<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 24, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CITATION INSURANCE GROUP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CALIFORNIA 6331 94-2723335
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
</TABLE>
ONE ALMADEN BOULEVARD, SUITE 300
SAN JOSE, CALIFORNIA 95113-2213
(408) 292-0222
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DONALD HENDERSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CITATION INSURANCE GROUP
ONE ALMADEN BOULEVARD, SUITE 300
SAN JOSE, CALIFORNIA 95113-2213
(408) 292-0222
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
<TABLE>
<S> <C>
LAWRENCE CALOF, ESQ. REBECCA K. SCHMITT, ESQ.
GREGORY T. DAVIDSON, ESQ. CHRISTOPHER P. BIFONE, ESQ.
GIBSON, DUNN & CRUTCHER GRAY CARY WARE & FREIDENRICH
ONE MONTGOMERY STREET, 26TH FLOOR 4365 EXECUTIVE DRIVE, SUITE 1600
SAN FRANCISCO, CALIFORNIA 94104 SAN DIEGO, CALIFORNIA 92121
(415) 393-8200 (619) 677-1400
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable following the effective date of the Registration
Statement
If the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities act of
1933, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
PROPOSED PROPOSED
TITLE OF EACH CLASS AMOUNT MAXIMUM MAXIMUM AMOUNT OF
OF SECURITIES BEING OFFERING PRICE AGGREGATE REGISTRATION
BEING REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE(1)
- -------------------------------------------------------------------------------------------------
Common Stock(2).............. 35,018,522 Shares $24.375 $141,542,701 $48,068
- -------------------------------------------------------------------------------------------------
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</TABLE>
(1) The Registration fee has been calculated in accordance with Section (f)(1)
of Rule 457 based upon the market value of the securities to be received by
Citation in the Merger. On June 19, 1996, there were 5,718,897 shares of
PICO Class A Common Stock outstanding (including shares issuable upon
exercise of outstanding options) and the average of the high and low prices
of such stock on the Nasdaq National Market was $24.375, resulting in an
aggregate value of $139,398,110.
(2) Each share of Common Stock includes a right to purchase one-hundredth of a
share of Series A Junior Participating Cumulative Preferred Stock pursuant
to a rights agreement between the registrant and Bank of America, NT & SA,
as Rights Agent.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
CITATION INSURANCE GROUP
------------------------
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
SHOWING LOCATIONS IN THE PROSPECTUS OF THE INFORMATION
REQUIRED BY PART 1 OF FORM S-4
<TABLE>
<CAPTION>
FORM S-4 CAPTION CAPTION IN PROSPECTUS
------------------------------------------ --------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of
Prospectus.............................. Forepart of Registration Statement; Cross-
Reference Sheet; Outside Front Cover Page.
2. Inside Front and Outside Back Cover Pages
of Prospectus........................... Inside Front Cover Page; Available
Information.
3. Risk Factors, Ratio of Earnings to Fixed
Charges, and Other Information.......... Summary; Risk Factors; Selected Consolidated
Financial Data of Citation.
4. Terms of the Transaction.................. Summary; Introduction; The Shareholder
Meetings; The Merger; The Merger
Agreement.
5. Pro Forma Financial Information........... Pro Forma Financial Information.
6. Material Contracts With the Company Being
Acquired................................ The Merger.
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to Be Underwriters...................... Not applicable.
8. Interests of Named Experts and Counsel.... Legal Matters.
9. Disclosure of Commission Position on
Indemnification For Securities Act
Liabilities............................. Not applicable.
10. Information With Respect to S-3
Registrants............................. Not applicable.
11. Incorporation of Certain Information by
Reference............................... Not applicable.
12. Information With Respect to S-2 or S-3
Registrants............................. Certain Citation Information; Appendices G &
H
13. Incorporation of Certain Information by
Reference............................... Incorporation of Certain Information by
Reference.
14. Information With Respect to Registrants
Other Than S-3 or S-2 Registrations..... Not applicable.
15. Information With Respect to S-3
Companies............................... Not applicable.
16. Information With Respect to S-2 or S-3
Companies............................... Not applicable.
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
FORM S-4 CAPTION CAPTION IN PROSPECTUS
------------------------------------------ --------------------------------------------
<C> <S> <C>
17. Information With Respect To Companies
Other than S-2 or S-3 Companies......... Summary; PICO Business; Selected
Consolidated Financial Data of PICO; PICO
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Experts; Financial Statements.
18. Information if Proxies, Consents or
Authorizations Are to be Solicited...... Summary; Introduction; The Shareholder
Meetings; The Merger; The Merger
Agreement; Dissenters' Rights; Amendments
to Citation's Articles of Incorporation;
Amendments to Citation's Bylaws; Executive
Officers of PICO; Directors of PICO; PICO
Executive Compensation; Principal
Shareholders of Citation; Description of
Citation Capital Stock; Principal
Shareholders of PICO; Description of PICO
Capital Stock; Comparison of Shareholder
Rights.
</TABLE>
<PAGE> 4
CITATION INSURANCE GROUP
ONE ALMADEN BOULEVARD, SUITE 300
SAN JOSE, CALIFORNIA 95113
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
A Special Meeting of Shareholders of Citation Insurance Group, a California
corporation ("Citation") will be held at on at
a.m., Pacific Daylight Savings Time, for the following purposes:
1. To consider and vote upon a proposed merger (the "Merger") of
Citation Holdings, Inc., an Ohio corporation ("Holdings") and a
wholly-owned subsidiary of Citation, with and into Physicians Insurance
Company of Ohio, an Ohio corporation ("PICO"), pursuant to an Agreement and
Plan of Reorganization (the "Merger Agreement"), dated as of May 1, 1996,
by and among PICO, Citation and Holdings. As a result of the Merger, each
outstanding share of the Class A Common Stock of PICO (the "PICO Stock")
(other than shares as to which dissenters' rights are perfected under the
General Corporation Law of Ohio) will be converted into the right to
receive a number of shares of Citation Common Stock equal to the Exchange
Ratio. The Exchange Ratio will be equal to the PICO Share Value divided by
$5.03. The PICO Share Value will be the average of the closing prices of
one share of PICO Stock on the Nasdaq National Market for the 20
consecutive trading days immediately prior to the last to occur of (i) the
approval of the Ohio insurance regulatory authorities or receipt of
confirmation that the Merger is exempt from applicable Ohio insurance laws
and regulations, (ii) the approval of the California insurance regulatory
authorities, (iii) the approval of the transactions contemplated by the
Merger Agreement by the shareholders of Citation and PICO and the lapse of
10 days after the PICO shareholders meeting, and (iv) notification of the
termination of any notice or waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act, except that if the average share value as
described above is less than or equal to $25.20 per share, the PICO Share
Value will be equal to $25.20 and if the average share value is greater
than or equal to $30.80 per share, the PICO Share Value will be equal to
$30.80. As a result of the Merger, the former shareholders of PICO will own
between 80% and 83% of the outstanding Citation Common Stock and will
control the Board of Directors of Citation. Citation has also agreed to
assume all outstanding options to acquire PICO Stock (the "PICO Options"),
with the number of shares of Citation Common Stock to be issued upon
exercise of the PICO Options to be based on the Exchange Ratio. Upon
consummation of the Merger, Citation's name will be changed to "PICO
Holdings, Inc." and the Nasdaq symbol for Citation Common Stock will be
changed to "PICO."
2. If the Merger is approved, to consider and vote upon certain
amendments to Citation's Articles of Incorporation in connection with the
Merger, including an increase in the authorized capitalization of Citation.
3. If the Merger is approved, to consider and vote upon certain
amendments to Citation's Bylaws in connection with the Merger.
4. To transact such other business as may properly be brought before
the meeting and any adjournment thereof.
Shareholders of Citation have the right to dissent from the Merger and
demand appraisal rights for their shares, provided that demands for payment are
duly filed with respect to 5% or more of the outstanding shares of Citation
Common Stock prior to the date of the Special Meeting of Shareholders and such
shareholders comply with the requirements of Chapter 13 of the California
General Corporation Law. See "Dissenters' Rights" in the accompanying Joint
Proxy Statement/Prospectus for a description of the rights of dissenting
<PAGE> 5
shareholders and a discussion of the procedures which must be followed by
Citation shareholders to obtain appraisal of their shares.
Shareholders of record at the close of business on , 1996 will
be entitled to notice of and to vote at the Special Meeting and any adjournment
thereof. Approval of the Merger and the Merger Agreement and the Amendments to
Citation's Articles of Incorporation and Bylaws requires the affirmative vote of
the holders of a majority of the outstanding shares of the Citation Common
Stock.
By Order of the Board of Directors,
J. PHILIP DINAPOLI
Chairman of the Board
Dated: , 1996
TO ASSURE YOUR REPRESENTATION AT THE MEETING, WHETHER OR NOT YOU PLAN TO ATTEND,
PLEASE VOTE, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED
ENVELOPE. THE GIVING OF A PROXY WILL NOT AFFECT YOUR RIGHT TO REVOKE SUCH PROXY
BY APPROPRIATE WRITTEN NOTICE OR BY VOTING IN PERSON AT THE MEETING. PLEASE NOTE
THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER NOMINEE AND
YOU WISH TO VOTE AT THE MEETING, YOU MUST BRING TO THE MEETING A LETTER FROM THE
BROKER, BANK OR OTHER NOMINEE CONFIRMING YOUR BENEFICIAL OWNERSHIP OF THE SHARES
AND YOU MUST OBTAIN FROM THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME.
<PAGE> 6
PHYSICIANS INSURANCE COMPANY OF OHIO
13515 YARMOUTH DRIVE, N.W.
PICKERINGTON, OHIO 43147
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
A Special Meeting of Shareholders of Physicians Insurance Company of Ohio,
an Ohio corporation ("PICO"), will be held at PICO's executive offices at 13515
Yarmouth Drive, N.W., Pickerington, Ohio on , , 1996 at
10:00 a.m., Eastern Daylight Savings Time, for the following purposes:
1. To consider and vote upon a proposed merger (the "Merger") of
Citation Holdings, Inc., an Ohio corporation ("Holdings") and a
wholly-owned subsidiary of Citation Insurance Group, a California
corporation ("Citation"), with and into PICO pursuant to an Agreement and
Plan of Reorganization (the "Merger Agreement"), dated as of May 1, 1996,
by and among PICO, Citation and Holdings. As a result of the Merger, each
outstanding share of the Class A Common Stock of PICO (the "PICO Stock")
(other than shares as to which dissenters' rights are perfected under the
General Corporation Law of Ohio) will be converted into the right to
receive a number of shares of Citation Common Stock equal to the Exchange
Ratio. The Exchange Ratio will be equal to the PICO Share Value divided by
$5.03. The PICO Share Value will be the average of the closing prices of
one share of PICO Stock on the Nasdaq National Market for the 20
consecutive trading days immediately prior to the last to occur of (i) the
approval of the Ohio insurance regulatory authorities or receipt of
confirmation that the Merger is exempt from applicable Ohio insurance laws
and regulations, (ii) the approval of the California insurance regulatory
authorities, (iii) the approval of the transactions contemplated by the
Merger Agreement by the shareholders of Citation and PICO and the lapse of
10 days after the PICO shareholders meeting, and (iv) notification of the
termination of any notice or waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act, except that if the average share value as
described above is less than or equal to $25.20 per share, the PICO Share
Value will be equal to $25.20 and if the average share value is greater
than or equal to $30.80 per share, the PICO Share Value will be equal to
$30.80. As a result of the Merger the former shareholders of PICO will own
between 80% and 83% of the outstanding Citation Common Stock and will
control the Board of Directors of Citation. Citation has also agreed to
assume all outstanding options to acquire PICO Stock (the "PICO Options"),
with the number of shares of Citation Common Stock to be issued upon
exercise of the PICO Options to be based on the Exchange Ratio. Upon
consummation of the Merger, Citation's name will be changed to "PICO
Holdings, Inc." and the Nasdaq symbol for Citation Common Stock will be
changed to "PICO." The Merger is more fully described in, and the Merger
Agreement and Plan of Reorganization is attached in its entirety to, the
accompanying Joint Proxy Statement/Prospectus.
2. To transact such other business as may properly be brought before
the meeting and any adjournment thereof.
Shareholders of PICO have the right to dissent from the Merger and demand
fair cash value for their shares, provided that the Merger is consummated and
such shareholders comply with the requirements of Section 1701.85 of the General
Corporation Law of Ohio. See "Dissenters' Rights" in the accompanying Joint
Proxy Statement/Prospectus for a description of the rights of dissenting
shareholders and a discussion of the procedures which must be followed by PICO
shareholders to obtain the fair cash value of their shares.
<PAGE> 7
Shareholders of record at the close of business on , 1996 will
be entitled to notice of and to vote at the Special Meeting and any adjournment
thereof. Approval of the Merger and the Merger Agreement requires the
affirmative vote of the holders of a majority of the outstanding shares of the
PICO Stock.
By Order of the Board of Directors,
JOHN R. HART
President and Chief Executive Officer
Dated: , 1996
TO ASSURE YOUR REPRESENTATION AT THE MEETING, WHETHER OR NOT YOU PLAN TO ATTEND,
PLEASE VOTE, SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED
ENVELOPE. THE GIVING OF A PROXY WILL NOT AFFECT YOUR RIGHT TO REVOKE SUCH PROXY
BY APPROPRIATE WRITTEN NOTICE OR BY VOTING IN PERSON AT THE MEETING. PLEASE NOTE
THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER, BANK OR OTHER NOMINEE AND
YOU WISH TO VOTE AT THE MEETING, YOU MUST BRING TO THE MEETING A LETTER FROM THE
BROKER, BANK OR OTHER NOMINEE CONFIRMING YOUR BENEFICIAL OWNERSHIP OF THE SHARES
AND YOU MUST OBTAIN FROM THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME.
<PAGE> 8
CITATION INSURANCE GROUP
AND
PHYSICIANS INSURANCE COMPANY OF OHIO
JOINT PROXY STATEMENT FOR THEIR RESPECTIVE
MEETINGS OF SHAREHOLDERS TO BE HELD ON
[ ], 1996
------------------------
CITATION INSURANCE GROUP
PROSPECTUS
------------------------
This Joint Proxy Statement/Prospectus is being furnished to holders of
Common Stock of Citation Insurance Group, a California corporation ("Citation"),
and to holders of the Class A Common Stock of Physicians Insurance Company of
Ohio, an Ohio corporation ("PICO"), in connection with the solicitation by their
respective Boards of Directors of proxies for use at their special meetings of
shareholders (the "Citation Meeting" and the "PICO Meeting," respectively, and
collectively, the "Shareholder Meetings") and any adjournments or postponements
thereof. The Citation Meeting will be held on , 1996 at a.m.,
Pacific Daylight Savings Time, and the PICO Meeting will be held on ,
1996 at a.m., Eastern Daylight Savings Time. This Joint Proxy
Statement/Prospectus is first being mailed to shareholders of Citation and PICO
on or about , 1996.
At the Shareholder Meetings, shareholders of Citation and PICO will vote
upon a proposal to approve the principal terms of a merger (the "Merger") by
which Citation Holdings, Inc., an Ohio corporation ("Holdings"), a wholly-owned
subsidiary of Citation, will merge with and into PICO pursuant to an Agreement
and Plan of Reorganization (the "Merger Agreement"), dated as of May 1, 1996, by
and among PICO, Citation and Holdings. As a result of the Merger, each
outstanding share of the Class A Common Stock of PICO (the "PICO Stock") (other
than shares as to which dissenters' rights are perfected under the General
Corporation Law of Ohio) will be converted into the right to receive a number of
shares of Citation Common Stock equal to the Exchange Ratio. The Exchange Ratio
will be equal to the PICO Share Value divided by $5.03. The PICO Share Value is
the average of the closing prices of one share of the Class A Common Stock of
PICO on the Nasdaq National Market for the 20 consecutive trading days
immediately prior to the last to occur of (i) the approval of the Ohio insurance
regulatory authorities or receipt of confirmation that the Merger is exempt from
applicable Ohio insurance laws and regulations, (ii) the approval of the
California insurance regulatory authorities, (iii) the approval of the
transactions contemplated by the Merger Agreement by the shareholders of
Citation and PICO and the lapse of 10 days after the PICO shareholders meeting,
and (iv) notification of the termination of any notice or waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act, except that if the average
share value as described above is less than or equal to $25.20 per share, the
PICO Share Value will be equal to $25.20 and if the average share value is
greater than or equal to $30.80 per share, the PICO Share Value will be equal to
$30.80. As a result of the Merger, the former shareholders of PICO will own
between 80% and 83% of the outstanding Citation Common Stock and will control
the Board of Directors of Citation. As a result of the Merger, the former
shareholders of PICO will own between 80% and 83% of the outstanding Citation
Common Stock and will control the Board of Directors of Citation. Citation has
also agreed to assume all outstanding options to acquire PICO Stock (the "PICO
Options"), with the number of shares of Citation Common Stock to be issued upon
exercise of the PICO Options to be based on the Exchange Ratio. Upon
consummation of the Merger, Citation's name will be changed to "PICO Holdings,
Inc." and the Nasdaq symbol for Citation Common Stock will be changed to "PICO."
On June 14, 1996, the closing bid price on the Nasdaq National Market was $4.50
per share for the Citation Common Stock and $25.00 per share for the PICO Stock.
Citation shareholders who wish to exercise dissenters' rights must, among other
things, make a demand for the purchase of their shares prior to the Citation
Meeting and vote against the Merger. Citation shareholders will not have
dissenters' rights unless demands with respect to at least 5% of the outstanding
stock of Citation are received prior to the Citation Meeting. PICO shareholders
who wish to exercise dissenters' rights must, among other things, not vote for
approval of the Merger and must make a written demand on PICO on or before
, 1996 [10 days after the PICO meeting]. See "Dissenters' Rights."
In addition, the Citation shareholders will be asked to vote upon and
approve certain amendments to Citation's Articles of Incorporation and Bylaws,
including an increase in the authorized capital stock of Citation.
Citation has filed a Registration Statement on Form S-4 (the "Registration
Statement") under the Securities Act of 1933, as amended, with the Securities
and Exchange Commission (the "SEC") covering the shares of Citation Common Stock
to be issued in connection with the Merger. This Joint Proxy
Statement/Prospectus constitutes the Prospectus of Citation filed as part of the
Registration Statement relating to the approximately 35,018,522 shares of
Citation Common Stock expected to be issued to PICO shareholders in connection
with the Merger. This Prospectus does not cover any re-sales of Citation Common
Stock to be received by PICO's shareholders in the Merger, and no person is
authorized to make any use of this Prospectus in connection with such resale.
SEE "RISK FACTORS" COMMENCING ON PAGE 15 FOR CERTAIN INFORMATION WHICH
SHOULD BE CAREFULLY CONSIDERED BEFORE VOTING UPON THE MATTERS DESCRIBED HEREIN.
THE SHARES OF CITATION COMMON STOCK TO BE ISSUED IN THE MERGER HAVE NOT BEEN
APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION NOR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Joint Proxy Statement/Prospectus is , 1996.
<PAGE> 9
This Joint Proxy Statement/Prospectus does not contain all the information
contained in the Registration Statement filed with the SEC by Citation in
connection with the offering of the shares of Citation Common Stock to be issued
in the Merger, certain parts of which are omitted in accordance with the SEC's
rules and regulations. All information in this Joint Proxy Statement/Prospectus
concerning Citation has been furnished by Citation and all information
concerning PICO has been furnished by PICO.
AVAILABLE INFORMATION
Citation is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the SEC.
Such reports, proxy statements and other information may be inspected and copied
at the SEC's Public Reference Section, Room 1024, 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549, where copies may be obtained at
prescribed rates, as well as at the following regional offices: Northeast
Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048; and
Midwest Regional Office, Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. This material may also be inspected at
the offices of the National Association of Securities Dealers, Inc., 1755 K
Street, N.W., Washington, D.C. 20006.
No person is authorized to give any information or to make any
representations other than those contained or incorporated by reference in this
Joint Proxy Statement/Prospectus, and if given or made, such information or
representation should not be relied upon as having been authorized. This Joint
Proxy Statement/Prospectus does not constitute an offer to sell, or a
solicitation of an offer to purchase, the securities offered by this Joint Proxy
Statement/Prospectus, or the solicitation of a proxy, in any jurisdiction to or
from any person to whom or from whom it is unlawful to make such offer,
solicitation of an offer or proxy solicitation in such jurisdiction. Neither the
delivery of this Joint Proxy Statement/Prospectus nor any sale made hereunder
shall, under any circumstance, create any implication that there has been no
change in the affairs of Citation or PICO since the date hereof or that the
information in this Joint Proxy Statement/Prospectus or in the documents
incorporated by reference herein is correct as of any time subsequent to the
dates thereof. If any material change occurs during the period in which this
Joint Proxy Statement/Prospectus is required to be delivered, this Joint Proxy
Statement/Prospectus will be amended and supplemented accordingly.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed with the SEC by Citation are incorporated in
this Joint Proxy Statement/Prospectus by reference:
1. Proxy Statement filed with the SEC on May 2, 1996.
2. Annual Report on Form 10-K for the fiscal year ended December 31,
1995 filed pursuant to Section 13(a) or 15(d) of the Exchange Act (the
"Citation 10-K"), a copy of which is attached hereto as Appendix G.
3. Quarterly Report on Form 10-Q for the quarter ended March 31, 1996
filed pursuant to Section 13(a) or 15(d) of the Exchange Act (the "Citation
10-Q"), a copy of which is attached hereto as Appendix H.
4. All other reports filed by Citation pursuant to Section 13(a) or
15(d) of the Exchange Act since the end of the fiscal year ended December
31, 1995.
5. The description of the Citation Common Stock contained in the
Registration Statement of Citation on Form 8-A filed pursuant to the
Exchange Act, effective as of March 21, 1991.
6. The description of certain rights attaching to the Citation Common
Stock to purchase Series A Junior Participating Preferred Stock contained
in the Registration Statement of Citation on Form 8-A filed pursuant to the
Exchange Act, effective as of July 18, 1991.
2
<PAGE> 10
All reports and other documents filed by Citation after the date of this
Joint Proxy Statement/Prospectus pursuant to Sections 13(a), 13(c), 14 or 15(d)
of the Exchange Act and prior to , 1996 [[shareholder meeting date]]
shall be deemed to be incorporated by reference herein and to be a part hereof.
Statements contained in this Joint Proxy Statement/Prospectus as to the
contents of any contract or document are not necessarily complete and in each
instance such statements are qualified in their entirety by reference to the
copy of such contract or other document filed as an exhibit to the Registration
Statement or incorporated by reference therein. Any statement contained in a
document incorporated or deemed to be incorporated in this Joint Proxy
Statement/Prospectus by reference shall be deemed to be modified or superseded
for the purpose of this Joint Proxy Statement/Prospectus to the extent that a
statement contained in this Joint Proxy Statement/Prospectus or in any other
subsequently filed document which also is or is deemed to be incorporated in
this Joint Proxy Statement/Prospectus by reference modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Joint Proxy
Statement/Prospectus.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE
AVAILABLE UPON REQUEST FROM CITATION, ONE ALMADEN BOULEVARD, SUITE 300, SAN
JOSE, CALIFORNIA 95113, ATTENTION: CORPORATE SECRETARY. IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY ,
1996.
"Survivor Key" with stylized dove is a registered service mark of a
subsidiary of PICO.
All dollar amounts included in this Joint Proxy Statement/Prospectus are in
U.S. dollars unless otherwise indicated.
3
<PAGE> 11
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
AVAILABLE INFORMATION........................... 2
INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE..................................... 2
SUMMARY......................................... 5
The Parties................................... 5
The Shareholder Meetings...................... 6
The Merger.................................... 7
Market Prices................................. 10
Comparative and Pro Forma Per Share Financial
Information................................. 10
Dissenters' Rights............................ 11
Selected Consolidated Financial
Data -- Citation............................ 12
Selected Consolidated Financial
Data -- PICO................................ 14
RISK FACTORS.................................... 15
Risk Factors Applicable to PICO............... 15
Risk Factors Applicable to Citation........... 18
Risk Factors Applicable to Both PICO and
Citation.................................... 19
Risk Factors Applicable to the Merger......... 22
INTRODUCTION.................................... 25
General....................................... 25
Voting and Proxies............................ 25
Proxy Solicitation............................ 26
THE MERGER...................................... 27
General....................................... 27
Merger Consideration.......................... 27
Background and Reasons for the Merger......... 28
Opinion of Citation's Financial Advisor....... 31
Opinion of PICO's Financial Advisor........... 34
Certain Federal Income Tax Consequences....... 38
Certain Rights of TOC and GPG................. 40
Interest of Certain Persons in the
Transactions................................ 41
Board Representation and Management........... 41
Restriction on Transfer of Shares............. 42
Regulatory Requirements....................... 42
THE MERGER AGREEMENT............................ 43
The Merger.................................... 43
Conversion of Shares.......................... 43
Assumption of PICO Options.................... 43
Effective Time................................ 43
Exchange of PICO Certificates for Citation
Certificates................................ 44
Fractional Shares............................. 44
Conditions to Consummation of the Merger...... 44
Termination................................... 46
Expenses...................................... 46
Acquisition Proposals......................... 46
Dissenters' Rights............................ 47
Conduct of Business Pending Merger............ 47
Representations and Warranties................ 48
Amendments and Waivers........................ 48
DISSENTERS' RIGHTS.............................. 49
California Law -- Citation Shareholders....... 49
Ohio Law -- PICO Shareholders................. 51
<CAPTION>
PAGE
-----
<S> <C>
UNAUDITED PRO FORMA COMBINED FINANCIAL
STATEMENTS.................................... 52
COMPARATIVE MARKET PRICE DATA................... 58
AMENDMENTS TO CITATION'S ARTICLES OF
INCORPORATION................................. 59
AMENDMENTS TO CITATION'S BYLAWS................. 61
BUSINESS OF PICO................................ 62
Introduction.................................. 62
Business and Properties of PICO............... 62
Business and Properties of TOC................ 74
Business and Properties of Sequoia............ 78
PICO'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................... 81
Recent Developments........................... 81
Results of Operations -- Years Ended December
31, 1995, 1994 and 1993..................... 84
Liquidity and Capital Resources -- Years Ended
December 31, 1995, 1994 and 1993............ 89
Quarterly Results of Operations -- Quarters
Ended March 31, 1996 and 1995............... 90
Liquidity and Capital Resource -- Quarters
Ended March 31, 1996, 1995 and 1994......... 94
PICO MANAGEMENT................................. 95
PICO EXECUTIVE COMPENSATION..................... 97
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
OF PICO....................................... 99
PRINCIPAL SHAREHOLDERS OF PICO.................. 101
PRINCIPAL SHAREHOLDERS OF CITATION.............. 103
CERTAIN INFORMATION REGARDING CITATION.......... 105
DESCRIPTION OF CITATION CAPITAL
STOCK......................................... 106
COMPARISON OF SHAREHOLDER RIGHTS................ 109
LEGAL MATTERS................................... 115
EXPERTS......................................... 116
OTHER MATTERS................................... 116
GLOSSARY OF SELECTED INSURANCE TERMS............ 117
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...... F-1
Appendix A -- Agreement and Plan of
Reorganization (with Agreement of
Merger)........................... A-1
Appendix B -- Amended and Restated Articles of
Incorporation of Citation..................... B-1
Appendix C -- Amended and Restated Bylaws of
Citation...................................... C-1
Appendix D -- California Corporations Code sec.
1300 et seq. and Ohio Revised Code sec.
1701.85....................................... D-1
Appendix E -- Fairness Opinion of Prudential
Securities, Inc............................... E-1
Appendix F -- Fairness Opinion of Montag &
Joselson...................................... F-1
Appendix G -- Citation 1995 Form 10-K........... G-1
Appendix H -- Citation Form 10-Q for the Quarter
Ended March 31, 1996.......................... H-1
</TABLE>
4
<PAGE> 12
SUMMARY
This Joint Proxy Statement/Prospectus relates to a Special Meeting of
Shareholders (the "Citation Meeting") of Citation Insurance Group ("Citation")
and a Special Meeting of Shareholders (the "PICO Meeting") of Physicians
Insurance Company of Ohio ("PICO"). At the Citation Meeting and the PICO
Meeting, shareholders of Citation and PICO will vote on a proposal to approve
the principal terms of a merger (the "Merger") by which Citation Holdings, Inc.,
an Ohio corporation ("Holdings"), will merge with and into PICO, pursuant to an
Agreement and Plan of Reorganization, dated as of May 1, 1996, by and among
PICO, Citation and Holdings (the "Merger Agreement"). As a result of the Merger,
each outstanding share of Class A Common Stock of PICO ("PICO Stock") (other
than shares as to which dissenters' rights are perfected under the General
Corporation Law of Ohio) will be converted into the right to receive a number of
shares of the Common Stock, $0.001 par value, of Citation ("Citation Common
Stock") equal to the Exchange Ratio. The Exchange Ratio will be equal to the
PICO Share Value divided by $5.03. The PICO Share Value is the average of the
closing prices of one share of the PICO Stock on the Nasdaq National Market for
the 20 consecutive trading days immediately prior to the last to occur (the
"Determination Date") of (i) the approval of the Ohio insurance regulatory
authorities or receipt of confirmation that the Merger is exempt from applicable
Ohio insurance laws and regulations, (ii) the approval of the California
insurance regulatory authorities, (iii) the approval of the transactions
contemplated by the Merger Agreement by the shareholders of Citation, and the
shareholders of PICO and the lapse of 10 days after the PICO shareholders
meeting, and (iv) notification of the termination of any notice or waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act, except that if
the average share value as described above is less than or equal to $25.20 per
share, the PICO Share Value will be equal to $25.20 and if the average share
value is greater than or equal to $30.80 per share, the PICO Share Value will be
equal to $30.80. Upon consummation of the Merger, Citation's name will be
changed to "PICO Holdings, Inc." As a result of the Merger, the former
shareholders of PICO will own between 80% and 83% of the outstanding Citation
Common Stock and will control the Board of Directors of Citation. Citation has
also agreed to assume all outstanding options to acquire PICO Stock (the "PICO
Options"), with the number of shares of Citation Common Stock to be issued upon
exercise of the PICO Options to be based on the Exchange Ratio. The terms and
conditions of the Merger are set forth in the Merger Agreement, a copy of which
is attached hereto as Appendix A.
The following is a brief summary of certain information included elsewhere
in this Joint Proxy Statement/Prospectus. The Summary does not purport to be
complete and is qualified in its entirety by the more detailed information
contained in this Joint Proxy Statement/Prospectus, the appendices, and the
material incorporated by reference, all of which should be carefully reviewed.
Cross-references in this Summary refer to indicated captions or portions of this
Joint Proxy Statement/Prospectus. For ease of reference and to avoid confusion,
the term "Citation" as used herein refers both to Citation Insurance Group prior
to the Merger and to the combined company following the Merger, which will be
renamed "PICO Holdings, Inc."
THE PARTIES
CITATION INSURANCE GROUP
Citation is a holding company principally engaged in writing workers'
compensation and commercial property and casualty insurance through its
wholly-owned subsidiary, Citation Insurance Company ("CIC"), and its indirectly
wholly-owned subsidiary, Citation National Insurance Company ("CNIC").
CIC is currently licensed to write business in Arizona, California,
Colorado, Hawaii, Nevada, New Mexico and Utah and is currently writing business
in Arizona, California, Colorado, Nevada and Utah. CNIC is licensed in
California, but is not currently writing business. CIC is currently rated B-
(Adequate) by A.M. Best Company ("Best") and CNIC is currently rated C
(Marginal). Best's ratings are based upon factors relevant to policyholders
rather than the protection of investors, and are subject to review and change
over time. A "B-" rating is Best's eighth highest rating classification out of
15 ratings and is awarded to insurers
5
<PAGE> 13
which in Best's opinion "have demonstrated adequate overall performance when
compared to the standards established by Best." A "C" rating is Best's eleventh
highest rating classification and is awarded to insurers which in Best's opinion
"have demonstrated marginal overall performance when compared to the standards
established by Best." See "Certain Information Regarding Citation."
Citation was incorporated in 1981 and began operations in 1982. The
principal executive offices of Citation are located at One Almaden Boulevard,
Suite 300, San Jose, California 95113, and its telephone number is (408)
292-0222.
PHYSICIANS INSURANCE COMPANY OF OHIO
PICO, an Ohio licensed insurance corporation, operates primarily as a
diversified investment and insurance company. Its operations include strategic
investing, investment management, life insurance and property and casualty
insurance. Strategic investments in undervalued entities are made utilizing
portfolio assets as well as through PICO's 38.2% ownership of The Ondaatje
Corporation, a Canadian investment banking corporation ("TOC"). Investment
management services are offered to clients throughout the United States through
a wholly-owned subsidiary, Summit Global Management, Inc. ("Summit"). Summit is
a registered investment advisor. PICO's indirectly wholly-owned subsidiary,
American Physicians Life Insurance Company ("APL") offers critical illness
insurance through Survivor Key policies as well as other life and health
insurance products. Sequoia Insurance Company ("Sequoia"), also a wholly-owned
subsidiary of PICO, offers property and casualty insurance in California. PICO
has been licensed as a property and casualty insurer by the Ohio Department of
Insurance ("Ohio Department"), since 1976. PICO is also licensed by the Kentucky
Department of Insurance. Up until 1995, PICO wrote medical professional
liability ("MPL") insurance for physicians, dentists, nurses and other
healthcare professionals. In August 1995, PICO sold its recurring book of MPL
insurance to another MPL insurance company. PICO is running off the loss
reserves on the policies it issued from 1976 to 1995. PICO may be deemed to be
controlled by Guinness Peat Group plc ("GPG"), a strategic investment company
domiciled in London, England. GPG is a publicly held company with its shares
listed on the London, Australia and New Zealand stock exchanges. See "Business
of PICO."
PICO was incorporated in Ohio in 1976. Its executive offices are located at
13515 Yarmouth Drive N.W., Pickerington, Ohio, 43147 and its telephone number at
that location is (614) 864-7100.
THE SHAREHOLDER MEETINGS
At the Citation Meeting and the PICO Meeting (collectively, the
"Shareholder Meetings"), shareholders of Citation and PICO, respectively, will
vote upon a proposal to approve the principal terms of the Merger. In addition,
in connection with the Merger, the holders of Citation Common Stock will vote on
certain amendments to Citation's Articles of Incorporation and Bylaws. The
Citation Meeting will be held on , 1996, at a.m., Pacific
Daylight Savings Time, at . The PICO Meeting will be held on
, 1996, at a.m., Eastern Daylight Savings Time, at the
PICO executive offices at 13515 Yarmouth Drive, N.W., Pickerington, Ohio 43147.
RECORD DATE; SHARES ENTITLED TO VOTE
Holders of record of Citation Common Stock at the close of business on
, 1996 (the "Citation Record Date"), will be entitled to notice of
and to vote at the Citation Meeting. At the close of business on the Citation
Record Date, [6,407,803] shares of Citation Common Stock were issued and
outstanding. Each outstanding share of Citation Common Stock is entitled to one
vote at the Citation Meeting, except for 313,600 shares which are held by a
subsidiary of Citation and which may not be voted.
Holders of record of PICO Stock at the close of business on ,
1996 (the "PICO Record Date"), will be entitled to notice of and to vote at the
PICO Meeting. At the close of business on the PICO Record Date, [5,210,897]
shares of PICO Stock were issued and outstanding. Each outstanding share of PICO
Stock is entitled to one vote at the PICO Meeting. See "Introduction -- Voting
and Proxies."
6
<PAGE> 14
VOTE REQUIRED
The affirmative votes of the holders of a majority of the outstanding
shares of Citation Common Stock and a majority of the outstanding shares of PICO
Stock are required for approval of the Merger Agreement and the Merger. The
affirmative votes of the holders of a majority of the outstanding shares of
Citation Common Stock are required for approval of the amendments to Citation's
Articles of Incorporation and Bylaws. The presence, in person or by proxy, of
the holders of at least a majority of the outstanding shares of Citation Common
Stock and one-third of the outstanding shares of PICO Stock, respectively,
entitled to vote is necessary to constitute a quorum at the Shareholder
Meetings.
On the Citation Record Date, directors and executive officers of Citation
as a group (19 persons) beneficially owned 690,050 shares of Citation Common
Stock entitled to vote at the Citation Meeting or approximately 11.3% of the
total outstanding shares of Citation Common Stock entitled to vote. Citation has
been advised that all of its directors and executive officers intend to vote
shares of Citation Common Stock owned by them in favor of the Merger. See
"Principal Shareholders of Citation." On the PICO Record Date, directors and
executive officers of PICO as a group (10 persons) beneficially owned 1,263,606
shares of PICO Stock or approximately 24.24% of the total outstanding shares of
PICO Stock. PICO has been advised that all of its directors and executive
officers intend to vote shares of PICO Stock owned by them in favor of the
Merger. In addition, GPG, which owns 23.2% of the outstanding PICO Stock, and
TOC, which owns 16.3% of the outstanding PICO Stock, have advised PICO that they
intend to vote in favor of the Merger. See "Principal Shareholders of PICO."
THE MERGER
GENERAL
At the Effective Time (as defined below), if the Merger is consummated,
each outstanding share of PICO Stock (other than shares as to which dissenters'
rights are perfected under the General Corporation Law of Ohio) will be
converted into the right to receive a number of shares of Citation Common Stock,
equal to the Exchange Ratio. The Exchange Ratio will be equal to the PICO Share
Value divided by $5.03, and the PICO Share Value is the average of the closing
prices of one share of PICO Stock on the Nasdaq National Market for the 20
consecutive trading days ending with the trading day immediately prior to the
Determination Date, except that if the average share value as described above is
less than or equal to $25.20 per share, the PICO Share Value will be equal to
$25.20 and if the average share value is greater than or equal to $30.80 per
share, the PICO Share Value shall be equal to $30.80. As a result of the Merger,
the former shareholders of PICO will own between 80% and 83% of the outstanding
Citation Common Stock and will control the Board of Directors of Citation. The
terms and conditions of the Merger are set forth in the Merger Agreement. See
"The Merger Agreement -- Conversion of Shares." The Merger will become effective
when a Certificate of Merger is duly filed with the Secretary of State of Ohio
(the "Effective Time"). The filing of the Certificate of Merger will be made as
soon as practicable after all conditions set forth in the Merger Agreement have
been satisfied or waived. Upon consummation of the Merger, Citation's name will
be changed to "PICO Holdings, Inc." and the Nasdaq symbol for Citation Common
Stock will be changed to "PICO."
RECOMMENDATIONS OF THE CITATION AND PICO BOARDS OF DIRECTORS
The Citation Board and the PICO Board each unanimously approved the Merger
and the Merger Agreement. The Citation Board and the PICO Board each unanimously
recommends that its respective shareholders vote FOR the proposal to approve and
adopt the Merger and the Merger Agreement. See "The Merger -- Background and
Reasons for the Merger" for a discussion of the factors considered by the
Citation Board and the PICO Board. The Citation Board also unanimously approved
the proposed changes to the Articles of Incorporation and Bylaws, and recommends
that the Citation shareholders vote FOR the proposed amendments.
7
<PAGE> 15
RISK FACTORS
In connection with a determination to approve the Merger and the Merger
Agreement, shareholders should evaluate certain risk factors associated with
PICO, Citation and the operation of the combined company following the Merger.
See "Risk Factors."
FAIRNESS OPINIONS
In connection with the Citation Board's consideration of the Merger
Agreement, Prudential Securities, Inc. ("Prudential") delivered its written
opinion dated April 25, 1996, to the effect that as of such date, based upon
considerations described in the opinion, the Exchange Ratio in the Merger,
within the range of PICO Share Values from $22.50 to $33.50, is fair to Citation
shareholders from a financial point of view. Citation has agreed to pay
Prudential certain fees in connection with the Merger and has agreed to
indemnify Prudential against certain liabilities and expenses in connection with
its services, including certain liabilities and expenses under the Federal
securities laws. See "The Merger -- Opinion of Citation's Financial Advisor."
In connection with the PICO Board's consideration of the Merger Agreement,
Montag & Joselson delivered its written opinion dated June 19, 1996, to the
effect that as of such date, based upon considerations described in the opinion,
the Exchange Ratio in the Merger is fair to PICO shareholders from a financial
point of view. PICO has agreed to pay Montag & Joselson certain fees in
connection with the Merger and has agreed to indemnify Montag & Joselson against
liabilities and expenses in connection with its services. See "The
Merger -- Opinion of PICO's Financial Advisor."
The full text of the written opinions of Prudential and Montag & Joselson
which set forth the assumptions made, matters considered and limitations on the
reviews undertaken, are attached as Appendices E and F hereto, respectively, and
should be read carefully.
EXCHANGE RATIO
In the Merger, each outstanding share of PICO Stock (other than shares as
to which dissenters' rights are perfected under the General Corporation Law of
Ohio) will be converted into the right to receive a number of shares of Citation
Common Stock equal to the Exchange Ratio. The Exchange Ratio will be equal to
the PICO Share Value divided by $5.03. The PICO Share Value is the average of
the closing prices of one share of PICO Stock on the Nasdaq National Market for
the 20 consecutive trading days ending with the trading day immediately prior to
the Determination Date, except that if the average share value as described
above is less than or equal to $25.20 per share, the PICO Share Value will be
equal to $25.20 and if the average share value is greater than or equal to
$30.80 per share, the PICO Share Value shall be equal to $30.80. Based on the
average of the closing prices of the PICO Stock on the Nasdaq National Market
for the 20 consecutive trading days ending with June 14, 1996, equal to $23.78,
the Exchange Ratio would have been 5.0099 and would have resulted in PICO's
shareholders receiving approximately $22.54 per share in market value of
Citation Common Stock for each share of PICO Stock, if the Merger had been
effected on June 14, 1996 (assuming a market value of $4.50 per share of
Citation Common Stock, the closing sale price on June 14, 1996). Because the
Exchange Ratio is based upon the PICO Share Value, if the PICO Share Value
increases, PICO shareholders will receive more shares of Citation Common Stock
for each share of PICO Stock. See "The Merger Agreement -- Conversion of Shares"
and "Comparative Market Price Data." If the Exchange Ratio at the Effective Time
equaled the example set forth above with respect to June 14, 1996, the
shareholders of PICO would own approximately 80.3% of the Citation Common Stock
to be outstanding immediately following the Merger.
If the PICO Share Value is in excess of $33.50, PICO has the right to
terminate the Merger Agreement. Similarly, if the PICO Share Value is less than
$22.50, Citation has the right to terminate the Merger Agreement. Such
termination rights may be exercised at the option of the respective party. The
Merger will not be consummated without re-solicitation of shareholders if the
average share value of the PICO Stock, as described above, is in excess of
$35.00 per share or less than $22.50. See "The Merger -- Exchange Ratio,"
including the table setting forth the number of shares of Citation Common Stock
that may be issued in the Merger based upon various hypothetical Exchange
Ratios.
8
<PAGE> 16
EXCHANGE OF STOCK CERTIFICATES
On or before the Effective Time, Citation will deliver to Huntington
National Bank, which will act as the Exchange Agent (the "Exchange Agent"), the
Citation Common Stock issuable to PICO's shareholders in the Merger. As soon as
practicable after the Effective Time, the Exchange Agent will mail to all former
holders of record of PICO Stock instructions for surrendering their certificates
in exchange for a certificate or certificates representing Citation Common
Stock. PICO SHAREHOLDERS ARE REQUESTED NOT TO SURRENDER THEIR CERTIFICATES FOR
EXCHANGE UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL AND INSTRUCTIONS FROM THE
EXCHANGE AGENT. See "The Merger Agreement -- Exchange of PICO Certificates for
Citation Certificates."
NO SOLICITATION OF TRANSACTIONS
Pursuant to the Merger Agreement, Citation has agreed not to solicit,
encourage, facilitate, agree to or endorse any takeover proposal of a third
party. However, the Board of Directors of Citation is not prohibited from taking
any action which is necessary in the exercise of its fiduciary duties. See "The
Merger Agreement -- Acquisition Proposals."
CONDITIONS TO THE MERGER; TERMINATION
The respective obligations of Citation and PICO to consummate the Merger
are each subject to various conditions including, among others: (a) receipt of
all required regulatory approvals and other consents; (b) requisite shareholder
approval; (c) the holders of PICO Stock exercising dissenters' rights equaling
less than 5% of the outstanding shares of PICO Stock and the holders of Citation
Common Stock filing demands for purchase equaling less than 5% of the
outstanding shares of Citation Common Stock; (d) the truth in all material
respects, as of the Effective Time, of the representations and warranties of
Citation and PICO set forth in the Merger Agreement; and (e) the Effective Time
occurring on or prior to December 31, 1996 or such other date upon which
Citation and PICO may mutually agree. See "The Merger Agreement -- Conditions to
Consummation of the Merger." The Merger Agreement is subject to amendment prior
to the Effective Time under certain circumstances, and is subject to termination
by Citation or PICO either before or after the approval of the Citation and PICO
shareholders upon the occurrence of certain events. See "The Merger
Agreement -- Termination."
REGULATORY MATTERS
The Merger is subject to the approval of the California Department of
Insurance ("California Department"). The filing with the California Department
has been made. The parties believe that the Merger is an exempt transaction
under Ohio insurance laws and regulations. PICO has filed a notice of exemption
with the Ohio Department.
Certain acquisition transactions such as the Merger are reviewed by the
Department of Justice (the "Justice Department") or the Federal Trade Commission
(the "FTC") to determine whether or not they comply with applicable antitrust
laws. Under the provisions of the Hart-Scott-Rodino Antitrust Improvements Act
of 1976 (the "HSR Act"), the Merger may not be consummated until certain
information has been furnished to the Justice Department and the FTC and certain
waiting period requirements under the HSR Act have been satisfied. Citation,
PICO and certain companies in which PICO has an investment have filed Pre-Merger
Notification and Report Forms pursuant to the HSR Act with the Justice
Department and the FTC. See "The Merger -- Conditions to Consummation of
Merger."
FEDERAL INCOME TAX CONSEQUENCES
In general, if the Merger is treated as a "reorganization" for federal
income tax purposes, PICO shareholders will not recognize any gain or loss
realized as a result of the Merger. Gain or loss "realized" is equal to the
difference between (a) the sum of the fair market value of the Citation Common
Stock received by the shareholder, and (b) the shareholder's tax basis in his or
her PICO Stock. A holder's tax basis in Citation Common Stock received generally
will equal the holder's basis in PICO Stock surrendered in the
9
<PAGE> 17
Merger, increased by any gain recognized. If the Merger is not treated as a
reorganization for tax purposes, PICO shareholders generally will recognize as
taxable income any gain or loss realized. See "The Merger -- Certain Federal
Income Tax Consequences" for a more detailed discussion of the federal income
tax consequences of the Merger. PICO and Citation shareholders are urged to
consult their own tax advisors to determine the particular tax consequences to
them of the Merger.
ACCOUNTING TREATMENT
The Merger will be accounted for using the purchase method of accounting
and as a reverse merger since the PICO shareholders will control approximately
80% of the outstanding shares of Citation Common Stock after the Merger. See
"Pro Forma Financial Information -- Note 1."
BOARD REPRESENTATION
Pursuant to the Merger Agreement, immediately following the Effective Time,
the Citation Board will consist of nine persons, two of whom are being
designated by Citation and seven of whom are being designated by PICO. See "The
Merger -- Board Representation and Management." In addition, if approved by
shareholders, Citation will amend its Articles of Incorporation to effect a
reduction in the authorized number of directors to the range of five to nine.
See "Amendments to Citation's Articles of Incorporation."
PICO STOCK OPTIONS
Pursuant to the Merger Agreement, Citation will assume all of the PICO
Stock options that are outstanding and unexercised as of the Effective Time (the
"PICO Options"). The PICO Options will be converted into options to purchase
Citation Common Stock based upon the Exchange Ratio. See "The
Merger -- Assumption of PICO Options" and "PICO Executive Compensation."
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
Certain officers of Citation are entitled to notice of termination of their
employment and/or consultant status if they are terminated within a specified
period after the Merger. In addition, certain executive officer employees of
PICO are entitled to severance pay if they are terminated within a specified
period after the Merger. Outstanding options covering 91,250 shares of Citation
Common Stock will become exercisable upon consummation of the Merger. See "The
Merger -- Interests of Certain Persons in the Transactions" and "PICO
Management -- Certain PICO Relationships and Related Transactions."
GPG and TOC are parties to agreements with PICO which provide each of them
with rights to purchase PICO Stock and registration rights with respect to
shares of PICO Stock held by them. Pursuant to the Merger Agreement, PICO's
obligations under such agreements will be assumed by Citation. See "The
Merger -- Certain Rights of TOC and GPG."
MARKET PRICES
The Citation Common Stock and the PICO Stock are traded on the Nasdaq
National Market under the symbols CITN and PICOA, respectively. On March 1,
1996, the last trading date prior to the joint public announcement by Citation
and PICO of the signing of the letter of intent with respect to the Merger
Agreement, the last reported sale price on the Nasdaq National Market was $4.00
per share for Citation Common Stock and $27.13 per share for PICO Stock. On June
14, 1996, the closing sale price on the Nasdaq National Market was $4.50 per
share for the Citation Common Stock and $25.00 per share for PICO Stock.
Citation has not paid dividends to its shareholders. PICO has not paid cash
dividends to its shareholders since 1985. See "Comparative Market Prices and
Dividends."
COMPARATIVE AND PRO FORMA PER SHARE FINANCIAL INFORMATION
The following table sets forth certain per share information for Citation
on an historical basis and for PICO on an historical basis and a pro forma
equivalent basis at the dates and for the periods indicated, assuming the
Exchange Ratio is 5.0099 and 6.1233 (PICO Share Values of $25.20 and $30.80).
See "The
10
<PAGE> 18
Merger -- Exchange Ratio." The pro forma data is not necessarily indicative of
the actual amounts which would have resulted had the Merger actually been
consummated at the beginning of the periods presented. The data should be read
in conjunction with the historical financial statements and the related notes
thereto of Citation and PICO included elsewhere or incorporated by reference in
this Joint Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
EXCHANGE RATE OF 5.0099 EXCHANGE RATE OF 6.1233
----------------------- -----------------------
HISTORICAL PER (2) (2)
COMMON SHARE PICO PICO
----------------- PRO FORMA EQUIVALENT PRO FORMA EQUIVALENT
CITATION PICO PER SHARE PER SHARE PER SHARE PER SHARE
-------- ------ --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations per common
share
Year ended:
December 31, 1995....................... $ 0.15 $ 0.32 $0.14 $ 0.70 $0.12 $ 0.72
Quarter ended:
March 31, 1996.......................... 0.07 (0.01) 0.02 0.10 0.02 0.12
Dividends per common share(1)...............
Book value per common share as of
March 31, 1996............................ 7.37 14.69 3.46 17.34 2.93 17.96
</TABLE>
- ---------------
(1) Historically no dividends have been paid by Citation or PICO.
(2) Calculated by multiplying pro forma share amounts by the ratio at which PICO
Stock will be exchanged into Citation Common Stock in the Merger.
DISSENTERS' RIGHTS
Under the California General Corporation Law, if the Merger is effected and
proper demands are filed prior to the date of the Citation Meeting with respect
to at least 5% of the outstanding shares of Citation Common Stock, all holders
of shares of Citation Common Stock who file proper demands with Citation will be
entitled to receive the "fair market value" in cash for their shares if they (i)
make a written demand for such treatment which is received by Citation or its
transfer agent no later than the date of the Citation Meeting, (ii) vote their
shares against the Merger, and (iii) submit to Citation or its transfer agent,
within 30 days after notice of approval of the Merger is sent to them, the
certificates representing the shares for which they are demanding payment.
Failure to follow any of these procedures may result in the loss of statutory
dissenters rights.
Any PICO shareholder who does not vote in favor of the Merger and who
delivers a demand therefor to PICO on or before , 1996, shall have the
right under Ohio law to receive the fair cash value of such shareholder's PICO
shares in lieu of the Citation shares which would otherwise be received pursuant
to the Merger. See "Dissenters' Rights."
11
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA -- CITATION
The following selected consolidated financial data of Citation at December
31, 1995, 1994, 1993, 1992 and 1991 and for each of the years in the five-year
period ended December 31, 1995 has been derived from the audited financial
statements or other accounting records of Citation. The selected consolidated
financial data as of, and for the three months ended, March 31, 1996 and 1995
has been derived from unaudited financial statements of Citation. In the opinion
of Citation, all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of Citation's consolidated financial position
and results of operations for such unaudited periods have been included. The
consolidated financial information of Citation for the three months ended March
31, 1996 and 1995 is not necessarily indicative of the results that may be
expected for the year. See Appendices G and H.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31 YEAR ENDED DECEMBER 31
------------------- --------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------- ------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS
Revenues
Net Premiums Written
Workers' Compensation................. $ 4,945 $ 6,278 $22,935 $ 36,879 $53,049 $60,885 $61,916
Property and Casualty................. 10,413 1,822 18,623 36,991 23,875 14,573 8,088
Personal Automobile................... 269 1,797 5,633 9,467 -- -- --
Net Earned Premiums
Workers' Compensation................. 5,201 6,938 24,385 38,704 52,662 61,326 59,249
Property and Casualty................. 6,905 6,196 22,705 34,461 20,921 10,665 6,152
Personal Automobile................... 794 2,818 7,646 6,604 -- -- --
Net Investment Income (excluding capital
gains and losses)..................... 2,212 2,404 9,514 10,375 9,252 8,579 7,315
Net Capital Gains....................... -- 38 2,133 521 1,029 1,472 414
Other Revenues.......................... 40 276 562 326 787 438 320
------- ------- ------- -------- ------- ------- -------
Total Revenues.................... $15,152 $18,670 $66,945 $ 90,991 $84,651 $82,480 $73,450
======= ======= ======= ======== ======= ======= =======
Components of Net Income (Loss)
Workers' Compensation Underwriting
Profit (Loss)......................... $ (81) $ 905 $ 4,492 $ 7,591 $(5,114) $(6,970) $(9,899)
Property and Casualty Underwriting
Profit (Loss)......................... (1,579) (1,618) (6,602) (24,613) (4,935) 850 693
Personal Automobile Underwriting Loss... (38) (2,654) (7,671) (2,105) -- -- --
Loss on Disposition of Subsidiary....... -- -- -- (6,708) -- -- --
Net Investment Income................... 2,212 2,442 11,647 10,896 10,281 10,051 7,729
Other Income (Expenses), Net............ (78) (30) (927) (631) (455) 40 (498)
------- ------- ------- -------- ------- ------- -------
436 (955) 939 (15,570) (223) 3,972 (1,975)
Federal Income Tax Expense (Benefit).... -- -- -- (3,881) (756) 719 --
------- ------- ------- -------- ------- ------- -------
436 (955) 939 (11,689) 533 3,222 (1,975)
Extraordinary Item -- Reduction of
Income Taxes.......................... -- -- -- -- -- 674 --
Cumulative Effect of Change In
Accounting for Income Taxes........... -- -- -- -- 3,500 -- --
------- ------- ------- -------- ------- ------- -------
Net Income (Loss)................. $ 436 $ (955) $ 939 $(11,689) $ 4,033 $ 3,896 $(1,975)
======= ======= ======= ======== ======= ======= =======
Per Share
Income (Loss) Before Items Below........ $ 0.07 $ (0.16) $ 0.15 $ (1.92) $ 0.12 $ 0.78 $ (0.53)
Extraordinary Item...................... -- -- -- 0.16 --
Cumulative Effect of Change in
Accounting for
Income Taxes.......................... -- -- 0.76 -- --
------- ------- ------- -------- ------- ------- -------
Net Income (Loss) Per Share....... $ 0.07 $ (0.16) $ 0.15 $ (1.92) $ 0.88 $ 0.94 $ (0.53)
======= ======= ======= ======== ======= ======= =======
Ratios (GAAP Basis)
Workers' Compensation
Loss and Loss Adjustment Expense
Ratio............................... 71.2% 63.3% 58.4% 49.8% 84.5% 87.8% 91.2%
Underwriting Expense Ratio............ 30.1 21.7 23.5 27.4 24.0 20.9 21.2
Policyholders' Dividend Ratio......... 0.3 2.0 (0.3) 3.2 1.2 2.7 4.3
------- ------- ------- -------- ------- ------- -------
Combined Ratio.................... 101.6% 87.0% 81.6% 80.4% 109.7% 111.4% 116.7%
======= ======= ======= ======== ======= ======= =======
Property and Casualty
Loss and Loss Adjustment Expense
Ratio............................... 85.8% 90.1% 91.9% 135.2% 91.4% 64.7% 62.8%
Underwriting Expense Ratio............ 37.0 36.0 37.2 36.2 32.2 27.3 25.9
------- ------- ------- -------- ------- ------- -------
Combined Ratio.................... 122.8% 126.1% 129.1% 171.4% 123.6% 92.0% 88.7%
======= ======= ======= ======== ======= ======= =======
Personal Automobile
Loss and Loss Adjustment Expense
Ratio............................... 89.6% 152.8% 151.9% 107.0% -- -- --
Underwriting Expense Ratio............ 15.1 41.4 48.4 24.8 -- -- --
------- ------- ------- -------- ------- ------- -------
Combined Ratio.................... 104.7% 194.2% 200.3% 131.8% -- -- --
======= ======= ======= ======== ======= ======= =======
</TABLE>
12
<PAGE> 20
<TABLE>
<CAPTION>
DECEMBER 31
MARCH 31, ------------------------------------------------------------
1996 1995 1994 1993 1992 1991
--------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Total Cash and Investments
-- Carrying Value........................... $130,365 $136,608 $138,316 $178,037 $123,803 $107,182
-- Market Value............................. 130,365 136,608 138,316 178,366 128,357 112,163
Total Assets.................................. 176,634 184,353 190,095 269,403 146,097 128,411
Long Term Debt................................ -- -- -- -- -- 86
Loss and Loss Adjustment Expense Reserves..... 104,019 105,969 118,104 166,485 93,016 80,558
Total Liabilities............................. 131,741 138,250 151,547 209,624 111,820 96,563
Shareholders' Equity.......................... 44,893 46,103 38,548 59,779 34,277 31,848
Book Value Per Share.......................... 7.37 7.60 6.35 9.79 8.63 7.62
Outstanding Shares............................ 6,094 6,069 6,069 6,108 3,971 4,177
</TABLE>
13
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA -- PICO
The selected consolidated financial data presented below as of, and for
PICO's fiscal years ended, December 31, 1995, 1994, 1993, 1992 and 1991 has been
derived from audited consolidated financial statements of PICO. The selected
consolidated financial data as of, and for the three months ended, March 31,
1996 and 1995 has been derived from unaudited financial statements of PICO. In
the opinion of PICO, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of PICO's consolidated financial
position and results of operations for such unaudited periods have been
included. The consolidated financial information of PICO for the three months
ended March 31, 1996 and 1995 is not necessarily indicative of the results that
may be expected for the year. The data set forth below are qualified in their
entirety by, and should be read in conjunction with, "PICO's Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
PICO's Consolidated Financial Statements, the Notes thereto, and the other
financial and statistical information included elsewhere in this Joint Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31 YEAR ENDED DECEMBER 31
---------------------- -------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Revenues
Premium income earned............... $ 4,644 $ 529 $ 4,291 $ 3,922 $ 8,804 $ 8,560 $ 7,436
Net investment income............... 3,914 3,148 14,429 5,865 12,007 5,730 10,303
Other income........................ 6,408 615 6,862 2,056 2,684 2,465 1,197
-------- -------- -------- -------- -------- -------- --------
Total revenues........................ $ 14,966 $ 4,292 $ 25,582 $ 11,843 $ 23,495 $ 16,755 $ 18,936
======== ======== ======== ======== ======== ======== ========
Income (loss) before discontinued
operations and cumulative effect of
changes in accounting principle..... (57 ) 1,543 1,656 2,481 6,113 (662 ) 5,785
Income (loss) from discontinued
operations.......................... 2,028 (409 ) 14,017 16,350 (6,004 ) (6,203 ) (6,653 )
Cumulative effect of change in
accounting principle................ (4,110 )
-------- -------- -------- -------- -------- -------- --------
Net income (loss)..................... $ 1,972 $ 1,134 $ 15,673 $ 14,721 $ 108 $ (6,865 ) $ (869 )
======== ======== ======== ======== ======== ======== ========
WEIGHTED AVERAGE SHARES OUTSTANDING... 5,445,489 5,103,897 5,188,154 4,822,468 3,149,837 3,079,747 3,079,747
PER COMMON SHARE RESULTS
Income (loss) from continuing
operations.......................... $ (0.01 ) $ 0.30 $ 0.32 $ 0.51 $ 1.94 $ (0.21 ) $ 1.88
Income (loss) from discontinued
operations.......................... 0.37 (0.08 ) 2.70 3.39 (1.91 ) (2.02 ) (2.16 )
Income (loss from cumulative effect of
change in accounting principle...... (0.85 )
-------- -------- -------- -------- -------- -------- --------
Net income (loss)..................... $ 0.36 $ 0.22 $ 3.02 $ 3.05 $ 0.03 $ (2.23 ) $ (0.28 )
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31
MARCH 31, -------------------------------------------------------------
1996 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL CONDITION
Assets........................................... $491,039 $509,925 $297,163 $297,887 $295,054 $241,646
Unpaid losses and loss adjustment expenses, net
of discount.................................... 223,010 229,797 180,691 191,735 185,054 133,379
Total liabilities, including minority
interests...................................... 410,594 430,576 261,419 271,780 273,267 212,943
Shareholders' equity............................. 80,446 79,349 35,744 26,107 21,788 28,703
Book value per share............................. 15.46 15.25 7.00 5.84 7.07 9.32
</TABLE>
14
<PAGE> 22
RISK FACTORS
The following are among the factors that should be considered carefully in
evaluating PICO, Citation and the operation of Citation after the Merger.
RISK FACTORS APPLICABLE TO PICO
RECENT CHANGES IN OPERATIONS AND STRATEGIC FOCUS. In 1995, PICO changed
its strategic direction from the operation of an MPL insurance business to
investing in businesses which PICO believes are undervalued or will benefit from
additional capital, restructuring of operations or management or improved
competitiveness through operational efficiencies with existing PICO operations.
Accordingly, in mid-1995, PICO sold all its MPL insurance business and related
liability insurance business, which had been the primary business of PICO since
PICO was formed in 1976. See "Business of PICO -- Business and Properties of
PICO -- History." In addition, in January 1995, PICO reactivated its investment
advisory subsidiary, Summit, and in August 1995 PICO acquired Sequoia and
entered new lines of property and casualty insurance and in September 1995 PICO
purchased 38.2% of TOC, a Canadian corporation active in investment banking,
agricultural services, water rights, and other businesses. Due to PICO's limited
experience in the operation of the businesses of each of these subsidiaries,
which currently constitute a substantial majority of PICO's continuing
operations, there can be no assurance as to the future operating results of PICO
or the recently acquired businesses of PICO.
PICO will continue to make selective investments for the purpose of
enhancing and realizing additional value by means of appropriate levels of
shareholder influence and control. This could involve the restructuring of the
financing or management of the entities in which PICO invests and initiating and
facilitating mergers and acquisitions. This business strategy has only recently
been implemented, however, and it is not reflected in the historical financial
statements, nor are the pro forma financial statements indicative of possible
results of this new business strategy in the future. Shareholders will be
relying on the experience and judgment of PICO's management to locate, select
and develop new acquisition and investment opportunities. There can be no
assurance that sufficient opportunities will be found or that this business
strategy will be successful. Failure to successfully implement this strategy may
negatively impact the business and financial condition and results of operations
of PICO. See "PICO Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Recent Developments -- Strategic Direction of PICO"
and " -- Acquisition Philosophy."
Application of PICO's new strategy in 1995 has resulted in a greater
concentration of equity investments held by PICO. Market values of equity
securities are subject to changes in the stock market, which may cause PICO's
shareholders' equity to fluctuate from period to period. At times, PICO may come
to hold securities of companies for which no market exists or which may be
subject to restrictions on resale. As a result, periodically, a portion of
PICO's assets may not be liquid.
DEPENDENCE ON KEY PERSONNEL. PICO has several key executive officers, the
loss of whom could have a significant adverse effect on PICO. In particular,
Ronald Langley, PICO's Chairman, and John R. Hart, PICO's President and Chief
Executive Officer, play key roles in PICO's investment decisions. Although
neither officer is party to an employment agreement, they have entered into
consulting agreements with PICO and various of its subsidiaries. See "Certain
Relationships and Related Transactions of PICO." Messrs. Langley and Hart are
key to the implementation of PICO's new strategic focus, and the ability of PICO
to implement its current strategy is dependent on its ability to retain the
services of Messrs. Langley and Hart.
CONTINUING MPL LIABILITY. In August 1995, PICO sold its and the
Professionals Insurance Company's ("PRO's") MPL insurance business and related
liability insurance business. PICO and PRO retained all assets and liabilities
related to insurance policies written prior to the sale of the recurring book of
business. PICO and PRO will continue to administer claims and loss adjustment
expenses under MPL insurance policies issued or renewed prior to July 16, 1995.
See "PICO Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recent Developments -- Sale of Medical Professional
Liability Business" and "Business of PICO -- Business and Properties of
PICO -- Reinsurance."
15
<PAGE> 23
Cash flow needed to fund the day-to-day operations and the payment of
claims and claims expenses will be provided by investment income, lease income,
and proceeds from the sale or maturity of securities. PICO and PRO have
established reserves to cover losses and loss adjustment expense ("LAE") on
claims incurred under the MPL policies issued or renewed prior to March 31,
1996. The amounts established and to be established by PICO and PRO for loss and
LAE reserves are estimates of future costs based on various assumptions and, in
accordance with Ohio law, have been discounted (adjusted to reflect the time
value of money). These estimates are based on actual and industry experience and
assumptions and projections as to claims frequency, severity and inflationary
trends and settlement payments. In accordance with Ohio law, PICO and PRO
annually obtain a certification that their respective reserves for losses and
LAE are adequate from an independent actuary. PICO and PRO also obtain a
concurring actuarial opinion. PICO's and PRO's reserves for losses and LAE for
prior years developed favorably in 1994, and these reserves were decreased by
$12.7 million in 1994. Reserves also developed favorably in 1995; however,
accretion of reserve discount exceeded the amount of favorable development and
retroactive reinsurance, resulting in a $3.2 million increase in liabilities for
prior years' claims. As a result of continued favorable claims experience,
reserves for prior years' claims were further reduced in the first quarter of
1996. Management believes that the reserving methods and assumptions are
reasonable and prudent and that PICO's and PRO's reserves for losses and LAE are
adequate. Due to the inherent uncertainties in the reserving process there is a
risk, however, that PICO's and PRO's reserves for losses and LAE could prove to
be inadequate which could result in a decrease in earnings and shareholders'
equity. Adverse reserve development can reduce statutory surplus or otherwise
limit the growth of such surplus. See "Business of PICO -- Business and
Properties of PICO -- Liabilities for Unpaid Loss and Loss Adjustment Expenses."
Under Ohio law, the statute of limitations in MPL cases does not begin to
run until the age of majority, i.e. until the age of eighteen or until the
claimant is deemed to be competent, whichever is later. With regard to PICO's
and PRO's historical book of MPL business, PICO and PRO will have liability
until all claims have been settled and resolved. However, PICO and PRO estimate
that approximately 75% of their respective claim liabilities will be paid out
within five years.
RISKS REGARDING TOC. TOC operates primarily as an international investment
company and in recent years has made a number of investments in South East Asia.
See "Business and Properties of TOC -- History." With PICO's recent investment
in TOC, the strategic direction of TOC is to investigate new business
opportunities in more sophisticated markets, including North America and Europe.
See "Business of PICO -- Business and Properties of TOC -- History" and
" -- Business." Principal risks and uncertainties with respect to TOC include:
- Since its investment in TOC, PICO has installed new officers and
directors who are experienced in international investments. Management is
re-evaluating TOC's current investments in the security and commodities
brokerage business and the food processing business and its focus on
South East Asia. See "Business of PICO -- Business and Properties of
TOC -- History," Therefore, past results attained by TOC's prior
management constitute no assurance and may not be indicative of results
which may be obtained by TOC hereafter. No representation is made as to
what results TOC will or is likely to achieve.
- Shareholders will be relying on the experience and judgment of TOC's new
management to locate, select and develop new acquisition and investment
opportunities and there can be no assurance that sufficient opportunities
will be found.
- The combination of certain key officers and directors, particularly
Ronald Langley and John R. Hart, is particularly important to the future
profitability of TOC. The loss of the services of one or more of these
persons could have a detrimental effect on the operations of TOC. See
"Dependence on Key Personnel."
- At times, TOC may come to hold securities of companies for which no
market exists or which may be subject to restrictions on resale. As a
result, a portion of TOC's assets may not be liquid. See "-- Recent
Changes in Operations and Strategic Focus."
16
<PAGE> 24
- As a result of global diversification investment decisions already made,
TOC's revenues may be adversely affected by economic, political and
governmental conditions in countries where it maintains investments or
operations, such as volatile interest rates or inflation, the imposition
of exchange controls which could restrict or prohibit TOC's ability to
withdraw funds, political instability and fluctuations in currency
exchange rates.
RISKS REGARDING SEQUOIA. On a going forward basis, Sequoia will continue
to write property and casualty insurance in California. Sequoia's insurance
operations, excluding investment and other income, have produced significant
losses for at least the past five years. Although PICO has initiated steps to
improve Sequoia's profitability, which include disposing of its more
unprofitable classes of business, initiating expense savings measures, reducing
its reinsurance costs and restructuring its investment portfolio to allow
improved investment returns, there can be no assurance that Sequoia's new
management and operating strategies will be successful in producing a profit
from insurance operations.
Sequoia management, which is experienced in underwriting property and
casualty insurance in California, together with its independent actuary,
establishes reserves for its reported losses, its estimated losses on claims
incurred but not reported ("IBNR") and any related loss expenses. For reported
losses, Sequoia first establishes liabilities when it receives notice of a
claim. It establishes reserves for IBNR claims based upon estimates developed
pursuant to several methods, using its own claims experience as well as industry
claims and reserve data. In general, these methods involve estimating ultimate
losses using reported loss data and loss development patterns.
Loss reserves are established by management using historical experience and
by making various assumptions and judgments about the ultimate amount to be
paid. These estimates are revised periodically. Management believes that
Sequoia's reserving methods and assumptions are reasonable and prudent and that
Sequoia's reserves for losses and LAE are adequate. As required by California
law, Sequoia annually obtains a certification from an independent actuary that
its reserves for losses and LAE are adequate. Due to the inherent uncertainty in
estimating reserves for losses and LAE however, there can be no assurance that
the reserves will prove to be adequate to cover ultimate loss development.
PICO's profitability and financial condition could be adversely affected to the
extent that Sequoia's estimated reserves are insufficient to cover losses and
LAE.
PICO's investment in Sequoia resulted in the recording of goodwill on
Sequoia's books which will be amortized into the income statement over time.
There can be no assurance that PICO will be able to realize this value in any
eventual sale of Sequoia. This could cause the entire remaining goodwill asset
to be completely written off at some time in the future.
PICO believes that should Sequoia fail to maintain its current B++ (Very
Good) rating by Best, it would possibly have a material adverse effect on
Sequoia's ability to write new insurance policies as well as potentially reduce
its ability to increase market share. There can be no assurance that Sequoia
will continue to maintain its B++ (Very Good) rating with Best in the future.
See "-- A.M. Best Insurance Company Ratings" and "Business of PICO -- Business
and Properties of Sequoia."
RISKS REGARDING SUMMIT GLOBAL MANAGEMENT. Summit is registered as an
investment adviser in California, Kansas, Louisiana, Oregon, Virginia and
Wisconsin, as well as with the Securities and Exchange Commission (the "SEC").
See "Business and Properties of PICO -- History" and " -- Marketing." Summit
must file periodic reports with the SEC and must be available for periodic
examination by the SEC. Summit is subject to Section 206 of the Investment
Advisers Act of 1940, which prohibits material misrepresentations and fraudulent
practices in connection with the rendering of investment advice, and to the
general prohibitions of Section 208 of such Act. If Summit were to violate the
Investment Advisers Act prohibitions, it would risk criminal prosecution, SEC
injunctive actions and the imposition of sanctions ranging from censure to
revocation of registration in an administrative hearing.
The investment adviser business is highly competitive. There are several
thousand investment advisers registered in the states in which Summit does
business, many of which are larger and have greater financial
17
<PAGE> 25
resources than Summit. There can be no assurance that Summit will be able to
compete effectively in the markets that it serves. See "Business of
PICO -- Business and Properties of PICO."
GLOBAL DIVERSIFICATION OF INVESTMENTS. As a result of global
diversification investment decisions already made and which may be made in the
future, particularly with regard to TOC, PICO's revenues may be adversely
affected by economic, political and governmental conditions in countries where
it maintains investments or operations, such as volatile interest rates or
inflation, the imposition of exchange controls which could restrict PICO's
ability to withdraw funds, political instability and fluctuations in currency
exchange rates.
RISK FACTORS APPLICABLE TO CITATION
FLUCTUATIONS IN HISTORICAL OPERATING RESULTS; DEFERRED TAX
ASSET. Citation's operating results over the past five years have been
volatile. See "Selected Consolidated Financial Data -- Citation." In 1991 and
1994, Citation incurred a loss of $2.0 million and $11.7 million, respectively,
as compared to net income of $3.9 million, $4.0 million and $0.9 million in
1992, 1993 and 1995, respectively. For the three-month period ended March 31,
1996, Citation recorded net income of $0.4 million, as compared to a loss of
$1.0 million for the same period in 1995. At March 31, 1996, Citation had a
deferred tax asset of approximately $11.9 million. Realization of the recorded
deferred tax asset is dependent on Citation's ability to generate sufficient
pre-tax and taxable income to offset the available losses during the reversal
period. Based on the expiration of existing net operating losses, Citation will
have to generate an average of approximately $1.35 million of taxable income in
each year from 1996 forward to fully utilize the available losses, after giving
effect to the valuation allowance. If Citation does not generate sufficient
income it may have to write off all or a portion of the deferred tax asset. See
"Citation's 10-K -- Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Citation's 10-Q -- Management's Discussion and
Analysis of Financial Condition and Results of Operations."
VOLATILITY OF RESERVES. During the past several years, the levels of the
reserves for Citation's insurance subsidiaries have been very volatile. As a
result of its claims experience and the level of existing reserves with respect
to its property and casualty insurance business, Citation has had to
significantly increase these reserves in two out of the past four years. There
can be no assurance that significant increases with respect to the reserves for
the property and casualty or workers' compensation business will not be
necessary in the future, that the level of reserves for Citation's insurance
subsidiaries will not be volatile in the future or that any such increases or
volatility will not have an adverse effect on Citation's operating results and
financial condition.
FACTORS AFFECTING THE WORKERS' COMPENSATION BUSINESS. CIC presently sells
workers' compensation insurance, and is subject to the workers' compensation
laws of California and the volatile economic and regulatory environment of the
workers' compensation industry. On a pro forma consolidated basis, 29% of
consolidated net premiums earned in 1995 would have been attributable to
workers' compensation. Beginning in 1991, the California workers' compensation
industry was materially affected by a number of factors. These included a
dramatic increase in the number of disability claims involving stress, primarily
in the Los Angeles area, which appear to have arisen from increased layoffs due
to the effect of the continuing California recession, an increase in potentially
fraudulent claim activity and abuse of the workers' compensation system and an
increase in utilization of the system as a result of higher benefit levels
provided under the Worker's Compensation Reform Act of 1989.
In July 1993, the California legislature enacted a series of seven bills to
significantly change the California workers' compensation system (the "1993
Reforms"). Although the 1993 Reforms contain provisions designed to reduce
certain claims expenses, the 1993 Reforms also increased costs as a result of
benefit increases commencing July 1, 1994 and continuing through July 1, 1996.
In addition, the 1993 Reforms reduced revenues through an immediate reduction in
minimum rates which were further decreased in 1994. In January 1995,
California's minimum rate law was replaced by a competitive rating system. Under
minimum rate laws, insurers could not charge a premium which was less than the
published minimum rate and, therefore competed primarily on the basis of service
to policyholders, the level of agent commissions and policyholders' dividends.
In the open rating environment, each California workers' compensation insurer
must
18
<PAGE> 26
determine and file with the California Department the premiums and rating plans
that it will use. The California Department can only disapprove a filed rate if
it determines that the rate will threaten the insurer's solvency or will lead to
a monopoly which is defined to be 20% or more of the total California workers'
compensation market. The new open rating environment brings uncertainties to
premium revenues and continued operating profits due to increased price
competition and the risk of incurring adverse loss experience over a smaller
premium base.
RISK FACTORS APPLICABLE TO BOTH PICO AND CITATION
INSURANCE REGULATION. PICO and Citation and each of their respective
insurance subsidiaries are subject to extensive state regulatory oversight in
the jurisdictions in which they are organized and in the jurisdictions in which
they do business. See "Citation 10-K -- Business -- Regulation" and "Business of
PICO -- Business and Properties of PICO -- Regulation." Insurance companies are
required to file detailed annual reports with the supervisory agencies in each
of the states in which they do business, including the Ohio Department and the
California Department, and their business and accounts are subject to
examination by such agencies at any time. The primary purpose of such regulation
and supervision is to provide safeguards for policyholders and injured workers
and MPL claimants rather than to protect the interests of shareholders.
Typically, state regulations extend to such matters as licensing agents and
insurance companies, restricting the types or quality of investments, requiring
triennial financial examinations and market conduct surveys of insurance
companies, regulating premium rates, forms and advertising, determining minimum
reserve and deposit requirements, regulating aspects of a company's relationship
with its agents, restricting use of some underwriting criteria, limiting the
grounds for cancellation or nonrenewal of policies, solicitation and replacement
practices, policyholders' dividends, and specifying what might constitute unfair
practices.
Domiciliary insurance departments place certain restrictions on insurance
company investments to protect policyholders and claimants. In general, these
investment statutes place limits on the amounts of investment in any one
company, the percentage owned of any one company and the quality of investments.
In California, Citation's and PICO's insurance subsidiaries each prepare
and transmit extensive filings to the California Department to establish or
modify rates and underwriting rules for each product classification other than
workers' compensation. Rate changes are based, in part, on loss cost statistics
compiled by industry-sponsored rating bureaus, such as the Insurance Services
Office, Inc. ("ISO"), as well as each company's loss and expense experience.
There can be no assurance that the California Department will approve CIC's or
Sequoia's rate or rule filings in full or in part or that approvals will be
received in a timely manner. There can be no assurance that rates, once approved
and in use, will keep pace with claims, claims handling or administrative costs,
which are influenced by many factors (as described below), some of which are not
recognized as allowable and recoverable by the California Department. Future
political initiatives, legislation or regulatory action could lead to an
unfavorable business climate, to restrictions on CIC's and Sequoia's marketing
strategies or to enforced participation in involuntary assigned risk pools, any
of which events could have a material adverse effect on Citation and PICO. See
"Citation 10-K -- Business -- Regulation" and "Business of PICO -- Business and
Properties of PICO -- Regulation."
Recently, the National Association of Insurance Commissioners (the "NAIC")
and state insurance regulators have been examining existing laws and
regulations, with an emphasis on insurance company investment, insolvency issues
and risk-based capital guidelines. From time to time, legislation has also been
introduced in Congress that could result in the federal government assuming some
role in the regulation of the insurance industry. CIC, PICO and their insurance
subsidiaries are also subject to assessment as a result of participation in
various state guarantee associations and similar arrangements.
Beginning in 1994, Citation's insurance subsidiaries and Sequoia became
subject to the provisions of the Risk-Based Capital for Insurers Model Act (the
"Model Act") which has been adopted by the NAIC for the purpose of helping
regulators identify property and casualty insurers that may be in financial
difficulty. The Model Act contains a formula which takes into account asset
risk, credit risk, underwriting risk and all other relevant risks. Under this
formula, each insurer is required to report to regulators using formulas which
measure the quality of its capital and the relationship of its modified capital
base to the level of risk assumed in specific aspects of its operations. The
formula does not address all of the risks associated with the operations of an
insurer. The formula is intended to provide a minimum threshold measure of
capital adequacy by individual
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insurance company and does not purport to compute a target level of capital.
Companies which fall below the threshold will be placed into one of four
categories: Company Action Level, where the insurer must submit a plan of
corrective action; Regulatory Action Level, where the insurer must submit such a
plan and the regulator will issue a corrective order; Authorized Control Level,
which includes the above actions and may include rehabilitation or liquidation;
and Mandatory Control Level, where the regulator must rehabilitate or liquidate
the insurer. There can be no assurance that Sequoia or the insurance
subsidiaries of Citation will be able to meet the minimum thresholds set by the
Model Act formulas.
CIC, CNIC, PICO, PRO, APL and Sequoia, as regulated insurers, are subject
to a wide range of financial restrictions and regulations. Many regulations are
based on Statutory Accounting Principles ("SAP") which are generally more
conservative than Generally Accepted Accounting Principles ("GAAP"). SAP is
modified from time to time, such modifications having an influence on CIC's,
CNIC's, PICO's, PRO's, APL's and Sequoia's financial reporting to regulators and
the regulator's conclusions about each of the companies' respective financial
positions. CIC, CNIC, PICO, PRO, APL and Sequoia have no influence over the
establishment or modification of SAP. There can be no assurance that CIC's,
CNIC's, PICO's, PRO's, APL's or Sequoia's market or financial position will not
be materially and adversely affected by new or reinterpreted regulatory
requirements of SAP.
In addition, CIC and PICO and their respective insurance subsidiaries are
licensed or are applying for admission to transact insurance in states other
than California. The marketing plans of Citation and PICO include
diversification to other state markets as key long-term business development
goals. Each state insurance department has a somewhat different approach to
financial, market conduct and rate regulation. There is no assurance that
Citation and PICO or their respective subsidiaries will ultimately receive
regulatory approval to transact insurance in the states to which they have
applied for admission. Further, there is no assurance that once admitted, CIC
and PICO or their subsidiaries will be permitted to file and use rate structures
and underwriting programs which provide a reasonable rate of return.
Proposed federal legislation has been introduced from time to time in
recent years that would provide the federal government with substantial power to
regulate property and casualty insurers, primarily through the establishment of
uniform solvency standards. Proposals also have been discussed to modify or
repeal the antitrust exemption for insurance companies provided by the
McCarran-Ferguson Act. The adoption of such proposals could have a material
adverse impact upon the business, financial condition and results of operations
of Citation and PICO.
There can be no assurance that the regulatory requirements affecting
Citation and PICO and their respective insurance subsidiaries will not become
more stringent in the future and have an adverse effect on the business,
financial condition and results of operations of Citation and PICO and their
insurance subsidiaries.
REINSURANCE. As with other property and casualty insurers, CIC's, CNIC's,
and Sequoia's operating results and financial condition can be adversely
affected by volatile and unpredictable natural and man-made disasters, such as
hurricanes, windstorms, earthquakes, fires and explosions. CIC, CNIC, and
Sequoia generally seek to reduce their exposure to such events through
individual risk selection and the purchase of reinsurance. CIC's, CNIC and
Sequoia's estimates of their exposures depend on their views of the possibility
of a catastrophic event in a given area and on the probable maximum loss to CIC,
CNIC or Sequoia should such an event occur. While CIC, CNIC and Sequoia attempt
to limit their exposure to acceptable levels, it is possible that an actual
catastrophic event or multiple catastrophic events could significantly exceed
the probable maximum loss previously assumed, resulting in a material adverse
effect on the financial condition and results of operations of Citation or PICO.
See "Citation 10-K -- Business -- Reinsurance" and "Business of PICO -- Business
and Properties of PICO -- Reinsurance."
Industry-wide catastrophe losses have accelerated sharply during the last
seven years. Deteriorating experience for some reinsurers has resulted in their
withdrawal from the market, and overall catastrophe losses have directly reduced
capacity and availability of certain types of reinsurance. CIC, CNIC, PICO, PRO
and Sequoia rely on reinsurance coverage, primarily to mitigate risks to
solvency occasioned either by catastrophes or severe individual losses. To the
extent that CIC, CNIC, PICO, PRO and Sequoia are unable to purchase
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reinsurance coverage at sufficient limits, the companies' premium writings would
either reflect increased exposure to loss or would have to be curtailed. To the
extent the reinsurance is available but at a higher cost, CIC, CNIC, PICO, PRO
and Sequoia could, subject to regulatory approval, increase premium costs to
pass the increased costs on to the ultimate consumer. No assurance can be given
that the increased premiums would be competitive or that CIC, CNIC, PICO, PRO
and Sequoia would avoid suffering reduced margins as a result of increased
costs.
Although PICO and PRO have reinsured 100% of risks incurred under MPL
Policies issued or renewed between July 16, 1995 and January 1, 1996 with Mutual
Assurance, Inc. ("Mutual") and CIC, CNIC, PICO, PRO and Sequoia have purchased
reinsurance coverage on a regular basis, CIC, CNIC, PICO, PRO and Sequoia are
primarily liable for the full amount of all claims made by policyholders.
Therefore, the future financial results of Citation and PICO could be adversely
affected by disputes with their respective reinsurers with respect to coverage
and by the solvency of such reinsurers. Neither CIC nor PICO is aware of actual
or potential disputes with any of their respective reinsurers that could
materially and adversely impact the financial results of Citation and PICO or is
aware of any insolvent reinsurer whose current obligations to CIC, CNIC, PICO,
PRO or Sequoia are material to such companies.
In connection with PICO's purchase of Sequoia from Sydney Reinsurance
Corporation ("SRC") in August 1995, SRC assumed the responsibility for all
policy and claims liabilities of Sequoia prior to the acquisition, and such
obligations have been irrevocably and unconditionally guaranteed by QBE
Insurance Group Limited, an Australian corporation ("QBE"). See "Business of
PICO -- Business and Properties of PICO -- Recent Developments." Despite such
agreements, if claims were made by third parties against Sequoia under
applicable policies and SRC and QBE were either unable or unwilling to satisfy
their obligations with respect to such claims and it was ultimately determined
that Sequoia was obligated to satisfy such claims, there could be a material
adverse effect on Sequoia's financial condition and results of operations.
