SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14D-9
Solicitation/Recommendation Statement
Pursuant to Section 14(d)(4) of
the Securities Exchange Act of 1934
Meridian Insurance Group, Inc.
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(Name of Subject Company)
Meridian Insurance Group, Inc.
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(Name of Person(s) Filing Statement)
Common Stock, No Par Value
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(Title of Class of Securities)
589644-10-3
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(CUSIP Number of Class of Securities)
Norma J. Oman
Chief Executive Officer
Meridian Insurance Group, Inc.
2955 North Meridian Street
Indianapolis, Indiana 46208-4788
(317) 931-7000
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(Name, address and telephone number of person authorized to
receive notice and communications on behalf of the
person(s) filing statement)
with copies to:
Stephen J. Hackman
Ice Miller
One American Square
Box 82001
Indianapolis, Indiana 46282-0002
(317) 236-2100
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ITEM 1. SUBJECT COMPANY INFORMATION
The name of the subject company is Meridian Insurance Group, Inc., an
Indiana corporation (the "Company" or "MIGI"). The address of the principal
executive office of MIGI is 2955 North Meridian Street, Indianapolis, Indiana
46208-4788. The telephone number of the principal executive office of MIGI is
(317) 931-7000. The title of the class of equity securities to which this
Statement relates is shares of Common Stock, no par value of MIGI (including the
associated preferred stock purchase rights issued pursuant to the Rights
Agreement dated as of September 18, 1998) (collectively herein, the "Common
Stock" or "Shares"). As of June 30, 2000, (as reported in the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2000),
7,852,411 shares of Common Stock were outstanding.
ITEM 2. IDENTITY AND BACKGROUND OF FILING PERSON
The name, business address and business telephone number of the
Company, which is the person filing this Statement, are set forth in Item 1
above.
This Statement relates to the tender offer by Meridian Insurance Group
Acquisition Corporation ("Bidder"), an Illinois corporation and wholly-owned
subsidiary of American Union Insurance Company ("Parent" or "AUIC"). Parent is
an Illinois stock insurance company that is 50% owned by Gregory M. Shepard
("Shepard"). Shepard is also Chairman of the Board and President of AUIC.
According to the Offer (as defined below), the tender offer is for the purchase
of all of the outstanding shares of Common Stock of MIGI at a purchase price of
$20.00 per Share, net to the seller in cash, without interest thereon, upon the
terms and subject to the conditions set forth in the Offer to Purchase dated
August 31, 2000, and the related Letter of Transmittal (which together
constitute the "Offer").
According to the Offer, Parent intends, as soon as practicable after
the consummation of the Offer, to seek to have the Company merge with the Bidder
(the "Proposed Merger") in order to acquire all shares of Common Stock not
beneficially owned by the Bidder following consummation of the Offer. According
to the Offer, each remaining share of Common Stock outstanding after the
Proposed Merger (other than shares of Common Stock held by Parent or Shepard or
held in the treasury of the Company) would be converted into the right to
receive $20.00 net per Share in cash.
The Offer states that the principal executive offices of the Bidder are
located at 303 East Washington Street, Bloomington, Illinois 61701.
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ITEM 3. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS
Certain agreements, arrangements or understandings between the Company
and its executive officers, directors or affiliates are described in the
Company's Proxy Statement for the 2000 Annual Meeting of Shareholders, dated
April 3, 2000 (the "Proxy Statement"), under the following headings: "Election
of Directors", "Committees of the Board of Directors", "Certain Relationships
and Transactions", "Description of Pooling Agreement", "Executive Compensation",
"Aggregated Option/SAR Exercises in 1999 and 1999 Year-End Option/SAR Values",
"Pension Plan", "Supplemental Retirement Income Plan", "Executive Bonus
Compensation Plan", "Compensation Committee Interlocks and Insider
Participation", "Change-in Control Agreements", and "Compensation of Directors".
The Company has eight (8) directors, five (5) of whom are also
directors of one of its affiliates, Meridian Mutual Insurance Company ("Meridian
Mutual"). All of the Company's officers also serve as officers of Meridian
Mutual. Meridian Mutual reimburses the Company for the services these officers
perform solely on behalf of Meridian Mutual.
Except as discussed herein or incorporated herein by reference, to the
best of the Company's knowledge, as of the date hereof there are no other
material agreements, arrangements or understandings, and no actual or potential
conflicts of interest between the Company or its affiliates and (i) the
Company's executive officers, directors or affiliates, or (ii) the Bidder or its
executive officers, directors or affiliates.
ITEM 4. THE SOLICITATION OR RECOMMENDATION
At special meetings of the Board of Directors of the Company (the
"Board") held on September 6 and September 8, 2000, the Board considered the
terms of the Offer. As a result of these meetings, the Board, by unanimous vote
(including the unanimous vote of the three members of the Board who are not
members of the board of directors of Meridian Mutual), determined that the Offer
is inadequate and not in the best interests of the Company and the Company's
shareholders.
ACCORDINGLY, THE BOARD RECOMMENDS THAT THE COMPANY'S SHAREHOLDERS REJECT THE
OFFER AND NOT TENDER ANY SHARES TO THE BIDDER.
A letter to shareholders communicating the Board's position and a copy
of the press release announcing such recommendation are filed as Exhibits A and
B hereto, respectively, and are incorporated herein by reference.
In reaching the determination and recommendation set forth above, the
Board considered numerous factors, including, without limitation, the following:
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(1) The Board's belief that the Offer price is inadequate and does not
reflect the inherent value of the Company. In this regard, the Board
considered the business, financial condition, results of operations,
current business strategy and future prospects of the Company and
whether the Offer was reflective thereof, including the opinion of the
Company's management that the financial terms of the Offer are
inadequate. The opinion of management was based on a variety of
factors, including its knowledge of the Company's business and
operations and of the strategic objectives and corporate policies and
its views as to the prospects of the Company.
(2) The opinion of A.G. Edwards & Sons, Inc. ("A.G. Edwards") that the
Offer price is inadequate from a financial point of view as of
September 8, 2000. Representatives of A.G. Edwards, who acted as
financial advisors to the Company in relation to the Offer,
participated in the special meetings of the Board and presented to the
Board an analysis of the Offer from a financial point of view. A.G.
Edwards has delivered a written opinion (the "A.G. Edwards Opinion") to
the Board stating therein that, as of September 8, 2000, the
consideration of $20.00 per Share being offered to the holders of the
Shares pursuant to the Offer is inadequate from a financial point of
view to the Company's shareholders (other than the Bidder and its
affiliates).
A copy of the A.G. Edwards Opinion is attached as Annex A hereto. THE
COMPANY'S SHAREHOLDERS ARE URGED TO CAREFULLY READ THE A.G. EDWARDS
OPINION IN ITS ENTIRETY.
(3) The Board's belief that, the Offer is subject to certain conditions
that will not be satisfied, and, therefore, the Offer will not succeed.
According to the Offer, there are significant uncertainties and
contingencies associated with the Offer, including conditions which (i)
are in the sole discretion of the Bidder, (ii) are subject to external
events not directly related to the Company or (iii) are not within the
control of the Company or the Bidder. Included among these
contingencies are the following conditions:
(a) Shares representing at least 50.1% of the voting securities of
the Company (including Shares owned by Shepard) must have been
tendered and not withdrawn before the expiration of the Offer
("Minimum Condition"). The Board believes that a majority of
the Company's shareholders do not support the Offer. Meridian
Mutual, which holds approximately 48.5% of the outstanding
Common Stock, and the Company's directors and executive
officers, who in the aggregate hold approximately two percent
of the Common Stock, have advised the Board they will not
tender their Shares in response to the Offer. In addition, the
Company has received several unsolicited communications from
other unrelated shareholders who have indicated that they will
not tender their Shares in response to the Offer. The Shares
owned by the shareholders described above represent more than
50% of the outstanding Common Stock. Consequently, the Board
concluded that the Minimum Condition will not be satisfied.
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(b) Bidder (through AUIC or Shepard) must obtain sufficient funds
to finance the purchase of all of the Company's outstanding
Shares at a price of $20.00 per Share. The Board does not
believe that the Bidder will have available adequate financing
to complete the Offer. In this regard, the Board noted that,
according to the Offer, the total amount of funds necessary to
consummate the Offer, including related fees and expenses,
will be approximately $135.9 million. The Offer further states
that the Bidder intends to obtain all of the funds necessary
to purchase tendered shares from AUIC, and that AUIC "plans to
obtain such funds from any and all sources available to it."
