to the Federal Trade Commission or the Department of Justice relating to the
status of the transaction contemplated hereby under the antitrust laws, whether
or not such additional information is requested or required under the HSR Act.
SECTION 9.2. Insurance Regulatory Approvals. Each of the parties hereto
will use its best efforts to take all steps necessary or appropriate to obtain
the Connecticut Waiver, the Connecticut Approval and the other Insurance
Regulatory Approvals required for the consummation of the Merger.
SECTION 9.3. Filings and Approvals. The Company, its Subsidiaries, Buyer
and Buyer Sub shall, as applicable: (i) file a Form A with the Connecticut
Commissioner of Insurance with respect to the grant of prior approval or
exemption by the Connecticut Commissioner of Insurance under Connecticut
General Statute Section 38a-132 in connection with the Merger (the
"Connecticut Approval") and make a request for waiver of Connecticut General
Statute Section 38a-136(i)(2)(A) with the Connecticut Commissioner of
Insurance (the "Connecticut Waiver") all of which filings shall be made on or
before May 8, 1996; (ii) duly make all other regulatory filings required to be
made by each in respect of this Agreement or the transactions contemplated
-43-
<PAGE> 140
hereby; (iii) comply as promptly as practicable with all governmental
requirements applicable to the transactions contemplated hereby; and (iv)
obtain promptly all necessary permits, orders and other consents of
Governmental Entities and consents of third parties necessary for the
consummation of the Merger. Buyer shall use its reasonable best efforts to
obtain, and each of the Company and its Subsidiaries shall use its reasonable
best efforts to assist Buyer in obtaining, the Connecticut Waiver, the
Connecticut Approval and all other Acquiror Approvals. The Company and its
Subsidiaries shall each use its reasonable best efforts to obtain, and Buyer
shall use its reasonable best efforts to assist the Company and the
Subsidiaries in obtaining, the Connecticut Waiver, the Connecticut Approval and
all other Sellers Approvals. Buyer will promptly notify the Company of all
material communications with the Connecticut Department of Insurance with
respect to the Connecticut Approval and the Connecticut Waiver. Buyer will
furnish the Company with a copy of the aforementioned Form A and request for
waiver promptly after the same are filed with the Connecticut Department of
Insurance.
SECTION 9.4. Continued Effectiveness of Representations and Warranties.
Buyer and Buyer Sub shall use their reasonable best efforts to cause the
representations and warranties contained in Article VII hereof to continue to
be true, complete and accurate on and as of the Closing Date with the same
force and effect as if made on and as of the Closing Date in a manner so as to
satisfy the condition set forth in Section 11.2 hereof.
SECTION 9.5. Advice of Changes. Buyer shall give prompt written notice
to the Company of the occurrence, or failure to occur, of any event which
occurrence or failure would be likely to cause any representation or warranty
of Buyer or Buyer Sub contained in this Agreement, if made on or as of the date
of such event or as of the Closing Date, to be untrue or inaccurate; provided,
however, that no such notification shall affect the representations and
warranties of Buyer or Buyer Sub or the conditions to the obligations of Buyer
or Buyer Sub hereunder.
SECTION 9.6. Proxy Statement. Buyer and Buyer Sub shall use all
reasonable efforts to obtain and furnish to the Company the information
relating to it required to be included in the Proxy Statement.
SECTION 9.7. Further Assurances. In addition to the actions, contracts
and other agreements and documents and other papers specifically required to be
taken or delivered pursuant to this Agreement, each of the parties hereto shall
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 provisions hereof and the transactions contemplated hereby.
Each such party shall, on or prior to the Effective Time, use its best efforts
to fulfill or obtain the fulfillment of the conditions precedent to the
consummation of the Merger, including the
-44-
<PAGE> 141
execution and delivery of any documents, certificates, instruments or other
papers that are reasonably required for the consummation of the Merger.
SECTION 9.8 Directors' and Officers' Insurance. After the Effective
Time, Buyer will cause the Surviving Corporation, or another affiliate of
Buyer, to (i) maintain the current directors' and officers' liability and
corporate indemnification insurance policy of the Company and its Subsidiaries,
or a substantially similar policy, subject to terms and conditions no less
advantageous than under such current policy, for all officers and directors of
the Company and its Subsidiaries on the date of this Agreement, for 36 months
after the Effective Time to cover acts and omissions of directors and officers
of the Company and its Subsidiaries occurring prior to the Effective Time,
provided, however, that in no event shall the Surviving Corporation be required
to pay an annual premium for any such policy in excess of 125% of the current
annual premium in effect as of the date hereof, but shall instead in such case
obtain the greatest amount of coverage available at a premium equal to 125% of
the current premium, and (ii) maintain in effect provisions of the certificate
of incorporation and by-laws of the Surviving Corporation and its subsidiaries,
as the case may be, and cause the Surviving Corporation to comply with all
agreements between the Company and its directors and officers providing for
indemnification, all relating to the rights of officers and directors with
respect to indemnification for acts and omissions occurring prior to the
Effective Time on terms no less advantageous to such officers and directors as
in effect prior to the Effective Time.
ARTICLE X
CONDITIONS TO OBLIGATIONS OF BUYER AND BUYER SUB
The obligations of Buyer and Buyer Sub under this Agreement are subject to
the satisfaction (or waiver in writing, in whole or in part), at or before the
Effective Time, of each of the following conditions:
SECTION 10.1. Compliance with Agreements. The Company and each of its
Subsidiaries shall have performed and complied in all material respects with
all of the obligations required of any of them by this Agreement and the other
agreements provided herein to be performed or complied with by each of them on
or before the Closing Date, and Buyer shall have received from the Company and
each of its Subsidiaries at the Closing a certificate, dated the Closing Date,
to such effect and stating that all conditions to the Buyer's obligations
hereunder have been satisfied.
SECTION 10.2. Representations and Warranties. The representations and
warranties made by the Company in this Agreement shall be true, complete and
accurate (i) in all
-45-
<PAGE> 142
respects (in the case of any representation or warranty
containing any materiality qualification) or (ii) in all material respects (in
the case of any representation or warranty without any materiality
qualification), in each case as of the Closing Date as though such
representations and warranties were made at and as of such time (except for any
representation and warranty made or given as of a specified date, which shall
have been true and correct as of such specified date, and except for any
changes expressly permitted by the terms hereof or consented to in writing by
Buyer). Buyer shall have received from the Company at the Closing a
certificate, dated the Closing Date, to that effect.