COMPETITION. Citation and PICO and their respective subsidiaries face
competition from a wide range of insurers. The commercial property and casualty
markets in which CIC, CNIC and Sequoia compete are highly fragmented and highly
competitive, as are the life and health insurance markets in which some of APL's
competitors market insurance through independent producers. Others market
insurance through employed producers or producers who are contractually bound to
sell exclusively the products of a single insurer. In general, insurers who
market through exclusive or employed producers have lower operating and
administrative expenses, relative to premiums, and can offer premiums below
those of insurers like Citation and Sequoia, which market through independent
producers. Moreover, many competitors of CIC, CNIC, APL and Sequoia have
significantly greater financial resources than CIC, CNIC, APL and Sequoia.
Pricing is a primary means of competition. See "Citation
10-K -- Business -- Competition" and "Business of PICO -- Business and
Properties of PICO -- Competition."
In addition, CIC's, CNIC's and Sequoia's marketing is focused in a limited
number of commercial business classifications. In general, these classifications
are considered preferred by most competitors because of historically profitable
results realized from underwriting such classifications. CIC's, CNIC's and
Sequoia's customer bases and prospective revenues are vulnerable to the pricing
actions of larger or more efficient competitors who target CIC's, CNIC's and
Sequoia's desired classifications or individual policyholders and offer
substantially lower rates.
FACTORS AFFECTING THE PROPERTY AND CASUALTY BUSINESS. CIC and Sequoia each
write property and casualty insurance policies. On a pro forma consolidated
basis, (excluding personal automobile insurance) 59% of CIC's, CNIC's and
Sequoia's net premiums earned in 1995 would have been attributable to property
and casualty. The property and casualty insurance industry has been highly
cyclical, and the industry has been in a cyclical downturn over the last several
years due primarily to premium rate competition, which has resulted in lower
profitability. Premium rate levels are related to the availability of insurance
coverage, which varies according to the level of surplus in the industry. The
level of surplus in the industry varies with returns on invested capital and
regulatory barriers to withdrawal of surplus. Increases in surplus have
generally been accompanied by increased price competition among property and
casualty insurers. The cyclical trends in the industry and the industry's
profitability can also be affected significantly by volatile and unpredictable
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developments, including natural disasters (such as hurricanes, windstorms,
earthquakes and fires), fluctuations in interest rates and other changes in the
investment environment which affect market prices of insurance companies'
investments and the income from those investments, inflationary pressures that
affect the size of losses and judicial decisions affecting insurers'
liabilities. The demand for property and casualty insurance can also vary
significantly, generally rising as the overall level of economic activity
increases and falling as such activity decreases.
LOSS RESERVE EXPERIENCE. The inherent uncertainties in estimating loss
reserves are greater for some insurance products than for others, and are
dependent on the length of the tail associated with a given product, the
diversity of historical development patterns among various aggregations of
claims, the amount of historical information available during the estimation
process, the degree of impact that changing regulations and legal precedents may
have on open claims, and the consistency of reinsurance programs over time,
among other things. Because workers' compensation and commercial casualty claims
may not be fully paid for several years or more, estimating reserves for such
claims can be more uncertain than estimating reserves in other lines of
insurance, such as property, in which the period between occurrence of the claim
and final settlement of the loss is usually shorter. As a result, precise
reserve estimates cannot be made for several years following a current accident
year for which reserves are initially established. CIC's, CNIC's and Sequoia's
initially established reserves historically have increased over time.
There can be no assurance that CIC, CNIC and Sequoia have established
reserves adequate to meet the ultimate cost of losses arising from such claims.
It has been necessary, and will over time continue to be necessary, for Citation
and PICO to review and make appropriate adjustments to reserves for estimated
ultimate losses and LAE. Although Citation's and PICO's managements, after
consultation with their respective independent actuaries with respect to loss
experience through December 31, 1995, believe that their respective overall
reserve levels as of December 31, 1995 are adequate to meet their obligations
under existing policies, actual losses and LAE paid may deviate, perhaps
materially, from reserves reflected in Citation's and PICO's financial
statements. To the extent reserves prove to be inadequate, Citation and PICO, as
applicable, would have to adjust such reserves and incur a charge to earnings,
which could have a material adverse effect on the financial results of Citation
and PICO. See "Citation 10-K -- Business -- Loss and Loss Adjustment Expense
Reserves" and "Business of PICO -- Business and Properties of PICO -- Loss and
Loss Adjustment Expense Reserves."
RESTRICTIONS ON DIVIDENDS FROM SUBSIDIARIES. Citation, as an insurance
holding company, is dependent upon dividends received from its subsidiaries for
income. Under California law, CIC, CNIC and Sequoia are restricted in their
ability to pay dividends or make other distributions to their respective parent
companies and, without the approval of the California Department, may only pay
dividends or make other distributions in any 12-month period from earned surplus
of the company in an amount up to the greater of (a) net investment income for
the preceding year and (b) 10% of statutory policyholders' surplus as of the
preceding December 31. In addition, under Ohio law PICO and its Ohio insurance
subsidiaries are also restricted in the amount of dividends which are payable.
Without the approval of the Ohio Department, PICO and its Ohio insurance
subsidiaries cannot declare a dividend which exceeds the greater of (i) the
preceding year's statutory net income and (ii) 10% of statutory shareholders'
equity as of the preceding December 31. Various regulatory organizations have
proposed more restrictive dividend regulations and there can be no assurance
that more restrictive rules on dividend payments may not ultimately be
implemented.
Citation has never paid a dividend to shareholders and does not anticipate
paying cash dividends on the Citation Common Stock in the foreseeable future.
RISK FACTORS APPLICABLE TO THE MERGER
CHANGE IN CONTROL. Upon consummation of the Merger, Holdings will be
merged with and into PICO and the PICO shareholders will own an aggregate of
approximately 26,100,000 shares of Citation Common Stock (assuming a PICO Share
Value of $25.20 and a corresponding Exchange Ratio of 5.0099). Immediately upon
consummation of the Merger, the former PICO shareholders will own approximately
80% of the outstanding Citation Common Stock and the holders of Citation Common
Stock immediately prior to the Merger will own approximately 20% of the
outstanding Citation Common Stock. GPG will own 18.7% of
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the outstanding Citation Common Stock upon consummation of the Merger. In
addition, upon consummation of the Merger, the Citation Board will consist of
nine members, only two of whom will be from Citation's Board prior to the
Merger. See "The Merger Agreement -- Conversion of Shares," "The Merger -- Board
Representation and Management" and "PICO Management."
ADDITIONAL INVESTMENTS IN COMPANIES WITH COMBINED INVESTMENT
PORTFOLIO. PICO's management has informed Citation that PICO's strategic
direction after the Merger will be to increase shareholder value through
investment in businesses which PICO believes are undervalued or will benefit
from additional capital, restructuring of operations or management or improved
competitiveness through operational efficiencies with existing PICO operations.
PICO will continue to make selective investments for the purposes of enhancing
and realizing additional value by means of appropriate levels of shareholder
influence and control. PICO may use certain of the assets in Citation's
investment portfolio to finance such investments. There can be no assurance that
any investments that are made in the future will be profitable or will increase
shareholder value and will not have an adverse impact on the financial condition
of Citation after the Merger. See "-- Recent Changes in Operations and Strategic
Focus," "PICO Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Recent Developments -- Strategic Direction of PICO" and
"-- Acquisition Philosophy."
A.M. BEST INSURANCE COMPANY RATINGS. Best has recently assigned Sequoia a
rating of B++ (Very Good) and APL has had a Best rating of B+ (Very Good) since
1983. CIC is currently rated B- (Adequate) and CNIC is currently rated C
(Marginal) by Best. PICO and PRO are currently rated, and have been for a number
of years, NR-3 (rating procedure inapplicable). Best's ratings are based upon
factors relevant to policyholders rather than the protection of investors, and
are subject to review and change over time. There can be no assurance that
Sequoia or APL will maintain their ratings after the Merger, and such ratings
may be downgraded as a result of the Merger. If Sequoia or APL fail to maintain
their current ratings, it would possibly have a material adverse effect on their
ability to write new insurance policies as well as potentially reduce their
ability to maintain or increase market share.
As a result of the reported losses of Citation and the increase in
reserves, primarily from construction defect claims. In 1994, Best reduced its
rating of CNIC from B+ to C- (which rating has subsequently been increased to C)
and in 1995 reduced its rating of CIC from B+ to B-. Citation believes that many
potential customers will not insure with an insurer that carries a Best rating
of less than B+, and that customers who do so will demand lower rate structures.
In addition, there can be no assurances that CIC's Best rating will be
maintained or increased after the Merger. See "Citation
10-K -- Business -- Company Overview" and "Business of PICO--Business and
Properties of Sequoia."
As is typical upon the announcement of a proposed merger, Best has placed
the rating of all Citation's insurance subsidiaries and PICO and its insurance
subsidiaries under review.
SUBSTANTIAL INCREASE IN OUTSTANDING SHARES OF CITATION AND DILUTION. As a
result of the Merger and assuming that the Exchange Ratio is 6.1233, Citation
will issue a maximum of approximately 31,900,000 shares of Citation Common Stock
(excluding shares issuable upon exercise of outstanding PICO options to be
assumed by Citation). Accordingly, upon consummation of the Merger, the former
PICO shareholders will own approximately 83% of the outstanding Citation Common
Stock and the holders of Citation Common Stock immediately prior to the Merger
will own approximately 17% of the outstanding Citation Common Stock.
As a result of the Merger, assuming a PICO Share Value of $30.80 per share,
shareholders of Citation will experience an immediate dilution in the book value
per share of Citation Common Stock at March 31, 1996 from $7.37 to $2.93, or
60%, on a pro forma basis. See "Comparative and Pro Forma Per Share Financial
Information." In addition, Citation's authorized capital stock is being
increased. Accordingly, Citation may issue additional shares in the future which
may result in additional dilution to the shareholders of Citation after the
Merger. See "Amendments to Citation's Articles of Incorporation."
INTEGRATION OF CERTAIN OPERATIONS. Citation and PICO have entered into the
Merger Agreement with the expectation that the Merger will result in certain
benefits for the combined company. Achieving the
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anticipated benefits of the Merger will depend in part upon whether certain of
the two companies' business operations can be integrated in an efficient and
effective manner. There can be no assurance that this will occur or that cost
savings in operations will be achieved. The successful combination of the two
companies will require, among other things, integration of the companies'
respective product offerings, medical management of health care claims and
management information systems enhancements. The difficulties of such
integration may be increased by the necessity of coordinating geographically
separated organizations. The integration of certain operations following the
Merger will require the dedication of management resources which may temporarily
distract attention from the day-to-day business of the combined companies. There
can be no assurance that integration will be accomplished smoothly or
successfully. Failure to effectively accomplish the integration of the two
companies' operations could have an adverse effect on Citation's results of
operations and financial condition following the Merger.
CONCENTRATION OF BUSINESS IN CALIFORNIA. For the year ended December 31,
1995 and the three months ended March 31, 1996, approximately 92% and 88%,
respectively, of CIC's direct written premiums, and 100% of Sequoia's direct
written premiums were in California. In addition, 100% of the direct written
premiums from policies previously written by CNIC were in California.
Consequently, CIC's, CNIC's and Sequoia's operating results are expected to be
largely dependent upon its ability to write profitable insurance in California.
ANTI-TAKEOVER EFFECTS OF STAGGERED BOARD AND SHAREHOLDER RIGHTS
PLAN. Citation's Articles of Incorporation (the "Citation Articles") classify
the Citation Board of Directors into three classes, each of which serve for
staggered three-year periods. In July 1991, Citation adopted a Shareholder
Rights Plan (the "Rights Plan") pursuant to which holders of Citation Common
Stock are given rights, under certain circumstances, to acquire additional
shares of Citation Common Stock. The Merger will not result in any action under
the Rights Plan. The staggered Board of Directors and the Rights Plan may be
deemed to have anti-takeover effects and may delay, defer or prevent a takeover
attempt that a shareholder might consider in its best interest and also may
adversely affect prevailing market prices for the Citation Common Stock. See
"Description of Citation Capital Stock -- Shareholder Rights Plan" and
"Comparison of Shareholder Rights."
FEDERAL INCOME TAX CONSEQUENCES. No ruling has been or will be sought from
the Internal Revenue Service. PICO shareholders could be required to recognize
income or loss as a result of the Merger. See "The Merger -- Certain Federal
Income Tax Consequences."
SHARES ELIGIBLE FOR FUTURE SALE. The shares of Citation Common Stock
issuable to the PICO shareholders who are affiliates of PICO will be subject to
certain statutory restrictions pursuant to Rule 145 under the Securities Act of
1933, as amended, for a period of two years after the Merger. All other shares
of Citation Common Stock issued pursuant to the Merger will be freely tradeable.
Citation believes that the Merger will provide additional liquidity with respect
to the shares of Citation Common Stock held by Citation shareholders, which may
increase the likelihood that Citation shareholders will sell their stock after
consummation of the Merger. See "The Merger -- Background and Reasons for the
Merger." In addition, a number of PICO shareholders will own significant blocks
of Citation stock as a result of the Merger and two significant shareholders
will have registration rights with respect to such shares beginning six months
after the Merger. See "Principal Shareholders of PICO." No prediction can be
made as to the effect, if any, that future sales of Citation Common Stock will
have on the market price of Citation Common Stock prevailing from time to time.
Sales of substantial amounts of Citation Common Stock or the possibility that
such sales could occur may adversely affect prevailing market prices for
Citation Common Stock. See "The Merger -- Background and Reasons for the
Merger."
VOLATILITY OF STOCK PRICES. Recently, there has been significant
volatility in the market prices of securities of companies in the insurance
industry, including the price of Citation Common Stock and PICO Stock. Many
factors, including medical cost increases, general legal and judicial climate,
analysts' comments, announcements of new legislative proposals or laws relating
to insurance reform, the performance of, and investor expectations for, Citation
and PICO, the trading volume of the Citation Common Stock after the Merger and
general economic and market conditions, may influence the trading price of the
Citation Common Stock. Accordingly, there can be no assurance as to the price at
which the Citation Common Stock will trade in the future. See "Comparative
Market Price Data."
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INTRODUCTION
GENERAL
This Joint Proxy Statement/Prospectus is being furnished to the
shareholders of Citation and PICO in connection with the solicitation of proxies
by the Citation Board and the PICO Board from holders of outstanding Citation
Common Stock and PICO Stock, respectively, for use at the Shareholder Meetings.
At the Shareholder Meetings, shareholders of Citation and PICO will be asked to
consider and vote upon a proposal to approve and adopt the Merger and the Merger
Agreement. In addition, the Citation shareholders will be asked to vote upon and
approve certain amendments to Citation's Articles and Bylaws, including an
increase in the authorized capital stock of Citation. See "Amendments to
Citation's Articles of Incorporation" and "Amendments to Citation's Bylaws."
This Joint Proxy Statement/Prospectus constitutes the Prospectus of
Citation with respect to the shares of Citation Common Stock to be issued in the
Merger. The information in this Joint Proxy Statement/Prospectus with respect to
Citation has been supplied by Citation and the information with respect to PICO
has been supplied by PICO. The principal executive offices of Citation are
located at One Almaden Boulevard, Suite 300, San Jose, California 95113, and its
telephone number is (408) 292-0222. The principal executive offices of PICO are
located at 13515 Yarmouth Drive, N.W., Pickerington, Ohio 43147, and its
telephone number is (614) 864-7100.
VOTING AND PROXIES
Holders of record of shares of Citation Common Stock at the close of
business on , 1996 will be entitled to vote at the Citation Meeting
and at any adjournment or postponement thereof. As of the close of business on
the Citation Record Date, Citation had 6,407,803 shares of its Common Stock
outstanding, excluding 313,600 shares held by a subsidiary of Citation, which
cannot be voted at the Citation Meeting. Holders of record of shares of PICO
Stock at the close of business on , 1996 will be entitled to vote at
the PICO Meeting and at any adjournment or postponement thereof. As of the close
of business on the PICO Record Date, PICO had 5,210,897 shares of PICO Stock
outstanding.
The affirmative votes of the holders of a majority of the outstanding
shares of Citation Common Stock and PICO Stock are required for approval of the
Merger. The presence, either in person or by proxy, of the holders of at least a
majority of the outstanding shares of Citation Common Stock entitled to vote is
necessary to constitute a quorum at the Citation Meeting. The holders of
Citation Common Stock are entitled to one vote per share at the Citation
Meeting. The presence, either in person or by proxy, of the holders of at least
one-third of the outstanding shares of the PICO Stock entitled to vote is
necessary to constitute a quorum at the PICO Meeting. The holders of PICO Stock
are entitled to one vote per share at the PICO Meeting. Any abstentions or
broker non-votes with respect to Citation shareholders and PICO shareholders
will have the same effect as a vote against the Merger proposal.
On the Citation Record Date, directors and executive officers of Citation
as a group (19 persons) beneficially owned 690,050 shares of Citation Common
Stock entitled to vote at the Citation Meeting, or approximately 11.3% of the
total outstanding shares eligible to vote. See "Principal Shareholders of
Citation." Citation has been advised that all of its directors and executive
officers intend to vote in favor of the Merger. On the PICO Record Date,
directors and executive officers of PICO as a group (10 persons) beneficially
owned 1,263,606 shares of PICO Stock, or approximately 24.24% of the total
outstanding shares. See "Principal Shareholders of PICO." PICO has been advised
that all of its directors and executive officers intend to vote in favor of the
Merger. In addition, GPG which owns 23.2% of the outstanding PICO Stock, and
TOC, which owns 16.3% of the outstanding PICO Stock, have advised PICO that they
intend to vote in favor of the Merger.
All shares of Citation Common Stock and PICO Stock represented by properly
executed proxies will be voted at the respective Shareholder Meetings in
accordance with the directions indicated on the respective proxies unless the
proxies have been previously revoked. Unless contrary direction is given, all
shares represented by such proxies will be voted FOR the Merger, and in the case
of the Citation Meeting, FOR the
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Amendment to the Articles of Incorporation and FOR the Amendment to the ByLaws,
and in the proxy holders' discretion, as to such other matters incident to the
conduct of the respective Shareholder Meetings as may properly come before the
shareholders.
THE CITATION BOARD AND THE PICO BOARD UNANIMOUSLY RECOMMEND THAT
SHAREHOLDERS VOTE FOR THE MERGER. THE CITATION BOARD UNANIMOUSLY RECOMMENDS THAT
THE CITATION SHAREHOLDERS VOTE FOR THE AMENDMENTS TO CITATION'S ARTICLES OF
INCORPORATION AND THE AMENDMENTS TO CITATION'S BYLAWS.
The Boards of Directors of Citation and PICO are not aware of any matters
other than those specifically stated in this Joint Proxy Statement/Prospectus
which are to be presented for action at the respective Shareholder Meetings. If
any other matters are properly presented at the Shareholder Meetings for action,
including a question of adjourning the meeting from time to time, the persons
named in the proxies and acting thereunder will have discretion to vote on those
matters in accordance with their best judgment. Any adjournment of either of the
Shareholder Meetings will require the affirmative vote of the holders of at
least a majority of the shares represented at such Shareholder Meeting
(regardless of whether those shares constitute a quorum). A Citation or PICO
shareholder executing and returning a proxy has the power to revoke it at any
time before it is voted. A shareholder who wishes to revoke a proxy can do so by
executing a later-dated proxy relating to the same shares and delivering it to
the Secretary of Citation or PICO, as the case may be, prior to the vote at the
respective Shareholder Meeting, by written notice of revocation to the Secretary
prior to the vote at the respective Shareholder Meeting or by appearing in
person at the respective Shareholder Meeting and voting in person the shares to
which the proxy relates. Any written notice revoking a Citation proxy should be
sent to Citation at One Almaden Boulevard, Suite 300, San Jose, California
95113-2213, Attention: Douglas S. Gould, Secretary, and any written notice
revoking a PICO proxy should be sent to PICO at 13515 Yarmouth Drive, N.W.,
Pickerington, Ohio 43147, Attention: James F. Mosier, Secretary.
PROXY SOLICITATION
Proxies are being solicited from Citation's and PICO's shareholders by and
on behalf of the respective Boards of Directors of each of Citation and PICO.
Each of Citation and PICO will bear their own expenses for the solicitations,
including the costs of preparing and mailing this Joint Proxy
Statement/Prospectus to their respective shareholders. In addition to
solicitation by mail, proxies may be solicited from the shareholders of Citation
or PICO by directors, officers and regular employees of Citation and PICO,
respectively, in person, by telecopy or by telephone. Such directors, officers
and employees will not receive any additional compensation for such services but
may be reimbursed for reasonable expenses incurred by them in forwarding the
proxy soliciting materials to the beneficial owners of Citation Common Stock and
PICO Stock. PICO has retained Corporate Investor Communications, Inc., a proxy
solicitation firm, in connection with the PICO Meeting, at an estimated cost of
$1,300. Citation has retained D.F. King & Co., a proxy solicitation firm, in
connection with the Citation Meeting, at an estimated cost of $7,500. Citation
and PICO will reimburse banks, brokerage firms and other custodians, nominees
and fiduciaries for the forwarding of proxy solicitation materials to beneficial
owners of Citation Common Stock and PICO Stock held of record by such persons.
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THE MERGER
GENERAL
All shares of Citation Common Stock to be issued for shares of PICO Stock
will be registered under the Securities Act of 1933, as amended (the "Securities
Act"). After the Merger, if the Merger is effected assuming a PICO Share Value
of $25.20 or $30.80, approximately 32,513,876 shares and 38,315,689 shares,
respectively, of Citation Common Stock will be outstanding (including 316,000
shares of Citation Common Stock owned by CIC), and the shareholders of PICO will
own between approximately 80% and 83%, respectively, of the Citation Common
Stock to be outstanding immediately following the Merger. There will be no
material changes in the rights of Citation shareholders as a direct or indirect
result of the Merger, except as a consequence of the Amendments to the Articles
and Bylaws of Citation. See "Amendments to Citation's Articles of Incorporation"
and "Amendments to Citation's Bylaws."
MERGER CONSIDERATION
If the Merger is consummated, Holdings will merge with and into PICO and
the shareholders of PICO will receive shares of Citation Common Stock. Upon
consummation of the Merger, each outstanding share of PICO Stock (other than
shares as to which dissenters' rights are perfected under the General
Corporation Law of Ohio) will be converted into the right to receive a number of
shares of Citation Common Stock equal to the Exchange Ratio. The Exchange Ratio
will be equal to the PICO Share Value divided by $5.03, and the PICO Share Value
will be the average of the closing prices of one share of PICO Stock on the
Nasdaq National Market for the 20 consecutive trading days ending with the
trading day immediately prior to the Determination Date, except that if the
average share value as described above is less than or equal to $25.20 per
share, the PICO Share Value will be equal to $25.20, and if the average share
value is greater than or equal to $30.80 per share, the PICO Share Value will be
equal to $30.80. The terms and conditions of the Merger are set forth in the
Merger Agreement. Upon consummation of the Merger, Citation's name will be
changed to PICO Holdings, Inc., and the Nasdaq symbol for Citation Common Stock
will be changed to "PICO".
If the PICO Share Value is in excess of $33.50 for the 20 consecutive
trading days before the Determination Date, PICO has the right to terminate the
Merger Agreement. Similarly, if the PICO Share Value is less than $22.50 for the
20 consecutive trading days before the Determination Date, Citation has the
right to terminate the Merger Agreement. Such termination rights may be
exercised at the option of the respective party. The formula for determining the
Exchange Ratio cannot be modified, without further approval of shareholders.
The following table sets forth hypothetical Exchange Ratios and the number
of shares of Citation Common Stock that would be issued to PICO shareholders,
based upon certain assumed average closing prices of PICO Stock for the 20
consecutive trading days ending with the trading day immediately prior to the
Determination Date. The Merger will not be consummated without re-solicitation
of shareholders if the average share value of the PICO Stock, as described
above, is in excess of $35.00 per share or less than $22.50.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
AVERAGE PRICE OF CITATION
PICO STOCK(1) PICO SHARE VALUE EXCHANGE RATIO COMMON STOCK
- ----------------- ---------------- -------------- ---------------------
<S> <C> <C> <C>
$22.50 to $25.20 $25.20 5.0099 26,106,073
$26.00 $26.00 5.1690 26,935,127
$27.00 $27.00 5.3678 27,971,053
$28.00 $28.00 5.5666 29,006,979
$29.00 $29.00 5.7654 30,042,906
$30.00 $30.00 5.9642 31,078,832
$30.80 to $35.00 $30.80 6.1233 31,907,886
</TABLE>
- ---------------
(1) Assumed average of the closing prices of one share of PICO Stock on the
Nasdaq National Market for the 20 consecutive trading days ending with the
trading day immediately prior to (and not including) the Determination Date.
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<PAGE> 35
BACKGROUND AND REASONS FOR THE MERGER
CITATION
In the fall of 1993, Citation acquired Madison Capital, Inc., including its
insurance subsidiaries CNIC and Citation General Insurance Company ("CGIC"), as
part of Citation's strategic plan to become a regional, multi-line insurer
operating in focused areas of market specialization and to reduce its dependence
on what was perceived as an increasingly difficult marketplace in the workers'
compensation industry. In February 1994, Citation began writing personal
automobile insurance through a managing general agent.
In the fourth quarter of 1993, Citation identified a significant and
continuing increase in certain types of construction defect claims, causing it
to significantly increase its IBNR reserves on its property and casualty
business at the time. During the third quarter of 1994, a more detailed analysis
of property and casualty claim development patterns was undertaken which
resulted in a significant increase in Citation's property and casualty loss
reserves for prior years of $11.6 million and an increase in 1994 loss reserves.
A significant portion of the claims giving rise to the increase in loss reserves
in the latter half of 1994 arose from construction defect claims associated with
policies written by CGIC prior to its acquisition by Citation. Subsequent to the
third quarter loss reserve increases, Citation notified the California
Department that the cumulative effect of these increases brought CGIC below the
minimum surplus required by statute. Citation began working with the California
Department to formulate a plan for resolving the situation. Based upon
discussions with the California Department regarding the possible conservation
of CGIC, Citation concluded that its control over CGIC had become temporary and,
as a result, has accounted for the results of CGIC on the equity method since
November 1994, resulting in a write off of its remaining investment in CGIC of
$4.2 million at that date. At that time, CGIC and CNIC stopped writing any new
business. Over the course of the next several months Citation worked with the
California Department to resolve CGIC's situation which ultimately led to the
conservation and placing of CGIC in liquidation in 1995. Moreover, in the fourth
quarter of 1994, Citation terminated its managing general agent for the personal
automobile business, which resulted in litigation with the agent which was
settled in April 1996. Citation incurred underwriting losses from its personal
automobile business for 1994 and 1995 of $2.1 million and $7.7 million,
respectively. In 1995, Citation decided to withdraw from the business as rapidly
as permitted by California law.
The losses and lower Best ratings resulting from the activities described
above, coupled with the new competitive rate law for workers compensation in
California in 1995, led the Citation Board to conclude that if Citation were to
grow and prosper it needed to seek a strategic relationship or a merger partner,
ideally with a company engaged in insurance operations which carried a higher
Best rating. The Citation Board decided to engage an investment banking firm to
advise it regarding its strategic alternatives and selected Prudential
Securities Incorporated ("Prudential") as its representative in April 1995.
Prudential's assignment included providing an analysis of Citation's strategic
alternatives, advice regarding a range of valuation estimates, the provision of
a fairness opinion and other customary services. Citation appointed a committee
(the "Committee") consisting of a majority of outside directors to work with
Prudential and make recommendations to the Citation Board regarding any
potential transaction. See "Opinion of Citation's Financial Advisor."
In March 1995, Citation commenced discussions with a party unaffiliated
with Citation or PICO regarding a proposed acquisition of at least 80% of the
outstanding stock of Citation. These negotiations and due diligence reviews by
each of the parties continued through September 1995, at which time the parties
terminated discussions, primarily as a result of an inability to reach an
agreement on valuation and price.
Citation then requested Prudential to seek other possible merger candidates
or investors. Prudential contacted a number of potentially interested parties as
a result of Citation's request, although none of those initiatives resulted in a
definitive offer, except as described below. In the meantime, Citation conducted
its operations on the basis that it would remain independent and that no
transaction would occur. In early December 1995, one of the directors of
Citation held an introductory meeting with the President of Sequoia, an
operating subsidiary of PICO which markets property and casualty insurance in
central and northern California. During the first week of January 1996, two
additional preliminary meetings took place. On January 8, 1996, a meeting with
several Citation directors and Prudential took place to discuss whether there
was an interest in a combination between Citation and PICO. On January 15, 1996,
a number of Citation
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<PAGE> 36
directors met with representatives of PICO and Prudential and discussed terms of
a possible combination with PICO, valuation issues, due diligence issues,
strategic considerations and risks associated with PICO's stock and investment
philosophy. From January 16, 1996 through January 23, 1996, discussions
continued and a draft of a letter of intent was circulated and discussed by the
Citation Board. In addition, the Committee and the Citation Board considered an
alternative offer from an unaffiliated party to make an investment in Citation
on terms that the Citation Board considered materially less attractive than the
terms being offered by PICO. As a result of the above considerations, Citation
and PICO agreed to conduct due diligence reviews for a period of 30 days, after
which they would negotiate a letter of intent, if the due diligence reviews were
satisfactory.
During February 1996, the Committee met on at least a weekly basis and
conducted a due diligence review of PICO regarding accounting and financial
matters, management, reserves, investment portfolio, stock price volatility and
similar issues. During the latter part of February 1996 the parties negotiated
the terms of a letter of intent which was approved by the Citation Board
following a presentation by Prudential. The letter of intent was executed and
delivered on March 1, 1996.
During March 1996, the parties continued the due diligence review and began
negotiation of the definitive agreement. The Committee met formally and
informally on a regular basis during this period. On April 11, 1996, the
Committee made a report to the Citation Board recommending approval of the
definitive agreement and the Merger, subject to completion of review of PICO's
audited financial statements and the presentation by Prudential to the Citation
Board of its analysis of the fairness of the transaction to Citation's
shareholders from a financial point of view. At the April 11, 1996 meeting,
Prudential discussed its preliminary findings. In mid-April, PICO provided its
audited financial statements to Citation and such statements were reviewed by
Citation's management and by Prudential. The formal Prudential presentation was
made at a meeting of the Citation Board held on April 25, 1996, at which time
the Citation Board approved the transactions described in this Registration
Statement/Proxy Statement. The Committee received two indications of interest at
or about the time the Merger Agreement was to be executed, but in neither case
was the interested party prepared to make a definitive proposal which could be
considered by the Citation Board.
The Citation Board believes that the Merger is fair to and in the best
interests of Citation and its shareholders. In reaching its conclusion to enter
into the Merger Agreement and to recommend approval of the Merger Agreement by
the shareholders of Citation, the Citation Board considered a number of factors,
including the factors described below. In light of the variety of factors
considered in its evaluation of the Merger, the Citation Board did not find it
practical to and did not quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching its determination.
1. The Citation Board considered the recent trends in the California
workers' compensation insurance industry, including the open rating
environment that became effective January 1, 1995, and the recent trends in
the California property and casualty insurance industry, including the
effect of Citation's Best ratings. The Citation Board determined that the
pricing of both workers' compensation insurance and commercial property and
casualty insurance has become increasingly more important, particularly as
a result of Citation's Best ratings. While the Citation Board considered
these competitive challenges in the context of remaining independent, the
Citation Board believed that Citation would benefit to a greater extent
from the significant resources and synergies available through a merger
with PICO.
2. The Citation Board considered the strategic and operating
synergies, as well as other benefits, that could result from the planned
coordination of the marketing and administrative activities of CIC and
Sequoia. Sequoia currently is rated B++ by Best. While there is no
assurance that Sequoia will maintain such rating, the Citation Board
believed that it would be able to compete for certain business that was not
available to it with a B- rating and that the increased financial strength
of the affiliated family of insurance companies following the Merger would
allow it to compete more effectively in the industry. Furthermore, the
coordinated operations likely would permit Citation to offer a broader
product line, and the size of the affiliated insurance companies under
common ownership would make Citation a more significant factor in its
dealings with its producers. In addition, the combined company will have a
pro forma asset base of approximately $667.4 million and a pro forma
capital base of approximately $111.3
29
<PAGE> 37
million which are expected to provide CIC and Sequoia access to additional
capital to meet leverage requirements as their insurance businesses grow
and which also are expected to provide economies of scale, such as in the
purchase of reinsurance and the absorption of administrative overhead.
3. The Citation Board considered the results of its due diligence
review of PICO's operations and its financial strength, price/earnings
ratio, strategic objectives and the fact that PICO's diversification into
other businesses could reduce Citation's exposure to events that impact the
market for insurance company stocks. The Citation Board also reviewed the
historical market trends and prices of Citation Common Stock and PICO
Stock, the fact that the valuation of Citation represented a premium over
the current and historical prices of Citation Common Stock and the
perceived benefit to the Citation shareholders from the negotiation of the
price collar.
4. The Citation Board considered the track record of PICO's
investments and the opportunity for access to additional investment
managers within the PICO organization.
5. The Exchange Ratio, including the valuation of Citation, was
considered in conjunction with the Citation Board's review of the analysis
presented by Prudential, which is discussed in greater detail elsewhere
herein, regarding the fairness, from a financial point of view, of the
Exchange Ratio to the shareholders of Citation.
6. The Citation Board considered the structure of the transaction,
providing Citation shareholders with a continuing equity interest in a much
larger and more diversified enterprise that is expected to benefit
strategically and competitively from the Merger, which is expected to
provide additional liquidity to the Citation shareholders. The Citation
Board also considered the potential for increased market following by
analysts for Citation Common Stock given the size of the combined entities
and the additional public float arising out of the issuance of at least an
additional 26 million shares of Citation Common Stock in the Merger. In
addition, the Citation Board considered that it was permitted, if required
in the exercise of its fiduciary duties, to consider unsolicited
alternative offers, without the payment of a break-up fee.
7. The Citation Board also considered many of the matters described in
this Joint Proxy Statement/Prospectus under the caption "Risk Factors" with
particular emphasis on risk factors continuing to affect Citation and those
which will continue to affect PICO.
AFTER CONSIDERING ALL THE FACTORS DISCUSSED ABOVE, THE CITATION BOARD HAS
APPROVED THE MERGER AND UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE
PROPOSALS TO APPROVE AND ADOPT THE MERGER AGREEMENT AND THE RELATED CHANGES TO
CITATION'S ARTICLES OF INCORPORATION AND BYLAWS.
PICO
Until mid-1995, PICO's and its subsidiaries' primary business focus was on
writing MPL insurance and life and health insurance. Since that time, PICO has
shifted its strategic focus and now operates primarily as a diversified
investment and insurance company. PICO's current objective is to use its
resources and those of its subsidiaries and affiliates to increase shareholder
value through investments in businesses which PICO believes are undervalued or
will benefit from additional capital, restructuring of operations or management,
or improved competitiveness through operational efficiencies with existing PICO
operations.
In late 1995 PICO management, through the president of its wholly owned
California insurance subsidiary, became aware of Citation's operations and began
a review of its financial status to determine whether an acquisition of Citation
would conform to PICO's strategic goals. At that time, Citation shares were
trading below book value. After an initial review of assets and financial status
of Citation and the operating efficiencies which PICO management believes may be
obtained by the elimination of redundant functions, coordination between PICO
and Citation management and the application of PICO's business systems and
approaches to Citation's business, PICO management determined to proceed with
negotiation of a letter of intent, followed by the execution of a definitive
agreement. On April 29, 1996, the PICO Board of Directors
30
<PAGE> 38
reviewed the 1995 financial results of Citation as well as the final agreement
and related documents and authorized the Merger.
The shareholders of PICO will own between 80% and 83% of Citation following
the Merger. Although generally a merger under these circumstances would be
structured to provide that PICO would be the surviving corporation, PICO and
Citation agreed that significant benefits would accrue to the companies and
their shareholders by structuring the transaction as presently contemplated.
Although PICO will survive as an Ohio corporation regulated by the Ohio
Department, the shareholders of PICO will become shareholders of Citation, which
is not a regulated insurance company but is an SEC reporting company.
Accordingly, management of the surviving corporation may not be as restricted by
insurance regulations with respect to its investment activities but will be
subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended. See "Business of PICO -- Business and Properties of PICO -- Regulation"
and "Comparison of Shareholder Rights -- Regulatory Changes."
OPINION OF CITATION'S FINANCIAL ADVISOR
Citation retained Prudential as financial advisor to the Citation Board in
its consideration of the Merger and to render an opinion as to the fairness,
from a financial point of view, to Citation's shareholders of the Exchange Ratio
within the range of PICO Share Values from $22.50 to $33.50 ("the Exchange
Range"). No limitations were imposed by the Citation Board upon Prudential with
respect to the review undertaken or the procedures followed in rendering its
opinion.
Citation originally retained Prudential in April 1995 to explore and
evaluate strategic alternatives for Citation. Prudential worked with the
Committee to prepare offering materials for Citation and to engage in
discussions with interested parties. As a result of such discussions, only one
party other than PICO made a definitive, bona fide offer to engage in a
transaction with Citation, but ultimately, Citation was unable to agree to terms
with such other party.
Prudential has delivered its written opinion, dated April 25, 1996, to the
Citation Board to the effect that as of that date, based on the assumptions and
qualifications contained therein, the Exchange Ratio within the Exchange Range
was fair, from a financial point of view, to the Citation shareholders.
THE FULL TEXT OF PRUDENTIAL'S OPINION, WHICH SETS FORTH THE ASSUMPTIONS
MADE, THE MATTERS CONSIDERED AND THE LIMITATIONS ON THE REVIEW UNDERTAKEN, IS
SET FORTH AS APPENDIX E TO THIS JOINT PROXY STATEMENT/PROSPECTUS, IS
INCORPORATED HEREIN BY REFERENCE AND SHOULD BE READ IN ITS ENTIRETY IN
CONNECTION WITH THIS JOINT PROXY STATEMENT/PROSPECTUS. PRUDENTIAL'S OPINION IS
DIRECTED ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO WITHIN THE EXCHANGE RANGE
AND DOES NOT ADDRESS ANY OTHER TERMS OF THE MERGER OR THE CITATION BOARD'S
UNDERLYING BUSINESS DECISION TO EFFECT THE MERGER. PRUDENTIAL'S OPINION WAS
DELIVERED FOR THE INFORMATION OF CITATION'S BOARD AND DOES NOT CONSTITUTE A
RECOMMENDATION TO ANY SHAREHOLDER OF CITATION AS TO HOW SUCH SHAREHOLDER SHOULD
VOTE SUCH SHAREHOLDER'S SHARES AT THE CITATION MEETING. THE SUMMARY OF
PRUDENTIAL'S FAIRNESS OPINION SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE FAIRNESS
OPINION ATTACHED AS APPENDIX E.
In acting as financial advisor to the Citation Board and in rendering such
opinion, Prudential, among other things: (i) reviewed the terms and conditions
of a draft of the Merger Agreement and the financial terms of the transaction as
set forth therein; (ii) analyzed historical business and financial information
relating to Citation and PICO, including certain public filings of each of
Citation and PICO; (iii) considered Citation's recent operating results and the
related underlying trends, as well as anticipated future financial performance,
(iv) reviewed certain internal financial forecasts provided by Citation relating
to the business of Citation; (v) conducted discussions with members of the
senior managements of Citation and PICO concerning their respective businesses
and prospects and reviewed certain actuarial studies prepared on behalf of
Citation and PICO; (vi) considered certain financial and stock market data for
each of Citation and PICO and compared that data with similar data for other
publicly-held companies in businesses that Prudential deemed reasonably similar
to Citation and PICO; (vii) compared the proposed financial terms of the Merger
with the financial terms of other transactions that Prudential deemed relevant
and (viii) reviewed such other studies and analyses and performed such other
investigations and considered such other matters as Prudential deemed relevant
to its opinion.
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<PAGE> 39
The foregoing factors represent all of the material factors considered by
Prudential. Prudential's opinion was necessarily based upon information
available to it, and on economic, financial, market and other conditions as they
existed and could be evaluated on the date of the opinion.
In connection with its review and analysis Prudential relied, without
independent verification, upon the accuracy and completeness of the financial
data and other information that was provided by Citation or PICO, or that was
publicly available. With respect to financial forecasts furnished by Citation,
Prudential assumed that the projections prepared by Citation reflect the best
currently available estimates and judgments of Citation's management as to the
expected future financial performance of Citation. Prudential did not undertake
any independent analysis to verify the reasonableness of the assumptions
underlying these projections. Prudential neither made nor obtained any
independent appraisals of the assets of Citation or PICO, nor conducted any
independent actuarial analyses of the businesses of either Citation or PICO.
In formulating its opinion, Prudential performed a variety of financial
analyses, including those summarized below. The summary set forth below does not
purport to be a complete description of the analyses performed. The preparation
of a fairness opinion is a complex process that involves various determinations
as to the most appropriate and relevant methods of financial analysis and the
application of these methods to the particular circumstances. Accordingly, such
an opinion is not necessarily susceptible to partial analysis or summary
description. Prudential believes that its analysis must be considered as a whole
and that selecting portions thereof or portions of the factors considered by it,
without considering all analyses and factors, could create an incomplete view of
the evaluation process underlying the opinion. Prudential made numerous
assumptions with respect to industry performance, general business, economic,
market and financial conditions and other matters, many of which are beyond the
control of Citation and PICO. Any estimates contained in Prudential's analyses
are not necessarily indicative of actual values or actual future results, which
may be significantly more or less favorable than suggested by such analyses.
Additionally, estimates of the values of businesses and securities do not
purport to be appraisals or necessarily reflect the prices at which businesses
or securities actually may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. Subject to the foregoing, the
following is a brief summary of the material financial analyses performed by
Prudential in connection with the rendering of its opinion as to the fairness,
from a financial point of view, to the shareholders of Citation of the Exchange
Ratio within the Exchange Range, as discussed with the Citation Board at its
meeting on April 25, 1996.
COMPARABLE COMPANY ANALYSIS
Prudential selected other publicly-traded companies whose lines of
business, size and operations made them, in Prudential's judgment, as nearly
comparable to Citation as practicable (the "Citation Comparables"). An analysis
of comparable companies is not purely mathematical; rather it involves complex
considerations and judgments concerning similarities and differences in
financial, operational and other characteristics of potentially comparable
companies. In this regard, Prudential noted that although the companies selected
were considered similar to Citation, none of the companies had the same recent
operating history, management makeup, size, type or combination of businesses as
Citation. For purposes of this analysis, Prudential treated the following
companies as comparable to Citation: American Eagle Group, Inc., First Central
Financial Corporation, Home State Holdings, Inc, McM Corporation, Merchants
Group, Inc., Pac Rim Holding Corporation and Unico American Corporation.
Using publicly available financial data, Prudential determined the
relationship for the companies in the Citation Comparables between their
unlevered market value ("UMV") (defined as market value plus total debt and
redeemable preferred stock minus available cash) and their latest 12-month
revenues ("LTMR") and the relationship between their market value of equity
("MV") and each of the following: their book value ("BV"), their tangible book
value ("TBV") and their statutory book value ("SBV"). Prudential also performed
similar analyses for Citation using the multiples implied by an unlevered
purchase price ("UPP") (defined as purchase price plus total debt and redeemable
preferred stock minus available cash) of $29.5 million and a purchase price
("PP") of $30.8 million, based on 6.1 million fully diluted Citation shares
outstanding and a Citation share value of $5.03. These analyses generated an
estimated UPP/LTMR ratio of 0.5 for Citation, as compared to low, high, mean and
median UMV/LTMR ratios for the Citation
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<PAGE> 40
Comparables of 0.47, 1.06, 0.67 and 0.56, an estimated PP/BV ratios for Citation
of 0.7 as compared to the low, high, mean and median MV/BV ratios for the
Citation Comparables of 0.49, 1.34, 1.01, 1.06; an estimated PP/TBV ratio for
Citation of 0.9, as compared to the low, high, mean and median MV/TBV ratios for
the Citation Comparables of 0.64, 1.76, 1.37 and 1.52; and an estimated PP/SBV
ratio for Citation of 0.9, as compared to the low, high, mean and median MV/SBV
ratios for the Citation Comparables of 0.46, 2.02, 1.26 and 1.28.
Prudential also selected other publicly-traded companies whose lines of
business made them, in Prudential's judgment, comparable to PICO (the "PICO
Comparables"). For purposes of this analysis, Prudential treated the following
companies as comparable to PICO: Allied Capital Corporation, Berkshire Hathaway
Inc., Brooke Group Ltd., Capital Southwest Corp., Leucadia National Corp. and
Ruddick Corp. Using publicly available financial data, Prudential determined the
relationship for the companies in the PICO Comparables between their MV and
their BV and TBV. Prudential also performed similar analyses for PICO based upon
the multiples implied by a MV of a minimum of $111.8 million and a maximum of
$136.7 million, based on 5.4 million fully diluted PICO shares outstanding and a
Citation share price at April 22, 1996 of $4.125. Prudential used this MV range
for a comparison to each of: PICO's BV; PICO's book value adjusted to reconcile
its investment in TOC from historical cost to its market value, net of tax, at
December 31, 1995 ("ABV"); PICO's TBV; and PICO's tangible book value similarly
adjusted ("ATBV"). These analyses generated an estimated MV/BV ratio of a
minimum of 1.4 and a maximum of 1.7 for PICO as compared to low, high, mean and
median MV/BV ratios for the PICO Comparables of 1.32, 2.32, 1.70 and 1.65; an
estimated MV/ABV ratio of a minimum of 1.2 and a maximum of 1.4 for PICO as
compared to low, high, mean and median MV/BV ratios for the PICO Comparables of
1.32, 2.32, 1.70 and 1.65; an estimated MV/TBV ratio for PICO of a minimum of
1.5 and a maximum of 1.8 as compared to the low, high, mean and median MV/TBV
ratios for the PICO Comparables of 1.32, 2.49, 1.79 and 1.65; and an estimated
MV/ATBV ratio for PICO of a minimum of 1.2 and a maximum of 1.5 and low, high,
mean and median MV/TBV ratios for the PICO Comparables of 1.32, 2.49, 1.79 and
1.65.
COMPARABLE TRANSACTIONS ANALYSIS
Prudential reviewed acquisitions of companies and businesses similar to
those of Citation over the past several years, and selected a number of those
acquisitions that it believed were most comparable to a transaction involving
the sale of Citation (the "Comparable Transactions"). Because the reasons for
and circumstances surrounding each of the transactions analyzed were diverse and
because of the inherent differences between the businesses and operations of
Citation and those of the companies engaged in the Comparable Transactions, an
appropriate use of a comparable transaction analysis in this instance
necessarily involved qualitative judgments concerning, among other things,
differences between the characteristics of those transactions and the Merger
that would affect the acquisition values of the companies involved in the
Comparable Transactions and those of Citation.
For purposes of this analysis, Prudential treated the following
acquisitions as comparable: MECC Inc. by WR Berkley Corp., Hoosier Insurance
Company (Baldwin & Company Inc.) by General Casualty Co. of Wisconsin, Milwaukee
Insurance Group Inc. by Unitrin Inc., Western Pioneer Insurance Company
(Atlantis Plastics, Inc.) by Commerce Insurance Company (The Commerce Group,
Inc.), Viking Insurance Holdings (Talegen Holdings Inc.) by Guaranty National
Corp., Lincoln Insurance Company by Markel Corp., Casualty Insurance Company
(The Continental Corporation) by Fremont General Corp., Armco Inc. Insurance
Operations by Vik Brothers Insurance, Inc., Federal Kemper Insurance Co. (Kemper
Co.) by Anthem P&C Holdings Inc., Ranger Insurance Co. (Chase Enterprises) by
Fairfax Financial Holdings, Milbank Insurance Company (Royal Group, Inc.) by
State Auto Financial Corp. (State Auto Mutual Insurance Co.) and Business
Insurance Corp. (Hilb Rogal & Hamilton) by Foundation Health Corporation.
Using publicly available information, Prudential determined for the
Comparable Transactions the relationship between the UPP and the target's LTMR
and the relationship between the PP and the targets' BV, TBV and SBV. Prudential
also performed similar analyses for Citation using multiples implied by a UPP of
$29.5 million and a PP of $30.8 million, based on 6.1 million fully diluted
Citation shares outstanding and a Citation share value of $5.03. These analyses
generated an estimated UPP/LTMR ratio of 0.5 for Citation as
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<PAGE> 41
compared to low, high, mean and median UPP/LTMR ratios for the Comparable
Transactions of 0.40, 1.54, 0.81 and 0.72; an estimated PP/BV ratio for Citation
of 0.7 as compared to the low, high, mean and median PP/BV ratios for the
Comparable Transactions of 0.86, 1.24, 1.11 and 1.15; an estimated PP/TBV ratio
of 0.9 for Citation as compared to the low, high, mean and median PP/TBV ratios
for the Comparable Transactions of 1.16, 2.32, 1.54 and 1.37; and an estimated
PP/SBV ratio for Citation of 0.9 as compared to the low, high, mean and median
PP/SBV ratios for the Comparable Transactions of 0.79, 2.24, 1.51 and 1.56.
TERMINAL VALUE ANALYSIS
Prudential also analyzed the present value of Citation based upon 5-year
financial projections of net income and using various discount rates and
terminal value multiples. Prudential used, without independent verification,
projections that had been prepared by Citation's senior management for internal
planning purposes. Prudential used these projections to calculate ranges of
equity values for Citation based on the discount to present value of Citation's
terminal values at the end of such period, using terminal value multiples that
were based on the net income multiple range for the Citation Comparables.
Prudential applied discount rates ranging from 10% to 13% and terminal multiples
ranging from 7.0x to 10.0x. Using these projections, Prudential found an
estimated present value of $3.14 to $5.12 per share of Citation Common Stock.
In determining the discount rates used in this analysis, Prudential noted,
among other things, factors such as inflation, prevailing market interest rates,
the business risks inherent to Citation, the historical weighted average cost of
capital for Citation and the historical weighted average cost of capital for the
Citation Comparables.
Prudential is an internationally-recognized investment banking firm that is
regularly engaged in the evaluation of businesses and their securities in
connection with mergers and acquisitions and for other purposes. Prudential was
selected as Citation's financial advisor for the Merger and to provide its
fairness opinion based on such expertise. Pursuant to its engagement letter of
April 17, 1995, Prudential received a retainer fee of $100,000 for its advisory
services and, upon consummation of the Merger, will receive a transaction fee of
an additional $475,000. In addition, Citation has agreed to reimburse Prudential
for any out-of-pocket and incidental expenses, including all reasonable fees and
disbursements of Prudential's legal counsel, incurred in connection with the
services provided by Prudential, and to indemnify and hold Prudential and
certain related parties harmless to the full extent lawful from and against
certain liabilities, including certain liabilities under the federal securities
laws or otherwise relating to or arising out of its engagement. In the ordinary
course of business, Prudential may actively trade Citation Common Stock or PICO
Stock for its own account or for the accounts of its customers and, accordingly,
may at any time hold a long or short position in either Citation Common Stock or
PICO Stock.
OPINION OF PICO'S FINANCIAL ADVISOR
PICO has engaged Montag & Joselson as its financial advisor.
Montag and Joselson has delivered its written opinion, dated June 19, 1996,
to the PICO Board that, as of the date of such opinion, the aggregate Merger
Consideration to be received by the holders of outstanding shares of PICO Common
Stock pursuant to the Merger Agreement is fair to such holders. Montag &
Joselson did not make recommendations to the PICO Board regarding the Agreement;
it and other terms of the Agreement are the result of arms-length negotiations
between representatives of PICO and Citation.
The full text of the written opinion of Montag & Joselson, which sets forth
assumptions made, matters considered and limitations on the review undertaken in
connection with the opinion, is attached to this Joint Proxy
Statement/Prospectus as Appendix F and is incorporated herein by reference.
Shareholders of PICO are urged to, and should, read such opinion in its
entirety.
In connection with its opinion, Montag & Joselson reviewed, among other
things, (i) the Merger Agreement; (ii) Annual Reports to shareholders of PICO
for the five years ended December 31, 1995; (iii) certain interim reports and
other communications to shareholders of PICO; (iv) Statutory Annual Statements
of PICO, APL, PRO and Sequoia for the years 1991-1995; (v) the latest triennial
examination, as conducted by the appropriate regulatory bodies, for PICO, APL,
PRO and Sequoia; (vi) the December 31,
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<PAGE> 42
1995 actuarial opinions filed with the Ohio Insurance Department by PICO, APL
and PRO and the December 31, 1995 actuarial opinion filed with the California
Department by Sequoia; (vii) certain annual reports of companies in which PICO
or its affiliates have significant equity investments, including TOC; (viii)
certain internal financial analyses of Citation prepared by PICO management and
(ix) PICO's latest Proxy Statement. Montag & Joselson also reviewed (i) Annual
Reports to shareholders and Annual Reports on Form 10-K of Citation for the five
years ended December 31, 1995; (ii) certain interim reports by Citation to
shareholders and Quarterly Reports on Form 10-Q; (iii) certain other
communications from Citation to its shareholders; (iv) Statutory Annual
Statements for CIC for the years 1991-1995; (v) Statutory Annual Statements for
CNIC for the years 1993-1995; (vi) the December 31, 1995 actuarial opinions for
CIC and CNIC as filed with the California Department; and (vii) Citation's proxy
statement dated May 3, 1996. Montag & Joselson also held discussions with
members of the senior management of PICO and Citation regarding the past and
current business operations, financial condition and future prospects of their
respective companies. In addition, Montag & Joselson reviewed the reported price
and trading activity for the common stock of PICO and Citation, compared certain
financial and stock market information for PICO and Citation with similar
information for certain other companies, the securities of which are publicly
traded, reviewed the financial terms of certain recent business combinations in
the insurance industry specifically, and in other industries generally and
performed such other studies and analyses as it considered appropriate.
In rendering its opinion, Montag & Joselson relied upon and assumed,
without independent verification, the accuracy, completeness and fairness of all
of the financial and other information that was available to it from public
sources, that was provided to Montag & Joselson by PICO and Citation or their
respective representatives, or that was otherwise reviewed by Montag & Joselson.
With respect to the financial projections developed by Montag & Joselson and
reviewed by the management of PICO, Montag & Joselson has assumed that the
information provided by the management of PICO in connection therewith, reflects
the best currently available estimates and judgments of management as to the
future operating and financial performance of PICO. Montag & Joselson did not
make any independent evaluation of PICO's or Citation's assets or liabilities,
nor did Montag & Joselson verify any of the information reviewed by it.
The following is a summary of the material factors considered and principal
financial analyses performed by Montag & Joselson to arrive at the Montag &
Joselson Opinion. Montag & Joselson performed certain procedures, including each
of the financial analyses described below, and reviewed with the managements of
PICO and Citation the assumptions on which such analyses were based and other
factors, including the current and projected financial results of such
companies.
PICO and Citation Market Values
Montag & Joselson noted that the closing prices of PICO's and Citation's
common stock on June 7, 1996 were $23 3/8 and $4 5/8, respectively. Pursuant to
the terms of the Merger Agreement between PICO, Citation Holdings, Inc. and
Citation Insurance Group, dated May 1, 1996, each outstanding share of PICO
Stock will be converted into Citation Common Stock based upon a floating
exchange rate. The exchange rate is calculated by dividing the PICO Share Value
by $5.03 per share of Citation Common Stock. The following table sets forth
hypothetical average PICO share prices (as determined under section 1.5(a)(i) of
the Merger Agreement ("PICO Prices"), corresponding PICO Share Values, and
corresponding Exchange Ratios (as computed in Section 1.5(b) of the Merger
Agreement).
<TABLE>
<CAPTION>
PICO PRICES EXCHANGE
UNDER SECTION 1.5(A)(I) PICO SHARE VALUE RATIO
- ----------------------- ----------------- --------
<S> <C> <C>
$ 22.50 to $25.20 $ 25.20 5.0099
$ 26.00 $ 26.00 5.1690
$ 27.00 $ 27.00 5.3678
$ 28.00 $ 28.00 5.5666
$ 29.00 $ 29.00 5.7654
$ 30.00 $ 30.00 5.9642
$ 30.80 to $35.00 $ 30.80 6.1233
</TABLE>
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<PAGE> 43
If the PICO Price is in excess of $33.50 per share, PICO has the right to
terminate the Merger Agreement. Similarly, if the PICO Price is less than $22.50
per share, Citation has the right to terminate the Merger Agreement.
Based on the closing price of PICO on June 7, 1996, the implied aggregate
value of the consideration for PICO was $131.3 million. Replacing the Exchange
Ratio denominator of $5.03, as called for in the Merger Agreement, with
Citation's closing price on June 7, 1996, results in an implied aggregate value
of the consideration for PICO of $120.7 million. Under the terms of the Merger
Agreement, PICO shareholders will own between 80% and 83% of the combined
companies.
Public Market Valuation Analysis
To provide contextual data and comparative market information, Montag &
Joselson compared selected share prices and operating and financial data and
ratios for PICO to the corresponding data and ratios of the following publicly
traded companies: Alfa Corporation; American Financial Group; W.R. Berkley
Corporation; Capitol Transamerica Corporation; Capsure Holdings; Guaranty
National Corporation; Leucadia National Corporation; Reliance Group Holdings;
TIG Holdings; and USF&G Corporation. The ranges of price as a multiple of 1995
operating earnings, price as a multiple of estimated 1996 operating earnings,
price as a multiple of projected 1997 operating earnings, and price as a
multiple of shareholders' equity for the publicly traded companies at the date
of the Montag & Joselson Opinion were: 25.7x to 8.0x; 19.6x to 8.6x; 16.6x to
7.4x; and 1.67x to 1.06x, respectively. The average multiple of price to 1995
operating earnings, average multiple of price to estimated 1996 operating
earnings, average multiple of price to projected 1997 operating earnings and
average multiple of price to shareholders' equity for the publicly traded
companies as of the date of the Montag & Joselson Opinion were 14.2x, 12.6x,
10.6x and 1.35x, respectively. Such analysis indicated that the total
consideration to be paid to PICO shareholders, over the range of PICO Prices,
would result in multiples within or below the range of the price-earnings
trading multiples of the publicly traded companies. Assuming a PICO Price of
$22.50 (the level below which Citation has the right to terminate the Merger),
and utilizing $5.03 as the denominator of the Exchange Ratio, the total
consideration to be paid PICO shareholders in the Merger would result in a
purchase price multiple to PICO's 1995 operating earnings of 8.4x (this multiple
is 7.7x utilizing $4.625 as the denominator in the Exchange Ratio). Assuming a
PICO Price between $22.50 and $33.50, the total consideration to be paid to PICO
shareholders, utilizing $5.03 as the denominator of the Exchange Ratio, would
result in a purchase price multiple to PICO's 1995 operating earnings of 9.3x
(this multiple is 8.6x utilizing $4.625 as the denominator in the Exchange
Ratio). Assuming a PICO Price of $33.50 (the level above which PICO has the
right to terminate the Merger), and utilizing $5.03 as the denominator of the
Exchange Ratio, the total consideration to be paid PICO shareholders in the
Merger would result in a purchase price multiple to PICO's 1995 operating
earnings of 10.2x (this multiple is 9.4x utilizing $4.625 as the denominator in
the Exchange Ratio).
Such analysis indicated that the total consideration to be paid to PICO
shareholders, over the range of PICO Prices, would result in multiples of
shareholders' equity within or above the range of the price-to-book trading
multiples of the publicly traded companies. Assuming a PICO Price of $22.50, and
utilizing $5.03 as the denominator of the Exchange Ratio, the total
consideration to be paid to PICO shareholders would result in a purchase price
multiple to PICO's shareholders' equity of 1.63x (this multiple is 1.5x
utilizing $4.625 as the denominator in the Exchange Ratio). Assuming a PICO
Price between $22.50 and $33.50, the total consideration to be paid to PICO
shareholders, utilizing $5.03 as the denominator of the Exchange Ratio, would
result in a purchase price multiple to PICO's shareholders' equity of 1.81x
(this multiple is 1.67x utilizing $4.625 as the denominator in the Exchange
Ratio). Assuming a PICO Price of $33.50, and utilizing $5.03 as the denominator
of the Exchange Ratio, the total consideration to be paid to PICO shareholders
would result in a purchase price multiple to PICO's shareholders' equity of
2.00x (this multiple is 1.84x utilizing $4.625 as the denominator in the
Exchange Ratio).
SELECTED TRANSACTIONS ANALYSIS
Montag & Joselson reviewed certain publicly available information regarding
selected merger and acquisition transactions involving companies engaged in
similar businesses to PICO occurring since 1991. The
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<PAGE> 44
selection of comparable transactions, like the selection of comparable companies
for purposes of the public market comparables valuation, involves complex
considerations and judgments concerning similarities and differences in
financial, operational and other characteristics of potentially comparable
companies. None of the companies utilized in the selected merger and acquisition
comparables analysis was identical to PICO or Citation and none of the
transactions was identical to the Merger. The transactions deemed comparable
(the "PICO Comparable Transactions") were as follows: SIG Holdings/Delphi
Financial Group; Condor Services/Amwest Insurance Group; Viking Insurance
Company/Guaranty National; Milwaukee Insurance Group/Unitrin; Victoria
Financial/USF&G; MECC Inc./W.R. Berkley Corp.; American Premier
Underwriters/American Financial Group; Bankers and Shippers/Integon Corp.; C.E.
Health Compensation and Liability/Care America; Leader National Insurance/Penn
Central; Beacon Insurance/Ohio Farmers; UniCare Financial/WellPoint; Economy
Fire & Casualty/St. Paul Companies; Milbank Insurance/State Auto Financial; and,
American Southern/Vista Resources. Montag & Joselson determined that for the
PICO Comparable Transactions, the range of multiples to net operating earnings
and the average multiple to net operating earnings, based on the results of the
respective most recent fiscal years, were 5.0x to 29.0x and 14.5x, respectively.
Such analysis indicated that the total consideration to be paid PICO
shareholders, over the range of PICO Prices, would result in multiples within
the range of the price-earnings transaction multiples of the selected
transactions analysis. Montag & Joselson also determined that for the PICO
Comparable Transactions, the range of multiples to shareholders' equity and the
average multiple to shareholders' equity, were 1.0x to 3.2x and 1.7x,
respectively. Such analysis indicated that the total consideration to be paid to
PICO shareholders, over the range of PICO Prices, would result in multiples
within the range of the price-book value transaction multiples of the selected
transactions analysis.
Contribution Analysis
Montag & Joselson examined the contribution of each of PICO and Citation
to, among other things, the premium income, net investment income, net operating
income, total investments, total assets and total shareholders' equity of the
combined pro forma company. This analysis demonstrated that for the 12 months
ended December 31, 1995, among other factors, PICO would have contributed 34.9%
of the premium income of the pro forma combined company, 61.1% of the net
investment income, and 73.9% of the net operating income. As of March 31, 1996
on a combined pro-forma basis, PICO would have contributed 70.6% of the total
investments, 72.1% of the total assets, and 58.1% of shareholders' equity,
compared with an implied ownership range of 80% to 83%.
Limitations of Analyses
The summary set forth above does not purport to be a complete description
of the analyses performed by Montag & Joselson. The preparation of fairness
opinions involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances and, therefore, such opinions are not readily
susceptible to summary description. The preparation of fairness opinions does
not involve a mathematical evaluation or weighing of the results of the
individual analyses performed, but requires Montag & Joselson to exercise its
professional judgment, based on its experiences and expertise, in considering a
wide variety of analyses taken as a whole. Each of the analyses conducted by
Montag & Joselson was carried out in order to provide a different perspective on
the transaction and to add to the breadth of information available. Montag &
Joselson did not form a conclusion as to whether any individual analysis,
considered in isolation, supported or failed to support an opinion as to
fairness. Rather, in reaching its conclusion, Montag & Joselson considered the
results of the analyses in light of each other and ultimately reached its
conclusions based on the results of all analyses taken as a whole. Montag &
Joselson did not place particular reliance or weight on any individual analysis,
but instead concluded that its analyses, taken as a whole, supported its
determination. Accordingly, notwithstanding the separate factors summarized
above, Montag & Joselson believes that its analyses must be considered as a
whole and that selecting portions of its analyses and the factors considered by
it, without considering all analyses and factors, may create an incomplete view
of the evaluation process underlying its opinions. In performing its analyses,
Montag & Joselson made numerous assumptions with respect to industry
performance, business and economic conditions and other matters. The analyses
performed by Montag & Joselson are not necessarily indicative of actual
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<PAGE> 45
values or future results, which may be significantly more or less favorable than
those suggested by such analyses.
Other Matters
Pursuant to an engagement letter dated May 15, 1996 between PICO and Montag
& Joselson, PICO has paid Montag & Joselson a $25,000 retainer fee and an
additional $75,000 fee for the Montag & Joselson Opinion. PICO has also agreed
to indemnify Montag & Joselson against certain liabilities, including liability
under the federal securities laws. The fee paid to Montag & Joselson was payable
upon delivery of a fairness opinion, regardless of the conclusions contained
therein. In the ordinary course of its business, Montag & Joselson may actively
trade securities of PICO and Citation for its own account and for the accounts
of its customers and, accordingly, may at any time hold a long or short position
in such securities.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following description of certain federal income tax consequences of the
Merger is based on the assumption that the Merger is consummated as contemplated
herein, is for general informational purposes only and is not tax advice. This
discussion does not cover all aspects of federal income taxation that may be
relevant to Citation, PICO or their shareholders, nor does the discussion deal
with tax issues peculiar to certain types of taxpayers (including but not
limited to life insurance companies, S corporations, banks and other financial
institutions, tax-exempt organizations or retirement accounts, dealers in
securities, foreign taxpayers or holders who acquire PICO Stock pursuant to the
exercise of options or otherwise as compensation or through a tax-qualified
retirement plan). No aspect of foreign, state, local or estate and gift taxation
is addressed. Therefore, the following summary is not a substitute for careful
tax planning and advice based upon the individual circumstances of each
shareholder of Citation and PICO.
The following summary is based on the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury Regulations promulgated and proposed thereunder,
judicial decisions and published administrative rulings and pronouncements of
the Internal Revenue Service ("IRS"), as in effect on the date of the Joint
Proxy Statement/Prospectus. Changes in or additions to such rules, or new
interpretations thereof, may have retroactive effect and therefore could
significantly affect the consequences described below. No ruling has been (or
will be) sought from the IRS as to the anticipated tax consequences of the
Merger. PICO AND CITATION SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS
TO THE TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABILITY AND
EFFECT OF FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS, AND ANY
CHANGES IN SUCH LAWS (POSSIBLY INCLUDING CHANGES WITH RETROACTIVE EFFECT).
TREATMENT OF CITATION, PICO AND THEIR SHAREHOLDERS UPON THE EXCHANGE OF PICO
STOCK FOR CITATION COMMON STOCK.
Gray Cary Ware & Freidenrich, counsel to PICO, and Gibson, Dunn, & Crutcher
LLP, counsel to Citation (collectively, "Counsel"), have advised their
respective clients that, in their opinion, the following discussion, insofar as
it relates to matters of federal income tax law affecting their respective
clients and their shareholders, is a fair and accurate summary of such matters.
In rendering such opinion, Counsel has expressly relied on the accuracy of
certain assumptions and the representations made to such Counsel by Holdings,
Citation, PICO, and certain PICO shareholders.
Subject to the limitations and qualifications described herein, the Merger
should qualify as a "reorganization" for federal income tax purposes within the
meaning of Section 368(a) of the Code and the following federal income tax
consequences should generally result:
- No gain or loss should be recognized by Citation or PICO shareholders as
a result of the Merger (other than gain or loss attributable to cash
received by PICO shareholders in lieu of fractional shares or cash
received by PICO or Citation shareholders as a result of the exercise of
dissenters' rights). See "-- Cash in Lieu of Fractional Shares."
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<PAGE> 46
- The basis of each share of Citation Common Stock received by each PICO
shareholder should be the same as the basis of his or her PICO Stock
exchanged therefor, reduced by any basis attributable to a fractional
share of Citation Common Stock for which the shareholder receives cash;
See "-- Cash in Lieu of Fractional Shares."
- The holding period of the shares of Citation Common Stock received by
each PICO shareholder should include the shareholder's holding period for
his or her PICO Stock exchanged therefor, provided the PICO Stock was
held as a capital asset by the PICO shareholder.
- Neither Citation nor PICO should recognize taxable gain or loss as a
result of the Merger; and
- A dissenting shareholder of Citation or PICO who receives payment for
shares in cash will generally recognize capital gain or loss (if the
shares were held as a capital asset at the Effective Time) equal to the
difference between the cash received and the holder's basis in such
shares, provided the payment is neither essentially equivalent to a
dividend within the meaning of Section 302 of the Code, nor has the
effect of the distribution of a dividend within the meaning of Section
356(a)(2) of the Code (collectively a "Dividend Equivalent Transaction").
A sale of shares pursuant to an exercise of dissenters' rights will
generally not be a Dividend Equivalent Transaction, if, as a result of
such exercise, the shareholder owns no shares of stock (either actually
or constructively within the meaning of Section 318 of the Code).
The anticipated federal income tax consequences of the Merger discussed
above are based on certain factual representations and assumptions, including
representations set forth in the Merger Agreement, which, if untrue or
incorrect, could affect the discussions set forth herein. In particular, in
order to qualify as a reorganization, among other things, the historic PICO
shareholders must maintain a sufficient "continuity of interest" in Citation
following the Merger. The IRS has indicated in published rulings that the
continuity of interest requirement will be satisfied if the historic
shareholders of the acquired entity (i.e., PICO) receive and retain, in the
aggregate, 50% of the value of the stock of the acquired entity in the form of
stock of the acquiring corporation (i.e., Citation). Shares received by
shareholders who at the time of receipt have an intention to sell or otherwise
dispose of such shares generally are treated as not having been retained for
purposes of this requirement. Moreover, Citation Common Stock issued in exchange
for PICO Stock acquired in contemplation of the Merger may, in certain cases, be
treated as property other than stock for this purpose.
In May and June 1996, GPG sold an aggregate of 850,000 shares of PICO Stock
to TOC. The sales of shares by GPG reduces GPG's ownership interest in PICO from
approximately 39.5% of outstanding PICO Stock to approximately 23.2%. It is
likely that the IRS will exclude the 850,000 shares sold by GPG to TOC in
determining whether the requisite continuity of interest has been maintained by
the historic shareholders of PICO. See "The Merger -- Certain Rights of TOC and
GPG."
PICO has represented in the Merger Agreement that it is aware of no plan or
intention on the part of PICO shareholders that would violate the continuity of
interest requirement for qualification as a reorganization. In addition, each
PICO shareholder holding 5% or more of the PICO Stock immediately prior to the
Merger (except TOC) has certified that it has no current plan or intention to
sell, exchange or transfer, distribute, pledge, dispose or otherwise engage in a
transaction (a "Sale") that reduces those shareholders' risk of ownership,
whether directly or indirectly with respect to the Citation Common Stock
received in the Merger. Such shareholders are not, however, prohibited from
engaging in such a Sale of Citation Common Stock following the Merger. The
representations of PICO and the shareholder certifications by themselves,
however, are not sufficient to ensure that the continuity of interest
requirement will be satisfied with respect to the Merger. If PICO shareholders
undertake substantial Sales of PICO Stock in anticipation of the Merger or
substantial Sales of Citation Common Stock after the Merger, pursuant to a plan
or intention existing at or around the time of the Merger, the continuity of
interest test may not be met and the Merger may not qualify as a reorganization
within the meaning of Section 368(a) of the Code.
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<PAGE> 47
If the IRS were to successfully challenge the status of the Merger as a
"reorganization" under Section 368(a) of the Code (based on a failure to satisfy
the "continuity of interest" requirement or otherwise), the federal income tax
consequences would generally be as follows:
- A PICO shareholder who, pursuant to the Merger, exchanges PICO Stock for
Citation Common Stock, and cash, if any, in lieu of a fractional share,
would recognize capital gain or loss in an amount equal to the
difference, if any, between (i) the amount of cash and the fair market
value of the Citation Common Stock received and (ii) the PICO
shareholder's adjusted tax basis in the PICO Stock surrendered in
exchange therefor, provided the PICO Stock was held as a capital asset
by the PICO shareholder.
- If a PICO shareholder owns more than one "block" of such stock (each
block consisting of shares of stock acquired at the same time in a
single transaction), gain or loss should be determined separately for
each block held. In general, the amount of cash, if any, and the fair
market value of the Citation Common Stock received should be allocated
ratably among the blocks in the proportion that the number of shares in
a particular block bears to the total number of shares held by such PICO
shareholder.
CASH IN LIEU OF FRACTIONAL SHARES.
A PICO shareholder who receives cash in lieu of a fractional share of
Citation Common Stock in the Merger generally should be treated as if the
fractional share had been distributed to such holder as part of the Merger and
then redeemed by Citation in exchange for the cash distributed in lieu of the
fractional share in a transaction qualifying as an exchange under Section 302 of
the Code. Any shareholder of PICO who receives cash in lieu of a fractional
share of Citation Common Stock will recognize income or loss for federal income
tax purposes equal to the difference between the cash received and the basis
which would otherwise be allocable to the fractional share of the Citation
Common Stock. Any gain or loss likely will be treated as capital gain or loss,
provided the PICO Stock was held as a capital asset by the PICO shareholder.
THE DISCUSSION OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS FOR
GENERAL INFORMATION ONLY AND IS BASED ON EXISTING LAW AS OF THE DATE OF THIS
PROXY STATEMENT/PROSPECTUS. THIS DISCUSSION DOES NOT ADDRESS ALL FEDERAL INCOME
TAX CONSIDERATIONS THAT MAY BE RELEVANT TO PARTICULAR PICO OR CITATION
SHAREHOLDERS IN LIGHT OF THEIR SPECIFIC CIRCUMSTANCES. SHAREHOLDERS OF CITATION
AND PICO ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE
PARTICULAR TAX CONSEQUENCES TO THEM OF THE MERGER (INCLUDING THE APPLICABILITY
AND EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS).
CERTAIN RIGHTS OF TOC AND GPG
GPG entered into an Agreement for Purchase and Sale of Stock, dated
November 23, 1993, with Quaker Holdings Limited and PICO (the "GPG Agreement")
as amended by the Agreement for Purchase and Sale of Shares dated May 9, 1996
between GPG, TOC and PICO (the "Subsequent Agreement"), pursuant to which GPG
acquired an aggregate of 2,060,150 shares of PICO Stock. Pursuant to the GPG
Agreement, GPG acquired certain rights with respect to nomination of directors
to the PICO Board of Directors and to the purchase of additional shares from
PICO. Pursuant to the Subsequent Agreement, GPG sold to TOC 850,000 shares of
PICO Stock and transferred certain rights held by it to TOC. PICO's obligations
under the GPG Agreement and Subsequent Agreement will be assumed by Citation
upon the Merger.
The GPG Agreement, as amended, provides that, subject to the fiduciary
duties and responsibilities which PICO and its Board of Directors owe to all of
its shareholders and other persons under Ohio law, PICO will use its best
efforts to cause the nomination and election of persons designated by GPG to
serve on PICO's Board of Directors. Currently, GPG has designated Messrs.
Langley and Hart and Dr. Weiss as its nominees to PICO's Board of Directors. See
"Principal Shareholders of PICO." Under the GPG Agreement, as
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amended, GPG shall continue to have the right to nominate one director so long
as it owns 11% or more of PICO (or Citation after the Merger).
GPG has an option to purchase approximately $1,175,000 more of newly issued
shares of PICO Stock, pursuant to the GPG Agreement. The purchase price would be
the average of the closing bid prices for the PICO Stock on Nasdaq for the
twenty trading days immediately preceding the date when GPG gives notice of
purchase. This option will expire if GPG's ownership of PICO Stock becomes less
than 7.5%. PICO has, pursuant to the GPG Agreement, a first right to purchase
any shares of PICO Stock which GPG desires to sell, except for sales to Ronald
Langley and John R. Hart. See "Principal Shareholders of PICO."
Pursuant to the Subsequent Agreement, TOC has an option to purchase
$825,000 more of newly issued shares of PICO Stock with the purchase price and
on the terms described in the preceding paragraph. Also pursuant to the
Subsequent Agreement, until December 10, 1996, if PICO issues additional equity
securities of any class or type, TOC has the prior right and option to
participate in the issuance of such equity securities in an amount not to exceed
$5 million in aggregate purchase price. PICO has, pursuant to the Subsequent
Agreement, a first right to purchase any PICO Stock which TOC desires to sell.
Pursuant to the GPG Agreement and the Subsequent Agreement, each of GPG and
TOC have the right to require PICO to register their shares for resale in the
public market. GPG and TOC have agreed not to exercise their registration rights
for a period of six months after the Merger. See "Risk Factors -- Applicable to
the Merger -- Shares Available for Future Sale."
See "PICO Management -- Directors" and "Principal Shareholders of PICO."
TOC will not be able to vote any shares of Citation Common Stock which it
receives in the Merger. See "Comparison of Shareholder Rights -- Restrictions on
Voting of Shares."
INTEREST OF CERTAIN PERSONS IN THE TRANSACTIONS
PICO has entered into a severance agreement with each of its employee
executive officers pursuant to which PICO generally is obligated to pay
severance benefits in the event the individual's employment is terminated within
two years after the Merger. Severance pay will consist of salary continuation
benefits for the longer of six months or until the first anniversary of the
Merger with respect to Ms. Althauser or the second anniversary of the Merger for
Messrs. Burchfield, Sharpe and Mosier. See "PICO Management."
In connection with the Merger, Citation has entered into agreements with
certain of its executive officers which provide for certain benefits to be paid,
under specified circumstances, to such officers in the event their employment is
terminated. The agreements with the following employees provide that they each
will receive nine months' severance pay (based on then-current salary) if
Citation is sold or liquidated and if their employment is terminated without
cause prior to the date listed next to their respective names: Charles McInnis
(July 10, 1997); Robert Erickson (June 5, 1997); Willard Heffelman (August 22,
1997); and Donald Henderson (April 17, 1998). Citation has agreed with certain
other key employees that it will provide at least 90 days' notice of termination
if their employment is terminated without cause within one year of the Merger
plus severance pay as described below. In addition, all employees of Citation
who are terminated without cause within one year of the Merger will receive two
weeks' notice of termination of employment and severance pay equal to one weeks'
pay for each year, or fraction thereof, of employment. Outstanding options
covering 91,250 shares of Citation Common Stock will become exercisable upon
consummation of the Merger.
BOARD REPRESENTATION AND MANAGEMENT
Pursuant to the Merger Agreement, immediately following the Effective Time,
the Citation Board will consist of nine persons, two of whom are being
designated by Citation (collectively, the "Citation Directors"), and seven of
whom are being designated by PICO (collectively, the "PICO Directors"). Three
PICO Directors, S. Walter Foulkroud III, Esq., Richard D. Ruppert, M.D., and
Gary H. Weiss will serve as Class I Directors and will stand for reelection at
the 1997 annual shareholders' meeting. The Citation Directors, Marshall J. Burak
and Paul M. Bancroft, and one PICO Director, Robert R. Broadbent, will serve as
Class II
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Directors and will stand for reelection at the 1998 annual shareholders'
meeting. Three PICO Directors, John R. Hart, Ronald Langley and John D. Weil,
will serve as Class III Directors and will stand for reelection at the 1999
annual shareholders' meeting. If one or more directors resign or are unable to
serve after the Merger, the remaining members of the Board have the right to
nominate a director to fill the vacancy so created, but there are no
restrictions on who may be nominated. If one of the Citation Directors becomes
unable to serve before the Merger, a substitute from among Citation's current
directors will be named, and if one of the PICO Directors becomes unable to
serve before the Merger, a substitute will be named by PICO. In addition, if
approved by shareholders, Citation will amend its Articles to effect a reduction
in the authorized number of directors to the range of five to nine. See
"Amendments to Citation's Articles of Incorporation."
The management of Citation after the Merger will consist of the following
executive officers: John R. Hart, Chief Executive Officer and President; Ronald
Langley, Chairman; James F. Mosier, General Counsel and Corporate Secretary; and
Gary W. Burchfield, Chief Financial Officer and Treasurer. See "PICO
Management -- Directors" and "-- Executive Officers."
There will be no change in the management of PICO or its subsidiaries as a
result of the Merger.
RESTRICTION ON TRANSFER OF SHARES
Pursuant to Rule 145 under the Securities Act, any person or entity who is
an affiliate of PICO at the time of the PICO Meeting and who publicly offers or
sells the Citation Common Stock that such person or entity receives in the
Merger will be deemed to be engaged in a distribution and, therefore, an
underwriter under the Securities Act. However, such person or entity will not be
deemed to be engaged in a distribution nor an underwriter if (i) the Citation
Common Stock is sold in accordance with the volume limitations and manner of
sale requirements of Rule 144(e), (f) and (g) and Citation, at the time of the
offer or sale, has current public information available, as specified in Rule
144(d); (ii) such person or entity, at the time of such offer or sale, is not an
affiliate of Citation, a period of two years from the Effective Time has elapsed
and Citation has public information available; or (iii) such person or entity,
at the time of such offer or sale, is not, and has not been for at least three
months, an affiliate of Citation and at least three years from the Effective
Time has elapsed. In addition, any PICO shareholder who becomes an affiliate of
Citation as a result of the Merger will be subject to the provisions of Rule 144
under the Securities Act. PICO shareholders should consult their legal advisors
prior to making any offer or sale of the Citation Common Stock received in the
Merger.
REGULATORY REQUIREMENTS
The Merger is subject to the approval of the California Department. The
filing with the California Department has been made. The California Department
may impose material conditions on the terms of the Merger as a condition to its
granting approval of the Merger. The parties believe that the Merger is an
exempt transaction under Ohio insurance laws and regulations. PICO has filed a
notice of exemption with the Ohio Department.
Certain acquisition transactions such as the Merger are reviewed by the
Justice Department or the FTC to determine whether or not they comply with
applicable antitrust laws. Under the provisions of the HSR Act, the Merger may
not be consummated until certain information has been furnished to the Justice
Department and the FTC and certain waiting period requirements under the HSR Act
have been satisfied. Citation, PICO and certain companies in which PICO has an
investment have filed Pre-Merger Notification and Report Forms pursuant to the
HSR Act with the Justice Department and the FTC.
Except as disclosed in this Joint Proxy Statement/Prospectus, Citation and
PICO are not aware of any other material federal, state or foreign regulatory
approval that is required in order to consummate the Merger. Should any such
approval be required, it is currently contemplated that such approval will be
sought.
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THE MERGER AGREEMENT
THE MERGER
The Merger Agreement provides that, subject to the adoption of the Merger
Agreement by the shareholders of Citation and PICO and the satisfaction or
waiver of the other conditions to the Merger, Holdings will be merged with and
into PICO. Following consummation of the Merger, Holdings will no longer exist.
The Merger Agreement provides for Citation and PICO to implement the Merger by
entering into a formal Agreement of Merger and filing a Certificate of Merger,
as required by the General Corporation Law of Ohio ("OGCL"), consistent with the
applicable provisions of the Merger Agreement. Approval of the principal terms
of the Merger by the shareholders of Citation and PICO will constitute their
authorization of the execution and implementation of the Agreement of Merger and
the Certificate of Merger.
The Merger Agreement is summarized below. This summary does not purport to
be complete and is qualified in its entirety by reference to the complete text
of the Merger Agreement, which is reprinted as Appendix A to this Joint Proxy
Statement/Prospectus and incorporated herein by this reference.
CONVERSION OF SHARES
At the Effective Time of the Merger, each share of PICO Stock outstanding
immediately prior to the Effective Time (except shares of PICO Stock as to which
dissenters' rights have been perfected pursuant to the OGCL) will be converted
into the right to receive a number of shares of Citation Common Stock equal to
the Exchange Ratio. The Exchange Ratio will be equal to the PICO Share Value
divided by $5.03, and the PICO Share Value will be the average of the closing
prices of one share of PICO Stock on the Nasdaq National Market for the 20
consecutive trading days ending with the trading day immediately prior to the
Determination Date, except that if the average share value as described above is
less than or equal to $25.20 per share, the PICO Share Value will be equal to
$25.20, and if the average share value is greater than or equal to $30.80 per
share, the PICO Share Value will be equal to $30.80. See "The Merger -- Exchange
Ratio," including the table setting forth the number of shares of Citation
Common Stock that may be issued in the Merger based upon various hypothetical
Exchange Ratios.
ASSUMPTION OF PICO OPTIONS
As of the Close of business on the PICO Record Date, there were outstanding
PICO Options to purchase 508,000 shares of PICO Stock. At the Effective Time of
the Merger, Citation will assume PICO's obligations with respect to such PICO
Options. Each PICO Option will thereafter be exercisable for that number of
shares of Citation Common Stock equal to the number of shares of PICO Stock
subject to such PICO Option immediately prior to the Effective Time of the
Merger multiplied by the Exchange Ratio and rounded down to the nearest whole
number. The exercise price per share of Citation Stock for each PICO Option will
be determined by dividing the exercise price per share of PICO Stock for such
PICO Option in effect immediately prior to the Effective Time of the Merger by
the Exchange Ratio, and rounding down to the nearest whole cent.
Prior to the Merger and as a condition of PICO to the closing of the
Merger, Citation will enter into an option assumption agreement with each holder
of a PICO Option. Promptly following the Merger, Citation will use reasonable
efforts to file a Form S-8 registration statement covering the PICO Options and
the shares of Citation Common Stock issuable upon exercise thereof.
EFFECTIVE TIME
The Effective Time of the Merger will occur when the Certificate of Merger
is duly filed with the Secretary of State of Ohio. The filing of the Certificate
of Merger will be made as soon as practicable after all conditions set forth in
the Merger Agreement have been satisfied or waived.