The Board further noted that, although the Offer states that
the Bidder, Parent and Shepard have held discussions with
investment bankers and financial institutions regarding
Parent's ability to finance the Offer, the Offer does not
state that any of those persons expressed an interest in or
willingness to provide financing for the Offer. Moreover, the
Board noted that the Offer specifically states that none of
Parent, Bidder or Shepard makes any guarantees regarding their
ability to finance the purchase of all outstanding Shares of
the Company at a price of $20.00 per Share and that the Bidder
has no alternative financing arrangements or plans.
Furthermore, the Board believes that, based on the financial
statements provided to the Company by Shepard and AUIC,
neither AUIC nor Shepard has sufficient capital to purchase
all of the Common Stock at a price of $20.00 per share
pursuant to the Offer without additional financing, and that
it is unlikely that AUIC or Shepard will be able to obtain
such financing.
In view of the foregoing, the Board believes that the Offer is
conditioned on financing which is not readily available and
therefore is, in effect, illusory.
(c) The Company's preferred share purchase rights must be redeemed
by the Company at the redemption price of $.005 per right (the
"Rights Redemption Condition"). The Board has not taken any
action to redeem the preferred share purchase rights in
response to the Offer and does not intend to do so. Therefore,
the Rights Redemption Condition will not be satisfied.
(d) Bidder, AUIC and Shepard must have obtained all insurance
regulatory approvals necessary for their acquisition of
control of the Company and its insurance subsidiaries on terms
and conditions satisfactory to the Bidder, in its sole
discretion. Based in part on Shepard's involvement in the
recent insolvency of Illinois Healthcare Insurance Company and
the harm caused thereby to policyholders in Indiana, Illinois
and Ohio (see paragraph 4, below), the Board believes it is
unlikely that Bidder, AUIC and Shepard will receive the
regulatory approvals required to satisfy this condition.
(4) The Board's belief that, based on Shepard's history and
experience in the insurance industry, it would be contrary to the best
interests of the Company's shareholders, employees, agents and
policyholders and detrimental to the long-term financial viability of
the Company and its insurance company subsidiaries for Shepard to gain
control of the Company. Among the significant concerns noted by the
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Board was Shepard's involvement in the recent insolvency of Illinois
HealthCare Insurance Company ("Illinois HealthCare"). The Offer states
that Shepard was Chairman and Chief Executive Officer of Illinois
HealthCare, an Illinois life, accident and health insurance company
with health maintenance organization authority, from its founding in
1997 to June 30, 2000, when it voluntarily entered into an order of
liquidation with the Illinois Department of Insurance. On September 1,
2000, The Indianapolis Star reported that the Illinois HealthCare
insolvency left 26,000 policyholders in Indiana, Illinois and Ohio
without insurance coverage, and required insurance guaranty funds in
Indiana, Illinois and Ohio to cover health claims owed to
policyholders.
(5) The Board's belief that the market price of the Common Stock does
not reflect the inherent value of the Company. The Board noted that
many property and casualty insurance companies are currently out of
favor with investors in general, and are trading at depressed prices
relative to historic measures of value, such as book value. Immediately
prior to the announcement of the Offer, the market price of the
Company's Common Stock ($12.75) was below its June 30, 2000 book value
($17.00 per share). Moreover, the Company's Common Stock is not widely
held and does not generally trade in large volumes. Thus, the Board
concluded that the apparent premium associated with the Offer is
misleading inasmuch as it is derived from a market price that does not
represent the inherent value of the Company.
(6) The Board's belief that no operational, financial or other
synergies would result from an acquisition of the Company by AUIC or
Shepard. As disclosed in the Offer, AUIC has only six (6) employees,
and AUIC's total premiums earned in 1999 were less than $5.6 million.
(7) The Board's belief that, based in part on the Company's experience
in connection with the prior tender offer commenced by Shepard in 1999,
the Offer is not a serious offer. The Board noted that, in April, 1999,
Shepard, through American Union Financial Corporation, commenced a
tender offer to purchase up to 350,000 MIGI shares (representing
approximately 3.17% of the then-outstanding MIGI shares). However, as
stated in the Offer, Shepard and American Union Financial Corporation
terminated the tender offer without purchasing any of the tendered
shares.
(8) The Board's belief that the Offer is an attempt by Shepard, through
AUIC and the Bidder, to capture for himself the future growth in
revenues, net income and cash flow that are expected to be realized
from the implementation of the Board's long-term strategies.
(9) The destabilizing effect that the Board believes a successful Offer
would have on the employees, agents and policyholders of the Company
and the Company's affiliated insurance companies.
In light of the above factors, the Board has determined that the Offer
is not in the best interests of the Company and the Company's shareholders.
ACCORDINGLY, THE BOARD UNANIMOUSLY RECOMMENDS THAT THE COMPANY'S SHAREHOLDERS
REJECT THE OFFER AND NOT TENDER THEIR SHARES PURSUANT TO THE OFFER.
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The foregoing discussion of the information and factors considered by
the Board is not intended to be exhaustive but addresses all of the material
information and factors considered by the Board in its consideration of the
Offer. In view of the variety of factors and the amount of information
considered, the Board did not find it practicable to provide specific
assessments of, quantify or otherwise assign any relative weights to the
specific factors considered in determining to recommend that the Company's
shareholders reject the Offer. Such determination was made after consideration
of all the factors taken as a whole. In addition, individual members of the
Board may have given differing weights to different factors.
To the best of the Company's knowledge after reasonable inquiry, none
of the Company's executive officers or directors currently intends to tender to
the Bidder the Shares held of record or beneficially owned by such persons.
Meridian Mutual, the Company's largest shareholder, has advised the Company that
it does not intend to tender any of its Shares in response to the Offer.
ITEM 5. PERSONS/ASSETS, RETAINED, EMPLOYED, COMPENSATED OR USED
Pursuant to a letter agreement, dated August 31, 2000 (the "Letter
Agreement"), the Company has retained A.G. Edwards to act as the Company's
exclusive financial advisor in connection with the evaluation of the Offer.
Pursuant to the Letter Agreement, the Company has agreed to pay A.G. Edwards the
following fees: (i) an initial payment of $100,000 upon the execution of the
Letter Agreement (to be credited against the fees earned in (iii) following);
(ii) a monthly retention payment of $40,000 every 30th day subsequent to
September 30th for the term of the engagement; (iii) a fee of $400,000 in the
event A.G. Edwards issues a written opinion; (iv) fees for assistance with any
litigation that may arise as a result of the rejection or acceptance of the
Offer. In the event that the Board elects to examine other strategic
alternatives, the Company and A.G. Edwards will agree on a separate fee for
those services.
The Company has also agreed to reimburse A.G. Edwards for all
reasonable out-of-pocket expenses incurred in connection with the performance of
its duties under the Letter Agreement. These expenses, which shall be billed
separately, include legal and other professional fees, travel, document
procurement and computer services, and all other out-of-pocket expenses. A.G.
Edwards shall not incur expenses in excess of $20,000 without receiving approval
of the Company, such approval not to be unreasonably withheld. In addition, the
Company has agreed to indemnify A.G. Edwards against certain liabilities in
connection with their engagement.
The Letter Agreement may be terminated at any time by either party,
with or without cause, upon written notice to that effect to the other party;
provided, however, that (i) any fees earned and expenses incurred will become
payable immediately; (ii) the terms of indemnification will survive such
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termination; and (iii) A.G. Edwards will be entitled to a reasonable Strategic
Alternative Fee, in the event that any time prior to the expiration of twelve
months after such termination, an agreement is entered into with respect to any
transaction whereby A.G. Edwards analyzed the alternative at the explicit
request of the Board during the term of its engagement.
A.G. Edwards has provided investment banking services to the Company
from time to time in the past for which it has received customary compensation.
Except as set forth above, neither the Company nor any person acting on
its behalf has employed, retained or compensated any person to make
solicitations or recommendations to the Company's shareholders with respect to
the Offer.
ITEM 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY
Except as set forth in this Item 6, no transactions in Shares have been
effectuated during the past 60 days by the Company, or, to the best of the
Company's knowledge, by any executive officer, director, affiliate or subsidiary
of the Company.
On August 15, 2000, Steven R. Hazelbaker, Executive Vice President and
Chief Operating Officer of the Company, surrendered 312 Shares to the Company in
payment of the exercise price of options to acquire 410 Shares at a price of
$9.8136 per Share. Also, since 1998, Steven R. Hazelbaker has authorized regular
monthly withdrawals of sums from his salary to be allocated to the purchase of
Shares under the Company's 401(k) Plan. Within the past 60 days, the sum of $388
has been withheld from his salary, with which the Company's 401(k) Plan has
purchased approximately 30 Shares for the benefit of Mr. Hazelbaker.
