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Exhibit (a)(1)(U)
OFFICE OF THE SECRETARY OF STATE
SECURITIES DIVISION
IN THE MATTER OF: CAUSE NO. 00-0208 TO
TENDER OFFER BY MERIDIAN INSURANCE GROUP ACQUISITION
CORPORATION, A WHOLLY OWNED SUBSIDIARY OF AMERICAN
UNION INSURANCE COMPANY, TO ACQUIRE ALL OUTSTANDING
SHARES OF MERIDIAN INSURANCE GROUP, INC.
FINDINGS OF FACT, CONCLUSIONS OF LAW
AND FINAL ORDER
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Background
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On September 25, 2000, this matter came before the Securities Commissioner
for a hearing on the takeover statement filed by Meridian Insurance Acquisition
Corporation, a wholly owned subsidiary of American Union Insurance Company. The
Securities Commissioner, having considered the testimony and exhibits admitted
at the hearing, together with the supporting briefs and proposed findings
submitted by the parties, now enters the following findings of fact, conclusions
of law and final order.
Findings of Fact
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1. Meridian Insurance Group, Inc. hereinafter "Meridian"), is an Indiana
corporation with its principal place of business at 3955 North Meridian
Street, Indianapolis, Indiana 46202-1908.
2. Meridian has substantial assets in the State of Indiana.
3. Meridian has in excess of seventy-five (75) shareholders of its common
stock, which is publicly listed on the New York Stock Exchange under
the symbol MIGI.
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4. American Union Insurance Company (hereinafter "American Union") is
organized in the State of Illinois with a principal place of business
at 303 East Washington Street, Bloomington, Illinois 61701.
5. Meridian Insurance Group Acquisition Corporation (hereinafter "MIGAC")
is an Illinois corporation and a wholly owned subsidiary of American
Union.
6. MIGAC was organized for the sole purpose of acquiring Meridian.
7. Gregory M. Shepard and Tracy M. Shepard are affiliates as defined by
the Indiana Business Takeover Act and are, therefore, parties to this
transaction.
8. On August 30, 2000, MIGAC and American Union commenced a tender offer
for all outstanding shares of Meridian by filing a takeover statement
(SEC Schedule-TO) with the U.S. Securities and Exchange Commission
(hereinafter "SEC") and the Securities Division of the Indiana
Secretary of State's office (hereinafter "Securities Division").
9. Pursuant to Ind. Code (S) 23-2-3.1-7, the Securities Commissioner
issued a Notice of Hearing on September 1, 2000, scheduling the
takeover statement filed by MIGAC and American Union for hearing on
September 25, 2000, within the statutory period.
10. On September 14, 2000, MIGAC and American Union amended their takeover
statement to include, among other changes, the identification of
Gregory M. Shepard and Tracy M. Shepard as offerors.
11. On September 18, 2000, offerors MIGAC, American Union, Gregory M.
Shepard and Tracy M. Shepard (hereinafter "offerors") further amended
and supplemented
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the takeover statement to amend the financial terms of the offer among
other changes./1/
12. On or about September 21, 2000, the Securities Division filed an
Administrative Complaint requesting that a Cease and Desist Order be
issued against MIGAC and American Union, their officers, employees,
and agents ordering them to cease and desist from further violations
of or be ordered to comply with the Indiana Business Takeover Act.
13. On or about September 25, 2000, a hearing was held, testimony
submitted and evidence admitted in this matter. The parties agreed
that the sole purpose of the hearing was to determine, by a
preponderance of the evidence, whether:
[T]he takeover statement fails to provide full and fair disclosure
to the offerees of all material information concerning the takeover
offer...
Ind. Code (S) 23-2-3.1-7(a)(1)/2/
14. Upon the parties' agreement and stipulation, all documents previously
identified and filed as part of the parties' respective witness lists
were admitted into evidence without objection./3/
15. The financial statements of American Union filed as part of the
takeover statement have been prepared on the basis of statutory
accounting principles ("SAP") rather than on the basis of generally
accepted accounting principles
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/1/ The term "takeover statement" hereinafter used in this order refers to the
takeover statement filed on August 30, 2000, along with all amendments thereto.