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EXCHANGE OF PICO CERTIFICATES FOR CITATION CERTIFICATES
Huntington National Bank will act as the Exchange Agent for the exchange of
certificates representing PICO Stock ("Certificates") for certificates
representing Citation Common Stock. On or before the Effective Time, Citation
will deliver to the Exchange Agent the Citation Common Stock issuable to PICO
shareholders in the Merger. As soon as practicable after the Effective Time, the
Exchange Agent will mail to all former holders of record of PICO Stock
instructions for surrendering their Certificates in exchange for a certificate
or certificates representing Citation Common Stock. PICO SHAREHOLDERS ARE
REQUESTED NOT TO SURRENDER THEIR CERTIFICATES FOR EXCHANGE UNTIL THEY RECEIVE A
LETTER OF TRANSMITTAL AND INSTRUCTIONS FROM THE EXCHANGE AGENT.
Upon surrender of a Certificate for cancellation to the Exchange Agent,
together with the letter of transmittal, duly executed, the holder of the
Certificate will be entitled to receive in exchange a certificate for the number
of whole shares of Citation Common Stock represented by the Certificate so
surrendered. The Certificate surrendered will then be canceled. In the event of
a transfer of ownership of PICO Stock which is not registered in the transfer
records of PICO, Citation Common Stock may be delivered to a transferee if the
Certificate representing the PICO Stock is presented to the Exchange Agent and
accompanied by all documents required to evidence and effect such transfer and
by evidence that any applicable stock transfer taxes have been paid, and if
Citation is satisfied that such transfer will not adversely affect the tax-free
nature of the Merger.
No holder of a PICO Certificate will be entitled to vote the shares of
Citation Common Stock into which such holder's PICO Stock has been converted
until the surrender of such PICO Certificate. No dividends will be paid to the
holder of a PICO Certificate until the Certificate has been surrendered. Upon
surrender, the amount of dividends, if any, which would have been payable but
which were not paid with respect to the number of shares of Citation Common
Stock represented by the new certificate issued upon such surrender, will be
paid, without interest. After the Effective Time, there will be no further
registration of transfers on the stock transfer books of PICO of the PICO Stock
outstanding immediately prior to the Effective Time. If, after the Effective
Time, Certificates are presented for any reason, they will be canceled and
exchanged as described above.
FRACTIONAL SHARES
No certificates or scrip representing fractional shares of Citation Common
Stock will be issued in the Merger. In lieu of the issuance or recognition of
fractional shares of Citation Common Stock, or interests or rights therein, each
fractional share of Citation Common Stock which would otherwise have been
issuable will, on a shareholder by shareholder basis (aggregating all such
holder's shares), be converted into cash in an amount equal to the product of
such fraction multiplied by $5.03.
CONDITIONS TO CONSUMMATION OF THE MERGER
The obligations of Citation and PICO to consummate the Merger are each
subject to the satisfaction of the following conditions: (i) the Merger
Agreement and the Merger shall have been validly approved and adopted by the
holders of a majority of the outstanding shares of Citation Common Stock and
PICO Stock, and the Certificate of Merger shall have been filed with the Ohio
Secretary of State; (ii) all requisite regulatory approvals shall have been
obtained, and all waiting periods required to expire prior to consummation of
the Merger shall have expired, without the imposition of any condition which in
the reasonable judgment of Citation and PICO is materially burdensome; (iii) the
registration statement shall have become effective under the Securities Act, and
no stop order suspending the effectiveness of the registration statement shall
have been issued and shall remain in effect; (iv) all blue sky filings shall
have been made and the sale of the Citation Common Stock resulting from the
Merger shall have been qualified or registered in all appropriate state
jurisdictions; (v) the waiting period under the HSR Act shall have expired; (vi)
the Merger and the transfer of ownership of PICO and its subsidiaries shall have
been approved by the California Department, the Ohio Department, if required,
and, if required, the insurance departments of any states in which Citation,
PICO and any subsidiaries of either of them conduct business; and (vii) no
legal,
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administrative, arbitration or other similar proceeding shall have been
instituted and, at what would otherwise have been the Effective Time, remain
pending to restrain or prohibit the transactions contemplated by the Merger
Agreement; (viii) the Amended and Restated Articles of Incorporation of Citation
shall have been filed with the California Secretary of State; (ix) no more than
5% of the outstanding shares of PICO Stock shall have been determined to be
dissenting shares under Ohio law; (x) GPG and each other holder of greater than
5% of the PICO Stock (other than TOC) shall have executed and delivered to PICO
a letter with respect to their ownership interest in PICO and their "continuity
of interest" in PICO; and (xi) GPG shall have consented in writing to the Merger
and the other transactions contemplated by the Merger Agreement.
The obligations of Citation to consummate the Merger are also subject to
the satisfaction of the following conditions: (i) the representations and
warranties of PICO and its subsidiaries contained in the Merger Agreement shall
be true in all material respects at the Effective Time as though made at and as
of the Effective Time, and PICO shall have duly performed and complied in all
material respects with all agreements, covenants and conditions required by the
Merger Agreement to be performed or complied with by it prior to or at the
Effective Time; (ii) all consents required for the consummation of the Merger
under any agreement or license to which PICO or any of its subsidiaries is a
party or by or under which either of them is bound or licensed, the withholding
of which would have a material adverse effect on PICO, shall have been obtained;
(iii) neither PICO nor any PICO subsidiary shall be subject to any litigation or
proceeding which, if determined adversely to such party, would have a material
adverse effect on PICO; (iv) Citation shall have obtained all necessary
licenses, approvals, permits and authorizations which, in its reasonable
judgment, are necessary for it to conduct the business of PICO after the Merger;
(v) Citation shall have received satisfactory legal opinions from counsel to
PICO; (vi) Citation shall have received a satisfactory letter from PICO's
independent auditors with respect to the most recent unaudited financial
statements of PICO delivered to Citation and the capital stock structure of PICO
and the shareholders' equity of PICO; (vii) PICO and its subsidiaries, taken as
a whole, shall not have suffered a material adverse change in their financial
condition, operations, assets, or business or financial prospects; (viii) PICO
shall have provided a certification to Citation that PICO has not been for a
specified period of time a "United States real property holding company" as
defined in the Code; (ix) Citation shall have received a fairness opinion from
Prudential; (x) Citation shall have received evidence satisfactory to it in its
sole discretion that the transactions between PICO, TOC and GPG regarding the
sale by GPG of 850,000 shares of PICO Stock to TOC shall have been consummated;
and (xi) Citation shall have approved in writing the final form of the agreement
regarding such sale by GPG.
The obligations of PICO to consummate the Merger are also subject to the
satisfaction of the following conditions: (i) the representations and warranties
of Citation contained in the Merger Agreement shall be true in all material
respects at the Effective Time as though made at and as of the Effective Time,
and Citation shall have duly performed and complied in all material respects
with all agreements, covenants and conditions required by the Merger Agreement
to be performed or complied with by it prior to or at the Effective Time; (ii)
Citation shall have deposited with the Exchange Agent the shares of Citation
Common Stock issuable upon the Merger; (iii) PICO shall have received a
satisfactory legal opinion from counsel to Citation; (iv) no more than 5% of the
outstanding shares of Citation Common Stock shall have been determined to be
dissenting shares, as defined in the California General Corporation Law; (v)
PICO shall have received a satisfactory letter from Citation's independent
auditors with respect to the most recent unaudited financial statements of
Citation delivered to PICO and the long term debt and capital stock structure of
Citation or any Citation subsidiary and the shareholders' equity of Citation;
(vi) there shall not have been any increase in long-term debt of Citation or any
Citation subsidiary as compared with long-term debt determined on the same basis
at December 31, 1995, any increase in the capital stock of Citation or any
Citation subsidiary (other than issuances pursuant to the exercise of options)
or any decrease in Citation's consolidated shareholders' equity of greater than
5%, as compared with consolidated shareholders' equity at December 31, 1995;
(vii) PICO shall have received the resignations of all of the directors of
Citation and the PICO Directors and the Citation Directors shall have been
appointed; (viii) PICO shall have received a fairness opinion from Montag &
Joselson; (ix) the Amended and Restated Articles of Incorporation of Citation
shall have been filed with the California Secretary of State; (x) no event shall
have occurred which would result in a Distribution Date under Citation's Rights
Plan; (xi) the Amended and Restated Bylaws of Citation shall have been approved
and shall have become effective; (xii) Citation and each holder of an option to
purchase
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PICO Stock shall have entered into an agreement providing for the assumption of
such options by Citation and conversion thereof into options to purchase
Citation Common Stock in accordance with the Exchange Ratio; (xiii) Citation
shall have executed its standard form indemnity agreement with each PICO
Director; and (xiv) Citation shall have executed and delivered to PICO an
assignment and assumption agreement pursuant to which Citation shall have been
assigned all rights and assumed all obligations of PICO under the GPG Agreement
and the Subsequent Agreement.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after the approval of the shareholders of Citation or
PICO, under the following circumstances.
Either Citation or PICO may terminate the Merger Agreement if: (i) the
Effective Time has not occurred by December 31, 1996; or (ii) the consent of the
other party is given.
Citation may terminate the Merger Agreement if: (i) there exists a default
by PICO in the performance of any of its material obligations under the Merger
Agreement which is not cured within 10 business days after receipt of written
notice of such default from Citation; (ii) PICO fails to satisfy any conditions
to the obligations of Citation to effect the Merger as specified in the Merger
Agreement; or (iii) the average closing price of the PICO Stock as reported on
the Nasdaq National Market for the 20 consecutive trading days immediately prior
to the Determination Date is less than $22.50.
PICO may terminate the Merger Agreement if (i) there exists a default by
Citation in the performance of any of its material obligations under the Merger
Agreement which is not cured within 10 business days after receipt of written
notice of such default from PICO; (ii) Citation fails to satisfy any conditions
to the obligations of PICO to effect the Merger contained in the Merger
Agreement; or (iii) the average closing price of the PICO Stock as reported on
the Nasdaq National Market for the 20 consecutive trading days immediately prior
to the Determination Date is more than $33.50.
EXPENSES
Citation and PICO will bear their own expenses in connection with the
Merger.
ACQUISITION PROPOSALS
PICO and Citation, and their respective directors and officers will take
any and all reasonable actions (including but not limited to voting in favor of
the Merger) to promote the consummation of the Merger.
The Merger Agreement provides that Citation will not, and will not
authorize its directors, shareholders, officers, agents or other representatives
to, encourage, solicit, initiate (or otherwise engage in discussions or
negotiations with), or provide any information to, any person, entity or group
concerning any acquisition proposal, tender offer, exchange offer, merger,
consolidation, sale of substantial assets, sale of securities or rights to vote
shares of Citation Common Stock, or in connection with the liquidation,
dissolution or any similar transactions involving Citation or any subsidiary or
division of Citation (collectively, "Citation Acquisition Proposals"). Citation
will promptly inform PICO of any inquiry it may receive with respect to any
Citation Acquisition Proposal which Citation's Board of Directors believes
merits serious consideration and furnish to PICO a copy thereof. The Citation
Board is entitled to furnish information to, or enter into discussions or
negotiations with, any person or entity that makes a bona fide Citation
Acquisition Proposal if: (i) the Citation Board, after consultation with and
receiving the advice of its legal counsel and financial advisors, determines in
good faith that such action is necessary or required for the Citation Board to
comply with its fiduciary duties to Citation's shareholders under applicable
law; (ii) before furnishing such information to, or entering into discussions or
negotiations with, such person or entity, Citation discloses to PICO that it is
furnishing information to, or entering into discussions or negotiations with,
such person or entity, which notice shall describe the terms thereof (but need
not identify the person or entity making the offer); (iii) prior to furnishing
such information to such person or entity, Citation receives from such person or
entity an executed confidentiality agreement, with terms no less favorable to
Citation than those contained in
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the confidentiality agreement between Citation and PICO, and (iv) Citation keeps
PICO informed promptly of the status (including the terms, but any disclosure of
terms is covered by the confidentiality agreement between Citation and PICO) of
any such discussions or negotiations (provided that, Citation is not required to
disclose to PICO confidential information concerning the business or operations
of the person making the expression of interest). Subject to the preceding
sentence, the Citation Board may approve and recommend to Citation's
shareholders a Citation Acquisition Proposal from a third party.
DISSENTERS' RIGHTS
Under the California General Corporation Law ("CGCL"), if the Merger is
effected and if proper demands are filed prior to the date of the Citation
Meeting with respect to at least 5% of the outstanding shares of Citation Common
Stock, all holders of shares of Citation Common Stock who file proper demands
with Citation will be entitled to receive the "fair market value" in cash for
their shares if they (i) make a written demand for such treatment which is
received by Citation or its transfer agent no later than the date of the
Citation Meeting, (ii) vote their shares against the Merger and (iii) submit to
Citation or its transfer agent, within 30 days after notice of approval of the
Merger is sent to them, the certificates representing the shares for which they
are demanding payment. Failure to follow any of these procedures may result in
the loss of statutory dissenters' rights. See "Dissenters' Rights -- California
Law -- Citation Shareholders."
Any PICO shareholder who does not vote in favor of the Merger and who
delivers a demand therefor to PICO on or before , 1996, has the
right under Ohio law to receive the fair cash value of such shareholder's PICO
shares in lieu of the Citation Common Stock which would otherwise be received
pursuant to the Merger. See "Dissenters' Rights -- Ohio Law -- PICO
Shareholders."
CONDUCT OF BUSINESS PENDING MERGER
PICO and Citation have agreed that, between the date of the Merger
Agreement and the Effective Time, except as specifically contemplated by the
Merger Agreement, they will, and will cause their respective subsidiaries to,
carry on their respective businesses in the ordinary course in substantially the
same manner in which such businesses have been conducted, and will use all
reasonable efforts to preserve intact their business organizations, assets,
prospects and advantageous business relations and will keep available the
services of their officers and employees and maintain satisfactory relationships
with their respective suppliers, contractors, distributors, customers,
policyholders, agents, other insurers and others having business dealings with
them.
Without the consent of the other party and except as contemplated by the
Merger Agreement, neither Citation nor any of its subsidiaries will, and neither
PICO nor any of its subsidiaries will: (i) amend their respective Articles of
Incorporation or Bylaws or change the authorized number of directors; (ii)
declare, pay or set aside for payment any dividend (other than policyholder
dividends in the ordinary course of business) on or make any other distribution
in respect of its capital stock, or split, combine or reclassify any capital
stock, or directly or indirectly repurchase, redeem or otherwise acquire any
shares of its capital stock or other securities or redeem rights under the
Rights Plan for more than $0.01 per right; (iii) authorize for issuance, issue,
sell, pledge or enter into any agreement or commitment to issue, sell or pledge
any of their respective capital stock or securities exchangeable or convertible
into shares of common stock, other than pursuant to the exercise of stock
options under currently existing plans; (iv) other than in the ordinary course
of business consistent with past practice, incur any material liability or
obligation or issue any debt securities or assume, guarantee, endorse or
otherwise as an accommodation become responsible for the obligations of any
other individual or entity, or change any assumption underlying, or methods of
calculating, any bad debt, contingency or other reserve; (v) acquire any
corporation, partnership, or other business organization or make any investment
other than in the ordinary course of business; (vi) pay, discharge or satisfy
any claims, liabilities or obligations other than in the ordinary course of
business; (vii) acquire (including by lease) any capital assets or properties
having a cost in excess of $100,000 in the case of PICO and $25,000 in the case
of Citation in the aggregate and not included within the respective company's
most recent capital budget, or sell, dispose of, mortgage or encumber any assets
or properties having a book value in excess of $100,000 in the case of PICO and
$25,000 in the case of Citation, other than in the ordinary course of business;
(viii) waive, release, grant or transfer any rights of value in any existing
license, lease, contract or other document other than in the ordinary course of
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business; (ix) commit a material breach of or default under any material
agreement to which it is a party or to which any of its assets may be subject,
or violate any applicable material law, regulation, injunction or other
governmental agency order; (x) fail to file all reports and returns required to
be filed with governmental authorities, which failure could result in a material
adverse effect; (xi) fail to promptly pay taxes and to withhold or collect
appropriate taxes other than with the respect to amounts being contested in good
faith; (xii) cancel or allow to expire without renewal any policy of insurance
covering their respective businesses and assets; (xiii) make any capital
expenditures or commitments with respect thereto, except those in the ordinary
course of business which are not in excess of $100,000 in the case of PICO and
$25,000 in the case of Citation in the aggregate and are included within the
respective company's most recent capital budget; (xiv) fail to maintain their
respective assets and properties in good condition and repair, normal wear and
tear excepted; or (xv) take, or agree in writing or otherwise to take, any of
the foregoing actions.
In addition, PICO and Citation have agreed that neither of them nor any of
their respective subsidiaries will, without the prior written consent of the
other party (i) authorize or issue any new options, (ii) hire any new employees
at the level of vice president or above, (iii) accelerate any existing options,
or (iv) enter into, adopt or amend any employee benefit plan or other
employee-related agreement or grant, or become obligated to grant, any increase
in the compensation payable or to become payable to any of their or their
respective subsidiaries' officers or directors or any general increase in the
compensation payable or to become payable to their respective employees.
REPRESENTATIONS AND WARRANTIES
In the Merger Agreement, Citation and PICO have made certain
representations and warranties concerning corporate existence and power,
corporate authorization, governmental consents and approvals, non-contravention
of agreements and instruments, capitalization, subsidiaries and joint ventures,
SEC filings, financial statements, reserves, reinsurance, disclosure documents,
absence of certain changes, no undisclosed material liabilities, litigation,
taxes, employee benefits, labor matters, compliance with laws, finders' fees and
opinions of financial advisors. Citation and PICO believe that the
representations and warranties contained in the Merger Agreement are customary
in transactions similar in nature to the Merger. See Articles II and III of the
Merger Agreement, attached as Appendix A hereto.
AMENDMENTS AND WAIVERS
Any term of the Merger Agreement may be amended, and the observance of any
term of the Merger Agreement may be waived, by a writing signed by both PICO and
Citation. At any time before or after approval of the Merger Agreement and the
Merger by the shareholders of PICO and prior to the Effective Time, the Merger
Agreement may be amended or supplemented by PICO or Citation with respect to any
of the terms contained in the Merger Agreement, except that following approval
by the shareholders of Citation or PICO, no amendment may be made which changes
the principal terms of the Merger Agreement within the meaning of applicable law
without again seeking the approval of the shareholders of Citation and PICO.
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DISSENTERS' RIGHTS
Rights of shareholders of Citation to dissent from the Merger and demand
appraisal right for their shares are governed by Chapter 13 of the CGCL and
rights of shareholders of PICO to dissent from the Merger and demand appraisal
rights for their shares are governed by Section 1701.85 of the OGCL, the full
text of which are reprinted as Appendix D to this Joint Proxy
Statement/Prospectus. The summary of those rights set forth below is not
intended to be complete and is qualified in its entirety by reference to
Appendix D. It is recommended that each Citation and PICO shareholder having
questions regarding dissenters' rights under the CGCL or the OGCL consult with
counsel.
CALIFORNIA LAW -- CITATION SHAREHOLDERS
Under the CGCL, if demands for payment are duly filed with respect to 5% or
more of the outstanding shares of Citation Common Stock, shareholders of record
of Citation, will have the right, by fully complying with all of the applicable
provisions of the CGCL, to dissent with respect to the Merger and to receive
from Citation, as applicable, payment in cash of the "fair market value" of any
or all of their shares. However, shareholders of record of Citation whose shares
are subject to any restriction on transfer imposed by Citation or by any law or
regulation will have the right, under the CGCL, to dissent with respect to the
Merger and to receive such cash payment for their shares of Citation Common
Stock from Citation, regardless of whether demands for payment are duly filed
with respect to 5% or more of the outstanding shares of Citation Common Stock.
Under the CGCL, "fair market value" is determined as of the day before the first
announcement of the terms of the proposed reorganization, excluding any
appreciation or depreciation in consequence of the proposed reorganization. On
March 1, 1996, the last trading date prior to the joint public announcement by
Citation and PICO of the signing of the Letter of Intent with respect to the
Merger Agreement, the last reported sale price on the Nasdaq National Market was
$4.00 per share for the Citation Common Stock.
Cash dividends declared and paid, if any, on dissenting shares after the
date of approval of the principal terms of the Merger are deducted from the
amount paid for the dissenting shares. If the parties are unable to agree on
fair market value, the determination of fair market value is subject to
litigation, including appellate review, with respect to Citation Common Stock,
in the Superior Court for the County of Santa Clara, California.
Dissenters' rights cannot be validly exercised by persons other than
shareholders of record regardless of the beneficial ownership of the shares.
Persons who are beneficial owners of shares held of record by another person,
such as a broker, a bank or a nominee, should instruct the record holder to
follow the procedure outlined below if they wish to dissent from the Merger with
respect to any or all of their shares.
In order to perfect their dissenters' rights, Citation shareholders of
record must (i) make written demand for the purchase of their dissenting shares
upon Citation or its transfer agent on or before the date of the Citation
Meeting, (ii) vote their dissenting shares against the Merger and (iii) within
30 days after the mailing to shareholders by Citation of notice of approval of
the Merger, submit the certificates representing their dissenting shares to
Citation or its transfer agent, for the notation thereon that they represent
dissenting shares.
FAILURE TO FOLLOW ANY OF THESE PROCEDURES MAY RESULT IN THE LOSS OF
STATUTORY DISSENTERS' RIGHTS.
DEMAND FOR PURCHASE.
Dissenting Citation shareholders must submit to Citation at its principal
executive offices, One Almaden Boulevard, Suite 300, San Jose, California 95113,
Attention: Douglas S. Gould, Secretary, a written demand that Citation purchase
for cash some or all of their shares.
The notice must state the number of shares held of record by such
shareholders which they demand to be purchased and the amount which they claim
to be the "fair market value" of those shares. That statement of fair market
value will constitute an offer by the dissenting shareholder to sell such shares
at that price. Such demand shall not be effective unless it is received by not
later than the date of the Citation Meeting. See "Notice of Approval."
Dissenting Citation shareholders may not withdraw their demand for payment
without the consent of the Citation Board. The rights of dissenting shareholders
to demand payment terminate if the Merger is abandoned (although dissenting
shareholders are entitled upon demand to reimbursement of
49
<PAGE> 57
expenses incurred in a good faith assertion of their dissenters' rights), or if
the shares are transferred prior to submission for endorsement as dissenting
shares.
No shareholder who has a right to demand payment of cash for such
shareholder's shares and who in fact makes such a demand would have any right to
attack the validity of the Merger or have the Merger set aside or rescinded,
except in an action to test whether the number of shares required to approve the
Merger have been legally voted in favor thereof. Any shareholder who does not
demand payment of cash for such shareholder's shares and who institutes an
action to attack the validity of the Merger or to have the Merger set aside or
rescinded would not thereafter have any right to demand payment of cash pursuant
to the exercise of dissenters' rights.
VOTE AGAINST THE MERGER
Any shareholders of Citation desiring to exercise dissenters' rights must
vote against the Merger. Record shareholders of Citation may vote part of the
shares which they are entitled to vote in favor of the Merger or abstain from
voting a part of such shares without jeopardizing their dissenters' rights as to
other shares; however, if record shareholders vote part of the shares they are
entitled to vote in favor of the Merger and fail to specify the number of shares
they are so voting, it is conclusively presumed under the CGCL that their
approving vote is with respect to all shares which they are entitled to vote.
Voting against the Merger will not of itself, absent compliance with all of the
provisions summarized herein, satisfy the requirements of the CGCL for exercise
and perfection of dissenters' rights for Citation shareholders.
NOTICE OF APPROVAL
If shareholders of Citation have a right to require Citation to purchase
their shares for cash under the dissenters' rights provision of the CGCL,
Citation will mail to each such shareholder a notice of approval of the Merger
within 10 days after the date of shareholder approval, stating the price
determined by it to represent the "fair market value" of the dissenting shares.
The statement of price will constitute an offer to purchase any dissenting
shares at that price.
SUBMISSION OF STOCK CERTIFICATES
Within 30 days after the mailing of the notice of approval of the Merger,
dissenting shareholders must submit to Citation or its transfer agent
certificates representing the dissenting shares demanded to be purchased, such
certificates to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed. The notice of approval of the Merger would
specify the date by which the submission of certificates for endorsement had to
be made and a submission made after that date would not be effective for any
purpose.
PURCHASE OF DISSENTING SHARES
If a dissenting shareholder and Citation agree that any of the shares are
dissenting shares and agree upon the price of the shares, Citation, upon
surrender of certificates, will make payment of that amount (plus interest
thereon at the legal rate on judgments from the date of such agreement) within
30 days after such agreement. Any agreement between dissenting shareholders and
Citation fixing the "fair market value" of any dissenting shares must be filed
with the Secretary of Citation.
If Citation denies that the shares are dissenting shares, or Citation and a
dissenting shareholder fail to agree upon the "fair market value" of the shares,
the dissenting shareholder may, within six months after the date on which notice
of approval of the Merger was mailed to the shareholder, but not thereafter,
file a complaint (or intervene in a pending action, if any) in the Superior
Court for Santa Clara County, State of California, requesting that the Superior
Court determine whether the shares are dissenting shares and if so, the "fair
market value" per share of the dissenting shares. The cost of the action will be
assessed or apportioned as the Superior Court considers equitable, but if the
"fair market value" is determined to exceed the price offered to the shareholder
by Citation, then Citation will be required to pay such costs (including, in the
discretion of the Superior Court, attorneys fees, fees of expert witnesses and
interest at the legal rate on judgments, if such "fair market value" is
determined to exceed 125% of the price offered by Citation). A dissenting
shareholder must bring this action within six months after the date on which
notice of approval of the Merger was mailed
50
<PAGE> 58
to the shareholder whether or not Citation responds within such time to the
shareholder's written demand that Citation purchase for cash shares voted
against the Merger.
OHIO LAW -- PICO SHAREHOLDERS
The rights and remedies of shareholders of PICO whose shares are not voted
in favor of the Merger Agreement are set forth in Section 1701.85 of the Ohio
Revised Code (the text of which is included as Appendix D to this Joint Proxy
Statement/Prospectus). The following summary of Section 1701.85 is not intended
to be complete and is qualified in its entirety by reference to the full text of
Appendix D.
Section 1701.85 provides in effect that a shareholder of PICO whose shares
are not voted in favor of the Merger is entitled, if the Merger is consummated,
to be paid the fair cash value of the shares held of record by the shareholder
on the record date, if the shareholder serves a written demand therefor upon
PICO on or before the 10th day following the shareholders' vote authorizing the
Merger and if the shareholder otherwise complies with Section 1701.85. If PICO
and any shareholder cannot agree upon the fair cash value of such shares, PICO
or the shareholder may, within three months after the service of the written
demand by the shareholder, file or join in a petition in the Court of Common
Pleas of Fairfield County, Ohio, for a determination of the fair cash value
thereof. Fair cash value is determined as of the day prior to the date on which
the vote of the shareholders authorizing the Merger is taken and excludes any
appreciation or depreciation in market value resulting from the proposed Merger.
Failure to vote against the Merger will not constitute a waiver of a
shareholder's rights under Section 1701.85. Voting against the Merger will not
constitute a written demand as required by that statute. The rights of a
dissenting shareholder to be paid the fair cash value of his or her shares will
terminate (1) if the Merger is not consummated, (2) if the shareholder fails to
serve a timely and appropriate written demand upon PICO, (3) if the shareholder
does not, upon request of PICO, make timely and appropriate surrender of the
certificates evidencing the shares for endorsement thereon of a legend to the
effect that demand for the fair cash value of such shares has been made, (4) if
the demand is withdrawn with the consent of the directors of PICO or (5) if PICO
and the dissenting shareholder shall not have agreed upon the fair cash value of
such shares and PICO has not filed, or such shareholder has not filed or joined
in, an appropriate petition in the Court of Common Pleas of Fairfield County,
Ohio, for an appraisal of the fair cash value of such shares within three
months.
PICO shareholders electing to exercise their dissenters' rights with
respect to some or all of their shares must deliver a written notice to PICO at
Physicians Insurance Company of Ohio, 13515 Yarmouth Drive, N.W., Pickerington,
Ohio 43147, Attn: Mr. James F. Mosier, Secretary.
The notice must specify the shareholder's name and address, the number of
shares as to which relief is sought and the amount claimed by the shareholder as
the fair cash value thereof. Such notice must be received by PICO on or before
, 1996, 10 days after the PICO Meeting.
51
<PAGE> 59
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed balance sheet as of
March 31, 1996 combines the historical consolidated balance sheets of Citation
and PICO as if the pending Merger had been effective on March 31, 1996 after
giving effect to the purchase accounting adjustments described in the
accompanying notes. The unaudited pro forma combined condensed statements of
operations present the combined results of operations of Citation and PICO for
the year ended December 31, 1995 and the quarter ended March 31, 1996 as if the
acquisition had been effective on January 1, 1995 , after giving effect to the
purchase accounting adjustments described in the accompanying notes.
Pursuant to the Merger Agreement between Citation and PICO, PICO will
acquire Citation in a reverse merger whereby each holder of a share of PICO
Stock will receive a number of shares of Citation Common Stock equal to the
Exchange Ratio. The Exchange Ratio will be equal to the PICO Share Value divided
by $5.03, and the PICO Share Value will be the average of the closing price of
one share of PICO Stock on the Nasdaq National Market for the 20 consecutive
trading days ending with the trading day immediately prior to the Determination
Date. The unaudited pro forma combined financial statements are prepared based
upon the assumption that the PICO average trading price is at the minimum level
of $25.20.
The unaudited pro forma combined condensed financial statements and
accompanying notes reflect the application of the purchase method of accounting.
Under this method of accounting, the purchase price will be allocated to
Citation's assets acquired and liabilities assumed based on their estimated fair
values at the time of the acquisition. As described in the accompanying notes,
preliminary estimates of the fair values of assets and liabilities have been
combined with the recorded values of the assets and liabilities of PICO.
Changes to the adjustments included in the unaudited pro forma combined
condensed financial statements are expected to be made as evaluations of assets
and liabilities are completed and as additional information becomes available.
Accordingly, the final combined amounts will differ from those set forth in the
accompanying unaudited pro forma combined condensed financial statements. The
unaudited pro forma combined condensed financial statements are intended for
informational purposes only and are not necessarily indicative of the future
financial position or future results of operations of the combined company or of
the financial position or the results of operations of the combined company that
would have actually occurred had the acquisition been in effect as of the date
or for the periods presented.
These unaudited pro forma combined condensed financial statements and the
accompanying notes should be read in conjunction with the consolidated financial
statements, including the accompanying notes, of Citation and PICO appearing
elsewhere or incorporated by reference in this Joint Proxy Statement/
Prospectus.
52
<PAGE> 60
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MINIMUM PICO SHARE PRICE OF $25.20
<TABLE>
<CAPTION>
PHYSICIANS
INSURANCE COMPANY PRO FORMA
OF OHIO AND SUBSIDIARIES CITATION INSURANCE ADJUSTMENTS
CONSOLIDATED GROUP FOR
FOR THE FOR THE PURCHASE OF
THREE MONTHS ENDED THREE MONTHS ENDED CITATION
MARCH 31, 1996 MARCH 31, 1996 INSURANCE
(AS REPORTED) (AS REPORTED) GROUP PRO FORMA
------------------------ --------------------- ------------ ---------
<S> <C> <C> <C> <C>
Operating data:
Premium income................... $4,644 $12,900 $17,544
Net investment income............ 3,210 2,252 5,462
Food processing and other........ 7112 $ 299(j) 7,411
------ ------- ----- -------
Total revenues........... 14,966 15,152 299 30,417
Net losses and loss adjustment
expenses...................... 3,446 10,343 13,789
Insurance underwriting and other
expenses...................... 4,936 4,373 (118)(i) 9,191
Food processing and other........ 5,711 5,711
------ ------- ----- -------
Total expenses........... 14,093 14,716 (118) 28,691
------ ------- ----- -------
Income from continuing operations
before income taxes and
minority interest............. 873 436 417 1,726
Minority interest in income of
subsidiaries.................. 499 499
Income taxes..................... 431 40(l) 471
------ ------- ----- -------
Income (loss) from continuing
operations.................... $ (57) $ 436 $ 377 $ 756
====== ======= ===== =======
Per common share:
Income (loss) from continuing
operations.................... $(0.01) $ 0.02
Weighted average shares
outstanding...................... 5,445 33,439(k)
</TABLE>
The accompanying notes are an integral part of this pro forma financial
information.
53
<PAGE> 61
PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MINIMUM PICO SHARE PRICE OF $25.20
<TABLE>
<CAPTION>
PHYSICIANS (EXCHANGE
INSURANCE RATE)
COMPANY (UTILIZED
OF OHIO AND .733) CITATION
SUBSIDIARIES SEQUOIA THE ONDAATJE INSURANCE
CONSOLIDATED INSURANCE CORPORATION(2) GROUP
FOR THE COMPANY FOR FOR THE NINE PRO FORMA PRO FORMA FOR THE YEAR
YEAR ENDED THE MONTHS ADJUSTMENTS ADJUSTMENTS ENDED
DECEMBER 31, SEVEN MONTHS ENDED FOR FOR DECEMBER 31,
1995 ENDED SEPTEMBER 30, PURCHASE OF PURCHASE OF 1995
(AS JULY 31, 1995 SEQUOIA THE ONDAATJE (AS
REPORTED) 1995 (AS REPORTED) INSURANCE(4) CORPORATION(3) TOTAL REPORTED)
------------ ------------ -------------- ------------ -------------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Premium income....... $ 4,291 $ 25,022 $29,313 $ 54,736
Net investment
income............. 9,286 2,502 $ 3,128 14,916 9,514
Realized gain on
investments........ 5,142 5,142 2,133
Food processing and
other.............. 3,314 3,314
Other income......... 3,548 201 12,333 16,082 562
------- ------- ------- ----- ------- ------- -------
Total
revenues..... 25,581 27,725 15,461 68,767 66,945
Net losses and loss
adjustment
expenses........... 4,363 20,789 25,152 46,723
Insurance
underwriting and
other expenses..... 19,158 4,394 $ (477)(o) 23,200 19,283
125(p)
Food processing and
other.............. 21,218 $ 25(m) 21,243
------- ------- ------- ----- ------- ------- -------
Total
expenses..... 23,521 25,183 21,218 (352) 25 69,595 66,006
------- ------- ------- ----- ------- ------- -------
Income (loss) from
continuing
operations before
income taxes and
minority
statement.......... 2,060 2,542 (5,757) 352 (25) (828) 939
Minority interest in
loss of
subsidiaries....... 473 (67) 4,054(n) 4,460
Provision for income
taxes.............. 877 23 736 1,636
------- ------- ------- ----- ------- ------- -------
Income (loss) from
continuing
operations......... $ 1,656 $ 2,519 $ (6,560) $ 352 $4,029 $ 1,996 $ 939
======= ======= ======= ===== ======= ======= =======
Per common share:
Income from
continuing
operations......... $ 0.32
Weighted average shares
outstanding.......... 5,187
<CAPTION>
PRO FORMA
ADJUSTMENTS
FOR
PURCHASE OF
CITATION
INSURANCE GROUP PRO FORMA
--------------- ---------
<S> <C> <C>
OPERATING DATA:
Premium income....... $ 84,049
Net investment
income............. 24,430
Realized gain on
investments........ 7,275
Food processing and
other.............. 3,314
Other income......... $ 1,196(j) 17,840
----- --------
Total
revenues..... 1,196 136,908
Net losses and loss
adjustment
expenses........... 71,875
Insurance
underwriting and
other expenses..... (470)(i) 42,013
Food processing and
other.............. 21,243
----- --------
Total
expenses..... (470) 135,131
----- --------
Income (loss) from
continuing
operations before
income taxes and
minority
statement.......... 1,666 1,777
Minority interest in
loss of
subsidiaries....... 4,460
Provision for income
taxes.............. 160(l) 1,796
----- --------
Income (loss) from
continuing
operations......... $ 1,506 4,441
===== ========
Per common share:
Income from
continuing
operations......... $ 0.14
Weighted average shares
outstanding.......... 32,075 (k)
</TABLE>
The accompanying notes are an integral part of this pro forma financial
information.
54
<PAGE> 62
PRO FORMA COMBINED BALANCE SHEET
AS OF MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PHYSICIANS (1)
INSURANCE COMPANY PRO FORMA
OF OHIO AND ADJUSTMENTS
SUBSIDIARIES CITATION FOR MERGER WITH
CONSOLIDATED INSURANCE GROUP CITATION
(AS REPORTED) (AS REPORTED) INSURANCE GROUP PRO FORMA
----------------- --------------- --------------- ---------
<S> <C> <C> <C> <C>
Assets
Cash, cash equivalents, and other invested
assets......................................... $ 139,559 $ 2,478 $ 142,037
Marketable securities............................ 170,834 127,887 298,721
Land held for development........................ 1,625 1,625
-------- -------- --------
Total Investments...................... 312,018 130,365 442,383
-------- -------- --------
Premiums due and other receivables............... 23,549 10,685 34,234
Reinsurance receivables.......................... 95,650 12,958 108,608
Prepaid deposits and reinsurance premiums........ 8,738 707 9,445
Accrued investment income........................ 1,295 2,417 3,712
Property and equipment, net...................... 28,894 964 $ (964)(d) 28,894
Deferred policy acquisition costs................ 4,427 4,208 8,635
Assets held in separate accounts................. 4,823 4,823
Other............................................ 11,645 14,330 668(e) 26,643
-------- -------- -------- --------
Total Assets................................ $ 491,039 $ 176,634 $ (296) $ 667,377
======== ======== ======== ========
Liabilities
Unpaid losses and loss adjustment expense, net of
discount....................................... $ 223,010 $ 104,019 $ 327,029
Future policy benefits and claims payable........ 13,635 13,635
Annuity and other policyholders' funds........... 32,366 32,366
Unearned premiums................................ 26,558 17,570 44,128
Reinsurance balances payable..................... 6,702 6,643 13,345
Accrued expenses and other liabilities........... 15,487 3,509 11,961(e) 32,712
1,000(f)
755(b)
Deferred tax liability........................... 9,320 9,320
Deferred gain on retroactive reinsurance......... 3,424 3,424
Liabilities related to separate accounts......... 4,823 4,823
-------- -------- -------- --------
Total Liabilities........................... 335,325 131,741 13,716 480,782
-------- -------- -------- --------
Minority interest................................ 75,270 75,270
Shareholders' Equity
Common stock and additional paid in capital...... 17,409 45,902 (13,021)(h) 50,290
Net unrealized appreciation on investments....... 22,533 1,617 (1,617)(h) 22,533
Cumulative foreign currency translation
adjustment..................................... (575) (575)
Retained earnings (deficit)...................... 41,878 (626) 626(h) 41,878
Less common stock in treasury.................... (801) (2,000) (2,801)
-------- -------- -------- --------
Total Shareholders' Equity.................. 80,444 44,893 (14,012) 111,325
-------- -------- -------- --------
Total Liabilities and Shareholders'
Equity............................... $ 491,039 $ 176,634 $ (296) $ 667,377
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of this pro forma financial
information.
55
<PAGE> 63
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
(1) The Merger will be accounted for under the purchase method of
accounting as a reverse merger since the PICO shareholders will control
approximately 80% of the newly issued shares of the newly combined corporation.
The final allocation of the purchase price has not yet been determined, and
accordingly, the amounts shown below may differ from the amounts ultimately
determined. The allocation of the purchase price is determined as follows (in
thousands):
Purchase Price
<TABLE>
<S> <C>
Value of Citation shares to be exchanged(a)....... $ 30,654
Acquisition Costs(b).............................. 755
Value of Citation option assumed(c)............... 227
--------
31,636
</TABLE>
Allocation of Purchase Price
<TABLE>
<S> <C>
Historic Citation Shareholders' Equity............ 44,893
Adjust assets and liabilities:
Property and equipment(d).................... (964)
Deferred income taxes(e)..................... 668
Integration liability(f)..................... (1,000)
Negative goodwill(g)......................... (11,961)
--------
$ 31,636
</TABLE>
- ---------------
(a) Represents the currently issued and outstanding shares of Citation Common
Stock as of March 31, 1996 valued at $5.03, the implied share price of
Citation Common Stock.
(b) Represents management's estimate of PICO's expenses and fees related to the
Merger, including expenses and fees for legal counsel, investment advisors,
printing and distribution, and accountants.
(c) Represents an adjustment to reflect the fair value of Citation stock options
assumed.
(d) Represents an adjustment to write-off property and equipment due to negative
goodwill.
(e) Represents an adjustment to deferred income taxes related to the write-off
of property and equipment and integration liability.
(f) Represent management's estimate of integration costs as a result of the
Merger.
(g) Represents negative goodwill related to the excess of Citation's fair value
of net assets in excess of the purchase price.
(h) Represents the elimination of Citation retained earnings and unrealized
appreciation of investments and the adjustment of equity accounts for the
combined corporation.
Citation's pro forma adjustments to its results of operations for the three
months ended March 31, 1996 and twelve months ended December 31, 1995 for the
acquisition are as follows:
(i) Represents adjustment related to the add back of depreciation expense
related to the twelve months ended December 31, 1995 and three months ended
March 31, 1996.
(j) Represents adjustment related to the straight line amortization of negative
goodwill over a 10 year period.
(k) For fiscal year 1995 reflects Citation's weighted average shares outstanding
of 6,082,825 plus PICO's historic weighted average shares for 1995 at the
exchange rate of 5.01. For the three months ended March 31, 1996 reflects
Citation's weighted average shares of 6,107,292 plus the PICO's historic
weighted average shares at the exchange rate of 5.01.
(l) Represents the tax effect of (other than negative goodwill) pro forma
adjustments at an effective tax rate of 34%.
56
<PAGE> 64
NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
(2) TOC's results of operations from October 1, 1995 through December 31,
1995 (stub period) are included in PICO's Consolidated Results of Operations for
the twelve months ended December 31, 1995, "as reported". The following is a
summary of TOC's result of operations for the stub period.
<TABLE>
<S> <C>
Total revenue.................................... $6,685,000
Total expense.................................... $7,025,000
Loss from continuing operations.................. $1,204,000
</TABLE>
Sequoia's results of operations from the acquisition date, August 1, 1995,
through December 31, 1995 (stub period) are included in PICO's Consolidated
Results of Operations for the twelve months ended December 31, 1995, "as
reported." The following is a summary of Sequoia's results of operations for the
stub period.
<TABLE>
<S> <C>
Total revenue.................................... $2,421,000
Total expenses................................... $6,207,000
Loss from continuing operations.................. $3,722,000
</TABLE>
(3) On September 5, 1995, PICO purchased 21,681,084 shares of common stock
in TOC for $34.4 million. The Company's purchase amounted to approximately 38.2%
of TOC's outstanding shares. PICO obtained four of the five Board of Directors'
seats, and the chairman of the Board of Directors (chairman) and the Chief
Executive Officer (CEO) of the Company are the chairman and CEO of TOC,
respectively (Board action requires a vote of a majority of the Directors). As a
result, PICO has effective control of TOC and controls the day-to-day operations
of TOC. Therefore, TOC's financial statements are consolidated.
The following pro forma adjustments have been reflected:
(m) Adjustment to reflect estimated amortization of goodwill over
25-year period.
(n) Adjustment to reflect the 61.8% minority interest in TOC's results
of operations.
(4) On March 7, 1995, PICO executed a Stock Purchase Agreement
("Agreement") with Sydney Reinsurance Corporation ("SRC") to acquire all
outstanding stock of SRC's wholly-owned subsidiary, Sequoia, a property and
casualty insurance company incorporated under the laws of California and
licensed to write insurance in California. The acquisition price of $1.4 million
was paid in cash August 1, 1995.
In connection with the Agreement, Sequoia entered into a Reinsurance
Agreement with SRC. Under the Reinsurance Agreement, Sequoia ceded its net
unpaid loss and loss adjustment expense and unearned premiums as of August 1,
1995 to SRC for a reinsurance premium equal to the sum of the account balances
ceded. The Reinsurance Agreement resulted in no gain or loss to Sequoia. The
prospective and retroactive provisions of the agreement will be accounted for
separately. The amount paid under the Reinsurance Agreement for retroactive
reinsurance will be reported as reinsurance receivable and the amounts paid for
prospective reinsurance will be reported as prepaid reinsurance in accordance
with Statement of Financial Accounting Standard No. 113, Accounting and
Reporting for Reinsurance of Short-Duration and Long Duration Contracts.
The following pro forma adjustments have been made to reflect the impact of
the Stock Purchase Agreement and Reinsurance Agreement on Sequoia's historical
financial statements.
(o) To adjust the amount of historical depreciation expense to reflect
depreciation on the portion of the purchase price ($350,000) allocated to
fixed assets. Depreciation reported for the seven months ended July 31,
1995 was $593,000. Fixed assets are depreciated on the straight line method
over the estimated lives of the assets.
(p) To record the amortization of goodwill ($1.0 million) on a
straight line basis over a 10-year period.
57
<PAGE> 65
COMPARATIVE MARKET PRICE DATA
The Citation Common Stock has been traded under the symbol "CITN" on the
Nasdaq National Market since March 1991. PICO Stock has been traded on the
Nasdaq National Market under the symbol "PICOA" since 1980. The table below sets
forth, for the calendar quarters indicated, the high and low sales prices for
the Citation Common Stock and the PICO Stock as reported on the Nasdaq National
Market. During the periods presented below, neither Citation nor PICO has
declared or paid any dividends.
<TABLE>
<CAPTION>
PRICE PER SHARE
-----------------------------
CITATION PICO
------------ ------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
1993
First Quarter.......................................... $8 $6 3/4 $5 1/2 $3 1/2
Second Quarter......................................... 9 3/8 7 3/8 4 1/4 3
Third Quarter.......................................... 11 1/4 8 3/4 3 1/2 2 3/4
Fourth Quarter......................................... 10 3/4 9 4 2 3/4
1994
First Quarter.......................................... 9 1/2 5 1/4 5 1/4 3
Second Quarter......................................... 6 1/2 5 6 1/4 4 1/2
Third Quarter.......................................... 6 1/4 5 1/4 6 1/4 5 1/2
Fourth Quarter......................................... 6 2 3/4 5 1/2 5
1995
First Quarter.......................................... 3 1/4 2 3/8 7 3/8 5 1/4
Second Quarter......................................... 3 3/8 2 3/4 10 5/8 7 3/8
Third Quarter.......................................... 4 7/8 2 7/8 16 1/4 10 1/4
Fourth Quarter......................................... 4 7/8 3 1/2 33 15 3/4
1996
First Quarter.......................................... 4 3/4 3 1/2 31 3/4 20 3/4
Second Quarter (through June 14)....................... 4 5/8 3 7/8 25 3/4 21
Third Quarter (through ).....................
</TABLE>
On March 1, 1996, the last full trading day prior to the announcement of
the Merger, the reported closing price of Citation Common Stock was $4.00 per
share and the reported closing price of the PICO Stock was $27.13 per share. On
June 14, 1996, the reported closing price of Citation Common Stock was $4.50 per
share and the reported closing price of the PICO Stock was $25.00 per share.
Following the Merger, the Citation Common Stock will continue to trade on
the Nasdaq National Market under the symbol "PICO". Following the Merger, the
PICO Stock will cease to trade on the Nasdaq National Market and there will be
no further market for the PICO Stock.
Because the Exchange Ratio is not fixed and because the market price of the
PICO Stock is subject to fluctuation, the market value of the shares of the
Citation Common Stock that holders of the PICO Stock will receive in the Merger
may increase or decrease prior to and following the Merger. Shareholders are
urged to obtain current market quotations for the Citation Common Stock and the
PICO Stock.
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<PAGE> 66
AMENDMENTS TO CITATION'S ARTICLES OF INCORPORATION
If the Merger is approved by the shareholders of Citation, the Citation
Board proposes to amend and restate Citation's Articles of Incorporation to read
in full as reflected in the Amended and Restated Articles of Incorporation
attached hereto as Appendix B. Each of the amendments to the Articles described
below were requested by PICO in the course of the negotiations regarding the
Merger. The approval of all of the amendments, in the form of the Amended and
Restated Articles, is a condition to PICO's obligation to consummate the Merger.
If the shareholders of Citation approve such amendments, all of them will be
effected through adoption of the Amended and Restated Articles of Incorporation
(the "Amended Articles"). If the shareholders do not approve all of the
amendments, none of them will be adopted and the Merger will not occur. The
material amendments to the Articles of Incorporation are described below.
PROPOSED AMENDMENTS AND PRINCIPAL REASONS THEREFOR
CHANGE OF NAME OF THE COMPANY
The name of the corporation will be changed from Citation Insurance Group
to PICO Holdings, Inc. This change is being made in order to take advantage of
the goodwill associated with the "PICO" name in the insurance and investment
industry.
INCREASE IN AUTHORIZED SHARES
The number of authorized shares of Common Stock of Citation will be
increased from 15,000,000 shares, with a par value of $0.10 per share, to
100,000,000 shares, with a par value of $0.001 per share. The number of
authorized shares of Preferred Stock of Citation will be increased from
1,000,000 shares, with a par value of $1.00 per share, to 2,000,000 shares, with
a par value of $0.01 per share. The number of shares designated as Series A
Junior Participating Cumulative Preferred shares will be increased from 100,000
shares to 1,000,000 shares and will be reserved for issuance under the Rights
Plan. These amendments changing the authorized number of shares are being made
in order for Citation to satisfy its obligations in connection with the issuance
of shares in the Merger, as well as to provide a reasonable number of authorized
shares for future contingencies and business opportunities as they arise.
Neither Citation nor PICO has entered into any agreements in principle or other
contractual commitments with respect to any future contingencies or business
opportunities. Assuming the Merger becomes effective, and assuming the maximum
Exchange Ratio of 6.1233, Citation will be required to issue an additional
31,907,886 shares of Common Stock to the shareholders of PICO. Citation also
intends to reserve 3,110,636 shares of Common Stock for issuance upon exercise
of stock options of PICO (assuming an Exchange Ratio of 6.1233), which Citation
will assume upon consummation of the Merger.
NUMBER OF AUTHORIZED DIRECTORS
The current number of authorized directors of Citation is 11. The Articles
of Incorporation will be amended to provide that the authorized number of
directors is not less than five nor more than nine. The exact number of
authorized directors immediately following the Merger will be nine. Following
the Merger, the Board of Directors of Citation or the holders of a majority of
the outstanding shares can fix the exact number of directors (within the five to
nine range). The minimum or maximum number of directors may be changed only by
the affirmative vote of at least a majority of the voting power of the
outstanding shares of capital stock entitled to vote and by a resolution duly
adopted by the Board of Directors. By creating a range for the authorized number
of directors, Citation, through its Board of Directors, will have greater
flexibility to expand or reduce the size of the board (within the range) as it
deems necessary.
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<PAGE> 67
EFFECTIVE DATE OF PROPOSED AMENDMENTS AND VOTE REQUIRED FOR ADOPTION
The proposed amendments to Citation's Articles of Incorporation, as
reflected in the Amended and Restated Articles of Incorporation, will become
effective upon consummation of the Merger and will continue in effect until
amended or repealed. The proposed amendments require the affirmative vote of the
holders of a majority of the outstanding shares of Citation Common Stock
entitled to vote at the Citation Meeting.
THE CITATION BOARD RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE ADOPTION OF
ALL OF THE PROPOSED AMENDMENTS TO CITATION'S ARTICLES OF INCORPORATION, AS
REFLECTED IN THE AMENDED AND RESTATED ARTICLES OF INCORPORATION OF CITATION,
ATTACHED HERETO AS APPENDIX B.
60
<PAGE> 68
AMENDMENTS TO CITATION'S BYLAWS
If the Merger is approved by the shareholders of Citation, the Citation
Board proposes to amend Citation's Bylaws to read in full as reflected in the
Amended and Restated Bylaws attached hereto as Appendix C (the "Amended
Bylaws"). Each of the amendments to the Bylaws described above were requested by
PICO in the course of the negotiations regarding the Merger. The approval of
such amendments, in the form of the Amended and Restated Bylaws, is a condition
to PICO's obligation to consummate the Merger. If the shareholders of Citation
approve such amendments, all of the amendments shall be effected through
adoption of the Amended Bylaws. If the shareholders of Citation do not approve
all of the amendments, none of them will be adopted and a material condition to
the Merger will not be satisfied.
PROPOSED AMENDMENTS AND PRINCIPAL REASONS THEREFOR
ANNUAL MEETING DATE
The Citation Bylaws currently provide that the annual meeting of
shareholders will be held on the first Thursday of May each year. The proposed
amendment provides that the annual shareholders' meeting will be held on the day
and at the time that the Citation Board fixes. The purpose of this amendment is
to provide Citation with some flexibility in setting the date and time for the
annual meeting.
NUMBER OF AUTHORIZED DIRECTORS
In order to be consistent with the Amended Articles, the Bylaws will be
amended to provide that the authorized number of directors will be not less than
five nor more than nine. See "Amendments to Citation's Articles of
Incorporation -- Proposed Amendments and Principal Reasons Therefor -- Number of
Authorized Directors."
EFFECTIVE DATE OF PROPOSED AMENDMENTS AND VOTE REQUIRED FOR ADOPTION
The proposed amendments to Citation's Bylaws will become effective upon
consummation of the Merger and will continue in effect until amended or
repealed. The proposed amendments require the affirmative vote of the holders of
a majority of the outstanding shares of Citation Common Stock entitled to vote
at the Citation Meeting.
THE CITATION BOARD RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE ADOPTION OF
ALL OF THE PROPOSED AMENDMENTS TO CITATION'S BYLAWS, AS REFLECTED IN THE AMENDED
AND RESTATED BYLAWS OF CITATION, ATTACHED HERETO AS APPENDIX C.
61
<PAGE> 69
BUSINESS OF PICO
INTRODUCTION
PICO, a licensed Ohio insurance corporation, operates primarily through a
number of wholly and partially owned subsidiaries. The most significant
subsidiaries of PICO are TOC, a Canadian investment company, and Sequoia, a
wholly owned California insurance corporation. Accordingly, a description of
PICO and its subsidiaries are described below followed by additional
descriptions of the business and properties of each of TOC and Sequoia.
BUSINESS AND PROPERTIES OF PICO
HISTORY
PICO was incorporated under the laws of Ohio in September 1976 and was
licensed by the Ohio Department in December 1976. PICO was formed with the
sponsorship of the Ohio State Medical Association ("OSMA") to provide MPL
insurance coverage to physicians who were members of the OSMA. PICO was formed
in response to a then-existing crisis in the MPL insurance marketplace in Ohio.
MPL claims had increased substantially in severity and frequency. Insurance
companies providing MPL coverage responded in some cases by increasing premiums
significantly or even by leaving the marketplace. The OSMA sought to provide a
stable insurance provider for its members in the face of this volatile MPL
marketplace by forming PICO.
Until 1993, OSMA held shares representing a majority of PICO's voting
power. PICO's Code of Regulations also contained the requirement that three OSMA
officers sit on PICO's Board of Directors and that PICO only write MPL insurance
for the OSMA members. PICO secured the endorsement of its insurance products by
the OSMA pursuant to an endorsement contract.
The strategic direction of PICO changed in 1993. First, PICO repurchased
its shares from the OSMA and amended its Code of Regulations to delete the
requirements that three OSMA officers sit on PICO's Board. The MPL product
endorsement was terminated and the three PICO directors who were affiliated with
the OSMA resigned as directors.
Additionally in 1993, PICO was approached by an investor who could provide
a significant capital infusion. PICO sold 1,428,571 newly-issued and authorized
shares of PICO stock, representing, at that time, 32% of PICO's voting power,
for $5 million to GPG, a London-based strategic investment company. At that same
time, four designees of GPG (Messrs. Broadbent, whose term expired in 1995,
Langley and Hart and Dr. Weiss) were elected to PICO's Board. GPG subsequently
purchased from PICO $3.0 million of additional shares of PICO Stock, thereby
increasing GPG's equity stake in PICO.
At March 31, 1996, PICO operated in four industry segments: property and
casualty insurance, life and health insurance, investment banking and other. The
MPL segment has been discontinued as a result of the sale of PICO's and PRO's
recurring MPL business to Mutual beginning with January 1, 1996 renewals. See
"-- Recent Developments." MPL insurance was written by PICO and its wholly-owned
subsidiary, PRO, an Ohio corporation organized in 1979. PICO and PRO sold MPL
insurance to physicians, dentists, nurses and other allied health care
professionals. PICO has conducted and continues to conduct its life and health
insurance business through its indirect subsidiary, APL, an Ohio-domiciled life
insurer which was formed in 1978. APL is a wholly-owned subsidiary of Physicians
Investment Company ("PIC"), an Ohio corporation formed in 1982. PICO owns all of
the issued and outstanding shares of PIC. In July 1993, APL began aggressively
marketing a critical illness policy which PICO and APL believe is unique to the
U.S. market. The investment banking and other segments are conducted principally
by TOC in which PICO acquired 38.2% ownership and effective control on September
5, 1995. The property and casualty insurance segment is currently engaged in by
Sequoia, a wholly-owned subsidiary of PICO acquired on August 1, 1995. See "--
Recent Developments" and "-- Business and Properties of Sequoia."
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<PAGE> 70
In addition to PRO, PIC, APL and Sequoia, at March 31, 1996, PICO had five
wholly-owned subsidiaries, none of whose current operations are material to the
financial position of PICO. See "-- Recent Developments" below for a discussion
of CLM Insurance Agency, Inc. Raven Development Company was incorporated in Ohio
in 1981 as a real estate development corporation. It is currently involved in
one development in central Ohio but is in the process of withdrawing from the
real estate development industry. Medical Premium Finance Company ("MPFC") was
incorporated in Ohio to conduct insurance premium finance business. MPFC ceased
writing new loans effective September 30, 1994, and became totally dormant as of
October 1, 1995. S.M.B. Financial Planning, Inc. ("SMB") is an Ohio corporation
acquired in 1983 to provide financial planning services. SMB has not been
operating for the past five years.
In 1983, PICO incorporated Summit and registered it with the SEC as an
investment adviser. Summit was inactive from 1990 through 1994, and in January
1995, Summit was reactivated. In addition to its registration with the SEC,
Summit is registered as an investment adviser in California, Kansas, Louisiana,
Oregon, Virginia and Wisconsin. Summit maintains an office in California. Funds
under management are approximately $400 million, 88% of which are funds which
Summit is managing on behalf of PICO and its subsidiaries and affiliates. Summit
provides an opportunity for PICO to be further diversified and will provide fee
based revenues. Since February 1995, Summit has provided investment management
services to PICO and its insurance subsidiaries. Summit also offers its services
to other individuals and institutions.
RECENT DEVELOPMENTS
During 1995, there has been an overall shift in the strategic direction of
PICO. As discussed further below, PICO has sold its recurring MPL business,
purchased a property and casualty insurance company in California which does not
write MPL insurance and made a significant investment in TOC which operates
primarily as an international investment company. PICO's objective is to use its
resources and those of its subsidiaries and affiliates to increase shareholder
value through investments in businesses which PICO believes are undervalued or
will benefit from additional capital, restructuring of operations or management,
or improved competitiveness through operational efficiencies with existing PICO
operations. This business strategy has only recently been implemented. See "Risk
Factors -- Risk Factors Applicable to PICO -- Recent Changes in Strategic
Focus."
On March 7, 1995, PICO executed the Stock Purchase Agreement with SRC to
acquire all of the outstanding stock of SRC's wholly-owned subsidiary, Sequoia,
a property and casualty insurance company incorporated under the laws of
California and licensed to write insurance in California. Sequoia provides light
commercial and multiperil insurance in northern and central California through
an independent agency system. The acquisition price of $1,350,000 was paid in
cash on August 1, 1995. All policy and claims liabilities of Sequoia prior to
closing will be the responsibility of SRC and have been unconditionally and
irrevocably guaranteed by QBE Insurance Group Limited, an Australian corporation
of which SRC indirectly is a wholly-owned subsidiary. PICO is required to
maintain a minimum surplus in Sequoia of $7.5 million and, through a management
agreement, will supervise the run-off of SRC's liabilities. As part of the
management agreement, PICO will be reimbursed for certain expenses incurred in
the servicing of the business existing prior to closing. Since its acquisition
by PICO, Sequoia has continued to write light commercial and multiperil
insurance in northern and central California.
On August 1, 1995, PICO also acquired CLM, an insurance agency licensed in
the State of California. CLM writes property and casualty policies as an
independent agent for various insurance companies.
Based upon discussions at a number of prior board meetings and after
extensive review and research, at their strategic meeting in November 1994, the
boards of directors of PICO and PRO authorized and directed management to
explore the possibility of entering into a cooperative arrangement with another
MPL insurer to reduce PICO's and PRO's involvement in the MPL industry,
including the possible sale of the MPL business or some portion thereof. This
decision was based upon the boards' conclusion that PICO and PRO, as then
operating, could not produce an acceptable return on equity for shareholders in
the long term. A number of factors contributed to the conclusion including, but
not limited to: changes in physician practices; the formation of hospital
alliances; the creation of large physician entities; volatility of the MPL
business; the legal and competitive climates within Ohio; PICO's declining
market share; lack of an acceptable Best rating; and the loss of the exclusive
endorsement from the OSMA to market MPL coverage to OSMA members in Ohio.
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<PAGE> 71
While PICO's 1994 consolidated operating results were strong, those results were
largely attributable to positive developments in PICO's historical loss
reserves. PICO believes that the MPL marketplace in Ohio and PICO's position in
it have significantly changed in the past several years, and that its 1994
consolidated operating results do not accurately reflect its long-term prospects
in the MPL industry.
On July 14, 1995, PICO and PRO entered into an Agreement for the Purchase
and Sale of Certain Assets (the "Mutual Agreement") with Mutual. This
transaction was approved by PICO's shareholders on August 25, 1995 and closed on
August 28, 1995. Pursuant to the Mutual Agreement, PICO sold the recurring
professional liability insurance business and related liability insurance
business for physicians and other health care providers (the "Book of Business")
of PICO and PRO. PICO and PRO were engaged in, among other things, the business
of offering MPL insurance and related insurance to physicians and other health
care providers principally located in Ohio. Mutual acquired the Book of Business
in consideration of the payment of $6.0 million, plus interest at a rate of 6%
per annum from July 1, 1995 until the date of closing, or an aggregate of $6.1
million.
The Book of Business generally included all contracts with independent
insurance agents, all documents and records used by PICO or PRO in connection
with professional liability policies previously issued by PICO and PRO, the
names "PICO" and "PRO" and all of the stock of PICO Insurance Agency, Inc.
Mutual did not assume any liabilities of PICO or PRO, except for any
obligations arising under the agency contracts after closing and the obligation
of PICO and PRO to issue "tail coverage" without additional premium to any
person having a professional liability policy issued or renewed by PICO or PRO
after July 15, 1995, or who renews with Mutual an insurance policy which was in
force with PICO or PRO as of July 15, 1995, and who dies, becomes disabled or
retires during the policy period ("DDR Tail Coverage"). PICO and PRO will
continue to administer the payment of claims and claims adjustment expenses
under MPL policies in force prior to July 16, 1995. PICO and PRO contributed
$3.3 million into escrow under an escrow agreement in order to fund the
liability assumed by Mutual with respect to the DDR Tail Coverage for PICO's and
PRO's insureds. An agreed amount of such funds will be released to Mutual from
escrow as and when each of such insureds renews with Mutual, and any funds
remaining in escrow after all PICO's and PRO's insurance policies have been
renewed by Mutual or expired without renewal will be released to PICO and PRO.
Simultaneously with execution of the Mutual Agreement, PICO and Mutual
entered into a Reinsurance Treaty pursuant to which Mutual agreed to assume all
risks attaching after July 15, 1995 under medical professional liability
insurance policies issued or renewed by PICO on physicians, surgeons, nurses,
and other health care providers, dental practitioner professional liability
insurance policies including corporate and professional premises liability
coverage issued by PICO, and related commercial general liability insurance
policies issued by PICO (the "Policies"), net of inuring reinsurance. The
premium payable to Mutual for such reinsurance is an amount equal to 100% of the
premiums paid to PICO, net of inuring reinsurance, on the Policies subject to a
ceding commission equal to the sum of (i) the commissions payable to PICO, to
agents procuring the Policies; (ii) Mutual's allocable share of PICO's premium
taxes or franchise taxes, whichever is lower; and (iii) Mutual's allocable share
of any guaranty fund assessment against PICO with respect to premiums paid on
the Policies.
Mutual, PICO, and PRO also entered into a Management Agreement (the
"Management Agreement") to establish the relationship among PICO, PRO and Mutual
with respect to the management of the Policies subject to the Reinsurance
Treaty. PICO and PRO appointed Mutual as their manager with respect to
marketing, underwriting, and issuing of Policies and billing and collecting
premiums therefor. The Management Agreement required PICO to continue to issue
or renew Policies to applicants approved by Mutual from the effective date of
the Reinsurance Treaty until Mutual developed the data base and administrative
support to issue Policies in Ohio. PICO and PRO provided Mutual administrative
services to support Mutual's duties as manager during this period. Mutual has
agreed to reimburse the costs of PICO and PRO in providing these services plus
approved additional expenditures. Mutual began issuing Policies directly to
insureds in Ohio on January 1, 1996, and the Management Agreement terminated as
of that date.
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<PAGE> 72
PICO and PRO have reinsured a portion of the insurance written prior to
July 16, 1995 with unaffiliated reinsurers and 100% of the insurance written
between July 16, 1995 and January 1, 1996 with Mutual. Subject to such
reinsurance, PICO and PRO remain primarily liable to policyholders.
As part of the Mutual Agreement, PICO and PRO agreed not to sell the
following insurance products for a period of five years ending August 27, 2000,
in any state in which PICO, PRO or Mutual was licensed to offer MPL insurance
products as of August 28, 1995: professional liability insurance for physicians,
surgeons, dentists, hospitals, ambulatory surgical clinics, and other health
care providers (collectively, "Health Care Providers"); reinsurance for insurers
writing professional liability insurance for such Health Care Providers;
comprehensive general liability insurance for Health Care Providers; stop loss
insurance for Health Care Providers who have contracted to provide health care
services at a fixed rate; and managed care liability insurance providing
coverage for liability arising from errors and omissions of a managed care
organization, for the vicarious liability of a managed care organization for
acts and omissions by contracted and employed providers, and for liability of
directors and officers of a managed care organization.
PICO will continue to administer the runoff of claims on policies written
or renewed prior to July 16, 1995. PICO estimates based upon actuarial
indications that approximately 75% of PICO's claim liabilities will be paid out
within five years.
On September 5, 1995, PICO purchased 21,681,084 common shares of TOC for
$34.4 million in cash. TOC is a Canadian corporation which has its offices in
Toronto, Canada. TOC is a publicly-held corporation and is listed on the Toronto
Stock Exchange (the "TSE") and The Montreal Exchange under the symbol "VOC."
PICO's purchase amounted to 38.2% of TOC's outstanding common shares and
resulted in PICO's having effective control. TOC operates primarily as an
international investment company. See "-- Business and Properties of TOC."
PREMIUMS
The following table shows the total net premiums written (gross premiums
less premiums ceded pursuant to reinsurance treaties) by line of business by
PICO, PRO and APL as a group (collectively "Physicians Insurance Company of Ohio
Group") for the periods indicated as reported in financial statements filed with
the Ohio Department using statutory accounting principles:
PHYSICIANS INSURANCE COMPANY OF OHIO GROUP
NET PREMIUMS WRITTEN
BY LINE OF BUSINESS
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Property and Casualty -- Continuing........................... $10,755 $ -- $ --
Property and Casualty -- Discontinued (MPL)................... 11,824 7,130 41,837
------- ------- -------
Total Property and Casualty Premiums........................ 22,579 7,130 41,837
------- ------- -------
Individual:
Life........................................................ 1,122 826 966
Health...................................................... 86 87 82
Annuity..................................................... 1,480 1,721 1,626
Group:
Life........................................................ 475 551 618
Health...................................................... 274 2,578 7,513
Annuity..................................................... 462 818 1,865
------- ------- -------
Total Life Insurance Premiums................................. 3,899 6,581 12,670
------- ------- -------
Total Premiums...................................... $26,478 $13,711 $54,507
======= ======= =======
</TABLE>
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<PAGE> 73
PICO experienced significant declines in MPL net premiums written over the
period described. Net premiums equal direct premiums plus assumed premiums,
minus premiums ceded under reinsurance treaties. The amount of reinsurance
assumed by PICO over the years has been negligible. However, direct MPL premiums
written have declined significantly, from $37.5 million in 1993 to $22.6 million
in 1995. Additionally, MPL premiums ceded under reinsurance treaties have varied
greatly from year to year. See "-- Reinsurance." APL's premium writings have
also declined significantly since 1993, mostly as a result of exiting the group
health insurance business in mid-1994. Purchase of APL's critical illness policy
has been less than expected and not enough to offset the decline in health
premiums. Nevertheless, premiums received for this product have increased in
recent quarters. Sequoia's property and casualty premium writings are shown only
for the period August 1 through December 31, 1995.
MARKETING
Prior to the sale of the MPL insurance business in August 1995, PICO and
PRO sold only MPL coverage. PICO and PRO were represented by approximately 40
independent insurance agents and by PICO's wholly-owned subsidiary insurance
agency, PICO Insurance Agency. While PICO and PRO were licensed collectively in
the states of Ohio, Kentucky, Michigan, West Virginia and Wisconsin, MPL
coverage was actively sold only in Ohio and Kentucky. APL is represented on a
commission basis by approximately 400 independent agents, some of whom may also
be licensed with other unaffiliated companies.
Sequoia is licensed to write insurance in California and is represented by
approximately 75 independent insurance agents and by PICO's wholly-owned
subsidiary insurance agency, CLM. Sequoia writes primarily light commercial and
multiperil insurance in northern and central California. As previously
discussed, all policy and claims liabilities of Sequoia prior to August 1, 1995
will be the responsibility of Sequoia's former parent, SRC. See "-- Recent
Developments."
Summit is registered as an investment adviser in California, Kansas,
Louisiana, Oregon, Virginia and Wisconsin as well as with the SEC. Since
February 1995, Summit has provided investment management services to PICO and
its insurance subsidiaries. Summit also offers its services to other individuals
and institutions in the jurisdictions in which it is registered as an investment
adviser and in other states where registration is not yet required.
REINSURANCE
Prior to July 16, 1995, PICO ceded a portion of the insurance it wrote to
unaffiliated reinsurers through reinsurance agreements. PICO's reinsurers for
insurance policies with effective dates between July 1, 1993 and July 15, 1995,
were TIG Reinsurance Company (rated A (Excellent) by Best), Transatlantic
Reinsurance Company (rated A+ (Superior) by Best) and Cologne Reinsurance
Company of America (rated A+ (Superior) by Best). PICO ceded insurance to these
carriers on an automatic basis when retention limits were exceeded. PICO
retained all risks up to $200,000 per occurrence. All risks above $200,000, up
to policy limits of $5 million, were transferred to reinsurers, subject to the
specific terms and conditions of the various reinsurance treaties. PICO remains
primarily liable to policyholders for ceded insurance should any reinsurer be
unable to meet its contractual obligations. PICO has not incurred any material
loss resulting from a reinsurer's breach or failure to comply with the terms of
any reinsurance agreement. MPL insurance written or renewed after July 15, 1995,
was fully reinsured by Mutual.
INVESTMENT OPERATIONS
PICO and its insurance subsidiaries, as insurance companies, must comply
with the insurance laws of their respective domiciliary states, and of the other
states in which they are licensed. The investments of insurance companies must
be in accordance with the domiciliary state's investment laws for insurance
companies. These laws prescribe the kind, quality, and concentration of
investments which may be made by insurance companies. In general, these laws
permit investments, within specified limits and subject to certain
qualifications, in federal, state and municipal obligations, corporate bonds,
common and preferred stocks, real estate and real estate mortgages.
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<PAGE> 74
The distribution of invested assets of PICO and its insurance subsidiaries
are determined by a number of factors including insurance law requirements, the
liquidity needs and taxable position of PICO and its insurance subsidiaries and
general market conditions. Accordingly, adjustments are made to each insurer's
investment portfolio from time to time. Assets relating to the property and
casualty insurance operations of PICO and its insurance subsidiaries are
invested to maximize after-tax returns with appropriate diversification of risk.
Assets relating to life insurance operations are invested consistent with
contract obligations regarding interest rate guarantees and estimated contract
maturities. Current investment policies of the life insurance operations
emphasize portfolio quality while achieving high investment yields in order to
permit the marketing of competitive interest-sensitive products such as
annuities and universal life policies.
The following table sets forth the carrying values and other data for
consolidated invested assets as of December 31 of the years indicated. TOC and
Sequoia are included as of December 31, 1995. Fixed maturity investments for
1994 and 1995 are classified as Available-For-Sale and thus they are reflected
at fair value. For 1993, fixed maturity investments are classified as Held to
Maturity and thus they are reflected at amortized cost.
<TABLE>
<CAPTION>
% OF % OF % OF
1995 TOTAL 1994 TOTAL 1993 TOTAL
------------ ----- ------------ ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
Government
Agencies............. $ 32,183,335 16.6% $ 99,724,468 46.6% $132,173,500 55.0%
Corporate Securities... 29,987,063 15.5 68,814,210 32.1 74,278,250 30.9
Mortgage-Backed
Securities........... 18,173,673 9.4 20,110,461 9.4 22,458,036 9.3
------------ ------------ ------------
Total Fixed
Maturities........... 80,334,071 41.5 188,649,139 88.1 228,909,786 95.2
Equity Securities...... 101,061,295 52.2 19,333,272 9.0 5,372,329 2.2
Short Term (CD's,
etc.)................ 9,162,925 4.7 1,998,521 0.9 1,775,981 0.7
Real Estate............ 3,038,750 1.6 4,326,497 2.0 4,654,775 1.9
------------ ------------ ------------
Total Fair Value of
Investments.......... $193,607,041 100.0% $214,307,429 100.0% $240,712,871 100.0%
============ ============ ============
Total Amortized Cost of
Fixed Maturities..... $ 80,096,983 $198,571,887 $220,357,035
============ ============ ============
</TABLE>
The consolidated fixed income portfolio (identified above as "Total Fixed
Maturities") had the following quality ratings for the last three years:
FIXED MATURITY
DISTRIBUTION BY RATING
<TABLE>
<CAPTION>
1995 1994 1993
% OF % OF % OF
TOTAL TOTAL TOTAL
----- ----- -----
<S> <C> <C> <C>
U.S. Treasury............................................... 7.2%* 23.2%* 23.7%*
Government Agency........................................... 40.7 33.1 37.0
AAA**....................................................... 2.6 4.5 4.7
AA.......................................................... 0.0 3.8 3.0
A........................................................... 13.4 15.9 18.3
Below A..................................................... 12.6 10.6 9.2
Unrated..................................................... 23.5 8.9 4.1
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
- ---------------
* Percentages are based on the face value of the instruments.
** "AAA", "AA", and "A" refer to ratings from Standard and Poor's.
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<PAGE> 75
As of December 31, 1995, the fixed income portfolios of PICO and PRO
combined had an average effective maturity of 3.9 years, while the fixed income
portfolio of APL had an average effective maturity of 4.7 years. The
mortgage-backed portfolio, which represented 22.6% of fixed maturity investments
at December 31, 1995, has not experienced a significant level of prepayments
over the last few years. This portfolio is predominantly composed of "AAA"
rated, U.S. government guaranteed collateralized mortgage obligations. As a
result of the disposition of a portion of PICO's fixed income securities during
1995 and the converting of the proceeds to equity securities and cash and cash
equivalents, the average maturity of the property and casualty portfolio fell
well below 5 years. Cash and cash equivalents totalled $121.1 million for the
consolidated group at December 31, 1995. The carrying value of the fixed income
portfolio relating to PICO and PRO totaled $52.6 million. The carrying value of
the fixed income portfolio relating to life insurance operations totaled $27.7
million. Sequoia and TOC had no fixed income securities other than cash
equivalents.
Investment income is affected by the amount of new investable funds and
investable funds arising from maturities, repayments, calls, and exchanges as
well as the timing of receipt of such funds. In addition, other factors such as
interest rates at the time of investment and the maturity, income tax status,
credit status, and other risks associated with new investments are reflected in
investment income. Future changes in the distribution of investments and the
factors described above could affect overall investment income in the future;
however, the amount of any increase or decrease cannot be predicted.
Purchases of taxable fixed income securities in 1995 were in the following
amounts: $12.8 million for PICO, $782,000 for APL and none for PRO and Sequoia.
Purchases of equity securities in 1995 totaled $93.9 million for PICO, $395,000
for PRO, $9.9 million for APL and $14.9 million for Sequoia.
Dispositions (including maturities, calls, exchanges, and scheduled
repayments) of taxable fixed income securities in 1995 were as follows: $104.2
million for PICO, $8.7 million for PRO, $28.3 million for APL, and $62.5 million
for Sequoia. Dispositions of equity securities in 1995 totaled $13.3 million for
PICO, $410,000 for PRO, $1.4 million for APL and $5.4 million for Sequoia.
Consolidated realized investment gains in 1995 totaled $5.1 million. The
yield to maturity for the fixed income portfolio was:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
PICO/PRO............................................... 6.80% 6.85% 6.98%
APL.................................................... 6.60% 7.44% 7.36%
</TABLE>
LIABILITIES FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
Liabilities for unpaid loss and LAE are estimated based upon actual and
industry experience, and assumptions and projections as to claims frequency,
severity and inflationary trends and settlement payments. Such estimates may
vary from the eventual outcome. The inherent uncertainty in estimating reserves
is particularly acute for lines of business for which both reported and paid
losses develop over an extended period of time such as MPL insurance. The
liabilities for unpaid loss and LAE of prior years were increased by $3.2
million in 1995, decreased by $12.7 million in 1994 and increased by $11.2
million in 1993, net of discount accretion, due to the following:
<TABLE>
<CAPTION>
1995 1994 1993
----- ------ -----
(IN MILLIONS)
<S> <C> <C> <C>
(Decrease) in provision for prior year claims.............. $(0.3) $(19.6) $(5.9)
Retroactive reinsurance.................................... (2.4) (7.6) --
Increase from commutation of reinsurance treaties.......... -- -- 7.7
Accretion of reserve discount 5.9 14.5 9.4
----- ------ -----
Net increase (decrease) in liabilities for unpaid loss
and LAE of prior years................................ $ 3.2 $(12.7) $11.2
===== ====== =====
</TABLE>
See schedule in Note 11 of Notes to the PICO Consolidated Financial Statements
for additional information regarding reserve changes.
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<PAGE> 76
Although PICO and PRO reserves are certified annually by two independent
actuaries as required by state law, significant fluctuations in reserve levels
can occur based upon a number of variables used in actuarial projections of
ultimate incurred losses and LAE. Although reserves are actuarially reviewed at
least twice per year, the large reserve swings for prior years indicated in the
table in the preceding paragraph were recorded in the fourth quarter of the
applicable year, rather than on an interim basis throughout the year. Reserve
fluctuations were recorded in this manner due to the fact that either the
interim actuarial report(s) showed little or no indication of significant
changes in reserve levels, or the fluctuations shown were considered to be
consistent with interim fluctuations of prior years which had proven to be of
limited validity in predicting year-end values. Interim reports are also
considered to be less credible because they are less detailed than annual
reserve reports and no actuarial opinion is issued.
In part in 1993, but to a greater extent in 1994, data indicated projected
occurrence frequency had stabilized and projected severity was lower based on
current data. Both incurred and paid development methods reflected more stable
and internally consistent results which were lower than 1992 levels (and, in
1994, lower than 1993 levels). Given that all methods at December 31, 1994
affirmed the early signals of improvement in 1993, projected ultimate incurred
losses and LAE were adjusted for the prior years. Excess loss layers (losses
greater than $200,000) were more significantly impacted because the
aforementioned improvement in basic limits projections flows into the excess
loss projection estimation process and was supplemented by a more thorough study
of excess loss levels that also indicated favorable development for this layer
of exposure (PICO's excess experience was determined to be more favorable
relative to prior indications). In combination, these changes across all
coverage types (basic and excess limits; occurrence, claims-made and tail)
resulted in the large reduction in ultimates at December 31, 1994 versus
ultimates at December 31, 1993 shown in the roll-forward of reserves schedule in
Note 11 of Notes to the PICO Consolidated Financial Statements.
PICO's liability for unpaid loss and LAE is discounted to reflect
investment income as permitted by the Ohio Department. The method of discounting
is based upon historical payment patterns and assumes an interest rate at or
below PICO's investment yield, and is the same rate used for statutory reporting
purposes. Prior to 1994, direct and assumed MPL reserves were discounted at a
rate of 7.5% for 1987 and prior accident years, 5.5% for the 1988 accident year,
5% for accident years 1989, 1990 and 1991, and 4% for the 1992 and 1993 accident
years. In 1994, PICO lowered its discount rate to 4% for all accident years
resulting in a cumulative effect of a change in accounting principle of $4.1
million.
PICO seeks to reduce the loss that may arise from individually significant
claims or other events that cause unfavorable underwriting results by reinsuring
certain levels of risk with other insurance carriers.
In 1993, PICO commuted an aggregate excess of loss reinsurance contract
entered into in 1992 resulting in the reversal of the ceded premiums and losses.
PICO realized a loss on the commutation of $1.7 million. In 1994, PICO entered
into a specific excess reinsurance treaty covering $3.0 million of losses in
excess of the $2.0 million retention after a one-time deductible of an aggregate
$3.0 million of losses in excess of $2.0 million on losses incurred during the
period January 1, 1992 through June 30, 1993. The $1.6 million of premiums paid
under this treaty has been accounted for as a deposit. PICO entered into two
other treaties in 1994. One treaty covers $800,000 of losses in excess of the
$200,000 retention and the other treaty covers $4.0 million of losses in excess
of $1.0 million. Both treaties cover policies issued or renewed after July 1,
1993, and contain elements of retroactive and prospective risk transfers. The
expected retroactive reinsurance gain of $3.5 million was deferred as of
December 31, 1995.
RECONCILIATION OF UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
An analysis of changes in the liability for unpaid loss and LAE for 1993,
1994 and 1995 is set forth in Note 11 of Notes to the PICO Consolidated
Financial Statements.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
The following table presents the development of balance sheet liabilities
for 1985 through 1995 for the MPL line of business. Sequoia's property and
casualty reserves are not included as all net reserves are
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<PAGE> 77
attributable to the current year due to the reinsurance agreement with SRC. The
"Net liability as originally estimated" line shows the estimated liability for
unpaid losses and LAE recorded at the balance sheet date on a discounted basis
for each of the indicated years. Reserves for other lines of business that PICO
ceased writing in 1989, which are immaterial, are excluded. The "Gross liability
as originally estimated" represents the estimated amounts of losses and LAE for
claims arising in all prior years that are unpaid at the balance sheet date on
an undiscounted basis, including losses that had been incurred but not reported.
70
<PAGE> 78
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net liability as originally estimated:....... $ 65,705 $ 77,041 $104,495 $109,435 $126,603 $128,104 $129,766
Discount..................................... 17,992 31,915 35,146 37,100 36,806 30,230 30,647
Gross liability as originally estimated:..... 83,697 108,956 139,641 146,535 163,409 158,334 160,413
CUMULATIVE PAYMENTS AS OF:
One year later............................. 29,060 27,975 35,339 27,229 43,725 42,488 42,986
Two years later............................ 56,282 62,794 61,228 69,335 84,463 81,536 81,489
Three years later.......................... 86,932 84,278 96,680 105,274 110,291 108,954 103,505
Four years later........................... 101,178 112,830 123,254 122,589 128,737 120,063 120,073
Five years later........................... 118,263 130,606 135,034 136,454 135,170 126,100
Six years later............................ 128,970 139,479 144,405 138,907 138,912
Seven years later.......................... 134,510 146,440 145,569 140,451
Eight years later.......................... 137,108 147,452 145,733
Nine years later........................... 137,552 147,895
Ten years later............................ 137,350
LIABILITY REESTIMATED AS OF:
One year later............................. 104,582 133,028 149,426 148,847 162,653 160,200 188,811
Two years later............................ 124,255 142,201 145,432 148,932 162,371 179,915 184,113
Three years later.......................... 126,334 152,705 149,243 154,177 176,123 172,715 174,790
Four years later........................... 138,463 150,504 152,427 165,596 169,488 170,847 177,811
Five years later........................... 143,398 152,873 158,868 163,676 171,532 171,968
Six years later............................ 143,480 152,209 160,414 165,996 170,873
Seven years later.......................... 141,612 157,366 164,727 166,144
Eight years later.......................... 143,174 162,547 164,893
Nine years later........................... 147,137 162,212
Ten years later............................ 146,156
CUMULATIVE REDUNDANCY (DEFICIENCY)........... $(62,459) $(53,256) $(25,252) $(19,609) $ (7,464) $(13,634) $(17,398)
<CAPTION>
1992 1993 1994 1995
-------- -------- -------- --------
<S> <<C> <C> <C> <C>
Net liability as originally estimated:....... $159,804 $179,390 $153,212 $135,825
Discount..................................... 31,269 32,533 20,144 16,568
Gross liability as originally estimated:..... 191,073 211,923 173,356 152,393
CUMULATIVE PAYMENTS AS OF:
One year later............................. 41,559 34,207 35,966
Two years later............................ 73,012 69,037
Three years later.......................... 103,166
Four years later...........................
Five years later...........................
Six years later............................
Seven years later..........................
Eight years later..........................
Nine years later...........................
Ten years later............................
LIABILITY REESTIMATED AS OF:
One year later............................. 197,275 183,560 170,411
Two years later............................ 179,763 184,138
Three years later.......................... 182,011
Four years later...........................
Five years later...........................
Six years later............................
Seven years later..........................
Eight years later..........................
Nine years later...........................
Ten years later............................
CUMULATIVE REDUNDANCY (DEFICIENCY)........... $ 9,062 $ 27,785 $ 2,945
</TABLE>
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<PAGE> 79
Each decrease or (increase) amount includes the effects of all changes in
amounts during the current year for prior periods. For example, the amount of
the redundancy related to losses settled in 1989, but incurred in 1986, will be
included in the decrease or (increase) amount for 1986, 1987 and 1988.