ITEM 7. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS
No negotiation is being undertaken or is underway by the Company in
response to the Offer which relates to or would result in (1) a tender offer or
other acquisition of the Company's securities by the Company, any subsidiary of
the Company, or any other person; (2) an extraordinary transaction such as a
merger, reorganization or liquidation involving the Company or any subsidiary of
the Company; (3) a purchase, sale or transfer of a material amount of assets by
the Company or any subsidiary of the Company; (4) any material change in the
present dividend rate or policy of the Company, or in the indebtedness or
capitalization of the Company.
Except for the Board resolutions embodying the Board's recommendation
described in Item 4, there are no transactions, board resolutions, agreements in
principle or signed contracts entered into in response to the Offer which relate
to or would result in one or more of the matters referred to in the first
paragraph of this Item 7.
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ITEM 8. ADDITIONAL INFORMATION
According to the Bidder's Offer to Purchase, the purpose of the Offer
is to enable the Bidder to acquire control of, and ultimately the entire equity
interest in, the Company. The Bidder currently intends, following completion of
the Offer, to seek to consummate the Proposed Merger. In general, pursuant to
the Indiana Business Corporation Law (the "IBCL"), the approval of both the
shareholders and the board of directors of a corporation is required to effect a
proposed merger of that corporation with or into another corporation except that
no shareholder approval is required in the case of a corporation merging with a
parent that owns 90% or more of the corporation pursuant to the provisions of
Section 23-1-40-4 of the IBCL. A merger effected pursuant to such provision is
referred to herein as a "short-form merger." If the Offer is consummated and
Bidder acquires 90% or more of the outstanding Shares pursuant to the Offer (and
subsequent purchases, if any), according to the Offer to Purchase it will seek
to effect the Proposed Merger as a short-form merger promptly thereafter. If the
Offer is consummated and the Bidder acquires less than 90% of the outstanding
Shares pursuant to the Offer (and subsequent purchases, if any), the Proposed
Merger can only be effected with the approval of the Board and the Company's
shareholders.
A. Anti-takeover protections. Certain provisions of Indiana law and
certain of the Company's contractual obligations (including the Rights Plan
described below) may affect the ability of the Bidder to obtain control of the
Company and to cause the consummation of the Proposed Merger.
(1) State Takeover Statutes.
Many states (including Indiana, where the Company is
incorporated) have adopted takeover laws and regulations that purport,
in varying degrees, to be applicable to attempts to acquire securities
of corporations that are incorporated in those states or that have
substantial assets, stockholders, principal executive offices or
principal places of business in those states. In 1982, the Supreme
Court of the United States, in Edgar v. MITE Corp., invalidated on
constitutional grounds the Illinois Business Takeover Act, which, as a
matter of states securities law, made takeovers of corporations meeting
certain requirements more difficult. In 1987, however, in CTS Corp. v.
Dynamics Corp. of America, the Supreme Court of the United States held
that the State of Indiana could as a matter of corporate law, and in
particular, with respect to those aspects of corporate law concerning
corporate governance, constitutionally disqualify a potential acquirer
from voting on the affairs of a target corporation without the prior
approval of the remaining stockholders, as long as those laws were
applicable only under certain conditions. Subsequently, in TLX
Acquisition Corp. v. Telex Corp., a federal district court in Oklahoma
ruled that the Oklahoma statutes were unconstitutional insofar as they
apply to corporations incorporated outside Oklahoma, because they would
subject those corporations to inconsistent regulations. Similarly in
Tyson Foods, Inc. v. McReynolds, a federal district court in Tennessee
ruled that four Tennessee takeover statutes were unconstitutional as
applied to corporations incorporated outside Tennessee. This decision
was affirmed by the United States Court of Appeal for the Sixth
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Circuit. In December 1988, a federal district court in Florida held, in
Grand Metropolitan PLC v. Butterworth, that the provisions of the
Florida Affiliated Transactions Act and Florida Control Share
Acquisition Act were unconstitutional as applied to corporations
incorporated outside of Florida.
Indiana has a takeover offers statute that by its terms is
applicable to the Offer. This statute requires the Bidder to file a
takeover offer statement with the Indiana Securities Commissioner (the
"Commissioner"). The Commissioner is required to hold a hearing within
20 business days thereafter to determine whether the takeover offer
statement provides full and fair disclosure and, according to the
statute, the Commissioner has the power to prohibit purchases under the
Offer unless the takeover offer statement is deemed adequate by the
Commissioner. Notwithstanding the statement in the Offer to the effect
that the Indiana Takeover Offers Act does not apply to the Offer, the
Bidder filed a takeover offer statement with the Indiana Securities
Division on or about August 30, 2000. The Commissioner has scheduled a
hearing on the matter for September 25, 2000.
(2) The Rights Plan.
On September 18, 1998, the Board of Directors of the Company
adopted a Shareholder Rights Plan (the "Rights Plan"). The purpose of
the Rights Plan is to deter certain coercive takeover tactics, such as
the Offer, and enable the Board of Directors to represent effectively
the interests of shareholders in the event of a takeover attempt, and
to protect against market accumulators who may be interested in putting
the Company "into play." The Rights Plan does not deter negotiated
mergers or business combinations that the Board of Directors determines
to be in the best interests of the Company and its shareholders. The
existence of the Rights Plan will make it more difficult for the Bidder
to acquire control of the Company if Shares are purchased pursuant to
the Offer.
Implementation. To implement the Rights Plan the Board of
Directors declared a dividend of one preferred share purchase right (a
"Right") for each outstanding common share of the Company. The dividend
was paid on September 28, 1998 to the shareholders of record on that
date. Each Right entitles the registered holder to purchase from the
Company one one-thousandth of a share of Series A Junior Participating
Preferred Stock of the Company, no par value (the "Preferred Shares"),
at a price of $75.00 per one-thousandth of a Preferred Share, subject
to adjustment. The description and terms of the Rights are set forth in
a Rights Agreement (the "Rights Agreement") between the Company and
Harris Trust and Savings Bank, as Rights Agent.
Rights Attach to Common Shares Initially. Initially and until
a Distribution Date (as defined below) occurs, the Rights are attached
to all Shares and no separate Rights certificates will be issued.
During this initial period, the Rights are not exercisable; the Rights
are transferred with the Shares and are not transferable separately
from the Shares; new Share certificates or book entry Shares issued
will contain a notation incorporating the Rights Agreement by
reference; and the transfer of any Shares will also constitute the
transfer of the Rights associated with those Shares.
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Distribution of Rights. Separate certificates evidencing the
Rights will be mailed to holders of record of the Shares on the
"Distribution Date." The Distribution Date is the earlier to occur of
the following two events (or such later date as may be determined by
the Board of Directors, upon approval by a majority of Continuing
Directors as defined below): the tenth day after a public announcement
that a person or group of affiliated or associated persons has acquired
20% or more of the outstanding Shares (thereby becoming an "Acquiring
Person" under the Rights Plan); or such date as may be determined by
the Board of Directors of the Company, upon approval of a majority of
the Continuing Directors, after the commencement or announcement of a
tender or exchange offer by a person or group for 20% or more of the
outstanding Shares. Acquisitions by the following persons will not
result in the person becoming an Acquiring Person: the Company,
Meridian Mutual, any subsidiary or employee benefit plan of the Company
or Meridian Mutual, or any other person approved in advance by the
Board of Directors and the Continuing Directors.
After the Distribution Date, the Rights will be tradable
separately from the Shares. After the Distribution Date and after the
Company's right to redeem (as described below) has expired, the Rights
will be exercisable in two different ways depending on the
circumstances as set forth below.
Right to Purchase Company Stock. If a person or group acquires
20% or more of the outstanding Common Shares (thereby becoming an
Acquiring Person) and the Company's redemption right has expired, each
holder of a Right (except those held by the Acquiring Person and its
affiliates and associates) will have the right to purchase, upon
exercise, common shares (or, in certain circumstances, one
one-thousandths of a Preferred Share or other similar securities of the
Company) having a value equal to two times the purchase price of the
Right. In other words, the Rights holders other than the Acquiring
Person may purchase common shares or their equivalent at a 50%
discount. For example, at the purchase price of $75.00 per Right, each
Right not owned by an Acquiring Person would entitle its holder to
purchase $150.00 worth of Shares (or their equivalent) for $75.00.
Assuming a value of $20.00 per Share at such time, the holder of each
valid Right would be entitled to purchase 7.5 Shares (or their
equivalent) for $75.00.
Right to Purchase Acquiring Person Stock. Alternatively, if,
in a transaction not approved by the Board of Directors and the
Continuing Directors, the Company is acquired in a merger or other
business combination or 50% or more of its assets or earning power are
sold after a person or group has become an Acquiring Person, and the
Company's redemption right has expired, proper provision will be made
so that each holder of a Right will thereafter have the right to
purchase, upon exercise, that number of shares of common stock of the
acquiring company as have a market value of two times the exercise
price of the Right. In other words, a Rights holder may purchase the
acquiring company's common stock at a 50% discount.