/2/ The parties agreed that there was no dispute as to the takeover statement's
satisfaction of the requirement specified in Ind. Code (S) 23-2-3.1-7(a)(2) and
that statutory requirement is not in issue here.
/3/ By agreement of the parties, the handwritten notes (beginning "handed to
me...") appearing at the top of Exhibit 6 of Offeree Meridian's First
Supplemental Exhibit List, were stricken from the record.
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("GAAP"). No reconciliation between SAP and GAAP is provided and the 1998
and 1999 American Union financial statements are not audited.
16. Offerors argue that American Union is a privately held property and casualty
insurance company which prepares and files its financial statements with the
Illinois Department of Insurance on the basis of SAP and, pursuant to
Instruction 8 of Item 10 of SEC Schedule TO (17 C.F.R. (S) 240.14d-100 K,
Item 10 Financial Statements, no. 8), is not required to prepare GAAP
financial statements.
17. Instead of providing a reconciliation between GAAP and SAP, offerors provide
a narrative description of what they contend are all material variations
between GAAP and SAP. According to offerors, Instruction 8 to Item 10 of
SEC Schedule TO (17 C.F.R. (S) 240.14d-100 K, Item 10 Financial Statements,
no. 8) permits the use of a narrative description when a reconciliation
between GAAP and SAP is not available or obtainable without unreasonable
cost or expense.
18. Offerors assert that Instruction 7 to Item 10 of Schedule TO of the SEC (17
C.F.R. (S) 240.14d-100 K, Item 10 Financial Statements, no. 7) specifically
permits the use of unaudited financial statements in the case of an offeror
which is not subject to the periodic reporting requirements of the
Securities Exchange Act of 1934 (15 U.S.C. 78) and where audited financial
statements are not available without unreasonable cost or expense.
19. The offerors presented no meaningful evidence regarding the costs or
expenses that would be incurred in providing audited financial statements
and/or a reconciliation between SAP and GAAP as a part of the tender offer
statement.
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20. In regard to the source of funds or other consideration to be used to
finance the takeover, the offerors' takeover statement provides as follows;
"Gregory M. Shepard's net worth immediately prior to the commencement of the
Offer was approximately $56.1 million consisting of assets of $101.6 million
and liabilities of $45.5 million. Gregory M. Shepard's principal assets are
his stock in Parent and the Company and investment real estate. Tracey M.
Shepard's net worth immediately prior to the commencement of the Offer was
approximately $73.8 million consisting of assets of $79 million and
liabilities of $5.2 million. Tracey M. Shepard's principal assets are his
stock in Parent and investment real estate."
21. The takeover statement merely states the net worth of the offerors, Gregory
M. Shepard and Tracey M. Shepard, and that such net worth is comprised
primarily of stock in American Union Insurance Group and investment real
estate that will be used to finance twenty-five percent (25%) of the
transaction, approximately $18.7 million.
22. The takeover statement states that the remaining seventy-five percent (75%)
of the transaction, approximately $56.2 million, will be financed through a
capital contribution from American Union.
23. The assets of the Shepards that consist of capital stock of American Union
and the assets to be used to finance the other seventy-five (75%) stated in
paragraph 22 above are essentially one and the same.
24. The takeover statement does not contain any disclosures regarding the
amounts of the Shepards' net worth constituting illiquid assets and/or the
magnitude of guarantees or contingencies that may negatively affect their
net worth.
25. The assertion in Item 10 of the takeover statement that offerors' principal
assets are "stock in [American Union] and investment real estate" fail to
establish that offerors, in fact, have sufficient net worth and liquidity to
finance the takeover.
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26. Any Finding of Fact more properly construed as a Conclusion of Law shall be
so construed and any Conclusion of Law more properly construed as a Finding
of Fact shall be so construed.
Conclusions of Law
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1. The Securities Commissioner has jurisdiction over the parties and the
subject matter of this action.
2. The intent of the Indiana General Assembly in adopting the Indiana Business
Takeover Act is set forth at Ind. Code (S)(S)23-2-3.1-0.5(a) and (b) which
provide as follows:
(a) The general assembly finds that it is often difficult for corporate
shareholders to obtain sufficient information to make an informed
and timely decision when faced with the questions of accepting or
rejecting a takeover offer. Moreover, there have emerged a number
of practices which have resulted in shareholders of Indiana
corporations losing the benefits of takeover offers because they
lacked the sophistication and ability to secure those benefits.