SECTION 10.3. Opinion of Counsel for the Company. Buyer shall have
received an opinion from Lord, Bissell & Brook, special counsel for the Company
and its Subsidiaries, dated the Closing Date, substantially to the effect set
forth in Exhibit B hereto.
SECTION 10.4. Approvals. The Connecticut Waiver, the Connecticut
Approval, all other Acquiror Approvals and all other Sellers Approvals shall
have been obtained and shall be in full force and effect on the Closing Date,
and the continued conduct by the Company or any of its Subsidiaries of their
respective businesses in substantially the same manner as currently conducted
and the consummation of the transactions contemplated hereby shall not violate
or conflict with any judgment, code, ruling, order, writ, injunction, decree,
award, statute, law, ordinance, rule or regulation or other restriction binding
upon or applicable to the Company or any of its Subsidiaries. None of the
Connecticut Waiver, the Connecticut Approval or any such other approvals shall
contain any terms, limitations or conditions which Buyer determines in good
faith to be materially burdensome (restrictions under Connecticut General
Statute Section 38a-136(i), other than Connecticut General Statute Section
38a-136(i)(2)(A), shall be deemed not 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 the controlling shareholder of the Company
(including, without limitation, its right to participate actively in the
management of the Company and its Subsidiaries), or which would prevent Buyer,
its affiliates or the Company and its Subsidiaries from conducting their
respective businesses in substantially the same manner as conducted on the date
hereof.
SECTION 10.5. Legislation. No legislation shall have been proposed in
bill form or enacted since the date hereof, and no statute, law, ordinance,
code, rule or regulation shall have been adopted, revised or interpreted, by
any Governmental Entity, which would require, upon or as a condition to the
Merger, the divestiture or cessation of the conduct of any business presently
conducted by the Company or any of its Subsidiaries, on the one hand, or, by
Buyer or any of its affiliates, on the other hand, or, in the event that the
transactions contemplated hereby are consummated, which may, individually or in
the aggregate, have an adverse effect on Buyer or on 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 or its Subsidiaries.
-46-
<PAGE> 143
SECTION 10.6. Absence of Preventative Litigation. On the Closing Date:
(i) there shall be no injunction, restraining order or order of any nature
issued by any court of competent jurisdiction which direct that this Agreement
or any transaction contemplated hereby shall not be consummated as herein
provided or compels or would compel CHPII to dispose of or discontinue any
portion of the business conducted by CHPII and its subsidiaries or of the
business conducted by the Company or any of its Subsidiaries as a result of the
consummation of the transactions contemplated hereby, and (ii) there shall be
no suit, action, claim, proceeding or investigation instituted or threatened by
or before any court or any foreign, federal, state, county or local government
or any other governmental, regulatory or administrative agency or authority
seeking to restrain, prohibit or invalidate the consummation of the
transactions contemplated hereby or to seek damages in connection with such
transactions or which might affect the right of Buyer to own, operate or
control, after the Closing, the assets, properties and businesses of the
Company and its Subsidiaries or which has or may have, in the opinion of the
Buyer, a Material Adverse Effect (the matters referred to in this Section
being collectively referred to as "Preventative Litigation").
SECTION 10.7. Secretary's Certificate; Certified Copies. The Buyer shall
have received: (i) a secretary's certificate for the Company attached to which
shall be a certified copy of the resolutions of the Board of Directors of the
Company and a copy certified by the secretary of the corporation of the vote or
written consent of the Company's stockholders, in each case authorizing this
Agreement, the Merger and the transactions contemplated hereby, and an
incumbency certificate for each officer executing any agreement, certificate or
other instrument provided for herein to be executed and delivered by the
Company; and (ii) copies of the certificate of incorporation of the Company and
each of its Subsidiaries certified by the Secretary of State of the
jurisdiction of its incorporation and copies of by-laws certified by the
secretary of the applicable corporation. The Company shall deliver to Buyer
copies of certificates of good standing (together with tax clearance) for the
Company and each of its Subsidiaries from the Secretary of State or other
appropriate official of the respective jurisdictions of incorporation and
jurisdictions in which the Company or any of its Subsidiaries is qualified to
do business.
SECTION 10.8. Resignations. Buyer shall have received resignations
from those directors and officers of the Company and its Subsidiaries as shall
be designated by Buyer not less than five days prior to the Closing Date, such
resignations to be effective at the Effective Time of the Merger.
SECTION 10.9. Dissenting Stock. The aggregate number of shares of
Dissenting Stock shall be less than 5% of the number of shares of Common Stock
outstanding at the time of the stockholders' meeting referred to in Section 8.8
hereof.
-47-
<PAGE> 144
SECTION 10.10. No Material Adverse Effect No Material Adverse Effect
shall have occurred and be existing as of the Closing Date.
SECTION 10.11. Stock Option Plan and Directors' Incentive Plan;
Options. Buyer shall have received evidence satisfactory to it that: (i) the
Company Stock Option Plan, effective February 28, 1991 and the Directors'
Incentive Plan, as amended March 8, 1995, shall have been terminated; and (ii)
all Options and any other options for Common Stock have been canceled.
ARTICLE XI
CONDITIONS TO OBLIGATIONS OF
THE COMPANY
The obligations of the Company under this Agreement are subject to the
satisfaction (or waiver in writing in whole or in part), at or before the
Effective Time, of each of the following conditions:
SECTION 11.1. Compliance with Agreement. Buyer and Buyer Sub shall have
performed and complied in all material respects with all the obligations
required by this Agreement to be performed or complied with by it on or before
the Closing Date, and the Company shall have received from Buyer and Buyer Sub
at the Closing a certificate, dated the Closing Date, to such effect and
stating that all conditions to the Buyer's obligations hereunder have been
satisfied.