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Exchange of Company Stock for Rights. At any time after any
person or group becomes an Acquiring Person and before the Acquiring
Person acquires 50% or more of the outstanding Shares, the Board of
Directors may exchange the Rights (other than Rights owned by the
Acquiring Person which will have become void), in whole or in part, at
an exchange ratio of one Share (or a share or interest in a share of a
class or series of the Company's preferred stock having equivalent
rights, preferences and privileges), per Right (subject to adjustment).
Redemption. The Rights are redeemable by the Company, in whole
but not in part, at a price of $0.005 per Right at any time up to and
including the tenth day after the time that a person or a group has
become an Acquiring Person, subject to extension of this redemption
period by the Board of Directors. Immediately upon redemption the right
to exercise will terminate and the only right of holders will be to
receive the redemption price.
Expiration of Rights. The Rights will expire on September 18,
2008 unless the expiration date is extended by amendment as described
below or unless the Rights are earlier redeemed or exchanged by the
Company as described above.
Amendments. As long as the Rights are redeemable, the terms of
the Rights may be amended by the Board of Directors (upon the approval
of a majority of the Continuing Directors) in its discretion without
the consent of the Rights holders. After that time, no amendment may
adversely affect the interests of the Rights holders (other than the
Acquiring Person).
Miscellaneous. "Continuing Director" means a member of the
Board of Directors, who is not an Acquiring Person or a representative
or nominee of an Acquiring Person, and who either (i) was a member of
the Board of Directors on the date of the Rights Agreement or (ii)
thereafter became a member of the Board of Directors, and whose
nomination for election or election to the Board of Directors was
recommended or approved by a majority of the Continuing Directors then
on the Board of Directors.
The number of outstanding Rights and the number of one
one-thousandths of a Preferred Share issuable upon exercise of each
Right are subject to adjustment under certain circumstances.
Because of the nature of the Preferred Shares' dividend,
liquidation and voting rights, the value of the one one- thousandth
interest in a Preferred Share that may be purchased upon exercise of
each Right should approximate the value of one Share.
- 12 -
<PAGE>
Until a Right is exercised, a Rights holder, as such, will
have no rights as a shareholder of the Company, including, without
limitation, the right to vote or to receive dividends.
B. Litigation. On August 30, 2000, AUIC, Shepard and Bidder instituted
a declaratory judgment action against the Company and the individual members of
the Board in the federal court for the Southern District of Indiana claiming,
inter alia, that certain amendments to Article IV of the Company's Articles
filed with the Secretary of State of Indiana on July 30, 1997 were ineffective
to remove Sections 4.05 and 4.06 from the Company's Articles due to a failure to
obtain shareholder approval as required by the IBCL. The complaint also alleges
certain violations of the proxy rules of the Securities and Exchange Commission
and alleges certain breaches of fiduciary duty by the Board members.
The Company investigated the matters raised by the complaint and
concluded that, due to a clerical error, Sections 4.05 and 4.06 of the Articles
opting out of the Indiana Control Share Acquisition Statute and the Business
Combinations Statute were inadvertently omitted from the text of the amendment
to the Company's Articles filed with the Secretary of State in 1997. The
plaintiffs were advised of the Company's findings on September 1, 2000. The
Company filed articles of correction with the Secretary of the State to correct
the error on September 6, 2000. Accordingly, the Control Share Acquisition
Statute and the Business Combinations Statute do not apply to the Company.
ITEM 9. EXHIBITS
Exhibit A. Letter to Shareholders, dated September 11, 2000.*
Exhibit B. Press release issued by the Company dated September 11,
2000.
Exhibit C. Excerpted Sections of MIGI's Proxy Statement, dated
April 3, 2000, relating to MIGI's Annual Meeting of
Shareholders.
Exhibit D. Opinion of A.G. Edwards & Sons, Inc., dated September 8,
2000.*
-----------------------------------
* Included in the Schedule 14D-9 mailed to Shareholders.
- 13 -
<PAGE>
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
September 11, 2000 /s/ Norma J. Oman
-------------------
Norma J. Oman
President and Chief Executive Officer
- 14 -
<PAGE>
Exhibit A
September 11, 2000
Dear Shareholders,
On August 31, 2000, Gregory M. Shepard ("Shepard"), through Meridian
Insurance Group Acquisition Corporation (the "Bidder") and its parent, American
Union Insurance Company began its hostile tender offer to buy your shares of
Meridian Insurance Group, Inc. (the "Company" or "MIGI") at a price of $20.00
per share. By now, you may have received the Bidder's tender offer materials.
AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY
DETERMINED THAT THE BIDDER'S OFFER IS INADEQUATE AND NOT IN THE BEST INTERESTS
OF THE COMPANY OR ITS SHAREHOLDERS. ACCORDINGLY, YOUR BOARD RECOMMENDS THAT YOU
REJECT THE BIDDER'S OFFER AND NOT TENDER ANY OF YOUR SHARES.
Our recommendation is based on our belief that the Bidder's tender
offer price does not reflect the inherent value of the Company and is unlikely
to succeed. You may recall that Shepard commenced a tender offer in April 1999
through American Union Financial Corporation, in which he tried to acquire less
than 5% of the outstanding shares of the Company. Now, he is trying to acquire
100% of the Company, to obtain absolute control.
As you may have heard in the press, since Shepard's last tender offer,
Illinois HealthCare Insurance Company, an Illinois insurance company of which
Shepard had control, was forced into liquidation, leaving thousands of
policyholders in Indiana, Illinois and Ohio without insurance coverage.
The following is a summary of the reasons why the Board recommends
rejection of the offer:
o Your Board believes that, based on the Company's business,
financial condition, results of operations, current business
strategy and future prospects of the Company, the offer price
is inadequate and does not reflect the inherent value of the
Company.
o A.G. Edwards & Sons, Inc., the Company's financial advisor,
has delivered its opinion that the tender offer price is
inadequate to the Company's shareholders from a financial
point of view.
o The Company has received communications from shareholders who,
in the aggregate, hold more than 50% of the Company's shares,
indicating that they do not support the offer and will not
tender their shares. Therefore, the Board believes that
Shepard will not be able to meet the Minimum Condition set
forth in his Offer.
o Your Board believes that Shepard will not be able to obtain
sufficient funds to finance the purchase of all of the
Company's shares at $20.00 per share. In fact, he
- 1 -
<PAGE>
has failed to present any plan or proposal regarding the
financing of the tender offer. Also, in the offer Shepard
specifically states that he has no alternative financing
arrangements or plans, and that he will not make any
guarantees regarding the ability to finance the tender offer.
o Based on Shepard's past history and experience in the
insurance industry, it would not be in the best interests of
the Company or its shareholders, employees, agents and
policyholders and would be detrimental to the long-term
viability of the Company for Shepard to obtain control.
Specifically, the Board is concerned with Shepard's
involvement in the recent insolvency of Illinois HealthCare
Insurance Company, as noted above.
o The tender offer is an attempt by Shepard, through American
Union Insurance Company and the Bidder, to capture for himself
the future growth in revenues, net income, and cash flow that
are expected to be realized from the implementation of the
Board's long-term strategy.
We urge you to read the attached Schedule 14D-9 with care so that you
will be fully informed as to the Board's recommendation.
In contrast to last year, this time we strongly urge you to reject the
inadequate and highly conditional offer and recommend that you do not tender
your shares.
We thank you for your continued support and confidence.
Sincerely,
Norma J. Oman
President and Chief Executive Officer
- 2 -
<PAGE>
Exhibit B
FOR IMMEDIATE RELEASE
Contact: Steven R. Hazelbaker
Executive Vice President and Chief Operating Officer
(317) 931-7269
MERIDIAN INSURANCE GROUP, INC.'S BOARD
UNANIMOUSLY REJECTS HOSTILE TENDER OFFER
Indianapolis, IN, September 11, 2000--Meridian Insurance Group, Inc., (Nasdaq:
MIGI) announced that on September 8, 2000, its Board of Directors met and
unanimously recommended that MIGI's shareholders reject the recent $20.00 per
share tender offer and not tender any of their shares.
In response to the hostile tender offer commenced on August 31, 2000, by Gregory
M. Shepard, through Meridian Insurance Group Acquisition Corporation (Bidder)
and its parent American Union Insurance Company (AUIC), Norma J. Oman, President
and Chief Executive Officer of MIGI sent a letter to the shareholders on behalf
of the Board of Directors summarizing the reasons for the Board's recommendation
not to tender any of their shares.