Conditions and trends that have affected development of the liability in the
past may not necessarily occur in the future. For example, PICO commuted
reinsurance contracts in several different years that significantly increased
the estimate of net reserves for prior years by reducing the recoverable loss
and LAE reserves for those years. Accordingly, it may not be appropriate to
extrapolate future increase or decreases based on this table.
The data in the above table is based on Schedule P from the 1985 to 1995
PICO Consolidated Annual Statements, as filed with state insurance departments;
however, the development table above differs from the development displayed in
Schedule P, Part-2, as Schedule P, Part-2 excludes unallocated LAE.
COMPETITION
The insurance industry is highly competitive. There are approximately 700
life and health insurers licensed in Ohio, many of which are larger and have
greater financial resources than APL. APL currently is rated B+ (Very Good) by
Best. APL is, to PICO's knowledge, the only life insurance company in the U.S.
offering a critical illness policy which pays a lump sum benefit equal to the
face amount even if the insured is not terminally ill (in contemplation of death
within twelve months). This critical illness policy, which is called "Survivor
Key", is the main focus of APL's marketing efforts.
There are several hundred property and casualty insurers licensed in
California, many of which are larger and have greater financial resources than
Sequoia. Sequoia currently is rated B++ (Very Good) by Best. Sequoia writes
primarily light commercial and multiperil insurance in northern and central
California. See "Risk Factors -- Risk Factors Applicable to Both PICO and
Citation -- Competition."
The investment advisory business is highly competitive. Many of Summit's
competitors are larger and have greater financial resources than Summit.
REGULATION
PICO and its insurance subsidiaries are subject to extensive state
regulatory oversight in the jurisdictions in which they are organized and in the
jurisdictions in which they do business.
PICO, PRO, APL and Sequoia investments are strictly regulated by investment
statutes in their states of domicile. In general, these investment laws place
limits on the amounts of investment in any one company, the owned percentage of
any one company and the quality of investments and seek to ensure the
claims-paying ability of the insurer.
Ohio has enacted legislation that regulates insurance holding company
systems, including PICO and its insurance subsidiaries. Each insurance company
in the holding company system is required to register with the Ohio Department
and furnish information concerning the operations of companies within the
holding company system that may materially affect the operations, management or
financial condition of the insurers within the system. Pursuant to these laws,
the Ohio Department may examine PICO and/or its insurance subsidiaries at any
time and require disclosure of and/or approval of material transactions
involving the insurers within the system, such as extraordinary dividends from
any one of PICO or any of its insurance subsidiaries. All material transactions
within the holding company system affecting PICO or its Ohio-domiciled insurance
subsidiaries must be fair and reasonable. Sequoia is subject to similar
legislation in California.
Ohio insurance law provides that no person may acquire direct or indirect
control of PICO, PRO or APL unless it has obtained the prior written approval of
the Ohio Superintendent of Insurance for such acquisition unless such
transaction is exempt. Similarly, California insurance law provides that no
person may acquire direct or indirect control of Sequoia unless it has obtained
the prior written approval of the California Insurance Commissioner of such
acquisition.
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<PAGE> 80
Since PICO, PRO and APL are domiciled in Ohio, the Ohio Department is the
principal supervisor and regulator of each of these companies. Since Sequoia is
domiciled in California, the California Insurance Commissioner is its principal
supervisor and regulator. However, each of the companies are also subject to
supervision and regulation in the states in which they transact business, and
such supervision and regulation relate to numerous aspects of an insurance
company's business and financial condition. The primary purpose of such
supervision and regulation is to ensure financial stability of insurance
companies for the protection of policyholders. The laws of the various states
establish insurance departments with broad regulatory powers relative to
granting and revoking licenses to transact business, regulating trade practices,
required statutory financial statements, and prescribing the types and amount of
investments permitted. Although premium rate regulations vary among states and
lines of insurance, such regulations generally require approval of the
regulatory authority prior to any changes in rates.
Insurance companies are required to file detailed annual reports with the
supervisory agencies in each of the states in which they do business, and their
business and accounts are subject to examination by such agencies at any time.
PICO, PRO and APL are restricted by the insurance laws of Ohio as to the
amount of dividends they may pay without the prior approval of state regulatory
authorities. The maximum dividend that may be paid during any year without the
prior approval of the Ohio Department is limited to the greater of 10% of the
insurer's surplus as regards policyholders as of the preceding December 31 or
the net income of the insurer for the year ended the previous December 31. Any
dividend paid from other than earned surplus is considered to be an
extraordinary dividend and must be approved. As of January 1, 1996,
approximately $13.2 million and $754,300 was available for payment by PICO and
APL, respectively, without the prior approval of the Ohio Department. No amounts
were available for payment by PRO.
Under the insurance laws of California, Sequoia may only pay dividends from
earned surplus unless it has the prior approval of state regulatory authorities.
The insurance industry is also affected by court decisions. Premium rates
are actuarially determined to enable an insurance company to generate an
underwriting profit. These rates contemplate a certain level of risk. The courts
may undercut insurers' expectations with respect to the level of risk being
assumed in a number of ways, including eliminating exclusions, multiplying
limits of coverage and creating rights for policyholders not set forth in the
contract. These decisions can adversely affect an insurer's profitability.
Recently, the NAIC and state insurance regulators have been examining
existing laws and regulations, with an emphasis on insurance company investment
and solvency issues, risk-based capital guidelines, interpretations of existing
laws, the development of new laws and the implementation of nonstatutory
guidelines. From time to time, legislation has also been introduced in Congress
that would result in the federal government assuming some role in the regulation
of the insurance industry. PICO and its insurance subsidiaries are also subject
to assessment as a result of participation in various types of state guaranty
associations and similar arrangements. There can be no assurance that such
regulatory requirements will not become more stringent in the future and have an
adverse effect on the operations of PICO and its insurance subsidiaries.
As a registered investment adviser, Summit is subject to regulation by, and
files annual reports with, the SEC and the securities administrators in some of
the jurisdictions in which it is registered to do business.
EMPLOYEES
At May 31, 1996, PICO had 26 employees, all of whom were located in
Pickerington, Ohio. At May 31, 1996, APL had 18 employees, 14 of whom were
located in Pickerington, and the other 4 of whom were Regional Sales Directors
located in Indianapolis, Indiana, Louisville, Kentucky, Cleveland, Ohio, and
Cincinnati, Ohio. At May 31, 1996, Sequoia had 85 employees, 53 of whom were
located in Pleasanton, California and the remainder of whom were located at
Sequoia's regional claims and underwriting offices in Modesto (2 employees),
Monterey (6 employees), Rancho Cordova (17 employees), Ventura (3 employees);
Visalia (3 employees), and Fairfield, California (1 employee). At May 31, 1996,
Summit had 6 employees, 5
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<PAGE> 81
of whom were located in La Jolla, California and one of whom was located in
Ketchum, Idaho. At May 31, 1996, CLM had no employees.
PROPERTIES
PICO's only office space consists of an owned facility in Pickerington,
Ohio. APL's Regional Sales Director located in Indianapolis shares office space
with the state medical association. APL's Cleveland Regional Sales Director
leases office space in Cleveland; APL is a party to the lease and reimburses the
Regional Sales Director for all of the lease costs. APL also leases office space
in Louisville, Kentucky for its Regional Sales Office located there. Sequoia
leases office space for its headquarters in Pleasanton, California and for its
regional claims and underwriting offices in Modesto, Monterey, Rancho Cordova,
Ventura, Visalia, and Fairfield, California. CLM's only office space consists of
a leased facility in Monterey, California. Summit's only office space consists
of a leased facility in La Jolla, California.
LEGAL PROCEEDINGS
There are no material pending legal proceedings against PICO or its
subsidiaries other than litigation arising in the ordinary course of business
with the settlement of insurance claims.
BUSINESS AND PROPERTIES OF TOC
SUBSIDIARIES
Set forth below are the names and respective jurisdictions of incorporation
of certain direct and indirect subsidiaries of TOC, all of which are wholly
owned except for Forbes Ceylon Limited ("Forbes Ceylon") which was 51% owned as
at December 31, 1995. The following list includes, but is not limited to, all
subsidiaries the total assets of which constituted more than 10% of the
consolidated assets of TOC as at December 31, 1995 or the total revenues of
which constituted more than 10% of the consolidated revenues of TOC during
fiscal 1995.
<TABLE>
<CAPTION>
JURISDICTION OF
SUBSIDIARY INCORPORATION
---------------------------------------------------------------- ---------------
<S> <C>
Direct
Forbes & Walker Securities Limited.............................. Ontario
Forbes & Walker (USA) Inc....................................... Delaware
Indirect
Forbes Ceylon Limited........................................... Sri Lanka
Forbes & Walker International Limited........................... Barbados
Forbes & Walker Limited......................................... Sri Lanka
Vidler Water Company, Inc....................................... Colorado
</TABLE>
Subsidiaries of TOC are either holding companies or inactive, with the
exception of Forbes & Walker Securities Limited ("F&WSL"), which continues to be
a broker and a member of the "TSE"; Forbes & Walker Limited ("Forbes & Walker"),
which was acquired by TOC on October 21, 1993 (see "-- History -- Forbes &
Walker"); Forbes Ceylon, a Colombo Stock Exchange ("CSE") listed company, which
completed an approximate Cdn. $66 million initial public offering in the fall of
1994 and is an investment holding company; and Vidler Water Company, Inc.
("Vidler"), which acquires and manages water-related assets that was acquired on
November 14, 1995. The other subsidiaries may be utilized in the future in
furtherance of the international investment banking, asset management or
corporate finance activities of TOC.
TOC and its subsidiaries own two connected office buildings in Toronto,
Canada, an office building in London, England, and an office building and
warehouse in Colombo, Sri Lanka.
HISTORY
TOC is a corporation which, through its various subsidiaries, historically
engaged primarily in the stock brokerage and investment banking business. During
July and August 1992, management of TOC and its
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<PAGE> 82
Board of Directors formulated a restructuring plan designed to focus on the
redirection of TOC's capital towards international investment banking, asset
management and corporate finance. As a result of this plan, and a focus on
emerging frontiers such as South East Asia, TOC made a number of investments in
South East Asia consistent with the original target of approximately one third
of consolidated capital being invested in that region.
The core, mature operations of Forbes & Walker remain tea and commodity
brokering, which are conducted within the company and stockbrokering operations,
conducted through the company's wholly owned subsidiary, Forbes Stockbrokers
(Pvt.) Limited. Forbes Ceylon's operating business comprise plantation services,
food manufacturing and distribution and real estate.
The major events that have influenced the general business of TOC during
the last three years are discussed below.
TAKE-OVER BID BY THE SOUTH EAST ASIA PLANTATION CORPORATION LIMITED. On
June 8, 1992, The South East Asia Plantation Corporation Limited ("SEAP"), a
private corporation controlled by Mr. Christopher Ondaatje, made a take-over bid
to acquire all of the outstanding common shares of TOC (the "TOC Shares"). All
of the conditions of the take-over bid were complied with and, on July 7, 1992,
SEAP took up and paid for all of the 6,751,210 TOC Shares that had been
tendered.
On April 16, 1993, TOC completed a rights offering pursuant to which TOC
received a total of approximately Cdn. $39.6 million. Mr. Ondaatje, through
SEAP, subscribed for additional TOC Shares at an aggregate subscription price of
approximately Cdn. $21.6 million.
Following the acquisition of control by Mr. Ondaatje, a number of
significant changes occurred including: the sale of 100% of a western Canada
based brokerage operation; the settlement of a significant lease; the
establishment of an institutional brokerage business by certain key employees of
F&WSL with the assistance of TOC; the Cdn. $39.6 million rights offering
financing of TOC; the acquisition of Forbes & Walker; the Cdn. $48.0 million
private placement; and the establishment of Forbes Ceylon to transact business
in Sri Lanka and elsewhere in South East Asia.
DISPOSITION OF LOM WESTERN. In November 1989, TOC acquired L.O.M. Western
Securities Ltd. ("LOM Western"). At the time, LOM Western was a large Vancouver
based brokerage firm with four branches in British Columbia and an institutional
equity division in Toronto. The institutional equity division was subsequently
integrated into the institutional operations of F&WSL.
Notwithstanding the foregoing, the integration did not provide acceptable
financial results. Following a consideration of alternative strategies, the
Board of Directors of TOC and the senior management of LOM Western agreed that
it was in the best interests of TOC and LOM Western that LOM Western be sold to
its senior management. The Board of Directors of TOC also pursued the
disposition of LOM Western in order to convert TOC's investment in LOM Western
to cash which may be utilized by TOC to give effect to a new business plan.
TOC completed on October 2, 1992, with effect from April 1, 1992, the sale
of all of the issued and outstanding shares of LOM Western to Lomcap Investments
Ltd. for a purchase price of Cdn. $11.5 million. The purchase price was
satisfied by a cash payment of Cdn. $6.5 million with the balance of Cdn. $5.0
million evidenced by a promissory note maturing September 30, 1996 issued in
favor of TOC. The amounts outstanding under the promissory note were fully
repaid on October 1, 1994.
SETTLEMENT OF LEASE. On November 2, 1992, the most significant liability
in TOC on a consolidated basis, the lease by F&WSL of premises in Scotia Plaza,
Toronto, was settled in full, the financial impact of which was included in the
financial results for the quarter ended September 30, 1992.
LOEWEN, ONDAATJE, MCCUTCHEON LIMITED. At the time of its take-over bid for
TOC, SEAP expressed an intention to provide an opportunity to certain employees
of TOC's brokerage business to purchase all or a portion of the equity in TOC's
subsidiaries carrying on such business. It was subsequently determined that a
separate brokerage entity would be established in which certain key employees
would invest. To facilitate the establishment of such an entity, TOC acquired
all of the outstanding common shares and subordinated
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indebtedness of Loewen, Ondaatje, McCutcheon Limited ("LOM Limited"), for
nominal consideration. At the time of its acquisition by TOC, LOM Limited was a
dormant brokerage firm which held a seat on the TSE as well as certain other
marketable securities and assets. On October 23, 1992, Green Line Investor
Services Inc. was retained to perform various securities trading and clearing
activities and record keeping functions. Regulatory approval was obtained on
November 24, 1992 from the TSE for certain key employees, through 997359 Ontario
Inc. ("997359"), to acquire LOM Limited from TOC and, on December 30, 1992, TOC
announced the closing of this transaction. Persons having an interest in 997359
included a number of former directors and officers of TOC.
TOC also assisted in the establishment of LOM Limited as an independent
brokerage by providing an indirect guarantee of a Cdn. $1.25 million
subordinated line of credit, by F&WSL selling certain furniture, equipment, and
certain other assets and agreeing to transfer to LOM Limited its seats on The
Montreal Exchange, the Vancouver Stock Exchange, the Alberta Stock Exchange and
the Toronto Futures Exchange, and by TOC sub-leasing a portion of its premises
to LOM Limited. As of October 1, 1993, the indirect guarantee was terminated in
conjunction with TOC loaning 997359, the parent company of LOM Limited, Cdn.
$6.3 million at 10% per annum. Under separate agreements made as of October 1,
1993, a wholly-owned subsidiary of TOC agreed to provide various financial
services to each of the brokerage subsidiaries of 997359 (including LOM Limited)
in return for a fee based on the revenues of each such subsidiary. TOC no longer
sub-leases space to LOM Limited.
In December, 1995, the Cdn. $6.3 million loan was repaid by 997359 in full.
THE RIGHTS OFFERING. On April 16, 1993, TOC completed a rights offering
which generated net subscription proceeds of approximately Cdn. $39.6 million.
Pursuant to the rights offering, two rights were issued in respect of each TOC
Share held as of March 26, 1993. Each right conferred the right to purchase one
TOC Share at a subscription price of $1.50 per share.
FORBES & WALKER. In October 1993, TOC paid approximately Cdn. $8.4 million
(through the issuance of TOC Shares and TOC Share purchase warrants) for 100% of
Forbes & Walker, a privately owned group of companies with their principal
office in Colombo, Sri Lanka. Forbes & Walker was originally established in 1881
as one of the first brokering firms in Ceylon (as Sri Lanka was then known).
Forbes & Walker then consisted of 22 companies employing approximately 550
people and was one of Sri Lanka's leading commodities brokers in tea, rubber,
coconut and spices and is also involved in stock brokering.
PRIVATE PLACEMENT. In December 1993, TOC raised approximately Cdn. $48.0
million through a private placement of special warrants at Cdn. $3.20 per
warrant that ultimately resulted in the issuance of 15,000,000 TOC Shares.
IPO OF FORBES CEYLON. Forbes Ceylon was incorporated under the laws of Sri
Lanka on May 4, 1994. On September 30, 1994, Forbes Ceylon completed a Cdn.
$66.0 million (Rs 2.4 billion) initial public offering. Forbes Ceylon is listed
on the CSE.
Forbes Ceylon's strategy is to manage, through its subsidiaries, operating
businesses in selected growth sectors of the Sri Lankan economy. Through a
wholly-owned subsidiary, Forbes Capital (Private) Limited, it also participates
in the financing of investment opportunities.
As of September 30, 1994, Forbes Ceylon used a portion of the proceeds of
its initial public offering and a private placement to purchase, at a total cost
of Rs 822 million (approximately Cdn.$23.5 million), a number of operating
businesses, real estate assets and portfolio investments from Forbes & Walker.
These assets are in the following sectors: real estate, including ownership,
management and warehousing; tea plantation management; agricultural products;
food; tourism; and imports and exports.
PURCHASE OF TOC SHARES BY PICO. In September 1995, PICO purchased the
approximately 38% shareholding in TOC held by SEAP and a new board of directors
was appointed. It is expected that, in the future, there will be a greater focus
on investment banking, asset management and corporate finance activities in more
sophisticated markets, such as North America and Europe. It is also the
intention of current
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management to investigate new business opportunities for TOC, which may result
in changes to the business focus and direction of TOC and may lessen TOC's
involvement in South East Asia.
PURCHASE OF VIDLER WATER COMPANY, INC. On November 14, 1995, a subsidiary
of TOC acquired 100% of the shares of Vidler in exchange for $7.5 million in
cash. Vidler acquires and manages water-related assets including the capacity to
transport water from the west slope to the east slope of the continental divide
in central Colorado. The acquisition has been accounted for by the purchase
method with the fair value of net assets acquired, at their assigned values,
amounting to $7.5 million including costs of acquisition. A subsidiary of TOC
also acquired other water rights and options for $5.2 million in cash.
TOC PURCHASE OF PICO SHARES HELD BY GPG. In Spring 1996, TOC purchased
850,000 shares of PICO Stock held by GPG. As a result, TOC owns 16% of PICO's
issued and outstanding shares and TOC will be able to vote the newly acquired
shares of PICO Stock up to the Effective Date of the Merger. However, as a
result of the CGCL, immediately after the Merger TOC will be deemed a
"subsidiary" of Citation for voting purposes and accordingly will be unable to
vote its Citation Stock. See "Comparison of Shareholder Rights -- Restrictions
on Voting of Shares."
BUSINESS
TOC is a corporation which, through its various subsidiaries, engaged
primarily in the stock brokerage and investment banking business prior to 1993
and which has restructured its business in accordance with a new business plan
designed to focus on the redirection of TOC's capital towards international
investment banking, asset management and corporate finance.
INTERNATIONAL INVESTMENT BANKING, ASSET MANAGEMENT AND CORPORATE
FINANCE. TOC currently engages, both directly and through its various
subsidiaries, in investment banking, asset management and corporate finance
activities on an international basis. These activities include the acquisition
of significant interests in operating companies as well as providing additional
capital, in the form of equity, secured debt or other senior financial
instruments, to operating companies. It is also currently expected that TOC and
its subsidiaries may provide management advisory services to companies in which
they acquire interests or to which they provide capital, in exchange for fees
and profit participation rights.
In accordance with its then business plan, in October 1993, TOC purchased
Forbes & Walker, a Sri Lanka company and established Forbes Ceylon (see
"-- Forbes & Walker and Forbes Ceylon").
TOC focused its acquisition and business financing activities in South East
Asia during the last three years. However, TOC will, in the future, implement a
strategy to focus in the more sophisticated markets, including North America and
Europe. Consistent with this strategy, a subsidiary of TOC made significant
investments, including the acquisition and management of water rights and
related assets, both directly and through Vidler, its wholly owned subsidiary.
Through F&WSL, TOC has retained the ability to operate as a broker in the
same manner as it operated prior to the restructuring described above. F&WSL
continues to be a member of, and has retained its seat on, the TSE and operates
as a broker concentrating on corporate finance and principal trading.
AGRICULTURAL SERVICES AND FOOD PROCESSING -- FORBES & WALKER AND FORBES
CEYLON. Since October 1992, a reorganization and re-focusing of Forbes & Walker
resulted in the establishment of a new company in Sri Lanka, Forbes Ceylon.
Forbes Ceylon raised approximately Cdn. $66.0 million through common share
equity financings. Part of the proceeds of these financings were used by Forbes
Ceylon to purchase selected businesses and assets from Forbes & Walker for
approximately Cdn. $23.5 million. See "General Development of the
Business -- Historical Development -- IPO of Forbes Ceylon" above. Forbes &
Walker currently focuses on its traditional core businesses of tea, commodity
and stock brokering.
TEA AND COMMODITY BROKERING OPERATIONS. The tea brokering division of F&W
provides a service to a large client base of tea producers both in the Sri
Lankan private and public sector. The tea brokering division tastes, catalogues
and sells the producers' tea at the Colombo Tea Auction mainly to foreign
buyers. In addition, F&W finances certain clients from the period the producers'
tea is stored at the warehouse, owned by Forbes Real Estate and managed by
Forbes Services, to the date of the auction. The financing is secured on the
producers' tea stocks held at the warehouse. F&W itself is financed by Forbes
Capital (Pvt) Limited for
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these loans. Loans are typically made on 50% of the value of the tea price
achieved at the previous week's auction.
The main commodity handled by F&W's commodity brokering division is rubber.
The service is similar to that of tea brokers except that the rubber is also
sold directly by the brokers to buyers both inside and outside Sri Lanka.
STOCKBROKERING OPERATIONS. F&W is a licensed stockbroker for shares traded
on the Colombo Stock Exchange. F&W caters mainly to retail clients and
occasionally to local institutions and has approximately 3% to 4% of total
market share. In October 1995, F&W entered into a Memorandum of Understanding
with HG Asia Limited, a broker with offices throughout Asia. HG Asia is partly
owned by ABN Amro Bank. The agreement prescribes an upgrading of F&W's research
capabilities and allows the company access, for the first time, to foreign
investors through HG Asia's client list.
PLANTATION SERVICES AND MANAGEMENT. Forbes Ceylon commenced operations on
October 1, 1994. Forbes Ceylon is essentially debt free and very liquid, and
continues to have the ability to evaluate and pursue future investment
opportunities.
In Forbes Ceylon's first six months of operations for the period ended
March 31, 1995, the operating business included confectionery manufacturing,
food distribution, gherkin growing and processing and import of medical
supplies. At December 31, 1995, these operations had either been sold, or were
in the process of being sold, to third parties, or discontinued. The group's
operations now focus more clearly on plantation services and management,
conducted through Forbes Services and Forbes Plantations and comprise tea
warehousing, plantation estate support service, spice and gherkin exports and
management of a government owned plantation company. In addition, operations
also comprise textured vegetable product (soya) manufacture, conducted through
Soy Foods (F&W) Limited, and a small travel agency service conducted through
Tour East (Lanka) Limited. Forbes Capital also has a share portfolio at a cost
of approximately $3 million in a variety of Sri Lanka equities, of which 90% by
value are quoted securities on the CSE. Of the CSE quoted securities,
approximately 75% of the cost is represented by a holding of 950,000 shares in
Vanik Corporation, a Colombo based merchant bank.
NUMBER OF EMPLOYEES. The number of employees decreased marginally during
the most recently completed financial period. The largest change was in Sri
Lanka where the number of employees declined from 618 to 556. Outside of Sri
Lanka Forbes Ceylon has 5 employees.
VIDLER WATER COMPANY, INC. Vidler, based in Colorado, acquires and
conducts water right transfers and manages and markets water assets to municipal
end users, to water utilities and to large commercial water consumers. Vidler
also intends to establish water investment syndications for appropriate
situations. The private water business in the West has unique supply/demand
attributes which TOC believes will increasingly require the services of
organizations like Vidler. The law governing water assets is very specialized
and varies from region to region.
BUSINESS AND PROPERTIES OF SEQUOIA
HISTORY
Sequoia is a stock property and casualty insurance company organized under
the laws of California in 1946. Sequoia was formed under the sponsorship of
interests identified with California county and farm mutuals. Operations were
commenced on February 21, 1947.
In 1963, Sequoia was purchased from its original sponsors, the California
county and farm mutuals, by Kemper Insurance Company. On December 31, 1986, all
of Sequoia's stock was purchased by QBE from Kemper.
In December 1994, QBE contributed all of Sequoia's issued and outstanding
capital stock to SRC, a Pennsylvania-domiciled affiliate of QBE.
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In March 1995, QBE announced its intention for SRC to sell Sequoia to PICO,
and PICO announced its intention to acquire Sequoia, pending satisfactory
completion of due diligence research and subject to all necessary regulatory
approvals. On August 1, 1995, PICO acquired all of the capital stock and the
prospective business of Sequoia, plus certain fixed assets and most of its
operating systems other than the processing software owned by QBE, for $1.4
million.
PICO initially capitalized Sequoia with $2.6 million in paid-in capital and
an additional $5.9 million in paid-in surplus. Subsequently, PICO has
contributed an additional $6.8 million to Sequoia to cover anticipated 1995 net
losses, to strengthen Sequoia for purposes of maintaining or improving Sequoia's
"B++" (Very Good) Best rating and its NAIC risk-based capital ratio, and to
provide capital for growth.
Immediately prior to the sale, SRC entered into a reinsurance agreement
with Sequoia whereby all of Sequoia's insurance and unearned premium contractual
liabilities were 100% reinsured by SRC and irrevocably and unconditionally
guaranteed by QBE. Effective August 1, 1995, Sequoia entered into a management
agreement whereby Sequoia will receive a management fee of $4.8 million over a
period of three years for processing policies, and claims on policies, which
were effective prior to the date of the sale.
PICO subsequently replaced the former management team with a new management
team with extensive property and casualty insurance experience headed by Charles
E. Bancroft, President and CEO. Mr. Bancroft's career in the insurance industry
has spanned nearly 45 years and a number of companies, including The Kemper
Group and a number of California-based property and casualty insurance carriers
and a Monterey, California insurance agency. In addition to Mr. Bancroft's
extensive insurance background as an insurance executive, he brings with him an
understanding of the insurance agency business and established relationships
with many of the agents in California.
BUSINESS
Sequoia is a California-domiciled insurance company licensed to write
insurance coverage for property and casualty risks within the state of
California. Sequoia writes business through approximately 75 independent agents
and brokers covering risks located primarily within northern and central
California. Although multiple line underwriting is conducted and at one time or
another all major lines of property and casualty insurance except workers'
compensation and ocean marine have been written Sequoia has, over the past few
years, transitioned from writing primarily personal lines of business
(automobile, homeowners, etc.) to commercial lines.
Principal sources of premium production represent farm insurance and small
to medium size commercial accounts, most of which are located outside of large
urban areas. Most business is written at independently filed rates.
A small amount of earthquake coverage is provided, either as an endorsement
to an existing insurance policy or as a result of participation in a
state-mandated pool. Net earned premiums, incurred losses and corresponding loss
ratios by line of business for the full year of 1995 are shown in the following
table:
<TABLE>
<CAPTION>
NET PREMIUMS NET LOSSES NET LOSS
EARNED INCURRED* RATIO*
------------ ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fire.............................................. $ (17) $ 50 --%
Allied lines...................................... 24 20 86.0
Homeowners multiperil............................. 191 146 76.4
Commercial multiperil............................. 13,628 10,647 78.1
Inland marine..................................... 1 (91) --
Earthquake........................................ 13 82 638.6
Other liability................................... 1,135 (891) --
Auto liability.................................... 8,122 3,494 41.3
Auto physical damage.............................. 3,881 724 18.7
------- -------
Total................................... $ 26,978 $ 14,181 52.6%
======= =======
</TABLE>
- ---------------
* Net losses incurred and net loss ratios shown exclude LAE.
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The statutory loss and combined ratios for Sequoia for the past three years
were:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Loss & LAE Ratio............................................ 69.8% 74.6% 83.5%
Expense Ratio............................................... 100.0 32.5 33.6
------ ------ -----
- -
-----
Combined Ratio.............................................. 169.8% 107.1% 117.1%
======= ======= =====
</TABLE>
Substantially all liabilities resulting from the roll back of insurance
rates under California's well-publicized Proposition 103 had been settled or
reserved for prior to PICO's purchase of Sequoia.
Sequoia's statutory year end financial statements are certified annually by
an independent public accounting firm as required by the California Department.
In addition, as required by the California Department, insurance loss reserves
are certified annually by an independent actuary.
The California Department conducts an examination of each domestic
insurance company once every three years. This triennial examination was last
performed in 1993 for the three years ended December 31, 1992. The findings of
the examination team were subsequently addressed by management. The next
examination is due to take place in 1996 and will cover the three years ended
December 31, 1995.
The California Department also periodically conducts examinations of
insurance companies' rating and underwriting practices. Such an examination was
completed May 14, 1994. A number of criticisms were documented by the
examination team primarily with regard to errors and inconsistencies in rating
and underwriting practices. The examination report of the same date details
these criticisms along with prior management's response as to corrective action
to be taken.
These examination reports are public documents on file with the California
Department.
FINANCIAL HIGHLIGHTS
Set forth below are selected statutory financial highlights for the past
three calendar years:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross premiums written................................ $42,026 $48,233 $47,456
Net premiums written.................................. 14,081 43,913 42,965
Net underwriting loss................................. (6,037) (3,771) (7,569)
Net investment gain................................... 2,623 3,613 4,560
Federal income tax benefit............................ -- -- (1,180)
Net income (loss)..................................... (3,319) 71 (2,506)
Policyholder surplus.................................. 10,254 19,806 20,370
</TABLE>
- ---------------
* Amounts shown for 1995 are results for the entire year, including operations
prior to the purchase by PICO.
Sequoia has expended considerable effort and expense in streamlining and
reordering its operations in the latter part of 1995. Computer systems have been
developed to facilitate decentralization of underwriting and claims adjusting
functions. As a result, in May 1996, Sequoia terminated its home office lease
agreement and entered into a short-term lease arrangement for substantially less
office space at a nearby location. This may result in a significant savings to
Sequoia over time and provides greater flexibility for the future.
Sequoia owns no real estate or buildings.
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PICO'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
STRATEGIC DIRECTION OF PICO
At June 30, 1995, the PICO group consisted principally of a property and
casualty insurance company writing MPL insurance and one life and health
insurance company (APL). The historical financial statements included in this
Prospectus reflect the results of operations of these businesses for 1993, 1994,
and part of 1995. For a variety of reasons, discussed below, the respective
boards of directors of PICO and PRO determined that it was in the best interests
of PICO and PRO and their respective shareholders to sell their MPL insurance
business. This sale was part of an overall shift in the strategic direction of
PICO. Since June 30, 1995, PICO and PRO have sold their recurring MPL business,
PICO has purchased a property and casualty insurance company in California which
does not write MPL insurance and PICO has made a significant investment in a
Canadian corporation which operates primarily as a strategic international
investment company. In addition to the operation of PICO's subsidiaries, PICO's
objective is to use its resources and those of its subsidiaries and affiliates
to increase shareholder value through investments in businesses which PICO
believes are undervalued or will benefit from additional capital, restructuring
of operations or management or improved competitiveness through operational
efficiency with existing PICO operations. This business strategy has only
recently been implemented, however, and it is not reflected in the historical
financial statements nor are the pro forma financial statements indicative of
possible results of this new business strategy in the future. See "Risk
Factors -- Risk Factors Applicable to PICO -- Recent Changes in Operations and
Strategic Focus."
SALE OF MEDICAL PROFESSIONAL LIABILITY INSURANCE BUSINESS
PICO believes that the MPL marketplace in Ohio and PICO's position in it
have significantly changed in the past several years, and that its 1994
consolidated operating results, which were largely attributable to positive
developments in PICO's historical loss reserves, do not accurately reflect its
long-term prospects in the MPL industry. Accordingly, in August 1995, pursuant
to an Agreement for the Purchase and Sale of Certain Assets (the "Mutual
Agreement") PICO sold the Book of Business of PICO and PRO. See "Risk
Factors -- Continuing MPL Liability" and "Business of PICO -- Business and
Properties of PICO -- History". Mutual acquired the Book of Business in
consideration of the payment of $6.0 million plus interest at a rate of 6% per
annum from July 1, 1995 until the date of closing, or an aggregate of $6.1
million.
Mutual did not assume any liabilities of PICO or PRO, except for any
obligations arising under the agency contracts after closing and the obligation
of PICO and PRO to issue "tail coverage" without additional premium to any
person having a professional liability policy issued or renewed by PICO or PRO
after July 15, 1995, or who renews with Mutual an insurance policy which was in
force with PICO or PRO as of July 15, 1995, and who dies, becomes disabled or
retires during the policy period ("DDR Tail Coverage"). PICO and PRO will
continue to administer the payments of claims and claims adjustment expenses
under MPL insurance policies written or renewed prior to July 16, 1995. PICO and
PRO contributed $3.3 million into escrow under an escrow agreement in order to
fund the liability assumed by Mutual with respect to the DDR Tail Coverage for
PICO's and PRO's insureds. An agreed amount of such funds will be released to
Mutual from the escrow as and when each of such insureds renews with Mutual, and
any funds remaining in escrow after all PICO's and PRO's insurance policies have
been renewed by Mutual or have expired without renewal will be released to PICO
and PRO. To date, $498,000 has been released to Mutual.
Simultaneously with execution of the Mutual Agreement, PICO and Mutual
entered into a Reinsurance Treaty pursuant to which Mutual agreed to assume all
risks attaching after July 15, 1995 under MPL insurance policies issued or
renewed by PICO including corporate and professional premises liability coverage
issued by PICO, and related commercial general liability insurance policies
issued by PICO (the "Policies"), net of inuring reinsurance. The premium payable
to Mutual for such reinsurance is an amount equal to 100% of the premiums paid
to PICO on the Policies, net of inuring reinsurance, subject to a ceding
commission
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equal to the sum of (i) the commissions payable by PICO to agents procuring the
Policies; (ii) Mutual's allocable share of PICO's premium taxes or franchise
taxes, whichever is lower; and (iii) Mutual's allocable share of any guaranty
fund assessment against PICO with respect to premiums paid on the Policies.
Mutual, PICO and PRO also entered into the Management Agreement to
establish the relationship among PICO, PRO and Mutual with respect to the
management of the Policies subject to the Reinsurance Treaty. PICO and PRO
appointed Mutual as their manager with respect to marketing, underwriting and
issuing of Policies and billing and collecting premiums therefor. The Management
Agreement required PICO to continue to issue or renew Policies to applicants
approved by Mutual from the effective date of the Reinsurance Treaty until
Mutual developed the data base and administrative support to issue Policies in
Ohio. PICO and PRO provided Mutual administrative services to support Mutual's
duties as manager during this period. Mutual agreed to reimburse PICO and PRO at
their estimated cost of providing these services plus approved additional
expenditures. The Management Agreement terminated for policies issued or renewed
after December 31, 1995.
PICO and PRO have reinsured a portion of the insurance written prior to
July 16, 1995 with unaffiliated reinsurers and 100% of the insurance written or
renewed between July 16, 1995 and January 1, 1996 with Mutual. Subject to such
reinsurance, PICO and PRO remain primarily liable to policyholders. See "Risk
Factors -- Continuing MPL Liability" and "-- Reinsurance."
As part of the Mutual Agreement, PICO and PRO agreed not to compete against
Mutual for a five-year period. This means that PICO and PRO will not sell MPL
insurance in Ohio and various other states for at least five years. As a result
of this decision to exit the MPL insurance business, PICO and PRO have accounted
for this portion of their business as "discontinued operations" and,
accordingly, MPL operations are segregated in the accompanying Consolidated
Financial Statements of PICO.
PURCHASE OF SEQUOIA
In August 1995, PICO acquired Sequoia, a property and casualty insurance
company licensed to write insurance in California. Sequoia provides light
commercial and multiperil insurance in northern and central California through
an independent agency system. The acquisition price of $1.4 million was paid in
cash on August 1, 1995. PICO used available working capital to make the
purchase. PICO is not responsible for any policy or claims liabilities of
Sequoia prior to closing and all such liabilities have been unconditionally and
irrevocably guaranteed by QBE, a publicly-held corporation based in Sydney,
Australia. In its annual report for the fiscal year ended June 30, 1995, QBE
reported a consolidated net worth of in excess of Australian $659 million. PICO
is required to maintain a minimum surplus in Sequoia of $7.5 million and,
through a management agreement will be reimbursed for certain expenses incurred
in the servicing of the business existing prior to closing. Management fees in
the amount of $4.8 million to be received over a three-year period for servicing
such business will provide additional cash inflows and should offset net
operating expenses of the business.
Sequoia has the potential for providing the consolidated group with an
increased asset base and significant cash flows from operations and investment
activities as operating efficiencies are achieved, less profitable lines of
business are eliminated, and investment returns are bolstered through prudent
investment management. Sequoia's return on average invested assets for 1994 was
approximately 5.4%. There can be no assurance, however, that Sequoia will be
able to maintain or improve its return on investments.
As previously discussed, Sequoia was purchased on August 1, 1995 and,
therefore, only five months of operating results are included in the audited
Consolidated Statements of Operations for the year ended December 31, 1995. For
the five months ended December 31, 1995, Sequoia reported a net loss of $2.5
million. Included in this net loss were significant amounts of "start-up" costs
such as employee severance payments, systems development costs, and increased
travel and related expenses. Management fees received during this period helped
to offset some of these additional costs, as well as the costs of processing
claims and policyholder receivables and segregating systems and reports to
provide information to SRC on the business ceded to it.
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SUMMIT GLOBAL MANAGEMENT, INC.
PICO incorporated Summit in 1983. Summit was inactive from 1990 through
1994. In January 1995, Summit filed an extensive amendment to its registered
investment adviser filing with the SEC in order to be reactivated. Summit is
registered as an investment adviser with the SEC and in California, Kansas,
Louisiana, Oregon, Virginia and Wisconsin. Summit maintains an office in
California. Funds under management are approximately $400 million, 88% of which
are funds which Summit is managing on behalf of PICO and its subsidiaries and
affiliates.
Summit provides the opportunity for PICO to be further diversified and will
provide fee based revenues. Summit provides investment management services to
PICO and its insurance subsidiaries, and offers its services to other
individuals and institutions. From April 1, 1995 to August 31, 1995, two members
of PICO's board of directors provided investment consulting services in the area
of investment management for Summit. See "PICO Management" and "Certain
Relationships and Related Transactions of PICO."
THE ONDAATJE CORPORATION
On September 5, 1995, PICO purchased 21,681,084 common shares of TOC for
$34.4 million. PICO used available working capital to make the purchase. TOC is
a publicly-held Canadian corporation and is listed on the TSE and The Montreal
Exchange under the symbol "VOC." PICO's purchase amounted to 38.2% of TOC's
outstanding common shares.
TOC is active in three business segments as reported in its consolidated
financial statements. These segments include investment banking, agricultural
services, and other. See "Business of PICO -- Business and Properties of TOC."
The accompanying Consolidated Statements of Operations of PICO for the year
ended December 31, 1995 include only three months of TOC operating results due
to the purchase date of September 5, 1995. However, pro forma financial
statements for the year 1995 indicate that TOC could potentially have reduced
consolidated net income from continuing operations by an adjusted $2.5 million
had TOC been in the consolidated group for the entire calendar year. This net
loss included some significant unusual costs recorded both before and after the
investment date, including significant restructuring and severance costs and the
write down of assets believed to be overvalued. TOC contributed a $480,000 loss
to consolidated income from continuing operations for the three months included
in these 1995 consolidated results.
The investment in TOC brings to the consolidated group access to a
significant amount of invested assets (more than $78 million at December 31,
1995), most of which are highly liquid. PICO has effective control of TOC, its
management and its investment strategies. Accordingly, PICO hopes to capitalize
on the proven investment expertise of its management team to maximize investment
returns on TOC's invested assets, while at the same time protecting asset
values. PICO also hopes to maximize net operating income in all other areas of
TOC's business endeavors. Management has begun to evaluate individual holdings
of TOC to identify potential operating inefficiencies and improve operating
income and returns on these investments. There can be no assurance that
management will be able to maintain or improve the results of operations or
financial condition of TOC. See "Risk Factors -- Risk Factors Applicable to
PICO -- Risks Regarding TOC."
ACQUISITIONS BY TOC
On November 14, 1995, a subsidiary of TOC acquired 100% of the shares of
Vidler in exchange for $7.5 million in cash. Vidler has the capacity to
transport water from the west slope to the east slope of the continental divide
in central Colorado. The acquisition has been accounted for by the purchase
method with the fair value of net assets acquired, at their assigned values,
amounting to $7.5 million including costs of acquisition. A subsidiary of TOC
also acquired other water rights and options for $5.2 million in cash.
In Spring 1996, TOC purchased 850,000 shares of PICO from GPG for an
aggregate purchase price of $15.3 million. These shares constitute 16.3% of the
outstanding shares of PICO. This purchase was pursuant to TOC's overall
investment policy. See "Business of PICO -- Business and Properties of
TOC -- TOC Purchase of PICO Shares Held by GPG."
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RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
PICO reported consolidated net income for 1995 of $15.7 million, or $3.02
per share. This compares to net income of $14.7 million, or $3.05 per share,
reported in 1994, and $108,000, or $0.03 per share, in 1993.
Shareholders' equity increased to a record high of $79.3 million as of
December 31, 1995, an increase of over $43.6 million, or 122%, from the $35.7
million year end 1994 level. This record increase in equity consisted of the
$15.7 million net income, a $28.3 million increase in unrealized investment
gains and $350,000 in proceeds from the reissue of treasury stock under PICO's
1993 Stock Option Plan, partially offset by a negative foreign currency
translation adjustment of $700,000. Unrealized gains excluded more than $20.0
million in market appreciation of PICO's investment in the publicly-traded
common stock of TOC. Due to PICO's control, TOC is consolidated in these
financial results, rather than valued at the market price of its shares as an
investment in common stock.
Net income consisted of $1.7 million, or $0.32 per share, from continuing
operations and $14.0 million, or $2.70 per share, from discontinued operations,
i.e. PICO's MPL segment which was sold to Mutual on August 28, 1995.
Income from discontinued operations included a $4.8 million, or $0.92 per
share, gain on the sale of PICO's recurring MPL business to Mutual, net of tax.
Also included was a one-time addition to net income of $9.2 million, or $1.78
per share, in deferred tax benefits resulting from the reversal of the valuation
allowance previously provided for net deferred tax assets. In reducing this
valuation allowance, management believes that it is more likely than not that
these deferred tax benefits will be realized in the future.
PICO's continuing operations income included realized investment gains of
$3.4 million, net of tax, $177,000 from the reversal of the valuation allowance
and $778,000 in net income from life and related products operations of PICO's
wholly-owned subsidiary, APL. These amounts were partially offset by a $2.5
million loss posted by Sequoia, and a $480,000 loss attributable to PICO's 38.2%
holdings in TOC, purchased in September 1995.
Much of Sequoia's loss was attributable to restructuring costs and the lag
between the recording and earning of premiums from the date of ownership. Most
of the TOC loss resulted from the write down of goodwill and other assets during
the fourth quarter.
Assets increased $212.8 million during 1995 from $297.1 million to $509.9
million, largely as a result of the consolidation of PICO's two newly-acquired
subsidiaries, Sequoia and TOC. At the same time, liabilities increased $169.2
million from $261.4 million at December 31, 1994 to $430.6 million at year end
1995, including a $74.5 million liability for minority interests, principally in
TOC's equity held by others.
Total revenues from continuing and discontinued operations for the twelve
months amounted to $54.6 million, including $6.0 million from the sale of PICO's
MPL business, compared to $42.3 million in the previous year. Revenues and
pre-tax operating income from continuing operations are summarized in the
following table.
REVENUES FROM CONTINUING OPERATIONS
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
(in millions)
<S> <C> <C> <C>
Investment Banking.................................. $10.7 $ 2.0 $ 8.4
Life and Health Insurance........................... 6.8 8.2 12.8
Property and Casualty Insurance (California)........ 2.5 -- --
Other............................................... 5.6 1.6 2.3
------ ------ ------
Total Continuing.......................... $25.6 $11.8 $23.5
====== ====== ======
</TABLE>
84
<PAGE> 92
OPERATING INCOME FROM CONTINUING OPERATIONS (PRE-TAX)
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- ----
(in millions)
<S> <C> <C> <C>
Investment Banking................................... $ 5.6 $ 0.1 $6.1
Life and Health Insurance............................ 0.9 2.9 2.2
Property and Casualty Insurance (California)......... (3.7) -- --
Other................................................ (0.3) -- 0.2
----- ----- ----
Pre-Tax Operating Income From Continuing
Operations......................................... $ 2.5 $ 3.0 $8.5
===== ===== ====
</TABLE>
INVESTMENT BANKING
Investment banking operations produced $10.7 million in revenues in 1995,
compared to $2.0 million in 1994 and $8.4 million in 1993. Investment banking
activities include PICO's investment results from continuing operations and
those of PICO's subsidiary, TOC, as shown in the following table:
INVESTMENT BANKING REVENUES
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
(in millions)
<S> <C> <C> <C>
PICO-Continuing..................................... $8.1.. $ 2.1 $ 8.7
The Ondaatje Corporation............................ 2.7 -- --
Miscellaneous....................................... (0.1) (0.1) (0.3)
----- ----- -----
Total Revenues............................ $10.7 $ 2.0 $ 8.4
===== ===== =====
</TABLE>
PICO's investment banking operations include investment income, net of
expenses, and realized gains from PICO's and PRO's investment portfolios in
excess of investment income assigned to the discontinued MPL lines of business
of both companies. PICO's realized investment gains account for most of the
variances between years. Realized investment gains were $5.0 million in 1995,
$766,000 in 1994, and $5.6 million in 1993.
Excluding realized investment gains, 1994 investment revenues were
approximately $1.8 million below those of both 1993 and 1995. This decline was
primarily a result of the reduction in the rate used by PICO to discount claims
reserves, which resulted in a greater investment income allocation to
discontinued operations during 1994.
TOC, purchased on September 5, 1995, added $2.7 million to investment
banking operations of the group.
Investment banking accounted for $5.6 million of 1995 pre-tax operating
income. This compares to $118,000 in 1994 and $6.1 million in 1993. As discussed
above, these fluctuations were primarily due to over $5.0 million in realized
investment gains in both 1995 and 1993.
See "Business of PICO -- Business and Properties of PICO -- Investment
Operations" for a discussion of investment holdings.
85
<PAGE> 93
LIFE AND HEALTH
Revenues generated by PICO's wholly-owned life insurance subsidiary, APL,
amounted to $6.8 million in 1995, $8.2 million in 1994 and $12.8 million in
1993. As shown in the following table, revenues for 1995 included $1.9 million
in earned premiums, $4.0 million in investment income, $123,000 in realized
investment gains, and $756,000 in other income.
LIFE AND HEALTH REVENUES
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- -----
(in millions)
<S> <C> <C> <C>
Net Earned Premiums................................... $1.9 $3.9 $ 8.8
Investment Income..................................... 4.0 3.7 3.6
Realized Investment Gains............................. 0.1 0.1 --
Other Income.......................................... 0.8 0.5 0.4
---- ---- -----
Total Revenues.............................. $6.8 $8.2 $12.8
==== ==== =====
</TABLE>
The decline in earned premium revenues from $8.8 million in 1993 to $3.9
million in 1994 and $1.9 million in 1995 has been a result of APL's exit from
the group health insurance market effective July 1, 1994. Net earned premiums by
line of business were as follows:
LIFE AND HEALTH NET EARNED PREMIUMS
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(in millions)
<S> <C> <C> <C>
Life Insurance......................................... $1.5 $1.3 $1.2
Health Insurance....................................... 0.4 2.6 7.6
---- ---- ----
Net Earned Premiums.......................... $1.9 $3.9 $8.8
==== ==== ====
</TABLE>
The exit from the group health insurance market (primarily major medical)
was a result of management's decision to concentrate APL's marketing and sales
efforts on the Survivor Key product line. This life insurance product combines
the benefits of a lump sum cash payout upon the diagnosis of certain critical
illnesses with a death benefit. The increase in net life insurance earned
premiums is a direct result of this concentration of efforts. Gross premiums
written for Survivor Key have increased from $28,000 in 1993 to $96,000 in 1994
and $257,000 in 1995.
Operating income before taxes declined to $859,000 for 1995, compared to
$2.9 million in 1994 and $2.2 million in 1993. The 1995 decrease was primarily a
result of the exit from the group health insurance market. APL's claims
experience was excellent in this product line in both 1993 and 1994, resulting
in reserve decreases for those years and accounting for the substantially higher
operating income.
PROPERTY AND CASUALTY INSURANCE
Property and casualty insurance is presently written by PICO's wholly-owned
subsidiary, Sequoia, which was acquired August 1, 1995. Therefore, the financial
results of Sequoia for only the five months of August through December 1995 are
included herein. Sequoia writes predominately light commercial and multiperil
insurance coverage in central and northern California.
See "Business and Properties of Sequoia" for a discussion of Sequoia's
operations.
86
<PAGE> 94
As shown in the following chart, total property and casualty revenues for
the five-month period ended December 31, 1995 were $2.5 million.
PROPERTY AND CASUALTY INSURANCE
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED
DECEMBER 31, 1995
-----------------
(in millions)
<S> <C>
Net Earned Premiums........................................ $ 2.4
Investment Income.......................................... 0.2
Realized Investment Gains.................................. --
Other (Loss) Income........................................ (0.1)
----
Total Revenues................................... $ 2.5
====
</TABLE>
Sequoia produced a pre-tax operating loss of $3.7 million for the
five-month period. Much of Sequoia's loss was attributable to expenses which are
expected to result in improved operating efficiencies in the future. These
expenses include, among other things, those associated with development of a new
policy quoting and processing system and integrated claims processing and
accounting systems. Software has been developed and is now in use which allows
underwriters and agents to decentralize, rate policies in the field, and
download the information via modem to the home office, allowing them to spend
much more time in the field inspecting the risks and servicing the policies.
Also contributing to the pre-tax operating loss were insurance acquisition
costs (such as commissions) based upon written premiums which were much higher
than net earned premiums. Since the previous owner of Sequoia retained liability
for the unearned premium reserve at July 31, 1995, a considerable lag developed
between Sequoia's written premiums and earned premiums. As a result, operating
expenses were high compared to earned premiums. Normally, these acquisition
expenses could have been deferred and expensed over the underlying policy
periods. However, this was not the case in 1995 for Sequoia. A large portion of
these acquisition expenses had to be expensed immediately according to
accounting rules due to the excess of these expenses over the expected future
revenues (unearned premiums) of the underlying policies.
Property and casualty operating income consisted of the $6.8 million in
revenues shown in the preceding table less losses and loss adjustment expenses
incurred of $1.9 million and operating expenses of $4.3 million. Direct written
premiums amounted to $13.2 million for the five-month period, $10.8 million, net
of reinsurance.
OTHER OPERATIONS
Other operations consisted principally of agricultural products, food
processing and other activities of TOC, investment management services provided
by Summit, real estate development activities of Raven and insurance agency
operations and insurance premium financing activities (which were dormant in
1995). Revenues from other operations are summarized below.
OTHER OPERATIONS REVENUES
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(in millions)
<S> <C> <C> <C>
Food Processing and Other.............................. $2.2 $ -- $ --
Agricultural Products.................................. 1.8 -- --
Real Estate Development................................ 1.4 1.5 2.2
Investment Management.................................. 0.2 -- --
Other.................................................. -- 0.1 0.1
---- ---- ----
Total Revenues............................... $5.6 $1.6 $2.3
==== ==== ====
</TABLE>
87
<PAGE> 95
Total other operations revenues increased $4.0 million over 1994 and $3.3
million over 1993, principally due to the inclusion of three months of revenues
of TOC in the 1995 results. TOC was purchased September 5, 1995. PICO's
wholly-owned real estate development subsidiary continues to wind down
operations. Nearly all of the remaining developed real estate and raw land has
been placed under contract as of May 1996. Summit Global Management, Inc.,
reactivated from its dormant status in January 1995, was successful in adding a
number of new accounts to its client base during 1995. Summit presently manages
over $400 million in assets.
Other operations produced a pre-tax operating loss of $271,000 during 1995,
compared to a break even in 1994, and income of $213,000 in 1993. The principal
reasons for the variances between the years include additional expenses
associated with the winding down of real estate development operations and
restructuring costs related to investment management services.
DISCONTINUED OPERATIONS
Discontinued operations include PICO's and PRO's MPL insurance business
which was sold to Mutual on August 28, 1995. See "-- Sale of MPL Business."
Revenues from discontinued operations included the following:
DISCONTINUED OPERATIONS REVENUES
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
(in millions)
<S> <C> <C> <C>
Net Earned Premiums................................. $17.1 $20.0 $50.4
Investment Income, Net of Expenses.................. 5.9 10.4 9.4
Income from Sale of MPL Business.................... 6.0 -- --
----- ----- -----
Total Revenues............................ $29.0 $30.4 $59.8
===== ===== =====
</TABLE>
Since the withdrawal of PICO and PRO from personal automobile and
homeowners lines of business in the late 1980's, MPL has, for all intents and
purposes, been these two companies' only sources of insurance premiums. The
decline in net earned premiums from $50.4 million in 1993 to $20.0 million in
1994 and $17.1 million in 1995 is indicative of the increasing competitive
pressures within Ohio which, among other factors, led PICO and PRO to increase
premium rates, to be more selective in underwriting and, ultimately, to withdraw
from the MPL line of business.
Direct written MPL premiums were $52.6 million in 1992, $37.5 million in
1993, $29.0 million in 1994 and $22.6 million in 1995. As a result of the sale
of the rights to the MPL business to Mutual, (See "-- Sale of Medical
Professional Liability Insurance Business") very few MPL premiums will be
written in 1996; although $7.3 million in unearned premiums at December 31,
1995, net of reinsurance, will be earned in 1996.
As shown above, investment income allocated to discontinued operations
increased from $9.4 million in 1993 to $10.4 million in 1995 and then decreased
to $5.9 million in 1995. This fluctuation is reflective of the changes in the
accretion of loss reserve discount, since investment income is assigned to
discontinued operations based upon the accretion of discount for the period.
Discount accretion increased in 1994 as compared to 1993 due to PICO's lowering
of its effective discount rate from around 5% to 4% for all accident years in
accordance with suggested Ohio Department guidelines. The much lower 1995 level
of investment income was primarily due to the reduced discount rate and the
reduced loss and loss adjustment expense reserve levels resulting from the
decline in the MPL business and the payment of claims.
88
<PAGE> 96
MPL loss and LAE reserve levels, direct, net of reinsurance, and net of
reinsurance and discount are shown below:
DISCONTINUED OPERATIONS -- LOSS AND LAE RESERVES
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
(in millions)
<S> <C> <C> <C>
Direct Reserves.................................. $192.5.. $204.3 $225.8
Reinsurance Reserves............................. (38.5) (29.8) (12.6)
Discount of Net Reserves......................... (17.8) (20.1) (32.5)
------ ------ ------
Net MPL Reserves....................... $136.2 $154.4 $180.7
====== ====== ======
</TABLE>
Reserve balances above differ from those shown in the financial statements
included elsewhere herein due to discounting.
MPL loss and LAE reserves continue to decline as a result of the decreasing
level of in force policies and the payment of claims. Loss and LAE reserves are
certified as being within acceptable ranges of expected ultimate outcomes
annually by two independent actuarial firms.
Although PICO ceased writing MPL risks effective January 1, 1996 under the
agreement with Mutual, PICO will continue to administer the runoff of claims.
PICO estimates based upon actuarial indications, that approximately 75% of claim
liabilities will be paid out within five years.
Discontinued operations produced pre-tax operating income of $6 million in
1995 compared to $16.3 million in 1994 and a loss of $9.3 million in 1993. The
wide variations between the years is attributable to reserve discount accretion
in 1993 which was nearly double that of 1995, more than $12.0 million in reserve
reductions in 1994, net of additional reserve discount accretion associated with
reducing the reserve discount rate to 4%, and $6.0 million in 1995 from the sale
of PICO's MPL business.
LIQUIDITY AND CAPITAL RESOURCES -- YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
As shown in the accompanying Consolidated Statements of Cash Flows, PICO
used cash flows of $14.0 million for operations in 1995 and $5.7 million in
1994, compared to cash provided by operations of $4.3 million in 1993. Cash from
operations was favorably impacted in 1993 by the receipt of $6.0 million in
proceeds from the commutation of reinsurance treaties covering prior periods. In
contrast, the cash used for 1994 operations was due primarily to significant
reinsurance transactions consummated in 1994. The additional cash outflows for
1995 principally relate to a reduction in net MPL premium collections as
compared to 1994 of $6.3 million, increased claims payments of $1.3 million and
increased operating expenses relating to PICO's acquisitions.
Cash provided by investing activities in 1994 and 1995 reflect PICO's
liquidation of much of its fixed income investment portfolio in limiting its
exposure to the fluctuations of market values due to changing interest rates
and, at the same time, provide PICO flexibility and liquidity to take advantage
of consolidation and market opportunities. Amounts for 1995 are difficult to
compare with those of previous years due to the inclusion of TOC's cash flows in
1995. Approximately $77.0 million of the 1995 cash and cash equivalent total of
$121.1 million belonged to TOC. Cash outflows in 1993 reflect liquidation of
investments to fund reinsurance treaties and to purchase additional fixed
maturity securities.
Financing activities provided cash in all three years. Most of the cash
provided related to capital infusions by GPG in 1993 and 1994 and the issuance
of treasury stock in 1995 pursuant to the exercise of stock options issued under
PICO's 1993 Stock Option Plan. Life and annuity insurance products also provided
financing cash flows of $1.1 million in 1995, $1.5 million in 1994, and $1.9
million in 1993.
PICO and its insurance subsidiaries attempt to structure the duration of
their invested assets to match the cash flows required to settle the related
unpaid claims liabilities. PICO's invested assets provide adequate liquidity to
fund projected claims and LAE payments for the coming years.
89
<PAGE> 97
At December 31, 1995, PICO had no significant commitment for future capital
expenditures.
CAPITAL RESOURCES
In the past three years, PICO has completed significant transactions
impacting shareholders' equity of PICO and the ownership of PICO. In 1993, PICO
purchased PICO shares from the OSMA for $1.0 million. In December 1993, GPG,
purchased 1,428,571 newly-issued shares of PICO Stock for $5.0 million. In
accordance with the original stock purchase agreement, GPG was entitled to
purchase up to $5.0 million of additional shares of PICO Stock at any time at a
per share price equal to the average of the bid prices for the shares of PICO
Stock as reported by Nasdaq for the 20 trading days immediately preceding the
date GPG notifies PICO of the intent to purchase. In 1994, GPG exercised $3.0
million of its option and purchased 631,579 of additional shares of PICO Stock.
See "The Merger -- Certain Rights of TOC and GPG."
During 1994, PICO adopted the provisions of SFAS No. 115 which resulted in
an increase in shareholders' equity upon adoption of $7.4 million.
Shareholder dividends payable by PICO or its insurance subsidiaries are
subject to certain limitations imposed by Ohio or California law, according to
the state of domicile. Generally, the limitations are determined using the
greater of the prior year's statutory net income or 10% of statutory
policyholder surplus. As of January 1, 1996, PICO dividends were limited to
approximately $13.2 million without regulatory approval. PICO has not declared a
cash shareholder dividend since 1985.
In the past few years, the NAIC has developed risk-based capital ("RBC")
measurements for both property and casualty and life insurers. The measures
provide the various state regulators with varying levels of authority based on
the adequacy of an insurer's RBC. The State of Ohio enacted the NAIC's RBC
rules, effective March 3, 1996. However, disclosure of each company's RBC
adequacy was required to be reported in their statutory annual statements filed
with the various departments of insurance for 1994 and 1995. At December 31,
1995, the PICO, PRO, APL and Sequoia annual statements reported more than
adequate RBC levels.
QUARTERLY RESULTS OF OPERATIONS -- QUARTERS ENDED MARCH 31, 1996 AND 1995
PICO reported net income of $2.0 million, or $0.36 per share, for the three
months ended March 31, 1996. This compares to net income of $1.1 million, or
$0.22 per share, in the first quarter of 1995. Shareholders' equity increased to
$80.4 million for the period. Shareholders' equity does not include $17.2
million in unrealized market gains, net of taxes, from PICO's ownership interest
in TOC which is consolidated for accounting purposes.
The first quarter 1996 earnings included a $57,000 loss from continuing
operations, after federal income taxes of $431,000 and minority interests of
$499,000. Much of this after-tax loss resulted from non-recurring expenses of
Sequoia. Non-recurring expenses of Sequoia include change-over and information
systems development costs. It is expected that the change-over, including
decentralization of the underwriting and claims adjustment functions, and
improved information systems, will result in a reduction of Sequoia's loss ratio
and expense ratio over time.
Positive earnings from continuing operations were contributed by APL, TOC
and Summit. APL's positive results reflect favorable claims experience and the
increasing demand for its Survivor Key insurance policy. PICO believes that this
is one of the few, if not the only, policies in the country which pays the full
face value benefit upon the diagnosis of specific critical illnesses, such as
heart attack, stroke, major organ transplants, and a number of others,
regardless of whether death is expected within twelve months. Summit is
experiencing an increase in funds under management as a result of its
performance for 1995 when its investment returns for clients in its growth
account reached 117%.
Income from discontinued operations in 1996 of $2.0 million, after federal
income taxes of nearly $1.1 million, included $2.3 million of MPL reserve
reductions, net of taxes, due to continuing favorable loss reserve development.
90
<PAGE> 98
Revenues from continuing operations were $15.0 million for the 1996
quarter, compared to $4.3 million in the first quarter of 1995. This increase
principally resulted from the additions of Sequoia and TOC to the PICO group in
the third quarter of 1995.
Revenues and pre-tax operating income by segment are shown in the following
schedules:
REVENUES FROM CONTINUING OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
--------------
1996 1995
----- ----
(in millions)
<S> <C> <C>
Investment Banking............................................ $ 3.4 $2.2
Life and Health Insurance..................................... 1.7 1.6
Property and Casualty Insurance (California).................. 4.6 --
Other......................................................... 5.3 0.5
----- ----
Revenues from Continuing Operations........................... $15.0 $4.3
===== ====
</TABLE>
OPERATING INCOME FROM CONTINUING OPERATIONS (PRE-TAX)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
---------------
1996 1995
----- -----
(in millions)
<S> <C> <C>
Investment Banking........................................... $ 0.2 $ 1.6
Life and Health Insurance.................................... 0.3 (0.1)
Property and Casualty Insurance (California)................. (0.2) --
Other........................................................ 0.1 --
----- -----
Pre-Tax Operating Income from Continuing Operations.......... $ 0.4 $ 1.5
===== =====
</TABLE>
INVESTMENT BANKING
Revenues from investment banking of $3.4 million for the first quarter of
1995 were up $1.2 million from the first quarter of 1995. Investment banking
activities include PICO's investment results from continuing operations and
those of TOC, as shown in the following table:
INVESTMENT BANKING REVENUES
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
---------------
1996 1995
---- ----
(in millions)
<S> <C> <C>
PICO-Continuing.............................................. $0.5 $2.2
TOC.......................................................... 2.9 --
---- ----
Total Revenues..................................... $3.4 $2.2
==== ====
</TABLE>
The decline in investment banking revenues from PICO's continuing
operations for the first quarter of 1996 compared to 1995 was due to reduced
realized investment gains, which decreased from $748,000 in 1995 to $200,000 in
1996, and reduced investment income.
The reduction in investment income in the first quarter of 1996
attributable to continuing operations amounted to $1.2 million and resulted from
a shift in the portfolio mix from fixed maturity securities toward equity
securities, consistent with PICO's strategic direction, and included the
purchase and capitalization of Sequoia and the investment in TOC. At March 31,
1995, PICO and PRO portfolios contained more than $156 million in
interest-bearing fixed maturity securities, cash and cash equivalents. Twelve
months later, securities in these categories totaled less than $76.0 million.
91
<PAGE> 99
No comparative results are shown for TOC as it was not part of the
consolidation until after September 5, 1995, the date of PICO's investment.
Investment banking contributed $228,000 to pre-tax operating income for the
first quarter of 1996, compared to $1.6 million in the first quarter of 1995.
The breakdown of pre-tax operating income from investment banking operations is
shown in the following schedule:
INVESTMENT BANKING OPERATING INCOME
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
--------------
1996 1995
----- ----
(in millions)
<S> <C> <C>
PICO-Continuing............................................... $(0.3) $1.6
TOC........................................................... 0.7 --
Other......................................................... (0.2) --
----- ----
Operating Income (Pre-Tax).......................... $ 0.2 $1.6
===== ====
</TABLE>
The explanations for differences between both years' first quarter results
principally reflect the differences in revenues discussed above. Reduced
investment income and realized capital gains in 1996 account for nearly all the
difference between 1996 and 1995, other than the addition of TOC to the
consolidated group in the fourth quarter of 1995. The decrease in investment
income has been offset by the appreciation in the market values of equity
securities in the past two years as evidenced by the increase in size of
unrealized gains during the past two years.
LIFE AND HEALTH INSURANCE
APL, PICO's indirectly wholly-owned life insurance subsidiary produced $1.7
million in revenues during the first quarter of 1996, nearly the same as the
$1.6 million of the first quarter of 1995. These revenues are detailed in the
following schedule:
LIFE AND HEALTH INSURANCE REVENUES
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
---------------
1996 1995
---- ----
(in millions)
<S> <C> <C>
Net Earned Premiums.......................................... $0.5 $0.5
Investment Income............................................ 0.8 0.9
Realized Investment Gains.................................... 0.3 --
Other Income................................................. 0.1 0.2
---- ----
Total Revenues..................................... $1.7 $1.6
==== ====
</TABLE>
There is very little difference between the two quarters other than a small
amount of capital gains in 1996 and additional other income in the 1995 first
quarter.
Life and health operations added pre-tax operating income of $260,000 to
the first quarter of 1996, compared to a $100,000 loss in the first quarter of
1995.
PROPERTY AND CASUALTY INSURANCE
Total revenues for Sequoia for the first three months of 1996 were $4.6
million, nearly twice the $2.5 million in revenues recorded during the last five
months of 1995, from the date of purchase of Sequoia to year end. Revenues
continue to grow as written premiums are earned. Premiums are earned pro-rata
throughout the terms of the underlying policies.
92
<PAGE> 100
No comparative figures are shown for prior years since PICO did not acquire
Sequoia until August 1, 1995.
PROPERTY AND CASUALTY INSURANCE
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, 1996
--------------------
(in millions)
<S> <C>
Net Earned Premiums....................................... $4.1
Investment Income......................................... 0.2
Realized Investment Gains................................. 0.2
Other Income.............................................. 0.1
----
Total Revenues.................................. $4.6
====
</TABLE>
Direct premium writings amounted to $10.7 million for the first quarter of
1996, down 14.8 percent from the first quarter of 1995 when Sequoia was under
different ownership. This downturn in premium writings reflects the increased
underwriting selectivity of Sequoia's new management team. As policies come up
for renewal, they are reviewed carefully by underwriting management for
excessive loss experience and unwanted risks. New business writings have only
partially offset renewal policies lost or not renewed.
Property and casualty operations contributed an operating loss of $238,000
to the first quarter 1996 consolidation.
OTHER OPERATIONS
Other operations consisted principally of agricultural products, food
processing and other activities of TOC, investment management services provided
by Summit, and real estate sales of Raven as shown in the following schedule:
OTHER OPERATIONS REVENUES
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
---------------
1996 1995
---- ----
(in millions)
<S> <C> <C>
Food Processing and Other.................................... $2.0 $ --
Agricultural Products........................................ 1.7 --
Real Estate Development...................................... 1.5 0.4
Investment Management........................................ 0.1 --
Other........................................................ -- 0.1
--- ---
Total Revenues..................................... $5.3 $0.5
=== ===
</TABLE>
Food processing and other and agricultural products revenues of TOC are
nearly the same as those of the last quarter of 1995, which was the only quarter
of inclusion of TOC in the PICO 1995 year-end consolidation due to investment in
TOC by PICO on September 5, 1995. See "PICO's Management's Discussion and
Analysis of Financial Condition and Results of Operations for the Years Ended
December 31, 1995, 1994 and 1993" for this prior quarter data.
Sales of real estate spiked significantly during the quarter as compared to
the previous two years' first quarter. During the first quarter, consistent with
Raven's plan of orderly withdrawal from the real estate development business,
management was successful in selling a large tract of undeveloped land which
represented most of Raven's existing inventory. Raven contributed a small amount
of operating income to the consolidated group for the quarter and now holds less
than $200,000 in inventory of land for sale.
93
<PAGE> 101
Other operations added $125,000 of operating income to the consolidation
for the 1996 first quarter. This compares to $16,000 during the first quarter of
1995.
DISCONTINUED OPERATIONS
Discontinued operations include PICO's and PRO's MPL insurance business
which was sold to Mutual on August 28, 1995. See "-- Business of
PICO -- Business and Properties of PICO -- Sale of MPL Business." Revenues from
discontinued operations included the following:
DISCONTINUED OPERATIONS REVENUES
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
---------------
1996 1995
---- ----
(in millions)
<S> <C> <C>
Net Earned Premiums.......................................... $2.5 $4.4
Investment Income, Net of Expenses........................... 1.3 1.2
--- ---
Total Revenues............................................. $3.8 $5.6
=== ===
</TABLE>
Revenues continue to decline as the premium from the discontinued MPL line
is earned. Nearly all of the premium will be fully earned by July 16, 1996, the
anniversary of the date of the 100% quota share treaty with Mutual.
Discontinued operations contributed $3.1 million to pre-tax operating
income in the first quarter of 1996, compared to a loss of $345,000 during the
first quarter of 1995. This increase was attributable to favorable MPL loss
reserve development of $3.5 million, which was partially offset by other costs
of discontinued operations. Favorable MPL loss reserve development began in 1994
and continues into 1996. The PICO claims department staff continues to process
the runoff of the remaining MPL loss and LAE claims which is progressing
routinely.
LIQUIDITY AND CAPITAL RESOURCES -- QUARTERS ENDED MARCH 31, 1996, 1995 AND 1994
Cash and cash equivalents increased from $121.1 million at December 31,
1995 to $126.5 million as of March 31, 1996. This compares to $41.9 million as
of March 31, 1995. The increase in cash and cash equivalents during the first
quarter of 1996 was primarily a result of investment activities in which sales
and maturities exceeded purchases. The net cash provided by investing activities
equaled $7.2 million during the first quarter of 1996. This compares to $23.9
million provided during the first quarter of 1995 when PICO was liquidating
certain debt securities to provide cash for other investment activities and to
lessen the impact of interest rate fluctuations on shareholders' equity.
Operating activities used $2.0 million in cash and cash equivalents during
the first quarter of 1996. This compares to $3.0 million used during the first
quarter of 1995. A number of smaller items were responsible for this improvement
in operating cash flow, including reduced overhead expenses and additional cash
flow from subsidiaries.
At March 31, 1996, PICO has no significant commitments for future capital
expenditures, other than in the ordinary course of business.
94
<PAGE> 102
PICO MANAGEMENT
DIRECTORS
The Board of Directors of PICO currently consists of six directors divided
into two classes of three directors each. The directors in one class serve for a
term of three years and until their successors are elected and qualified. The
directors in the other class serve for a term of one year and until their
successors are elected and qualified. The following table sets forth certain
information concerning the directors and director nominee as of May 31, 1996.
Unless otherwise indicated, each person has held his principal occupation for
more than five years.
<TABLE>
<CAPTION>
NAME, AGE AND YEAR FIRST TERM PRINCIPAL OCCUPATION AND
BECAME A DIRECTOR OF PICO OF CLASS POSITIONS/OFFICES HELD WITH PICO
- ------------------------------------------- -------- ------------------------------------------
<S> <C> <C>
S. Walter Foulkrod, III, Esq., 54; 1988.... 1996 Attorney; Owner of S. Walter Foulkrod, III
& Associates, Attorneys at Law since 1994;
President and Chairman of Foulkrod,
Reynolds & Havas, PC from 1984 to 1994
Richard D. Ruppert, MD, 65; 1988........... 1996 Physician; Chairman of Board of APL and
PIC since 1989; President of Medical
College of Ohio from 1978 to 1993;
President of American Society of
Internal Medicine from 1992 to 1993
Dr. Gary H. Weiss, 43; 1993................ 1996 Barrister and Solicitor; Executive
Director of GPG, an investment holding
company, since July 1992; Director of
Turnbull & Partners Ltd., an investment
bank, from 1990 to June 1992(1)(2)
John R. Hart, 36; 1993..................... 1997 President and Chief Executive Officer of
PICO and PRO since July 1995; President
and Chief Executive Officer of TOC since
September 1995; Self-employed Investor;
President, Quaker Holdings Limited, an
investment company, since 1991; Partner
in Detwiler, Ryan & Company, Inc., an
investment bank, from 1982 to 1991(1)(3)
Ronald Langley, 52; 1993................... 1997 Chairman of the Board of PICO and PRO
since July 1995; Chairman of the Board
of Summit since November 1994; Chairman
of the Board of TOC since September
1995; Self-employed investor since 1992;
Director and Officer of Pacific
Southwest Corporation, a strategic
investment company, from 1989 to
1992(1)(4)
John D. Weil, 55; 1987..................... 1997 President, Clayton Management Company, a
strategic investment company(5)
DIRECTOR NOMINEE:
Robert R. Broadbent, 75;................... Retail consultant since January 1989;
President, CEO, Director and Vice Chairman
of the Higbee Company from 1979 to 1984;
President and Chief Executive Officer of
Liberty House - Mainland from 1976 to
1978; Chairman and Chief Executive
Officer of Gimbel's from 1973 to 1976;
Director of PICO from 1993 to 1995.
</TABLE>
- ---------------
(1) The GPG Agreement, as amended, provides that, subject to the fiduciary
duties and responsibilities which PICO and its Board of Directors owe to all
of its shareholders and other persons under Ohio law, so long as GPG owns
equity securities of PICO which in the aggregate represent not less than 11%
of the total voting power of PICO, PICO will use its best efforts to cause
the nomination and election of one
95
<PAGE> 103
person designated by GPG to serve on PICO's Board of Directors. Currently,
GPG has designated three nominees, Messrs. Langley and Hart and Dr. Weiss,
to PICO's Board of Directors. See "Principal Shareholders of PICO." Given
GPG's ownership of approximately 18.7% of the Citation voting power
(assuming the exchange of 5.0099 shares of Citation Common Stock for each
share of PICO Stock), after the Merger, GPG will be entitled under the GPG
Stock Purchase Agreement to continue to designate one of the directors of
Citation.
(2) Dr. Weiss is a director of GPG.
(3) Mr. Hart is also a director of Resource America, Inc. and TOC.
(4) Mr. Langley is also a director of Fairfield Communities, Inc., PC Quote,
Inc. and TOC.
(5) Mr. Weil is also a director of Todd Shipyards Corporation, Cliffs Drilling
Company, CleveTrust Realty Investors, Oglebay Norton Company and Southern
Investors Service Co., Inc.
After the Merger each of the directors of PICO and the director nominee
will become directors of Citation. See "The Merger -- Board Representation and
Management."
EXECUTIVE OFFICERS
The executive officers of PICO, in addition to Messrs. Langley and Hart,
are as follows:
Richard H. Sharpe, 40; Chief Operating Officer. Mr. Sharpe was appointed as
Chief Operating Officer in March 1994. He has also served as President and Chief
Operating Officer of APL since 1989. On November 3, 1995, Mr. Sharpe was elected
President and Chief Executive Officer of APL. Mr. Sharpe joined PICO in 1977.
Martha G. Althauser, Esq., 54; Vice President, Claims. Ms. Althauser has
served in her present capacity since February 1989. Prior to that time, she
served in various other executive capacities since joining PICO in 1980.
Gary W. Burchfield, 49; Chief Financial Officer and Treasurer. Mr.
Burchfield has been Chief Financial Officer of PICO since November 1995 and
Treasurer since November 1994. Mr. Burchfield was Controller of PICO from March
1990 to November 1995 and Chief Accounting Officer of PICO from December 1993 to
November 1995. Prior to joining PICO, Mr. Burchfield served in a variety of
positions at J.C. Penney Casualty Insurance Company from 1973 to March 1991,
including as assistant controller from 1986 to 1990.
James F. Mosier, 48; General Counsel and Corporate Secretary. Mr. Mosier
has served in his present capacities since October 1984 and in various other
executive capacities since joining PICO in 1981. From 1975 to 1981 Mr. Mosier
was a staff attorney for the Ohio Department.
The executive officers of PICO have no agreed upon terms of employment and
serve at the pleasure of the Board of Directors. See "Certain Relationships and
Related Transactions of PICO."
After the Merger, each executive officer will continue to hold the same
office in PICO. In addition, Messrs. Langley, Hart, Burchfield and Mosier will
become executive officers of Citation. See "The Merger -- Board Representation
and Management."
96
<PAGE> 104
PICO EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table summarizes compensation awarded or paid to, or earned
by, executive officers of PICO whose compensation during 1995 exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM ALL OTHER
COMPENSATION COMPENSATION AWARDS COMPENSATION(6)
------------ ------------ ------- ---------------
<S> <C> <C> <C> <C> <C>
Ronald Langley, Chairman of 1995 $197,945(3) $ -- 175,000(4) --
the Board(1)(2) 1994 -- -- -- --
1993 -- -- -- --
John R. Hart, President 1995 $197,945(3) $ -- 175,000(4) --
and Chief Executive 1994 -- -- -- --
Officer(1)(2) 1993 -- -- -- --
John E. Albers, MD, 1995 $ 97,500 $ -- -- --
Chairman of the Board, 1994 180,000 -- $ 8,507
President and Chief 1993 142,500 -- 100,000(5) --
Executive Officer(2)
Richard H. Sharpe, 1995 $140,256 $ -- 60,000(4) $ 7,590
Chief Operating Officer(1) 1994 129,662 6,000 -- 5,919
1993 -- -- -- --
</TABLE>
- ---------------
(1) Messrs. Langley and Hart were not executive officers of PICO prior to 1995
and Mr. Sharpe was not an executive officer of PICO prior to 1994.
(2) Dr. Albers resigned his positions as an executive officer and a director of
PICO on July 15, 1995 and Messrs. Langley and Hart assumed their positions
as executive officers as of that date.
(3) Amounts paid pursuant to consulting agreements with PICO and a subsidiary of
TOC described under "Certain Relationships and Related Transactions of
PICO."
(4) Options for PICO stock granted pursuant to the PICO 1995 Non-Qualified Stock
Option Plan (the "1995 Plan"). See first table under "Options" for more
detailed information about such options. Does not include options granted to
Messrs. Langley and Hart to purchase TOC Shares. See "Certain Relationships
and Related Transactions of PICO" and "Principal Shareholders of PICO-TOC
Ownership."
(5) Options for PICO stock granted pursuant to the PICO 1993 Stock Option Plan.
See second table under "Options."
(6) Employer contributions to PICO's 401(k) plan during 1994 and 1995. Dr.
Albers was not eligible to participate in the 401(k) plan in 1993.
OPTIONS
The following table sets forth certain information with respect to options
granted during 1995 to each of the named executive officers.
OPTION GRANTS IN 1995
<TABLE>
<CAPTION>
POTENTIAL
% OF REALIZABLE VALUE AT
TOTAL ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED TO EXERCISE APPRECIATION
UNDERLYING EMPLOYEES OR BASE FOR OPTION TERM(1)
OPTIONS IN FISCAL PRICE EXPIRATION -----------------------
NAME GRANTED YEAR ($/SH) DATE 5%($) 10%($)
- ------------------------------ ---------- -------------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John E. Albers, MD............ 0 -- -- -- -- --
Ronald Langley................ 175,000(2) 33.98% $13.50 8/24/2005 $3,848,303 $6,127,975
John R. Hart.................. 175,000(2) 33.98% $13.50 8/24/2005 $3,848,303 $6,127,975
Richard H. Sharpe............. 60,000(2) 11.65% $13.50 8/24/2005 $1,319,418 $2,101,020
</TABLE>
- ---------------
(1) The amounts reflected in this table represent certain assumed rates of
appreciation only. Actual realized values, if any, on option exercises will
be dependent on the actual appreciation of the PICO Stock over the term of
the options. There can be no assurances that the Potential Realizable Values
in this table will be achieved.
97
<PAGE> 105
(2) These options were granted on August 24, 1995, under the 1995 Plan at 100%
of the fair market value of the PICO stock on that date. The options granted
to Messrs. Langley and Hart were immediately exercisable. One-third of the
options granted to Mr. Sharpe were immediately exercisable and one-third
will become exercisable on August 24 in 1996 and 1997. The options will
expire ten years after the grant date or immediately upon any earlier
consolidation, merger or sale of substantially all of PICO's assets if the
successor corporation does not agree to continue the 1995 Plan. In the event
an option holder ceases to be an employee, consultant or officer of PICO,
the exercisable portion of his options may be exercised at any time during
the three-month period thereafter, and prior to the expiration of the
ten-year term of the options, except that, if the option holder shall have
died or become disabled, the exercisable portion of his options may be
exercised at any time during the one-year period following death or
disability, and prior to the expiration of the ten-year term of the options.
The following table sets forth certain information with respect to options
exercised during 1995 and options held at December 31, 1995 by each of the named
executive officers:
AGGREGATED OPTION EXERCISES IN 1995
AND DECEMBER 31, 1995 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING IN-THE-MONEY OPTIONS
SECURITIES UNEXERCISED OPTIONS AT FISCAL YEAR-END
UNDERLYING AT FISCAL YEAR-END(#) ($)(1)
OPTIONS VALUE --------------------------- ---------------------------
NAME EXERCISED(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------- ---------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John E. Albers, MD.......... 100,000 $ 737,500 -- -- $ -- $ --
Ronald Langley.............. -- -- 175,000 -- 3,193,750 --
John R. Hart................ -- -- 175,000 -- 3,193,750 --
Richard H. Sharpe........... -- -- 20,000 40,000 365,000 730,000
</TABLE>
- ---------------
(1) Values are pre-tax and are based on the December 29, 1995 closing price of
$31.75 per share.
COMPENSATION OF DIRECTORS
All outside directors of PICO receive an annual Board of Directors fee of
$10,000. Outside directors serving on a particular committee (other than the
Claims Committee) receive $600 per committee meeting attended, excluding
committee meetings conducted by telephone conference call. Outside directors
serving on the Claims Committee receive $1,000 per committee meeting attended in
person and $500 per committee meeting conducted by telephone conference call.
Directors who are employees or officers of PICO do not receive Board or
committee fees.
98
<PAGE> 106
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF PICO
Effective May 17, 1993, PICO entered into an employment agreement with John
E. Albers, MD, former Chairman of the Board, President and Chief Executive
Officer of PICO, pursuant to which Dr. Albers was employed by PICO as Chief
Executive Officer and President at a monthly salary of $15,000 for an initial
term of three years with optional one-year renewals. If Dr. Albers were
terminated by PICO, without cause, during the initial term or any renewal term,
he would be entitled to receive his monthly salary through the remainder of such
term with additional amounts to be paid in certain circumstances if such
termination occured after a change in control. Dr. Albers resigned as a
Director, Executive Officer and employee of PICO on July 15, 1995, and on that
date, he exercised options to acquire 100,000 shares of PICO Stock. See
"Options."
On November 1, 1992, each current employee executive officer of PICO
entered into a Key Employee Severance Agreement with PICO (the "Severance
Agreement") which provides that in the event of his or her termination of
employment under certain circumstances during the 24-month period (the
"Effective Period") following a "change of control" of PICO, such employee will
be entitled to certain severance benefits. If the employee terminates his
employment with PICO during the Effective Period for "good reason" or if PICO
terminates such employee's employment during such period for any reason other
than for serious cause, PICO will be obligated to continue the employee's
compensation at the base rate then in effect for the longer of (a) the period
remaining between the termination date of the employee's employment and the
second anniversary of the change of control with respect to Messrs Sharpe,
Burchfield and Mosier or the first anniversary of the change of control with
respect to Ms. Althauser and (b) a period of six months. A "change of control"
is defined to include, among other events, the acquisition by any person of
shares possessing in the aggregate more than 50% of the voting power of PICO or
the sale of all or substantially all of the assets of PICO.
Ronald Langley and John R. Hart, both of whom are currently executive
officers and directors of PICO, have entered into consulting contracts with
PICO. Messrs. Langley and Hart are to render services in the areas of investment
banking, management and operational analysis, and investment portfolio analysis.
Their specific duties include investigation of opportunities for consolidation,
joint ventures, mergers and acquisitions, analysis of PICO's internal structure
relative to improving operations and working on specific projects at the request
of the PICO Board.
In 1995, each of Messrs. Langley and Hart were to be compensated $75,000 by
PICO for rendering consulting services in the areas of investment banking and
management and operational analysis. Summit was to be compensated in the total
amount of $150,000 on an annual basis, beginning February 1, 1995, for managing
and analyzing the investment portfolios of PICO, PRO, and APL; Summit in turn
retained Messrs. Langley and Hart as consultants to advise Summit with respect
to the analysis and management of the investment portfolios of PICO, PRO, and
APL in the total amount of $150,000 on an annual basis. Beginning in September
1995, however, all such consulting fees (amounting to $150,000 per year to each
of Messrs. Langley and Hart) became payable by PICO directly.
In consideration for their efforts in locating and hiring a president and
chief executive officer for Summit and for assisting in the renewal of Summit's
operations, Messrs. Langley and Hart together will receive 50% of the first
$1,000,000 of profits attributable to PICO's ownership interest in Summit. To
date, no profits have been generated by Summit or have been paid to either Mr.
Hart or Mr. Langley.