SECTION 11.2. Representations and Warranties. The representations and
warranties made by Buyer and Buyer Sub in this Agreement shall be true,
complete and accurate (i) in all respects (in the case of any representation or
warranty containing any materiality qualification) or (ii) in all material
respects (in the case of any representation or warranty without any materiality
qualification), in each case as of the Closing Date as though such
representations and warranties were made at and as of such time (except for any
representation and warranty made or given as of a specified date, which shall
have been true and correct as of such specified date, and except for any
changes expressly permitted by the terms hereof or consented to in writing by
the Company). The Company shall have received from Buyer and Buyer Sub at the
Closing a certificate, dated the Closing Date, to that effect.
-48-
<PAGE> 145
SECTION 11.3. Opinion of Counsel for Buyer. The Company shall have
received an opinion from Schulte Roth & Zabel, special counsel for Buyer and
Buyer Sub, dated the Closing Date, substantially to the effect set forth in
Exhibit C hereto.
SECTION 11.4. Approvals. All Sellers Approvals specified in clauses (i)
through (iv), inclusive, of Section 6.5 hereof shall have been obtained and be
in full force and effect on the Closing Date.
SECTION 11.5. Secretary's Certificate. The Company shall have received a
secretary's certificate of Buyer and Buyer Sub, attached to which certificate
shall be a certified copy of the resolutions of the Board of Directors of Buyer
and Buyer Sub, in each case authorizing this Agreement, the Merger and the
transactions contemplated hereby, and a certificate of incumbency as to each
officer executing and delivering to the Company any agreement or certificate
pursuant hereto.
SECTION 11.6. Absence of Preventative Litigation. There shall be no
Preventative Litigation.
SECTION 11.7. Good Standing. The Company shall have received
certificates of good standing for the Buyer and Buyer Sub from the Delaware
Secretary of State.
ARTICLE XII
TERMINATION, AMENDMENT, WAIVERS
SECTION 12.1. Termination. At any time prior to the Effective Time of
the Merger, this Agreement may be terminated and the Merger provided for herein
abandoned, whether before or after and notwithstanding adoption and approval
thereof 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 this Agreement;
provided, however, that if such breach or failure is curable, notice of such
breach or failure shall have been given to Buyer and Buyer
-49-
<PAGE> 146
Sub and Buyer or Buyer Sub, as the case may be, shall not have cured such
failure 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 this Agreement; provided, however, that if such breach or
failure is curable, notice of such breach or failure shall have been given
to the Company and such breaching party shall not have cured such failure
within 15 days;
(iv) by Buyer or the Company if the Effective Date shall not be on or
before September 30, 1996 or such later date as the parties hereto may agree
upon, unless the failure to consummate the Merger is the result of a willful
and material breach of this Agreement by the party seeking to terminate this
Agreement;
(v) at the election of the Company, in the event of an Unsolicited
Sale and the payments required by Section 8.7(b) of this Agreement have been
made; 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 in accordance with Section 8.7(a) hereof,
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.
The termination of this Agreement shall be effectuated by the delivery by
the party terminating this Agreement to each other party of a written notice of
such termination. If this Agreement so terminates, it shall become null and
void and have no further force or effect, except as provided in Section 12.2.
SECTION 12.2. Effect of Termination. In the event of any termination
pursuant to this Article XII, the parties hereto shall be released from all
liabilities and obligations arising under this Agreement with respect to
matters contemplated by this Agreement, other than (i) for damages to the
extent arising from the failure to perform any obligation or breach of any
representation or covenant made in this Agreement arising prior to the time of
such termination, provided, however, that in no event shall Buyer and Buyer Sub
or the Company, as the case may be, be liable for aggregate damages resulting
from such failure to perform or breach in excess of $3,500,000, (ii) for the
expenses set forth in Section 13.2 hereof, (iii) for the amounts required to be
paid to CHPII pursuant to Sections 8.7(b) and 8.7(c) hereof and (iv) for the
obligations arising under the Confidentiality Agreement. Notwithstanding
anything in this Agreement to the contrary, in the event of any breach by the
Company of Section 8.7(a) hereof as a result of
-50-
<PAGE> 147
entering into an agreement involving an Acquisition Proposal other than an
agreement involving an Unsolicited Sale entered into in accordance with the
terms and provisions of Section 8 hereof, then the Company shall be obligated
concurrently upon the execution of such agreement, to pay to Buyer, Buyer Sub
and CHPII damages for such breach in an aggregate amount equal to the amounts
specified in clauses (i) and (ii) of Section 8.7(c) hereof, and upon making
such payment shall have no further liability or obligation whatsoever to Buyer,
Buyer Sub or CHPII.
SECTION 12.3. Amendments, Modifications, Etc. At any time prior to the
Effective Time of the Merger, this Agreement may be amended, modified,
superseded or supplemented to the extent permitted by applicable law only by an
instrument in writing executed and delivered on behalf of each of the parties
hereto, which instrument when so executed and delivered shall thereupon become
a part of this Agreement and the provisions thereof shall be given effect as if
contained in this Agreement as of the date hereof; provided that if the Merger
and this Agreement shall have been prior thereto approved by vote or consent of
the stockholders of the Company, no amendment shall be made in a manner which
is materially adverse, as reasonably determined by the Company, to the right of
stockholders of the Company without the vote or written consent of the
stockholders of the Company thereto.
SECTION 12.4. Waivers. The representations, warranties, covenants or
conditions of this Agreement may be waived only by a written instrument
executed by the party so waiving. The failure of any party at any time or times
to require performance of any provision hereof shall in no manner affect the
right of such party at a later time to enforce the same. No waiver by any
party of any condition, or breach of any term, covenant, agreement,
representation or warranty contained in this Agreement, in any one or more
instances, shall be deemed to be or construed as a waiver of any other
condition or of the breach of any other term, covenant, agreement,
representation or warranty contained in this Agreement.
ARTICLE XIII
MISCELLANEOUS PROVISIONS
SECTION 13.1. Publicity. Buyer and Company will consult with one another
before issuing, and provide one another the opportunity to review, comment upon
and consent to (which consent shall not be unreasonably withheld) any press
release or other public statements with respect to the transactions
contemplated by this Agreement, including the Merger, and shall not issue any
such press release or make any such public statement prior to such consultation
except as may be required by applicable law, court process or by any stock
exchange rule, regulation, or consent, or as may be advised by counsel.