According to the letter, the Board concluded that the offer does not reflect
MIGI's inherent value. The Board further elaborated, that MIGI's largest
shareholder, Meridian Mutual, and MIGI's officers and directors have indicated
that they will not tender their shares in response to the offer. The Board
concluded that, since these shareholders collectively hold a majority of MIGI
shares, the likelihood of success of the tender offer is questionable.
Also, the Board indicated that the Bidder has failed to present any plan or
proposal regarding the financing of the tender offer. This is further supported
by statements by the Bidder that no guarantees will be made regarding the
ability to finance the tender offer.
Meridian Insurance Group, Inc. provides automobile, homeowners, farmowners,
other personal lines of coverage, and commercial insurance. Meridian is licensed
to write business in Washington, D.C., to facilitate the writing of commercial
lines business by Maryland and Virginia agents, in the states of Arizona,
Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Michigan,
Minnesota, Missouri, North Dakota, Ohio, Pennsylvania, South Dakota, Tennessee,
Virginia, Washington and Wisconsin.
<PAGE>
Exhibit C
ELECTION OF DIRECTORS
The Board of Directors consists of eight directors divided into three
classes. Directors generally serve for terms of three years, but at the
discretion of the Board, terms may be for one or two years. The term of one
class of directors expires at each Annual Meeting of Shareholders. According to
MIGI policy, at least two members of the Board of Directors will not otherwise
be affiliated with MIGI or Meridian Mutual.
Nominees for election this year are: Mr. Joseph D. Barnette, Jr., and
Mr. Thomas H. Sams for three-year terms and Mr. Ramon L. Humke for a one-year
term. All the nominees currently serve as MIGI directors. The other directors
listed in the following table have terms of office expiring in 2001 or 2002.
Each nominee has consented to serve for an additional term. If a
nominee becomes unavailable before the election, your proxy card authorizes us
to vote for a replacement nominee if the Board names one.
Name Age Capacity
---- --- --------
Nominee for election as director
with term expiring in 2001:
Ramon L. Humke 67 Director
Nominees for election as director
with terms expiring in 2003:
Joseph D. Barnette, Jr. 60 Director
Thomas H. Sams 58 Director
Directors continuing in office
with terms expiring in 2002:
James D. Price 61 Director
Sarah W. Rowland 67 Director
Directors continuing in office
with terms expiring in 2001:
Norma J. Oman 52 President, Chief Executive Officer
and Director
David M. Kirr 62 Director
John T. Hackett 67 Director
<PAGE>
Mr. Barnette has served as a director of the Company since 1988. Mr.
Barnette is the Chief Executive Officer and Chairman of the Board of Bank One,
Indiana, NA. He also serves as a director of Indianapolis Power and Light
Company and IPALCO Enterprises, Inc.
Mr. Humke has served as a director of MIGI since 1987 and as Chairman
since 1992. He is also Chairman of the Board of Directors of Meridian Mutual.
Mr. Humke has been the President, Chief Operating Officer and a director of
Indianapolis Power and Light Company since 1990. Mr. Humke is also a director of
IPALCO Enterprises, Inc.
Mr. Sams has served as a MIGI director since 1994. Mr. Sams has been
President, Chief Executive Officer, principal owner, and a director of Waldemar
Industries, Inc., an investment holding company in Indianapolis, Indiana, since
1967. He is also a director of Indianapolis Power and Light Company, IPALCO
Enterprises, Inc., and Mid-America Capital Resource, Inc.
Ms. Oman has been President, Chief Executive Officer, and a director of
MIGI since 1991. She has served as President, Chief Executive Officer, and a
director of Meridian Mutual and Meridian Security Insurance Company ("Meridian
Security") since 1990. She is also a director of Lilly Industries, Inc.
Mr. Kirr has served as a MIGI director since 1992. Mr. Kirr has been
the President of Kirr, Marbach & Company, a Columbus, Indiana, investment
advisory firm, since 1975.
Mr. Hackett has served as a director of the Company since 1992. Mr.
Hackett has been a Managing General Partner of CID Equity Partners, L.P., a
venture capital firm, since 1991. Mr. Hackett also serves as a director of
Meridian Mutual, Ball Corporation, Irwin Financial Corporation, Waterlink, Inc.,
and Wabash National Corporation.
Mr. Price has been a MIGI director since 1998 and a Meridian Mutual
director since 1987. Mr. Price is a First Vice President - Investments for
Prudential Securities Incorporated.
Ms. Rowland has served as a director of the Company since 1994. Ms.
Rowland was Chief Executive Officer of Rowland Design, Inc., an Indianapolis,
Indiana, interior design and space planning firm, from 1993 to 1999, and she has
been chairman of its board of directors since 1993. She also is a director of
Meridian Mutual, Indianapolis Power and Light Company and IPALCO Enterprises,
Inc.
COMMITTEES OF THE BOARD OF DIRECTORS
During 1999 the Board of Directors held six meetings. Each director
attended at least 75 percent of the aggregate of the total number of Board
meetings and the total number of meetings of all Board committees on which the
director served. MIGI's Board of Directors has six committees. They normally
hold joint meetings with similar committees of the Meridian Mutual Board of
Directors.
<PAGE>
Audit Committee
Members: Directors Barnette, Hackett, Humke and Price
Number of Meetings in 1999: Four
Functions: o Reviews accounting and financial reporting functions
o Oversees internal controls, audits and compliance
program
o Recommends independent auditors and oversees their
activities
o Monitors the parties' relationships under the
Reinsurance Pooling Agreement
Compensation Committee
Members: Directors Humke and Sams
Number of Meetings in 1999: Two
Functions: o Establishes and administers executive compensation
program and any incentive compensation plans
o Reviews salary and employee benefit programs
o Administers 1996 Employee Incentive Stock Plan
Finance and Investment Committee
Members: Directors Barnette, Hackett, Humke, Kirr, Oman and Price
Number of Meetings in 1999: Four
Functions: o Establishes investment policy and guidelines
o Reviews and approves Company investment transactions
Nominating Committee
Members: Directors Humke, Oman and Rowland
Number of Meetings in 1999: None
Functions: o Considers and recommends candidates for membership on
the Board of Directors
o Will consider a candidate for director recommended by a
shareholder
Business Development Committee
Members: Directors Rowland, Humke, Oman, and Price
Number of Meetings in 1999: Two
Functions: o Reviews management proposals for product and service
developments and enhancements
o Assists and guides management with strategic business
initiatives
Pooling Agreement Committee
Members: Directors Barnette, Hackett, Humke, Kirr, and Oman
Number of Meetings in 1999: None
Functions: o At request of Audit Committee and in conjunction with
Meridian Mutual's Pooling Agreement Committee,
reviews relationships among the parties to the
Reinsurance Pooling Agreement and determines whether
the percentage participation of the parties continues
to bear an appropriate relationship
<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Meridian Mutual incorporated MIGI in 1986. MIGI remained a wholly-owned
subsidiary of Meridian Mutual until March 1987. At that time, MIGI sold
1,700,000 Common Shares in a public offering. This reduced Meridian Mutual's
ownership of MIGI's outstanding Common Shares from 100 percent to approximately
65 percent. MIGI completed a second public offering of 1,725,000 Common Shares
in 1993. This further reduced Meridian Mutual's ownership of MIGI to
approximately 46.8 percent of its Common Shares. In mid-1996, the Company
acquired Citizens Security Group, Inc., and its property and casualty insurance
subsidiaries, Meridian Citizens Security Insurance Company ("MC Security"),
formerly Citizens Fund Insurance Company, and Insurance Company of Ohio ("ICO")
and became affiliated with Meridian Citizens Mutual Insurance Company ("MC
Mutual"), formerly Citizens Security Mutual Insurance Company. References in
this Proxy Statement to "Meridian Citizens Group" include MC Security, ICO and
MC Mutual.
MIGI markets insurance products and services through its wholly-owned
subsidiaries, Meridian Security and MC Security. Their operations are
interrelated with the operations of MC Mutual and Meridian Mutual, an Indiana
mutual property and casualty company. MIGI believes its various transactions
with Meridian Mutual and MC Mutual are on terms no less favorable to MIGI than
what could be negotiated with an independent third party.
MIGI obtains the majority of its insurance business through a
Reinsurance Pooling Agreement with Meridian Mutual and MC Mutual. In addition,
Meridian Mutual provides the facilities and many services required to conduct
MIGI's business. During 1999 MIGI paid Meridian Mutual $334,008 for
administrative and other services.
Description of Pooling Agreement
Meridian Mutual, Meridian Security, MC Mutual, MC Security and ICO are
parties to a Reinsurance Pooling Agreement. It covers all the property and
casualty insurance written by the parties. Thus, premiums, losses, loss
adjustment expenses and the underwriting and administrative expenses of the
parties are shared according to established percentages. Currently, the
participation percentages are 74 percent for MIGI's insurance subsidiaries, 22
percent for Meridian Mutual, and four percent for MC Mutual. These participation
percentages were fixed with reference to the relative surplus positions of the
companies.