Effective September 11, 1995, Messrs. Langley and Hart entered into
consulting contracts with a subsidiary of TOC. Messrs. Langley and Hart are to
render services in the areas of investment banking, investment portfolio
analysis and management and operational analysis. Each of Messrs. Langley and
Hart will receive $150,000 annually for rendering such services.
On September 26, 1995, each of Messrs. Langley and Hart was granted an
option by TOC to purchase up to 1,549,833 shares of common stock of TOC at an
exercise price of Cdn. $2.50 per share, which was the closing market price from
the TOC shares on the TSE on the date of grant. Such options are immediately
exercisable. In addition, on October 24, 1995, each of Messrs. Langley and Hart
was granted options by TOC to purchase an additional 950,167 shares of common
stock of TOC at an exercise price of Cdn. $2.45 per
99
<PAGE> 107
share. Such options do not become exercisable until the earlier to occur of (a)
approval by the shareholders of TOC or (b) shares becoming available as a result
of the cancellation of options held by other option holders. Neither of such
events has occurred as of the date hereof.
On May 9, 1996, PICO entered into the Subsequent Agreement with GPG and
TOC. See "The Merger -- Certain Rights of TOC and GPG."
100
<PAGE> 108
PRINCIPAL SHAREHOLDERS OF PICO
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of shares of PICO Stock as of May 31, 1996, and as adjusted
to reflect the effects of the Merger, by (i) each person, group or entity known
by the PICO Board to be the beneficial owner of more than 5% of PICO Stock, (ii)
each of the current directors of PICO and the director nominee, (iii) each
executive officer named in the PICO Summary Compensation Table, and (iv) all
current directors and executive officers of PICO as a group.
<TABLE>
<CAPTION>
NUMBER OF PICO NUMBER OF CITATION POST-MERGER
SHARES AND NATURE PERCENTAGE SHARES AND NATURE PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP OF BENEFICIAL OWNERSHIP OF
OF BENEFICIAL OWNER OWNERSHIP(1) OF PICO OWNERSHIP(1)(2) CITATION(2)
- -------------------------------- -------------------- --------- ------------------ ------------
<S> <C> <C> <C> <C>
Guinness Peat Group plc(3)...... 1,210,777(4) 23.2% 6,065,871 18.7%
The Ondaatje Corporation(5)..... 850,000(6) 16.3 4,258,415 13.1
John D. Weil(7)................. 436,800(8) 8.4 2,188,324 6.8
John R. Hart(9)................. 381,015(10) 7.1 1,908,847 5.7
Ronald Langley(9)............... 381,015(10) 7.1 1,908,847 5.7
Richard D. Ruppert, M.D......... 6,166(11) * 30,891 *
S. Walter Foulkrod, III, Esq.... 2,500 * 12,524 *
Dr. Gary H. Weiss............... 1,769(12) * 8,862 *
John E. Albers, M.D............. 102,800 2.0 515,017 1.6
Robert Broadbent (nominee)...... 4,000 * 20,039 *
Richard H. Sharpe............... 22,273(13) * 111,585 *
Current executive officers and
directors as a group (10
persons)(14).................. 1,263,606 22.5 6,330,539 18.4
</TABLE>
- ---------------
* Less than 1%
(1) Sole voting and investment power unless otherwise indicated.
(2) Assumes that the Merger has been consummated with an Exchange Ratio of
5.0099 shares of Citation Common Stock for each share of PICO Stock. Based
on 6,285,751 shares of Citation Common Stock outstanding as of June 14,
1996, as adjusted to include shares covered by options exercisable by
directors and officers of Citation upon consummation of the Merger. See
"Principal Shareholders of Citation."
(3) Address: 2nd Floor, 21-26 Garlick Hill, London EC4V 2AU, England.
(4) GPG has an option to purchase $1,175,000 more of newly issued shares of
PICO Stock, pursuant to the GPG Agreement, as amended. The purchase price
would be the average of the closing bid prices for PICO Stock on Nasdaq for
the 20 trading days immediately preceding the date when GPG gives notice of
purchase. This option will expire if GPG's ownership of shares of PICO
Stock becomes less than 7.5%. PICO has, pursuant to the Stock Purchase
Agreement, a first right to purchase any PICO Stock which GPG desires to
sell, except for sales to Ronald Langley and John R. Hart (see note 10
below). This does not include shares beneficially owned by Dr. Weiss, who
is a director of GPG.
(5) Address: 30A Hazelton Avenue, 4th Floor, Toronto, Ontario, Canada, M5R2E2.
(6) TOC has an option to purchase $825,000 more of newly issued shares of PICO
Stock, pursuant to the Subsequent Agreement. The purchase price would be
the average of the closing bid prices for PICO Stock on Nasdaq for the 20
trading days immediately preceding the date when TOC gives notice of
purchase. This option will expire if TOC's ownership of PICO Stock becomes
less than 7.5% Also pursuant to the Subsequent Agreement, until December
10, 1996, if PICO issues additional equity securities of any class or type,
TOC has the prior right and option to participate in the issuance of such
equity securities in an amount not to exceed $5,000,000 in aggregate
purchase price. PICO has, pursuant to the Subsequent Agreement, a first
right to purchase any PICO Stock which TOC desires to sell.
(7) Address: 200 North Broadway, Suite 825, St. Louis, Missouri 63102-2573.
(8) Mr. Weil owns 346,900 shares of PICO Stock directly and has indirect
ownership of an additional 89,900 shares of PICO Stock.
101
<PAGE> 109
(9) Address: c/o Physicians Insurance Company of Ohio, 13515 Yarmouth Drive,
N.W., Pickerington, Ohio 43147.
(10) Mr. Langley and Mr. Hart each hold options to purchase up to 206,015 shares
of PICO Stock presently owned by GPG. In addition, Mr. Langley and Mr. Hart
each hold currently exercisable options to purchase up to 175,000 shares of
PICO Stock under the 1995 Plan.
(11) Dr. Ruppert shares voting and investment power with respect to these shares
of PICO Stock with his wife.
(12) Does not include shares beneficially owned by GPG. Dr. Weiss is a director
of GPG.
(13) Includes currently exercisable options to purchase up to 20,000 shares of
PICO Stock under the 1995 Plan.
(14) Includes currently exercisable options to purchase up to 398,000 shares of
PICO Stock under the 1995 Plan. Does not include shares beneficially owned
by GPG.
TOC OWNERSHIP
Certain executive officers and directors of PICO hold shares or options to
purchase shares of TOC as follows: John R. Hart, options to purchase 2,500,000
shares, 4.2%; Ronald Langley, options to purchase 2,500,000 shares, 4.2%; Robert
R. Broadbent, 65,000 shares, less than 1%; Richard H. Sharpe, 14,550 shares,
less than 1%; and 10 current executive officers and directors as a group,
5,033,550 shares (including options to purchase 5,000,000 shares), 8.2%.
102
<PAGE> 110
PRINCIPAL SHAREHOLDERS OF CITATION
The following table sets forth information, as of June 14, 1996, with
respect to the beneficial ownership of Citation Common Stock by each person
known by Citation to be the beneficial owner of more than 5% of the Citation
Common Stock, and by each director, each Named Officer and all executive
officers and directors as a group. The table also sets forth such information
assuming the Merger has been consummated. For similar information with respect
to each shareholder of PICO who will be an officer, director or beneficial owner
of more than 5% of the Citation Common Stock following the Merger, see
"Principal Shareholders of PICO."
<TABLE>
<CAPTION>
NUMBER OF SHARES AND PRE-MERGER POST-MERGER
NAME AND ADDRESS NATURE OF BENEFICIAL PERCENTAGE PERCENTAGE
OF BENEFICIAL OWNER OWNERSHIP(1) OWNERSHIP(2) OWNERSHIP(3)
- ------------------------------------------------- -------------------- ------------ ------------
<S> <C> <C> <C>
The Crabbe Huson Special Fund, Inc.(4)........... 595,500 9.5% 1.8%
The Crabbe Huson Group, Inc.
121 S.W. Morrison Street, Suite 1400
Portland, Oregon 97204
Philo Smith(5)................................... 578,457 9.2 1.8
Philo Smith & Co., Inc.
PSCO Partners Limited Partnership
PSCO Partners Limited Partnership Two
PSCO Fund Limited
Philo Smith Capital Corporation
2950 Summer Street
Stamford, CT 06905
J. Philip DiNapoli............................... 249,500(6) 4.0 *
Theodore J. Biagini.............................. 156,250(7) 2.5 *
Donald F. Imwalle................................ 24,500 * *
Louis J. Mariani, Sr............................. 22,750(8) * *
Larry D. Russel.................................. -0- -- --
James R. Bancroft................................ 101,600(9) 1.6 *
Paul M. Bancroft................................. 111,555(10) 1.8 *
Donald Henderson................................. 80,000(11) 1.3 *
Marshall J. Burak................................ -0- -- --
E. Alexander Glover.............................. 25,000 * *
Harry H. Gordon.................................. 3,424 * *
Eugene A. O'Rourke............................... 7,000 * *
All directors and officers as a group
(19 persons pre-merger)........................ 885,927(12) 14.1 2.7
</TABLE>
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* Less than 1%.
(1) The table lists beneficial ownership in accordance with the definitions
adopted by the SEC under Rule 13d-3 of the Exchange Act, and includes
officers' allocations of vested shares under the ESOP and options which
become exercisable upon consummation of the Merger.
(2) Based on 6,285,751 shares of Citation Common Stock outstanding as of June
14, 1996, as adjusted to include shares covered by options exercisable by
directors and officers upon consummation of the Merger. Does not include
313,600 shares of Citation Common Stock owned by CIC, Citation's wholly-
owned subsidiary.
(3) Assumes that the Merger has been consummated at an Exchange Ratio of 5.0099
shares of Citation Common Stock for each share of PICO Stock.
(4) Based upon information supplied in a Schedule 13G filed with the SEC. The
Crabbe Huson Special Fund, Inc. reported direct ownership of 544,200
shares. The Crabbe Huson Group, Inc. reported shared voting and dispositive
power over the 544,200 shares owned by the fund for which it acts as
investment advisor and with respect to 51,300 additional shares owned by
others.
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(5) Based upon information supplied in a Schedule 13D filed with the SEC. Philo
Smith and Philo Smith & Co., Inc. beneficially own 143,778 shares held by
PSCO Partners Limited Partnership, Philo Smith Capital Corporation
beneficially owns 194,300 shares held by PSCO Partners Limited Partnership
Two, and Philo Smith and Philo Smith Capital Corporation beneficially own
240,379 shares held by PSCO Fund Limited.
(6) Includes 161,625 shares as to which ownership consists of shared voting and
investment power. Mr. DiNapoli disclaims beneficial ownership of 16,575 of
such shares.
(7) Includes (i) options to purchase 20,000 shares of Citation Common Stock,
and (ii) 28,500 shares as to which Mr. Biagini disclaims beneficial
ownership.
(8) Includes 22,500 shares as to which Mr. Mariani has shared voting and
investment power but disclaims beneficial ownership.
(9) Includes 29,164 shares as to which Mr. James Bancroft disclaims beneficial
ownership and 25,228 shares as to which he shares voting and investment
power.
(10) Includes 24,137 shares as to which Mr. Paul Bancroft disclaims beneficial
ownership.
(11) Includes options covering 50,000 shares of Citation Common Stock which
become exercisable upon consummation of the Merger.
(12) Includes options covering 191,548 shares of Citation Common Stock some of
which become exercisable upon consummation of the Merger.
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CERTAIN INFORMATION REGARDING CITATION
GENERAL
Citation is a holding company principally engaged in writing workers'
compensation and commercial property and casualty insurance through its
wholly-owned subsidiary, CIC and its indirectly wholly-owned subsidiary, CNIC.
In its workers' compensation business, CIC historically specialized in
providing coverage for California businesses but has expanded to provide
coverage in Arizona, Colorado and Utah. CIC focuses on insuring smaller accounts
in those classifications it believes to be historically profitable. CIC believes
that by maintaining its focus on a limited number of employment classifications
it can provide claim management and loss control services to the smaller
accounts at a level appropriate to the size and type of business of the
policyholder. Historically, CIC competed with other workers' compensation
insurers principally on the basis of its loss control expertise, claim
management services and policyholder dividends. Beginning January 1, 1995,
California's long standing rate law (known as the minimum rate law) was replaced
with a competitive rate law which CIC believes resulted in the lowest premium
price becoming the most prominent competitive factor.
In October 1989, Citation entered the commercial property and casualty
business to capitalize on what management believed was an attractive opportunity
to operate in a relatively narrow segment of the commercial property and
casualty market. Since that time, CIC has underwritten general liability and
property insurance for small and medium-sized businesses with uniform risk
characteristics and coverage needs. CIC typically provides general liability,
theft, inland marine, property, glass and incidental products liability
coverage. Commercial auto and umbrella liability are written for accounts where
Citation writes other lines of business.
In October 1993, Citation completed the acquisition of Madison Capital,
Inc. and its subsidiaries ("Madison"). Madison was merged with and into Citation
and its former wholly-owned subsidiaries. The Canadian Insurance Company of
California, California Consumers Insurance Company and Madison Acceptance
Corporation ("MAC"), became wholly-owned subsidiaries of Citation. In February
1994, the names of The Canadian Insurance Company of California and California
Consumers Insurance Company were changed to Citation General Insurance Company
("CGIC") and Citation National Insurance Company ("CNIC"), respectively.
CGIC and CNIC specialized in insuring accounts in commercial
property-oriented business classifications, including investment properties,
retail operations, restaurants, wholesale distribution operations and other
service-related businesses. Until October 1994, they also provided coverage for
artisan contractors. They competed principally on the basis of price,
comprehensive coverage, service and premium payment plans. Historically, CGIC
and CNIC could invoice the policyholder directly or, if the policyholder
preferred, through a producer. In both instances, CGIC and CNIC provided
installment payment options. Since January 1994, all three insurance
subsidiaries offered installment payment plans directly to the policyholder. All
producer invoicing requires 100% of policy premiums to be paid upon issuance of
the policy.
MAC is licensed by the California Department of Corporations as an
industrial loan company empowered to transact premium financing in California.
MAC does not presently conduct premium financing operations.
During 1994, Citation increased CGIC's loss reserves and, in the third
quarter of 1994, the increase in CGIC's loss reserves aggregated approximately
$6.2 million. These increases were due primarily to re-evaluation of potential
losses related to construction defect claims emanating from CGIC's artisan
contractor policies written in years prior to the merger. Subsequent to the
third quarter loss reserve increases, Citation notified the California
Department that the cumulative effect of these increases brought CGIC below the
minimum surplus required under California regulations. Citation began working
with the California Department to formulate a plan for resolving the situation.
Based upon discussions with the California Department regarding the possible
conservation of CGIC, Citation concluded that its control over CGIC had become
temporary and, as a result, has accounted for the results of CGIC on the equity
method since November 1994,
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resulting in a write off of its remaining investment in CGIC of $4.2 million at
that date. At that time, CGIC and CNIC stopped writing any new business.
In February 1995, Citation reached an agreement in principle with the
California Department regarding CGIC. Under the terms of the agreement an
inter-company pooling reinsurance agreement between CGIC and CNIC was commuted
effective September 30, 1994. In addition, CNIC transferred approximately $1.1
million of securities into a contingency fund for potential further development
of CGIC's loss reserves associated with accident years 1990 to 1994 during which
time the inter-company pooling agreement was in effect. Further, Citation agreed
to pay $600,000 in cash to CGIC and transfer its 25% ownership of Citation's
Costa Mesa property to CGIC. As a result of this agreement Citation recorded a
liability for the cost of the disposition of CGIC, which includes the above
described payments and transfers which, when combined with its write off of its
investment in CGIC, resulted in a $6.7 million charge to operating results in
1994. Further, CIC agreed to acquire the in-force book of business of CGIC for
approximately $1.7 million, which amount was accrued as a liability and recorded
as an other asset at December 31, 1994.
During July 1995, CGIC was placed into conservation by the State of
California, effectively transferring control of CGIC's assets to the California
Department. In August 1995, CGIC was placed into liquidation by the State of
California.
On November 30, 1995, Citation contributed all of the capital stock of CNIC
to CIC. This transaction increased the paid in and contributed surplus of CIC by
$5.3 million. CIC is currently rated B- (Adequate) by Best. CNIC is currently
rated C (Marginal) by Best.
In February 1994, Citation entered the personal automobile insurance
business in California by offering low limit policies marketed through a
Managing General Agent. Primarily as a result of poor operating results in this
line, Citation decided in early 1995 to withdraw from this business as rapidly
as permitted under California law, and focus on its primary business
segments -- workers' compensation and commercial property and casualty.
For the year ended December 31, 1995 approximately 45% of Citation's
consolidated net premiums earned were attributable to workers' compensation, 41%
were attributable to its commercial property and casualty lines of business and
14% were attributable to personal automobile insurance. For the year ended
December 31, 1994, approximately 49% of Citation's consolidated net premiums
earned were attributable to workers' compensation, 43% were attributable to its
commercial property and casualty lines of business and 8% were attributable to
personal auto insurance.
CIC is currently licensed to write business in Arizona, California,
Colorado, Hawaii, Nevada, New Mexico and Utah and is currently writing business
in Arizona, California, Colorado, Nevada and Utah. CNIC is licensed in
California.
ADDITIONAL INFORMATION
Additional information concerning Citation is included in the Citation 10-K
and the Citation 10-Q, which are included as Appendix G and Appendix H,
respectively, to this Joint Proxy Statement/Prospectus. Such documents and
certain other documents are also incorporated by reference herein. See
"Available Information" and "Incorporation of Certain Information by Reference."
DESCRIPTION OF CITATION CAPITAL STOCK
Citation is authorized to issue two classes of shares, common stock and
preferred stock. As of March 29, 1996, there were 191 shareholders of record of
Citation Common Stock.
COMMON STOCK
The number of shares of Citation Common Stock authorized by Citation's
Articles of Incorporation will be 100,000,000, par value $.001 per share, upon
completion of the Merger. At March 29, 1996 Citation had 6,407,803 issued and
outstanding shares of Citation Common Stock (including 313,600 shares of
Citation
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Common Stock held by a subsidiary of Citation). All issued and outstanding
shares of Citation Common Stock offered hereby, when issued pursuant to the
Merger, will be validly issued, fully paid and non-assessable.
The holders of Citation Common Stock are entitled to one vote for each
share held of record on each matter submitted to a vote of shareholders and,
upon giving the notice required by law, may cumulate their votes in the election
of directors. Subject to the preferences applicable to any shares of preferred
stock outstanding at the time, holders of Citation Common Stock are entitled to
receive ratably such dividends as may be declared by the Citation Board out of
funds legally available therefor and, in the event of the liquidation or
dissolution of Citation, are entitled to share ratably in all assets remaining
after payment of liabilities and preferred stock preferences, if any. Holders of
Citation Common Stock have no preemptive rights and have no rights to convert
their Citation Common Stock into any other securities. See "Comparison of
Shareholder Rights" for a description of other rights related to the Citation
Common Stock.
PREFERRED STOCK
The number of shares of preferred stock authorized by Citation's Articles
is 1,000,000, at $1.00 par value per share. Of such shares, 100,000 have been
designated as Series A Junior Participating Cumulative Preferred Stock (the
"Series A Preferred Stock"). Upon completion of the Merger and assuming approval
of the proposed amendment to Citation's Articles, the Authorized Preferred Stock
will consist of 2,000,000 shares with a par value of $.01 per share and of which
1,000,000 shares will be designated as Series A Preferred Stock. The Series A
Preferred Stock was designated pursuant to the adoption of the Shareholder
Rights Plan adopted by Citation in July 1991. See "Shareholder Rights Plan." The
Citation Board is authorized, without further action by the shareholders, to
issue, from time to time, additional series of preferred stock, in one or more
series, to fix and alter the dividend rights, dividend rate, conversion rights,
voting rights, the rights and terms of redemption (including sinking fund
provisions), the redemption price and the liquidation preferences of any wholly
unissued series of preferred stock, to fix the number of shares constituting
such series and to increase or decrease the number of shares of any such series
(but not below the number of shares then outstanding). The Citation Board,
without further shareholder approval, can thus issue preferred stock with voting
and conversion rights, which would adversely affect the voting power and other
rights of the holders of Common Stock. In addition, the Citation Board can issue
and sell shares of preferred stock to designated persons the impact of which
could make it more difficult for a holder of a substantial block of Common Stock
to remove incumbent directors or otherwise gain control of Citation. See
"Amendments to Citation's Articles of Incorporation" and "Comparison of
Shareholder Rights."
As of the date of this Joint Proxy Statement Prospectus, there are no
shares of Series A Preferred Stock or any other shares of preferred stock of
Citation outstanding. Citation has no present plans to issue any preferred
stock, except as provided in the Shareholder Rights Plan described below.
SHAREHOLDER RIGHTS PLAN
On July 11, 1991, Citation adopted the Rights Plan, set forth in a Rights
Agreement (the "Rights Agreement") pursuant to which the Citation Board declared
a dividend of one preferred stock purchase right (a "Right") for each share of
Citation Common Stock to holders of record as of July 22, 1991. All Citation
Common Stock issued thereafter includes a Right. Pursuant to the Rights Plan, in
the event (i) of a public announcement that any person has become a beneficial
owner of 10% or more of the outstanding Citation Common Stock (such person, a
"10% Shareholder" and the date of such announcement, the "Acquisition Trigger
Date") or (ii) a tender offer or exchange offer is commenced, the consummation
of which would cause any person to become a 10% Shareholder, each Right (other
than a Right held by such 10% Shareholder) will be exercisable, on and after the
close of business on the tenth business day following such event (the
"Distribution Date"), to purchase Citation Common Stock having a market value
equal to two times the then current exercise price (presently $35) (the
"Exercise Price"). The Rights Plan further provides that if, on or after the
occurrence of such event, Citation is merged into any other corporation or 50%
or more of Citation's assets or earning power are sold, each Right (other than a
Right held by the 10% Shareholder) will be exercisable to purchase common shares
of the acquiring corporation having a market value equal to two times the
Exercise Price. The Exercise Price is subject to adjustment from time to time in
order to prevent
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dilution. The Rights will expire on July 22, 2001, unless earlier redeemed or
exchanged. Prior to expiration, the Rights may be redeemed by Citation, in
whole, but not in part, under certain circumstances at a price of $.01 per
Right.
At any time after the Acquisition Trigger Date and prior to the first date
thereafter upon which a 10% Shareholder becomes the beneficial owner of 50% or
more of the Citation Common Stock. Citation may exchange all, but not less than
all, of the then outstanding Rights for Citation Common Stock, at an exchange
ratio of one share of Common Stock per Right. Until a Right is exercised, the
holder thereof has no rights as a shareholder of Citation solely by virtue of
the ownership of such Right.
Upon the close of business on a Distribution Date, the Rights will be
traded independently of the Citation Common Stock, and each Right, except those
held by the 10% Shareholder (which will be void), entitles the holder thereof to
acquire, upon payment of the Exercise Price, a fraction of a share of Series A
Preferred Stock of Citation, which fraction of a share is designed to have a
value approximately equal to the value of one share of Citation Common Stock.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to the person or group that attempts to acquire Citation
unless the offer is conditional on a substantial number of Rights being
acquired. The Rights, however, should not affect any prospective offeror willing
to make an offer at an equitable price and that is otherwise in the best
interest of Citation and its shareholders, as determined by the Citation Board.
The Rights should not interfere with any merger or other business combination
approved by the Citation Board, since a majority of the independent directors
may cause Citation to redeem the rights at a price of $.01 per Right within a
specified period after a person acquires sufficient shares to cause the Rights
to become exercisable. In connection with the Merger, Citation amended the
Rights Plan so it would not be triggered by the Merger. Each share of Citation
Common Stock issued in the Merger includes a Right.
OTHER ANTI-TAKEOVER ITEMS
In June 1993, Citation adopted a Severance Plan for Certain Executive
Officers, Senior Management and Key Employees of Citation and its subsidiaries
(the "Severance Plan"). This plan provided for severance payments to key
executives in the event of a change of control and subsequent termination or
constructive termination of the employment of the executive. Although the
Severance Plan is in place, no current Citation employees are participants of
the plan. The Severance Plan may be deemed to have anti-takeover effects and may
delay, defer or prevent a takeover attempt.
TRANSFER AGENT
Following the Merger, the transfer agent for the Citation Common Stock will
be Huntington National Bank.
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COMPARISON OF SHAREHOLDER RIGHTS
As a result of the Merger, PICO shareholders will become shareholders of
Citation, a California corporation, and their rights will be governed by the
Citation Articles and the Citation Bylaws (assuming the shareholders approve the
amendments described herein). Although it is impractical to compare all of the
aspects in which the OGCL and the CGCL and the Companies' governing documents
differ with respect to shareholders' rights, the following discussion summarizes
certain significant differences between them. These differences arise from (i)
the differences between the governing instruments of the companies, (ii) the
differences between the OGCL and the CGCL, (iii) the absence of regulatory
restrictions which are imposed by the Ohio Department, which are imposed upon
PICO but which will not be applicable to Citation and (iv) the Citation
Shareholder Rights Plan. This summary is not intended to be complete and is
qualified in its entirety by reference to applicable provisions of the OGCL, the
CGCL, the Citation Articles and Bylaws to be in effect after the Merger and
which are attached as Appendix A and Appendix B to this Joint Proxy
Statement/Prospectus, and the PICO Articles and Regulations and the rules and
regulations promulgated by the Ohio Department.
INDEMNIFICATION
Under the OGCL and the CGCL, directors, officers, employees and agents of a
corporation have an absolute right to indemnification for expenses reasonably
incurred by them to the extent they are successful on the merits or otherwise in
defense of any action, suit or proceeding brought against them. Under the OGCL,
in most instances directors are also entitled to mandatory payment of expenses
by the corporation as they are incurred, provided the director agrees to
cooperate with the corporation concerning the matter and to repay the amount
advanced if it is proved by clear and convincing evidence that his or her act or
failure to act was done with deliberate intent to cause injury to the
corporation or with reckless disregard for the corporation's best interests.
Ohio law and California law both allow a corporation to include in its
by-laws and in agreements between the corporation and its directors and
officers, similar provisions expanding the scope of indemnification beyond that
otherwise provided by law, however, it is unclear how California courts will
interpret this law. Generally, under the laws of both states, a corporation has
the power to indemnify a director, officer, employee or agent of the corporation
against expenses, judgments, fines and settlements incurred in a proceeding if
that person acted in good faith and in a manner the person reasonably believed
to be in (or under Ohio law, not opposed to) the best interest of the
corporation and, with respect to any criminal matter, the person had no
reasonable cause to believe his or her conduct was unlawful; provided, however,
that in an action by or on behalf of the corporation, such individuals may be
indemnified only against expenses incurred in the defense or settlement of the
action unless, under Ohio law, the court determines that despite an adjudication
of liability the individual is entitled to indemnity. Under California law,
however, a corporation may not indemnify its directors and officers for expenses
incurred in connection with a proceeding that is settled without court approval.
The Citation Articles and Bylaws and the PICO Regulations contain similar
provisions which (i) authorize indemnification of officers, directors and other
corporate agents to the fullest extent permitted by law, and (ii) provide that
the company may advance expenses to its officers and directors as incurred,
provided that they undertake to repay the amount advanced if it is ultimately
determined that they are not entitled to indemnification. In addition, Citation
and PICO are both authorized to enter into indemnification agreements with their
respective officers and directors. Citation has entered into indemnification
agreements with its executive officers and directors, and PICO has entered into
indemnification agreements with its directors. It is a condition to closing that
Citation enter into such an agreement with each PICO director.
Currently, PICO does not maintain any directors and officers liability
insurance. Citation maintains directors and officers liability insurance in the
amount of $2 million per occurrence, which it will be obligated to maintain
after the Merger.
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DUTY OF CARE FOR DIRECTORS
Under Ohio law, a director must perform his duties in good faith, in a
manner he reasonably believes to be in or not opposed to the best interests of
the corporation, and with the care that an ordinarily prudent person in a like
position would use under similar circumstances. A director is not liable for
monetary damages unless it is proved by clear and convincing evidence that his
action or failure to act was undertaken with deliberate intent to cause injury
to the corporation or with reckless disregard for the best interests of the
corporation. This higher standard of proof, however, does not affect the
liability of directors for unlawful loans, dividends or distributions. There is
no comparable provision limiting the liability of officers, employees or agents
of Ohio corporations.
Under California law, a corporation is permitted to adopt, and the Citation
Articles include, a provision which eliminates a director's liability for
monetary damages for a breach of such director's duty of care to the company or
its shareholders. As a result, no director of Citation will be liable for
monetary damages for negligence or gross negligence occurring after the Merger.
The directors will continue to be subject to claims for equitable remedies
although such remedies in some circumstances may not be available as a practical
matter. In addition, each director will remain liable for engaging in a
transaction from which such director derives an improper personal benefit, for
engaging in intentional misconduct or a knowing violation of law or for the
wrongful payment of a dividend or repurchase of shares by Citation where such
dividend or repurchase was willfully or negligently caused by such director.
California law will also not limit a director's liability for violations of the
federal securities laws. In addition, California law expressly prohibits
elimination of liability for acts or omissions that (i) show a reckless
disregard for the director's duty to the corporation or its shareholders in
circumstances in which the director was aware or should have been aware of a
serious risk of injury to the corporation or the shareholders or (ii) constitute
an unexcused pattern of inattention that amounts to an abdication of the
director's duty to the corporation or its shareholders.
Ohio law provides specific statutory authority for directors, in
determining what they reasonably believe to be in the best interests of the
corporation, to consider, in addition to the interests of the corporation's
shareholders, other factors such as the interests of the corporation's
employees, suppliers, creditors and customers; the economy of the state and
nation; community and societal considerations; the long-term and short-term
interests of the corporation and its shareholders; and the possibility that
these interests may be best served by the continued independence of the
corporation. California statutory law contains no comparable provision.
NUMBER OF DIRECTORS; CLASSIFIED BOARD
The number of directors of PICO is currently set at six. The Board is
divided into two classes of three directors each. One class of directors is
elected to serve one-year terms and one class of directors is elected to serve
three-year terms, with the terms to expire at the annual meeting of shareholders
in 1997.
The Citation Articles and Bylaws will provide for a variable-sized Board of
between five and nine directors, subject to amendment only by the shareholders,
with the number of directors currently set at nine. The Board will be divided
into three classes of directors consisting of three directors each. The Class I,
Class II and Class III directors shall serve until the annual meeting of
shareholders in 1997, 1998 and 1999, respectively. Thereafter, each director
will be elected to serve for a term of three years. See "Amendments to Articles
of Incorporation."
A classification system of electing directors may tend to maintain the
incumbency of the Board as it generally makes it more difficult for shareholders
to change a majority of the directors. A classified Board also may contribute to
continuity and stability in leadership and policy. The Board believes that the
continued classification of the Board after the Merger will enable the Board to
protect the interests of nontendering or minority shareholders in the event that
another person, through a tender offer or otherwise, should obtain a substantial
amount of the Citation shares.
With a classified Board, it would ordinarily require at least two annual
meetings for a majority of the voting stock to elect a majority of the Citation
Board unless, prior to the end of such two years, shareholders
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were able to (a) obtain the approval of the then-existing Board to increase the
number of authorized directors, (b) amend the Articles of Incorporation
providing for a classified Board, (c) remove, or induce to resign, a sufficient
number of directors or (d) call a special meeting and vote to remove directors
for cause and elect persons to fill the resulting vacancies.
CUMULATIVE VOTING
The Articles of Incorporation of PICO contain a provision which eliminates
a shareholder's right to require cumulative voting. The Citation Articles do not
eliminate cumulative voting, which may result in a person or persons holding
shares or proxies representing less than a majority of the shares present being
able to elect directors. For example, if three directors are to be elected, a
shareholder or group of shareholders holding more than 25% of the shares voting
at the meeting could, by voting cumulatively, elect one director. Cumulative
voting enables minority shareholder interests to obtain representation on the
Board and thereby espouse their views and contribute to the decision-making
processes of the Board.
REMOVAL OF DIRECTORS AND FILLING OF VACANCIES
Under the PICO Regulations, a director or directors may be removed from
office, with or without cause, by the affirmative vote of the holders of at
least two-thirds of the voting power of PICO entitling them to elect directors
in place of those to be removed. Vacancies in the Board of Directors of PICO and
any newly-created directorships resulting from any increase in the number of
PICO's directors may be filled by PICO's Board of Directors, acting by the vote
of a majority of the directors then in office.
Under California law, the holders of at least 10% of the number of
outstanding shares of any class of stock may initiate a court action to remove
any director for cause. In addition, any or all of the directors of a California
corporation may be removed without cause by the affirmative vote of a majority
of the outstanding shares entitled to vote. However, no director may be removed
(unless the entire board is removed) when the votes cast against removal would
be sufficient to elect the director if voted cumulatively at an election at
which the same total number of votes were cast and the entire number of the
directors authorized at the time of the director's most recent election were
then being elected. The classification of the Board, therefore, makes it more
difficult for a substantial shareholder or group of shareholders to change the
entire Board abruptly without the approval or cooperation of incumbent directors
or the holders of more than a majority of Citation's stock. In addition, the
classified board makes it more difficult for shareholders to change a majority
of directors even when the reason for such a change might be dissatisfaction
with the performance of incumbent directors.
The Bylaws of Citation provide that vacancies occurring in the Board of
Directors, including a vacancy created by the removal of a director by the
shareholders, may be filled by a vote of a majority of the directors then in
office or by the shareholders if the directors fail to fill such vacancy.
California law also provides that if, after the filling of any vacancy by the
directors, the directors then in office who have been elected by the
shareholders shall constitute less than a majority of the directors then in
office, (i) any holder or holders of an aggregate of five percent (5%) or more
of the total number of shares at the time outstanding having the right to vote
for such directors may call a special meeting of shareholders, or (ii) the
California Superior Court of the proper county shall, upon application of such
shareholder or shareholders, summarily order a special meeting of shareholders
to be held to elect the entire Board of Directors.
AMENDMENT OF ARTICLES OF INCORPORATION
The PICO Articles of Incorporation provide that they may be amended if such
amendment is approved by the Board of Directors and by a majority of the shares.
Generally, the same approval requirements will apply to Citation under
California law. However, if Citation were to have more than one class or series
of stock outstanding, amendments affecting certain rights of any such class or
series would require the vote of a majority of the shares of such class or
series.
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AMENDMENT OF THE BY-LAWS
The regulations of an Ohio corporation may be amended only by the
corporation's shareholders. In the case of the PICO Regulations, an amendment
may be adopted by the shareholders by a majority or, in some instances,
two-thirds of the voting power entitled to vote in connection with the
amendment.
Under California law, the bylaws of a corporation may be amended by the
vote of either a majority of the directors or a majority of the outstanding
shares.
DIRECTOR NOMINATIONS
Ohio law provides that only nominated individuals may be elected as
directors. California law permits a corporation to include in its bylaws
provisions requiring advance notice of director nominations. The Citation Bylaws
provide a procedure for nominating persons to be elected to the Citation Board
including, among other things, the requirement of not less than 30 days notice
to the corporation before an annual meeting, or 7 days notice with respect to a
special meeting, and the provision of certain information about the nominee. The
PICO Bylaws do not provide a procedure for nominating directors. These
provisions are designed to prevent a hostile acquiror of PICO's securities from
nominating directors without giving adequate notice, thereby permitting the
Board of Directors to consider and prepare a response to such proposals. These
provisions do not give the Board of Directors any power to approve or disapprove
stockholder nominations.
ACTION BY SHAREHOLDERS WITHOUT A MEETING
The PICO Regulations contain provisions consistent with the OGCL relating
to the taking of shareholder actions without a meeting. Under the PICO
Regulations and the OGCL (when the articles or regulations do not otherwise
provide), any action which may be authorized or taken at a meeting of
shareholders may be authorized or taken without such meeting by the affirmative
vote and the written approval of all of the shareholders entitled to notice of
such meeting. Under the CGCL, shareholders may also take action by written
consent; however, except with respect to the election of directors, consents
need be obtained only from the holders of outstanding shares having not less
than the minimum number of votes which would be necessary to authorize such
action at a meeting where all shareholders are present.
CALL OF SPECIAL MEETINGS OF SHAREHOLDERS
The Regulations of PICO provide that special meetings of shareholders may
be called only by the President or Chairman of the Board of PICO, by the
directors or by a majority of the outstanding shares entitled to vote.
Under current California law and the Bylaws of Citation, special meetings
of shareholders may be called by the Board, the Chairman, the President and the
holders of 10% or more of the outstanding voting power.
BLANK CHECK PREFERRED STOCK
The Articles of both Citation and PICO each authorize the issuance of
Preferred Stock. Both further provide that the Board of Directors is entitled to
set the rights, preferences, privileges and restrictions of such authorized and
unissued stock. By issuing Preferred Stock with particular rights, a company may
be able to deter a hostile acquisition (e.g., the company may issue shares of
Preferred Stock with extraordinary voting rights or liquidation preferences to
make it more difficult for a hostile acquiror to gain control of the company.)
The authorized shares of Citation Preferred Stock, as well as shares of
Citation Common Stock, are available for issuance without further action by
Citation shareholders, unless such action is required by applicable law or the
rules of any stock exchange or automated quotation system on which Citation
securities may be listed or traded. Nasdaq currently requires shareholder
approval in connection with, among other matters, the sale or issuance of common
stock (or securities or securities convertible into or exercisable for common
stock) equal to 20% or more of the common stock or 20%, or more of the voting
power outstanding before the issuance for less than the greater of book value or
market value of the stock.
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<PAGE> 120
MERGERS, CONSOLIDATIONS AND OTHER CORPORATE TRANSACTIONS
Under both California law and PICO's Articles, an agreement of merger or
consolidation must be approved by the directors of each constituent corporation
and adopted by the shareholders of each constituent corporation (other than the
surviving corporation in the case of certain mergers) holding at least a
majority of the corporation's voting power. In addition, PICO's Articles require
the approval of a majority of the voting power of the corporation for (i) the
consummation of combinations and majority share acquisitions involving the
transfer or issuance of such number of shares as would entitle the holders
thereof to exercise at least 1/6 of the voting power of such corporation in the
election of directors immediately after the consummation of such transaction,
(ii) the disposition of all or substantially all of the corporation's assets
other than in the regular course of business and (iii) voluntary dissolutions.
Under the CGCL, if a party that makes a tender offer or proposes to acquire
a corporation by a reorganization or certain sales of assets is controlled by
such corporation or is controlled by an officer or director of such corporation,
or if a director or executive officer of such corporation has a material
financial interest in such party (each an "Interested Party Proposal"), (i) an
affirmative opinion in writing as to the fairness of the consideration to the
shareholders of such corporation must be delivered to shareholders of such
corporation, and (ii) such shareholders must be (x) informed of certain later
tender offers or written proposals for a reorganization or sale of assets made
by other persons, and (y) afforded a reasonable opportunity to withdraw any
vote, consent or proxy previously given or shares previously tendered in
connection with the Interested Party Proposal. Under both Ohio and California
law, holders of a particular class of shares are entitled to vote as a separate
class if certain rights of such class are affected by the proposed transaction.
In connection with any merger transaction, the CGCL also generally requires
that, unless all shareholders of a class or series consent, each share of such
class or series must be treated equally with respect to any distribution of
cash, property, rights or securities. The CGCL also provides generally that if a
corporation that is party to a merger, or its parent, owns more than 50% but
less than 90% of the voting power of the other corporation that is party to such
merger, the nonredeemable shares of common stock of the controlled corporation
may be converted only into nonredeemable shares of the surviving corporation or
a parent party unless all of the shareholders of the class consent.
APPRAISAL RIGHTS
Under the OGCL, dissenting shareholders are entitled to appraisal rights in
connection with the lease, sale, exchange, transfer or other disposition of all
or substantially all of the assets of a corporation. In connection with
amendments to a corporation's articles, its shareholders are entitled to
appraisal rights when the amendment proposes (i) certain substantially
prejudicial changes in preference in dividends and distributions and
liquidation, on the express terms of a class of issued shares (including
cumulative dividends), (ii) a substantial change in the purpose of the
corporation, and (iii) a change to nonprofit status. In addition, shareholders
of an Ohio corporation being merged into a new corporation are also entitled to
appraisal rights. Shareholders of an acquiring corporation are entitled to
appraisal rights in a merger, combination or majority share acquisition in which
such shareholders are entitled to voting rights.
California law does, in general, afford dissenters' rights in a
reorganization; however, it provides exclusions from dissenters' rights which
are somewhat different from those in Ohio. For example, in the case of a
corporation whose shares are listed on the Nasdaq National Market, dissenters'
rights would be available in certain transactions as to any shares on which
there are certain restrictions on transfer and as to any class of shares with
respect to which the holders of at least five percent (5%) of the outstanding
shares claim dissenters' rights. See "Dissenters' Rights."
ANTI-TAKEOVER STATUTES
The OGCL provides in part that no offeror may make a control bid pursuant
to a tender offer or a request or invitation for tenders unless, on the day the
offeror commences a control bid, it files with the Superintendent of Insurance
of the State of Ohio (the "Superintendent") and the target company certain
information in respect of the offeror, his ownership of the company's shares and
his plans for the company
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<PAGE> 121
(including, among other things, plans to terminate employee benefit plans, close
any plant or facility, or reduce the work force). If the Superintendent
determines that the offeror's disclosures are inadequate, it must act within
three calendar days from the date of the offeror's filing to issue a suspension
order. If a bid is suspended, a hearing must be held within ten calendar days
from the date of the Superintendent's suspension order. The hearing procedure
must be completed no later than 16 calendar days after the date on which the
suspension was imposed. A control bid is the purchase of or offer to purchase
any equity security of an issuer with certain connections to Ohio from a
resident of Ohio if (i) after the purchase of such security, the offeror would
directly or indirectly be the beneficial owner of more than 10% of any class of
the issued and outstanding equity securities of the issuer or (ii) the offeror
is the issuer, there is a pending control bid by a person other than the issuer,
and the number of the issued and outstanding shares of the company would be
reduced by more than 10%. This control bid provision does not apply when the
offeror or the target company is a bank, a bank holding company or a savings and
loan holding company and the control bid is subject to approval by the
appropriate federal regulatory agency.
Unless the corporation's articles or regulations otherwise provide, Section
1707.043 of the Ohio Revised Code (the "Profit Recovery Statute") permits an
Ohio corporation to recover any profit realized from the disposition of equity
securities of the corporation by a person or group who made a proposal to
acquire control of the corporation within 18 months before the disposition of
the equity securities. Certain profits are not recoverable pursuant to the
Profit Recovery Statute, including profits that do not exceed $250,000 in the
aggregate, profits with respect to securities that were acquired prior to April
11, 1990 or more than 18 months prior to the date on which the acquisition
proposal was made, and profits realized by a person or group that establishes in
court that its motives were not manipulative. Neither the PICO Articles nor the
PICO Regulations provide that the Profit Recovery Statute will not apply to PICO
and its equity securities.
The CGCL has no comparable provision, however, the California Insurance
Code requires the Insurance Commissioner to approve any proposed change of
control of Citation. For such purpose "control" is presumed to exist if any
person, directly or indirectly owns, controls, holds with the power to vote, or
holds proxies representing more than 10% of the voting securities of Citation.
QUORUM FOR SHAREHOLDERS MEETINGS
Under the PICO Regulations, attendance at a meeting of shareholders, in
person or by proxy, of shareholders representing one-third or more of the
outstanding shares of PICO's stock, constitutes a quorum, unless otherwise
provided by law. Under Citation's Bylaws, a majority of the outstanding shares
entitled to vote must be represented at a shareholder's meeting in order to
constitute a quorum.
INSPECTION OF SHAREHOLDER LIST
California law provides for an absolute right of inspection of the
shareholder list for persons holding five percent (5%) or more of a
corporation's voting shares or persons holding one percent (1%) or more of such
shares who have filed a Schedule 14B with the Securities and Exchange Commission
relating to the election of directors. California law and Ohio law upon written
demand allow any shareholder to inspect the shareholder list for any reasonable
and proper purpose. Also, Ohio law requires, upon the request of any shareholder
at a shareholder meeting, that an alphabetical list of shareholders entitled to
vote be provided. Ohio law, however, does not contain a comparable provision to
that of California which grants a shareholder (not at a shareholders meeting) an
absolute right of inspection.
CLASS VOTING
Under both Ohio and California law, holders of a particular class of shares
are entitled to vote as a separate class if the rights of such class are
affected by mergers, consolidations or amendments to the articles.
DIVIDENDS, DISTRIBUTIONS AND REPURCHASES
Without the approval of the Superintendent, an Ohio insurance corporation
may not pay dividends which exceed the greater of (i) the preceding calendar
year's statutory net income and (ii) 10% of the statutory
114
<PAGE> 122
shareholders equity as of the preceding December 31. In addition, the OGCL
limits dividends to an amount equal to the statutory earned surplus. See
"Business of PICO -- Business and Properties of PICO -- Regulation."
Under the OGCL, a corporation may repurchase its own shares if authorized
to do so by its articles or under certain other circumstances but may not do so
if immediately thereafter its assets would be less than its liabilities plus its
stated capital, if any, or if the corporation is insolvent or would be rendered
insolvent by such a purchase or redemption. The PICO Articles permit PICO to
repurchase shares to the extent permitted by law.
Under California law, a corporation may pay dividends and may purchase or
redeem outstanding shares of its capital stock only if the retained earnings of
the corporation, after the dividend, purchase or redemption, exceed the amount
spent in making such a dividend, purchase or redemption; or, in general, if the
assets of the corporation (excluding certain intangible assets) exceed 125% of
the liabilities of the corporation and the current assets of the corporation
exceed an amount equal to 100% or 125% (depending on whether certain financial
tests are met) of the current liabilities. California law does not permit the
revaluation of assets to their current fair market value. The California
Department also limits the payment of dividends.
To date, neither Citation nor PICO has paid cash dividends on its capital
stock since 1985. Further, neither company anticipates paying cash dividends in
the foreseeable future.
REGULATORY CHANGES
PICO is currently subject to regulation by the Ohio Department.
Accordingly, as a registered Ohio insurance company, PICO is required to comply
with the significant restrictions on investments imposed by the Ohio insurance
laws. See "Business of PICO -- Business and Properties of PICO -- Regulation."
PICO is currently exempt under the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder (collectively, the
"Exchange Act"). As a result of the Merger, PICO shareholders will become
shareholders of Citation, which is subject to the Exchange Act. Accordingly,
after the Merger, the current PICO shareholders will receive significantly more
information regarding Citation, including annual reports which comply with the
Exchange Act, than they currently do with respect to PICO. In addition, they
will receive the benefits of the more stringent insider and short-swing trading
prohibitions which result from being an Exchange Act registered company.
SHAREHOLDER RIGHTS PLAN
Citation has in place a Rights Plan pursuant to which holders of Citation
Common Stock are entitled to a Right, which is exercisable under certain
circumstances to purchase additional shares of stock of Citation or an entity
acquiring Citation. See "Description of Citation Capital Stock -- Shareholder
Rights Plan." The shares of Common Stock issued to PICO shareholders will
include Rights. PICO does not have a shareholders' rights plan.
RESTRICTIONS ON VOTING OF SHARES
Under the CGCL, any corporation deemed a subsidiary of a parent corporation
is prohibited from voting shares of the parent which are held by such
subsidiary. A corporation will be deemed a subsidiary for voting purposes if 25%
of its outstanding shares are owned directly or indirectly by the parent
corporation. Accordingly, TOC, 38% of which will be owned indirectly by Citation
after the Merger, will not be able to vote the shares of Citation stock to be
issued to it pursuant to the Merger in exchange for the PICO Stock it purchased
from GPG. The OGCL has a similar provision restricting voting, however, it
applies primarily to majority-owned subsidiaries.
LEGAL MATTERS
The validity of the shares of Citation Common Stock to be issued in
connection with the Merger and certain legal matters related to Citation and the
Merger will be passed upon by Gibson, Dunn & Crutcher
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<PAGE> 123
LLP, San Francisco, California, counsel to Citation. Certain legal matters
related to PICO and the Merger will be passed upon by the firm of Gray Cary Ware
& Freidenrich, San Diego, California, counsel to PICO.
EXPERTS
The Consolidated Financial Statements and the related financial statement
schedules included and incorporated in this Joint Proxy Statement/Prospectus by
reference from Citation's Annual Report on Form 10-K for the year ended December
31, 1995, have been audited by Deloitte & Touche, L.L.P., independent auditors,
as stated in their reports which are included and incorporated herein by
reference and have been so included and incorporated in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
The consolidated balance sheets of PICO as of December 31, 1995 and 1994,
and the consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1995,
included in this Joint Proxy Statement/Prospectus have been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given upon their authority as experts in accounting and auditing.
The balance sheet of Sequoia as of December 31, 1994 and 1993, and the
related statements of operations, changes in shareholder's equity, and cash
flows for each of the three years ended in the period ended December 31, 1994
included in this Joint Proxy Statement/Prospectus have been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given their authority as experts in accounting and auditing.
The consolidated statements of financial position of TOC as of March 31,
1994 and 1995 and the consolidated statements of operations, deficit and changes
in financial position for each of the years in the three year period ended March
31, 1995, included in this Joint Proxy Statement/Prospectus have been included
herein in reliance on the report of KPMG Peat Marwick Thorne, Chartered
Accountants, given upon their authority as experts in accounting and auditing.
OTHER MATTERS
The Citation Board and the PICO Board know of no other business which will
be presented at the Citation Meeting and the PICO Meeting. If any other business
is properly brought before the Citation Meeting or PICO Meeting, it is intended
that proxies in the enclosed form will be voted in respect thereof in accordance
with the judgments of the persons voting the proxies.
WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE SHAREHOLDER MEETINGS, YOU
ARE URGED TO COMPLETE, SIGN AND RETURN YOUR PROXY PROMPTLY.
By Order of the Citation Board
<TABLE>
<S> <C>
, 1996 Douglas S. Gould
San Jose, California Secretary
By Order of the PICO Board
, 1996 James F. Mosier
Pickerington, Ohio Secretary
</TABLE>
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<PAGE> 124
GLOSSARY OF SELECTED INSURANCE TERMS
The following terms when used in this Joint Proxy Statement/Prospectus have
the following meanings:
<TABLE>
<S> <C>
Assume............................... To receive from a ceding insurer all or a portion of a
risk in consideration of receipt of a premium.
Cede................................. To transfer to a reinsurer all or a portion of a risk
in consideration of payment of a premium.
Combined ratio....................... The sum of the loss ratio, the underwriting expense
ratio and the policyholder dividend ratio.
Earned surplus....................... The cumulative amount of retained net profits from
insurance operations, including investment income, as
determined under statutory accounting principles.
Excess of loss reinsurance........... A form of reinsurance whereby the reinsurer assumes
the risk insured by the ceding insurer in excess of a
specified limit in exchange for a portion of the
premium.
GAAP................................. Recording transactions and preparing financial
statements in accordance with generally accepted
accounting principles, generally reflecting a going
concern, rather than a liquidating, concept of
accounting.
Incurred but not reported ("IBNR")
reserves........................... The estimated liabilities for future payments on
losses that have occurred, but have not yet been
reported to the insurer.
Loss ratio........................... The ratio of net incurred losses and loss adjustment
expense to net premiums earned. Net incurred losses
include an estimated provision for IBNR.
Loss adjustment expense.............. The expenses of investigating and settling claims,
including legal fees, other fees and general expenses
of administering the claims adjustment process.
Net premiums earned.................. The portion of premiums applicable to the expired
period of policies after the assumption and cession of
reinsurance.
Net premiums written................. Premiums retained by an insurer after the assumption
and cession of reinsurance.
Participating policy................. An insurance policy under which the policyholder may
receive a dividend, which is a partial return of
premium, after the policy period, subject to
declaration by an insurance company's Board of
Directors, if, among other factors, the insured had
a favorable claim history during the policy period.
Policy acquisition costs............. Brokers' commissions, premium taxes, marketing,
underwriting and other direct expenses associated
with acquiring and retaining business.
Policyholder dividend ratio.......... The ratio of policyholder dividends incurred to net
premiums earned.
Producers............................ Independent insurance brokers who market insurance
products to potential policyholders.
</TABLE>
117
<PAGE> 125
<TABLE>
<S> <C>
Quota share reinsurance.............. A form of reinsurance in which the reinsurer assumes a
stated percentage of every risk insured by the ceding
insurer within a defined category and up to a
specified amount. The reinsurer and the ceding
insurer share proportionately premiums and losses on
such risks.
Reserves or loss reserves............ The balance sheet liability representing estimates of
amounts needed to pay reported and unreported claims
and related loss adjustment expense.
Statutory accounting................. Recording transactions and preparing financial
statements in accordance with the rules and procedures
adopted by regulatory authorities, generally
reflecting a liquidating, rather than a going
concern, concept of accounting.
Underwriting......................... The process whereby an insurer reviews applications
submitted for insurance coverage and determines
whether it will accept all or part of the coverage
being requested and at what premium.
Underwriting expenses................ The aggregate of policy acquisition costs and the
portion of administrative, general and other expenses
attributable to insurance operations other than the
insurance claim operation.
Underwriting expense ratio........... The ratio of underwriting expenses to net premiums
earned.
Underwriting profit (loss)........... The amount of income (loss) from insurance operations,
exclusive of net investment income.
</TABLE>
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<PAGE> 126
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PICO
Report of Independent Accountants.................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994......................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994 and
1993............................................................................... F-4
Consolidated Statement of Changes in Shareholders' Equity for the Years Ended
December 31, 1995 and 1994......................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and
1993............................................................................... F-6
Notes to the Consolidated Financial Statements....................................... F-8
Consolidated Balance Sheets as of March 31, 1996 (unaudited) and December 31, 1995... F-31
Consolidated Statements of Operations for the three months ended March 31, 1996 and
1995 (unaudited)................................................................... F-32
Consolidated Statements of Cash Flows for the three months ended March 31, 1996 and
1995 (unaudited)................................................................... F-33
Notes to the Consolidated Financial Statements....................................... F-34
TOC
Report of Chartered Accountants...................................................... F-35
Consolidated Statements of Financial Position for the Years Ended March 31, 1995 and
1994............................................................................... F-36
Consolidated Statements of Operations for the Years Ended March 31, 1995, 1994 and
1993............................................................................... F-37
Consolidated Statements of Deficit for the Years Ended March 31, 1995, 1994, and
1993............................................................................... F-38
Consolidated Statements of Changes in Financial Position for the Years Ended March
31, 1995, 1994 and 1993............................................................ F-39
Notes to the Consolidated Financial Statements....................................... F-40
SEQUOIA
Report of Independent Accountants.................................................... F-50
Balance Sheets as of December 31, 1994 and 1993...................................... F-51
Statements of Operations for the Years Ended December 31, 1994, 1993 and 1992........ F-52
Statement of Changes in Shareholder's Equity for the Years Ended December 31, 1994,
1993 and 1992...................................................................... F-53
Statements of Cash Flows for the Years Ended December 31, 1994, 1993 and 1992........ F-54
Notes to Financial Statements........................................................ F-55
</TABLE>
F-1
<PAGE> 127
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Physicians Insurance Company of Ohio
Pickerington, Ohio
We have audited the accompanying consolidated balance sheets of the
Physicians Insurance Company of Ohio and Subsidiaries as of December 31, 1995
and 1994, and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the balance sheet of
The Ondaatje Corporation, a consolidated controlled company acquired September
5, 1995, which statements reflect total assets of 24% of the related
consolidated totals as of December 31, 1995. This balance sheet was audited by
other auditors whose report has been furnished to us, and our opinion insofar as
it relates to the amounts included for The Ondaatje Corporation, is based solely
on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Physicians Insurance Company of Ohio and
Subsidiaries as of December 31, 1995, and 1994, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Columbus, Ohio
April 15, 1996
F-2
<PAGE> 128
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Investments:
Available for sale:
Fixed maturities, at fair value (amortized cost $80,096,982
and $198,571,887)........................................ $ 80,344,071 $188,649,139
Equity securities, at fair value (cost $66,241,369 and
$15,070,786)............................................. 101,061,295 19,333,272
Short-term investments, at cost............................... 9,162,925 1,998,521
Real estate................................................... 3,038,750 4,326,497
------------ ------------
Total investments..................................... 193,607,041 214,307,429
Cash and cash equivalents....................................... 121,063,805 21,058,769
Premiums and other receivables, net............................. 25,983,156 5,555,742
Reinsurance receivables......................................... 100,719,416 32,370,054
Prepaid deposits and reinsurance premiums....................... 16,623,918 6,051,246
Accrued investment income....................................... 1,417,091 3,509,521
Property and equipment, net..................................... 30,170,348 4,816,839
Deferred policy acquisition costs............................... 2,894,644 2,812,936
Other assets.................................................... 11,084,519 2,635,657
Assets held in separate accounts................................ 6,361,040 4,045,281
------------ ------------
Total assets.......................................... $509,924,978 $297,163,474
============ ============
LIABILITIES
Policy liabilities and accruals:
Unpaid losses and loss adjustment expenses, net of discount... $229,796,606 $180,691,044
Future policy benefits and claims payable..................... 15,576,716 14,399,165
Annuity and other policyholders' funds........................ 31,976,176 31,474,914
Unearned premiums............................................. 30,858,612 16,112,201
Reinsurance balance payable................................... 8,376,110 6,857,302
Deferred gain on retroactive reinsurance........................ 3,500,544 3,020,577
Other liabilities............................................... 20,671,611 4,989,636
Deferred tax liability.......................................... 8,984,461
Liabilities related to separate accounts........................ 6,361,040 3,441,397
------------ ------------
Total liabilities..................................... 356,101,876 260,986,236
------------ ------------
Minority Interest............................................... 74,473,757 433,176
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, authorized 1,000,000 shares; none
issued........................................................
Common stock:
Class A, $1 par value; authorized 8,000,000; issued 5,476,395
shares..................................................... 5,476,395 5,476,395
Additional paid-in capital...................................... 11,933,320 11,877,320
Net unrealized appreciation (depreciation) on investments....... 23,572,259 (4,748,349)
Cumulative foreign currency translation adjustment.............. (738,300)
Retained earnings............................................... 39,906,703 24,233,728
------------ ------------
80,150,377 36,839,094
Less treasury stock, at cost (Class A shares 272,498 in 1995 and
372,498 shares in 1994)....................................... (801,032) (1,095,032)
------------ ------------
Total shareholders' equity............................ 79,349,345 35,744,062
------------ ------------
Total liabilities and shareholders' equity............ $509,924,978 $297,163,474
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 129
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, AND 1994
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Premium income................................................. $ 4,291,240 $ 3,921,692 $ 8,803,570
Investment income, net......................................... 9,286,343 4,963,995 6,322,660
Realized gains on investments.................................. 5,142,275 901,303 5,684,464
Real estate sales.............................................. 1,336,501 1,537,500 2,183,000
Commission income.............................................. 1,328,000
Food processing and other...................................... 3,314,000
Other income................................................... 883,072 518,029 500,939
----------- ----------- -----------
Total revenues......................................... 25,581,431 11,842,519 23,494,633
----------- ----------- -----------
Expenses:
Loss and loss adjustment expenses.............................. 1,925,070
Benefits and claims............................................ 701,305 79,247 5,388,142
Interest credited to policyholders............................. 2,438,036 2,222,560 2,213,113
Policy acquisition costs....................................... 368,155 318,083 405,693
Cost of land sales............................................. 1,501,421 1,177,295 1,660,150
Insurance underwriting and other expenses...................... 16,587,471 5,025,360 5,353,108
----------- ----------- -----------
Total expenses......................................... 23,521,458 8,822,545 15,020,206
----------- ----------- -----------
Income from continuing operations before income taxes and
minority interest.......................................... 2,059,973 3,019,974 8,474,427
Provision for federal income taxes............................... 876,866 539,177 2,361,866
----------- ----------- -----------
Income from continuing operations before minority
interest................................................... 1,183,107 2,480,797 6,112,561
Minority interest in loss of subsidiaries........................ 472,939
----------- ----------- -----------
Income from continuing operations........................... 1,656,046 2,480,797 6,112,561
Discontinued Operations:
Operating income (loss) -- (net of federal income tax (benefit)
of $(7,991,020), $(87,296), and $(2,599,296)),
respectively................................................ 9,226,768 16,350,132 (6,004,280)
Gain on disposal of the Medical Professional Line of business,
net of federal income taxes of $1,209,838................... 4,790,162
----------- ----------- -----------
Income (loss) from discontinued operations....................... 14,016,930 16,350,132 (6,004,280)
----------- ----------- -----------
Income before cumulative effect of change in discount
rate....................................................... 15,672,976 18,830,929 108,281
Cumulative effect of change in discount rate..................... (4,109,941)
----------- ----------- -----------
Net income............................................. $15,672,976 $14,720,988 $ 108,281
=========== =========== ===========
Net income (loss) per common share:
Continuing operations.......................................... $ 0.32 $ 0.51 $ 1.94
Discontinued operations........................................ 2.70 3.39 (1.91)
Cumulative effect of change in discount rate................ (0.85)
----------- ----------- -----------
Net income per common share............................ $ 3.02 $ 3.05 $ 0.03
=========== =========== ===========
Pro forma amounts assuming new discount rate is applied
rectroactively
Net income..................................................... $18,830,929 $ 1,851,065
Net income per share........................................... $ 3.90 $ 0.59
Weighted average shares outstanding......................... 5,188,154 4,822,468 3,149,837
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE> 130
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
NET FOREIGN
COMMON STOCK ADDITIONAL UNREALIZED CURRENCY
--------------------- PAID-IN GAIN (LOSS) RETAINED TRANSLATION TREASURY
CLASS A CLASS B CAPITAL ON INVESTMENTS EARNINGS ADJUSTMENT STOCK TOTAL
---------- -------- ----------- -------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January
1, 1994......... $4,844,816 $ 36,000 $ 9,508,899 $ 3,335,431 $10,476,740 0 $(2,095,032) $ 26,106,854
Cumulative
effect of
change in
accounting for
investments,
net of
adjustment to
deferred
policy
acquisition
costs of
$635,756 and
deferred taxes
of $497,091... 7,419,901 7,419,901
Net income...... 14,720,988 14,720,988
Net unrealized
depreciation
on
investments,
net of
adjustment to
deferred
policy
acquisition
costs of
$1,123,648 and
deferred taxes
of $939,248... (15,503,681) (15,503,681)
Issuance of
common
stock......... 631,579 2,368,421 3,000,000
Retirement of
treasury stock
(all Class B
shares)....... (36,000) (964,000) 0 1,000,000 0
---------- -------- ----------- ----------- ----------- --------- ---------- ------------
Balances, December
31, 1994........ 5,476,395 0 11,877,320 (4,748,349) 24,233,728 0 (1,095,032) 35,744,062
---------- -------- ----------- ----------- ----------- --------- ---------- ------------
Net income...... 15,672,975 15,672,975
Cumulative
translation
adjustment of
foreign
subsidiaries... $(738,300) (738,300)
Net unrealized
appreciation
on
investments,
net of
adjustment to
deferred
policy
acquisition
costs of
$544,162 and
deferred taxes
of
$12,246,591... 28,320,608 28,320,608
Issuance upon
exercise of
options....... 56,000 294,000 350,000
---------- -------- ----------- ----------- ----------- --------- ---------- ------------
Balances, December
31, 1995........ $5,476,395 $ 0 $11,933,320 $ 23,572,259 $39,906,703 $(738,300) $ (801,032) $ 79,349,345
========== ======== =========== =========== =========== ========= ========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 131
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 15,672,975 $ 14,720,988 $ 108,281
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred taxes................................. (7,891,246) (34,119) (175,101)
Depreciation and amortization.................. 2,292,073 2,382,285 5,005,889
Realized gains on investments.................. (4,018,666) (901,303) (5,684,464)
Gain from disposition of discontinued
operations.................................. (6,000,000)
Changes in assets and liabilities, net of
effects from acquisitions of businesses:
Premiums and other receivables.............. (5,241,564) 2,581,834 4,366,203
Reinsurance recoverable and payable......... (75,607,649) (9,397,648) 7,582,197
Accrued investment income................... 2,100,012 484,708 (230,189)
Deferred policy acquisition costs........... (1,716,745) (33,162) (2,687,071)
Unpaid losses and loss adjustment
expenses.................................. 49,105,562 (11,044,212) 6,680,888
Claims payable.............................. 623,649 (2,733,267) (1,135,561)
Unearned premiums........................... 14,746,411 (3,579,272) (8,594,234)
Other....................................... 1,928,688 1,850,249 (957,992)
------------ ------------ ------------
Net cash (used in) provided by operating
activities................................ (14,006,500) (5,702,919) 4,278,846
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of investments:
Held to maturity:
Fixed maturities............................ 10,553,783
Available for sale:
Fixed maturities............................ 121,651,938 36,137,317
Equity securities........................... 10,104,499 1,468,258 5,673,890
Proceeds from maturity of investments:
Held to maturity:
Fixed maturities............................ 49,472,350
Available for sale:
Fixed maturities............................ 19,471,068 31,313,920
Equity maturities...........................
Purchases of investments:
Held to maturity:
Fixed maturities............................ (77,952,361)
Available for sale:
Fixed maturities............................ (23,547,155) (45,470,637)
Equity securities........................... (53,145,781) (14,471,269) (291,900)
Net sales (purchases) of short-term
investments.................................... (7,364,404) (222,540) (1,210,981)
Net sales of real estate......................... 1,062,798 688,483 1,574,250
Purchase of mortgage loans.......................
Proceeds from sale of property and equipment..... 70,782 16,769 37,508
Purchases of property and equipment.............. (2,635,317) (88,231) (102,612)
Proceeds from disposition of discontinued
operations..................................... 6,000,000
Purchases of business............................ (48,321,088)
</TABLE>
F-6
<PAGE> 132
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Loans to another entity.......................... 4,507,001
Purchased cash from acquiring consolidated
subsidiary..................................... 84,513,623
------------ ------------ ------------
Net cash provided by (used for) investing
activities................................ 112,367,964 9,372,070 (12,246,073)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank and other borrowings.......... 802,615
Repayment of bank and other borrowings........... (77,129) (100,081) (1,069,138)
Net increase in future policy benefits........... 888,688 709,827 969,568
Net increase in annuity and other policyholders'
funds.......................................... 166,476 743,459 890,918
Issuance of common stock......................... 3,000,000 5,000,000
(Purchase) issuance of treasury stock............ 350,000 (1,000,000)
------------ ------------ ------------
Net cash provided by financing activities... 1,328,035 4,353,205 5,593,963
------------ ------------ ------------
Effect of exchange rate changes on cash.......... 315,537
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents............................... 100,005,036 8,022,356 (2,373,264)
Cash and cash equivalents at beginning of year... 21,058,769 13,036,413 15,409,677
------------ ------------ ------------
Cash and cash equivalents at end of year.... $121,063,805 $ 21,058,769 $ 13,036,413
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest, net of amounts capitalized........ $ 2,427 $ 13,923 $ 18,845
============ ============ ============
Federal income taxes........................ $ 2,347,000 $ 481,000 $ 75,000
============ ============ ============
Noncash investing and financing activities:
Transfer of equity securities to subsidiary
at market value........................... $ 5,827,765
============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE> 133
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
The following is a description of the significant accounting policies and
practices followed in the preparation of the consolidated financial statements
of Physicians Insurance Company of Ohio (the Company):
A. Operations:
The Company, consisting of a number of consolidated affiliates, is
predominately an insurance and services provider, specializing in life and
health insurance, property and casualty insurance, investment banking and other
services. The Company's subsidiary, American Physicians Life Insurance Company,
provides life and health insurance coverage in a number of states. Sequoia
Insurance Company, acquired August 1, 1995, writes property and casualty
insurance (primarily light commercial and multiperil) in California (Note 2).
Investment management services are offered by Summit Global Management, Inc. The
Ondaatje Corporation (TOC), domiciled in Ontario, Canada, is a multinational
provider of investment banking and other services, operating in Canada, the
United States of America, Asia, the United Kingdom, and the Caribbean. The
Company acquired a 38% controlling interest in TOC on September 5, 1995 (Note
2). Prior to selling the Company's book of medical malpractice business in 1995,
the Company engaged in providing medical professional liability coverage to
physicians, surgeons, dentists and nurses, primarily in the state of Ohio (Note
14).
B. Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of
the Company and the following subsidiaries:
Wholly-Owned
- Sequoia Insurance Company (Sequoia)
- Medical Premium Finance Company (MPFC)
- The Professionals Insurance Company (PRO)
- Raven Development Company (Raven)
- Summit Global Management, Inc. (SGM)
- Physicians Investment Company (PIC), (97% owned in 1994 and 88% in 1993),
and its wholly-owned subsidiary, American Physicians Life Insurance
Company (APL). Association Benefit Planners, Inc. is 100% owned by
American Physicians Life.
- CLM Insurance Agency, Inc.
- SMB Financial Planning, Inc.
Majority Owned
Stonebridge Partners AG (Stonebridge), (76% owned by the Company). In
October 1995, the Company formed Stonebridge, a corporation in Zurich,
Switzerland. Stonebridge will be a distributor of investment products and fund
management services to institutions and insurance companies in Europe. Operating
results for the period October 1995 through December 1995 were comprised of
certain operating and start-up expenses.
F-8
<PAGE> 134
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Controlled Company
The Company acquired an approximately 38% interest in TOC during 1995.
Because the Company effectively controls TOC, the results of TOC have been
consolidated with the Company for 1995.
All significant intercompany accounts and transactions have been eliminated
in consolidation.
As described in Note 14, the Company and PRO sold their recurring medical
professional liability (MPL) insurance business in 1995 which has been accounted
for as discontinued operations.
C. Basis of Presentation:
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. The Company and its
insurance subsidiaries are subject to regulation by the insurance departments of
the states of domicile and other states in which the companies are licensed to
operate and file financial statements using statutory accounting practices
prescribed or permitted by the Departments of Insurance. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners (NAIC), as well as state laws,
regulations, and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed. The Company has
received written approval from the Ohio Department of Insurance to discount its
MPL unpaid loss and loss adjustment expense reserves, including related
reinsurance recoverables using a 4% discount rate; to account for uncertainties,
including guarantee fund assessments, in accordance with Statement of Financial
Accounting Standards (SFAS) No. 5, Accounting for Contingencies; and to account
for certain reinsurance contracts as reinsurance. Statutory practices vary in
certain respects from generally accepted accounting principles. The principal
variances are as follows:
(1) Certain assets are designated as "Non-admitted Assets" and charged to
shareholders' equity for statutory accounting purposes (principally
certain agents' balances and office furniture and equipment).
(2) Deferred policy acquisition costs are expensed for statutory accounting
purposes.
(3) Deferred federal income taxes are not recognized for statutory
accounting purposes.
(4) Equity in net income of subsidiaries and affiliates is credited
directly to shareholders' equity for statutory accounting purposes.
(5) Fixed maturity securities classified as available for sale are carried
at amortized cost.
(6) Loss and loss adjustment expense reserves and unearned premiums are
reported net of the impact of reinsurance for statutory accounting
purposes.
F-9
<PAGE> 135
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company and its wholly-owned insurance subsidiaries' net income (loss)
for the respective year and shareholders' equity on the statutory accounting
basis are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Physicians Insurance Company of Ohio:
Statutory net income (loss)....................... $13,212,594 $11,870,620 $ (805,432)
Shareholders' surplus............................. 83,380,498 44,517,831 22,234,618
The Professionals Insurance Company:
Statutory net income.............................. $ 403,378 $ 4,716,477 $ 312,888
Shareholders' surplus............................. 6,024,645 9,649,826 5,288,789
American Physicians Life Insurance:
Statutory net income.............................. $ 731,813 $ 2,548,619 $ 1,855,488
Shareholders' surplus............................. 9,658,540 8,975,713 6,545,776
Sequoia Insurance Company*
Statutory net (loss).............................. $(3,319,089)
Shareholders' surplus............................. 10,254,113
</TABLE>
- ---------------
* (Purchased August 1, 1995)
D. Investments:
Effective January 1, 1994, the Company adopted the provisions of SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities. The
Company classified the entire portfolio of debt and equity securities as
available for sale and has reported the cumulative effect of this accounting
change represented by the unrealized appreciation on available for sale
securities of $7,419,901, net of adjustment to deferred policy acquisition costs
of $635,756 and deferred taxes of $497,091 as an increase in shareholders'
equity.
Investments in available for sale securities are recorded at fair value.
Unrealized holding gains and losses, net of the adjustment to deferred policy
acquisition costs and deferred income taxes, are excluded from earnings and
reported as a separate component of shareholders' equity until realized.
A decline in the market value of any available for sale security below cost
that is deemed other than temporary is charged to earnings and results in the
establishment of a new cost basis for the security.
Investment income includes amortization of premium and accretion of
discount on the level yield method relating to bonds acquired at other than par
value. Realized investment gains and losses are determined on the identified
certificate basis and recorded on a trade date basis.
Short-term investments, which consist of certificates of deposit, are
stated at cost which approximates fair value.
Real estate represents costs incurred in connection with certain land
development projects and commercial real estate held for resale. Indirect costs
associated with the land development projects, including interest, are
capitalized as part of real estate costs. Selling, general and administrative
expenses are expensed as incurred.
F-10
<PAGE> 136
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
E. Disclosures About Fair Value of Financial Instruments:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that fair value:
- Fixed maturities and equity securities:
Fair values are based upon quoted market prices, dealer quotes for
comparable securities, or fair values adopted by the National Association
of Insurance Commissioners.
- Cash and short-term investments:
The carrying amounts of cash and short-term investments are reasonable
estimates of fair value.
- Premium notes receivable:
The carrying amounts of premium notes receivable are reasonable
estimates of fair value.
- Policyholder liabilities for investment-type insurance contracts:
Policyholder liabilities for investment-type insurance contracts
include reserves without mortality or morbidity risks. The fair value is
estimated using the rates currently offered for similar financial
instruments. The carrying amounts of policyholder liabilities for
investment-type insurance contracts less the applicable surrender charges
are reasonable estimates of fair value.
- Deposits with reinsurers and reinsurance recoverables:
The carrying amounts of deposits with reinsurers and reinsurance
recoverables with fixed amounts due are reasonable estimates of fair value.
F. Cash Equivalents:
The Company and its subsidiaries consider money market funds and highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
G. Property and Equipment:
Property and equipment are carried at cost net of accumulated depreciation.
Depreciation is computed on the straight-line method over the estimated lives of
the assets ranging from 5 to 45 years. Land and water rights are not
depreciated.
Maintenance, repairs, and minor renewals are charged to expense as
incurred, while renewals and betterments are capitalized.
The cost and related accumulated depreciation of assets sold are removed
from the related accounts, and the resulting gains or losses are reflected in
operations.
H. Deferred Acquisition Costs:
Certain costs of acquiring new insurance business, net of reinsurance
ceding commissions, are deferred and amortized over the term of the policy for
property and liability insurance and over the average lives of investment and
universal life-type contracts, based on the present value of the estimated gross
profit amounts expected to be realized over the life of the book of contracts,
and over the premium paying period of ordinary and group life insurance
contracts. Future investment income has been taken into consideration in
determining the recoverability of such costs.
F-11
<PAGE> 137
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
I. Reinsurance:
Effective January 1, 1993, the Company adopted the provision of SFAS No.
113, Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts, which requires that amounts due from reinsurers and
amounts paid to reinsurers relating to the unexpired portion of reinsured
contracts (prepaid reinsurance premiums) be disclosed separately as assets. This
statement also establishes the risk transfer criteria necessary for a contract
to be accounted for as reinsurance.
J. Unpaid Losses and Loss Adjustment Expenses:
As more fully described in Note 11, reserves for MPL and Property and
Casualty unpaid losses and loss adjustment expenses include amounts determined
on the basis of actuarial estimates of ultimate claim settlements which included
estimates of individual reported claims and estimates of incurred but not
reported claims. The methods of making such estimates and for establishing the
resulting liabilities are continually reviewed and updated based upon current
circumstances, and any adjustments resulting therefrom are reflected in
operations. Reserves for MPL unpaid losses and loss adjustment expenses for
medical professional liability claims have been adjusted to reflect the time
value of money (discounting).
Liabilities for future policy benefits have been calculated utilizing the
net level premium and Commissioners Reserve Valuation methods based on actuarial
assumptions as to anticipated mortality, withdrawals and interest rates ranging
from 3.5% to 8%. Annuity and other policyholders' funds have been calculated
based on contract-holders' contributions plus interest credited less applicable
contract charges.
K. Recognition of Premium Revenue:
MPL and other property and casualty insurance premiums written are earned
principally on a monthly pro rata basis over the life of the policy. The
premiums applicable to the unexpired terms of the policies are included in
unearned premiums.
Policy charges on universal life-type contracts represent the cost of the
insurance component of payments received and are recognized when earned. Amounts
assessed against universal life policyholder funds to compensate the Company for
future services are reported in unearned premiums and are recognized in income
using the same assumption and factors used to amortize capitalized acquisition
costs.
Premiums on ordinary and group life contracts, including critical illness,
are recognized when due and premiums on accident and health contracts are
recognized over the contract period. Unearned premiums have been principally
calculated using the monthly pro rata method, resulting in the earning of
premiums evenly over the terms of the policies. Benefits and expenses are
associated with earned premiums so as to result in recognition of profits over
the life of the contracts. This association is accomplished by means of the
provision for future policy benefits and the deferral and amortization of
acquisition costs.
L. Income Taxes:
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax basis of assets and liabilities and are
measured using the enacted rates and laws that will be in effect when the
differences are expected to reverse.
M. Per Share Data:
Net income (loss) per common share is based upon the weighted average
number of Class A common shares and common stock equivalents outstanding during
each year.
F-12
<PAGE> 138
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
N. Reclassifications:
Certain amounts in the financial statements for prior periods were
reclassified to conform with the 1995 presentation.
O. Separate Accounts:
Separate account assets and liabilities represent contract-holders' funds
which have been segregated into accounts with specific investment objectives.
The investment income and gains or losses of these accounts accrue directly to
the contract-holders. The activity of the separate accounts is not reflected in
the consolidated statements of operations and cash flows, except for the fees
that the Company receives for administrative services.
P. Use of Estimates in Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Q. Translation of Foreign Currency:
Revenues and expenses of foreign operations (TOC) are translated at average
rates of exchange in effect during the year. Assets and liabilities are
translated at the exchange rates in effect at the balance sheet date. Unrealized
exchange gains and losses arising on translation are deferred and included in
shareholders' equity.
R. Recent Accounting Developments:
In 1995, the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation" (SFAS 123). Under the provisions
of SFAS 123, companies can elect to account for stock-based compensation plans
using a fair-value-based method or continue measuring compensation expense for
those plans using the intrinsic value method prescribed in APB 25. SFAS 123
requires that companies electing to continue using the intrinsic value method
must make pro forma disclosures of net income and earnings per share as if the
fair-value-based method of accounting had been applied. As the Company
anticipates continuing to account for stock-based compensation using the
intrinsic value method, SFAS 123 will not have an impact on the Company's
statement of operations.
In 1995, the FASB also issued No. 121 "Accounting for the Impairment of
Long Lived Assets and for Long Lived Assets to be Disposed of". The impact on
the Company's financial statements has not been determined.
2. ACQUISITIONS:
On August 1, 1995, the Company acquired from Sydney Reinsurance Corporation
("SRC") all of the outstanding stock of SRC's wholly-owned subsidiary, Sequoia,
a property and casualty insurance company. The acquisition price of $1,350,000
was paid in cash on August 1, 1995. Approximately $350,000 was paid to acquire
Sequoia's fixed assets, while the remaining $1,000,000 was utilized in the
purchase of intangible assets and goodwill. These intangible assets are being
amortized over a ten year period utilizing the straight-line method. The Company
used available working capital to make the purchase. All policy and claims
liabilities of Sequoia prior to closing are the responsibility of SRC and have
been unconditionally and irrevocably guaranteed by QBE Insurance Group Limited
("QBE"), a publicly-held corporation based in Sydney, Australia, of which SRC
indirectly is a wholly-owned subsidiary. The Company is required to maintain a
F-13
<PAGE> 139
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
minimum surplus in Sequoia of $7.5 million and, through a management agreement,
will supervise the run-off of SRC's liabilities. As part of the management
agreement, the Company will be reimbursed $4.8 million in management fees for
processing the run off of claims and policy receivables and servicing the
business existing prior to closing. This management fee is to be received from
SRC over a three-year period. Approximately $1.6 million has been recognized as
management fee income during the period August 1, 1995 through December 31,
1995.
Sequoia's operating results are included in the Consolidated Statements of
Operations for the year ended December 31, 1995 from August 1, 1995. For the
months included in these Consolidated Financial Statements, Sequoia reported a
net loss.
On September 5, 1995, the Company purchased 38.2% of the outstanding common
shares of TOC for $34.4 million. Approximately $33.5 million was paid to acquire
the net assets, while the remaining $887,000 was allocated to goodwill. The
goodwill is being amortized over a ten year period utilizing the straight line
method. The Company used available working capital to make the purchase. TOC is
a Canadian corporation which has its offices in Toronto, Canada. TOC is a
publicly held corporation and is listed on the Toronto Stock Exchange and The
Montreal Exchange under the symbol "VOC". The Company obtained four of the five
Board of Directors' seats, and the chairman of the Board of Directors (chairman)
and the Chief Executive Officer (CEO) of the Company are the Chairman and CEO of
TOC, respectively (Board action requires a vote of a majority of the Directors).
As a result, the Company has effective control of TOC and controls the
day-to-day operations of TOC. Therefore, TOC's financial statements are
consolidated with the Company.
Due to the Company utilizing the purchase method in accounting for the TOC
acquisition, the Consolidated Statements of Operations of the Company for the
year ended December 31, 1995 include the net loss from TOC from October 1, 1995
to December 31, 1995, adjusted for minority interest.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company, TOC, and Sequoia if the
acquisition had occurred at the beginning of 1994, with pro forma adjustments to
give effect to amortization of goodwill, adjustment for the Company minority
interest in TOC, together with related income tax effects.
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Total revenues (continuing operations)........................... $68,767 $89,201
(Loss) income from continuing operations......................... (2,385) 3,203
Income from discontinued operations, net of taxes................ 14,017 16,350
Net income....................................................... 15,686 15,443
Net income per share............................................. $ 3.02 $ 3.20
</TABLE>
These pro forma results have been prepared for comparative and do not
purport to be indicative of the results of operations which actually would have
resulted had the combination been in effect on January 1, 1995, and 1994 or of
future results of operations of the consolidated entities.
Effective November 14, 1995, TOC's subsidiary Forbes & Walker (USA) Inc.
acquired 100% of the shares of Vidler Water Tunnel Company ("Vidler") in
exchange for approximately $5,600,000. Vidler is a water provider that collects
and stores water and has the capacity to transport water from the west slope to
the east slope of the continental divide in Colorado. The acquisition has been
accounted for by TOC using the purchase method with the fair value of net assets
acquired, at their assigned values, amounting to approximately $5,600,000
including costs of acquisition.
TOC also acquired other water rights and options for cash of $3,900,000.
F-14
<PAGE> 140
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENTS:
At December 31, the amortized cost and estimated fair value of investments
are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
1995:
Available for Sale
Fixed maturities:
U.S. Treasury securities and
obligations of U.S.
government corporations and
agencies.................... $ 32,171,232 $ 401,798 $ (389,695) $ 32,183,335
Corporate securities............. 29,729,110 323,160 (65,207) 29,987,063
Mortgage-backed and other
securities..................... 18,196,640 37,870 (60,837) 18,173,673
------------ ----------- ------------ ------------
80,096,982 762,828 (515,739) 80,344,071
Equity securities................ 66,241,369 37,051,426 (2,231,500) 101,061,295
------------ ----------- ------------ ------------
Total.................. $146,338,351 $37,814,254 $ (2,747,239) $181,405,366
============ =========== ============ ============
1994:
Available for Sale
Fixed maturities:
U.S. Treasury securities and
obligations of U.S.
government corporations and
agencies.................... $105,999,469 $ 229,465 $ (6,504,466) $ 99,724,468
Corporate securities............. 72,455,034 351,344 (3,992,168) 68,814,210
Mortgage-backed and other
securities..................... 20,117,384 107,716 (114,639) 20,110,461
------------ ----------- ------------ ------------
198,571,887 688,525 (10,611,273) 188,649,139
Equity securities................ 15,070,786 4,862,954 (600,468) 19,333,272
------------ ----------- ------------ ------------
Total.................. $213,642,673 $ 5,551,479 $(11,211,741) $207,982,411
============ =========== ============ ============
</TABLE>
The amortized cost and estimated fair value of investments in fixed
maturities at December 31, 1995, by contractual maturity, are shown below.
Expected maturities of certain corporate and mortgage-backed securities may
differ from contractual maturities because borrowers have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Due in one year or less................................... $ 3,879,537 $ 3,864,969
Due after one year through five years..................... 26,791,860 17,892,259
Due after five years through ten years.................... 28,321,453 37,477,270
Due after ten years....................................... 2,907,492 2,935,900
Mortgage-backed securities................................ 18,196,640 18,173,673
----------- -----------
$80,096,982 $80,344,071
=========== ===========
</TABLE>
F-15
<PAGE> 141
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investment income is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Investment income from:
Held to maturity:
Fixed maturities....................... $15,119,343
Available for sale:
Fixed maturities....................... $ 8,829,957 $15,152,173
Equity securities...................... 607,429 60,372 664,599
Short-term investments and other.......... 6,155,255 595,079 222,706
----------- ----------- -----------
Total investment income................... 15,592,641 15,807,624 16,006,648
Investment expenses....................... (378,016) (430,629) (248,988)
----------- ----------- -----------
Net investment income..................... 15,214,625 15,376,995 15,757,660
----------- ----------- -----------
Allocated to discontinued operations...... 5,928,282 10,413,000 9,435,000
----------- ----------- -----------
Continuing operations..................... $ 9,286,343 4,963,995 $ 6,322,660
=========== =========== ===========
</TABLE>
All available for sale investments were income producing in the last 12
months except for nine equity securities with a carrying amount totaling
approximately $22,000,000.