-51-
<PAGE> 148
SECTION 13.2. Certain Expenses. Other than as provided in Sections
8.7(b) and 8.7(c) hereof, if the Merger is not consummated, Buyer and Buyer
Sub, on the one hand, and the Company, on the other hand, each shall pay their
respective direct and indirect expenses incurred in connection with this
Agreement or in consummating the transactions contemplated hereby (including,
without limitation, the fees and disbursements and expenses of its attorneys,
accountants and advisors), provided, however, that in the event that this
Agreement is terminated pursuant to clause (i) or (iv) of Section 12.1 hereof
as a result of the Connecticut Waiver being denied, Buyer shall be obligated to
reimburse to the Company its out-of-pocket fees and expenses in connection with
the transactions contemplated by this Agreement in an amount not to exceed
$50,000 (a written itemization of which shall be delivered to Buyer).
SECTION 13.3. Notices. All notices or other communications required or
permitted under this Agreement shall be in writing and shall be given (and
shall be deemed to have been duly given upon receipt) by delivery personally,
by facsimile transmission, or by registered, certified or express mail, postage
prepaid, addressed as follows:
If to Buyer or Buyer Sub, to
c/o Castle Harlan, Inc.
150 East 58th Street
37th Floor
New York, New York 10155
Attention: Mr. Jeffrey M. Siegal
Facsimile: (212) 207-8042
Telephone: (212) 644-8600
with a copy to
Schulte Roth & Zabel
900 Third Avenue
New York, New York 10022
Attention: Marc Weingarten, Esq.
Facsimile: (212) 593-5955
Telephone: (212) 758-0404
-52-
<PAGE> 149
If to the Company, to
Financial Institutions Insurance Group, Ltd.
400 Royal Palm Way
Suite 204
Palm Beach, Florida 33480
Attention: R. Keith Long
Facsimile: (407) 655-6902
Telephone: (407) 832-4110
with a copy to
Lord, Bissell & Brook
115 South LaSalle Street
Chicago, Illinois 60603
Attention: Colleen M. Hennessy, Esq.
Facsimile: (312) 443-0336
Telephone: (312) 443-0700
Any party may change the person and addresses to which notices or other
communications are to be sent to it by giving written notice of any such change
in the manner provided herein for giving notice.
SECTION 13.4. Entire Agreement. Except as otherwise provided herein,
this Agreement, together with the exhibits and schedules hereto and the
Confidentiality Agreement set forth the entire agreement and understanding of
the parties hereto in respect of the transactions contemplated hereby, and
supersedes all prior agreements, arrangements and understandings relating to
the subject matter hereof.
SECTION 13.5. No Third Party Beneficiaries. Except as set forth in
Section 9.8 hereof, nothing in this Agreement is intended or shall be construed
to give any person, other than the parties hereto, any legal or equitable
right, remedy or claim under or in respect of this Agreement or any provision
contained herein.
SECTION 13.6. No Assignment. This Agreement shall inure to the benefit
of, and be binding upon, the respective successors and assigns of the parties
hereto; provided,
-53-
<PAGE> 150
however, that no assignment of any rights or delegation of
any obligations provided for herein shall be made by any party hereto without
the express prior written consent of the other party, except that Buyer shall
be permitted, without such consent, to assign any of its rights hereunder (but
not to delegate any of its obligations hereunder) to any wholly-owned domestic
subsidiary of CHPII or to a lender providing financing for the transactions
contemplated hereby.
SECTION 13.7. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of New York applicable to
agreements made and to be performed entirely within such State, except (i)
matters related to the validity of corporate action, which shall be governed by
the laws of the state or other jurisdiction of organization of the relevant
corporation and (ii) matters related to compliance of the transactions
contemplated hereby with applicable insurance regulatory statutes, which shall
be governed by the laws of the state or other jurisdiction the insurance
regulatory statutes of which apply.
SECTION 13.8. Counterparts. This Agreement may be executed in any number
of separate counterparts, each of which shall be deemed to be an original, but
which together shall constitute one and the same instrument.
SECTION 13.9. Headings. The section headings contained in this Agreement
are inserted for convenience of reference only and shall not affect the meaning
or interpretation of this Agreement.
SECTION 13.10. Severability. If any term, provision, covenant or
restriction of this Agreement, or any part thereof, is held by a court of
competent jurisdiction or any foreign, federal, state, county or local
government or any other governmental, regulatory or administrative agency or
authority to be invalid, void, unenforceable or against public policy for any
reason, the remainder of the terms, provisions, covenants and restrictions of
this Agreement shall remain in full force and effect and shall in no way be
affected, impaired or invalidated.
SECTION 13.11. Survival of Representations and Warranties. No
representations, warranties or agreements contained herein shall survive beyond
the Effective Time; provided however, that this Section shall not limit any
covenant or agreement of the parties hereto which by its terms specifically
contemplates performance after the Effective Time.
-54-
<PAGE> 151
IN WITNESS WHEREOF, each party hereto has caused this Agreement to be duly
executed on the date first above written.
FIIG HOLDING CORP.
By: ______________________________
Name:
Title:
FIIG MERGER CORP.
By: ______________________________
Name:
Title:
FINANCIAL INSTITUTIONS INSURANCE GROUP,
LTD.
By: ______________________________
Name:
Title:
-55-
<PAGE> 152
APPENDIX B
SECTION 262 OF DGCL
<PAGE> 153
SECTION 262 APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to the provisions of
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation,
who has otherwise complied with the provisions of subsection (d) of this
Section and who has neither voted in favor of the merger or consolidation nor
consented thereto in writing pursuant to Section 228 of this Chapter shall be
entitled to an appraisal by the Court of Chancery of the fair value of his
shares of stock under the circumstances described in subsections (b) and (c) of
this Section. As used in this Section, the word "stockholder" means a holder
of record of stock in a stock corporation and also a member of record of a
nonstock corporation; the words "stock" and "share" mean and include what is
ordinarily meant by those words and also membership or membership interest of a
member of a non-stock corporation; and the words "depository receipt" mean a
receipt or other instrument issued by a depository representing an interest in
one or more shares, or fractions thereof, solely of stock of a corporation,
which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
subsection (g) of Section 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did
not require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to Section Section
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
(a) Shares of stock of the corporation surviving or resulting from
such merger or consolidation or depository receipts in respect thereof;
(b) Shares of stock of any other corporation or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealer's Inc. or held of record by more than 2,000
stockholders;
(c) Cash in lieu of fractional shares or fractional depository
receipts of the corporations described in the foregoing subparagraphs a.