The MIGI and Meridian Mutual Audit Committees have the responsibility
of monitoring the parties' relationships under the Reinsurance Pooling
Agreement. The Committees have established the procedures they deem necessary
and appropriate for this process. Their guidelines provide for:
o reviewing the participation percentages at least annually and
o referring any decision to change the participation percentages to
the Pooling Agreement Committees of MIGI and Meridian Mutual.
<PAGE>
MIGI's business and operations are integrated with and dependent upon
Meridian Mutual's business and operations. Management of Meridian Mutual and
MIGI will decide:
o which expenses relate to underwriting, meaning they will be shared
by the parties under the pooling agreement; and
o which assets and liabilities will be transferred among the parties
to the pooling agreement and what their values are.
The pooling agreement does not have established procedures for making these
decisions.
MIGI and Meridian Mutual do not always have the same interests. Their
interests conflict when it comes to:
o establishing participation ratios under the pooling agreement;
o allocating expenses unrelated to insurance underwriting; and
o MIGI's dividend policy.
Their interests may or may not be in conflict regarding:
o business and investment philosophies;
o profit objectives;
o cash management; and
o possibly other matters.
The wording of the pooling agreement itself eliminates some potential
conflicts. For instance, it doesn't matter which company insures a particular
pooled risk because the operating results of all the participants depend on the
results of the total business covered by the pooling agreement. Therefore, the
parties will have identical loss and loss adjustment expense ratios and
virtually identical expense ratios.
When the interests of MIGI and Meridian Mutual conflict, MIGI directors
make decisions based on their fiduciary duties to the Company and its
shareholders. However, individuals who are directors of both the Company and
Meridian Mutual also owe fiduciary duties to the policyholders of Meridian
Mutual. There are no procedures for having only disinterested directors make
those decisions.
Future events that could affect the participation percentages among the
parties include:
o Meridian Mutual's receipt of dividends on MIGI Common Shares it
owns;
o changes in the capital structure or asset values of any of the
parties to the pooling agreement;
o different effective rates of income taxation; or
o other factors which disproportionately affect the surplus of the
companies.
The pooling agreement has no fixed term. It will stay in effect with
regard to any one party until both Meridian Mutual and that party decide to end
the agreement. A vote by MIGI shareholders is not necessary to amend or
terminate the pooling agreement. If the pooling agreement were terminated:
o the terminating party would transfer back to Meridian Mutual the
liabilities ceded by Meridian Mutual plus an equal amount of
assets, and
o Meridian Mutual would transfer back to the terminating party the
liabilities ceded by the terminating party plus an equal amount of
assets.
Terminating the pooling agreement would not affect MIGI's ownership of all the
outstanding common shares of Meridian Security, MC Security and ICO.
<PAGE>
The pooling agreement cannot be terminated or the participation
percentages changed unless the Insurance Commissioners of Indiana, Minnesota and
Ohio give their approval. This requirement is for the protection of
policyholders of Meridian Security, MC Security, ICO, MC Mutual and Meridian
Mutual, and not for the protection of MIGI shareholders. MIGI intends for its
insurance subsidiaries to remain in the pooling agreement, absent unforeseen
changes in circumstances.
MIGI Audit Committee: Directors Barnette, Hackett, Humke and Price
Meridian Mutual Audit Committee: Directors Hackett, Humke and Price
MIGI Pooling Agreement Committee: Directors Barnette, Hackett, Humke, Kirr and
Oman
Meridian Mutual Pooling Agreement Committee: Directors Hackett, Humke and
Oman
EXECUTIVE COMPENSATION
The following table shows the compensation paid for the last three
years to MIGI's Chief Executive Officer and the four other most highly
compensated executives serving as MIGI executive officers as of December 31,
1999. Annual compensation includes amounts deferred at the officer's election.
All of MIGI's officers also serve as officers of Meridian Mutual. Meridian
Mutual reimburses MIGI for the services these "Named Executive Officers" perform
solely on behalf of Meridian Mutual.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
Long-Term Compensation
------------------------------
Annual Compensation Awards Payouts
------------------- ------ -------
Other Securities
Annual Underlying All Other
Name and Compen- Options/ LTIP Compen-
Principal Salary Bonus sation SARS Payouts sation
Position Year ($) ($) ($) (1) (#) (2) ($) ($) (3)
-------- ---- --- --- ------- ------- --- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Norma J. Oman 1999 $350,000 $87,500 $233,222 --0-- --0-- $54,643
President and Chief 1998 340,192 --0-- --0-- --0-- --0-- 32,853
Executive Officer 1997 292,116 --0-- --0-- 81,590 --0-- 46,920
Steven R. Hazelbaker 1999 170,000 29,750 --0-- --0-- --0-- 4,800
Vice President 1998 163,762 --0-- --0-- --0-- --0-- 4,312
Chief Financial 1997 138,669 --0-- --0-- 19,333 --0-- 4,160
Officer and Treasurer
J. Mark McKinzie 1999 148,698 26,250 --0-- --0-- --0-- 4,299
Vice President 1998 148,577 --0-- --0-- --0-- --0-- 4,286
Corporate Secretary and 1997 130,654 --0-- --0-- 17,839 --0-- 3,920
General Counsel
Timothy J. Hanrahan 1999 150,000 26,250 19,093 --0-- --0-- 9,138
Senior Vice President 1998 140,962 --0-- --0-- --0-- --0-- 6,192
1997 113,054 --0-- --0-- 15,461 --0-- 3,392
Carl W. Buedel 1999 150,000 26,250 15,803 --0-- --0-- 8,673
Senior Vice President 1998 140,962 --0-- --0-- --0-- --0-- 6,082
1997 110,958 --0-- --0-- 14,436 --0-- 3,329
<PAGE>
<FN>
(1) For 1999, Other Annual Compensation reports the taxable portion of exercised
stock options, that being the difference between the fair market value of the
stock on the date of exercise and the option price.
(2) Options to acquire Common Shares granted pursuant to the 1996 Employee
Incentive Stock Plan, as adjusted for ten percent stock dividends distributed in
January 1999 and January 2000.
(3) For 1999, consists of Meridian Mutual's matching contributions of $4,800,
$4,800, $4,299, $4,308, and $4,308 to the Section 401(k) deferred compensation
accounts of Ms. Oman, Mr. Hazelbaker, Mr. McKinzie, Mr. Hanrahan, and Mr.
Buedel, respectively; and accruals under the Supplemental Retirement Income Plan
of $49,843, $4,830, and $4,365 for the accounts of Ms. Oman, Mr. Hanrahan, and
Mr. Buedel, respectively. For 1998, consists of MIGI's matching contributions of
$4,800, $4,312, $4,286, $4,229, and $4,229 to the Section 401(k) deferred
compensation accounts of Ms. Oman, Mr. Hazelbaker, Mr. McKinzie, Mr. Hanrahan,
and Mr. Buedel, respectively; and accruals under the Supplemental Retirement
Income Plan of $28,053, $1,963, and $1,853 for the accounts of Ms. Oman, Mr.
Hanrahan, and Mr. Buedel, respectively. For 1997, consists of MIGI's matching
contributions of $4,750, $4,160, $3,920, $3,392, and $3,329 to the Section
401(k) deferred compensation accounts of Ms. Oman, Mr. Hazelbaker, Mr. McKinzie,
Mr. Hanrahan, and Mr. Buedel, respectively; and an accrual under the
Supplemental Retirement Income Plan of $42,170 for the account of Ms. Oman.
</FN>
</TABLE>
The Board elects officers of MIGI for one-year terms. The officers
serve at the discretion of the Board of Directors. There is no family
relationship between any of the officers of the Company.
Mr. Hanrahan, age 54, was elected a Vice President of MIGI in 1994 and
a Senior Vice President in 1997. He has been a Vice President of Meridian Mutual
and Meridian Security for more than the past five years and a Meridian employee
since 1981.
Mr. Buedel, age 53, was elected a Vice President of MIGI in 1994 and
Senior Vice President in 1997. He has been a Vice President of Meridian Mutual
and Meridian Security since 1990. Mr. Buedel has been a Meridian employee since
1981.
Mr. Hazelbaker, age 44, was elected Chief Financial Officer and
Treasurer of MIGI, Meridian Mutual and Meridian Security in 1994 and a Vice
President of all three companies in 1995. From 1987 until joining the Company in
1994, he was a partner with PricewaterhouseCoopers L.L.P.