Pre-tax net realized gains (losses) on investments were as follows for each
of the years ended December 31:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Gross realized gains:
Held to maturity:
Fixed maturities......................... $ 222,159
Available for sale:
Fixed maturities......................... $ 1,023,621 $ 826,744
Equity securities........................ 6,241,593 222,350 5,627,106
---------- ---------- ----------
Total gains......................... 7,265,214 1,049,094 5,849,265
---------- ---------- ----------
Gross realized losses:
Held to maturity:
Fixed maturities......................... (164,801)
Available for sale:
Fixed maturities......................... (1,836,582) (72,563)
Equity securities........................ (286,357) (75,228)
---------- ---------- ----------
Total losses........................ (2,122,939) (147,791) (164,801)
---------- ---------- ----------
Net realized gains.................. $ 5,142,275 $ 901,303 $5,684,464
========== ========== ==========
</TABLE>
F-16
<PAGE> 142
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1995, the following available for sale securities exceeded
ten percent of shareholders' equity of the Company:
<TABLE>
<CAPTION>
FAIR VALUE
-----------
<S> <C>
Fixed maturities:
Resource America, Inc......................................... $ 7,760,000
===========
Equity securities:
Ford Holdings Series L........................................ $14,000,000
Fairfield Communities......................................... 13,635,298
PC Quote...................................................... 29,331,329
Rydex URSA Fund............................................... 9,503,545
Resource America, Inc. warrants............................... 4,737,500
-----------
Total................................................. $71,207,672
===========
</TABLE>
In addition, Resource America, Inc. has guaranteed fixed maturity
investments with a carrying amount of $12,000,000.
Investments with an aggregate par value of $4,135,000 are on deposit with
various departments of insurance in states where the Company is licensed.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1995 1994
----------------------------- -----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term
investments.................. $130,226,730 $130,226,730 $ 23,057,290 $ 23,057,290
Investment securities........... 184,444,116 184,444,116 212,308,908 212,508,908
Notes Receivable................ 5,000,000 5,000,000 126,852 126,852
Deposits with reinsurers and
reinsurance recoverables..... 12,005,160 11,787,091 18,131,825 17,491,886
Assets held in separate
accounts..................... 6,361,040 6,361,040 4,045,281 4,045,281
Financial liabilities:
Policyholder liabilities for
investment type.............. 42,611,466 40,866,413 42,294,819 40,526,097
Liabilities related to separate
accounts..................... 6,361,040 6,361,040 4,045,281 4,045,281
</TABLE>
See Note 1D for disclosure related to value determinations.
F-17
<PAGE> 143
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PREMIUMS AND OTHER RECEIVABLES:
Premiums and other receivables consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Premium notes receivable................................... $ 126,852
Agents' balances and unbilled premiums..................... $10,871,700 5,623,089
Due from clients and brokers............................... 4,014,000
Notes receivable........................................... 5,000,000
Other accounts receivable.................................. 6,050,456 1,801
------------- ----------
25,936,156 5,751,742
Allowance for doubtful accounts............................ (78,000) (196,000)
------------- ----------
$25,858,156 $5,555,742
============== ==========
</TABLE>
On March 29, 1995, Forbes Ceylon Limited, a subsidiary of TOC, advanced
$5,000,000 to Amalgamated Bean Coffee Trading Company (Pvt) Limited. The note is
due on demand and bears interest at 8% per annum. The loan is collateralized by
inventory and a personal guarantee.
6. FEDERAL INCOME TAX:
The Company and its U.S. subsidiaries file a consolidated life/nonlife
federal income tax return. Non-U.S. subsidiaries file tax returns in various
foreign countries.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for the financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities at December 31,
1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................... $ 883,307
Loss reserves.................................................. $16,109,534 17,122,098
Future policy benefits......................................... 749,342 793,979
Unearned premium reserves...................................... 2,986,855 2,720,848
Alternative minimum tax credits................................ 661,265 1,232,124
Unrealized depreciation on securities.......................... 1,758,607
Other, net..................................................... 893,289 682,983
Deferred gain on retroactive reinsurance....................... 1,190,185
----------- ------------
Total deferred tax assets.............................. 22,590,470 25,193,946
</TABLE>
F-18
<PAGE> 144
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1995 1994
----------- ------------
<S> <C> <C>
liabilities:Reinsurance receivables............................ $10,701,283 $ 10,226,820
Prepaid reinsurance............................................ 1,921,446 2,047,972
Deferred policy acquisition costs.............................. 1,086,584 940,488
Unrealized appreciation on securities.......................... 12,274,933
Accretion of bond discount..................................... 40,291 73,988
Depreciation................................................... 483,963 528,474
Goodwill....................................................... 2,063,307
Water rights................................................... 3,003,124
----------- ------------
Total deferred tax liabilities......................... 31,574,931 13,817,742
----------- ------------
Net deferred tax (liabilities) assets before valuation
allowance................................................... (8,984,461) 11,376,204
Less: Valuation allowance...................................... (10,772,320)
----------- ------------
Net deferred tax liabilities assets.................... $(8,984,461) $ 603,884
========== ===========
</TABLE>
At December 31, 1994, the Company had recorded a valuation allowance for
nearly all of its net deferred tax assets, as management believed the
realizability of the net deferred tax assets did not exceed the "more likely
than not" criteria required by SFAS No. 109. During 1995 -- because of the
significant increase in the net unrealized appreciation in the Company's
Available for Sale securities, the Company re-evaluated its need for a valuation
allowance for its net deferred tax assets. As a result, the Company reduced its
valuation allowance resulting in a decrease in deferred federal income tax
expense of approximately $9.4 million. Net deferred tax assets, the recorded
valuation allowance and federal income tax expense in future years can be
significantly affected by changes in enacted tax rates or by changes in
circumstances that would impact management's conclusions as to the ultimate
realizability of deferred tax assets.
At December 31, income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
UNITED STATES INTERNATIONAL TOTAL
------------- ------------- -----------
<S> <C> <C> <C>
1995:
Current.............................................. $ 220,092 $ 557,000 $ 777,092
Deferred............................................. (7,891,246) (7,891,246)
1994:
Current.............................................. $ 486,000 $ 486,000
Deferred............................................. (34,119) (34,119)
1993:
Current.............................................. $ 310,000 $ 310,000
Deferred............................................. (547,430) (547,430)
</TABLE>
The income tax provision (benefit) included in the financial statements is
as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- -------- -----------
<S> <C> <C> <C>
Continuing Operations................................. $ 876,866 $539,177 $ 2,361,866
Discontinued Operations............................... (7,991,020) (87,296) (2,599,296)
----------- -------- -----------
$(7,114,154) $451,881 $ (237,430)
=========== =========== ===========
</TABLE>
F-19
<PAGE> 145
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The significant components of deferred federal income tax expense are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax expense, exclusive of components listed
below............................................. $ 62,319 $ 1,113,176 $ 1,290,314
Utilization (generation) of net operating loss
carryforwards..................................... 883,307 4,656,072 (2,058,024)
Generation of alternative minimum tax credits....... 571,499 (486,000) (310,000)
Change in the valuation allowance................... (9,408,371) (5,317,367) 530,280
----------- ----------- -----------
$(7,891,246) $ (34,119) $ (547,430)
=========== =========== ===========
</TABLE>
The difference between income taxes provided at the Company's effective tax
rate and the 34% federal statutory rate at December 31 is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- ---------
<S> <C> <C> <C>
Federal income tax at statutory rate................. $ 2,749,200 $ 6,556,155 $(289,647)
Small life company deduction......................... (134,073) (573,715) (554,262)
Change in the valuation allowance.................... (9,408,371) (5,317,367) 530,280
Effect of alternative minimum tax
Other................................................ (320,910) (213,192) 76,199
----------- ----------- ---------
Federal income tax expense (benefit)............... $(7,114,154) $ 451,881 $(237,430)
=========== =========== =========
</TABLE>
At December 31, 1995, alternative minimum tax credit carryovers of $661,265
are available indefinitely to offset future regular federal income taxes.
7. PROPERTY AND EQUIPMENT:
The major classifications of property and equipment at December 31 are as
follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Land.............................................................. $ 500,016 $ 500,016
Home office....................................................... 4,841,059 4,841,059
Office furniture, fixtures, and equipment......................... 6,705,013 5,029,641
Building and leasehold improvements............................... 529,732 529,732
Estate management contracts....................................... 594,000
Property, plant, and equipment.................................... 12,198,000
Water rights and options.......................................... 12,428,000
----------- -----------
37,795,820 10,900,448
Accumulated depreciation.......................................... (7,625,472) (6,083,609)
----------- -----------
Net book value.................................................. $30,170,348 $ 4,816,839
=========== ===========
</TABLE>
Depreciation expense was $1,149,000, $688,000, and $773,000 in 1995, 1994,
and 1993, respectively.
F-20
<PAGE> 146
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. DEFERRED POLICY ACQUISITION COSTS:
Changes in deferred policy acquisition costs are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Balance, January 1.................................. $ 2,812,936 $ 3,427,425 $ 4,204,537
Additions:
Commissions.................................... 3,303,513 1,803,173 2,211,369
Other.......................................... 582,763 437,181 475,702
Ceding commissions............................. (864,432) (2,207,193)
----------- ----------- -----------
Deferral of expense....................... 3,021,844 33,161 2,687,071
----------- ----------- -----------
Adjustment for expected gross profits on
investment and universal life-type contracts... (544,163) 487,892
Adjustment for premium deficiency................. (1,305,099)
Amortization to expense:
Continuing operations.......................... (368,155) (318,083) (405,693)
Discontinued operations........................ (722,719) (817,459) (3,058,490)
----------- ----------- -----------
(1,090,874) (1,135,542 (3,464,183)
----------- ----------- -----------
Balance, December 31................................ $ 2,894,644 $ 2,812,936 $ 3,427,425
=========== =========== ===========
</TABLE>
9. SHAREHOLDERS' EQUITY:
In December 1993, the Company issued 1,428,571 Class A shares to Guinness
Peat Group plc for $5,000,000. In accordance with their original stock purchase
agreement, Guinness Peat Group plc was entitled to purchase additional Class A
shares at a price based upon the average closing bid price of the stock for a
period prior to the date of notice of intent to buy up to an aggregate purchase
price of $5,000,000. In June 1994, the Company issued 631,579 Class A shares to
Guinness Peat Group, plc for $3,000,000, increasing their ownership to
approximately 40%. At December 31, 1995, Guinness Peat Group plc was entitled to
purchase additional Class A shares up to an aggregate purchase price of
$2,000,000. In addition, if the Company issues any additional equity securities
before December 10, 1996, Guinness Peat Group plc has the right to purchase such
equity securities in an amount not to exceed $5,000,000 in aggregate purchase
price. The purchase price per equity shall be the same as that proposed in the
issuance by the Company.
In June 1993, the Company adopted the Physicians Insurance Company of Ohio
1993 Stock Option Plan (the 1993 Plan). The 1993 Plan authorizes the grant of
incentive stock options (ISOs) and non-qualified stock options (Non-Qualified
Options) with respect to 100,000 Class A common shares. Options were to be
granted at a price not less than 100% of the fair market value of the Company's
common shares at the date of the grant. Any full-time employee of the Company
and any non-employee Director of the Company who, in the opinion of the Stock
Option Committee, has demonstrated a capacity for contributing in a substantial
measure to the success of the Company is eligible to participate in the 1993
Plan. Participating employees are eligible to receive either ISOs or
Non-Qualified Options, or some combination thereof. Participating non-employee
Directors are eligible only to receive Non-Qualified Options. Upon approval of
the 1993 Plan, the individual serving as the Company's Chairman of the Board,
President, and Chief Executive Officer was granted a Non-Qualified Option to
purchase up to 100,000 Class A common shares of the Company at an exercise price
of $3.50 per share any time on or before June 11, 1998. In 1995, 100,000 of the
Non-Qualified stock options were exercised.
On August 24, 1995, the Company's Compensation Committee approved the "1995
Physician Insurance Company of Ohio Non-qualified Stock Option Plan (the "1995
Plan"). The Committee authorized 520,000
F-21
<PAGE> 147
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Class A common shares and granted 515,000 of the Class A shares for incentive
stock options at an exercise price of $13.50 to certain officers of PICO. As of
December 31, 1995, no options had been exercised, 405,000 are vested, and the
remaining 110,000 shares vest over two years.
10. REINSURANCE:
The Company has reinsurance contracts in effect under both treaty and
facultative arrangements. In addition, there are excess of loss contracts which
protect against losses over stipulated amounts arising from any one occurrence.
As described in Note 1, the Company adopted SFAS No. 113 in 1993.
Accordingly, all reinsurance assets and liabilities are shown on a gross basis
in the accompanying consolidated financial statements. Amounts recoverable from
reinsurers are estimated in a manner consistent with the claim liability
associated with the reinsured policy. Such amounts are included in "reinsurance
receivables" in the consolidated balance sheets as follows:
<TABLE>
<CAPTION>
1995 1994
------------ -----------
<S> <C> <C>
Estimated reinsurance recoverable on:
Unpaid losses and loss adjustment expense (net of discount of
$3,770,779 and $3,576,673, respectively)....................... $ 92,474,112 $26,335,327
Future policy benefits and claims payable........................ 2,036,394 1,870,147
------------ -----------
Total reinsurance reserves....................................... 94,510,506 28,205,474
Commutation and other balances receivable from reinsurers........ 6,208,910 4,164,580
------------ -----------
Reinsurance receivables................................ $100,719,416 $32,370,054
============ ===========
</TABLE>
Unsecured reinsurance risk is concentrated in five companies in the amounts
shown in the table below. The Company remains contingently liable with respect
to reinsurance contracts in the event that reinsurers are unable to meet their
obligations under the reinsurance agreements in force.
CONCENTRATION OF REINSURANCE
(IN MILLIONS)
<TABLE>
<CAPTION>
UNEARNED REPORTED UNREPORTED REINSURER
PREMIUMS CLAIMS CLAIMS BALANCES
-------- -------- ---------- ---------
<S> <C> <C> <C> <C>
CONTINUING OPERATIONS:
Sydney Reinsurance Corporation.................... $7.7 $6.3 $ 41.8 $55.8
DISCONTINUED OPERATIONS:
TIG Reinsurance Group............................. $ 7.7 $ 7.7
Transatlantic Reinsurance Co...................... $ .6 $ 7.7 $ 8.3
Cologne Reinsurance Co. of America................ $ .1 $ .8 $ .9
Mutual Assurance, Inc............................. $4.9 $ 1.5 $ 6.4
</TABLE>
As more fully described in Note 2, immediately prior to the sale of Sequoia
to the Company by SRC, Sequoia and SRC entered into a reinsurance treaty whereby
all policy and claims liabilities of Sequoia prior to the date of purchase by
the Company will be the responsibility of SRC. Payment of these reinsurance
liabilities has been unconditionally and irrevocably guaranteed by QBE.
The Company entered into one new reinsurance treaty in 1995 with Mutual.
This treaty is a 100% quota share treaty covering all claims arising from
policies with an effective date of July 16, 1995 to December 31, 1995. At the
same time the Company terminated two treaties entered into in 1994 and renewed
in 1995. The first of these is a claims made agreement under which the Company's
retention is $200,000, for both
F-22
<PAGE> 148
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
occurrence and claims made insurance policies. Claims are covered up to $1
million. The second treaty reinsures claims above $1 million up to policy limits
of $5 million on a true occurrence and claim made basis, depending upon the
underlying insurance policy.
The Company entered into three new reinsurance treaties in 1994. The first
is a specific excess treaty covering claims and claim adjustment expenses
incurred during the period January 1, 1992 through June 30, 1993. The treaty
reinsures claims in excess of $2 million aggregating up to a total recoverable
of $3 million after a one-time deductible of an aggregate of $3 million of
claims in excess of $2 million. This treaty is a "finite" arrangement and is
being accounted for as a deposit.
The remaining two 1994 treaties both reinsure losses in excess of specific
company retentions on an individual basis. The first of these 1994 treaties is a
claims-made agreement under which the Company's retention is $200,000, for both
occurrence and claims-made insurance policies. Claims are covered up to $1
million. The second 1994 treaty reinsures claims above $1 million up to policy
limits of $5 million on a true occurrence and claims-made basis, depending upon
the underlying insurance policy.
Both treaties contain elements of retroactive and prospective risk transfer
reinsurance and have been accounted for in accordance with SFAS No. 113. As a
result, the Company initially recorded a deferred gain on retroactive
reinsurance of $3,445,123 in 1994. This deferred gain is being amortized into
income over the expected payout of the underlying claims using the interest
method.
Effective December 31, 1993, the Company commuted a three-year aggregate
excess of loss reinsurance contract which limited calendar year and accident
year losses to a predetermined ratio to earned premiums for the treaty period
January 1, 1992 through December 31, 1994. The effect of the commutation was to
increase premium income by $6 million and to increase net losses and loss
adjustment expenses by $7.7 million, net of discount, resulting in a $1.7
million commutation loss.
Sequoia's net retention for both property and casualty business, excluding
umbrella coverage, is $150,000 per risk or occurrence. The working layers
provide coverage up to $5,350,000 excess of $150,000 per risk on property losses
subject to occurrence limits and unlimited reinstatements. General liability
coverage, excluding umbrella coverage, is provided up to $3,000,000 excess of
$150,000 per occurrence. Two excess catastrophe treaties provide additional
property reinsurance up to $10,000,000 each occurrence with allowances for one
full reinstatement each at pro-rata pricing. Sequoia retains the first $100,000
of each umbrella loss up to $5,000,000. Facultative reinsurance is placed with
various reinsurers.
APL's net retention for life insurance products is a maximum of $50,000 per
risk, except for their combined critical illness and life insurance product
which has a maximum retention of $25,000.
The following is a summary of the net effect of reinsurance activity on the
consolidated financial statements for 1995, 1994, and 1993:
F-23
<PAGE> 149
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CONTINUING OPERATIONS:
Direct premiums written............................. $16,280,962 $ 5,202,314 $10,492,841
Reinsurance premiums assumed........................ 140,303
Reinsurance premiums ceded.......................... (3,796,416) (1,280,622) (1,689,271)
----------- ----------- -----------
Net premiums written........................... $12,624,849 $ 3,921,692 $ 8,803,570
=========== =========== ===========
Direct premiums earned.............................. $ 6,385,285 $ 5,202,314 $10,492,841
Reinsurance premiums assumed........................ 140,303
Reinsurance premiums ceded.......................... (2,234,348) (1,280,622) (1,689,271)
Net premiums earned............................ $ 4,291,240 $ 3,921,692 $ 8,803,570
=========== =========== ===========
Losses and loss adjustment expenses incurred:
Direct............................................ $19,896,180
Assumed........................................... 41,084
Ceded............................................. (18,012,194)
-----------
Net losses and loss adjustment expenses............. $ 1,925,070
===========
DISCONTINUED OPERATIONS:
Direct premiums written............................. $22,615,193 $28,977,323 $37,413,613
Reinsurance premiums assumed........................ 8,565 76,864
Reinsurance premiums ceded.......................... (9,535,812) (16,894,169) (1,801,587)
Reinsurance premiums commuted....................... 6,040,000
----------- ----------- -----------
Net premiums written........................... $13,079,381 $12,091,719 $41,728,890
=========== =========== ===========
Direct premiums earned.............................. $25,546,001 $32,495,508 $66,875,884
Reinsurance premiums assumed........................ 1,193 45,438 81,757
Reinsurance premiums ceded.......................... (8,426,938) (12,514,484) (1,628,279)
Reinsurance premiums commuted....................... 6,040,000
----------- ----------- -----------
Net premiums earned............................ $17,120,256 $20,026,462 $71,369,362
=========== =========== ===========
Losses and loss adjustment expenses incurred:
Direct............................................ $27,160,931 $13,010,447 $50,742,891
Assumed........................................... (7,799) (2,764,335) 1,360,881
Ceded............................................. (9,293,054) (9,991,964) (812,497)
Commuted.......................................... 12,000,000
----------- ----------- -----------
17,860,078 254,148 63,291,275
Effect of discounting on losses and loss
adjustment expenses (Note 10).................. 3,386,440 11,384,463 (1,265,987)
----------- ----------- -----------
Net losses and loss adjustment expenses............. $21,246,518 $11,638,611 $62,025,288
=========== =========== ===========
</TABLE>
Reinsurance receivables at December 31, 1995 primarily represents amount
due from Sydney Reinsurance Corporation, whose reinsurance obligations to
Sequoia are unconditionally and irrevocably guaranteed by QBE. (Note 2)
Reinsurance receivables at December 31, 1994 primarily represent amounts due
from one authorized reinsurer.
F-24
<PAGE> 150
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. RESERVES FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES:
Reserves for unpaid losses and loss adjustment expenses on MPL and property
and casualty business represent management's estimate of ultimate losses and
loss adjustment expenses and fall within a range of reasonably expected ultimate
unpaid losses and loss adjustment expenses as estimated by the Company's
independent consulting actuaries.
Reserves for unpaid losses and loss adjustment expenses are estimated based
upon actual and industry experience, and assumptions and projections as to
claims frequency, severity and inflationary trends and settlement payments. Such
estimates may vary significantly from the eventual outcome.
The liability for unpaid losses and loss adjustment expenses related to
medical professional liability claims is adjusted (discounted) to reflect
investment income as permitted by the Ohio Department of Insurance. The method
of discounting is based upon historical payment patterns and assumes an interest
rate at or below the Company's investment yield, and is the same rate used for
statutory reporting purposes. Prior to 1994, direct and assumed medical
professional liability loss reserves and reinsurance recoverables were
discounted at a rate of 7.5% for 1987 and prior accident years, 5.5% for the
1988 accident year, 5% for the accident years 1989, 1990, 1991, and 4% for the
1992 and 1993 accident years. During 1994, the Company lowered its discount rate
to 4% for all accident years. The cumulative effect, as of January 1, 1994, of
this change of $4,109,941 was charged to earnings in 1994. The effect of
lowering the discount rate on the accompanying consolidated financial statements
decreased net income by $3.4 million ($.71 per share) in 1994. The carrying
value of MPL reserves was approximately $167.3 million, net of discounting of
$20.3 million at December 31, 1995, and $173.9 million, net of discounting of
$23.7 million at December 31, 1994.
RECONCILIATION OF LIABILITIES FOR LOSSES AND LOSS ADJUSTMENT EXPENSE
(IN THOUSANDS)
CONTINUING OPERATIONS (Sequoia, purchased August 1, 1995)
<TABLE>
<CAPTION>
1995
-----------
<S> <C>
Net balance at August 1......................................................... --
Provision for current accident year claims...................................... $1,925,070
Increase (decrease) in provision for prior accident year claims................. 0
-----------
Total incurred................................................................ 1,925,070
-----------
Payments for claims occurring during:
Current accident year......................................................... (835,303)
Prior accident years.......................................................... 0
-----------
Total Paid.................................................................... (835,303)
-----------
Net balance at December 31...................................................... 1,089,767
Plus reinsurance recoverables................................................... 60,222,127
-----------
Balance at December 31.......................................................... $61,311,894
===========
</TABLE>
F-25
<PAGE> 151
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Activity in the reserve for unpaid losses and loss adjustment expenses
related to discontinued operations is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Balance at January 1................................. $180,691,044 $191,735,256 $185,054,368
Less reinsurance recoverables...................... (26,335,327) (11,020,783) (22,431,812)
------------ ------------ ------------
Net balance at January 1........................... 154,355,717 180,714,473 162,622,556
------------ ------------ ------------
Provision for current accident year claims........... 15,961,490 21,465,081 49,743,918
Increase (decrease) in provision for prior accident
year claims........................................ (335,958) (19,616,968) (5,941,752)
Change in provision for discontinued personal lines
Retroactive reinsurance.............................. (2,422,308) (7,556,845) 1,045,098
SFAS No. 113 provision for deferral of retroactive
gain............................................... 2,115,011 6,934,113
Increase due to commutation of reinsurance
treaties........................................... 7,743,188
Accretion of discount................................ 5,928,283 10,413,230 9,434,836
------------ ------------ ------------
Total incurred..................................... 21,246,518 11,638,611 62,025,288
------------ ------------ ------------
Effect of change in discount rate.................... 4,109,941
Effect of retroactive reinsurance.................... (2,115,011) (6,934,113)
------------ ------------
Change in provision for losses on discontinued
personal lines operations.......................... (1,045,098)
------------
Payments for claims occurring during:
Current accident year.............................. (522,683) (803,390) (700,524)
Prior accident years............................... (36,731,814) (34,369,805) (42,187,749)
------------ ------------ ------------
Total Paid......................................... (37,254,497) (35,173,195) 43,933,371
------------ ------------ ------------
Net balance at December 31........................... 136,232,727 154,355,717 180,714,473
Plus reinsurance recoverables........................ 32,251,985 26,335,327 11,020,783
------------ ------------ ------------
Balance at December 31............................... $168,484,712 $180,691,044 $191,735,256
============ ============ ============
</TABLE>
In 1995 reduction in accretion of discount reflects lowering the MPL claims
reserves discount rate to 4% at December 31, 1994.
The 1995 decline in the provision for current accident year claims is due
primarily to reduced MPL premium writings and increased premium cessions
beginning July 16, 1995 (Note 10).
The 1994 decrease in provision for prior accident year claims resulted from
reduced claim severity that reduced the estimate for incurred but not reported
claims and for favorable settlements on case reserves.
Favorable development in 1993 was offset by the commutation of reinsurance
treaties in 1993 increasing prior years' claims.
12. EMPLOYEE BENEFIT PLANS:
The Company maintains a defined contribution plan (401(k) Savings Plan)
covering substantially all employees. The Company's matching contributions to
the Plan are based upon a percentage of employee compensation, as well as
amounts contributed by employees. During 1995, 1994, and 1993, the Company's
expense for contributions made to the Plan was $207,000, $154,000, and $374,000,
respectively.
Plan assets for the defined contribution plan are held by one of the
Company's subsidiaries. The subsidiary is responsible for management of the
Plan's assets.
F-26
<PAGE> 152
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. REGULATORY MATTERS:
Dividend Restrictions: Shareholder dividends payable by the Company or its
insurance subsidiaries cannot exceed certain limitations imposed by state law
without the prior approval of the Department of Insurance. This limitation is
determined using the greater of the prior year's statutory net income or 10% of
the statutory policyholders' surplus, subject to availability of sufficient
earned surplus. As of January 1, 1996, dividends payable by the Company were
limited to $13,212,594 without prior approval of the Department of Insurance.
14. DISCONTINUED OPERATIONS:
Effective July 30, 1988, the Company's Board of Directors approved a plan
to withdraw from the personal property and liability insurance market. For 1993,
as a result of favorable claims settlement experience associated with the
discontinued personal property and liability lines of business, the Company
recognized a gain of $722,755 from discontinued operations. In management's
opinion, the Company has substantially completed the phase-out of these
operations, except for the on-going settlement of related claims which will be
settled in the normal course of business.
Effective August 28, 1995, the Company entered into an agreement with
Mutual Assurance, Inc. (Mutual) in which the Company sold its recurring medical
professional liability insurance (MPL) business and that of its wholly owned
subsidiary PRO. In the Company's consolidated financial statements, the MPL line
of business has been accounted for as discontinued operations, and its
operations segregated in the consolidated statement of operations. Accordingly,
the accompanying financial statements for 1994 and 1993 have been restated from
those previously presented to reflect this accounting treatment.
The December 31, 1995 consolidated balance sheet includes the following
related to the discontinued MPL business:
<TABLE>
<S> <C>
Invested assets and cash...................................................... $ 135,673,480
Premiums and reinsurance receivable........................................... 40,878,616
Prepaid reinsurance........................................................... 5,651,311
Other assets.................................................................. 10,929,504
Loss and unearned premium reserves............................................ (181,470,190)
Reinsurance payable........................................................... (8,162,177)
Deferred gain on reinsurance.................................................. (3,500,544)
-------------
Net assets.................................................................. $ 0
=============
</TABLE>
Revenues, including premiums and investment income, and expenses, including
net loss and loss adjustment expenses, insurance underwriting costs and policy
acquisition costs for the three years ended December 31, 1995 for the
discontinued MPL and personal lines of business are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
Revenue................................................. $23,048,537 $30,439,462 $59,818,680
Expenses................................................ $21,812,789 $14,176,626 $68,422,256
</TABLE>
Investment income was allocated to the discontinued line of MPL business
equal to the accretion of the discount in the loss reserves for each year as the
Company is holding invested assets for this discontinued line in amounts
adequate to pay the claims as the Company estimates they will be required.
Insurance underwriting expenses include those expenses related to the production
of the MPL business, underwriting, employee compensation, occupancy, and other
directly related costs.
F-27
<PAGE> 153
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for federal income taxes related to discontinued operations
has been calculated based upon their separate results of operations.
15. RELATED PARTY TRANSACTIONS:
In 1994, the Company entered into a consulting agreement for a combined
annual fee of $200,000 with two of its directors for consulting services related
to the Company's investment activities, investment banking services and analysis
of operations. Effective January 1, 1995, the Company revised the agreement with
these directors to a combined annual fee of $300,000. Effective September 11,
1995, the previous agreements were terminated and the Company entered into
Consulting arrangements with the same two directors for a three-year period in
the annual total of $300,000 for their services as officers of the Company,
analysis of the Company's operations, investment banking activities, and
analysis and recommendation on the Company's investment portfolio. The Company
paid a combined fee of $305,000 and $200,000 to these two directors for 1995 and
1994, respectively.
SGM is a registered investment advisor which provides investment advisory
services to managed accounts including the Company and its subsidiaries.
Although dormant for several years SGM commenced active operations on January 1,
1995. SGM's President and CEO has an option expiring December 31, 2004 to
purchase 49% of SGM's common shares for a nominal amount. Two of PICO's
directors were instrumental in establishing the operations of SGM and are
entitled to receive 50% of the first $1,000,000 of profits attributed to PICO's
ownership of common stock. Effective January 1, 1996, SGM entered into a
contract to provide investment management services to the Company, PRO, Sequoia,
APL, and Separate Accounts A and B of APL.
Effective September 11, 1995, the same two directors also entered into
consulting contracts with a subsidiary of TOC. They are to render services in
the areas of investment banking, investment portfolio analysis and management
and operational analysis. Each will receive $150,000 annually for rendering such
services.
On September 26, 1995, the same two directors of the Company, who are also
officers and directors of TOC, were granted options by TOC to purchase up to
1,549,833 shares of common stock of TOC at an exercise price of $2.50 (Canadian)
per share, which was the closing market price of TOC shares on the Toronto Stock
Exchange on the date of grant. Such options are immediately exercisable. In
addition, on October 24, 1995, each was granted options by TOC to purchase an
additional 950,167 shares of common stock of TOC at an exercise price of $2.45
(Canadian) per share. Such options do not become exercisable until the earlier
to occur of (a) approval by the shareholders of TOC or (b) shares becoming
available as a result of the cancellation of options held by other
optionholders.
16. SEGMENT REPORTING
The Company's operations are organized into three principle segments:
investment banking, life & health insurance, and property & casualty insurance.
Other operations include the Company's real estate development and other
activities.
F-28
<PAGE> 154
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, the principal industry segments (000's omitted) are as
follows:
<TABLE>
<CAPTION>
PROPERTY
INVESTMENT LIFE AND AND
BANKING HEALTH CASUALTY OTHER DISCONTINUED CONSOLIDATED
---------- -------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1995:
Revenues......................... $ 10,722 $ 6,756 $ 2,485(1) $ 5,618 $ 29,049 $ 54,630
Operating income (loss).......... 5,667 859 (3,722)(1) (271) 6,026 8,559
Identifiable assets.............. 134,421 68,302 100,978(1) 13,091 193,133 509,925
Depreciation and amortization.... 2,857 343 139 4 3,343
Capital expenditures............. 1,888 720 27 2,635
1994:
Revenues......................... $ 2,016 $ 8,208 $ 1,619 $ 30,439 $ 42,282
Operating income (loss).......... 118 2,902 16,263 19,283
Identifiable assets.............. 25,603 62,383 2,959 206,219 297,164
Depreciation and amortization.... 2,074 290 18 2,382
Capital expenditures............. 88 88
1993:
Revenues......................... $ 8,410 $ 12,820 $ 2,264 $ 59,819 $ 83,313
Operating income (loss).......... 6,070 2,192 212 (8,604) (130)
Depreciation and amortization.... 4,580 400 26 5,006
Capital expenditures............. 103 103
</TABLE>
- ---------------
(1) All property and casualty operations are located and the business is written
in the state of California.
17. SUBSEQUENT EVENTS
On March 4, 1996, Citation Insurance Group (Citation) and the Company
announced they have signed a letter of intent for a stock-for-stock merger,
pursuant to which the Company will become a wholly-owned subsidiary of Citation.
The merger is expected to close in September 1996.
Under the terms of the letter of intent, each of the Company's outstanding
shares will be converted into Citation common stock based upon a floating
exchange rate. The denominator will be the agreed value of Citation stock of
$5.03 per share, and the numerator will be the average closing price of the
Company's common stock for the twenty trading days ending two business days
before the merger is consummated, within a range of $25.20 to $30.80 per share.
As a result of the transaction, which is anticipated to be a tax-free
merger, the shareholders of the Company will own between 80 and 83 percent of
the combined company, and the Citation shareholders will own between 17 and 20
percent.
In addition to negotiation of a definitive agreement, the transaction is
subject to receipt of fairness opinions, receipt of regulatory approvals,
approval of the transaction by the Boards of Directors and shareholders of
Citation and the Company, satisfactory completion of due diligence and other
conditions customary in transactions of this nature.
F-29
<PAGE> 155
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Condensed financial results of Citation for its year ended December 31,
1995 are as follows (in thousands):
<TABLE>
<S> <C>
Total revenue..................................................... $ 66,945
Net income........................................................ $ 939
Total assets...................................................... $184,353
Shareholders' equity.............................................. $ 46,103
</TABLE>
18. OPERATIONS IN GEOGRAPHIC AREAS
Information about the Company's operations by geographic area is as follows
(in thousands):
<TABLE>
<CAPTION>
UNITED GREATER
STATES CANADA EUROPE ASIA DISCONTINUED CONSOLIDATED
-------- ------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1995:
Revenues............................ $ 18,831 $ 1,315 $ 59 $ 5,376 $ 29,049 $ 54,630
Operating income.................... 2,958 (48) (438) 61 6,026 8,559
Identifiable assets................. 213,032 62,948 6,121 34,691 193,133 509,925
1994:
Revenues............................ $ 11,843 $ 30,439 $ 42,282
Operating income.................... 3,020 16,263 19,283
Identifiable assets................. 90,945 206,219 297,164
1993:
Revenues............................ $ 23,494 $ 59,819 $ 83,313
Operating income.................... 8,474 (8,604) (130)
</TABLE>
F-30
<PAGE> 156
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1995
MARCH 31, ------------
1996
------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments:
Available for sale:
Fixed maturities, at fair value (amortized cost $75,529,991
and $80,096,982)......................................... $ 74,687,804 $ 80,344,071
Equity securities, at fair value (cost $61,902,453 and
$66,241,369)............................................. 96,146,251 101,061,295
Short-term investments, at cost............................... 13,067,072 9,162,925
Real estate................................................... 1,624,666 3,038,750
------------ ------------
Total investments.......................................... 185,525,793 193,607,041
Cash and cash equivalents....................................... 126,491,516 121,063,805
Premiums and other receivables, net............................. 23,548,747 25,983,156
Reinsurance receivables......................................... 95,650,372 100,719,416
Prepaid deposits and reinsurance premiums....................... 8,738,324 16,623,918
Accrued investment income....................................... 1,295,493 1,417,091
Property and equipment, net..................................... 28,894,115 30,170,348
Deferred policy acquisition costs............................... 4,426,554 2,894,644
Other assets.................................................... 11,645,490 11,084,519
Assets held in separate accounts................................ 4,822,923 6,361,040
------------ ------------
Total assets............................................... $491,039,327 $509,924,978
============ ============
LIABILITIES
Policy liabilities and accruals:
Unpaid losses and loss adjustment expenses, net of discount... $223,009,799 $229,796,606
Future policy benefits and claims payable..................... 13,634,864 15,576,716
Annuity and other policyholders' funds........................ 32,365,576 31,976,176
Unearned premiums............................................. 26,557,738 30,858,612
Reinsurance balance payable................................... 6,701,976 8,376,110
Deferred gain on retroactive reinsurance........................ 3,423,720 3,500,544
Other liabilities............................................... 15,488,195 20,671,611
Deferred tax liability.......................................... 9,319,580 8,984,461
Liabilities related to separate accounts........................ 4,822,923 6,361,040
------------ ------------
Total liabilities.......................................... 335,324,371 356,101,876
------------ ------------
Minority Interest............................................... 75,270,055 74,473,757
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, $1 par value, authorized 1,000,000 shares; none
issued
Common stock:
Class A, $1 par value; authorized 8,000,000; issued 5,476,395
shares..................................................... 5,476,395 5,476,395
Additional paid-in capital...................................... 11,933,320 11,933,320
Net unrealized appreciation on investments...................... 22,533,278 23,572,259
Cumulative foreign currency translation adjustment.............. (575,483) (738,300)
Retained earnings............................................... 41,878,423 39,906,703
------------ ------------
81,245,933 80,150,377
Less treasury stock, at cost (Class A shares -- 272,498)........ (801,032) (801,032)
------------ ------------
Total shareholders' equity................................. 80,444,901 79,349,345
------------ ------------
Total liabilities and shareholders' equity................. $491,039,327 $509,924,978
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-31
<PAGE> 157
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1995
1996 ----------
----------- (UNAUDITED)
(UNAUDITED)
<S> <C> <C>
Revenues:
Premium income..................................................... $ 4,644,495 $ 528,702
Investment income, net............................................. 3,209,800 2,399,186
Realized gains on investments...................................... 703,754 748,882
Land sales......................................................... 1,496,123 424,500
Commission income.................................................. 691,177 38,049
Food processing and other.......................................... 4,027,453
Other income....................................................... 192,993 152,287
------------ -----------
Total revenues.................................................. 14,965,795 4,291,606
------------ -----------
Expenses:
Loss and loss adjustment expenses.................................. 2,761,841
Benefits and claims................................................ 98,524 298,207
Interest credited to policyholders................................. 584,601 594,180
Policy acquisition costs........................................... 51,190 37,371
Cost of food processing and land sales............................. 5,711,029 398,838
Insurance underwriting and other expenses.......................... 4,886,071 1,419,691
------------ -----------
Total expenses.................................................. 14,093,256 2,748,287
------------ -----------
Income from continuing operations before income taxes and
minority interest.............................................. 872,539 1,543,319
Provision for federal income taxes................................... 430,591
------------ -----------
Income from continuing operations before minority interest...... 441,948 1,543,319
Minority interest in income of subsidiaries.......................... (498,612)
------------ -----------
Income (loss) from continuing operations........................ (56,664) 1,543,319
Discontinued Operations:
Operating income (loss) -- net of federal income tax of $1,044,925,
and $64,910, respectively....................................... 2,028,384 (409,419)
------------ -----------
Net income...................................................... $ 1,971,720 $1,133,900
============ ===========
Net income (loss) per common share:
Continuing operations.............................................. $(0.01) $0.30
Discontinued operations............................................ 0.37 (0.08)
------ ------
Net income per common and common equivalent share............... $0.36 $0.22
------ ------
------ ------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-32
<PAGE> 158
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1995
1996 -----------
------------ (UNAUDITED)
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 1,971,720 $ 1,133,900
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred taxes................................................... 875,595 4,910
Depreciation and amortization.................................... 3,584,157 1,943,626
Realized (gains) losses on investments........................... (578,856) 411,431
Changes in assets and liabilities, net of effects from
acquisitions of businesses:
Premiums and other receivables................................ 2,434,409 (188,727)
Reinsurance recoverable and payable........................... 11,280,504 1,500,297
Accrued investment income..................................... 121,598 (360,023)
Deferred policy acquisition costs............................. (3,610,577) (1,621,535)
Unpaid losses and loss adjustment expenses.................... (6,786,807) (5,624,582)
Future policy benefits and claims payable..................... (1,552,452) 115,028
Unearned premiums............................................. (4,300,874) (267,457)
Other......................................................... (5,415,440) (60,825)
------------ -----------
Net cash used in operating activities............................ (1,977,023) (3,013,957)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of investments:
Available for sale:
Fixed maturities.............................................. 1,410,937 18,001,589
Equity securities............................................. 24,556,219
Proceeds from maturity of investments:
Available for sale:
Fixed maturities.............................................. 3,128,099 9,785,455
Purchases of investments:
Available for sale:
Equity securities............................................. (19,455,895) (4,001,684)
Net sales (purchases) of short-term investments.................... (3,904,147) 17,709
Net land sales..................................................... 1,482,778 180,883
Proceeds from sale of property and equipment....................... 10,261 1,358
Purchases of property and equipment................................ (26,611) (105,025)
------------ -----------
Net cash provided by investing activities........................ 7,201,641 23,880,285
------------ -----------
Effect of exchange rate changes on cash............................ 203,093
------------ -----------
Net increase in cash and cash equivalents.......................... 5,427,711 20,866,328
Cash and cash equivalents at beginning of year..................... 121,063,805 21,058,769
------------ -----------
Cash and cash equivalents at end of year......................... $126,491,516 $41,925,097
============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest, net of amounts capitalized.......................... $ 633
-----------
Federal income taxes.......................................... $ 202,000
===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-33
<PAGE> 159
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The interim financial statements include all adjustments which, in the opinion
of management, are necessary in order to make the financial statements not
misleading. For further information, refer to the consolidated financial
statements and footnotes included in the Company's annual report for the year
ended December 31, 1995. Certain reclassifications have been made to conform to
the current presentation.
2. SUBSEQUENT EVENTS
On May 9, 1996, Physicians Insurance Company of Ohio ("PICO"), Guinness
Peat Group plc ("GPG"), and The Ondaatje Corporation ("TOC") entered into an
agreement whereby GPG agreed to sell 850,000 Class A shares of PICO common stock
to TOC in two blocks, subject to regulatory approval, at an average price of
approximately US $18.00 per share. GPG agreed to sell the shares to TOC at a
discount to market due to their status as restricted stock and in consideration
of the quantity of shares to be purchased. On May 13, and June 4, 1996 TOC
purchased the shares. PICO currently owns approximately 38% of TOC's common
stock. Prior to these transactions, GPG owned approximately 40% of PICO common
stock. Following these transactions, GPG and TOC own approximately 23% and 16%
of PICO, respectively. Due to the inter-ownership of common stock between PICO
and TOC, the shares of PICO owned by TOC will be accounted for as treasury
shares in the PICO consolidated financial statements beginning with the second
quarter 1996 financial statements.
F-34
<PAGE> 160
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated statements of financial position of The
Ondaatje Corporation as at March 31, 1995 and 1994 and the consolidated
statements of operations, deficit and changes in financial position for each of
the years in the three year period ended March 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at March 31,
1995 and 1994 and the results of its operations and the changes in its financial
position for each of the years in the three year period ended March 31, 1995 in
accordance with accounting principles generally accepted in Canada.
Accounting principles generally accepted in Canada vary in certain
significant respects from accounting principles generally accepted in the United
States in the Company's circumstances, as described in note 14.
/s/ KPMG Peat Marwick Thorne
Chartered Accountants
Toronto, Canada
May 16, 1995
F-35
<PAGE> 161
THE ONDAATJE CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
March 31, 1995 and 1994
(in thousands of Canadian dollars)
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Investment banking:
Cash and short-term investments...................................... $104,509 $ 71,308
Marketable securities................................................ 10,869 23,992
Receivables.......................................................... 30,058 27,680
Capital assets....................................................... 13,347 4,189
Other assets......................................................... 6,521 2,462
-------- --------
165,304 129,631
Agricultural services:
Inventories.......................................................... 1,505 2,245
Accounts receivable.................................................. 2,043 3,075
Capital assets....................................................... 1,949 2,431
-------- --------
5,497 7,751
Food processing and other:
Inventories.......................................................... 1,362 466
Accounts receivable.................................................. 2,204 1,239
Capital assets....................................................... 2,769 2,356
-------- --------
6,335 4,061
-------- --------
$177,136 $141,443
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 7,628 $ 7,525
Due to brokers and clients........................................... 4,828 8,885
Income taxes payable................................................. 4,451 942
-------- --------
16,907 17,352
Minority interest...................................................... 31,878 747
Stockholders' equity:
Capital stock........................................................ 136,196 137,758
Deficit.............................................................. (8,343) (14,522)
Foreign currency translation adjustment.............................. 498 108
-------- --------
128,351 123,344
-------- --------
$177,136 $141,443
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-36
<PAGE> 162
THE ONDAATJE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
March 31, 1995, 1994 and 1993
(in thousands of Canadian dollars)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Investment banking........................................... $ 19,536 $ 16,367 $ 12,217
Agricultural services........................................ 9,888 5,883 --
Food processing and other.................................... 13,843 1,397 --
-------- -------- --------
43,267 23,647 12,217
Expenses:
Operating.................................................... 24,914 9,582 9,743
General and administration................................... 7,593 3,487 3,188
Amortization................................................. 1,093 297 348
-------- -------- --------
33,600 13,366 13,279
Restructuring costs.......................................... -- -- 11,816
-------- -------- --------
Earnings (loss) before minority interest and income taxes...... 9,667 10,281 (12,878)
Income taxes................................................... 3,332 946 114
Minority interest.............................................. 156 -- --
-------- -------- --------
Net earnings (loss) for the year............................... $ 6,179 $ 9,335 $(12,992)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE> 163
THE ONDAATJE CORPORATION
CONSOLIDATED STATEMENTS OF DEFICIT
March 31, 1995, 1994 and 1993
(in thousands of Canadian dollars)
Years ended March 31, 1995, 1994 and 1993 (In thousands of
Canadian dollars)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Deficit, beginning of year..................................... $(14,522) $(23,857) $(10,259)
Net earnings (loss) for the year............................... 6,179 9,335 (12,992)
Provision for repurchase and cancellation of shares pursuant to
shareholder dissent.......................................... -- -- (793)
Employee stock purchase plan adjustment........................ -- -- 187
-------- -------- --------
Deficit, end of year........................................... $ (8,343) $(14,522) $(23,857)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE> 164
THE ONDAATJE CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
Years ended March 31, 1995, 1994 and 1993
(in thousands of Canadian dollars)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Cash provided by (used for):
Operating activities:
Net earnings (loss) for the year......................... $ 6,179 $ 9,335 $(12,992)
Amortization............................................. 1,097 297 348
Minority interest........................................ 156 -- --
Gain on dilution of investment........................... (3,914) -- --
-------- -------- --------
3,518 9,632 (12,644)
Net change in amounts due from/due to brokers,
dealers and clients................................... 1,915 358 5,228
Net change in marketable securities and inventories...... 15,387 (23,746) 1,499
Foreign currency translation adjustment.................. 390 108 --
Net change in other non-cash operating items and other
assets................................................ (8,399) 42,380 (59,752)
-------- -------- --------
12,811 28,732 (65,669)
Financing activities:
Sale of 50% interest in subsidiary....................... 30,335 -- --
Common shares held by Forbes Ceylon Limited.............. (1,645) -- --
Provision for share cancellation pursuant to shareholder
dissent............................................... -- -- 787
Employee stock purchase plan adjustment.................. -- -- 650
Issue of common shares on exercise of special warrants... -- 44,840 --
Issue of common shares on exercise of rights............. -- -- 39,582
Issue of common shares on acquisition of Forbes & Walker
Limited............................................... -- 8,000 --
Issue of common shares on exercise of stock options...... 83 378 760
-------- -------- --------
28,773 53,218 41,779
Investing activities:
Disposition (purchase) of capital assets................. (8,383) (862) 2,493
Business acquisition..................................... -- (16,353) --
Note receivable.......................................... -- 2,619 --
Loan receivable.......................................... -- (6,300) --
Proceeds on sale of LOM Western.......................... -- -- 11,500
-------- -------- --------
(8,383) (20,896) 13,993
-------- -------- --------
Net change in cash......................................... 33,201 61,054 (9,897)
Cash, beginning of year.................................... 71,308 10,254 20,151
-------- -------- --------
Cash, end of year.......................................... $104,509 $ 71,308 $ 10,254
-------- -------- --------
Cash comprises cash and short-term investments.
</TABLE>
See accompanying notes to consolidated financial statements.
F-39
<PAGE> 165
THE ONDAATJE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended March 31, 1995, 1994 and 1993
(Tabular amounts in thousands of Canadian dollars, except earnings per share)
The consolidated financial statements of The Ondaatje Corporation (the
"Company") have been prepared in accordance with accounting principles generally
accepted in Canada ("Canadian GAAP") which, except as described in note 14,
conform in all material respects with accounting principles generally accepted
in the United States and practices prescribed by the United States Securities
and Exchange Commission ("U.S. GAAP"). The Ondaatje Corporation operates
primarily as an international investment banker. The Company is also involved in
agricultural services and food processing through its subsidiaries, Forbes &
Walker Limited and Forbes Ceylon Limited.
1. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of consolidation:
These consolidated financial statements include the accounts of the Company
and its subsidiaries since dates of acquisition.
(b) Marketable securities:
(i) securities owned and sold short are recorded at market;
(ii) investment securities are recorded at the lower of cost and market.
(c) Inventories:
Agricultural services and food processing inventories are valued at the
lower of cost and net realizable value.
(d) Securities transactions:
Securities transactions are recorded on a trade date basis.
(e) Capital assets:
Capital assets are carried at cost less accumulated amortization.
Amortization on furniture and equipment is calculated using the declining
balance method at rates ranging from 20% to 30%. Other capital assets are
amortized on a straight-line basis over their useful lives.
(f) Translation of foreign currency:
Revenues and expenses of self-sustaining foreign operations are translated
at average rates of exchange in effect during the year. Assets and liabilities
are translated at the exchange rates in effect at the balance sheet date.
Unrealized exchange gains or losses arising on translation are deferred and
included in shareholders' equity.
Movement in the foreign currency translation adjustment during the year
results from changes in the value of the Canadian dollar in comparison to the
Sri Lankan Rupee, and changes in foreign denominated net assets.
Assets and liabilities of domestic operations denominated in foreign
currencies are translated at the exchange rates in effect at the balance sheet
date. Revenue and expense items are translated at the average rate for the year.
Translation gains and losses are reflected in earnings in the period in which
they arise except for gains and losses relating to non-current monetary items.
Translation gains and losses relating to these items are deferred and amortized
on a straight-line basis over the remaining life of the respective item.
F-40
<PAGE> 166
THE ONDAATJE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Years ended March 31, 1995, 1994 and 1993
(Tabular amounts in thousands of Canadian dollars, except earnings per share)
(g) Goodwill:
Goodwill is carried at cost less accumulated amortization. Goodwill is
amortized over 20 years.
2. ACQUISITIONS AND DIVESTITURES:
(a) On October 21, 1993, the Company acquired 100% of the shares of Forbes
& Walker Limited in exchange for the issue of 2,706,895 common shares and
2,411,263 common share purchase warrants. The warrants are exercisable on a one
for one basis into common shares for a price of $3.25 per share. Forbes & Walker
Limited is a diversified company based in Sri Lanka involved in investment
banking, agricultural services and food processing. The acquisition has been
accounted for by the purchase method with the fair value of net assets acquired
amounting to $8,400,000 including costs of acquisition.
The fair values of assets acquired and liabilities assumed are as follows:
<TABLE>
<S> <C>
Land, building and equipment....................................... $ 7,857
Estate management contracts........................................ 1,079
Working capital.................................................... 7,914
------
16,850
Bank loans......................................................... 8,450
------
$ 8,400
======
</TABLE>
(b) On May 4, 1994, the Company incorporated a new subsidiary in Sri Lanka
called Forbes Ceylon Limited. Subsequently, Forbes Ceylon Limited acquired
certain assets from Forbes & Walker Limited and issued 239,999,993 common shares
for cash consideration of $65,776,151 through a public and private share
offering of which the Company acquired 50%. At March 31, 1995, the Company owned
50% of Forbes Ceylon Limited, however, Forbes Ceylon Limited is consolidated in
these financial statements as the Company is deemed to control it through the
Board of Directors. The gain on dilution of the Company's interest in Forbes
Ceylon Limited amounted to approximately $3,900,000 and is included in
investment banking revenue. Goodwill arising on this transaction amounted to
$3,087,000.
(c) On August 18, 1992, the Company agreed to sell all of the issued and
outstanding shares of LOM Western Securities Ltd. to a group led by Peter M.
Brown for an aggregate consideration of $11,500,000 to be settled in cash for
$6,500,000, and a note receivable for $5,000,000 due in 4 years with interest at
prime plus 1%. This transaction closed on October 2, 1992. The loss on this
transaction is included with restructuring costs.
Under the agreement, the results of operations from April 1, 1992 are for
the account of the purchaser and accordingly, have been excluded from the
consolidated statement of operations for the year ended March 31, 1993.
(d) On December 30, 1992, the Company transferred certain of the assets and
liabilities of its brokerage subsidiaries at net book value to a new brokerage
company which operates under the name Loewen Ondaatje McCutcheon Limited ("LOM
Limited"). At March 31, 1993, the Company had a banking relationship with LOM
Limited and provided an indirect guarantee of a $1.25 million subordinated line
of credit, which was terminated in the year ended March 31, 1994.
F-41
<PAGE> 167
THE ONDAATJE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Years ended March 31, 1995, 1994 and 1993
(Tabular amounts in thousands of Canadian dollars, except earnings per share)
3. MARKETABLE SECURITIES:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Securities owned............................................... $ 6,253 $10,454
Investment securities (market value $4,681,000;
1994 -- $13,358,000)......................................... 4,616 13,538
------- -------
$10,869 $23,992
======= =======
</TABLE>
4. RECEIVABLES:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Due from clients and brokers................................... $ 9,340 $15,312
Trade advance (U.S. $5,000,000)................................ 6,996 --
Trade receivable............................................... 3,132 --
Other accounts receivable...................................... 4,290 2,937
Loan receivable................................................ 6,300 6,300
Note receivable................................................ -- 3,131
------- -------
$30,058 $27,680
======= =======
</TABLE>
The note receivable matures September 30, 1996 and bears interest at prime
plus 1%. Principal repayments of $625,000 are due on April 1 and October 1, plus
an additional payment on October 1 in the amount, if any, by which 60% of net
income of the debtor for the most recently completed fiscal year exceeds
$1,250,000. On October 1, 1994, the note was fully repaid.
The loan receivable matures September 30, 2003, with interest at 10% to
997359 Ontario Inc., the parent company of Loewen Ondaatje McCutcheon Limited, a
Canadian investment dealer.
On March 29, 1995, FCL, a 50% owned subsidiary of the Company advanced U.S.
$5,000,000 to Amalgamated Bean Coffee Trading Co. (Pvt) Limited. The loan is due
on demand and bears interest at 8% per annum. The loan is secured by inventory
and a personal guarantee.
F-42
<PAGE> 168
THE ONDAATJE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Years ended March 31, 1995, 1994 and 1993
(Tabular amounts in thousands of Canadian dollars, except earnings per share)
5. CAPITAL ASSETS:
<TABLE>
<CAPTION>
1995 1994
------- ------
<S> <C> <C>
Investment banking:
Cost:
Furniture and fixtures..................................... $ 1,277 $1,338
Property, plant and equipment.............................. 12,955 3,396
------- -------
14,232 4,734
Less accumulated amortization.............................. 885 545
------- -------
13,347 4,189
Agricultural services:
Cost:
Furniture and fixtures..................................... 247 411
Estate management contracts................................ 795 810
Property, plant and equipment.............................. 1,092 1,566
------- -------
2,134 2,787
Less accumulated amortization.............................. 185 356
------- -------
1,949 2,431
Food processing and other:
Cost:
Furniture and fixtures..................................... 352 145
Property, plant and equipment.............................. 3,269 2,680
------- -------
3,621 2,825
Less accumulated amortization.............................. 852 469
------- -------
2,769 2,356
------- -------
$18,065 $8,976
======= =======
</TABLE>
Amortization for the year was as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ---- ----
<S> <C> <C> <C>
Investment banking...................................... $ 727 $ 52 $348
Agricultural services................................... 191 177 --
Food processing and other............................... 175 68 --
------ ---- ----
$1,093 $297 $348
====== ==== ====
</TABLE>
6. OTHER ASSETS:
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Goodwill (net of amortization of $280,000; 1994 -- $12,650)...... $3,060 $ 253
Other investment, at cost........................................ 3,461 2,209
------ ------
$6,521 $2,462
====== ======
</TABLE>
F-43
<PAGE> 169
THE ONDAATJE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Years ended March 31, 1995, 1994 and 1993
(Tabular amounts in thousands of Canadian dollars, except earnings per share)
7. CAPITAL STOCK:
(a) Authorized:
Unlimited number of shares designated as preferred shares issuable in one
or more series.
Unlimited number of common shares.
(b) Issued and outstanding:
<TABLE>
<CAPTION>
COMMON SHARES
NUMBER AMOUNT
---------- --------
<S> <C> <C>
Balance, April 1, 1992..................................... 12,467,000 $ 43,053
Withdrawal of shareholder dissent.......................... 457,600 1,580
Issued under common stock options.......................... 400,000 760
Issuable on exercise of rights............................. 26,649,200 39,582
Disposition of shares held under Employee Stock Purchase
Plan..................................................... -- (435)
---------- --------
Balance, March 31, 1993.................................... 39,973,800 84,540
Issued on exercise of special warrants..................... 15,000,000 44,840
Issued on acquisition of Forbes & Walker Limited........... 2,706,895 8,000
Issued on exercise of employee stock options............... 151,300 378
---------- --------
Balance, March 31, 1994.................................... 57,831,995 137,758
Issued on exercise of employee stock options............... 33,333 83
---------- --------
57,865,328 137,841
Shares held by Forbes Ceylon Limited....................... (814,100) (1,645)
---------- --------
Balance, March 31, 1995.................................... 57,051,228 $136,196
========== ========
</TABLE>
Pursuant to a rights offering in March 1993, shareholders subscribed for an
additional 26,649,200 shares of the Company which were issued for cash of
$39,973,800 in April 1993. This issue is included in capital stock at March 31,
1993 with the proceeds shown as subscriptions receivable. Costs of issue
amounting to $391,969 have been netted against the proceeds.
On December 16, 1993, the Company issued 15,000,000 common shares on
exercise of 15,000,000 special warrants issued on November 9, 1993 at a price of
$3.20 per warrant. Expenses of $3,160,000 including fees and commissions have
been netted against the proceeds.
(c) Common stock options:
At March 31, 1995, common shares were available for issue under the
Employee Stock Purchase Plan to a maximum of 5,783,000 shares. Options were
outstanding for the issue of 848,700 common shares at $2.50 per share with
666,666 of these vesting equally on June 21, 1995 and June 21, 1996. The options
expire June 21, 1998.
(d) Employee Stock Purchase Plan:
Under the terms of the Employee Stock Purchase Plan (the "Plan"), the
Company accepted five-year non-interest bearing promissory notes from employees
for the purchase of shares of the Company from the
F-44
<PAGE> 170
THE ONDAATJE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Years ended March 31, 1995, 1994 and 1993
(Tabular amounts in thousands of Canadian dollars, except earnings per share)
trustees of the Plan. The promissory notes were repayable at the rate of 5% per
annum, plus dividends paid on the purchased shares, with the remaining balance
payable in full at the end of the term.
Under the terms of the Plan, the shares vested to the individuals at the
rate of 20% per completed year of employment. In the event that the individual's
employment terminated prior to completion of the Plan, the promissory notes
related to the unvested shares were to be settled by surrender of these shares.
During the year ended March 31, 1993, all employees who were formerly
members of the Plan have terminated and a decision was taken to wind up the
Plan.
(e) Shareholder dissent:
As at March 31, 1992, the Company reduced its shareholders' equity by a
provision in the amount offered to purchase and cancel shares held by a
dissenting shareholder to certain special resolutions passed at the Annual and
Special Meeting of the shareholders held September 10, 1991. During the year
ended March 31, 1993, the dissent was withdrawn and accordingly the provision
was reversed.
8. EARNINGS (LOSS) PER SHARE:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- ------
<S> <C> <C> <C>
Earnings (loss) per share.............................. $0.11 $0.21 $(1.00)
===== ===== =====
</TABLE>
Earnings per share are calculated based on the weighted average number of
common shares outstanding during the year.
9. RETAINED EARNINGS:
Dividends paid out of the retained earnings of foreign subsidiaries are
subject to withholding taxes at rates between 20% and 15% for which provision
has not been made due to the Company's intention not to repatriate these
retained earnings. The foreign subsidiaries' portion of total retained earnings
at March 31 is $7,682,000 (1994 -- $8,395,000; 1993 -- $6,856,727).
10. INCOME TAXES:
The Company's effective tax rate is made up as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Combined basic Canadian federal and provincial statutory
rate.................................................. 48.3% 44.3% 44.3%
Canadian losses and timing differences not tax
effected.............................................. (15.1) (40.6) (48.1)
Non-taxable items....................................... 56.6 -- --
Prior year provisions no longer required................ (8.6) -- --
Large corporations tax.................................. -- 6.3 --
Higher (lower) income tax rates of foreign
subsidiaries.......................................... (47.3) (2.8) 2.9
Non-deductible items.................................... 1.1 2.0 --
----- ----- -----
35.0% 9.2% (0.9%)
===== ===== =====
</TABLE>
F-45
<PAGE> 171
THE ONDAATJE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Years ended March 31, 1995, 1994 and 1993
(Tabular amounts in thousands of Canadian dollars, except earnings per share)
11. SEGMENTED INFORMATION:
(a) Earnings (losses) by industry segment are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
Investment banking............................... $11,155 $10,195 $(12,878)
Agricultural services............................ (407) 18 --
Food processing and other........................ (1,081) 68 --
------- -------
$ 9,667 $10,281 $(12,878)
======= =======
</TABLE>
(b) Geographic information is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenue:
North America................................ $ 7,700 $ 14,342 $ 8,873
Europe....................................... 811 317 3,344
Asia......................................... 34,608 8,988 --
Caribbean.................................... 148 -- --
-------- -------- -------
$ 43,267 $ 23,647 $ 12,217
-------- -------- -------
Segment profit (loss) after direct costs:
North America................................ $ 5,533 $ 8,808 $ 1,563
Europe....................................... (174) 291 426
Asia......................................... 4,185 1,182 --
Caribbean.................................... 123 -- --
-------- -------- -------
Segment profit................................. 9,667 10,281 1,989
General corporate expenses..................... -- -- (14,867)
Minority interest.............................. 156 -- --
-------- -------- -------
Earnings (loss) before income taxes............ $ 9,511 $ 10,281 $(12,878)
-------- -------- -------
Identifiable assets:
North America................................ $ 78,043 $120,549 $ 57,240
Europe....................................... 5,952 5,677 7,009
Asia......................................... 77,829 15,217 --
Caribbean.................................... 15,312 -- --
-------- -------- -------
Total assets................................... $177,136 $141,443 $ 64,249
======== ======== =======
</TABLE>
12. RELATED PARTY TRANSACTIONS:
The Company has agreed to provide various financial services to each of the
brokerage subsidiaries of 997359 Ontario Inc. in return for a fee based on the
net revenues of each subsidiary. A subsidiary of 997359 Ontario Inc. provides
accounting and other administrative services to the Company at a cost of
approximately $390,000 per year commencing January 1, 1995.
F-46
<PAGE> 172
THE ONDAATJE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Years ended March 31, 1995, 1994 and 1993
(Tabular amounts in thousands of Canadian dollars, except earnings per share)
13. RESTRUCTURING COSTS:
In the year ended March 31, 1993, the operations of the Company were
restructured. Changes included the sale of LOM Western Securities Ltd., the
settlement of the Company's lease at Scotia Plaza and consequent move,
subcontracting of the back office and reorganization of the remaining brokerage
operations. The costs of effecting these and related charges are grouped
together as restructuring costs in the consolidated statement of operations for
the year ended March 31, 1993.
14. RECONCILIATION BETWEEN CANADIAN GAAP AND U.S. GAAP:
Reconciliations of net income (loss) determined in accordance with Canadian
GAAP to net income (loss) determined under U.S. GAAP are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ --------
<S> <C> <C> <C>
Net income (loss) for the year, as reported................ $6,179 $9,335 $(12,992)
Income taxes (a)........................................... (171) (785) --
------ ------ --------
Net income (loss) for the year in accordance with U.S.
GAAP..................................................... $6,008 $8,550 $(12,992)
------ ------ --------
Net income (loss) per share in accordance with U.S. GAAP
(c)...................................................... $ 0.10 $ 0.19 $ (1.00)
====== ====== ========
</TABLE>
The cumulative effect of adjustments on the consolidated shareholders'
equity of the Company is as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Shareholders' equity, as reported.................................... $128,351 $123,344
Income taxes (a)..................................................... 579 749
Carrying value of securities (b)..................................... (1,138) --
------- -------
Shareholders' equity, U.S. GAAP...................................... $127,792 $124,093
======= =======
</TABLE>
Under U.S. GAAP, the gain on dilution of approximately $3,900,000 resulting
from the issuance of shares by a subsidiary, Forbes Ceylon Limited on May 4,
1994 (see note 2(b)), would be reflected separately in the statement of
operations as non-operating income and excluded from Investment Banking
Revenues.
The cumulative effect of the application of U.S. GAAP as described in (a)
through (c) below, on the consolidated balance sheet of the Company as at March
31, 1995, would be to increase marketable securities by $62,963 (1994 -- nil),
increase goodwill by $3,004,800 (1994 -- increase $3,004,000), decrease other
assets by $1,200,684 (1994 -- nil), increase deferred tax asset by $920,535
(1994 -- increase $1,227,380), increase deferred tax liability by $3,345,956
(1994 -increase $3,482,058) and to decrease shareholders' equity by $558,342 as
at March 31, 1995 (1994 - increase $749,322).
Under Canadian GAAP, the issuance of common shares on acquisition of Forbes
& Walker Limited in the year ended March 31, 1994, the issue of common shares on
exercise of rights, provision for share cancellation pursuant to shareholder
dissent and amounts receivable from sale of a business, in the year ended March
31, 1993 have been reflected in the statement of changes in financial position
as financing and investing activities. Under U.S. GAAP, these non-cash
transactions would be excluded from financing and investing activities. Under
U.S. GAAP, the effect of exchange rate changes on cash balances in foreign
currencies is shown separately from operating activities. Also, under U.S. GAAP,
the cost of purchases of $3,645,000 (1994 -$240,000) and proceeds from the sale
of securities of $1,662,000 (1994 -- $2,120,000) which are classified as
F-47
<PAGE> 173
THE ONDAATJE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Years ended March 31, 1995, 1994 and 1993
(Tabular amounts in thousands of Canadian dollars, except earnings per share)
available for sale would be excluded from operating activities and included as
investing activities. Accordingly, under U.S. GAAP, cash flows would be reported
as follows in the statement of changes in financial position:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net cash provided by (used in) operating activities.... $ 14,404 $(12,838) $(20,040)
Net cash provided by (used in) investing activities.... (10,366) (11,016) 8,733
Net cash provided by financing activities.............. 28,773 84,800 1,410
Effect of exchange rate changes on cash................ 390 108 --
</TABLE>
(a) Accounting for income taxes:
Effective April 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS
109"), for its financial statements presented under U.S. GAAP. The adoption of
FAS 109 changes the Company's method of accounting for income taxes from the
deferred method, as recorded under Canadian GAAP, to an asset and liability
approach. Under the asset and liability method of FAS 109, deferred tax assets
and liabilities are recognized for future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. The resultant deferred tax
assets, net of applicable valuation allowances, and deferred tax liabilities are
valued annually using the applicable tax rate for the current year. Changes in
deferred taxes are charged to income or directly to shareholders' equity in
accordance with the underlying temporary difference giving rise to the deferred
tax.
There was no cumulative effect adjustment on the adoption of FAS 109 as at
April 1, 1993. The net loss for 1993 under U.S. GAAP has not been restated to
reflect the provisions of FAS 109.
The implementation of FAS 109 in 1994 and 1995 has been reflected in the
reconciliation of net income (loss) under Canadian GAAP to net income (loss)
under U.S. GAAP.
(b) Carrying value of securities:
Effective April 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("FAS 115") for its financial statements presented
under U.S. GAAP.
Under FAS 115, securities are classified in three categories and accounted
for as follows:
(i) Held-to-maturity securities:
When the enterprise has the positive ability and interest to hold debt
securities to maturity, such securities are carried at amortized cost.
(ii) Trading:
When debt or equity securities are bought and held principally for the
purpose of selling them in the near term, such securities are carried at fair
value with unrealized gains and losses reported in earnings.
(iii) Available for sale:
Debt and equity securities not classified as either held-to-maturity or
trading securities are classified as available for sale and reported at fair
value, with unrealized gains and losses excluded from income and reported in a
separate component of shareholders' equity.
F-48
<PAGE> 174
THE ONDAATJE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Years ended March 31, 1995, 1994 and 1993
(Tabular amounts in thousands of Canadian dollars, except earnings per share)
As a consequence of applying the provisions of FAS 115 to its financial
statements presented in accordance with U.S. GAAP, marketable securities as at
April 1, 1994 increased by $2,626,000 and shareholders' equity increased by a
corresponding amount. The impact of FAS 115 on the Company's financial
statements presented in accordance with U.S. GAAP as at March 31, 1995 is to
decrease marketable securities by $1,138,000 and decrease shareholders' equity
by a corresponding amount.
In 1994 and 1993, there were no material differences between Canadian GAAP
and U.S. GAAP applicable to marketable securities as specified by Statement of
Financial Accounting Standards No. 12, "Accounting for Certain Marketable
Securities".
(c) Earnings per share:
U.S. GAAP requires the application of the treasury stock method to
determine the amount of dilution to be reflected in both primary and fully
diluted earnings per share. Under this method, warrants and options are
considered common share equivalents and are included in the weighted average
number of shares used to calculate net income (loss) per share only when the
effect is dilutive.
Weighted average number of shares used to calculate net income (loss) per
share under United States accounting principles for the year ended March 31,
1995 were 58,055,699 (1994 -- 45,475,173; 1993 -- 13,024,600).
Primary and fully-diluted net income (loss) per share were the same for
each of the periods presented.
F-49
<PAGE> 175
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Sequoia Insurance Company
Pleasanton, California
We have audited the accompanying balance sheets of Sequoia Insurance
Company as of December 31, 1994 and 1993, and the related statements of
operations, changes in shareholder's equity, and cash flows for each of the
three years in the period ended December 31, 1994. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. These standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sequoia Insurance Company as
of December 31, 1994 and 1993, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1994 in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for investments and its method of accounting for income
taxes in 1992.
Coopers & Lybrand L.L.P.
San Francisco, California
November 3, 1995
F-50
<PAGE> 176
SEQUOIA INSURANCE COMPANY
BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
ASSETS
Investments:
Available for sale:
Fixed maturities at fair value (amortized cost:
1994 - $62,971,088, 1993 - $65,610,181).................. $ 62,157,157 $ 66,028,321
Equity securities at fair value (cost: 1994 - $0,
1993 - $4,239,293)....................................... -- 4,239,293
Real estate at cost (net of accumulated depreciation:
1994 - $0, 1993 - $33,673)................................. -- 303,155
Short-term investments, at cost which approximates fair
value...................................................... 8,953,158 4,997,394
------------ ------------
Total investments.......................................... 71,110,315 75,568,163
------------ ------------
Cash and cash equivalents....................................... 1,907,617 1,056,406
Premiums and agents' balances receivable (net of allowance for
doubtful accounts: 1994 - $275,000; 1993 - $65,000)........... 11,637,968 7,953,497
Reinsurance receivables......................................... 7,549,330 9,344,657
Prepaid reinsurance premiums.................................... 2,641,074 2,637,310
Property and equipment, net..................................... 1,591,455 2,020,555
Accrued investment income....................................... 1,333,960 1,015,243
Deferred policy acquisition costs............................... 1,495,735 1,683,247
Goodwill (net of accumulated amortization: 1994 - $0;
1993 - $280,000).............................................. -- 720,000
Federal income tax recoverable.................................. 386,358 394,041
Receivables from affiliates..................................... 4,016,352 1,928,176
Other assets.................................................... 14,202 158,252
------------ ------------
Total assets............................................... $103,684,366 $104,479,547
============ ============
LIABILITIES AND SHAREHOLDER'S EQUITY
Losses and loss adjustment expenses............................. $ 54,001,520 $ 53,919,982
Unearned premiums............................................... 23,871,723 22,314,392
Contingent commission and other similar charges................. 689,387 286,405
Payables from affiliates........................................ 683,345 1,104,140
Other liabilities............................................... 3,767,191 3,520,810
------------ ------------
Total liabilities.......................................... 83,013,166 81,145,729
------------ ------------
Contingencies (Notes 5 and 12).
Common stock ($2.50 par value, authorized - 1,000,000 shares;
issued - 400,000 shares)...................................... 1,000,000 1,000,000
Additional paid-in capital...................................... 6,500,000 6,500,000
Net unrealized appreciation (depreciation) on investments [net
of deferred income taxes of 1994 - $0; 1993 - $0]............. (813,931) 418,140
Retained earnings............................................... 13,985,131 15,415,678
------------ ------------
Total shareholder's equity................................. 20,671,200 23,333,818
------------ ------------
Total liabilities and shareholder's equity............ $103,684,366 $104,479,547
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE> 177
SEQUOIA INSURANCE COMPANY
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Premium earned........................................ $42,358,992 $42,569,256 $45,760,110
Investment income, net................................ 3,865,047 3,989,952 4,496,417
Realized gains (losses) on investments................ (252,125) 570,792 366,638
Other income.......................................... 82,988 171,859 424,212
----------- ----------- -----------
Total revenues..................................... 46,054,902 47,301,859 51,047,377
----------- ----------- -----------
Expenses:
Net losses and loss adjustment expenses............... 31,613,803 36,684,519 33,702,981
Policy acquisition costs.............................. 8,078,783 8,465,732 10,019,182
Insurance underwriting and other expenses............. 7,048,615 6,737,805 7,600,470
Dividends to policyholders............................ -- 900,000 --
Write off of goodwill................................. 680,000 -- --
----------- ----------- -----------
Total expenses..................................... 47,421,201 52,788,056 51,322,633
----------- ----------- -----------
Loss before federal income taxes........................ (1,366,299) (5,486,197) (275,256)
Provision (benefit) for federal income taxes............ 7,683 1,402,437 (128,967)
----------- ----------- -----------
Loss from continuing operations before cumulative effect
of accounting change.................................. (1,373,982) (6,888,634) (146,289)
Cumulative effect of accounting change for income
taxes................................................. -- -- 1,248,920
----------- ----------- -----------
Net income (loss)............................. $(1,373,982) $(6,888,634) $ 1,102,631
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE> 178
SEQUOIA INSURANCE COMPANY
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992
<TABLE>
<CAPTION>
CAPITAL ADDITIONAL NET UNREALIZED
STOCK -- PAID-IN GAIN (LOSS) RETAINED
COMMON CAPITAL ON INVESTMENTS EARNINGS TOTAL
---------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances, January 1, 1992........ $1,000,000 $6,500,000 -- $21,403,952 $28,903,952
Cumulative effect of change in
accounting for investments,
net of deferred income taxes
of $312,389................. $ 606,403 606,403
Net income..................... 1,102,631 1,102,631
---------- ---------- ----------- ----------- -----------
Balances, December 31, 1992...... 1,000,000 6,500,000 606,403 22,506,583 30,612,986
Net loss....................... (6,888,634) (6,888,634)
Adjustment for minimum pension
liability................... (202,271) (202,271)
Decrease in net unrealized
appreciation on investments
net of adjustment to write
off previously deferred
taxes of $(312,389)......... (188,263) (188,263)
---------- ---------- ----------- ----------- -----------
Balances, December 31, 1993...... 1,000,000 6,500,000 418,140 15,415,678 23,333,818
Net loss....................... (1,373,982) (1,373,982)
Adjustment for minimum pension
liability................... (56,565) (56,565)
Decrease in net unrealized
appreciation on investments
net of adjustment to
deferred income taxes of
$0.......................... (1,232,071) (1,232,071)
---------- ---------- ----------- ----------- -----------
Balances, December 31, 1994...... $1,000,000 $6,500,000 $ (813,931) $13,985,131 $20,671,200
========== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE> 179
SEQUOIA INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income................................. $(1,373,982) $(6,888,634) $ 1,102,631
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Deferred taxes................................. -- 1,724,319 (1,724,319)
Depreciation and amortization.................. 1,176,921 1,141,383 811,115
Realized losses (gains) on investments......... 252,125 (570,792) (366,638)
(Gains) losses on sale of equipment............ (2,848) 3,948 1,297
Extinguishment of goodwill..................... 680,000 -- --
Changes in assets and liabilities:
Premium and agent balances receivables....... (3,684,471) 539,704 960,885
Reinsurance receivables...................... 1,795,327 (3,073,701) (1,085,799)
Prepaid reinsurance premiums................. (3,764) (781,388) (1,709,985)
Accrued investment income.................... (318,717) 93,015 185,209
Deferred policy acquisition costs............ 187,511 376,807 1,897,542
Receivables from affiliates.................. (2,088,176) 72,824 (1,670,914)
Federal income tax recoverable............... 7,683 616,500 (896,269)
Unpaid losses and loss adjustment expenses... 81,538 4,890,475 (5,081,809)
Unearned premiums............................ 1,557,331 1,036,937 (708,719)
Payable from affiliates...................... (420,795) 420,294 598,248
Other........................................ 736,849 1,088,853 (826,947)
----------- ----------- -----------
Net cash (used for) provided by operating
activities.............................. (1,417,468) 690,544 (8,514,472)
Cash flows from investing activities:
Proceeds from the sale of investments
Available-for-sale:
Fixed maturities............................. 3,686,400 12,708,800 10,073,582
Equity securities............................ 12,062,174 6,377,810 257,500
Proceeds from the maturity of investments:
Available for sale:
Fixed maturities............................. 18,020,050 16,970,000 18,597,969
Purchase of investments:
Available-for-sale:
Fixed maturities............................. (19,917,188) (33,433,852) (26,347,844)
Equity securities............................ (7,822,881) (4,239,293) (6,377,810)
Net (purchase) sales of short term investments...... (3,955,764) 1,977,528 12,886,245
Sale of real estate................................. 356,726 -- --
Proceeds from sale of equipment..................... 5,670 8,120 26,032
Purchase of equipment............................... (166,508) (955,568) (971,023)
----------- ----------- -----------
Net cash provided by (used for) investing
activities.............................. 2,268,679 (586,455) 8,144,651
Net increase (decrease) in cash and cash
equivalents....................................... 851,211 104,089 (369,821)
Cash and cash equivalents at beginning of year...... 1,056,406 952,317 1,322,138
----------- ----------- -----------
Cash and cash equivalents at end of year............ $ 1,907,617 $ 1,056,406 $ 952,317
=========== =========== ===========
Supplemental disclosure of cash flow information:
Federal income taxes paid......................... -- -- $ 505,837
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-54
<PAGE> 180
SEQUOIA INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The accompanying financial statements present the financial position,
results of operations and cash flows of Sequoia Insurance Company (the Company),
a wholly owned subsidiary of Sydney Reinsurance Corporation (SRC). SRC is
domiciled in the State of Pennsylvania. All outstanding shares of the Company
were owned by QBE North America (QBE (N.A.) Inc.), a company domiciled in the
state of Delaware, until December 28, 1994. The change in ownership of the
Company was due to the restructuring of the United States insurance holdings of
QBE Insurance Group Limited (QBE), an Australian corporation, which owns both
QBE (N.A.) and SRC.
The financial statements have been prepared in conformity with generally
accepted accounting Principles (GAAP). The Company is subject to regulation by
the California Department of Insurance and files financial statements using
statutory accounting practices prescribed or permitted by the Department of
Insurance. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners (NAIC), as
well as state laws, regulations, and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not so
prescribed. The Company has no permitted accounting practices. Statutory
practices vary in certain respects from GAAP. The following includes a
description of the principal differences.
Statutory and GAAP Differences:
a. Policy acquisition costs, principally commissions, are expensed as
incurred, whereas related premiums are earned on a pro rata basis
over the periods covered by the policies for statutory accounting
purposes.
b. Federal income taxes are based on current taxable income. Deferred
income taxes are not provided for statutory accounting purposes.
c. Certain assets designated as "nonadmitted" assets (principally
furniture, equipment, supplies, prepaid items, and premium balances
over 90 days due) are excluded from the statement of admitted
assets, and the change in such assets is credited or charged
directly to unassigned surplus for statutory accounting purposes.
d. Debt securities available for sale are recorded on the balance
sheet at amortized cost. Permanent declines in the value of stock
are not reflected in income for statutory accounting purposes.
e. Cash equivalents included in the reconciliation of cash flows
include securities maturing within one year from the date of
purchase for statutory accounting purposes.
f. Pension costs are accounted for on a cash basis in accordance with
funding requirements.
g. Reinsurance receivables are recorded as a reduction of loss and
loss adjustment expense reserves. The unexpired portion of
reinsurance premium is recorded as a reduction of unearned premium
for statutory accounting purposes.
The Company's net income (loss) and shareholder's equity on the statutory
accounting basis as reported to regulatory authorities are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Statutory net income (loss)............. $ 70,882 $(2,506,903) $ 1,228,535
Shareholder's equity.................... $19,806,044 $20,370,784 $23,969,622
</TABLE>
INVESTMENTS:
Effective December 31, 1992, the Company adopted the provision of Statement
of Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities (SFAS No. 115). The Company classified the entire
portfolio of debt and equity securities as available-for-sale and has reported
the cumulative effect of this accounting change represented by the unrealized
appreciation on available-for-sale securities, net of deferred taxes as an
increase in shareholders' equity.
F-55
<PAGE> 181
SEQUOIA INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Investments in available-for-sale securities are recorded at fair value.
Unrealized holding gains and losses, net of deferred income taxes, are excluded
from earnings and reported as a separate component of shareholders' equity until
realized. Prior to the adoption of SFAS No. 115, fixed maturities were reported
at cost adjusted for the amortization of premium or discount and other than
temporary market value declines.
A decline in the market value of any available-for-sale security below
costs that is deemed other than temporary is charged to earnings and results in
the establishment of a new cost basis for the security.
Investment income includes amortization of premium and accretion of
discount on the constant yield method relating to bonds acquired at other than
par value. Realized investment gains and losses are determined on the basis of
specific identification and are included in net income.
Short term investments, which consist of corporate securities, are stated
at cost which approximates fair value.
Real estate is carried at cost less accumulated depreciation. Real estate
is depreciated over its estimated useful life on a straight-line basis.
Depreciation expense in 1994, 1993, and 1992 was $1,427, $5,709, and $5,709,
respectively.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that fair value:
Fixed Maturities and Equity Securities:
Fair values are based upon quoted market prices, dealer quotes for
comparable securities or fair values adopted by the National Association of
Insurance Commissioners.
Cash and Short-Term Investments:
The carrying amounts of cash and short-term investments are reasonable
estimates of fair value.
Disclosures about fair value are not required for insurance contracts,
other than financial guarantees and investment contracts, as those terms are
defined in FASB Statement No. 60 and FASB Statement No. 97. Certain financial
instruments, such as accrued investment income, reinsurance receivables, accrued
expenses, premiums and agents' balances receivable and receivables from
affiliates possess characteristics similar to trade receivables and payables,
therefore, carrying value approximates fair value.
CASH EQUIVALENTS:
The Company considers highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents.
FIXED ASSETS:
Equipment is carried at cost net of accumulated depreciation. Depreciation
is computed on the straight-line method over the estimated lives of the assets
ranging from four to ten years.
Maintenance, repairs, and minor renewals are charged to expenses as
incurred while renewals and betterments are capitalized.
The cost and related accumulated depreciation of assets sold are removed
from the related accounts, and the resulting gains or losses are reflected in
operations.
DEFERRED POLICY ACQUISITION COSTS (DPAC):
Costs of acquiring new insurance business, net of commissions and premium
taxes, are deferred and amortized over the term of the policy. DPAC is adjusted
for any premium deficiency. Premium deficiency is recognized if the sum of
expected loss and loss adjustments expenses, expected dividends, unamortized
F-56
<PAGE> 182
SEQUOIA INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DPAC, and maintenance expenses exceeds related unearned premiums. The Company
does not consider anticipated investment income in determining a premium
deficiency.
GOODWILL:
The excess of the purchase cost over the fair value of net assets acquired
in an acquisition is classified as goodwill in the accompanying balance sheets
and is being amortized principally over 25 years on a straight-line basis.
Amortization of goodwill amounted to $40,000 for 1994, 1993 and 1992. Goodwill
became impaired in 1994 (Note 4).
RECOGNITION OF PREMIUM REVENUE:
Premiums are generally recognized as revenue on a pro rata basis over the
policy term.
REINSURANCE:
Reinsurance premiums, commissions, expense reimbursements, and reserves
related to reinsured business are accounted for on a basis consistent with those
used in accounting for the original policies issued and the terms of the
reinsurance contracts. Premiums ceded to other companies have been reported as a
reduction of premium income.
During 1992, the Company adopted the provision of SFAS No. 113, Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts,
which requires that amounts due from reinsurers and amounts paid to reinsurers
relating to the unexpired portion of reinsured contracts (prepaid reinsurance
premiums) be disclosed separately as assets. This statement also establishes the
risk transfer criteria necessary for a contract to be accounted for as
reinsurance. These provisions were adopted effective January 1, 1992. There was
no effect on income.
INCOME TAXES:
The Company and QBE (N.A.) file a consolidated federal tax return. Each
company calculates its tax provision or benefit based on its individual results.
The Company makes all tax payments on behalf of QBE (N.A.) and itself.
Accordingly, any amounts owed or receivable from federal taxing authorities are
recorded as payable or receivable by the Company, and a corresponding
intercompany account is recorded with QBE (N.A.).