and b. of this paragraph; or
(d) Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
B-1
<PAGE> 154
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for such
meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall include
in such notice a copy of this section. Each stockholder electing to demand the
appraisal of his shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of his
shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of his shares. A proxy or vote against the
merger or consolidation shall not constitute such a demand. A stockholder
electing to take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or 253 of this title, the surviving or resulting corporation, either before the
effective date of the merger or consolidation or within 10 days thereafter,
shall notify each of the stockholders entitled to appraisal rights of the
effective date of the merger or consolidation and that appraisal rights are
available for any or all of the shares of the constituent corporation, and
shall include in such notice a copy of this section. The notice shall be sent
by certified or registered mail, return receipt requested, addressed to the
stockholder at his address as it appears on the records of the corporation.
Any stockholder entitled to appraisal rights may, within 20 days after the date
of mailing of the notice, demand in writing from the surviving or resulting
corporation the appraisal of his shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who
has complied with the provisions of subsections (a) and (d) hereof and who is
otherwise entitled to appraisal rights, may file a petition in the Court of
Chancery demanding a determination of the value of the stock of all such
stockholders. Notwithstanding the foregoing, at any time within 60 days after
the effective date of the merger or consolidation, any stockholder shall have
the right to withdraw his demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10
days after his written request for such a statement is received by the
surviving or resulting corporation or
B-2
<PAGE> 155
within 10 days after expiration of the period for delivery of demands for
appraisal under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with the provisions of this section and who have
become entitled to appraisal rights. The Court may require the stockholders
who have demanded an appraisal for their shares and who hold stock represented
by certificates to submit their certificates of stock to the Register in
Chancery for notation thereon of the pendency of the appraisal proceedings; and
if any stockholder fails to comply with such direction, the Court may dismiss
the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In determining
the fair rate of interest, the Court may consider all relevant factors,
including the rate of interest which the surviving or resulting corporation
would have had to pay to borrow money during the pendency of the proceeding.
Upon application by the surviving or resulting corporation or by any
stockholder entitled to participate in the appraisal proceeding, the Court may,
in its discretion, permit discovery or other pretrial proceedings and may
proceed at trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on
the list filed by the surviving or resulting corporation pursuant to subsection
(f) of this section and who has submitted his certificates of stock to the
Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to appraisal
rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and in the case of holders
of shares represented by certificates upon the surrender to the corporation of
the certificates representing such stock. The Court's decree may be enforced
as other decrees in the Court of Chancery may be enforced, whether such
surviving or resulting corporation be a corporation of this State or of any
other state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
of the shares entitled to an appraisal.
B-3
<PAGE> 156
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall
deliver to the surviving or resulting corporation a written withdrawal of his
demand for an appraisal and an acceptance of the merger or consolidation,
either within 60 days after the effective date of the merger or consolidation
as provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the
Court of Chancery shall be dismissed as to any stockholder without the approval
of the Court, and such approval may be conditioned upon such terms as the Court
deems just.
(l) The shares of the surviving or resulting corporation into which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
B-4
<PAGE> 157
APPENDIX C
OPINION OF WILLIAM BLAIR & COMPANY L.L.C.
<PAGE> 158
August 2, 1996
Board of Directors
Financial Institutions Insurance Group, Ltd.
10 North Dearborn Street
Chicago, IL 60602-4202
Members of the Board of Directors:
You have requested our opinion as to the fairness, from a financial point of
view, to the stockholders of Financial Institutions Insurance Group, Ltd. (the
"Company") of the consideration to be received pursuant to the terms of the
merger agreement dated as of April 12, 1996 (the "Merger Agreement") by and
among FIIG Holding Corp., FIIG Merger Corp., and the Company.
Pursuant to the Merger Agreement, FIIG Merger Corp. will be merged with
and into the Company (the "Merger"), and each outstanding share of common stock
(the "Common Stock") of the Company will be converted into the right to receive
$16.00 per share in cash. Furthermore, optionholders of the Company will
receive an amount per share of Common Stock subject to an option equal to
$16.00 minus the exercise price per share (the "Option Conversion" and together
with the Merger, the "Transaction").
We have acted as financial advisor to the Company in connection with this
transaction. For purposes of the opinion set forth herein, we have: (i)
analyzed certain publicly available financial statements of the Company; (ii)
analyzed certain financial projections prepared by the management of the
Company; (iii) discussed the past and current operations and financial
condition and the prospects of the Company with senior executives of the
Company; (iv) reviewed the reported prices and trading activity for the
Company's common stock; (v) reviewed the financial performance of the Company
and the prices of the Company's common stock with that of certain other
comparable publicly-traded companies and their securities; (vi) reviewed the
financial terms, to the extent publicly available, of certain comparable
acquisition transactions; (vii) reviewed the Merger Agreement; and (viii)
performed such other analyses as we have deemed relevant.
We assumed and relied upon without independent verification the accuracy and
completeness of the information reviewed by us for the purposes of this
opinion. We did not make any independent valuation or appraisal of the assets
or liabilities of the Company, nor were we furnished with any such appraisals.
With respect to the financial projections, we have assumed that they have been
reasonably prepared on the bases reflecting the best currently available
estimates and judgements of the Company's management. We assume no
responsibility for, and express no view as to, such
C-1
<PAGE> 159
Financial Institutions Insurance Group, Ltd. August 2, 1996
forecasts or the assumptions on which they are based. Our opinion is
necessarily based solely upon information available to us and business, market,
economic and other conditions as they exist on, and can be evaluated as of, the
date hereof. Our opinion does not address the Company's underlying business
decision to effect the Transaction.
In rendering our opinion, we have assumed that the Transaction will be
consummated on the terms described in the Merger Agreement, without any
waiver of any material terms or conditions by the Company, and that obtaining
the necessary regulatory approvals for the Transaction will not have an adverse
effect on the Company.
William Blair & Company, L.L.C. has been engaged in the investment banking
business since 1935. We undertake the valuation of investment securities in
connection with public offerings, private placements, business combinations,
estate and gift tax valuations and similar transactions. For our services,
including the rendering of this opinion, the Company will pay us a fee, a
significant portion of which is contingent upon consummation of the
Transaction, and indemnify us against certain liabilities.