These practices have included multiple proration pools, two-step
transactions a similar practices, and have resulted in relatively
small shareholders losing both the advantages of the takeover offer
and their equity positions in the corporation.
(b) By enacting this chapter, it is the intent and purpose of the
general assembly to provide for full and fair disclosure of all
material information concerning takeover offers to shareholders of
Indiana corporations, so that the opportunity of each shareholder
to make an informed and well-reasoned investment decision may be
secured. It is also the purpose of the general assembly to protect
shareholders of Indiana corporations from being disadvantaged by
those practices described in subsection (a). Finally, it is the
purpose of the general assembly to provide for adequate disclosure
and that protection in a manner consistent with the Constitutions
of the United States and of Indiana.
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3. Ind. Code (S) 23-2-3.1-9(a) provides that the Indiana Business Takeover Act
shall be administered by the Secretary of State of Indiana by and through
the Securities Commissioner, who may exercise all powers granted to him
under the Indiana Securities Act, Ind. Code (S) 23-2-1.
4. MIGAC, its parent corporation American Union, Gregory Shepard and Tracy
Shepard are offerors under Ind. Code (S) 23-2-3.1-1 (Offeror means a person
who makes or in any way participates in making a takeover offer").
5. Meridian is a target company under Ind. Code (S) 23-2-3.1-1 ("an issuer of
securities which is organized under the laws of the state, has its principal
place of business in this state, and has substantial assets in this
state.").
6. Pursuant to Ind. Code (S) 23-2-3.1-2, "[a] person shall not make a takeover
offer unless the offer is in compliance with sections 3, 4, 5.5, 6.5, 7 and
8 of this chapter."
7. The Securities Commissioner's role in a hearing under Ind. Code
(S) 23-2-3.1-7 is statutorily defined and narrowly circumscribed. Simply
stated, given the evidence presented at the hearing, and the parties' above-
described stipulations, the Securities Commissioner must determine whether
the takeover statement filed by offerors fully and fairly discloses to the
offerees all material information concerning the offer.
8. A takeover statement must provide full and fair disclosure of all material
information. An omitted fact is deemed material only if there is a
substantial likelihood that a reasonable shareholder would consider it
important in deciding how to vote. In essence, there must be a substantial
likelihood that the disclosure
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of the omitted fact would have been viewed by the reasonable shareholder as
having significantly altered the "total mix" of information made available.
TSC Industries, Inc. v. Northway, Inc. 426 U.S. 438, 449 (1976).
9. The takeover offer commenced by offeres is subject to federal law. Pursuant
to Ind. Code (S) 23-2-3.1-5(a) "[i]f the takeover offer is subject to any
federal law, including the Securities Exchange Act of 1934 (15 U.S.C. 78),
the statement must consist of.....document[s] required to be filed with the
Securities and Exchange Commission...."
10. Instruction 4 to Item 10 of SEC Schedule TO (17 C.F.R. (S) 240.14d-100 K,
Item 10 Financial Statements, no. 4) requires that financial statements
provide material disclosures including, but not limited to, the following
"If the offeror in a third-party tender offer is a natural person, and such
person's financial information is material, disclose the net worth of the
offeror. If the offeror's net worth is derived from material amounts of
assets that are not readily marketable or there are material guarantees and
contingencies, disclose the nature and approximate amount of the
individual's net worth that consists of illiquid assets and the magnitude
of any guarantees or contingencies that may negatively affect the natural
person's net worth.
11. Instruction 7 to Item 10 of SEC Schedule TO (17 C.F.R. (S) 240.14d-100 K,
Item 10 Financial Statements, no. 7) provides as follows:
"If the offeror is not subject to periodic reporting requirements of the
Act, the financial statements required by this Item need not be audited if
audited financial statements are not available or obtainable without
unreasonable cost or expense. Make a statement to that effect and the
reasons for their unavailability."