Effective January 1, 1992, the Company adopted SFAS No. 109, "Accounting
for Income Taxes" (SFAS 109). Under the asset and liability method of SFAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to be recovered or settled. The Company has reported the cumulative
effect of the change in method of accounting for income taxes in the 1992
statement of operations.
INSURANCE LIABILITIES:
The liability for losses and loss-adjustment expenses includes an amount
determined from loss reports and individual cases and an amount, based on past
experience, for losses incurred but not reported. Such liabilities are
necessarily based on estimates and, while management believes that the amount is
adequate, the ultimate liability may be in excess of or less than the amounts
provided. The methods for making such estimates and for establishing the
resulting liability are continually reviewed, and any adjustments are reflected
in current earnings. There is no discounting of reserves.
CONTINGENT COMMISSIONS:
Contingent commissions and other similar charges are management's best
estimate of the liability based on the profit experience of the policies they
have sold.
F-57
<PAGE> 183
SEQUOIA INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. RELATED PARTY TRANSACTIONS:
Pursuant to a technical and management assistance agreement entered into,
as of July 1, 1989, between the Company and QBE, certain expenses incurred by
QBE are reimbursed by the Company. Expenses reimbursed by the Company in
accordance with the aforementioned agreement for the years ended December 31,
1994, 1993, and 1992 were $660,000, $786,000, and $900,000, respectively.
The Company had receivables and payables from Melbourne Reinsurance
Holdings, Inc. (Melbourne Re), QBE (N.A.), and QBE (International) Limited at
December 31, 1994 and 1993, as detailed in the chart below. Melbourne Re and QBE
(International) Limited are subsidiaries of QBE. The Company receives and pays
no interest on these balances. Receivables are guaranteed by QBE Insurance Group
Limited.
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-------------------------
RECEIVABLE PAYABLE
---------- ----------
<S> <C> <C>
Melbourne Re................................................ $2,474,644 $ 357,695
QBE (International) Limited................................. 1,541,708 325,650
---------- ----------
Total............................................. $4,016,352 $ 683,345
========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1993
-------------------------
RECEIVABLE PAYABLE
---------- ----------
<S> <C> <C>
QBE (N.A.).................................................. $1,713,662 $ 761,006
QBE (International) Limited................................. 214,514 343,134
---------- ----------
Total............................................. $1,928,176 $1,104,140
========== ==========
</TABLE>
3. INVESTMENTS:
The amortized cost and fair value of fixed maturity investments at December
31, 1994 and 1993 are shown as follows:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNEALIZED FAIR
1994 COST GAIN LOSS VALUE
- ------------------------------------------- ----------- ------- --------- -----------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities................. $19,917,205 $13,604 $(230,809) $19,700,000
Obligations of states and political
subdivisions.......................... 239,997 3 -- 240,000
Debt securities issued by foreign
government............................ 2,340,301 -- -- 2,340,301
Corporate securities..................... 40,473,585 -- (596,729) 39,876,856
----------- ------- --------- -----------
$62,971,088 $13,607 $(827,538) $62,157,157
=========== ======= ========= ===========
</TABLE>
<TABLE>
<CAPTION>
1993
- ------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
Obligations of states and political
subdivisions......................... $ 1,258,211 $ 16,119 -- $ 1,274,330
Debt securities issued by foreign
government........................... 2,379,716 -- -- 2,379,716
Corporate securities.................... 61,972,254 560,976 (158,955) 62,374,275
----------- -------- --------- -----------
$65,610,181 $577,095 $(158,955) $66,028,321
=========== ======== ========= ===========
</TABLE>
There were no unrealized gains and losses on equity securities.
F-58
<PAGE> 184
SEQUOIA INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and fair value of fixed maturities at December 31, 1994,
by contractual maturity, are shown as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------- -----------
<S> <C> <C>
Due in one year or less......................... $ 9,486,211 $ 9,471,266
Due in one year through five years.............. 53,484,877 52,685,891
----------- -----------
$62,971,088 $62,157,157
=========== ===========
</TABLE>
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
Investment income is summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Investment income from:
Available-for-sale:
Fixed maturities.............................. $4,028,359 $4,536,579 $4,606,197
Equity securities............................. 90,165 -- 4,600
Short term investments and other................... 486,440 323,254 865,565
---------- ---------- ----------
Total investment income....................... 4,604,964 4,859,833 5,476,362
Investment expenses................................ (739,917) (869,881) (979,945)
---------- ---------- ----------
Net investment income......................... $3,865,047 $3,989,952 $4,469,417
========== ========== ==========
</TABLE>
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of municipal securities,
corporate debt securities and short-term investments. As the portfolio is well
diversified and issuers of securities are dispersed throughout many industries
and geographies, the concentrations of credit risk are limited.
At December 31, 1994, the following available for sale securities exceeded
ten percent of shareholder's equity of the Company:
<TABLE>
<CAPTION>
FAIR
VALUE
-----------
<S> <C>
Fixed maturities:
BAT Capital Corporation....................................... $ 4,000,000
Kingdom of Spain.............................................. 2,340,301
Boral Industries Inc.......................................... 5,000,000
Chrysler Financial............................................ 3,043,047
General Motors Acceptance Corp................................ 2,989,841
International Lease Finance................................... 4,087,965
Shell Oil Company............................................. 2,500,000
BHP Finance (USA) Ltd......................................... 3,880,000
National Australia Bank Ltd................................... 3,090,000
Pacific Dunlap Ltd............................................ 2,095,868
Qantas Airway Ltd............................................. 4,022,548
-----------
$37,049,570
===========
</TABLE>
F-59
<PAGE> 185
SEQUOIA INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Pre-tax net realized gains (losses) on investments were as follows for each
of the years ended December 31:
<TABLE>
<CAPTION>
1994 1993 1992
--------- -------- --------
<S> <C> <C> <C>
Gross realized gains:
Available-for-sale:
Fixed maturities................................. $ 100 $573,901 $358,977
Equity securities................................ -- -- 7,661
Real estate...................................... 54,998 -- --
--------- -------- --------
Total gains................................. 55,098 573,901 366,638
--------- -------- --------
Gross realized losses:
Available-for-sale:
Fixed maturities................................. (307,223) (3,109) --
Equity securities................................ -- -- --
--------- -------- --------
Total losses................................ (307,223) (3,109) --
--------- -------- --------
Net realized gains (losses)........................... $(252,125) $570,792 $366,638
========= ======== ========
</TABLE>
Changes in unrealized gains (losses) on fixed maturities and equity
securities were:
<TABLE>
<CAPTION>
1994 1993 1992
----------- --------- --------
<S> <C> <C> <C>
Available-for-sale:
Fixed maturities.................................. $(1,232,071) $(500,652) --
Equity securities................................. -- -- --
Cumulative effect of accounting change............ 918,792
----------- --------- --------
$(1,232,071) $(500,652) $918,792
=========== ========= ========
</TABLE>
Proceeds from sales of investments in fixed maturities during 1994, 1993
and 1992, were $21,706,450, $29,678,800, and $28,617,551, respectively. Proceeds
from sales of investments in equity securities during 1994, 1993 and 1992 were
$12,062,174, $6,377,810, and $257,500, respectively.
Certificates of deposit carried at a total cost of $35,000 are on deposit
with state insurance authorities for both December 31, 1994 and 1993.
4. WRITE OFF OF GOODWILL:
After poor results in 1993 the Company put in place a plan to grow the more
profitable commercial lines of business, and continue reducing the less
profitable personal lines of business. Significant expense savings were planned
from office relocations and conversion to the Parent Company's in-house computer
system.
Despite improving results in 1994 QBE concluded that the Company would not
produce an acceptable rate of return. After negotiations with potential buyers
of the Company, management concluded that the fair value of goodwill would not
be recovered upon a sale. Accordingly the remaining goodwill of $680,000, net of
accumulated amortization of $320,000, was written off in 1994. An impairment was
not recorded against goodwill in periods prior to fiscal year 1994, as
management believed that the realizability of goodwill was reasonably possible.
5. REINSURANCE ACTIVITY:
Reinsurance assumed consists of only those risks required by law from the
involuntary market. These are commercial automobile property and liability risks
from the assigned risk plan.
The Company limits the maximum net loss that can arise from large risks or
risks in concentrated areas of exposure by reinsuring (ceding) certain levels of
risks with other insurers or reinsurers, either on an automatic basis under
general reinsurance contracts known as "treaties" or by negotiation on
substantial
F-60
<PAGE> 186
SEQUOIA INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
individual risks. Ceded insurance is treated as the risk and liability of the
assuming companies. In the event that all or any of the reinsuring companies
might be unable to meet their obligations under existing reinsurance agreements,
the Company would be liable for such defaulted amounts.
As described in Note 1, the Company adopted SFAS No. 113 in 1992.
Accordingly, all reinsurance assets and liabilities are shown on a gross basis
in the accompanying Financial Statements. Amounts recoverable from reinsurers
are estimated in a manner consistent with the claim liability associated with
the reinsured policy. Such amounts are included in "reinsurance receivables" in
the Balance Sheet as follows:
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Estimated reinsurance recoverable on:
Unpaid losses........................................... $4,386,923 $5,415,618
Unpaid loss adjustment expense.......................... 1,472,633 1,875,174
---------- ----------
Total reinsurance reserves........................... 5,859,556 7,290,792
Recoverable on paid losses................................ 1,689,774 2,053,865
---------- ----------
Reinsurance receivables.............................. $7,549,330 $9,344,657
========== ==========
</TABLE>
In addition, amounts paid to reinsurers relating to the unexpired portion
of reinsurance contracts (unearned ceded premiums) and prepaid reinsurance
premiums are included in the balance sheet as "prepaid reinsurance premiums" of
$2,641,074 and $2,637,310 for December 31, 1994 and 1993, respectively.
The following is a summary of the effect of reinsurance activity on the
financial statements for 1994, 1993, and 1992:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Direct premiums written......................... $48,009,669 $46,413,058 $46,896,866
Reinsurance premiums assumed.................... 222,943 1,042,968 519,470
Reinsurance premiums ceded...................... (4,320,052) (4,956,059) (3,750,091)
----------- ----------- -----------
Net premiums written.......................... 43,912,560 42,499,967 43,666,245
----------- ----------- -----------
Direct premiums earned.......................... 46,419,749 45,294,840 48,991,384
Reinsurance premiums assumed.................... 255,251 1,124,248 581,147
Reinsurance premiums ceded...................... (4,316,008) (3,849,832) (3,812,421)
----------- ----------- -----------
Net premiums earned........................... 42,358,992 42,569,256 45,760,110
----------- ----------- -----------
Losses and loss adjustment expenses incurred:
Direct........................................ 34,668,768 40,854,363 39,253,281
Assumed....................................... 375,704 455,599 473,473
Ceded......................................... (3,430,669) (4,625,443) (6,023,773)
----------- ----------- -----------
Net losses and loss adjustment expenses.... $31,613,803 $36,684,519 $33,702,981
=========== =========== ===========
</TABLE>
Reinsurance receivables and prepaid reinsurance premiums of $10,190,404 and
$11,981,967 at December 31, 1994 and 1993, respectively, represent amounts due
primarily from one authorized reinsurer amounting to $7,284,000 and $9,630,000
at December 31, 1994 and 1993, respectively.
6. INCOME TAXES:
As discussed in the Summary of Significant Accounting Policies section, the
Company adopted SFAS 109 as of January 1, 1992. The cumulative effect of this
change in accounting for income taxes of $1,248,920 was determined as of January
1, 1992, and is reported in the statement of operations for the year ended
December 31, 1992.
F-61
<PAGE> 187
SEQUOIA INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Deferred tax assets:
Loss reserve discounting.............................. $ 908,940 $ 946,361
Unearned premium reserve.............................. 1,443,576 1,337,933
Net operating loss.................................... 619,632 722,249
Tax credits........................................... 32,234 24,551
Net unrealized depreciation of securities............. 276,739 --
Other items -- net.................................... 1,074,074 876,823
----------- -----------
Total deferred tax assets.......................... 4,355,195 3,907,917
----------- -----------
Deferred tax liabilities:
Deferred policy acquisition costs..................... 508,550 572,304
Market discount....................................... 286,122 277,483
Net unrealized appreciation of securities............. -- 142,168
Other items -- net.................................... (1,353) 3,533
----------- -----------
Total deferred tax liabilities..................... 793,319 995,488
----------- -----------
Net deferred tax asset before valuation allowance....... 3,561,876 2,912,429
Less: valuation allowance............................... (3,561,876) (2,912,429)
----------- -----------
Net deferred tax asset.................................. $ -- $ --
=========== ===========
</TABLE>
The Company established a net deferred tax asset at January 1, 1992 based
on a history of cumulative earnings. The Company established a valuation
allowance against deferred tax assets at December 31, 1993 due to cumulative
losses that caused management to conclude that it is more likely than not that
none of the Company's deferred tax assets will be realized. The beginning of the
year amount included in the valuation adjustment made in 1993 was $312,389 of
deferred income taxes on net unrealized investment gain and $1,724,319
previously recognized in income.
The provision (benefit) for federal income taxes consists of the following:
<TABLE>
<CAPTION>
1994 1993 1992
------ ---------- ---------
<S> <C> <C> <C>
Current........................................ $7,683 $ (321,881) $ 346,432
Deferred....................................... -- 1,724,318 (475,399)
------ ----------- ---------
$7,683 $1,402,437 $(128,967)
====== =========== =========
</TABLE>
Income tax expense attributable to income from continuing operations for
the years ended December 31, 1994, 1993, and 1992, differed from the amounts
computed by applying the U.S. federal tax rate of 34% to pretax income from
continuing operations as a result of the following:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- ---------
<S> <C> <C> <C>
GAAP income before income tax............ $(1,366,299) $(5,486,197) $(275,256)
=========== =========== =========
Expected tax at tax rate of 34%.......... (464,542) (1,865,307) (93,587)
Valuation Allowance.................... 230,540 3,054,597 --
Tax exempt interest.................... (14,444) (58,559) (49,737)
Dividends received deduction........... -- -- (2,237)
Travel and entertainment............... 11,329 3,106 2,994
Goodwill............................... 244,800 13,600 13,600
Other items -- net..................... -- 255,000 --
----------- ----------- ---------
Total tax benefit................... $ 7,683 $ 1,402,437 $(128,967)
=========== =========== =========
</TABLE>
F-62
<PAGE> 188
SEQUOIA INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1994, the Company had net operating loss carryforwards
totaling $1,822,448 for regular tax purposes, and $1,488,280 for alternative
minimum tax purposes that expire in the year 2008. At December 31, 1994,
alternative minimum tax credit carryforwards of $32,234 are available
indefinitely to offset future regular federal income taxes. These carryforward
amounts will not be realized due to the change in control at July 31, 1995 (Note
15.)
7. PROPERTY AND EQUIPMENT:
The major classifications of property and equipment at December 31 are as
follows:
<TABLE>
<CAPTION>
1994 1993
----------- ----------
<S> <C> <C>
EDP Equipment............................................ $ 1,539,712 $1,462,379
Computer software........................................ 893,998 852,768
Office furniture, fixtures, and equipment................ 473,012 412,001
Automobiles.............................................. 193,535 167,770
Leasehold improvements................................... 67,402 67,402
Accumulated depreciation................................. (1,576,204) (941,765)
---------- ----------
Net book value......................................... $ 1,591,455 $2,020,555
========== ==========
</TABLE>
Depreciation expense was $592,786, $553,613, and $317,488 in 1994, 1993,
and 1992, respectively.
8. DEFERRED POLICY ACQUISITION COSTS:
Changes in deferred policy acquisition costs are as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- ------------
<S> <C> <C> <C>
Balance, January 1............................. $ 1,683,247 $ 2,060,053 $ 3,957,595
Additions.................................... 7,891,271 8,088,926 8,121,640
Less policy acquisition costs................ (8,078,783) (8,465,732) (10,019,182)
----------- ----------- ------------
Balance, December 31........................... $ 1,495,735 $ 1,683,247 $ 2,060,053
=========== =========== ============
</TABLE>
Policy acquisition costs include adjustments for premium deficiencies of
$2,783,706, $2,296,480, and $1,864,904 for the years ended December 31, 1994,
1993 and 1992, respectively.
9. DIVIDENDS TO PARENT:
California law limits the payment of dividends by the Company. The maximum
dividend that may be paid without prior approval by the Commissioner of
Insurance is limited to the lessor of 10% of statutory surplus as of December
31, or net investment income earned for the year.
At December 31, 1994, the maximum dividend that is allowable for payment in
1995 without regulatory approval is approximately $1,980,604.
F-63
<PAGE> 189
SEQUOIA INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. LEASE COMMITMENTS:
The head office and branch office properties are leased. Rental expense for
the years ended December 31, 1994, 1993, and 1992 was $501,652, $673,693, and
$699,421, respectively.
The following is a schedule by years of future rental payments required
under these leases as of December 31, 1994.
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31
-----------------------------------------------------------------
<S> <C>
1995............................................................. $ 520,086
1996............................................................. 456,666
1997............................................................. 387,690
1998............................................................. 397,136
1999............................................................. 425,472
Thereafter....................................................... 1,542,765
----------
Total payments required.......................................... $3,729,815
==========
</TABLE>
Until March 31, 1993, the Company leased computer time for processing
business. These costs were $239,715 and $1,104,161 for the years ended December
31, 1993 and 1992, respectively.
11. BENEFIT PLANS:
The Company has a defined benefit pension plan covering substantially all
of its employees. The benefits are based on years of service and the employee's
compensation during employment. The Company has frozen plan participation and
the accumulation of benefits for its defined benefit pension plan as of December
31, 1991. The Company's funding policy is to contribute annually the maximum
amount that can be deducted for federal income tax purposes.
The pension plan is funded under the projected unit credit actuarial cost
method. Pension expense for 1994, 1993 and 1992 was $71,586, $17,322 and
$143,357, respectively. The Company's policy is to recognize pension expense in
the year it becomes deductible for income tax purposes.
A comparison of accumulated plan benefits and net plan assets is presented
as follows:
Actuarial present value of accumulated plan benefits as of the latest
actuarial valuation date:
<TABLE>
<CAPTION>
DEFINED BENEFIT DEFINED BENEFIT
PENSION PLAN PENSION PLAN
JANUARY 1, JANUARY 1,
1994 1993
--------------- ---------------
<S> <C> <C>
Vested................................................. $ 1,508,913 $ 1,490,838
========== ==========
Net assets available for benefits, at current value.... $ 1,209,502 $ 1,247,992
========== ==========
</TABLE>
The weighted average assumed rate of return used in determining the
actuarial present value of accumulated plan benefits is 8%.
In accordance with the provisions of SFAS No. 87, the Company recorded an
additional minimum liability at the end of each year representing the excess of
the accumulated benefit obligations over the fair value of plan assets and
accrued pension liabilities. The additional balance of the liability at the end
of the period is reported as a separate reduction of shareholder's equity.
The Company sponsors a 401(k) plan which is available to all of its
employees. Prior to October' 1, 1992 employees could contribute up to 5% of
salary to the plan and the company contributed 10% of the employee contribution.
Entitlement to company contributions was subject to a seven-year vesting
schedule.
F-64
<PAGE> 190
SEQUOIA INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of October 1, 1992, the plan was renamed the "Sequoia Insurance Company
401(k) Retirement Savings Plan" and was enhanced as follows:
i) Employee Contributions -- before-tax up to 15% of salary and after-tax
up to 5% of salary. Total contributions are restricted by regulation.
ii) Company Contributions -- 50% of employee before tax contributions up
to a maximum of 3% of salary. In addition, an annual retirement
contribution can be made at the company's discretion and allocated to
employees on a weighted formula based on age and salary.
iii) Vesting -- entitlement to all company contributions is subject to a
three-year vesting schedule based on years of service.
Company contributions to the plan amounted to $97,716, $93,255, and
$33,239, respectively, in the years ended December 31, 1994, 1993 and 1992.
12. CONTINGENCIES:
In the settlement of claims on a structured basis, the Company has
purchased individual annuities from Safeco Insurance Company, which is not an
affiliate company, where the claimant is payee and the Company is contingently
liable. The contingent liability associated with these structured settlements
for which no provision has been made in the financial statements amounted to
$898,498 as of December 31, 1993.
As of December 31, 1994, the Company is not contingently liable for any
structured settlements.
Lawsuits do arise against the Company in its normal course of business. No
contingent liabilities arising from litigation, income taxes or other matters
are, at this time, considered to be material.
13. PROPOSITION 103 REFUND:
The Company has recorded an accrued policyholder dividend in the 1993
financial statements of $900,000. This amount represents the agreed-upon
Proposition 103 refund between the Company and the California Department of
Insurance. The Stipulation and Consent Order was filed with the State of
California on February 8, 1994 and was adopted by the Department of Insurance on
February 15, 1994.
The Company has included in other liabilities dividends payable amounting
to $34,526 and $900,000 at December 31, 1994 and 1993, respectively.
F-65
<PAGE> 191
SEQUOIA INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
14. LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES:
Activity in the liability for unpaid claims and claim adjustment expenses
is summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Balance at January 1............................ $53,919,982 $49,029,507 $54,111,316
Less reinsurance recoverables................... 7,290,792 5,984,519 4,560,259
----------- ----------- -----------
Net balance at January.......................... 46,629,190 43,044,988 49,551,057
Incurred related to:
Current year.................................. 32,085,000 31,767,000 33,833,000
Prior years................................... (471,197) 4,917,519 (130,019)
----------- ----------- -----------
Total incurred............................. 31,613,803 36,684,519 33,702,981
Paid related to:
Current year.................................. 11,383,000 13,721,000 14,116,000
Prior years................................... 18,718,029 19,379,317 26,093,050
----------- ----------- -----------
Total paid................................. 30,101,029 33,100,317 40,209,050
Net balance at December 31...................... 48,141,964 46,629,190 43,044,988
Plus reinsurance recoverables................... 5,859,556 7,290,792 5,984,519
----------- ----------- -----------
$54,001,520 $53,919,982 $49,029,507
=========== =========== ===========
</TABLE>
15. SUBSEQUENT EVENT:
On August 1, 1995, the Company's parent, SRC, sold all of the Company's
stock to Physicians Insurance Company of Ohio.
F-66
<PAGE> 192
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
BETWEEN
CITATION INSURANCE GROUP,
CITATION HOLDINGS, INC.
AND
PHYSICIANS INSURANCE COMPANY OF OHIO
DATED AS OF MAY 1, 1996
A-1
<PAGE> 193
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
EXHIBITS AND SCHEDULES............................................................... A-5
EXHIBITS........................................................................... A-5
INDEX OF DEFINITIONS................................................................. A-6
AGREEMENT AND PLAN OF REORGANIZATION................................................. A-8
RECITALS............................................................................. A-8
AGREEMENT............................................................................ A-8
ARTICLE I -- THE MERGER.............................................................. A-8
1.1. Merger....................................................................... A-8
1.2. Effective Time of Merger..................................................... A-8
1.3. Articles of Incorporation and Bylaws......................................... A-8
1.4. Directors and Officers....................................................... A-8
1.5. Stock Consideration.......................................................... A-9
1.6. Assumption of Unexercised Stock Options...................................... A-11
1.7. Closing...................................................................... A-11
1.8. Supplementary Action......................................................... A-11
1.9. Tax Consequences of the Merger............................................... A-11
ARTICLE II -- REPRESENTATIONS AND WARRANTIES OF PICO................................. A-11
2.1. Organization of PICO......................................................... A-11
2.2. Authorization of Agreements.................................................. A-11
2.3. No Conflicts; Consents and Approvals......................................... A-12
2.4. Capitalization............................................................... A-12
2.5. Subsidiaries and Affiliates of PICO; Minute Books of PICO and Subsidiaries... A-12
2.6. Financial Statements and Reports............................................. A-13
2.7. Absence of Certain Changes................................................... A-13
2.8. Undisclosed Liabilities...................................................... A-14
2.9. Licenses and Permits......................................................... A-14
2.10. Regulatory Filings........................................................... A-14
2.11. Compliance with Applicable Laws.............................................. A-14
2.12. Litigation................................................................... A-14
2.13. Real Property................................................................ A-15
2.14. Insurance Issued by PICO Subsidiaries: Reserves: Reinsurance Treaties........ A-15
2.15. Tax Representations.......................................................... A-16
2.16. Additional Tax Representations............................................... A-17
2.17. Material Contracts........................................................... A-19
2.18. Employees.................................................................... A-19
2.19. Employee Plans; ERISA........................................................ A-20
2.20. Brokers and Finders.......................................................... A-20
2.21. No Investment Company........................................................ A-20
2.22. Accuracy of Information Supplied............................................. A-20
2.23. Effective Time of Representations, Warranties, Covenants and Agreements...... A-20
ARTICLE III -- REPRESENTATIONS AND WARRANTIES OF CITATION............................ A-21
3.1. Organization................................................................. A-21
3.2. Authorization of Agreements.................................................. A-21
3.3. No Conflicts; Consents and Approvals......................................... A-21
3.4. Capitalization............................................................... A-21
</TABLE>
A-2
<PAGE> 194
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
3.5. Subsidiaries and Affiliates of Citation; Minute Books of Citation and
Citation Subsidiaries........................................................... A-22
3.6. Financial Statements and SEC Reports......................................... A-22
3.7. Absence of Certain Changes................................................... A-23
3.8. Undisclosed Liabilities...................................................... A-23
3.9. Licenses and Permits......................................................... A-23
3.10. Regulatory Filings........................................................... A-23
3.11. Compliance with Applicable Laws.............................................. A-24
3.12. Litigation................................................................... A-24
3.13. Real Property................................................................ A-24
3.14. Insurance Issued by Citation Subsidiaries: Reserves; Reinsurance Treaties.... A-24
3.15. Tax Representations.......................................................... A-25
3.16. Additional Tax Representations............................................... A-26
3.17. Material Contracts........................................................... A-27
3.18. Employees.................................................................... A-28
3.19. Employee Plans; ERISA........................................................ A-28
3.20. Brokers and Finders.......................................................... A-29
3.21. Shareholder Rights Plan...................................................... A-29
3.22. Stock Consideration.......................................................... A-29
3.23. No Investment Company........................................................ A-29
3.24. Accuracy of Information Supplied............................................. A-29
3.25. Effective Time of Representations, Warranties, Covenants and Agreements...... A-30
ARTICLE IV -- ADDITIONAL AGREEMENTS.................................................. A-30
4.1. Access to Information........................................................ A-30
4.2. Confidentiality.............................................................. A-30
4.3. Public Announcements......................................................... A-31
4.4. Notification of Certain Events............................................... A-31
4.5. Conduct of Business in Ordinary Course....................................... A-31
4.6. Requisite Regulatory Approvals............................................... A-33
4.7. Shareholder Approval......................................................... A-35
4.8. Nasdaq Listing............................................................... A-35
4.9. Taking of Necessary Action................................................... A-35
4.10. Certain Agreements with Respect to Directors................................. A-35
4.11. Expenses..................................................................... A-35
4.12. Non-Solicitation and Cooperation............................................. A-36
4.13. Registration of Citation Stock............................................... A-37
4.14. Prohibition on Certain Sales................................................. A-37
4.15. Withdrawal of PICO Registration Statement.................................... A-37
4.16. Best Efforts Concerning Tax-Free Reorganization.............................. A-37
ARTICLE V -- CONDITIONS.............................................................. A-37
5.1. Conditions to Citation's and PICO's Obligations.............................. A-37
5.2. Conditions to Citation's Obligations......................................... A-38
5.3. Conditions to PICO's Obligations............................................. A-40
ARTICLE VI -- TERMINATION, AMENDMENTS AND WAIVERS
6.1. Termination.................................................................. A-41
6.2. Effect of Termination: Survival.............................................. A-42
</TABLE>
A-3
<PAGE> 195
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
6.3. Amendment.................................................................... A-42
6.4. Waiver....................................................................... A-42
ARTICLE VII -- SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS, LIMITATION OF
LIABILITY.......................................................................... A-42
7.1. No Survival.................................................................. A-42
7.2. Limitation of Liability...................................................... A-42
ARTICLE VIII -- GENERAL PROVISIONS................................................... A-42
8.1. Notices...................................................................... A-42
8.2. Severability................................................................. A-43
8.3. Successors and Assigns: Assignment........................................... A-43
8.4. Attorneys' Fees.............................................................. A-43
8.5. Governing Law................................................................ A-44
8.6. Headings: Pronouns........................................................... A-44
8.7. Counterpart Execution........................................................ A-44
8.8. Further Assurances........................................................... A-44
8.9. Remedies Cumulative.......................................................... A-44
8.10. Presumptions................................................................. A-44
8.11. Exhibits and Schedules....................................................... A-44
8.12. No Third Party Beneficiaries................................................. A-44
8.13. Time of Essence.............................................................. A-44
8.14. Definition of Best Knowledge................................................. A-44
8.15. Complete Agreement, Conflicts and Amendments................................. A-44
</TABLE>
A-4
<PAGE> 196
EXHIBITS AND SCHEDULES
<TABLE>
<S> <C>
EXHIBITS
Exhibit A Agreement of Merger and Certificate of Merger
Exhibit B-1 Legal Opinion of Gray Cary Ware & Freidenrich
Exhibit B-2 Legal Opinion of James Mosier
Exhibit B-3 Legal Opinion of Varys, Sater, Seymour and Pease
Exhibit C-1 Shareholder Letter (Guinness Peat Group plc)
Exhibit C-2 Shareholder Letter (Other 5% PICO Shareholders)
Exhibit D Legal Opinion of Gibson, Dunn & Crutcher
Exhibit E Amended and Restated Articles of Incorporation of
Citation Insurance Group
Exhibit F Amended and Restated Bylaws of Citation Insurance Group
SCHEDULES
Schedule 1.5(a) Examples re: Computation of Exchange Ratio/Number of Citation
Shares and Options
Schedule 2 PICO Disclosure Schedule
Schedule 2A Notice of Stipulation and Consent Order
Schedule 3 Citation Disclosure Schedule
</TABLE>
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INDEX OF DEFINITIONS
<TABLE>
<CAPTION>
TERM SECTION REFERENCE
- -------------------------------------------------------------------------- -----------------
<S> <C>
"Blue Sky Filings"........................................................ 4.6(b)
"Business Day"............................................................ 1.7
"Citation"................................................................ first paragraph
"Citation Acquisition Proposals".......................................... 4.12(a)
"Citation's Best Knowledge"............................................... 8.14(a)
"Citation"................................................................ Recitals
"Citation Directors"...................................................... 4.10(a)
"Citation Certificate".................................................... 1.5(e)(i)
"Citation Disclosure Schedule"............................................ Article III
"Citation Employee Plans"................................................. 3.19
"Citation Financial Statements"........................................... 3.6
"Citation Material Contracts"............................................. 3.17
"Citation Options"........................................................ 3.4(a)
"Citation Real Property Lease"............................................ 3.13
"Citation Reserves"....................................................... 3.14(d)
"Citation Stock".......................................................... Recitals
"Citation's SEC Reports" 3.6
"Citation Subsidiaries" 3.5(a)
"Citation Taxpayer"....................................................... 3.15(a)
"Closing"................................................................. 1.7
"Closing Date"............................................................ 1.7
"Code".................................................................... Recitals
"Confidentiality Agreement"............................................... 4.2
"Damages -................................................................ 7.2(a)
"Determination Date"...................................................... 1.5(a)
"Dissenting Shares"....................................................... 1.5(g)
"Effective Time".......................................................... 1.2
"ERISA"................................................................... 2.19
"Exchange Act"............................................................ 2.22(b)(i)
"Exchange Agent".......................................................... 1.5(e)(i)
"Exchange Ratio".......................................................... 1.5(b)
"GAAP".................................................................... 2.6
"GPG Agreement"........................................................... 5.2
"Hart-Scott Act".......................................................... 4.6(c)
"Hart-Scott Report"....................................................... 4.6(c)
"Insurance and Other Approvals"........................................... 4.6(d)
"IRS"..................................................................... 2.15(e)
"Material Adverse PICO Effect"............................................ 2.1
"Material Adverse Citation Effect"........................................ 3.1
"Merger".................................................................. Recitals
"Merger Agreement"........................................................ Recitals
"Newco"................................................................... first paragraph
"Nasdaq".................................................................. 1.5(a)
"OGCL".................................................................... Recitals
"Other Agreements"........................................................ 2.2
"parent".................................................................. 2.5(a)
</TABLE>
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<TABLE>
<CAPTION>
TERM SECTION REFERENCE
- -------------------------------------------------------------------------- -----------------
<S> <C>
"PICO".................................................................... First paragraph
"PICO's Best Knowledge" 8.14(b)
"PICO Class A"............................................................ 2.4(a)
"PICO Certificates"....................................................... 1.5(e)
"PICO Directors".......................................................... 4.10(a)
"PICO Disclosure Schedule"................................................ Article 2
"PICO Employee Plans"..................................................... 2.19
"PICO Financial Statements"............................................... 2.6
"PICO Insurance Subsidiaries"............................................. 2.5(a)
"PICO Material Contracts"................................................. 2.17
"PICO Options"............................................................ 2.4(a)
"PICO Real Property"...................................................... 2.13
"PICO Real Property Leases"............................................... 2.13
"PICO Reserves"........................................................... 2.14(d)
"PICO Share Value"........................................................ 1.5(a)
"PICO Stock".............................................................. 1.5
"PICO Subsidiaries"....................................................... 2.5(a)
"PICO Taxpayers........................................................... 2.15(a)
"Pre-Merger Expenses"..................................................... 4.11
"Pre-Merger Notification Agencies"........................................ 4.6(c)
"Prospectus/Proxy Statement".............................................. 2.22(b)
"Registration Statement" 2.3(b)
"Requisite Regulatory Approvals".......................................... 4.6(e)
"Required Approvals"...................................................... 1.7
"Rights Plan"............................................................. 3.21
"SEC"..................................................................... 2.3(b)
"Securities Act".......................................................... 2.22(b)(i)
"Shareholders"............................................................ Recitals
"Special Meetings"........................................................ 4.7
"Statutory Statements" 2.6(c)
"Stock Consideration"..................................................... 1.5(a)
"Subsidiary".............................................................. 2.5(a)
"Taxes"................................................................... 2.15(k)
"Tax Returns"............................................................. 2.15(a)
"TOC"..................................................................... 2.9
</TABLE>
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AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION is made and entered into as of
May 1, 1996, by and among Citation Insurance Group, a California corporation
("Citation"), Citation Holdings, Inc., an Ohio corporation ("Newco"), and
Physicians Insurance Company of Ohio, an Ohio corporation ("PICO").
RECITALS
A. The Boards of Directors of Citation, Newco and PICO deem it advisable,
for the mutual benefit of Citation, Newco, PICO and their respective
shareholders, that Newco, a wholly-owned subsidiary of Citation, be merged with
and into PICO (the "Merger") as soon as possible after the execution of this
Agreement, in accordance with the terms of the General Corporation Law of Ohio
(the "OGCL") and the terms and conditions of this Agreement and an Agreement of
Merger to be entered into between Citation, Newco and PICO in substantially the
form of Exhibit A to this Agreement (but subject to any changes which may be
necessary to conform to any requirements of any federal or state governmental
agency, authority or body the approval of which is legally required for
consummation of the Merger) (the "Merger Agreement"). Such Boards of Directors
have approved this Agreement, the Merger Agreement and the other agreements,
instruments and documents contemplated to be executed by the parties hereunder,
and have resolved to recommend to their respective shareholders approval of the
principal terms of the Merger.
B. The shareholders of PICO (the "Shareholders") shall receive as
consideration in the Merger shares of Common Stock of Citation ("Citation
Stock"). The parties recognize that as a result of the transactions contemplated
by this Agreement, the Shareholders will acquire a majority of the Citation
Stock. The options of PICO outstanding at the Closing (as defined herein) will
be assumed by Citation and converted into options to purchase shares of Citation
Stock.
C. The Merger is intended to qualify as a tax free reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code") and
will be accounted for as a purchase.
AGREEMENT
In consideration of the foregoing premises and of the respective
representations, warranties and covenants contained herein, the parties hereby
agree as follows:
ARTICLE I
THE MERGER
1.1 Merger. Subject to the terms and conditions of this Agreement and in
accordance with the OGCL, Newco shall be merged with and into PICO at the
Effective Time (as defined in Section 1.2), and the separate corporate existence
of Newco shall cease and PICO shall be the surviving corporation continuing its
corporate existence under the laws of the State of Ohio. The Merger shall have
the legal effect provided in the OGCL and in the Merger Agreement.
1.2 Effective Time of Merger. The Merger shall become effective at the
time of filing (the "Effective Time") of the Certificate of Merger pursuant to
the OGCL. Subject to the terms and conditions of this Agreement, Newco and PICO
shall duly execute the Merger Agreement and shall duly execute and file the
Certificate of Merger with the applicable state authorities at the Closing (as
defined in Section 1.7).
1.3 Articles of Incorporation and Bylaws. The Articles of Incorporation
and Bylaws attached to the Certificate of Merger and the Merger Agreement shall
be the Articles of Incorporation and Bylaws of PICO following the Effective
Time.
1.4 Directors and Officers. The directors and executive officers of PICO
after the Effective Time shall be as set forth in the Merger Agreement.
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1.5 Stock Consideration. At the Effective Time, by virtue of the Merger
and without any action on the part of any of the holders of shares of Class A
Stock of PICO who together hold all of the issued and outstanding shares of
capital stock of PICO (collectively, "PICO Stock"), the issued and outstanding
shares of PICO Stock (except for Dissenting Shares, as defined in Section 1.5(e)
below) shall be converted into shares of Citation Stock (the "Stock
Consideration") as follows:
(a) PICO Share Value.
(i) "PICO Share Value" shall mean the average of the closing prices
of one share of PICO Stock on the National Association of Securities
Dealers Automated Quotation System ("Nasdaq") for the twenty (20)
consecutive trading days prior to (and not including) the date of the
receipt by the parties of notice of the last to occur of (i) the
declaration by the SEC that the Registration Statement is effective,
(ii) the approval of the Ohio insurance regulatory authorities, (iii)
the approval of the California insurance regulatory authorities, (iv)
approval of the transactions contemplated by this Agreement by the
shareholders of Citation, (v) approval of the transactions contemplated
by this Agreement by the Shareholders of PICO; provided that if
Shareholders holding less than 95% of the PICO Stock have approved the
transaction, 10 days after the PICO Shareholder meeting, and (vi)
notification of the termination of any notice or waiting period with
respect to the Hart-Scott Report (the "Determination Date"), subject to
the limitations and conditions set forth in Section 1.5(a)(ii) and
(a)(iii) below.
(ii) If the average value determined in accordance with Section
1.5(a)(i) is less than or equal to $25.20 per share, the PICO Share
Value shall be equal to $25.20, or such lesser amount, if any, to which
PICO, in its sole discretion, may agree.
(iii) If the average value determined in accordance with Section
1.5(a)(i) is greater than or equal to $30.80 per share, the PICO Share
Value shall be equal to $30.80.
(iv) Schedule 1.5(a) hereto sets forth examples of different PICO
Share Values based on different potential average closing prices for the
shares of PICO Stock at the relevant dates.
(b) Exchange Ratio. The "Exchange Ratio" shall be the PICO Share
Value divided by $5.03 per share of Citation Stock.
(c) Conversion. At the Effective Time, each share of PICO Stock shall
be converted into a number of shares of Citation Stock equal to the
Exchange Ratio, subject to the provisions of Section 1.5(f) below.
(d) Adjustment. The amount of the Stock Consideration shall be
appropriately adjusted to reflect any recapitalization, reclassification,
split-up, merger, consolidation, exchange, issue of additional shares,
grant of new PICO Options or Citation Options, or stock or other dividend
or distribution made, declared or effective with respect to the PICO Stock
or Citation Stock between the date of this Agreement and the Effective
Time.
(e) Procedures. Certificates for shares of PICO Stock ("PICO
Certificates") shall be surrendered and the Stock Consideration shall be
paid in accordance with the following exchange procedures:
(i) After the Effective Time, upon surrender to the Registrar &
Transfer Company (the "Exchange Agent") of one or more PICO Certificates
for cancellation, accompanied by a duly executed letter of transmittal
in form reasonably satisfactory to Citation and PICO, the Exchange Agent
shall, as promptly as practicable thereafter, deliver to each holder of
such surrendered PICO Certificates, a certificate representing the
appropriate number of shares of Citation Stock into which the shares of
PICO Stock covered by such surrendered PICO Certificate are to be
converted pursuant to Section 1.5(a) (a "Citation Certificate").
(ii) Until PICO Certificates have been surrendered and exchanged as
herein provided, each outstanding PICO Certificate shall represent, at
and after the Effective Time, the right to receive Stock Consideration
into which the number of shares of PICO Stock shown thereon have been
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converted as provided in Section 1.5(a). No holders of unsurrendered
PICO Certificates shall be entitled to vote the shares of Citation Stock
into which such holders' PICO Stock has been converted until the
surrender of such PICO Certificates. No dividends or other distributions
that are declared on Citation Stock after the Effective Time shall be
paid to holders of unsurrendered PICO Certificates until such PICO
Certificates have been surrendered in exchange for Citation Certificates
in the manner herein provided, but upon such surrender, such dividends
or other distributions declared from and after the Effective Time will
be paid to such holders in accordance with the terms of such Citation
Stock. In no event shall the holders entitled to receive dividends or
other distributions be entitled to receive interest on such dividends or
other distributions.
(iii) No transfer taxes shall be payable by any Shareholder in
respect of the issuance of Citation Certificates, except that if any
Citation Certificate is to be issued in a name other than that in which
the corresponding surrendered PICO Certificates shall have been
registered, it shall be a condition of such issuance that the holder
requesting such issuance shall properly endorse the PICO Certificates
and shall pay to Citation any transfer taxes payable by reason thereof,
or of any prior transfer of such surrendered PICO Certificate, or
establish to the satisfaction of Citation that such taxes have been paid
or are not payable; provided, however, that in no event shall Citation
or the Exchange Agent be obligated to issue any Citation Stock in any
name other than that in which the PICO Certificate surrendered in
exchange therefor is registered if Citation, in its sole discretion,
upon the advice of counsel, determines that such issuance would
adversely affect the status of the Merger as a tax-free reorganization
within the meaning of Section 368(a) of the Code.
(iv) Any Citation Stock or cash for fractional shares delivered to
the Exchange Agent (together with any interest or profits earned
thereon) and not distributed pursuant to this Section 1.5 at the end of
12 months from the Effective Time shall be returned to Citation, in
which event the persons or entities entitled thereto shall look only to
Citation for distribution of such Citation Stock or cash.
(v) If any holder of PICO Stock shall be unable to surrender such
holder's PICO Certificates because such certificates have been lost or
destroyed, such holder may deliver in lieu thereof a lost certificate
affidavit and an indemnity bond in form and substance and with surety
satisfactory to Citation.
(vi) The Exchange Agent shall not be entitled to vote or exercise
any rights of ownership with respect to the shares of Citation Stock
held by it from time to time hereunder, except that it shall receive and
hold all dividends or other distributions paid or distributed with
respect to such shares of Citation Stock for the account of the persons
or entities entitled thereto.
(vii) After the Effective Time, there shall be no further
registration of transfers of the shares of PICO Stock or other capital
stock of PICO which were outstanding immediately prior to the Effective
Time and which are to be converted into the right to receive the Stock
Consideration in the Merger. If, after the Effective Time, certificates
representing such shares are presented to Citation for transfer, they
shall instead be canceled and exchanged for the Stock Consideration as
provided in this Section 1.5.
(f) Fractional Shares. No certificates or scrip representing
fractional shares of Citation Stock shall be issued in the Merger. In lieu
of the issuance or recognition of fractional shares of Citation Stock, or
interests or rights therein, each fractional share of Citation Stock which,
but for this Section 1.5(f), would have been issuable pursuant to Section
1.5(c) shall, on a holder by holder basis (aggregating all such holder's
shares), be converted into cash in an amount equal to the product of such
fraction multiplied by $5.03 per share of Citation Stock..
(g) Dissenting Shares. Shares of Citation Stock or PICO Stock to
which dissenters' rights are perfected under applicable law shall be
denominated "Dissenting Shares." Dissenting Shares of PICO shareholders
shall not be converted into or represent the right to receive the Stock
Consideration or any cash payment in lieu of the issuance of fractional
shares, provided, however, that if any holder of the
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PICO Dissenting Shares shall withdraw his demand for appraisal or shall
fail to perfect his appraisal rights in accordance with applicable law,
then such holder's Dissenting Shares shall cease to be Dissenting Shares
and shall, subject to the terms of this Agreement, be converted into and
represent the right to receive the Stock Consideration.
1.6 Assumption of Unexercised Stock Options. Citation will assume PICO
Options (as defined below) that are outstanding and unexercised as of the
Closing. Such PICO Options will be converted into options to purchase Citation
Common Stock under the formula set forth in Schedule 1.5(a).
1.7 Closing. The closing of the transactions contemplated hereby (the
"Closing") shall take place at the offices of Gibson, Dunn & Crutcher, One
Montgomery Street, 26th Floor, San Francisco, California 94104 at 10:00 a.m.,
Pacific Time, as soon as practicable after the Determination Date when all
conditions to the respective obligations of the parties have been satisfied or
waived, or on such Business Day as the parties may mutually agree (the "Closing
Date"), but no later than five Business Days after the Determination Date. The
term "Business Day" as used herein shall mean a day other than a Saturday,
Sunday or other day on which commercial banks in San Francisco, California are
authorized or required by law to close.
1.8 Supplementary Action. If, at any time after the Effective Time, any
further assignments or assurances in law or any other actions are necessary or
desirable to vest or to perfect or confirm of record or otherwise in Newco the
title to any property or rights of PICO or to carry out the provisions of this
Agreement, the officers and directors of Citation are hereby authorized and
empowered, on behalf and in the name of PICO, to execute and deliver any and all
agreements, instruments or documents necessary or advisable to do so.
1.9 Tax Consequences of the Merger. The Merger is intended to qualify as a
tax-free reorganization under Section 368(a) of the Code, and each of the
parties hereto agrees to report the Merger for federal and state income tax
purposes in a manner consistent with such characterization.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF PICO
In order to induce Citation to enter into this Agreement and to consummate
the transactions contemplated hereby, and except as disclosed in the PICO
Disclosure Schedule attached as Schedule 2 to this Agreement (the "PICO
Disclosure Schedule"), PICO makes the following representations and warranties
to Citation:
2.1 Organization of PICO. PICO is a corporation duly organized, validly
existing and in good standing under the laws of the State of Ohio. PICO has all
requisite corporate power and authority to own, lease and operate its properties
and assets and to carry on its business as presently conducted, and is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which its ownership or leasing of property or conduct of
business requires such qualification or licensing, except to the extent that all
failures to so qualify, be licensed or be in good standing, in the aggregate,
would not have a material adverse effect on the business, assets, properties,
operations, condition (financial or otherwise) or prospects of PICO and the PICO
Subsidiaries (as defined in Section 2.5 below) taken as a whole (a "Material
Adverse PICO Effect"). PICO has delivered to Citation complete and correct
copies of PICO's Articles of Incorporation and Bylaws as in effect on the date
hereof.
2.2 Authorization of Agreements. PICO has the requisite corporate power
and authority to enter into this Agreement, the Merger Agreement, and all other
documents and agreements ancillary hereto (the "Other Agreements") and to carry
out its obligations hereunder and thereunder. The execution and delivery of this
Agreement and the Merger Agreement and the approval of the Other Agreements by
PICO and the consummation of the transactions contemplated hereby and thereby
have been duly authorized by PICO's Board of Directors and no other corporate
action on the part of PICO is necessary for the execution and delivery hereof
and thereof, subject to the approval of this Agreement, the Merger Agreement and
the Merger by PICO's shareholders. This Agreement has been, and the Merger
Agreement will be, duly executed and
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delivered by PICO and, subject to such shareholder approval and receipt of the
Requisite Regulatory Approvals (as defined in Section 4.6(e) below),
constitutes, and will constitute, valid and binding obligations of PICO,
enforceable in accordance with their respective terms, except as such
enforceability may be limited by bankruptcy, insolvency, moratorium or other
similar laws affecting creditors' rights generally or by the principles
governing the availability of equitable remedies.
2.3 No Conflicts; Consents and Approvals.
(a) The execution and delivery of this Agreement, the Merger Agreement
and the Other Agreements and the consummation of the transactions
contemplated hereby and thereby will not conflict with, or result in any
violation of or default or loss of a material benefit under, any provision
of the Articles of Incorporation or Bylaws of PICO or any PICO Subsidiary,
any material mortgage, indenture, law, agreement or other material
instrument or any permit, concession, grant, franchise, license, judgment,
ruling, order, writ, decree, statute, law, ordinance, rule or regulation
applicable to PICO, any PICO Subsidiary or any of their respective
properties or assets.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with, any governmental or regulatory authority is
required in connection with the execution and delivery of this Agreement
and the Merger Agreement by PICO, the performance by PICO of its
obligations hereunder or thereunder or the consummation by PICO of the
transactions contemplated hereby or thereby, except for (i) filings
required in order to obtain Requisite Regulatory Approvals, (ii) the filing
of a Registration Statement on Form S-4 (the "Registration Statement")
relating to the Merger with the Securities and Exchange Commission (the
"SEC") and the declaration by the SEC and any applicable state securities
law regulatory authorities that the Registration Statement is effective,
and (iii) the filing of the Merger Agreement with the state authorities of
Ohio.
2.4 Capitalization.
(a) The authorized capital stock of PICO consists of 8,000,000 shares
of Class A Common Stock ("PICO Class A") and 1,000,000 shares of Preferred
Stock. As of the date of this Agreement, 5,210,897 shares of PICO Class A
are issued and outstanding, 508,000 shares of PICO Class A are reserved for
issuance upon the exercise of outstanding stock options granted pursuant to
PICO's 1995 Non-Qualified Stock Option Plan (the "PICO Options") and 5,000
shares of PICO Class A are reserved for future option grants. No shares of
Preferred Stock are issued and outstanding. All outstanding shares of PICO
Stock are duly authorized, validly issued, fully paid and nonassessable and
free from preemptive rights.
(b) Except for the PICO Options, there are no options, warrants,
calls, subscriptions, conversion rights or other rights, agreements,
commitments or arrangements of any character to which PICO is a party or by
which it is bound obligating PICO to issue, deliver or sell, or cause to be
issued, delivered or sold, additional shares of PICO Stock or obligating
PICO to grant, extend or enter into any such option, warrant, call,
subscription, conversion right or other right, agreement, commitment or
arrangement.
2.5 Subsidiaries and Affiliates of PICO; Minute Books of PICO and
Subsidiaries.
(a) The only direct or indirect Subsidiaries of PICO are the entities
listed on Item 2.5(a) of the PICO Disclosure Schedule (collectively, the
"PICO Subsidiaries"). The "PICO Insurance Subsidiaries" shall include
Sequoia Insurance Company, The Professionals Insurance Company, and
American Physicians Life Insurance Company. The PICO Disclosure Schedule
sets forth a complete list of (i) the officers and directors of PICO and
each PICO Subsidiary, (ii) the percentage of the outstanding voting stock
of such Subsidiary owned or controlled, directly or indirectly, by PICO,
and (iii) the percentage of the outstanding voting stock of such Subsidiary
owned or controlled, directly or indirectly, by one or more of PICO's other
Subsidiaries. Except as set forth on the PICO Disclosure Schedule, PICO
does not have any direct or indirect equity or ownership interest in any
other business or entity and does not have any direct or indirect
obligation or any commitment to invest any funds in any corporation or
other business or entity, other than for investment purposes in the
ordinary course of business in accordance with past practices. For purposes
of this Agreement, the term "Subsidiary" shall mean, with respect to a
corporation (the "parent"), any other corporation, association or other
business entity of which more
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than 50% of the outstanding voting stock is owned or controlled, directly
or indirectly, by the parent or by one or more Subsidiaries of the parent,
or by the parent and one or more of its Subsidiaries.
(b) Each PICO Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, has all requisite corporate power and authority to own,
lease and operate its properties and assets and to carry on its business
presently conducted, and is duly qualified or licensed to do business and
is in good standing in each jurisdiction in which its ownership or leasing
of property or conduct of business requires such qualification or
licensing, except to the extent that all failures to so qualify, be
licensed or be in good standing, in the aggregate, would not have a
Material Adverse PICO Effect. PICO has delivered to Citation complete and
correct copies of each PICO Subsidiary's Articles of Incorporation and
Bylaws as in effect on the date hereof.
(c) A record of all action taken by the shareholders and Boards of
Directors of PICO and each PICO Subsidiary, and complete and accurate
copies of all of their respective proceedings and actions by written
consent, and all minutes of their respective meetings, are contained in the
respective minute books of PICO and each PICO Subsidiary. The minute books
and stock ledgers of PICO and each PICO Subsidiary contain an accurate and
complete record of all issuances, transfers and cancellations of shares of
capital stock of PICO and each PICO Subsidiary, respectively. Citation has
been given access to and an opportunity to review all such minutes, minute
books and stock ledgers.
2.6 Financial Statements and Reports. PICO previously has delivered to
Citation complete and accurate copies of the following financial statements of
PICO and the PICO Subsidiaries:
(a) consolidated, audited balance sheets of PICO as of December 31,
1995, December 31, 1994 and December 31, 1993;
(b) consolidated, audited statements of income, stockholders' equity
and cash flows for the fiscal years ended December 31, 1995, December 31,
1994 and December 31, 1993; and
(c) annual Statutory Financial Statements for PICO and each PICO
Insurance Subsidiary for the years ended December 31, 1995 and 1994
(collectively, the "Statutory Statements.")
The financial statements set forth in subsections (a) and (b) above,
together with any notes, supporting schedules and related reports of PICO's
independent public accountants, are referred to herein as the "PICO Financial
Statements." The PICO Financial Statements have been prepared in conformity with
generally accepted accounting principles ("GAAP") consistently applied, and
present fairly the consolidated financial position of PICO and the consolidated
PICO Subsidiaries as of the dates of such statements and the results of their
operations and cash flows for the periods covered by such statements (subject,
in the case of unaudited statements, to normal, recurring audit adjustments, and
provided that unaudited statements may not contain all of the notes and
supporting schedules required by GAAP).
The Statutory Statements (A) have been prepared in accordance with the
books and records of PICO and each respective PICO Insurance Subsidiary, (B) are
prepared in accordance with the statutory provisions of the insurance laws of
the applicable jurisdictions, and (C) are consistent with prior periods, except,
as provided for therein and, for any changes required by applicable law or
accounting practices referred to in clause (B) hereof. Such Statutory
Statements, when read in conjunction with the notes thereto and any statutory
audit reports relating thereto, present fairly in all material respects the
statutory financial condition of PICO and each respective PICO Insurance
Subsidiary at December 31, 1995 and 1994, respectively, and the statutory
results of their respective operations for the period then ended.
2.7 Absence of Certain Changes. Since December 31, 1995 (a) the businesses
of PICO and the PICO Subsidiaries have been conducted only in the ordinary
course, in the same manner as theretofore conducted; (b) neither PICO nor any
PICO Subsidiary has declared, set aside or paid any dividend or other
distribution in respect of the capital stock of PICO or any PICO Subsidiary, or
any direct or indirect redemption, purchase or other acquisition by PICO or such
PICO Subsidiary of any such stock; (c) neither PICO nor any PICO Subsidiary has
issued additional shares or granted new options; (d) neither PICO nor any PICO
Subsidiary has incurred any indebtedness or other liability or obligation
(whether absolute, accrued, contingent or
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otherwise) other than in the ordinary course of business; and (e) to PICO's Best
Knowledge, there has been no material adverse change in the business, assets,
properties, operations, condition (financial or otherwise) or prospects of PICO
or any PICO Subsidiary.
2.8 Undisclosed Liabilities. Neither PICO nor any PICO Subsidiary has any
liabilities or obligations of any material nature, whether absolute, accrued,
contingent, known, unknown or otherwise and whether due or to become due, which
were not fully reflected or reserved against in all material respects in the
PICO Financial Statements, except for liabilities and obligations incurred in
the ordinary course of business and consistent with past practices since
December 31, 1995 and except for coverage and other claims (other than bad faith
claims) made with respect to insurance policies issued by any PICO Subsidiary.
2.9 Licenses and Permits. All licenses and permits that are necessary for
the conduct of the respective businesses of PICO, each PICO Subsidiary, and The
Ondaatje Corporation ("TOC") are in full force and effect, except for any
failure to be in full force and effect that would not, individually or in the
aggregate, have a Material Adverse PICO Effect. The properties and operations of
PICO and each of the PICO Subsidiaries are and have been maintained and
conducted, in all material respects, in compliance with all applicable licenses
and permits. There are no proceedings presently pending, or, to PICO's Best
Knowledge, threatened, relating to the revocation, restriction or suspension of
PICO's, TOC's, or any PICO Subsidiary's licenses or other qualifications to
conduct their businesses in any jurisdiction.
2.10 Regulatory Filings. PICO has delivered to Citation complete and
accurate copies of all annual and quarterly convention statements (including the
financial statements contained therein) which PICO and the PICO Subsidiaries
have filed with or submitted to the insurance regulatory commissions, agencies
or authorities of the respective jurisdictions in which they are licensed to
engage in the insurance business for the past three years. Such filings or
submissions were in substantial compliance with applicable law when filed and,
as of their respective dates, to PICO's Best Knowledge, did not contain any
false statements or material misstatements of fact or omit to state any material
facts necessary to make the statements set forth therein not materially
misleading in light of the circumstances in which such statements were made. No
material deficiencies have been asserted by any such regulatory commission,
agency or authority with respect to such filings or submissions.
2.11 Compliance with Applicable Laws. To PICO's Best Knowledge, neither
PICO, TOC, nor any of the PICO Subsidiaries is in default under, or in violation
of, any law, rule, regulation, ordinance, licensing requirement, order, judgment
or decree of any court, administrative agency or commission or other
governmental authority or instrumentality, except for violations which
individually or in the aggregate would not, and, insofar as reasonably can be
foreseen, in the future will not, have a Material Adverse PICO Effect. No
investigation or review by any court, administrative agency or commission or
other governmental authority or instrumentality with respect to PICO, TOC, or
any PICO Subsidiary is pending or, to PICO's Best Knowledge, threatened, nor has
any court, administrative agency or commission or other governmental authority
or instrumentality indicated to PICO, TOC, or any PICO Subsidiary an intention
to conduct the same, other than those the outcome of which will not have a
Material Adverse PICO Effect.
2.12 Litigation. Except as set forth and described in reasonable detail on
Item 2.12 of the PICO Disclosure Schedule, there is no action, suit, proceeding,
claim (including noncontractual claims, bad faith claims and claims against
PICO's or any PICO Subsidiary's directors or officers, but excluding coverage
and other claims made with respect to insurance policies issued by PICO or any
PICO Subsidiary), investigation or examination pending or, to PICO's Best
Knowledge, threatened against or affecting PICO, TOC, or any PICO Subsidiary or
any of their respective businesses, properties, assets or securities, at law or
in equity, before any federal, state or municipal court or other governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, nor, to PICO's Best Knowledge, is there any legitimate basis for any
such action, suit, proceeding, claim, investigation or examination. Except as
disclosed on Item 2.12 of the PICO Disclosure Schedule, there are no material
judgments, decrees, injunctions, rules or orders of any court, administrative
agency or commission or other governmental authority or instrumentality or
arbitrator outstanding against PICO or any PICO Subsidiary (including
noncontractual claims, bad faith claims and
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claims against PICO's or any PICO Subsidiary's directors or officers, but
excluding coverage and other claims made with respect to insurance policies
issued by PICO or any PICO Subsidiary).
2.13 Real Property. Neither PICO, TOC, nor any PICO Subsidiary owns any
right, title or interest in any real property, except as particularly described
on Item 2.13 of the PICO Disclosure Schedule (collectively, the "PICO Real
Property"). Item 2.13 of the PICO Disclosure Schedule sets forth a complete and
accurate list and general description of all material leases for real property
("PICO Real Property Leases") to which PICO or any PICO Subsidiary is a party or
by which any of them are bound. PICO or a PICO Subsidiary owns all right, title
and interest in, and has good and marketable title to, the PICO Real Property
and PICO and each PICO Subsidiary have valid leasehold interests in each PICO
Real Property Lease held by any of them, free and clear of all mortgages,
options to purchase, covenants, conditions, restrictions, easements, liens,
security interests, charges, claims, assessments and encumbrances, except for
(a) rights of lessors, co-lessees or sublessees that are reflected in each
respective Real Property Lease, (b) current taxes not yet due and payable; (c)
liens and encumbrances of public record; and (d) such nonmonetary imperfections
of title and encumbrances, if any, as do not materially detract from the value
of or materially interfere with the present use of such property. To PICO's Best
Knowledge, the activities of PICO and the PICO Subsidiaries with respect to all
real property and PICO Real Property Leases owned or held by each of them for
use in connection with their respective operations are in all material respects
permitted and authorized by applicable zoning laws, ordinances and regulations
and all laws, rules and regulations of any court, administrative agency or
commission or other governmental authority or instrumentality affecting such
properties. PICO and each PICO Subsidiary enjoy peaceful and undisturbed
possession under all material PICO Real Property Leases to which they are
parties, and all of such PICO Real Property Leases are valid and in full force
and effect.
2.14 Insurance Issued by PICO Subsidiaries; Reserves; Reinsurance Treaties.
(a) Each form of insurance policy, policy endorsement or amendment,
reinsurance contract, annuity contract, application form, sales material
and service contract now in use by PICO or any PICO Subsidiary in any
jurisdiction has, where required, received interim or final approvals from
the appropriate insurance regulatory authorities of such jurisdiction,
except for those approvals which, if not obtained, would not result in a
Material Adverse PICO Effect.
(b) Neither PICO nor any PICO Subsidiary has issued any participating
policies or any retrospectively rated policies of insurance, other than
policies with final premiums subject to audit.
(c) Any premium rates required to be filed with or approved by
insurance regulatory authorities have been so filed and have received
interim or final approval from such regulatory authorities, and all
premiums charged by the PICO Subsidiaries conform with such approvals,
except for those filings or approvals which, if not obtained, would not
result in a Material Adverse PICO Effect.
(d) Item 2.14(d) of the PICO Disclosure Schedule sets forth the PICO
and PICO Insurance Subsidiaries' reserves for unearned premiums,
outstanding claims (including claims due and unpaid, not yet due, and
incurred but not reported) and claims expenses (collectively, "PICO
Reserves"), gross and net of reinsurance thereof, as of December 31, 1995,
pertaining to PICO's and the PICO Insurance Subsidiaries' property and
casualty insurance businesses, medical malpractice insurance business, and
life and health insurance businesses. The PICO Reserves were prepared in
accordance with the statutory or other accounting practices prescribed or
permitted by the applicable insurance regulatory authorities and make good
and sufficient provisions for all insurance obligations of PICO and its
Insurance Subsidiaries. Outstanding claims and claims expenses have been
opined upon as reasonable and adequate as of December 31, 1995, by
Tillighast-Towers Perrin (with respect to PICO and The Professionals
Insurance Company), Merlino & Scofield, Inc. (with respect to American
Physicians Life Insurance Company), and Pacific Actuarial Consultants, Inc.
(with respect to Sequoia Insurance Company), in each case a duly qualified
actuary who is a member in good standing in the American Academy of
Actuaries.
(e) Item 2.14(e) of the PICO Disclosure Schedule sets forth a list and
description of all quota share, stop loss or other reinsurance agreement to
which either PICO or any PICO Subsidiary is a party.
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(f) PICO's and the PICO Insurance Subsidiaries' Reserves, gross and
net of reinsurance thereof, as of December 31, 1995, pertaining to PICO's
and the PICO Insurance Subsidiaries' businesses have been determined on a
consistent basis in accordance with the practices described in Item 2.14(f)
of the PICO Disclosure Schedule.
(g) Sequoia Insurance Company has entered into a Stipulation and
Consent Order relating to Sequoia's Proposition 103 rollback refund
obligation, a true and correct copy of which is attached as Schedule 2A
hereto. Sequoia Insurance Company has complied with all of its obligations
under such Stipulation and Consent Order.
2.15 Tax Representations.
(a) PICO, each of the PICO Subsidiaries, and every member of an
affiliated group (as defined in Section 1504 of the Code), and any
comparable group for state, local or foreign Tax purposes, which has
included PICO or any of the PICO Subsidiaries (for Taxable periods in which
PICO or any of the PICO Subsidiaries was included in such group) (each such
corporation, including PICO and any of the PICO Subsidiaries, a "PICO
Taxpayer," and collectively, the "PICO Taxpayers"), have timely filed all
returns and reports (including information returns) with respect to Taxes
("Tax Returns") and properly collected such information (including but not
limited to taxpayer identification numbers and related certifications)
required to have been filed and collected by them, and have paid when due
all Taxes owed to any Taxing authority with respect to all Taxable periods
ending on or prior to the date hereof, or otherwise attributable to all
periods prior to the date hereof. All Tax Returns filed are true, correct
and complete in all material respects. The PICO Financial Statements and
the additional unaudited financial statements delivered to Citation
pursuant to Section 4.1 hereto contain adequate accruals for all Taxes with
respect to periods covered thereby and all prior periods;
(b) All Tax deficiencies asserted or assessed against the PICO
Taxpayers have been paid or finally settled with no remaining amounts owed;
(c) None of the Tax Returns contain, or are expected to contain, an
understatement or misstatement under Section 6662 of the Code (or any
predecessor statute) or any similar provision of state, local or foreign
law;
(d) There is no pending or threatened action, audit, proceeding, or
investigation with respect to (i) the assessment or collection of Taxes or
(ii) a claim for refund made by a PICO Taxpayer with respect to Taxes
previously paid;
(e) No PICO Taxpayer has received notice that the Internal Revenue
Service (the "IRS") or any other taxing authority has asserted against a
PICO Taxpayer any deficiency or claim for Taxes;
(f) All amounts that are required to be collected or withheld by a
PICO Taxpayer, or with respect to Taxes of a PICO Taxpayer, have been duly
collected or withheld, and all such amounts that are required to be
remitted to any Taxing authority have been duly remitted on a timely basis;
(g) There are no outstanding waivers of any statute of limitations
with respect to the assessment of any Tax;
(h) There are no outstanding requests for extensions of time within
which to file returns and reports in respect of any Taxes;
(i) No PICO Taxpayer has taken action not in accordance with past
practice that would have the effect of deferring any Tax liability of a
PICO Taxpayer from any period ending on or before the Closing Date to any
period ending after such date;
(j) Neither PICO nor any of the PICO Subsidiaries is a party to any
tax-sharing agreement or similar arrangement (whether express or implied),
including any terminated agreement, as to which any of them could have any
continuing liability following the Effective Time;
and
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(k) As used herein, "Taxes" and all derivations thereof means any
federal, state, local or foreign income, gross receipts, license, payroll,
employment, excise, severance, stamp, occupation, premium, windfall
profits, environmental, customs, duties, capital stock, franchise, profits,
withholding, social security (or similar) unemployment, disability, real
property, personal property, sales, use, transfer, registration, value
added, alternative or add-on minimum, estimated, or other tax, charge, fee
levy or other assessment of any kind whatsoever, including any interest,
penalty, and/or addition thereto.
2.16 Additional Tax Representations.
(a) Pursuant to the Merger, Newco will merge with and into PICO, and
PICO will acquire all of the assets and liabilities of Newco. Specifically,
the assets transferred to PICO pursuant to the Merger will represent at
least ninety percent (90%) of the fair market value of the net assets and
at least seventy percent (70%) of the fair market value of the gross assets
held by Newco immediately prior to the Merger. In addition, at least ninety
percent (90%) of the fair market value of the net assets and at least
seventy percent (70%) of the fair market value of the gross assets held by
PICO immediately prior to the Merger will continue to be held by PICO
immediately after the Merger. For the purpose of determining the percentage
of PICO's and Newco's net and gross assets held by PICO immediately
following the Merger, the following assets will be treated as property held
by Newco or PICO, as the case may be, immediately prior but not subsequent
to the Merger: (i) assets used by PICO or Newco (other than assets
transferred from Citation to Newco for such purpose) to pay shareholders
perfecting dissenters' rights or other expenses or liabilities incurred in
connection with the Merger and (ii) assets used to make distributions,
redemptions or other payments in respect of stock of PICO (except for
regular, normal distributions) or in respect of rights to acquire such
stock (including payments treated as such for tax purposes) that are made
in contemplation of the Merger or that are related thereto;
(b) Other than in the ordinary course of business or pursuant to its
obligations under the Agreement, PICO has not disposed of any of its assets
(including any distribution of assets with respect to, or in redemption of,
stock) since January 1, 1996;
(c) PICO's principal reasons for participating in the Merger are bona
fide business purposes unrelated to taxes;
(d) PICO has no outstanding warrants, options, convertible securities
or any other type of right to acquire PICO Stock (or any other equity
interest in PICO) or to vote (or restrict or otherwise control the vote of)
shares of PICO Stock which, if exercised, would affect Citation's
acquisition and retention of Control of PICO;
(e) In the Merger, shares of PICO Stock representing "Control" of PICO
will be exchanged solely for shares of voting Citation Stock. For purposes
of this paragraph, shares of PICO Stock exchanged in the Merger for cash
and other property (including, without limitation, cash paid to
shareholders of PICO perfecting dissenters' rights or in lieu of fractional
shares of Citation Stock) will be treated as shares of PICO Stock
outstanding on the date of the Merger but not exchanged for shares of
Citation Stock. As used in this Subsection, "Control" shall consist of
direct ownership of shares of stock possessing at least eighty percent
(80%) of the total combined voting power of shares of all classes of stock
entitled to vote and at least eighty percent (80%) of the total number of
shares of all other classes of stock of the corporation. For purposes of
determining Control, a person shall not be considered to own shares of
voting stock if rights to vote such shares (or to restrict or otherwise
control the voting of such shares) are held by a third party (including a
voting trust) other than an agent of such person;
(f) The payment of cash in lieu of fractional shares of Citation Stock
is solely for the purpose of avoiding the expense and inconvenience to
Citation of issuing fractional shares and does not represent separately
bargained for consideration. The total cash consideration that will be paid
in the Merger to PICO shareholders in lieu of fractional shares of Citation
Stock will not exceed one (1) percent of the total consideration that will
be issued in the Merger to PICO shareholders in exchange for their shares
of PICO Stock;
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(g) PICO has no plan or intention to issue additional shares of stock
after the Merger, or take any other action, that would result in Citation
losing Control of PICO;
(h) PICO has no plan or intention to sell or otherwise dispose of any
of its assets or of any of the assets acquired from Newco in the Merger
except for dispositions made in the ordinary course of business or payment
of expenses, including payments to shareholders of PICO perfecting
dissenters' rights, incurred by PICO pursuant to the Merger and except for
transfers described in both Section 368(a)(2)(C) of the Code and Treasury
Regulation Section 1.368-2(j)(4);
(i) The fair market value of PICO's assets will, at the Effective Time
of the Merger, exceed the aggregate liabilities of PICO plus the amount of
liabilities, if any, to which such assets are subject;
(j) PICO is not an "investment company" within the meaning of Sections
368(a)(2)(F)(iii) and (iv) of the Code;
(k) PICO is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A) of the Code;
(l) To PICO's Best Knowledge, there is no plan or intention ("Plan")
on the part of the shareholders of PICO who own five percent or more of the
PICO Stock and, after due inquiry with its officers and directors, PICO has
no knowledge of, and believes that there does not exist, any Plan on the
part of the remaining shareholders of PICO to engage in a sale, exchange,
transfer, distribution (including, without limitation, a distribution by a
partnership to its partners or by a corporation to its stockholders),
pledge, disposition or any other transaction which results in a reduction
in the risk of ownership or a direct or indirect disposition (a "Sale") of
shares of Citation Stock received in the Merger that would reduce ownership
by shareholders of PICO of Citation Stock to a number of shares having a
value as of the Effective Time of the Merger of less than fifty percent
(50%) of the aggregate fair market value, immediately prior to the Merger,
of all outstanding shares of PICO Stock. For purposes of this paragraph,
shares of PICO Stock (i) with respect to which a shareholder of PICO
receives consideration in the Merger other than shares of Citation Stock
(including, without limitation, cash received pursuant to the exercise of
dissenter's rights or in lieu of fractional shares of Citation Stock)
and/or (ii) with respect to which a Sale occurs prior to and in
contemplation of the Merger, shall be considered outstanding shares of PICO
Stock exchanged for shares of Citation Stock in the Merger and then
disposed of pursuant to a Plan;
(m) The fair market value of the shares of Citation Stock received by
each shareholder of PICO will be approximately equal to the fair market
value of the shares of PICO Stock surrendered in exchange therefor and the
aggregate consideration received by shareholders of PICO in exchange for
their PICO Stock will be approximately equal to the fair market value of
all of the outstanding shares of PICO Stock immediately prior to the
Merger;
(n) PICO and the shareholders of PICO will pay separately its or their
own expenses relating to the Merger and PICO will not pay any expenses of
Citation or Newco with respect to the Merger;
(o) There is no intercorporate indebtedness existing between Citation
and PICO or between Newco and PICO that was issued, acquired, or will be
settled at a discount as a result of the Merger;
(p) None of the compensation received by any shareholder-employees of
PICO will be separate consideration for, or allocable to, any of their
shares of stock of PICO; none of the shares of Citation Stock received by
any shareholder-employees of PICO will be separate consideration for, or
allocable to, any employment agreement or any covenants not to compete; and
the compensation paid to any shareholder-employees of PICO will be for
services actually rendered and will be commensurate with amounts paid to
third parties bargaining at arm's length for similar services;
(q) To the best knowledge of PICO, during the past five (5) years,
none of the outstanding shares of capital stock of PICO, including the
right to acquire or vote any such shares, have directly or indirectly been
owned by Citation.
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2.17 Material Contracts. Item 2.17 of the PICO Disclosure Schedule sets
forth a complete and accurate list of all material contracts of PICO and the
PICO Subsidiaries as of the date of this Agreement, as defined in Item
601(b)(10) of SEC Regulation S-K (the "PICO Material Contracts"). PICO and the
PICO Subsidiaries have performed in all material respects all of the respective
obligations required to be performed by them to date and are not in default
under or in breach of any term or provision of any of the PICO Material
Contracts or any Real Property Leases to which any of them is a party, is
subject or is otherwise bound, and no event has occurred that, with the giving
of notice or the passage of time or both, would constitute such a default or
breach, where such default or breach would have a Material Adverse PICO Effect.
To PICO's Best Knowledge, there are no events, facts or circumstances which
constitute or, with the giving of notice or the passage of time or both, would
constitute a default or breach of any of the PICO Material Contracts or Real
Property Leases by the other parties thereto. Each of the PICO Material
Contracts is a valid and binding agreement of PICO or a PICO Subsidiary, as the
case may be, and, to PICO's Best Knowledge, of all other parties thereto.
2.18 Employees.
(a) To PICO's Best Knowledge, PICO and each PICO Subsidiary is in
compliance in all material respects with all currently applicable laws and
regulations respecting employment, discrimination in employment, terms and
conditions of employment, wages, hours and occupational safety and health
and employment practices, and is not engaged in any unfair labor practice.
PICO has complied with all applicable notice provisions of and has no
material obligations under COBRA with respect to any former employees or
qualifying beneficiaries thereunder. There are no proceedings pending or,
to the knowledge of PICO, threatened, between PICO and any one or more of
its employees or former employees, which proceedings have or could
reasonably be expected to have a Material Adverse PICO Effect. PICO is not
a party to any collective bargaining agreement or other labor union
contract nor does PICO know of any activities or proceedings of any labor
union to organize any of its employees. In addition, PICO and each PICO
Subsidiary has provided all employees with all relocation benefits, stock
options, bonuses and incentives, and all other compensation that such
employee has earned up through the date of this Agreement or that such
employee was otherwise promised in their employment agreement or agreements
with PICO or the relevant PICO Subsidiary, as the case may be.
(b) Except as disclosed in the PICO Financial Statements, all material
sums due for employee compensation have been paid, accrued or otherwise
provided for, and all employer contributions for employee benefits,
including deferred compensation obligations, and any benefits under any
PICO Employee Plan have been duly and adequately paid or provided for in
accordance with plan documents. To PICO's Best Knowledge, no person treated
as an independent contractor by PICO or any PICO Subsidiary is an employee
as defined in Section 3401(c) of the Code, nor has any employee been
otherwise improperly classified, as exempt, nonexempt or otherwise, for
purposes of federal or state income tax withholding or overtime laws,
rules, or regulations. No director, officer or employee of PICO or any PICO
Subsidiary is entitled to receive any payment or any amount under any
existing agreement, severance plan or other benefit plan as a result of the
consummation of any transaction contemplated by this Agreement or the
Merger Agreement. To PICO's Best Knowledge, no executive or key employee or
group of employees of PICO or any PICO Subsidiary has any plans to
terminate his, her or their employment.
(c) To PICO's Best Knowledge, PICO and the PICO Subsidiaries have
complied in all material respects with all applicable federal and state
statutes and regulations which govern employment matters, including,
without limitation, federal and state wage and hour laws, workplace safety
laws, workers' compensation laws, equal employment opportunity laws, equal
pay laws, civil rights laws, the Americans With Disabilities Act and the
Fair Labor Standards Act of 1938, as amended. To PICO's Best Knowledge,
there is no action, claim, cause of action, suit or proceeding pending or,
to PICO's Best Knowledge, threatened, on the part of any employee,
independent contractor or applicant for employment, including, without
limitation, any such action, claim, cause of action, suit or proceeding
based on allegations of wrongful termination or discrimination on the basis
of age, race, religion, sex, sexual preference, or mental or physical
handicap or disability.
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2.19 Employee Plans; ERISA. Except as set forth in Item 2.19 of the
Disclosure Schedule, neither PICO nor any PICO Subsidiary maintains, contributes
to or has any liability under (or with respect to) any pension, retirement,
stock purchase, stock option, stock bonus, savings or profit sharing plan,
individual employment agreement, bonus or incentive compensation programs,
deferred compensation agreements, welfare or employee pension plans as defined
in Section 3(3) of the Employee Retirement Income Safety Act of 1974, as amended
("ERISA") (collectively, the "PICO Employee Plans") providing benefits to
current or former employees, or payments contingent upon a change of control of
PICO or any PICO Subsidiary or other arrangement, whether or not terminated.
With respect to any such PICO Employee Plans, all required payments, premiums,
contributions, reimbursements or accruals for all periods ending prior to or as
of the Closing shall have been made or properly accrued and any bonding with
respect to such Employee Plan required under ERISA is in full force and effect.
None of any such Employee Plans has any unfunded liabilities. PICO and the PICO
Subsidiaries have complied with all terms of ERISA and all regulations
thereunder with respect to all PICO Employee Plans.
2.20 Brokers and Finders. Except as set forth on Item 2.20 of the PICO
Disclosure Schedule, neither PICO nor any PICO Subsidiary is a party to or
obligated under any agreement with any broker or finder relating to the
transactions contemplated hereby, and neither the execution of this Agreement
and the Merger Agreement nor the consummation of the transactions provided for
herein or therein will result in any liability to any broker or finder.
2.21. No Investment Company. Neither PICO nor any of the PICO Subsidiaries
is an "investment company", or a company "controlled" by an "investment
company", within the meaning of the Investment Company Act of 1940, as amended.
2.22 Accuracy of Information Supplied.
(a) To PICO's Best Knowledge, none of the information supplied or to
be supplied by PICO to Citation pursuant to this Agreement contains or will
contain any untrue statement of a material fact or omits or will omit to
state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they are made, not misleading.
(b) The Registration Statement and the Prospectus and Proxy Statement
used for the registration and qualification of shares of Citation Stock to
be issued as the Stock Consideration and used to solicit shareholder
approval of the Merger (the "Prospectus/Proxy Statement") and any other
documents to be filed with the SEC or any applicable state securities law
regulatory authorities relating to the Merger, at the respective times such
documents are filed or become effective, and with respect to the
Prospectus/Proxy Statement, from the time of mailing to PICO shareholders
through the period required for PICO shareholders to perfect dissenters'
rights under applicable law, shall, as to all information provided by PICO:
(i) comply in all material respects with the provisions of all
applicable regulations issued by the SEC pursuant to the Securities Act
of 1933, as amended ("Securities Act") and the Securities Exchange Act
of 1934, as amended (the "Exchange Act") and all other applicable laws
and regulations; and
(ii) not contain any statement which, at the time and in light of
the circumstances under which it is made, is false or misleading with
respect to any material fact and not omit to state any material fact
necessary in order to make the statements therein not false or
misleading or necessary to correct any statement in any earlier
communication with respect to the solicitation of a proxy for the same
meeting or subject matter which have become false or misleading.
2.23 Effective Time of Representations, Warranties, Covenants and
Agreements. Each representation, warranty, covenant and agreement of PICO and
as forth in this Agreement, as updated by any written disclosure schedule
delivered pursuant to Section 4.4 below, shall be deemed to be made on and as of
the date hereof, as of the effective date of the Registration Statement and as
of the Effective Time.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CITATION
In order to induce PICO to enter into this Agreement and to consummate the
transactions contemplated hereby, and except as disclosed in the Citation
Disclosure Schedule attached as Schedule 3 to this Agreement (the "Citation
Disclosure Schedule"), Citation makes the following representations and
warranties to PICO:
3.1 Organization. Citation is a corporation duly organized, validly
existing and in good standing under the laws of the State of California.
Citation has all requisite corporate power and authority to own, lease and
operate its properties and assets, and to carry on its business as presently
conducted, and is duly qualified or licensed to do business and in good standing
in each jurisdiction in which the ownership or leasing of property or conduct of
business requires such qualification or licensing, except to the extent that all
failures to so qualify, be licensed or be in good standing, in the aggregate,
would not have a material adverse effect on the business, assets, properties,
operations, condition (financial or otherwise) or prospects of Citation and the
Citation Subsidiaries (as defined in Section 3.5 below) taken as a whole (a
"Material Adverse Citation Effect"). Citation has delivered to PICO complete and
correct copies of Citation's Articles of Incorporation and Bylaws as in effect
on the date hereof.
3.2 Authorization of Agreements. Citation has the requisite corporate
power and authority to enter into this Agreement, the Merger Agreement, and the
Other Agreements and to carry out its obligations hereunder and thereunder. The
execution and delivery of this Agreement, the Merger Agreement, and the Other
Agreements by Citation and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by Citation's Board of Directors
and no other corporate action on the part of Citation is necessary for the
execution and delivery hereof or thereof, subject to the approval of this
Agreement, the Merger Agreement and the Merger by Citation's shareholders. This
Agreement has been, and the Merger Agreement and Other Agreements will be, duly
executed and delivered by Citation and, subject to such shareholder approval and
receipt of the Requisite Regulatory Approvals (as defined in Section 4.6(e)
below), constitutes, and will constitute, valid and binding obligations of
Citation, enforceable in accordance with their respective terms, except as such
enforceability may be limited by bankruptcy, insolvency, moratorium or other
similar laws affecting creditors' rights generally or by the principles
governing the availability of equitable remedies.
3.3 No Conflicts; Consents and Approvals.
(a) The execution and delivery of this Agreement, the Merger Agreement
and the Other Agreements and the consummation of the transactions
contemplated hereby and thereby will not conflict with, or result in any
violation of or default or loss of a material benefit under, any provision
of the Articles of Incorporation or Bylaws of Citation or any Citation
Subsidiary, any material mortgage, indenture, lease, agreement or other
material instrument or any permit, concession, grant, franchise, license,
judgment, ruling, order, writ, decree, statute, law, ordinance, rule or
regulation applicable to Citation, any Citation Subsidiary or any of their
respective properties or assets.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with, any governmental authority is required in
connection with the execution and delivery of this Agreement, the Merger
Agreement, and the Other Agreements by Citation, the performance by
Citation of its obligations hereunder or thereunder or the consummation by
Citation of the transactions contemplated hereby or thereby, except for (i)
filings required in order to obtain Requisite Regulatory Approvals, (ii)
the filing of the Registration Statement with the SEC and the declaration
by the SEC and any applicable state securities law regulatory authorities
that the Registration Statement is effective, and (iii) the filing of the
Merger Agreement with the state authorities of Ohio.
3.4 Capitalization.
(a) The authorized capital stock of Citation consists of 15,000,000
shares of Citation Stock, and 1,000,000 shares of preferred stock, 100,000
shares of which have been designated as Series A Junior Participating
Cumulative Preferred Stock. As of the date of this Agreement, 6,407,803
shares of Citation
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Stock are issued and outstanding, 234,930 shares of Citation stock are
reserved for issuance upon the exercise of outstanding stock options (the
"Citation Options") and 45,324 shares of Citation Stock are reserved for
future option grants. There are no shares of preferred stock outstanding.
All outstanding shares of Citation Stock are duly authorized, validly
issued, fully paid and nonassessable and free from preemptive rights.
(b) Except for the Citation Options, there are no options, warrants,
calls, subscriptions, conversion rights or other rights, agreements,
commitments or arrangements of any character to which Citation is a party
or by which it is bound obligating Citation to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of Citation Stock
or obligating Citation to grant, extend or enter into any such option,
warrant, call, subscription, conversion right or other right, agreement,
commitment or arrangement. Except as disclosed on the Citation Disclosure
Schedule, the transactions contemplated hereby will not cause acceleration
of vesting of outstanding Citation Options.
3.5 Subsidiaries and Affiliates of Citation; Minute Books of Citation and
Citation Subsidiaries.
(a) The only direct or indirect Subsidiaries of Citation are Citation
Insurance Company, Citation Insurance Services, Inc., Columbia Pacific
Corporation, Citation National Insurance Company, Madison Acceptance
Corporation, and Citation Holdings, Inc. (collectively, the "Citation
Subsidiaries"). Citation does not have any direct or indirect equity or
ownership interest in any other business or entity and does not have any
direct or indirect obligation or any commitment to invest any funds in any
corporation or other business or entity, other than for investment purposes
in the ordinary course of business in accordance with past practices.