Mr. McKinzie, age 46, terminated his employment with the Company in
January 2000. Prior to leaving the Company, he had served as Vice President,
Corporate Secretary, and General Counsel of MIGI, Meridian Mutual, and Meridian
Security for more than the past five years.
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN 1999 AND
1999 YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
The following table shows information about options exercised during
1999 and about unexercised options held at December 31, 1999, by the Named
Executive Officers. The Company does not have any outstanding stock appreciation
rights.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options/SARs at Fiscal Year End(#) Options/SARs at Fiscal Year End($) (3)
Acquired Exercisable(E)/ Exercisable(E)/
Name On Exercise(#)(1) Value Realized($) (2) Unexercisable(U) Unexercisable(U)
---- ----------------- --------------------- ---------------------------------- --------------------------------------
<S> <C> <C> <C> <C>
Norma J.
Oman 30,568 $233,222 141,814 E $ 332,374 E
Steven R.
Hazelbaker --0-- --0-- 41,343 E 111,159 E
J. Mark
McKinzie --0-- --0-- 38,015 E 102,011 E
Timothy J.
Hanrahan 3,850 19,093 28,761 E 70,887 E
Carl W.
Buedel 3,300 15,803 28,561 E 73,332 E
<FN>
(1) Share number reflects adjustment for ten percent stock dividend declared in
December 1999.
(2) Aggregate market value of the Common Shares covered by the option less the
aggregate price paid by the executive.
(3) Amounts reflecting gains on outstanding options are based on the December
31, 1999, closing stock price of $14.00.
</FN>
</TABLE>
Pension Plan
The Company maintains a defined benefit pension plan for eligible
employees. All MIGI employees completing more than 1,000 hours of employment
during a plan year become eligible to participate in the plan. The following
table shows the range of estimated annual benefits payable upon retirement for
graduated levels of average annual earnings and years of service, based on
retirement at age 65 in 2000. The annual earnings cannot exceed the $170,000
maximum compensation limit for purposes of pension calculations.
PENSION PLAN TABLE
Years of Service
-------------------------------------------------------
Remuneration 15 20 25 30 35
------------ -- -- -- -- --
$120,000 $28,209 $37,613 $47,016 $54,419 $65,822
200,000 38,709 51,613 64,516 77,419 90,322
250,000 38,709 51,613 64,516 77,419 90,322
350,000 38,709 51,613 64,516 77,419 90,322
450,000 38,709 51,613 64,516 77,419 90,322
550,000 38,709 51,613 64,516 77,419 90,322
<PAGE>
The plan provides a pension annuity beginning at age 65 of 1.125
percent of the employee's final monthly earnings for each year of credited
service plus .625 percent of the employee's final monthly earnings in excess of
the monthly Social Security covered compensation, if any, for each year of
credited service to a maximum of 35 years. "Final monthly earnings" mean the
employee's average monthly pay during his or her five highest consecutive salary
years out of the last ten. "Credited service" means calendar years during which
the employee completes at least 1,000 hours of employment. The plan also
provides benefits for delayed retirement, early retirement, and death and
disability. Early retirement benefits are available at age 55. The plan has
provisions for optional methods of benefit payment, payments to an employee
leaving after a certain number of years of service, and payments to the
employee's surviving spouse. Benefits listed in the table are computed based on
a straight life annuity and are not subject to any deduction for Social Security
or other offset amounts. Section 415 of the Internal Revenue Code allows an
individual maximum annual benefit of $135,000 for 2000. The Plan covers
compensation consisting of salary and cash bonus. For 1999, covered compensation
for the Named Executive Officers was: Ms. Oman, $437,500; Mr. Hazelbaker,
$199,750; Mr. McKinzie, $174,950; Mr. Hanrahan, $176,250; Mr. Buedel, $176,250.
The estimated credited years of service for the Named Executive
Officers as of January 2000 are listed below:
Estimated Years of
Credited Service
Norma J. Oman.................. 26
Steven R. Hazelbaker........... 6
J. Mark McKinzie............... 11
Carl W. Buedel................. 18
Timothy J. Hanrahan............ 19
Supplemental Retirement Income Plan
The Supplemental Retirement Income Plan covers certain MIGI employees
with more than ten years of credited service. These employees also participate
in the MIGI Pension Plan. The supplemental plan provides benefits in excess of
the limitations imposed by Section 401(a)(17) and Section 415 of the Internal
Revenue Code. The Supplemental Retirement Benefit is payable to an eligible
participant as a straight life annuity over the lifetime of the participant
beginning on the participant's normal retirement date. Early retirement benefits
are available at age 55. The Plan also has provisions for optional joint and
survivor methods of benefit payment. The Benefit will be a monthly amount equal
to the difference between (a) the monthly amount of the MIGI Pension Plan
retirement benefit to which the participant would have been entitled if computed
without the limitations under the Internal Revenue Code and (b) the monthly
amount of the benefit actually payable to the participant under the MIGI Pension
Plan.
The following table lists the Supplemental Retirement Benefit payable
upon retirement for graduated levels of average annual earnings and years of
service for participants under the Plan, based on retirement at age 65 in 2000.
The benefits are not subject to any deduction for Social Security or other
offset amounts. The 1999 compensation covered by the Plan for the Named
Executive Officers is found under the caption, "Pension Plan." Their estimated
years of credited service are also listed under "Pension Plan."
<PAGE>
Supplemental Retirement Income Plan Table
Years of Service
-----------------------------------------------------------
Remuneration 15 20 25 30 35
------------ -- -- -- -- --
$170,000...... $ 2,625 $ 3,500 $ 4,375 $ 5,250 $ 6,125
200,000...... 10,500 14,000 17,500 21,000 24,500
250,000...... 23,625 31,500 39,375 47,250 55,125
300,000...... 36,750 49,000 61,250 73,500 85,750
350,000...... 49,875 66,500 83,125 99,750 116,375
400,000...... 63,000 84,000 105,000 126,000 147,000
450,000...... 76,125 101,500 126,875 152,250 177,625
550,000...... 102,375 136,500 170,625 204,750 238,875
Executive Bonus Compensation Plan
MIGI maintains a bonus compensation plan for key executive employees
("the Plan"). The President selects Plan participants each year, subject to
approval of the Compensation Committees of the MIGI and Meridian Mutual Boards
of Directors. The purpose of the Plan is to establish compensation commensurate
with corporate performance compared to goal. Criteria for determining bonus
payments are established prior to the beginning of each year. The performance
measure for 1999 was the combined pre-tax net income of Meridian Mutual,
Meridian Security and the Meridian Citizens Group. Graduated amounts of cash
bonuses become payable if the combined financial performance of these companies
meets the threshold level of 80 percent of goal or exceeds it up to a maximum of
120 percent of goal. After the close of the year, performance is evaluated
relative to the predetermined goals. Actual bonus awards are determined on the
basis of this evaluation. The participant may elect to receive the bonus in cash
or MIGI stock or a combination of the two.
Compensation Committee Interlocks and Insider Participation
MIGI's Compensation Committee consists of Thomas H. Sams and Ramon L.
Humke, Chairman of the MIGI Board of Directors. The bylaws of the Company
provide that the Chairman of the Board is an officer of the Company, but Mr.
Humke is not an employee of the Company. Mr. Humke also serves on the
Compensation Committee of Meridian Mutual.
Change-in-Control Agreements
MIGI has executed change-in-control severance pay arrangements with the
executives of MIGI and Meridian Mutual. The Termination Benefits Agreement
("Agreement") would provide severance payments and benefits to the executives if
their employment is terminated under certain circumstances within one year
following a change in control. A "change in control" would occur if 50 percent
or more of MIGI's outstanding Common Shares were acquired by an entity other
than the Company, Meridian Mutual or an employee benefit plan of the Company.
There are additional conditions that could result in a change-in-control event.
MIGI may not waive or modify provisions of the Agreement, either before or after
a change in control, without the written consent of the participant. However,
either MIGI or the participant may elect not to extend the Agreement for the
next calendar year by giving written notice.
Under the Agreement, termination for other than "cause" after a change
in control would entitle Ms. Oman, Mr. Hazelbaker, Mr. Hanrahan and Mr. Buedel
to any earned and unpaid bonus and to a lump sum payment equal to 2.99 times
their average annual cash compensation received over the past five years. All
other eligible executives would receive any earned and unpaid bonus and a lump
sum payment equal to two times their average annual cash compensation received
over the past five years.
<PAGE>
Compensation of Directors
MIGI directors who are also salaried employees of the Company receive
no fees for services as directors. MIGI Board members who were not salaried
Company employees and who did not serve on the Board of any affiliates received
an annual retainer of $15,000 in 1999. Of that, $10,000 was paid in cash and
$5,000 in MIGI Common Shares. The Common Shares were valued at their fair market
value two days after MIGI's annual results were released to the public.