12. Instruction 8 to Item 10 of SEC Schedule TO (17 C.F.R. (S) 240.14d-100 K,
Item 10 Financial Statements, no. 8) provides as follows:
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"If the financial statements required by this Item are prepared on
the basis of a comprehensive body of accounting principles other
than U.S. GAAP, provide a reconciliation to U.S. GAAP in accordance
with Item 17 of Form 20-F ((S)249.220f of this chapter), unless a
reconciliation is unavailable or not obtainable without
unreasonable cost or expense. At a minimum, however, when financial
statements are prepared on a basis other than U.S. GAAP, a
narrative description of all material variations in accounting
principles, practices and methods used in preparing the non-U.S.
GAAP financial statements from those accepted in the U.S. must be
presented."
13. The takeover statement filed by the offerors fails to adequately
disclose the source and amount of funding relied upon by the offerors
to finance the intended takeover and fails to provide adequate
information concerning the financial condition of the offerors.
14. Given the fact that offerors' takeover statement makes clear that the
offerors seek only to purchase an amount of shares that would result
in control of 50.1% of the outstanding shares of Meridian, the
offerors have failed to provide material information concerning the
takeover as follows:
(a) Offerors have failed, without adequate explanation, to provide
a reconciliation of American Union's financial statements,
prepared in accordance with statutory accounting principles
(SAP), such that offerors' disclosure may be considered under
generally accepted accounting principles (GAAP);
(b) Offerors have failed, without adequate explanation, to provide
an auditors' report regarding their SAP based financial
statements;
(c) Offerers have failed to sufficiently describe in Item 10 of
their takeover statement, the source of funds or other
consideration to be used to fund the offer;/4/
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/4/ The SEC recently observed that "[A] bidder's ability to pay for the
securities is a material disclosure item. We believe the disclosure the
security holders currently receive in this area can be improved by
clarifying the "source of funds" item requirement for tender offers and
going-private transactions. As proposed, we are revising [Schedule TO] to
require disclosures of information regarding the specific sources of
financing, and conditions to the financing, and the filing person's ability
to finance the transaction through alternative means if the primary source
of financing should fall through."
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(d) Offerors have failed, without adequate explanation, to include
the required disclosure relative to the amounts of Gregory and
Tracy Shepards' net worth constituting illiquid assets and the
magnitude of guarantees or contingencies that may negatively
affect their net worth; and
(e) Offerers have failed, without adequate explanation, to
affirmatively demonstrate that the above information (items
described in Paragraphs 10(a) through 10(b) above) could not
be prepared and produced absent unreasonable cost or
expense./5/
15. Meridian and the Securities Division have demonstrated, by a
preponderance of the evidence, that the takeover statement fails to
provide for full and fair disclosure of all material information
concerning the takeover offer to the shareholders of Meridian as
required under Ind. Code (S) 23-2-3.1.
16. Ind. Code (S) 23-2-3.1-10(a) provides [w]henever it appears to the
commissioner that any person has engaged or is about to engage in any
act or practice constituting a violation of any provision of this
chapter or any regulation or order adopted under this chapter, the
commissioner may investigate and issue orders and notices, including
ex partc cease and desist orders without notice..."
17. Ind. Code (S) 23-2-3.1-7 provides that if, following a hearing, the
Securities Commissioner finds that the takeover statement fails to
provide full and fair disclosures to the offerees of all material
information concerning the takeover, the Securities Commissioner shall
by order prohibit the purchase of shares tendered
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/5/ The offerors presented no evidence as to the cost which would be necessary
to provide the material information specified here. The conclusory testimony
presented by the offerors' sole witness, Stephen Greenberg, failed to provide
any specific evidence relating to the cost, or the estimated cost, which would
be incurred to provide this information.
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in response to the takeover offer or condition purchase upon changes
of modifications.
18. It would be contrary to the findings and intent of the Indiana General
Assembly as set forth at Ind. Code (S) 23-2-3.1-0.5 of the Indiana
Business Takeover Act to allow the offerors to proceed with their
takeover offer until such time as the takeover statement is modified
or amended to provide for full and fair disclosure to the offerees of
all material information concerning the takeover offer.
19. Unless offerors are prohibited, pursuant to Ind. Code (S) 23-2-3.1-7,
from proceeding with the takeover offer until they correct the
deficiencies in the takeover statement, the shareholders of Meridian
will suffer immediate and irreparable harm.