It is understood that this letter may not be disclosed or otherwise referred to
without our prior written consent. We hereby consent, however, to the
inclusion of this opinion as an exhibit to any proxy statement distributed in
connection with the Transaction.
Based upon and subject to the foregoing, it is our opinion as investment
bankers that, as of August 2, 1996, the consideration to be received by the
stockholders of the Company in the Transaction is fair, from a financial point
of view, to such stockholders.
Very truly yours,
WILLIAM BLAIR & COMPANY, L.L.C.
C-2
<PAGE> 160
APPENDIX D
FORM OF VOTING AGREEMENT
<PAGE> 161
VOTING AGREEMENT
VOTING AGREEMENT, dated as of April __, 1996, among FIIG Holding Corp., a
Delaware corporation ("Buyer"), FIIG Merger Corp., a Delaware corporation and a
wholly-owned subsidiary of Buyer ("Buyer Sub") and the stockholder of the
Company named on the signature page hereto (the "Stockholder").
WHEREAS, as of the date hereof, the Stockholder owns the number of shares
of common stock, par value $1.00 per share ("Common Stock"), of Financial
Institutions Insurance Group, Ltd. (the "Company") set forth opposite such
Stockholder's name on the signature page hereto;
WHEREAS, concurrently herewith, the Company, Buyer and Buyer Sub have
entered into a Merger Agreement, dated the date hereof (the "Merger
Agreement"), pursuant to which and subject to the terms and conditions thereof
(i) Buyer Sub shall be merged (the "Merger") with and into the Company with the
Company as the surviving corporation (the "Surviving Corporation"), (ii) each
share of Common Stock (other than shares of Common Stock held by Buyer or Buyer
Sub) shall be converted into the right to receive $16 cash, (iii) each share of
Common Stock held by Buyer or Buyer Sub shall be canceled, and (iv) each share
of common stock, par value $.01 per share, of Buyer Sub shall be converted into
and become one share of common stock, par value $1.00 per share, of the
Surviving Corporation;
WHEREAS, the consummation of the Merger is subject to the approval by
holders of a majority of all outstanding shares of Common Stock entitled to
vote thereon;
WHEREAS, the Board of Directors of the Company has deemed the consummation
of the Merger to be in the best interests of the Company and its stockholders;
WHEREAS, each of the stockholders of the Company listed on Schedule A
hereto owns the number of shares of Common Stock set forth opposite such
stockholder's name on Schedule A hereto, and concurrently herewith is entering
into a Voting Agreement with Buyer and Buyer Sub identical to this Agreement;
WHEREAS, Buyer and Buyer Sub are not willing to enter into the Merger
Agreement without the prior agreement by the Stockholder and the other
stockholders listed on Schedule A hereto to vote in favor of the Merger and the
Merger Agreement as provided herein;
NOW THEREFORE, in consideration of and premised upon the various
representations, warranties, covenants and other agreements and undertakings of
Buyer, Buyer Sub and the Stockholder contained in this Agreement, and other
good and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto hereby agree as follows:
-1-
<PAGE> 162
ARTICLE I
PROXY OF THE STOCKHOLDERS
SECTION 1.01. Voting Agreement.
(a) The Stockholder hereby agrees, that during the time this Agreement is
in effect, at any meeting of the stockholders of the Company, and in any action
by consent of the stockholders of the Company, the Stockholder shall vote all
shares of Common Stock which the Stockholder owns or is otherwise entitled to
vote in favor of any proposal for the adoption or approval of the Merger and
the Merger Agreement.
(b) The Stockholder hereby agrees, that during the time this Agreement is
in effect, at any meeting of the stockholders of the Company, and in any action
by consent of the stockholders of the Company, the Stockholder shall vote all
of the shares of Common Stock which the Stockholder owns or is otherwise
entitled to vote: (i) against any proposal relating to (A) the sale of stock or
assets of the Company or any of its Subsidiaries or any interest therein other
than as contemplated by the Merger Agreement, (B) the merger, consolidation or
other combination of the Company or any of its Subsidiaries with any person,
other than as contemplated by the Merger Agreement, (C) the liquidation,
dissolution or reorganization of the Company or any of its Subsidiaries, or (D)
any other action or agreement that would result in a breach of any covenant,
representation, warranty or any other obligation or agreement of the Company or
any of its Subsidiaries under the Merger Agreement or which could result in any
of the conditions to Buyer and Buyer Sub's obligations under the Merger
Agreement not being fulfilled; and (ii) as otherwise necessary or appropriate
to enable the Company and Buyer to consummate the transactions contemplated by
the Merger Agreement.
SECTION 1.02. Irrevocable Proxy. In the event the Stockholder shall
fail or threaten to fail to comply with the provisions of Section 1.01 hereof
as determined by Buyer in its sole discretion, the Stockholder hereby agrees
that such failure or threatened failure shall result, without any further
action by the Stockholder, in the irrevocable appointment of John K. Castle,
until termination of the Merger Agreement, as the Stockholder's attorney and
proxy pursuant to the provisions of Section 212(c) of the General Corporation
Law of the State of Delaware, with full power of substitution, to vote, and
otherwise act (by written consent or otherwise) with respect to the shares of
Common Stock which the Stockholder is entitled to vote at any meeting of the
stockholders of the Company (whether annual or special and whether or not an
adjourned or postponed meeting) or consent in lieu of any such meeting or
otherwise, on the matters specified in Section 1.01 hereof in such manner as
Buyer or its substitute shall, in its sole discretion, deem proper. THIS PROXY
AND POWER OF ATTORNEY IS IRREVOCABLE AND COUPLED WITH AN INTEREST. The
Stockholder hereby revokes all other proxies and powers of attorney with
respect to the shares of
-2-
<PAGE> 163
Common Stock owned by the Stockholder which the Stockholder may have
heretofore appointed or granted (other than a proxy to vote in accordance with
Section 1.0 1 hereof), and no subsequent proxy or power of attorney shall be
given or written consent executed (and if given or executed, shall not be
effective) by the Stockholder with respect thereto (other than in accordance
with Section 1.01 hereof). All authority herein conferred or agreed to be
conferred shall survive the death, incapacity, bankruptcy or liquidation of the
Stockholder and any obligation of the Stockholder under this Agreement shall be
binding upon its heirs, representatives, assigns and successors.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER
The Stockholder hereby represents and warrants to Buyer as follows:
SECTION 2.01. Authority Relative to This Agreement. The Stockholder has
all requisite power and authority to enter into this Agreement and to perform
its obligations hereunder. This Agreement has been duly authorized, executed
and delivered by the Stockholder and, assuming this Agreement constitutes a
valid and binding obligation of the other parties hereto, constitutes a legal,
valid and binding obligation of the Stockholder, enforceable against the
Stockholder in accordance with its terms, except to the extent that the
enforceability thereof may be limited by: (i) applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium or similar laws
from time to time in effect affecting generally the enforcement of creditors'
rights and remedies; and (ii) general principles of equity, including, without
limitation, principles of reasonableness, good faith and fair dealing
(regardless of whether enforcement is sought in equity or at law).