Effective April 2000, the annual retainer has been increased to $20,000. Of that
amount, $5,000 is payable in MIGI Common Shares, and the balance is payable in
any combination of cash and MIGI Common Shares at the election of the Director.
Nonemployee MIGI Board members serving on the Board of an affiliate receive a
$1,000 annual retainer from MIGI.
The Chairman of the MIGI Board earned a total stipend of $30,000 in
1999, of which $10,000 was paid in MIGI Common Shares. Effective April 2000, the
Chairman's annual retainer has been increased to $40,000. While $10,000 is
payable in MIGI Common Shares, the Chairman may elect to take the remaining
$30,000 in any combination of cash and MIGI Common Shares. The chairmen of one
or more affiliated Boards or one or more Board committees receive an additional
$1,600 per year for services in those capacities. All directors, aside from
salaried employees, receive per diem meeting fees of $1,000 for each Board or
Committee meeting they attend.
MIGI had a defined benefit pension plan for the benefit of eligible
nonemployee directors of MIGI or Meridian Mutual until the Board terminated the
plan in February 2000. Directors became eligible to participate in the plan
after completing five years of credited service. This meant all calendar years
the nonemployee director attended at least 50 percent of the regular quarterly
meetings. The plan provided a monthly retirement allowance equal to 1.75 percent
of the final earnings for each year of credited service. Final earnings were the
five consecutive years with the highest average annual total fees paid during
the period of directorship. The monthly retirement allowance began on the
director's retirement date and continued monthly for his or her lifetime until
the plan was terminated in February 2000. The plan also provided benefits for
delayed retirement, early retirement or death. Early retirement benefits were
available at age 55. The directors could select an optional method of benefit
payment. When the plan was terminated in 2000, directors received a cash payment
equivalent to the present value of their accrued benefit.
MIGI has an Outside Director Stock Option Plan. An "outside director"
is a director of either MIGI or Meridian Mutual who is not a Meridian employee
on the date of grant. Each Outside Director was granted an option to purchase
1,000 Common Shares in May of each year from 1994 through 1999. Ten percent
stock dividends declared in 1999 and 2000 have increased each of these option
grants to 1,210 shares. Each Outside Director will be granted an option to
purchase 1,210 Common Shares on the date of each Annual Meeting of Shareholders
in the years 2000 through 2003, unless the plan is terminated earlier. The
directors will pay the Company no consideration for being granted the option.
The exercise price per share will equal the fair market value of a Common Share
on the date of grant. Each option will be exercisable beginning one year after
the date of grant. Each option will expire no later than ten years after the
date of grant.
<PAGE>
Exhibit D
September 8, 2000
The Board of Directors
Meridian Insurance Group, Inc.
2955 North Meridian Street
P. O. Box 1980
Indianapolis, IN 46206
Ladies and Gentlemen:
We understand that American Union Insurance Company (the "Offerer") has
commenced a tender offer for all of the outstanding shares of common stock, no
par value per share (the "Company Shares"), of Meridian Insurance Group, Inc.
(the "Company") not owned by the Offerer or its affiliates for $20.00 per share,
net to the seller in cash and without interest thereon, upon the terms and
subject to the conditions set forth in the Offer to Purchase dated August 31,
2000 (the "Offer to Purchase") and the related Letter of Transmittal (which
together with the Offer to Purchase constitutes the "Offer"). The terms of the
Offer are more fully set forth in the Schedule TO (the "Schedule TO") filed by
the Offerer with the Securities and Exchange Commission on August 30, 2000. We
also understand that the Offerer owns approximately 20.2% of the outstanding
Company Shares.
We have been requested by the Board of Directors (the "Board") of the
Company to render our opinion as to the fairness, from a financial point of
view, to the holders (other than the Offerer and its affiliates) of the
outstanding Company Shares (the "Independent Shareholders") of the consideration
offered to such Independent Shareholders in the Offer.
A.G. Edwards & Sons, Inc. ("A.G. Edwards"), as part of its investment
banking business, is regularly engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for estate, corporate or
other purposes. We are not aware of any present or contemplated relationship
between A.G. Edwards and the Company, the Company's directors and officers or
its shareholders, or the Offerer, its directors, officers or shareholders, which
in our opinion would affect our ability to render a fair and independent opinion
in this matter.
In connection with this opinion, we have, among other things:
i.) reviewed the terms and conditions of the Offer and the
Schedule TO;
ii.) reviewed publicly available information concerning the
Company, the Offerer and its affiliates that we believed to be relevant to our
analysis;
<PAGE>
iii.) reviewed certain historical financial statements and operating
information and financial projections for the Company furnished to us by the
Company;
iv.) held discussions with management of the Company regarding the
past and current business operations, assets, financial condition and future
prospects of the Company;
v.) reviewed the industry in which the Company operates;
vi.) reviewed a trading history of the Company Shares and a
comparison of that trading history with those of other companies that we deemed
relevant;
vii.) compared certain financial information for the Company,
including its recent public market valuation and the valuation proposed in the
Offer, with similar information and stock market information for certain other
companies, the securities of which are publicly traded;
viii.) compared certain financial information for the Company,
including its recent public market valuation and the financial terms of the
Offer, with similar information for certain recent transactions deemed relevant;
ix.) compared the premium over recent market prices for the Company
Shares implied in the Offer to premiums in certain recent business combinations
deemed relevant;
x.) reviewed a range of valuations of the Company based on
discounted present values of its projected cash flows; and
xi.) completed such other studies and analyses that we considered
appropriate.
In preparing our opinion, A.G. Edwards has assumed and relied upon,
without independent verification, the accuracy and completeness of all financial
and other information publicly available or that was supplied or otherwise made
available to us by the Company. We have not been engaged to, and therefore we
have not, verified the accuracy or completeness of any of such information. A.G.
Edwards has been informed and assumed that the financial projections supplied
to, discussed with or otherwise made available to us reflect the best currently
available estimates and judgments of the management of the Company as to the
expected future financial performance of the Company on a stand-alone basis.
A.G. Edwards has not independently verified such information or assumptions, nor
do we express any opinion with respect thereto. We have not made any independent
valuation or appraisal of the assets or liabilities of the Company, nor have we
been furnished with any such appraisals. A.G. Edwards has relied upon the
assurances of the management of the Company that they are not aware of any facts
that would make such information inaccurate or misleading.
In performing its analyses, A.G. Edwards made numerous assumptions with
respect to the property and casualty insurance industry, the various segments of
the industry in which the Company operates, general business and economic
conditions and government regulations, which are beyond the control of the
Company. The analyses performed by A.G. Edwards are not necessarily indicative
<PAGE>
of actual values or actual future results, which may be significantly more or
less favorable than suggested by such analyses. Such analyses were prepared
solely as part of A.G. Edwards' analysis of the fairness, from a financial point
of view, to the Independent Shareholders of the consideration offered in the
Offer and are being provided to the Board in connection with the delivery of
this opinion.
A.G. Edwards' opinion is necessarily based on economic, market and
other conditions as in effect on, and the information made available to us as
of, the date hereof. Our opinion as expressed herein, in any event, is limited
to the fairness, from a financial point of view, to the Independent Shareholders
of the consideration offered in the Offer.
Based upon and subject to the foregoing, it is our opinion that, as of
the date hereof, the consideration which has been offered pursuant to the Offer
is inadequate, from a financial point of view, to the Independent Shareholders.
We have acted as financial advisor to the Company in connection with
the Offer and will receive a fee for such services. In addition, the Company has
agreed to indemnify us for certain liabilities that may arise out of the
rendering of this opinion and any related activities as the Company's advisor.
We also have performed and may continue to perform various investment banking
services for the Company. In the ordinary course of business, we may actively
trade in the debt and equity securities of the Company for our own account and
for the accounts of our customers and, accordingly, may at any time hold a long
or short position in such securities.
It is understood that this letter is solely for the confidential use of
the Board and the Company's management and, except as required by law, may not
be reproduced, summarized, described, characterized, excerpted from, referred to
or given to any other person for any purpose without our prior written consent
(which will not be unreasonably withheld) except that this opinion may be
included in its entirety and the procedures followed in rendering this opinion
may be summarized (such summary to be reviewed and approved by A.G. Edwards) in
any proxy, tender offer or other materials which may be distributed to the
shareholders of the Company regarding the Offer. This opinion is not intended to
be and does not constitute a recommendation to any shareholder of the Company as
to whether to accept the consideration offered to the Independent Shareholders
in the Offer.
Very truly yours,
A.G. EDWARDS & SONS, INC.
By:
---------------------------------------------
Douglas E. Reynolds
Managing Director- Investment Banking