20. In the case of a takeover offer subject to the approval of the Indiana
Insurance Commissioner, no shares may be tendered or purchased by the
offeror until after approval by both the Securities Commissioner and
the Insurance Commissioner.
21. An appeal may be taken by any offeror, target company, or other party
to this proceeding from any final order of the Securities Commissioner
in accordance with Ind. Code (S) 23-2-3.1-11 and any applicable rules
of court.
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Final Order
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WHEREAS, the Securities Commissioner has considered the testimony and
evidence submitted at the hearing on September 25, 2000, along with the
supporting briefs and proposed findings; and
WHEREAS, the Findings of Fact and Conclusion of Law set forth above are
hereby adopted.
NOW, THEREFORE, IT IS ORDERED that the offerors are hereby prohibited from
proceeding with their takeover offer and purchasing any shares tendered in
response to the takeover offer until such time as they amend or modify their
takeover statement to satisfy the following conditions:
(a) Offerors shall provide a reconciliation of American Union's
financial statements, prepared in accordance with statutory
accounting principles (SAP), such that offerors' disclosure may be
considered under generally accepted accounting principles (GAAP),
or otherwise affirmatively demonstrate that such reconciliation
could not be prepared and produced absent unreasonable cost or
expense;
(b) Offerors shall provide an auditors' report regarding American
Union's SAP based financial statements, or otherwise affirmatively
demonstrate that audited financial statements could not be prepared
or produced absent unreasonable cost or expense;
(c) Offerors shall provide in Item 10 of the takeover statement an
adequate description of the source of the funds and consideration
to be used to finance the takeover offer;
(d) Offerors shall provide the required disclosure relative to the
amount of Gregory and Tracy Shepard's net worth constituting
illiquid assets and the magnitude of guarantees or contingencies
that may negatively affect their net worth; and
IT IS FURTHER ORDERED that the Securities Commissioner shall retain
jurisdiction over this matter for the purpose of conducting any further
proceedings that
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may properly come before the Securities Commissioner including, but not limited
to, any proceedings to determine whether any amendments or modifications to the
takeover statement satisfy the above-stated conditions; and
IT IS FURTHER ORDERED that even in the event that the offerors are able to
satisfy the above-stated conditions, they shall not purchase any shares tendered
in connection with the takeover offer until the necessary approval of the
takeover offer is obtained from the Indiana Insurance Commissioner; and
IT IS FURTHER ORDERED that the offerors shall bear the expenses, including
costs incurred by the Securities Division, in connection with this proceeding.
ORDERED at Indianapolis, Indiana this 4th day of October, 2000.
[SEAL] SUE ANNE GILROY
INDIANA SECRETARY OF STATE
/s/ Bradley W. Skolnik
BRADLEY W. SKOLNIK
INDIANA SECURITIES COMMISSIONER
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AFFIDAVIT OF SERVICE -- BY FACSIMILE,
FOLLOWED BY U.S. FIRST CLASS MAIL
Judith A. Smith, Enforcement CoordInator, being duty sworn, states that she
served the attached and foregoing FINDINGS OF FACT, CONCLUSIONS OF LAW AND FINAL
ORDER, upon. all Counsel of Record, by Facsimile at the following numbers:
Bryce H. Bennett, Jr.
Raymond T. Seach 686-8027
Arthur P. Kalleres,
Stephen J. Hackman,
Mark Barnes
A. James Chareq 592-4666
and followed by Regular U.S. First Class Mail, Postage Prepaid, addressed as
follows:
Bryce H. Bennett, Jr.
Raymond T. Seach
RILEY BENNETT & EGLOFF, LLP
One American Square, Box 82035
Indianapolis, IN 46282
Arthur P. Kalleres; Stephen J. Hackman,
Mark Barnes; and A. James Chareq
ICE MILLER
One American Square, Box 82001
Indianapolis, IN 46282
on this 4th day of October, 2000.
A copy was also hand-delivered to Kathleen Guymon Blackham and Panick J.
Sanders of the Indiana Securities Division.
/s/ Judith A. Smith
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Afflant