SECTION 2.02. No Conflict. The execution and delivery of this Agreement
by the Stockholder and performance of such Stockholder's obligations hereunder
do not (i) conflict with or violate any laws applicable to the Stockholder or
by which the shares of Common Stock of the Stockholder are bound or affected or
(ii) result in any breach of or constitute a default (or an event that with
notice or lapse of time or both would become a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation of,
or result in the creation of a lien or encumbrance on any of the shares of
Common Stock of the Stockholder pursuant to, any note, bond, mortgage,
indenture, contract, lease, license, permit, franchise or other instrument or
obligation to which the Stockholder is a party or by which the Stockholder or
the shares of Common Stock of the Stockholder are bound or affected.
SECTION 2.03. Title to the Shares. As of the date hereof, the
Stockholder is the beneficial owner of the number of shares of Common Stock
set forth opposite the Stockholder's name on the signature page hereto. Such
shares of Common Stock are all of such shares as are owned, either of record or
beneficially, by the Stockholder. The Stockholder owns all the shares of
Common
-3-
<PAGE> 164
Stock set forth opposite the Stockholder's name on the signature page
hereto free and clear of all security interests, liens, claims, pledges,
options, rights of first refusal, contracts, limitations on the Stockholder's
voting rights, charges and other encumbrances of any nature whatsoever. Except
as provided in this Agreement, the Stockholder has not appointed or granted
(and will not, after the date hereof, appoint or grant) any proxy, which
appointment or grant is still effective, with respect to the shares set forth
opposite the Stockholder's name on the signature page hereto, other than in
accordance with Section 1.01 hereof.
ARTICLE III
COVENANTS OF THE STOCKHOLDERS
SECTION 3.01. No Disposition or Encumbrance of Shares. The Stockholder
hereby covenants and agrees that, except as contemplated by this Agreement, the
Stockholder shall not, and shall not offer or agree to, sell, transfer, tender,
assign, hypothecate or otherwise dispose of, grant a proxy (other than the
irrevocable proxy granted herein) or power of attorney with respect to, create
or permit to exist any security interest, lien, claim, pledge, option, right of
first refusal, contract, limitation on the Stockholder's voting rights, charge
or other encumbrance of any nature whatsoever with respect to, the
Stockholder's shares of Common Stock, or directly or indirectly, initiate,
solicit or encourage any person to take actions which could reasonably be
expected to lead to the occurrence of any of the foregoing; provided however
that if the Stockholder is currently serving as a director or officer of the
Company, the Stockholder, acting in such capacities, shall not be precluded
from taking any such action or any action precluded by Section 3.02, based upon
the advice of counsel, that his or her fiduciary duties to the Company obligate
the Stockholder to do so; provided, further, however that the Stockholder may
transfer all or part of such Stockholder's shares of Common Stock to a
charitable remainder trust or other similar trust established for estate
planning purposes or to an entity which has claimed an exemption under Section
501(c)(3) of the Internal Revenue Code of 1986.
SECTION 3.02. No Negotiations. The Stockholder shall not, and shall not
permit any of its subsidiaries, affiliates, representatives, agents or any
other person acting for or on behalf of such Stockholder to, solicit, entertain
offers from, negotiate with, or in any manner discuss, encourage, recommend or
agree to any proposal relating to (a) the sale of the stock or assets of the
Company or any of its Subsidiaries or any interest therein, (b) the merger,
consolidation or other combination of the Company or any of its Subsidiaries
with any person, or (c) the liquidation, dissolution or reorganization of the
Company or any of its Subsidiaries, except as specifically contemplated by the
Merger Agreement. Without limiting the generality of the foregoing, the
Stockholder shall not, and shall not permit any of its subsidiaries,
affiliates, representatives, agents or any other person acting for or on behalf
of the Stockholder to, furnish or cause to be furnished any information with
respect to the Company or any of its Subsidiaries to any person (other than the
Buyer and its employees and agents and other than as required by law). If the
Stockholder or any of its subsidiaries, affiliates,
-4-
<PAGE> 165
representatives, agents or any other person acting for or on behalf of the
Stockholder receives from any person any offer, proposal or informational
request that may be subject to this Section, the Stockholder shall promptly
advise such person, by written notice, of the terms of this Section and shall
promptly deliver a copy of such notice to the Buyer. Nothing herein shall, to
the extent not prohibited by the Merger Agreement, prohibit any Stockholder who
is an officer of the Company from acting in his capacity as such, or who is a
director of the Company from participating in meetings of the Board or
Committees thereof.
ARTICLE IV
MISCELLANEOUS
SECTION 4.01. Termination. This Agreement shall remain in effect until
the first to occur of (i) the Closing Date or (ii) the termination of the
Merger Agreement; provided, however, that the provisions set forth in Section
4.03 shall survive the Closing.
SECTION 4.02. Definitions. Any terms used but not defined herein shall
have the meanings ascribed to them in the Merger Agreement.
SECTION 4.03. Further Assurances. The Stockholders will execute and
deliver all such further documents and instruments and take all such further
action as may reasonably be necessary in order to consummate the transactions
contemplated hereby, including, without limitation, the transactions
contemplated by the Merger Agreement.
SECTION 4.04. Specific Performance. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
SECTION 4.05. Entire Agreement. This Agreement constitutes the entire
agreement between the Stockholder and the Buyer with respect to the subject
matter hereof and supersedes all prior agreements and understandings, both
written and oral, between the Buyer and the Stockholder with respect to the
subject matter hereof.
SECTION 4.06. Amendment. This Agreement may not be amended, altered or
modified except by a written instrument executed by the parties hereto.
SECTION 4.07. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of
law, or public policy, all other conditions and provisions of this Agreement
shall nevertheless remain in full force and effect so long as the
-5-
<PAGE> 166
economic or legal substance of this Agreement is not affected in any manner
materially adverse to any party. Upon such determination that any term or
other provision is invalid, illegal or incapable of being enforced, the parties
hereto shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the terms of this Agreement remain as
originally contemplated to the fullest extent possible.
-6-
<PAGE> 167
SECTION 4.08. Governing Law. This Agreement shall be construed and
interpreted according to the laws of the State of New York applicable to
contracts made and to be performed wholly within such state.
SECTION 4.09. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and each of which shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the Stockholder has duly executed this Agreement.
_____________________________________
Number of Shares of Name:
Common Stock owned:
AGREED TO AND ACCEPTED:
FIIG HOLDING CORP.
By:
__________________________
Name:
Title:
FIIG MERGER CORP.
By:
__________________________
Name:
Title:
-7-
<PAGE> 168
SCHEDULE A - VOTING AGREEMENT
<TABLE>
<CAPTION>
Shareholder # of shares %*
- ------------------------------------------------------------------
<S> <C> <C>
R. Keith Long 398,188 12.41%
John A. Dore 113,450 3.54%
John B. Zellars 54,022 1.68%
Lonnie L. Steffen 33,792 1.05%
Wilbur Dean Cannon 24,984 .78%
Herschel Rosenthal 19,248 .60%
William B. O'Connell 14,313 .45%
Joseph C. Morris 13,276 .41%
Dale C. Bottom 8,823 .28%
John P. Diesel 7,200 .22%
- -------------- ------- ------
Total 687,296 21.42%
</TABLE>
*Based on % outstanding of 3,207,711 at January 31, 1996
-1-
<PAGE> 169
APPENDIX E
BUDGET
<PAGE> 170
1996 BUDGET HIGHLIGHTS
1996 is on budget in total revenue and ahead of budget in total net income.
The premium revenue is providing most of the increase from 1994, but a rebound
in interest rates and the resurgent investment market has allowed more income
to reach the bottom line in the form of investment income and capital gains.
Our expenses are at budget, and the underwriting results have continued to
develop per plan for both discontinued programs and our ongoing insurance and
reinsurance programs.
The 1996 budget calls for a 38.49% increase in net premium revenue but a
reduced amount of capital gains. The underwriting is going to benefit from the
lower commissions paid when we use First Re and the other expenses are
projected to be flat with 1995. We will increase our net income marginally
because of investment income, and if the investment markets allow capital
gains, we should exceed the budget by a higher margin.
Financial Institutions Insurance Group
Proforma Financial Results
(000 Omitted)
<TABLE>
<CAPTION>
Actual Actual Actual Actual Projected Budget
Yr. Ended Yr. Ended Yr. Ended Yr. Ended Yr. Ended Yr. Ended
1991 12/31/92 12/31/93 12/31/94 1995 1996
<S> <C> <C> <C> <C> <C> <C>
Revenue
Premiums earned 8,872 7,344 7,434 7,820 11,800 16,342
Net Investment Income 3,936 3,344 3,470 3,535 4,400 5,105
Net realized gains on
Investments 831 1,032 1,275 570 1,000 500
Goodwill Amortization 139 427 414 466 465 465
Other Income 168 277 150 50
------ ------ ------ ------ ------ -------
Total Revenue 13,778 12,147 12,762 12,667 17,815 22,462
------ ------ ------ ------ ------ -------
Losses and Expenses
Losses and loss adjustment
expenses 5,622 4,597 4,924 2,613 5,600 8,983
Commissions Expenses 2,605 1,762 1,864 1,787 2,800 3,859
Other operating and management
expenses 1,963 2,229 2,886 3,725 3,859 3,573
------ ----- ----- ----- ------ ------
Total losses and expenses 10,190 8,588 9,674 8,125 12,259 16,415
------ ------ ------ ------ ------ -------
Income before income taxes 3,588 3,560 3,088 4,543 5,556 6,046
Provision for income taxes 1,178 614 (124) 804 1,300 1,350
----- ----- ------ ----- ----- -----
Net Income 2,410 2,946 3,212 3,739 4,256* 4,696
----- ----- ------ ----- ----- -----
Net Income Increase 22.2% 9.0% 16.4% 13.8% 10.4%
----- ------ ----- ----- -----
Expense Ratios
Loss Ratio 63.4% 62.6% 66.2% 33.4% 47.5% 55.0%
Acquisition Ratio 29.4% 24.0% 25.1% 22.8% 23.7% 23.6%
Expense Ratio 22.1% 30.3% 38.8% 47.6% 32.7% 21.9%
Combined Ratio 114.9% 116.9% 130.1% 103.9% 103.9% 100.4%
----- ----- ------ ----- ----- -----
</TABLE>
<TABLE>
<CAPTION>
% Chg Budget 1995
------- -----------
<S> <C> <C>
Revenue
Premiums earned 38% $11,417
Net Investment Income 16% 4,628
Net realized gains on Investments -50% 250
Goodwill Amortization 0% 425
Other Income -67% 250
--- -------
Total Revenue 26% 16,970
--- -------
Losses and Expenses
Losses and loss adjustment expenses 60% 5,004
Commissions Expenses 38% 2,898
Other operating and management
expenses -7% 3,831
--- -------
Total losses and expenses 34% 11,733
--- -------
Income before income taxes 9% 5,238
Provision for income taxes 4% 1,001
-----
Net Income 10% 4,236
--- -------
Net Income Increase 13.3%
-------
Expense Ratios
Loss Ratio 43.8%
Acquisition Ratio 25.4%
Expense Ratio 33.6%
Combined Ratio 102.8%
-------
</TABLE>
__________________________________
* Actual 1995 net income was $4,321,799.