(b) Each Citation Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, has all requisite corporate power and authority to own,
lease and operate its properties and assets and to carry on its business
presently conducted, and is duly qualified or licensed to do business and
is in good standing in each jurisdiction in which its ownership or leasing
of property or conduct of business requires such qualification or
licensing, except to the extent that all failures to so qualify, be
licensed or be in good standing, in the aggregate, would not have a
Material Adverse Citation Effect. Citation has delivered to PICO complete
and correct copies of each Citation Subsidiary's Articles of Incorporation
and Bylaws as in effect on the date hereof. The Citation Disclosure
Schedule sets forth a complete list of the officers and directors of
Citation and each Citation Subsidiary.
(c) Citation is the record and beneficial owner of all of the
outstanding shares of capital stock of each Citation Subsidiary, and all of
the outstanding shares of capital stock of each Citation Subsidiary are
duly and validly issued, were not issued in violation of any preemptive
rights, are fully paid and nonassessable and are owned by Citation free and
clear of any claim, lien, encumbrance or agreement with respect thereto.
There are no options, warrants, calls, subscriptions, conversions, rights,
agreements, commitments or arrangements of any character with respect to
the issuance of shares of capital stock of any Citation Subsidiary or any
other securities convertible into, exchangeable for or evidencing the right
to subscribe for any such shares.
(d) A record of all action taken by the shareholders and Boards of
Directors of Citation and each Citation Subsidiary, and complete and
accurate copies of all of their respective proceedings and actions by
written consent, and all minutes of their respective meetings, are
contained in the respective minute books of Citation and each Citation
Subsidiary. The minute books and stock ledgers of Citation and each
Citation Subsidiary contain an accurate and complete record of all
issuances, transfers and cancellations of shares of capital stock of
Citation and each Citation Subsidiary, respectively. PICO has been given
access to and an opportunity to review all such minutes, minute books and
stock ledgers.
3.6 Financial Statements and SEC Reports. Citation has filed with the SEC
all reports and documents required to be filed pursuant to the Exchange Act.
Citation has delivered to PICO true and complete copies of its Annual Reports on
Form 10-K for the fiscal years ended December 31, 1995 and December 31, 1994,
which together contain consolidated balance sheets, statements of income,
stockholders' equity and cash flows
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as of December 31, 1995, 1994 and 1993, together with appropriate notes to such
financial statements and supporting schedules for the fiscal years ended on such
dates for Citation and the Citation Subsidiaries, accompanied by the related
reports of Citation's independent public accountants. Citation also has
delivered to PICO true and complete copies of all proxy statements, quarterly
reports on Form lO-Q and current reports on Form 8-K which Citation has filed
with the SEC since December 31, 1994. The above reports of Citation to the SEC
(including any reports filed between the date of this Agreement and the Closing)
are sometimes
collectively referred to hereinafter as "Citation's SEC Reports." The financial
statements of Citation included in Citation's SEC Reports (the "Citation
Financial Statements") comply as to form in all material respects with
applicable accounting requirements in the published rules and regulations of the
SEC with respect thereto, have been prepared in conformity with GAAP
consistently applied, and present fairly the consolidated financial position of
Citation and the Citation Subsidiaries as of the dates of such statements and
the consolidated results of their operations for the periods covered by such
statements (subject, in the case of unaudited statements, to normal, recurring
audit adjustments, and provided that unaudited statements may not contain all of
the notes and supporting schedules required by GAAP). As of their respective
dates, Citation's SEC Reports complied as to form in all material respects with
the requirements of the Exchange Act and did not contain any untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
3.7 Absence of Certain Changes. Since December 31, 1995: (a) the
businesses of Citation and the Citation Subsidiaries have been conducted only in
the ordinary course, in the same manner as theretofore conducted; (b) neither
Citation nor any Citation Subsidiary has declared, as aside or paid any dividend
or other distribution in respect of the capital stock of Citation or any
Citation Subsidiary, or any direct or indirect redemption, purchase or other
acquisition by Citation or such Citation Subsidiary of any such stock (except
for repurchases of Citation Stock in the open market pursuant to the stock
repurchase program previously approved by Citation's Board of Directors); (c)
neither Citation nor any Citation Subsidiary has incurred any indebtedness or
other liability or obligation (whether absolute, accrued, contingent or
otherwise) other than in the ordinary course of business; and (d) to Citation's
Best Knowledge, there has been no material adverse change in the business,
assets, properties, operations, condition (financial or otherwise) or prospects
of Citation or any Citation Subsidiary.
3.8 Undisclosed Liabilities. Neither Citation nor any Citation Subsidiary
has any liabilities or obligations of any material nature, whether absolute,
accrued, contingent, known, unknown or otherwise and whether due or to become
due, which were not fully reflected or reserved against in all material respects
in the Citation Financial Statements included in Citation's annual report on
Form 10-K for the year ended December 31, 1995, except for liabilities and
obligations incurred in the ordinary course of business and consistent with past
practices since December 31, 1995, and except for coverage and other claims
(other than bad faith claims) made with respect to insurance policies issued by
any Citation Subsidiary.
3.9 Licenses and Permits. All licenses and permits that are necessary for
the conduct of the respective businesses of Citation and each Citation
Subsidiary are in full force and effect, except for any failure to be in full
force and effect that would not, individually or in the aggregate, have a
Material Adverse Citation Effect. The properties and operations of Citation and
each of the Citation Subsidiaries are and have been maintained and conducted, in
all material respects, in compliance with all applicable licenses and permits.
There are no proceedings presently pending, or, to Citation's Best Knowledge,
threatened, relating to the revocation, restriction or suspension of Citation's
or any of the Citation Subsidiaries' licenses or other qualifications to conduct
their businesses in any jurisdiction.
3.10 Regulatory Filings. Citation has delivered to PICO complete and
accurate copies of all annual statutory statements (including the financial
statements contained therein) which Citation and the Citation Subsidiaries have
filed with or submitted to the insurance regulatory commissions, agencies or
authorities of the respective jurisdictions in which they are licensed to engage
in the insurance business for the past three years, and all quarterly statutory
statements (including the financial statements contained therein) which Citation
and the Citation Subsidiaries have filed with or submitted to the insurance
regulatory commissions, agencies or authorities of the respective jurisdictions
in which they are licensed to engage in the insurance
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business for the past year. Such filings or submissions were in substantial
compliance with applicable law when filed and, as of their respective dates, to
Citation's Best Knowledge, did not contain any false statements or material
misstatements of fact or omit to state any material facts necessary to make the
statements set forth therein not materially misleading in light of the
circumstances in which such statements were made. No material deficiencies have
been asserted by any such regulatory commission, agency or authority with
respect to such filings or submissions.
3.11 Compliance with Applicable Laws. To Citation's Best Knowledge,
neither Citation nor any of the Citation Subsidiaries is in default under, or in
violation of, any law, rule, regulation, ordinance, licensing requirement,
order, judgment or decree of any court, administrative agency or commission or
other governmental authority or instrumentality, except for violations which
individually or in the aggregate would not, and, insofar as reasonably can be
foreseen, in the future will not, have a Material Adverse Citation Effect. No
investigation or review by any court, administrative agency or commission or
other governmental authority or instrumentality with respect to Citation or any
Citation Subsidiary is pending or, to Citation's Best Knowledge, threatened, nor
has any court, administrative agency or commission or other governmental
authority or instrumentality indicated to Citation or any Citation Subsidiary an
intention to conduct the same, other than those the outcome of which will not
have a Material Adverse Citation Effect.
3.12 Litigation. Except as may be disclosed in Citation's SEC Reports or
as set forth and described in reasonable detail on Item 3.12 of the Citation
Disclosure Statement, there is no action, suit, proceeding, claim (including
noncontractual claims, bad faith claims and claims against Citation's directors
or officers, but excluding coverage and other claims made with respect to
insurance policies issued by any of Citation's Subsidiaries), investigation or
examination pending or, to Citation's Best Knowledge, threatened against or
affecting Citation or any Citation Subsidiary or any of their respective
business, properties, assets or securities, at law or in equity, before any
federal, state or municipal court or other governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, nor, to
Citation's Best Knowledge, is there any basis for any such action, suit,
proceeding, claim, investigation or examination. Except as may be disclosed in
Citation's SEC Reports, there are no material judgments, decrees, injunctions,
rules or orders of any court, administrative agency or commission or other
governmental authority or instrumentality or arbitrator outstanding against
Citation or any Citation Subsidiary (including non-contractual claims, bad faith
claims and claims against Citation's directors or officers, but excluding
coverage and other claims made with respect to insurance policies issued by any
of Citation's Subsidiaries).
3.13 Real Property. Neither Citation nor any Citation Subsidiary owns any
right, title or interest in any real property. Item 3.13 of the Citation
Disclosure Schedule attached hereto sets forth a complete and accurate list and
general description of all material leases for real property ("Citation Real
Property Leases") to which Citation or any Citation Subsidiary is a party or by
which any of them are bound. Citation or a Citation Subsidiary have valid
leasehold interests in each Citation Real Property Lease held by any of them,
free and clear of all mortgages, options to purchase, covenants, conditions,
restrictions, easements, liens, security interests, charges, claims, assessments
and encumbrances, except for (a) rights of lessors, co-lessees or sublessees
that are reflected in each respective Real Property Lease, (b) current taxes not
yet due and payable; (c) liens and encumbrances of public record; and (d) such
nonmonetary imperfections of title and encumbrances, if any, as do not
materially detract from the value of or materially interfere with the present
use of such property. To Citation's Best Knowledge, the activities of Citation
and the Citation Subsidiaries with respect to all real property and Citation
Real Property Leases owned or held by each of them for use in connection with
their respective operations are in all material respects permitted and
authorized by applicable zoning laws, ordinances and regulations and all laws,
rules and regulations of any court, administrative agency or commission or other
governmental authority or instrumentality affecting such properties. Citation
and each Citation Subsidiary enjoy peaceful and undisturbed possession under all
material Citation Real Property Leases to which they are parties, and all of
such Real Property Leases are valid and in full force and effect.
3.14 Insurance Issued by Citation Subsidiaries; Reserves; Reinsurance
Treaties.
(a) Each form of insurance policy, policy endorsement or amendment,
reinsurance contract, annuity contract, application form, sales material
and service contract now in use by Citation or any
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Citation Subsidiary in any jurisdiction has, where required, received
interim or final approval from the appropriate insurance regulatory
authorities of such jurisdiction, except for those approvals which, if not
obtained, would not result in a Material Adverse Citation Effect.
(b) Except with respect to workers' compensation policies, neither
Citation nor any Citation Subsidiary has issued any participating policies
or any retrospectively rated policies of insurance.
(c) Any premium rates required to be filed with or approved by
insurance regulatory authorities have been so filed and have received
interim or final approvals from such regulatory authorities, and all
premiums charged by the Citation Subsidiaries conform with such approvals,
except for those filings or approvals which, if not obtained, would not
result in a Material Adverse Citation Effect.
(d) Item 3.14 of the Citation Disclosure Schedule sets forth the
Citation Subsidiaries' reserves for unearned premiums, outstanding claims
(including claims due and unpaid, not yet due, and incurred but not
reported) and claims expenses (collectively, "Citation Reserves"), gross
and net of reinsurance thereof, as of December 31, 1995, pertaining to
Citation's and the Citation Subsidiaries' insurance businesses. The
Citation Reserves were prepared in accordance with the statutory or other
accounting practices prescribed or permitted by the applicable insurance
regulatory authorities and make good and sufficient provisions for all
insurance obligations of Citation and the Citation Subsidiaries. Such
reserves have been opined upon as reasonable and adequate as of December
31, 1995, by Milliman & Robertson, a duly qualified actuary who is a member
in good standing in the American Academy of Actuaries.
(e) Item 3.14 of the Citation Disclosure Schedule sets forth a list
and description of all quota share, stop loss or other reinsurance
agreements to which either Citation or any Citation Subsidiary is a party.
(f) Citation's and the Citation Subsidiaries' Reserves, gross and net
of reinsurance thereof, as of December 31, 1995, pertaining to Citation's
and the Citation Subsidiaries' workers compensation and property and
casualty insurance businesses have been determined on a consistent basis in
accordance with the practices described on Item 3.14 of the Citation
Disclosure Schedule.
3.15 Tax Representations.
(a) Citation, each of the Citation Subsidiaries, and every member of
an affiliated group (as defined in Section 1504 of the Code), and any
comparable group for state, local or foreign Tax purposes, which has
included Citation or any of the Citation Subsidiaries (for Taxable periods
in which Citation or any of the Citation Subsidiaries was included in such
group) (each such corporation, including Citation and any of the Citation
Subsidiaries, a "Citation Taxpayer," and collectively, the "Citation
Taxpayers"), have timely filed all Tax Returns and properly collected such
information (including but not limited to taxpayer identification numbers
and related certifications) required to have been filed and collected by
them, and have paid when due all Taxes owed to any Taxing authority with
respect to all Taxable periods ending on or prior to the date hereof, or
otherwise attributable to all periods prior to the date hereof. All Tax
Returns filed are true, correct and complete in all material respects. The
Citation Financial Statements and the additional unaudited financial
statements delivered to PICO pursuant to Section 4.1 hereto contain
adequate accruals for all Taxes with respect to periods covered thereby and
all prior periods;
(b) All Tax deficiencies asserted or assessed against the Citation
Taxpayers have been paid or finally settled with no remaining amounts owed.
(c) None of the Tax Returns contain, or are expected to contain, an
understatement or misstatement under Section 6662 of the Code (or any
predecessor statute) or any similar provision of state, local or foreign
law;
(d) There is no pending or threatened action, audit, proceeding, or
investigation with respect to (i) the assessment or collection of Taxes or
(ii) a claim for refund made by a Citation Taxpayer with respect to Taxes
previously paid;
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(e) No Citation Taxpayer has received notice that the IRS or any other
taxing authority has asserted against a Citation Taxpayer any deficiency or
claim for Taxes;
(f) All amounts that are required to be collected or withheld by a
Citation Taxpayer, or with respect to Taxes of a Citation Taxpayer, have
been duly collected or withheld, and all such amounts that are required to
be remitted to any Taxing authority have been duly remitted on a timely
basis;
(g) There are no outstanding waivers of any statute of limitations
with respect to the assessment of any Tax;
(h) There are no outstanding requests for extensions of time within
which to file returns and reports in respect of any Taxes;
(i) No Citation Taxpayer has taken action not in accordance with past
practice that would have the effect of deferring any Tax liability of a
Citation Taxpayer from any period ending on or before the Closing Date to
any period ending after such date;
(j) Neither Citation nor any of the Citation Subsidiaries is a party
to any tax-sharing agreement or similar arrangement (whether express or
implied), including any terminated agreement, as to which any of them could
have any continuing liability following the Effective Time;
3.16 Additional Tax Representations
(a) Pursuant to the Merger, Newco will merge with and into PICO, and
PICO will acquire all of the assets and liabilities of Newco. Specifically,
the assets transferred to PICO pursuant to the Merger will represent at
least ninety percent (90%) of the fair market value of the net assets and
at least seventy percent (70%) of the fair market value of the gross assets
held by Newco immediately prior to the Merger. In addition, at least ninety
percent (90%) of the fair market value of the net assets and at least
seventy percent (70%) of the fair market value of the gross assets held by
PICO immediately prior to the Merger will continue to be held by PICO
immediately after the Merger. For the purpose of determining the percentage
of PICO's and Newco's net and gross assets held by PICO immediately
following the Merger, the following assets will be treated as property held
by Newco or PICO, as the case may be, immediately prior but not subsequent
to the Merger: (i) assets used by PICO or Newco (other than assets
transferred from Citation to Newco for such purpose) to pay shareholders
perfecting dissenter's rights or other expenses or liabilities incurred in
connection with the Merger and (ii) assets used to make distributions,
redemptions or other payments in respect of PICO Stock (except for regular,
normal distributions) or in respect of rights to acquire such stock
(including payments treated as such for tax purposes) that are made in
contemplation of the Merger or that are related thereto;
(b) Newco was formed solely for the purpose of consummating the
transactions contemplated by the Agreement and at no time will Newco
conduct any business activities or other operations, or dispose of any of
its assets, other than pursuant to its obligations under the Agreement;
(c) Citation's principal reasons for participating in the Merger are
bona fide business purposes not related to taxes;
(d) Prior to the Merger, Citation will be in "Control" of Newco. As
used in this Subsection, "Control" shall consist of direct ownership of
shares of stock possessing at least eighty percent (80%) of the total
combined voting power of all classes of stock entitled to vote and at least
eighty percent (80%) of the total number of shares of all other classes of
stock of the corporation. For purposes of determining Control, a person
shall not be considered to own shares of voting stock if rights to vote
such shares (or to restrict or otherwise control the voting of such shares)
are held by a third party (including a voting trust) other than an agent of
such person;
(e) In the Merger, shares of PICO Stock representing Control of PICO
will be exchanged solely for shares of Citation Stock. For purposes of this
paragraph, shares of stock of PICO exchanged in the Merger for cash and
other property (other than shares of Citation Stock) (including, without
limitation, cash paid to shareholders of PICO perfecting dissenters' rights
or in lieu of fractional shares of Citation
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voting stock) will be treated as shares of PICO Stock outstanding on the
date of the Merger but not exchanged for shares of voting stock of
Citation;
(f) The payment of cash in lieu of fractional shares of Citation Stock
is solely for the purpose of avoiding the expense and inconvenience to
Citation of issuing fractional shares and does not represent separately
bargained for consideration. The total cash consideration that will be paid
in the Merger to the Shareholders in lieu of fractional shares of Citation
Stock will not exceed one (1) percent of the total consideration that will
be issued in the Merger to Shareholders in exchange for their PICO Shares;
(g) Citation has no plan or intention to cause PICO to issue
additional shares of stock after the Merger, or take any other action, that
would result in Citation losing Control of PICO;
(h) Citation has no plan or intention to reacquire any of its stock
issued pursuant to the Merger;
(i) Citation has no plan or intention to liquidate PICO; to merge PICO
with or into another corporation, including Citation or its affiliates; to
sell, distribute or otherwise dispose of the stock of PICO; or to cause
PICO to sell or otherwise dispose of any of its assets or of any assets
acquired from Newco, except for dispositions made in the ordinary course of
business or payment of expenses, including payments to shareholders of PICO
perfecting dissenters' rights, incurred by PICO pursuant to the Merger and
except for transfers described in both Section 368(a)(2)(C) of the Code and
Treasury Regulation Section 1.368-2(j)(4);
(j) In the Merger, Newco will have no liabilities assumed by PICO and
will not transfer to PICO any assets subject to liabilities, except to the
extent incurred in connection with the transactions contemplated by the
Agreement;
(k) Following the Merger, Citation will cause PICO to continue its
historic business or use a significant portion of its historic business
assets in a business;
(l) During the past five (5) years, none of the outstanding shares
PICO Stock, including the right to acquire or vote any such shares, have
directly or indirectly been owned by Citation;
(m) Neither Citation nor Newco is an "investment company" within the
meaning of Sections 368(a)(2)(F)(iii) and (iv) of the Code;
(n) The fair market value of the Citation stock received by each
stockholder of PICO will be approximately equal to the fair market value of
the stock of PICO surrendered in exchange therefor, and the aggregate
consideration received by shareholders of PICO in exchange for their stock
of PICO will be approximately equal to the fair market value of all of the
outstanding shares of stock of PICO immediately prior to the Merger;
(o) Newco, Citation, PICO and the shareholders of PICO will each pay
separately its or their own expenses relating to the Merger;
(p) There is no intercorporate indebtedness existing between Citation
and PICO or between Newco and PICO that was issued, acquired or will be
settled at a discount as a result of the Merger;
(q) None of the compensation received by any shareholder-employee of
PICO will be separate consideration for, or allocable to, any of their
shares of PICO Stock; none of the shares of Citation Stock received by any
shareholder-employee of PICO will be separate consideration for, or
allocable to, any employment agreement or any covenants not to compete; and
the compensation paid to any shareholder-employee of PICO will be for
services actually rendered and will be commensurate with amounts paid to
third parties bargaining at arm's-length for similar services.
3.17 Material Contracts. Item 3.17 of the Citation Disclosure Schedule
sets forth a complete and accurate list of all material contracts of Citation
and the Citation Subsidiaries as of the date of this Agreement, as defined in
Item 601(b)(10) of SEC Regulation S-K (the "Citation Material Contracts").
Citation and the Citation Subsidiaries have performed in all material respects
all of the respective obligations required to be performed by them to date and
are not in default under or in breach of any term or provision of
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any of the Citation Material Contracts to which any of them is a party, is
subject or is otherwise bound, and no event has occurred that, with the giving
of notice or the passage of time or both, would constitute such a default or
breach, where such default or breach would have a Material Adverse Citation
Effect. To Citation's Best Knowledge, there are no events, facts or
circumstances which constitute or, with the giving of notice or the passage of
time or both, would constitute a default or breach of any of the Citation
Material Contracts by the other parties thereto. Each of the Citation Material
Contracts is a valid and binding agreement of Citation or a Citation Subsidiary,
as the case may be, and, to Citation's Best Knowledge, of all other parties
thereto.
3.18 Employees.
(a) To Citation's Best Knowledge, Citation and each Citation
Subsidiary are in compliance in all material respects with all currently
applicable laws and regulations respecting employment, discrimination in
employment, terms and conditions of employment, wages, hours and
occupational safety and health and employment practices, and is not engaged
in any unfair labor practice. Citation has complied with all applicable
notice provisions of and has no material obligations under COBRA with
respect to any former employees or qualifying beneficiaries thereunder.
There are no proceedings pending or, to the knowledge of Citation,
threatened, between Citation and any one or more of its employees or former
employees, which proceedings have or could reasonably be expected to have a
Material Adverse Citation Effect. Citation is not a party to any collective
bargaining agreement or other labor union contract nor does Citation know
of any activities or proceedings of any labor union to organize any of its
employees. In addition, Citation and each Citation Subsidiary has provided
all employees with all relocation benefits, stock options, bonuses and
incentives, and all other compensation that such employee has earned up
through the date of this Agreement or that such employee was otherwise
promised in their employment agreement or agreements with Citation or the
relevant Citation Subsidiary, as the case may be.
(b) Except as disclosed in the Citation Financial Statements, all
material sums due for employee compensation have been paid, accrued or
otherwise provided for, and all employer contributions for employee
benefits, including deferred compensation obligations, and any benefits
under any Citation Employee Plan have been duly and adequately paid or
provided for in accordance with plan documents. To Citation's Best
Knowledge, no person treated as an independent contractor by Citation or
any Citation Subsidiary is an employee as defined in Section 3401(c) of the
Code, nor has any employee been otherwise improperly classified, as exempt,
nonexempt or otherwise, for purposes of federal or state income tax
withholding or overtime laws, rules, or regulations. Except as set forth in
Item 3.18 of the Citation Disclosure Schedule no director, officer or
employee of Citation or any Citation Subsidiary is entitled to receive any
payment or any amount under any existing agreement, severance plan or other
benefit plan as a result of the consummation of any transaction
contemplated by this Agreement or the Merger Agreement. To Citation's Best
Knowledge, no executive or key employee or group of employees of Citation
or any Citation Subsidiary has any plans to terminate his, her or their
employment.
(c) To Citation's Best Knowledge, Citation and the Citation
Subsidiaries have complied in all material respects with all applicable
federal and state statutes and regulations which govern employment matters,
including, without limitation, federal and state wage and hour laws,
workplace safety laws, workers' compensation laws, equal employment
opportunity laws, equal pay laws, civil rights laws, the Americans With
Disabilities Act and the Fair Labor Standards Act of 1938, as amended. To
Citation's Best Knowledge, there is no action, claim, cause of action, suit
or proceeding pending or, to Citation's Best Knowledge, threatened, on the
part of any employee, independent contractor or applicant for employment,
including, without limitation, any such action, claim, cause of action,
suit or proceeding based on allegations of wrongful termination or
discrimination on the basis of age, race, religion, sex, sexual preference,
or mental or physical handicap or disability.
3.19 Employee Plans; ERISA. Except as set forth in Item 3.19 of the
Citation Disclosure Schedule, neither Citation nor any Citation Subsidiary
maintains, contributes to or has any liability under (or with respect to) any
pension, retirement, stock purchase, stock option, stock bonus, savings or
profit sharing plan, individual employment agreement, bonus or incentive
compensation programs, deferred compensation agreements, welfare or employee
pension plans as defined in Section 3(3) of ERISA (collectively, the
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"Citation Employee Plans") providing benefits to current or former employees, or
payments contingent upon a change of control of Citation or any Citation
Subsidiary or other arrangement, whether or not terminated. With respect to any
such Citation Employee Plans, all required payments, premiums, contributions,
reimbursements or accruals for all periods ending prior to or as of the Closing
shall have been made or properly accrued and any bonding with respect to such
Employee Plan required under ERISA is in full force and effect. None of any such
Employee Plans has any unfunded liabilities. Citation and the Citation
Subsidiaries have complied with all terms of ERISA and all regulations
thereunder with respect to all Citation Employee Plans.
3.20 Brokers and Finders. Except as set forth on Item 3.20 of the Citation
Disclosure Schedule, neither Citation nor any Citation Subsidiary is a party to
or obligated under any agreement with any broker or finder relating to the
transactions contemplated hereby, and neither the execution of this Agreement,
the Merger Agreement, or the Other Agreements nor the consummation of the
transactions provided for herein or therein will result in any liability to any
broker or finder.
3.21 Shareholder Rights Plan. Citation's Board of Directors has approved
an amendment to its Shareholder Rights Plan (the "Rights Plan") so that the
execution and delivery of this Agreement, the Merger Agreement and the Other
Agreements by Citation, and the consummation of the transactions contemplated
hereby and thereby, will not trigger the provisions of Citation's Shareholder
Rights Plan, and assuming that no such Shareholder will own, following the
Merger, any additional shares of Citation Stock other than his, her or its
proportionate share of the Stock Consideration to be issued in the Merger. To
the best knowledge of Citation, no event has occurred on or before the date of
this Agreement which would trigger the provisions of the Rights Plan. Each share
of Citation Stock to be issued pursuant to the Merger Agreement will also be
deemed to represent a Right, as defined in the Rights Plan.
3.22 Stock Consideration. The shares of Citation Stock to be received by
the Shareholders as the Stock Consideration upon the Closing of the Merger will
be included on Nasdaq and will have the same rights, preferences, privileges and
restrictions as the shares of Citation Stock held by other shareholders of
Citation, except for: (a) the restrictions on voting and sales or transfers of
Citation Stock applicable to certain former shareholders of Madison Capital,
Inc. pursuant to a Shareholders Voting and Transfer Restriction Agreement, dated
October 4, 1993 and (b) applicable restrictions under federal or state
securities laws and regulations and state insurance laws and regulations. Such
shares of Citation Stock have been duly authorized and, upon issuance following
the Effective Time of the Merger, will be validly issued, fully paid and
nonassessable and free from preemptive rights.
3.23 No Investment Company. Neither Citation nor any of the Citation
Subsidiaries is an "investment company", or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of 1940,
as amended.
3.24 Accuracy of Information Supplied.
(a) To Citation's Best Knowledge, none of the information supplied or
to be supplied by Citation to PICO pursuant to this Agreement contains or
will contain any untrue statement of material fact or omits or will omit a
state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which
they are made, not misleading.
(b) The Registration Statement and the Prospectus/Proxy Statement and
any other documents to be filed with the SEC or any applicable state
securities law regulatory authorities relating to the Merger, at the
respective times such documents are filed or become effective, and with
respect to the Prospectus/Proxy Statement, from the time of mailing to PICO
shareholders through the period required for PICO shareholders to perfect
dissenters' rights under applicable law, shall, as to all information
provided by Citation:
(i) comply in all material respects with the provisions of all
applicable regulations issued by the SEC pursuant to the Securities Act
and the Exchange Act and all other applicable laws and regulations; and
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(ii) not contain any statement which, at the time and in light of
the circumstances under which it is made, is false or misleading with
respect to any material fact and not omit to state any material fact
necessary in order to make the statements therein not false or
misleading or necessary to correct any statement in any earlier
communication with respect to the solicitation of a proxy for the same
meeting or subject matter which have become false or misleading.
3.25 Effective Time of Representations, Warranties, Covenants and
Agreements. Each representation, warranty, covenant and agreement of Citation
as forth in this Agreement, as updated by any written disclosure schedule
delivered pursuant to Section 4.4 below, shall be deemed to be made on and as of
the date hereof, as of the effective date of the Registration Statement and as
of the Effective Time of the Merger.
ARTICLE IV
ADDITIONAL AGREEMENTS
4.1 Access to Information. Between the date of this Agreement and the
Effective Time: (a) PICO and Citation shall afford to each other and each
other's accountants, counsel and other representatives reasonable access, upon
reasonable notice and in such manner as will not unreasonably interfere with the
conduct of their respective businesses (provided that each shall have access
beyond the other's normal business hours) to all personnel, plants, offices and
other facilities and books and records of their respective businesses and the
businesses of their respective Subsidiaries; (b) Citation shall deliver to PICO,
as soon as practicable and in any event within three days after it is filed, a
copy of any documents filed with the SEC or the insurance regulatory agencies of
any state, (c) PICO shall deliver to Citation, as soon as practicable and in any
event within three days after it is filed, a copy of any documents filed with
the SEC or the insurance regulatory agencies of any state; (d) PICO shall
deliver, as promptly as practicable following the end of each quarter after the
date hereof, a consolidated balance sheet of PICO and the PICO Subsidiaries as
of the end of such quarter; (e) Citation shall deliver, as promptly as
practicable following the end of each calendar quarter after the date hereof, a
consolidated balance sheet of Citation and the Citation Subsidiaries as of the
end of such quarter; and (f) PICO and Citation each shall deliver to the other,
as soon as practicable, and in any event within ten days after filing or
receipt, a copy of any report, schedule or other document filed with or received
from any governmental or regulatory agency, authority or body by either of them
or any of their respective Subsidiaries (other than routine documents) and all
other information concerning their respective business, properties and personnel
as either party may reasonably request from the other party. Any failure to
comply with this covenant by either party shall be disregarded if promptly
corrected without material adverse consequences to the other party. The parties
shall promptly advise each other in writing of any change or event which they
believe is likely to have a material adverse effect on their respective
businesses, prospects, assets, earnings, properties, operations or financial
condition.
4.2 Confidentiality. Each party shall hold, and shall cause its
representatives to hold, in strict confidence all documents and information
concerning the other furnished to the other party in connection with the
transactions contemplated by this Agreement, the Merger Agreement, and the Other
Agreements (except to the extent that such information is (a) previously known
to the nondisclosing party prior to its disclosure by the disclosing party, (b)
in the public domain through no fault on the part of the nondisclosing party, or
(c) later lawfully acquired by them from other sources) and will not release or
disclose such information to any other person or entity, except to such party's
auditors, attorneys, financial advisors and other consultants and advisors in
connection with this Agreement, the Merger Agreement, and the Other Agreements
and except as may be required by order, statute, rule or regulation of any court
or governmental or regulatory authority, agency or body. If the transactions
contemplated by this Agreement are not consummated, such confidence shall be
maintained (subject to the same exceptions as forth above), and either party,
upon request by the other party, shall destroy or return all copies of written
information furnished by the other party. The confidentiality obligations as
forth in this Section 4.2 shall not derogate from any other confidentiality
obligations of the parties hereto or their agents pursuant to any other
agreements, including, without limitation, that certain Confidentiality
Agreement, dated January 23, 1996 (the "Confidentiality Agreement"), between
Citation and PICO (the provisions of which agreement shall govern in the event
of any
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conflict between such agreement and this section, and shall survive the
termination of this Agreement in their entirety) and shall survive the
termination of this Agreement for any reason whatsoever.
4.3 Public Announcements. PICO and Citation will consult with each other
before issuing any press release or otherwise making any public statements with
respect to this Agreement or the transactions contemplated hereby and will not
issue any such press release or make any such public statement without obtaining
the prior written consent of the other party, unless required to do so by
statute, rule, regulation, order or decree of any court or governmental agency,
authority or body.
4.4 Notification of Certain Events. Each party shall give prompt notice to
the other party as soon as practicable after it has actual knowledge of (a) the
occurrence, or failure to occur, of any event which would or would be likely to
cause either party's representations or warranties contained in this Agreement
to be untrue or incorrect in any material respect at any time from the date
hereof to the Effective Time, or (b) any failure on its part or on the part of
any of its or its Subsidiaries' officers, directors, employees, representatives
or agents (other than persons or entities who are such employees,
representatives or agents only because they are appointed insurance agents of
such parties) to comply with or satisfy in any material respect any covenant,
condition or agreement to be complied with or satisfied by such party under this
Agreement. Each party shall have the right to deliver to the other party a
written disclosure schedule as to any matter of which it becomes aware following
execution of this Agreement which would constitute a breach of any
representation, warranty or covenant of this Agreement by such party,
identifying on such disclosure schedule the representation, warranty or covenant
which would be so breached, provided that each such disclosure schedule shall be
delivered as soon as practicable after such party becomes aware of the as matter
disclosed therein. The nondisclosing party shall have five business days from as
receipt of such disclosure schedule to notify the disclosing party that (a) it
will Close notwithstanding the new disclosure, (b) it will not Close based on
such new disclosure, or (c) further investigation or negotiation is required for
it to reach a determination whether or not to Close based on such new
disclosure. If the parties thereafter are unable to reach agreement on a
mutually satisfactory means of resolving the matter so disclosed, the
nondisclosing party shall have the right, in its discretion, to terminate this
Agreement pursuant to Section 6.1(d) or Section 6.1(e) below.
4.5 Conduct of Business in Ordinary Course. During the period from the
date of this Agreement through the Effective Time, except as specifically
contemplated by this Agreement, PICO will, and will cause the PICO Subsidiaries
to, and Citation will, and will cause the Citation Subsidiaries to, carry on
their respective businesses in the ordinary course in substantially the same
manner in which such businesses have heretofore been conducted, and use all
reasonable efforts to preserve intact their business organizations, assets,
prospects and advantageous business relations, to keep available the services of
their officers and employees and to maintain satisfactory relationships with
their respective suppliers, contractors, distributors, customers, policyholders,
insurance agents, general agents and brokers, other insurers, other agents and
others having business dealings with them. Without limiting the generality of
the foregoing, neither PICO nor any of the PICO Subsidiaries will, without the
prior written consent of Citation, and neither Citation nor any of the Citation
Subsidiaries will, without the prior written consent of PICO:
(a) amend its Articles of Incorporation or Bylaws or change its
authorized number of directors, except pursuant to the terms of this
Agreement;
(b) declare, pay or set aside for payment any dividend (other than
policyholders dividends in the ordinary course of business) on or make any
other distribution in respect of any of its capital stock, split, combine
or reclassify any of its capital stock or issue or authorize the issuance
of any other securities in respect of, in lieu of or in substitution for,
shares of its capital stock, or directly or indirectly repurchase, redeem
or otherwise acquire any shares of its capital stock or other securities or
redeem rights under the Rights Plan for more than $.01 per right or make
payments to any of its shareholders other than in the ordinary course of
business;
(c) authorize for issuance, issue, sell, pledge, dispose of or
encumber, deliver or agree or commit to issue, sell, pledge or deliver
(whether through the issuance or granting of any options, warrants,
commitments, subscriptions, rights to purchase or otherwise) any of its
capital stock (or, with respect to the Citation Subsidiaries any capital
stock of Citation) or any securities convertible into or exchangeable
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for shares of its capital stock, other than (i) pursuant to the exercise of
the PICO Options or other outstanding options to acquire PICO Stock
disclosed on the PICO Disclosure Schedule, with respect to PICO, and (ii)
pursuant to the exercise of stock options granted under Citation's 1983
Stock Option Plan or 1991 Stock Option Plan, with respect to Citation;
(d) other than in the ordinary and usual course of business and
consistent with past practice, incur any material liability or obligation
(absolute, accrued, contingent or otherwise) or issue any debt securities
or assume, guarantee, endorse or otherwise as an accommodation become
responsible for the obligations of any other individual or entity, or
change any assumption underlying, or methods of calculating, any bad debt,
contingency or other reserve;
(e) acquire (by merger, consolidation or acquisition of stock or
assets) any corporation, partnership or other business organization or
division thereof or make any investment other than in the ordinary course
of business and consistent with past practice either by purchase of stock
or securities, contributions to capital, property transfer or purchase of
any material amount of properties or assets of any other individual or
entity;
(f) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, contingent or otherwise), other than the payment,
discharge or satisfaction in the ordinary course of business and consistent
with past practice of liabilities reflected or reserved against on the PICO
or Citation Financial Statements, as the case may be, or subsequently
incurred in the ordinary course of and consistent with past practice;
(g) acquire (including by lease) any capital assets or properties
having a cost in excess of $100,000 in the case of PICO and $25,000 in the
case of Citation in the aggregate and not included within the acquiring
party's most recent capital budget, a complete and accurate copy of which
has been delivered to the other party prior to the execution of this
Agreement, or sell, dispose of, mortgage or encumber any assets or
properties having a book value in excess of $100,000 in the case of PICO
and $25,000 in the case of Citation, other than in the ordinary course of
business and consistent with past practice;
(h) waive, release, grant or transfer any rights of value or modify or
change in any material respect any existing license, lease, contract or
other document, other than in the ordinary course of business and
consistent with past practice;
(i) commit a material breach of or default under any material license,
lease, contract or other document to which it is a party or to which any of
its assets may be subject, or violate any applicable material law,
regulation, ordinance, order, injunction or decree, or any other
requirement of any court or other governmental agency, authority or body
relating to its assets or business;
(j) fail to file all reports and returns required to be filed with
federal, state, local and foreign agencies, authorities or bodies, which
failure could result in a Material Adverse PICO Effect or Material Adverse
Citation Effect, as the case may be;
(k) other than with respect to amounts being contested in good faith
as to which the other party hereto has been advised, fail (i) to pay
promptly all taxes of any nature indicated by such returns or otherwise
lawfully levied or assessed upon it or any of its properties, or (ii) to
withhold or to collect and pay to the proper governmental authorities or to
hold in separate bank accounts for such payment all taxes and other
assessments which are required by law to be so withheld or collected;
(l) cancel or allow to expire without renewal on substantially the
same terms and conditions in effect prior to such expiration any policy of
insurance covering, in the case of PICO, the business and assets of PICO or
any PICO Subsidiary, and in the case of Citation, the business and assets
of Citation or any of the Citation Subsidiaries;
(m) make any capital expenditures, or commitments with respect
thereto, except those in the ordinary course of business which are not in
excess of $100,000 in the case of PICO and $25,000 in the case of Citation
in the aggregate and are included within such party's most recent capital
budget;
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(n) fail to maintain their respective assets and properties in good
condition and repair, normal wear and tear expected; or
(o) take, or agree in writing or otherwise to take, any of the
foregoing actions or any action which would at any time make any
representation or warranty in Article II or Article III, as the case may
be, untrue or incorrect.
In addition to the foregoing, neither Citation nor any Citation Subsidiary
shall, without the prior written consent of PICO, nor PICO, nor any PICO
Subsidiary shall, without the prior written consent of Citation, (i) authorize
or issue any new options, (ii) hire any new employees at the level of Vice
President or above, (iii) accelerate any existing options, except as disclosed
on the Citation Disclosure Schedule or (iv) enter into, adopt or amend any
employee benefit plan or other employee-related agreement or grant, or become
obligated to grant, any increase in the compensation payable or to become
payable to any of their officers or directors or any general increase in the
compensation payable or to become payable to their employees (including, in each
case, any such increase pursuant to any employee benefit plan or other
employee-related agreement).
4.6 Requisite Regulatory Approvals.
(a) Registration Statement. In connection with the solicitation of
approval of the principal terms of the Merger by their shareholders and the
registration of the shares of Citation Stock to be used as the Stock
Consideration, the parties will prepare, and Citation will file, the
Registration Statement and Proxy/Prospectus with the SEC which shall comply
as to form, in all material respects, with the provisions of the Securities
Act, the Exchange Act and other applicable law. Citation will use all
reasonable efforts to respond to the comments of the SEC staff with respect
to such Registration Statement and Proxy/Prospectus and to have such
Registration Statement and Proxy/Prospectus declared effective by the SEC
as soon as practicable, and PICO will cooperate with and assist Citation in
taking such actions. The information provided and to be provided by PICO
and Citation for use in Registration Statement and Proxy/Prospectus will
not, in the case of the Registration Statement on the date it becomes
effective, and in the case of the Proxy/Prospectus on such date and on the
date on which approval of the Merger by Citation's and PICO's shareholders
is obtained, contain any untrue statement of material fact or omit to state
any material fact required to be stated herein or necessary to make the
statements therein, in light of the circumstances in which they were made,
not misleading. Each of Citation and PICO agree promptly to correct any
such information provided by it which shall have become false or misleading
in any material respect and to take all steps necessary to file with the
SEC and have declared effective or cleared by the SEC any amendment or
supplement to the Registration Statement or the Proxy/Prospectus so as to
correct the same and to cause the Proxy/Prospectus so corrected to be
distributed to their respective shareholders to the extent required by
applicable law. To the extent that any opinion regarding the tax
consequences of the Merger is required with respect to the Registration
Statement or Proxy/Prospectus, PICO and Citation will both cause each of
their respective attorneys to issue substantially similar opinions.
(b) Blue Sky Approvals. Citation will prepare and file, and PICO will
cooperate with and assist Citation in preparing and filing, all statements,
applications, correspondence or forms required to be filed with appropriate
state security law regulatory authorities to register or qualify the shares
of Citation Stock included in the Stock Consideration or to establish an
exemption from such registration or qualification (the "Blue Sky Filings").
(c) Pre-Merger Notification. Pursuant to the Hart-Scott-Rodino
Anti-Trust Improvements Act (the "Hart-Scott Act"), PICO and Citation will
prepare and file, or cause to be filed, a notification and report form (the
"Hart-Scott Report") with the Pre-Merger Notification Office of the Federal
Trade Commission and with the Antitrust Division of the Department of
Justice (collectively, the "Pre-Merger Notification Agencies") in respect
of the transactions contemplated hereby, which filing shall comply as to
form with all requirements applicable thereto and all of the data and
information reported therein shall be accurate and complete in all material
respects. Each of PICO and Citation will promptly comply with all requests,
if any, of the Pre-Merger Notification Agencies for additional information
or documentation
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in connection with the Hart-Scott Report forms filed by or on behalf of
each of such parties pursuant to the Hart-Scott Act, and all such
additional information or documentation shall comply as to form with all
requirements applicable thereto and shall be accurate and complete in all
material respects.
(d) Insurance Department and Other Regulatory Filings. Each of PICO
and Citation shall duly make all other regulatory filings required to be
made by each in respect of this Agreement or the transactions contemplated
hereby. Each party shall use all reasonable efforts to obtain all material
permits, approvals and consents required to be obtained prior to the
consummation of the Merger or necessary to carry out the transactions
contemplated by this Agreement under applicable federal, state, local and
foreign laws, rules and regulations, including, without limitation, any
approvals required under applicable state insurance laws (the "Insurance
and Other Approvals"). A representative of each party shall be entitled to
participate in all substantive discussions with regulatory agencies.
(e) Each party will furnish all information, including certificates,
consents and opinions of counsel concerning it and its Subsidiaries
reasonably deemed necessary by the other party for the filing or
preparation for filing of the Registration Statement and Proxy/Prospectus,
the Blue Sky Filings, the Hart-Scott Report and the applications for the
Insurance and Other Approvals (collectively, the "Requisite Regulatory
Approvals"). Each party covenants and agrees that all information furnished
by it for inclusion in the Registration Statement, Blue Sky Filings and all
other documents filed to obtain the Requisite Regulatory Approvals for the
Merger will comply in all material respects with the provisions of
applicable law, including the Securities Act and the Exchange Act, and the
rules and regulations of the SEC promulgated thereunder, and will not
contain any untrue statement of material fact or omit to state any material
fact required to be stated therein or necessary to make the statements
contained therein, in light of the circumstances under which they were
made, not misleading.
(f) Each party shall provide to the other: (i) promptly after filing
thereof, copies of all statements, applications, correspondence or forms
filed by such party prior to the Closing Date with state securities law
regulatory authorities, the SEC, the Pre-Merger Notification Agencies and
insurance and other appropriate regulatory authorities; and (ii) promptly
after delivery to, or receipt from, such regulatory authorities, all
written communications, letters, reports or other documents relating to the
transactions contemplated by this Agreement.
(g) PICO shall deliver to Citation a letter from Coopers & Lybrand,
dated the effective date of the Registration Statement, addressed to
Citation and satisfactory to Citation, to the effect that (i) they are the
independent public accountants with respect to PICO within the meaning of
the Securities Act and the rules and regulations promulgated thereunder;
and (ii) they have carried out certain procedures specified in the letter
and reasonably acceptable to Citation, not constituting an audit, with
respect to the unaudited financial statements and certain amounts,
percentages and financial information which are derived from the general
accounting records of PICO, TOC and the PICO Subsidiaries and are included
in the Registration Statement and the Proxy/Prospectus or in the documents
filed with the SEC pursuant to the Exchange Act and incorporated by
reference in the Registration Statement and the Proxy/Prospectus, and on
the basis of such procedures:
(i) nothing came to their attention that caused them to believe
that the unaudited financial statements included in the Registration
Statement are not stated on a basis substantially consistent with that
of the audited PICO Financial Statements; and
(ii) they have compared such amounts, percentages and financial
information with such general accounting records of PICO, TOC and the
PICO Subsidiaries and with information derived from such records and
have found them to be in agreement, excluding any questions of legal
interpretation.
(h) Citation shall deliver to PICO a letter from Deloitte & Touche,
dated the effective date of the Registration Statement, addressed to PICO
and satisfactory to PICO, to the effect that (i) they are the independent
public accountants with respect to Citation within the meaning of the
Securities Act and the rules and regulations promulgated thereunder; and
(ii) they have carried out certain procedures specified
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in the letter and reasonably acceptable to PICO, not constituting an audit,
with respect to the unaudited financial statements and certain amounts,
percentages and financial information which are derived from the general
accounting records of Citation and the Citation Subsidiaries and are
included in the Registration Statement and the Proxy/Prospectus or in the
documents filed with the SEC pursuant to the Exchange Act and incorporated
by reference in the Registration Statement and the Proxy/Prospectus, and on
the basis of such procedures:
(i) nothing came to their attention that caused them to believe
that the unaudited financial statements included in the Registration
Statement are not stated on a basis substantially consistent with that
of the audited Citation Financial Statements; and
(ii) they have compared such amounts, percentages and financial
information with such general accounting records of Citation and the
Citation Subsidiaries and with information derived from such records and
have found them to be in agreement, excluding any questions of legal
interpretation.
4.7 Shareholder Approval. As soon as practicable after the Registration
Statement and Proxy/ Prospectus are declared effective by the SEC, PICO and
Citation will cause meetings of their respective shareholders (the "Special
Meetings") to be called and will give notice of, convene and hold such meetings
for the purpose of obtaining approval by their respective shareholders of the
principal terms of the Merger. The shareholder vote required for such approval
will be no greater than that required by the applicable provisions of applicable
law and the Articles of Incorporation of the respective parties.
4.8 Nasdaq Listing. Citation shall file a Notification Form for Listing of
Additional Shares with Nasdaq with respect to the Citation Stock to be received
by PICO Shareholders in the Merger and upon exercise of the PICO Options assumed
by Citation.
4.9 Taking of Necessary Action. Each of the parties hereby agrees to use
all reasonable efforts promptly to take or cause to be taken all action and
promptly to do or cause to be done all things necessary, proper or advisable
under applicable laws, rules and regulations to consummate and make effective
the transactions contemplated by this Agreement, the Merger Agreement and the
Other Agreements.
4.10 Certain Agreements with Respect to Directors.
(a) Board Representation. As of the Effective Time, Citation shall
cause its Board of Directors to adopt a resolution fixing the number of
directors on the Board of Directors at nine (9). In addition, Citation
shall amend its Articles to effect a reduction in the number of directors
on the Board of Directors to the range of five (5) to nine (9). PICO shall
designate seven (7) persons to become directors upon the Effective Date
(the "PICO Directors") to fill the vacancies created by the resignations of
seven (7) of the existing Citation directors. Citation shall designate two
(2) persons to become directors upon the Effective Date (the "Citation
Directors") to fill the vacancies created by the resignations of two (2) of
the existing Citation directors, to serve until Citation's annual meeting
of shareholders in 1998 and until their successors are duly elected and
qualified. In the event any director resigns or becomes unable to serve
prior to the expiration of his term, a majority of the remaining Directors
shall be entitled to elect a director to fill the vacancy so created.
(b) Indemnity of Directors. Citation shall continue in effect,
without amendment, the current provisions of its Articles and Bylaws, and
current contractual obligations, with respect to indemnification of each
member of its Board of Directors after the Closing Date. Following the
Closing Date, Citation shall either maintain its directors and officers
insurance at a level at least equal to that in existence immediately prior
to the Closing Date or Citation shall purchase the "tail coverage" on the
current insurance policy.
4.11 Expenses. Each party shall bear its own costs and expenses in
connection with the preparation and negotiation of this Agreement, the Merger
Agreement, and the Other Agreements, and the consummation of the transactions
contemplated hereby and thereby ("Pre-Merger Expenses"), whether or not the
Merger is consummated.
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4.12 Non-Solicitation and Cooperation.
(a) Citation, its directors and officers will take any and all
reasonable actions (including but not limited to voting in favor of the
Merger) to promote the consummation of the transactions contemplated by
this Agreement. Citation will not, and will not authorize its directors,
shareholders, officers, agents or other representatives to, encourage,
solicit, initiate (or otherwise engage in discussions or negotiations
with), or provide any information to, any person, entity or group
concerning any acquisition proposal, tender offer, exchange offer, merger,
consolidation, sale of substantial assets, sale of securities or rights to
vote shares of Citation Stock, or in connection with the liquidation,
dissolution or any similar transactions involving Citation or any
Subsidiary or division of Citation (collectively, "Citation Acquisition
Proposals"). Citation will promptly inform PICO of any inquiry it may
receive with respect to any Acquisition Proposal which Citation's Board of
Directors believes merits serious consideration and furnish to PICO a copy
thereof. Nothing contained in this Section 4.12(a) or in any other
provision of this Agreement shall, however, prohibit Citation or its Board
of Directors from making such disclosures to Citation's shareholders as are
required under applicable law. Nothing contained in this Section 4.12(a) or
in any other provision of this Agreement shall prohibit the Board of
Directors of Citation from furnishing information to, or entering into
discussions or negotiations with, any person or entity that makes a bona
fide Citation Acquisition Proposal if: (A) the Board of Directors of
Citation, after consultation with and receiving the advice of its legal
counsel and financial advisors, determines in good faith that such action
is necessary or required for the Board of Directors of Citation to comply
with its fiduciary duties to Citation's shareholders under applicable law,
(B) before furnishing such information to, or entering into discussions or
negotiations with, such person or entity, Citation discloses to PICO that
it is furnishing information to, or entering into discussions or
negotiations with, such person or entity, which notice shall describe the
terms thereof (but need not identify the person or entity making the
offer), (C) prior to furnishing such information to such person or entity,
Citation receives from such person or entity an executed confidentiality
agreement, with terms no less favorable to Citation than those contained in
the Confidentiality Agreement, and (D) Citation keeps PICO informed
promptly of the status (including the terms, but any disclosure of terms
shall be covered by the Confidentiality Agreement) of any such discussions
or negotiations (provided that, Citation shall not be required to disclose
to PICO confidential information concerning the business or operations of
the person making the expression of interest). Subject to the preceding
sentence, the Board of Directors may approve and recommend to Citation's
shareholders a Citation Acquisition Proposal from a third party.
(b) PICO, its directors and officers will take any and all reasonable
actions (including but not limited to voting in favor of the Merger) to
promote the consummation of the transaction.
(c) In order to maximize the opportunity to inform shareholders of the
mutual benefits contemplated to result from the Merger, Citation will use
reasonable efforts to include John Hart, Ron Langley or any executive
officer of PICO designated by them in any meetings or conference calls with
persons who own beneficially five percent (5%) or more of Citation's Common
Stock (determined in accordance with Section 13 of the Exchange Act) to the
extent such meetings or calls relate primarily to the Merger. While it is
the intent that Citation and PICO cooperate to jointly respond to
shareholders of Citation, Citation shall not be required to include PICO
representatives when responding to questions initiated by shareholders by
telephone or to reschedule meetings if PICO representatives are not
available at a time or times requested by a shareholder. Notwithstanding
the above, Citation shall not be required to include PICO in any meetings
or discussions with any third party which has made or is making a bona fide
Citation Acquisition Proposal, so long as Citation complies with the
provisions of Section 4.12(a) above.
(d) Notwithstanding any other provision of this Agreement (including
without limitation subsections (a) and (c) of this Section 4.12), Citation
shall have no obligations under subsections (a) and (c) of this Section
4.12 unless and until (i) Citation shall have received evidence
satisfactory to it in its sole discretion that Guinness Peat Group plc,
PICO, and TOC have executed the GPG Agreement, and (ii) Citation shall have
approved in writing the final form of the GPG Agreement; provided, however,
that Citation's obligations under subsections (a) and (c) of this Section
4.12 shall terminate 60 days after Guinness Peat Group plc, PICO, and TOC
have executed the GPG Agreement, if by the end of such 60
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day period the transactions contemplated by the GPG Agreement have not been
consummated; and provided, further, that the obligations of Citation in
subsections (a) and (c) of this Section 4.12 shall be in full force and
effect until May 10, 1996.
4.13 Registration of Citation Stock.
(a) Citation shall maintain the registration of the Citation Stock
under Section 12(g) of the Exchange Act for a period of not less than three
years following the Closing, and shall continue to comply with the
reporting and other requirements of the Exchange Act for the same
three-year period.
4.14 Prohibition on Certain Sales. Citation shall not file a registration
statement for the sale of the stock of Guinness Peat Group plc for six (6)
months following the Closing Date.
4.15 Withdrawal of PICO Registration Statement. Prior to the Closing, PICO
shall withdraw the registration statement it filed with the SEC on November 15,
1995 as amended by Amendment No. 1 filed with the SEC on January 30, 1996 (File
No. 33-99352).
4.16 Best Efforts Concerning Tax-Free Reorganization. Citation and PICO
each shall use their best efforts so that the Merger qualifies as a tax free
reorganization under Section 368(a) of the Code.
ARTICLE V
CONDITIONS
5.1 Conditions to Citation's and PICO's Obligations. The obligations of
Citation and PICO to effect the Merger and to consummate the transactions
contemplated hereby shall be subject to the fulfillment of the following
conditions:
(a) This Agreement, the Merger Agreement and the Merger shall have
been validly approved and adopted by the holders of a majority of the
outstanding shares of Citation Stock and PICO Stock, and the Merger
Agreement shall have been filed with the appropriate state authorities
immediately prior to the Closing.
(b) All Requisite Regulatory Approvals shall have been obtained, and
all waiting periods required to expire prior to consummation of the Merger
shall have expired, without the imposition of any condition which in the
reasonable judgment of Citation is materially burdensome upon Citation or
the Citation Subsidiaries or their affiliates (i.e., persons or entities
controlling, controlled by or under common control with such parties).
Without limiting the generality of the foregoing:
(i) The Registration Statement shall have become effective under
the Securities Act, and no stop order suspending the effectiveness of
the Registration Statement shall have been issued and shall remain in
effect;
(ii) All Blue Sky Filings shall have been made, and the sale of the
Citation Stock resulting from the Merger shall have been qualified or
registered with the appropriate state securities law regulatory
authorities of all states in which qualification or registration is
required under applicable state securities laws, and such qualifications
or registrations shall not have been suspended or revoked, or shall be
exempt from such qualification or registration.
(iii) The Hart-Scott Report shall have been submitted to the
Pre-Merger Notification Agencies, and the waiting period under the
Hart-Scott Act shall have expired; and
(iv) The Merger and the transfer of ownership of PICO and the PICO
Subsidiaries shall have been approved by the California Insurance
Department, the Ohio Insurance Department, and the insurance departments
of all states in which Citation, PICO and any Subsidiaries of either of
them conduct business, to the extent such approvals are required.
For purposes of this Agreement no condition shall be deemed to be
"materially burdensome" if compliance with such condition would not either
(A) require the taking of any action inconsistent with
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the manner in which Citation, PICO or any of their respective affiliates
have conducted their businesses previously, or (B) have a material adverse
effect upon the business, financial condition, results of operations or
prospects of Citation, PICO or any of their respective affiliates, or (C)
preclude satisfaction of any of the conditions to consummation of the
transactions contemplated by this Agreement.
(c) No legal, administrative, arbitration, investigatory or other
proceeding by any court, administrative agency or commission or other
governmental authority or instrumentality shall have been instituted and,
at what would otherwise have been the Effective Time, remain pending by or
before any court, administrative agency or commission or other governmental
authority or instrumentality to restrain or prohibit the transactions
contemplated hereby.
(d) For the purposes of qualifying as a tax-free reorganization under
Section 368(a) of the Code, not more than 5% of the outstanding shares of
PICO Stock shall have been determined to be Dissenting Shares; provided,
however, that if as of the Determination Date a lesser percentage is deemed
necessary by agreement of the parties to satisfy the representations made
in Section 2.16 and 3.16 hereof, not more than such lesser percentage of
the outstanding shares of PICO Stock shall have been determined to be
Dissenting Shares.
(e) Guinness Peat Group plc shall have executed and delivered the
Shareholder Letter to PICO in the form set forth in Exhibit C-1 and each
other 5% Shareholder of PICO shall have executed and delivered a
Shareholder Letter to PICO in the form set forth in Exhibit C-2.
(f) Guinness Peat Group plc shall have consented in writing to the
transactions contemplated by this Agreement.
5.2 Conditions to Citation's Obligations. The obligations of Citation to
effect the Merger and to consummate the transactions contemplated hereby shall
be subject to the fulfillment of the following conditions, any of which may be
waived by Citation in writing on or prior to the Closing Date:
(a) The representations and warranties pertaining to PICO and the PICO
Subsidiaries contained in Article II shall be true in all material respects
at the Effective Time as though made at and as of the Effective Time (after
taking into account matters disclosed on additional disclosure schedules
delivered by PICO pursuant to Section 4.4 above and not objected to by
Citation within five business days after receipt thereof or otherwise
accepted by Citation), PICO shall have duly performed and complied in all
material respects with all agreements, covenants and conditions required by
this Agreement to be performed or complied with by it prior to or at the
Effective Time, none of the events or conditions entitling Citation to
terminate this Agreement under Article VI shall have occurred and be
continuing, and PICO shall have delivered to Citation a certificate dated
the date of the Effective Time and signed by PICO's President certifying to
the effect set forth in this subsection (a).
(b) Citation shall have received certificates dated the Closing Date
and signed by the Secretary or an Assistant Secretary of PICO certifying
(i) that copies of the Articles of Incorporation and Bylaws of PICO
attached thereto are complete and accurate copies of such charter
documents, as amended through the Closing Date, (ii) that a complete and
accurate copy of the resolutions adopted by the Board of Directors and
Shareholders of PICO authorizing the Merger and the execution, delivery and
performance of this Agreement and the Merger Agreement and approval of the
Other Agreements and all instruments and documents contemplated to be
executed by PICO pursuant hereto is attached thereto, and (iii) the names,
signatures and positions of the officers of PICO who have executed this
Agreement or any other agreement, instrument or document executed by PICO
as a Closing document hereunder.
(c) Any consent required for the consummation of the Merger under any
agreement or license to which PICO or any PICO Subsidiary is a party or by
or under which any of them is bound or licensed, the withholding of which
would have a Material Adverse PICO Effect, shall have been obtained.
(d) Neither PICO nor any PICO Subsidiary shall be subject to any
litigation or proceeding (excluding coverage and other claims made with
respect to insurance policies issued by any PICO Subsidiary and litigation
or proceedings disclosed on any of the schedules to this Agreement and
accepted
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by Citation) which if determined adversely to such party would have a
Material Adverse PICO Effect, and no other fact, circumstance or event
shall have occurred or be occurring, or any damage to or destruction of any
of PICO's or any PICO Subsidiary's respective assets, properties or
records, whether or not insured, which, with the passage of time or
otherwise, is likely to result in a Material Adverse PICO Effect.
(e) Citation shall have obtained all necessary licenses, approvals,
permits and authorizations which in its reasonable judgment are necessary
for it to conduct the business of PICO after the Merger, including, without
limitation, licenses substantially similar to those held by PICO before the
Merger.
(f) Citation shall have received from legal counsel to PICO opinions
dated the Effective Time in substantially the forms attached hereto as
Exhibits B-1, B-2, and B-3.
(g) Citation shall have received from Coopers & Lybrand, accountants
to PICO, a letter, dated the Closing Date, addressed to Citation and
satisfactory to Citation, to the effect that (i) they are the independent
public accountants with respect to PICO within the meaning of the
Securities Act and the rules and regulations promulgated thereunder; (ii)
on the basis of certain procedures specified in the letter and reasonably
acceptable to Citation, not constituting an audit, nothing came to their
attention that caused them to believe that:
(A) the unaudited most recent financial statements delivered to
Citation pursuant to Section 4.1 of this Agreement are not stated on a
basis substantially consistent with that of the audited PICO Financial
Statements; and
(B) as of a specified date not more than five days prior to the
date of such letter, there has been no increase in long-term debt of
PICO or any PICO Subsidiary of greater than 10%, as compared with
long-term debt at December 31, 1995, or any increase in the outstanding
capital stock of PICO or any PICO Subsidiary (other than issuances of
additional stock pursuant to vested PICO Options or outstanding options
disclosed on the PICO Disclosure Schedule, or any decrease in PICO's
consolidated stockholders' equity (as calculated in accordance with
GAAP, consistently applied) of greater than 10%, as compared with
consolidated stockholders' equity at December 31, 1995.
Citation shall have no obligation to PICO, any Shareholder or any other
person to waive, in whole or in part, delivery of any such letter or the request
that it contain any given information.
(h) PICO and the PICO Subsidiaries, taken as a whole, shall not have
suffered a material adverse change in their financial condition,
operations, assets, or business or financial prospects.
(i) PICO shall have provided to Citation a certification meeting the
requirements of Section 1.1445-2(c)(3) of the Treasury Regulations to the
effect that PICO has not been a "United States real property holding
corporation" within the meaning of Section 897(c)(2) of the Code during the
period specified in Section 897(c)(1)(A)(ii) of the Code, using the
Effective Time as the "date of disposition of such interest" specified in
clause (II) thereof.
(j) Citation shall have received a fairness opinion from Prudential
Securities, Inc.
(k) Citation shall have received evidence satisfactory to it in its
sole discretion that the transactions between PICO, TOC and Guinness Peat
Group plc substantially as contemplated by that certain draft Agreement for
Purchase and Sale of Shares provided to counsel for Citation on May 2, 1996
(the "GPG Agreement") (including, without limitation, the sale by GPG of
843,000 shares of PICO Stock to TOC) shall have been consummated.
(l) Citation shall have approved in writing the final form of the GPG
Agreement.
(m) PICO shall have delivered to Citation such other certificates and
instruments as Citation and its counsel may reasonably request. The form
and substance of all certificates, instruments, opinions and other
documentation delivered to Citation under this Agreement shall be
reasonably satisfactory to Citation and its counsel.
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5.3 Conditions to PICO's Obligations. The obligations of PICO to effect
the Merger and to consummate the transactions contemplated hereby shall be
subject to the fulfillment of the following conditions, any of which may be
waived by PICO in writing on or prior to the Closing Date.
(a) The representations and warranties of Citation in Article III
shall be true in all material respects at the Effective Time as though made
at and as of the Effective Time (after taking into account matters
disclosed on any additional disclosure schedules delivered by Citation
pursuant to Section 4.4 above and not objected to by PICO within five
business days after receipt thereof or otherwise accepted by PICO),
Citation shall have duly performed and complied in all material respects
with all agreements, covenants and conditions required by this Agreement to
be performed or complied with by it prior to or at the Effective Time, none
of the events or conditions entitling PICO to terminate this Agreement
under Article VI shall have occurred and be continuing, and Citation shall
have delivered to PICO a certificate dated the date of the Effective Time
and signed by Citation's President certifying to the effect set forth in
this subsection (a).
(b) PICO shall have received certificates dated the Closing Date and
signed by the Secretary or an Assistant Secretary of Citation certifying
(i) that a complete and accurate copy of the resolutions adopted by the
Board of Directors and shareholders of Citation authorizing the Merger and
the execution, delivery and performance of this Agreement, the Merger
Agreement, the Other Agreements and all instruments and documents
contemplated to be executed by Citation pursuant hereto is attached
thereto, and (ii) the names, signatures and positions of the officers of
Citation who have executed this Agreement or any other agreement,
instrument or document executed by Citation as a Closing document
hereunder.
(c) Citation shall have deposited the Stock Consideration with the
Exchange Agent.
(d) PICO shall have received from legal counsel to Citation an opinion
dated the Effective Time in substantially the form attached hereto as
Exhibit D.
(e) Not more than 5% of the outstanding shares of Citation Stock shall
have been determined to be Dissenting Shares.
(f) Citation and the Citation Subsidiaries, taken as a whole, shall
not have suffered a material adverse change in their financial condition,
operations, assets, or business prospects.
(g) PICO shall have received a fairness opinion from Montag &
Joselson.
(h) PICO shall have received from Deloitte & Touche, accountants to
Citation, a letter, dated the Closing Date, addressed to PICO and
satisfactory to PICO, to the effect that (i) they are the independent
public accountants with respect to Citation within the meaning of the
Securities Act and the rules and regulations promulgated thereunder; (ii)
on the basis of certain procedures specified in the letter and reasonably
acceptable to PICO, not constituting an audit, nothing came to their
attention that caused them to believe that:
(A) the unaudited most recent financial statements delivered to
PICO pursuant to Section 4.1 of this Agreement are not stated on a basis
substantially consistent with that of the audited Citation Financial
Statements; and
(B) as of a specified date not more than five days prior to the
date of such letter, there has been no increase in long-term debt of
Citation or any Citation Subsidiary, as compared with long-term debt at
December 31, 1995, or any increase in the outstanding capital stock of
Citation or any Citation Subsidiary (other than issuances of additional
stock pursuant to vested Citation Options) as compared with capital
stock at December 31, 1995, or any decrease in Citation's consolidated
stockholders' equity (as calculated in accordance with GAAP,
consistently applied) of greater than 5%, as compared with consolidated
stockholders' equity at December 31, 1995.
(i) PICO shall have received copies of the resignations of all of the
current members of the Board of Directors of Citation, and the PICO
Directors and the Citation Directors shall have been appointed.
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(j) The Amended and Restated Articles of Incorporation of Citation
substantially in the form attached hereto as Exhibit E shall have been
filed in the office of the California Secretary of State.
(k) No event shall have occurred which would result in a Distribution
Date (as such term is defined in the Rights Plan).
(l) Citation shall have delivered to PICO such other certificates and
instruments as PICO and its counsel may reasonably request. The form and
substance of all certificates, instruments and other documentation
delivered to Citation under this Agreement shall be reasonably satisfactory
to PICO and its counsel.
(m) The Amended and Restated Bylaws of Citation, substantially in the
form attached hereto as Exhibit F, shall have been approved and shall
become effective at the Effective Time.
(n) Citation and each holder of a PICO Option (including outstanding
options disclosed on the PICO Disclosure Schedule) shall have entered into
an agreement providing for the assumption of such options by Citation and
conversion of such options to options to purchase Citation Stock in
accordance with the formula set forth on Schedule 1.5(a).
(o) Citation shall have executed and delivered its standard form
indemnity agreement to each PICO Director.
(p) Citation shall have executed and delivered to PICO an Assignment
and Assumption Agreement pursuant to which Citation shall have been
assigned all rights and assumed all obligations of PICO under the Agreement
for Purchase and Sale of Stock between PICO, Guinness Peat Group plc, and
Quaker Holdings Limited dated November 23, 1993, as amended (i) by
subsequent assignment by the parties thereto and (ii) by the GPG Agreement.
TERMINATION, AMENDMENTS AND WAIVERS
6.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after approval by the parties' respective
shareholders, only as follows:
(a) by mutual consent of the Boards of Directors of PICO and Citation;
(b) by either PICO or Citation if the Effective Time shall not have
occurred by the close of business on December 31, 1996; provided, however,
that neither party shall be permitted to terminate this Agreement under
this subsection (b) if the Effective Time shall not have occurred by such
date as a result of such party's breach of any representation, warranty,
agreement or covenant contained herein;
(c) by PICO after the occurrence of a default by Citation in the
performance of any of its material obligations hereunder which is not cured
within ten (10) business days after receipt of written notice of the
default from PICO;
(d) by Citation after the occurrence of a default by PICO in the
performance of any of its material obligations hereunder which is not cured
within ten (10) business days after receipt of written notice of the
default from Citation;
(e) by Citation upon PICO's failure to satisfy any conditions
specified in Section 5.1 or 5.2;
(f) by PICO upon Citation's failure to satisfy any conditions
specified in Section 5.1 or 5.3;
(g) by Citation if the average closing price of PICO Stock as reported
on Nasdaq for the twenty (20) consecutive trading days prior to (and not
including) the Determination Date is less than $22.50 per share; provided,
that Citation shall have no right to terminate this Agreement under this
subsection after the Closing Date; or
(h) by PICO if the average closing price of PICO Stock as reported on
Nasdaq for the twenty (20) consecutive trading days prior to (and not
including) the Determination Date is greater than $33.50 per
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share; provided, that PICO shall have no right to terminate this Agreement
under this subsection after the Closing Date.
6.2 Effect of Termination: Survival. No termination of this Agreement
under Section 6.1 for any reason or in any manner shall release, or be construed
as so releasing, either party hereto from its obligations pursuant to Sections
4.2, 4.11 or Article VII hereto or from any liability or damage to the other
party hereto arising out of, in connection with or otherwise relating to,
directly or indirectly, said party's material breach, default or failure in
performance of any of its covenants, agreements, duties or obligations arising
hereunder, or any intentional breaches of any representation or warranty
contained herein arising prior to the date of termination of this Agreement. If
and only if this Agreement is terminated by the parties pursuant to Section 6.1
prior to the Closing, neither party shall have any liability to the other party
for any unintentional breaches of any representation or warranty contained
herein arising prior to the date of termination of this Agreement.
6.3 Amendment. This Agreement may be amended by the parties hereto, by
action taken by their respective boards of directors or the duly authorized
committees thereof, at any time before or after approval hereof by the
shareholders of either party, but after any such approval by such shareholders,
no amendment shall be made which changes the principal terms of this Agreement
within the meaning of applicable law without again seeking the approval of the
shareholders of each party. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
6.4 Waiver. No waiver of any right or obligation of either party hereto
under this Agreement shall be effective unless in a writing, specifying such
waiver, executed by the party against which such waiver is being enforced. A
waiver by either party hereto of any of its rights under this Agreement on any
occasion shall not be a bar to the exercise of the same right on any subsequent
occasion or of any other right at any time.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS,
WARRANTIES AND COVENANTS,
LIMITATION OF LIABILITY
7.1 No Survival. Regardless of any investigation by the other party or its
agents, the representations, warranties, covenants and agreements made by the
parties in this Agreement (except those contained in Sections 4.10, 4.13, 4.14,
4.16, 6.2, and Articles VII and VIII), or in any certificate or document
furnished pursuant hereto, shall not survive the Effective Time.
7.2 Limitation of Liability. The term "Damages" contained herein shall
mean any demands, claims, actions or causes of action, assessments, losses,
damages, liabilities, costs and expenses, including, without limitation,
interest penalties and reasonable attorneys' fees and expenses. Notwithstanding
anything in this Agreement to the contrary:
(a) in the absence of actual fraud or willful misconduct: (i) in no
event shall PICO or the Shareholders have liability for Damages in
connection with this Agreement after the Closing; and (ii) in no event
shall Citation have liability for Damages in connection with this Agreement
after the Closing; and
(b) with respect to claims for Damages based on actual fraud or
willful misconduct, in no event shall PICO's or any Shareholder's liability
exceed the total amount of the Stock Consideration to be received by such
Shareholder pursuant to this Agreement and in no event shall Citation's
liability exceed an amount equal to the aggregate Stock Consideration.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Notices. All notices, requests, waivers and other communications made
to a party hereto pursuant to this Agreement shall be deemed to have been duly
given if given in writing and hand-delivered, mailed
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postage pre-paid, certified or registered, return-receipt requested, or sent by
prepaid courier, overnight delivery of which is guaranteed and acknowledgment of
receipt of which is required, to the address of the party set forth as follows,
or to any other address that such party may designate by written notice to the
other:
<TABLE>
<S> <C>
If to Citation: Citation Insurance Group
One Almaden Boulevard
Suite 300
San Jose, California 95113
Attn: Donald Henderson, President
With a copy to: Gibson, Dunn & Crutcher
One Montgomery Street
26th Floor, Telesis Tower
San Francisco, California 94104
Attn: Lawrence Calof, Esq.
If to PICO: Physicians Insurance Company of Ohio
P.O. Box 1449
Columbus, Ohio 42316
Attn: Mr. John R. Hart
Attn: Mr. James F. Mosier
With a copy to: Gray Cary Ware & Freidenrich
401 B Street, Suite 1700
San Diego, CA 92101-4297
Attn: Rob Ayling, Esq.
</TABLE>
Each such communication which is (a) hand delivered shall be deemed to be
effective when so delivered, (b) sent by mail shall be deemed to be effective
three business days (i.e., any day, other than a Saturday, Sunday or legal
holiday in the State of California, on which banks are open for substantially
all their banking business) after deposit in the United States mail, or (c) sent
by courier shall be deemed to be effective one business day after it is
delivered to the courier company.
8.2 Severability. In the event any provision, or portion thereof, of this
Agreement is held by a court having proper jurisdiction to be unenforceable in
any jurisdiction, then such portion or provision shall be deemed to be severable
as to such jurisdiction (but, to the extent permitted by law, not elsewhere) and
shall not affect the remainder of this Agreement, which shall continue in full
force and effect. If any provision of this Agreement is held to be so broad as
to be unenforceable, such provision shall be interpreted to be only so broad as
is necessary for it to be enforceable.
8.3 Successors and Assigns: Assignment. This Agreement shall be binding
upon, and inure to the benefit of, the respective legal representatives,
successors and permitted assigns of the parties, but nothing contained in this
Section shall be construed as a consent to any assignment of this Agreement. No
party may assign any rights or obligations under this Agreement without the
written consent of the other party hereto.
8.4 Attorneys' Fees. Should any litigation or arbitration be commenced
between Citation and PICO or the Shareholders concerning this Agreement, or the
rights and duties of the parties in relation to this Agreement, the party
prevailing in such litigation or arbitration shall be entitled, in addition to
such other relief as may be granted, to the reasonable attorneys' fees and costs
which it incurs in connection with such litigation or arbitration, as determined
by the trier of fact in such litigation or arbitration or in a separate action
brought for that purpose. The trier of fact in such litigation or arbitration
shall specify the "prevailing party" and the "non-prevailing party" in the
decision. If any such litigation or arbitration embraces more than one dispute
and a party is the prevailing party with respect to less than all such disputes,
the trier of fact shall apportion the costs and expenses and reasonable
attorneys' fees incurred by the parties to the separate disputes, and equitably
determine the amount to be borne by each party.
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8.5 Governing Law. The interpretation, performance and enforcement of this
Agreement and the legal relations among the parties hereto shall be governed by
and construed in accordance with the internal laws of the State of California
applicable to contracts made and to be wholly formed in such state.
8.6 Headings: Pronouns. The headings and subheadings used in this
Agreement are for convenience of reference only and shall not be considered in
construing this Agreement. All pronouns and any variations thereof shall be
deemed to refer to the masculine, feminine or neuter, singular or plural as the
context requires.
8.7 Counterpart Execution. This Agreement may be executed in counterparts
with the same effect as if all parties hereto had signed the same document. All
counterparts so executed shall be deemed to be an original, shall be construed
together and shall constitute one agreement.
8.8 Further Assurances. At the request of any party hereto, the other
parties shall execute, acknowledge and deliver such other documents and/or
instruments as may be reasonably required by the requesting party to carry out
the purposes of this Agreement. In the event either party shall be involved in
litigation, threatened litigation or government inquiries with respect to a
matter covered by this Agreement, the other party shall also make available to
such party, at reasonable times and subject to the reasonable requirements of
its own businesses, such of its personnel as may have information relevant to
such matters, provided that such party shall reimburse the providing party for
its reasonable costs for employee time incurred in connection therewith if more
than one business day is required. Following the Closing, the parties will
cooperate with each other in connection with tax audits and in the defense of
any legal proceedings.
8.9 Remedies Cumulative. Unless expressly made the exclusive remedy by the
terms of this Agreement, all remedies provided for herein are cumulative and
shall be in addition to any and all other rights and remedies provided by law
and by any other agreements between the parties.
8.10 Presumptions. It is expressly acknowledged and agreed that all
parties have been represented by counsel and have participated in the
negotiation and drafting of this Agreement, and that there shall be no
presumption against any party on the ground that such party was responsible for
preparing this Agreement or any part of it.
8.11 Exhibits and Schedules. Each of the exhibits and schedules referred
to herein and attached hereto is an integral part of this Agreement and is
incorporated herein by this reference.
8.12 No Third Party Beneficiaries. The parties do not intend to confer any
benefit hereunder upon any person, firm or corporation other than the parties
hereto and their shareholders.
8.13 Time of Essence. Time is of the essence in this Agreement as to all
dates and time periods set forth herein.
8.14 Definition of Best Knowledge. For purposes of this Agreement:
(a) The term "Citation's Best Knowledge," with respect to a particular
fact or circumstance, shall mean actual knowledge of such particular fact
or circumstance, or knowledge of other facts or circumstances from which a
reasonable person should have known of such particular fact or
circumstance, by the following persons: Donald Henderson, Robert Erickson,
J. Phillip DiNapoli, James Bancroft, Paul Bancroft, Theodore Biagini,
Marshall J. Burak, E. Alexander Glover, Douglas Gould, Donald Imwalle,
Louis J. Mariani, Sr., Eugene A. O'Rourke, Charles McInnis, Willard
Heffelman and Larry D. Russel.
(b) The term "PICO's Best Knowledge," with respect to a particular
fact or circumstance, shall mean actual knowledge of such particular fact
or circumstance, or knowledge of other facts or circumstances from which a
reasonable person should have known of such particular fact or
circumstance, by the following persons: John R. Hart, Ronald Langley, James
F. Mosier, Richard D. Ruppert. M.D., S. Walter Foulkrod, III, Dr. Gary H.
Weiss, John D. Weil, Richard H. Sharpe, Charles E. Bancroft, Gary W.
Burchfield, and John I. Dickerson.
8.15 Complete Agreement, Conflicts and Amendments. This Agreement,
together with all exhibits and schedules incorporated by reference herein and
the Confidentiality Agreement, constitutes the complete
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understanding of the parties regarding the subject matter hereof and supersedes
all prior or contemporaneous agreements of the parties, whether written or oral;
provided, however, that in the event of any conflict between the provisions of
this Agreement and the provisions of any exhibit incorporated by reference
herein, the provisions of such exhibit shall be controlling.
The parties hereto have executed and delivered this Agreement as of the
date first written above.
CITATION INSURANCE GROUP
By: /s/ J. PHILIP DINAPOLI
-------------------------------------
J. Philip DiNapoli
Chairman
PHYSICIAN'S INSURANCE COMPANY OF OHIO
By: /s/ JOHN R. HART
-------------------------------------
John R. Hart,
President and Chief Executive Officer
CITATION HOLDINGS, INC.
By: /s/ BOB ERICKSON
-------------------------------------
Bob Erickson
President
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<PAGE> 237
AGREEMENT OF MERGER
This AGREEMENT OF MERGER dated as of August , 1996 (the "Merger
Agreement") by and between Citation Holdings, Inc., an Ohio corporation
("Holdings"), and The Physicians Insurance Company of Ohio, an Ohio corporation
("PICO"; Holdings and PICO being hereinafter sometimes collectively referred to
as the "Constituent Corporations"):
WITNESSETH:
WHEREAS, each of Holdings and PICO is a corporation organized and existing
under the laws of the State of Ohio;
WHEREAS, pursuant to an Agreement and Plan of Reorganization dated as of
April 30, 1996 by and between Citation Insurance Group, a California corporation
("Citation"), Holdings and PICO (the "Reorganization Agreement"), Citation,
Holdings and PICO each have made certain agreements and undertakings in
connection with the Merger (as defined below) contemplated by this Merger
Agreement:
WHEREAS, the respective Board of Directors and shareholders of PICO,
Holdings and Citation have approved this Merger Agreement and deem it advisable
for the mutual benefit of the Constituent Corporations, and of the shareholders
of each, that Holdings merge with and into PICO under and pursuant to the
applicable provisions of Chapter 1701 of the Ohio Revised Code (the "Ohio
General Corporation Law") and upon the terms and conditions hereinafter set
forth;
NOW, THEREFORE, in consideration of the premises hereof and the mutual
agreements, provisions and covenants herein contained, and in accordance with
the laws of the State of Ohio, Holdings and PICO hereby agree that, subject to
the terms and conditions hereinafter set forth, on the Effective Date (as
defined in Section 6.1 hereof) Holdings shall be merged with and into PICO (the
"Merger"), PICO shall be the surviving corporation (hereinafter sometimes called
the "Surviving Corporation"), the name of the Surviving Corporation shall be
"Physicians Insurance Company of Ohio," and the Surviving Corporation shall
continue to be governed by the laws of the State of Ohio, and that the terms of
the Merger, the mode of carrying the same into effect and the manner and basis
of making distributions to shareholders of the Constituent Corporations in
extinguishment of or in substitution for their shares shall be as follows:
ARTICLE I
The Articles of Incorporation of the Surviving Corporation shall be as set
forth on EXHIBIT A hereto, and from and after the Effective Date of the Merger
such Articles shall become and continue to be, and may be separately certified
as, the "Articles" of the Surviving Corporation within the meaning of Section
1701.01 of the Ohio General Corporation Law until changed as provided by law.
ARTICLE II
The Regulations of the Surviving Corporation shall be as set forth on
Exhibit B hereto until changed as provided by law.
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<PAGE> 238
ARTICLE III
The Directors and Executive Officers of the Surviving Corporation at the
Effective Date of the Merger, who shall hold office until their respective
successors are elected in accordance with the Regulations of the Surviving
Corporation and shall have been duly qualified, are as follows:
<TABLE>
<CAPTION>
NAME POSITION
- ---------------------------- -------------------------------------------
<S> <C>
John R. Hart Director, President and Chief Executive
Officer
Richard H. Sharpe Chief Operating Officer
Martha G. Althauser Vice President, Claims
Gary W. Burchfield Chief Financial Officer and Treasurer
James Mosier General Counsel and Secretary
Ronald Langley Director and Chairman of the Board
S. Walter Foulkrod, III, Director
Esq.
Richard D. Ruppert M.D. Director
John D. Weil Director
Dr. Gary H. Weiss Director
</TABLE>
ARTICLE IV
The name and address of the statutory agent in Ohio upon whom any process,
notice or demand against either of the Constituent Corporations or the Surviving
Corporation may be served is as follows:
<TABLE>
<CAPTION>
NAME ADDRESS
- --------------------- ----------------------------
<S> <C>
James Mosier 13515 Yarmouth Drive, N.W.
Pickerington, OH 43147
</TABLE>
ARTICLE V
5.1 At the Effective Date of the Merger, by virtue of the Merger and
without any action on the party of the holders thereof:
(a) Each PICO Class A Common Share held by PICO as a treasury share
shall be cancelled;
(b) Each other outstanding PICO Class A Common Share, except those
held by Dissenting Shareholders (as defined in Section 5.1(c) hereof) of
PICO whose rights as dissenting shareholders have not terminated in
accordance with Section 1701.85(D) of the Ohio General Corporation Law,
shall be converted into the right to receive shares of Common Stock of
Citation.
(c) Each outstanding PICO Class A Common Share, the holder of which
has delivered or delivers to the corporation a written demand for the fair
cash value of his shares in accordance with Section 1701.85 of the Ohio
General Corporation Law and whose rights have not terminated under Section
1701.85(D) of the Ohio General Corporation Law (any shareholder duly making
such demand being hereinafter called a "Dissenting Shareholder"), shall not
be converted into or represent a right to Common Stock of Citation. If the
Dissenting Shareholder shall, in accordance with Section 1701.85 of the
Ohio General Corporation Law, become entitled to receive payment of the
fair cash value for his PICO Common Shares (the "Dissenting Share"), such
payment shall be made by the Surviving Corporation. If the rights of any
holder of Dissenting Shares shall have terminated in accordance with
Section 1701.85(D) of the Ohio General Corporation Law, such holder shall
no longer be entitled to receive payment of the fair cash value of his PICO
Common Shares under Section 1701.85 of the Ohio General Corporation Law and
such shares shall thereupon be deemed to have been converted into and to
have become exchangeable for, as of the Effective Date, the consideration
set forth in Section 5.1(b) hereto.
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<PAGE> 239
(d) Each outstanding Holdings Common Share shall be converted into one
validly issued and outstanding, fully paid and non-assessable Common Share
of the Surviving Corporation.
5.2 At and after the Effective Date of the Merger, the holders of
certificates for PICO Class A Common Shares shall cease to have any rights as
shareholders of Holdings (except such rights, if any, as they may have pursuant
to Sections 1701.84 and 1701.85 of the Ohio General Corporation Law), and,
except as aforesaid, their said rights shall pertain to the right to receive the
number of shares of Common Stock of Citation into which their PICO Common Shares
shall have been converted by the Merger. At and after the Effective Date of the
Merger, each holder of an outstanding certificate or certificates for Holdings
Common Shares shall be entitled, upon surrender of the same in accordance with
Section 1.5(e) of the Reorganization Agreement to the Exchange Agent appointed
in accordance with Section 1.5(e) of the Reorganization Agreement (the "Agent"),
to receive in exchange therefor an aggregate number of shares of Citation Common
Stock equal to multiplied by the number of PICO Class A Common
Shares so surrendered, subject to any required withholding of taxes. Until such
surrender and payment, such holder's certificate or certificates which
immediately prior to the Effective Date of the Merger represented outstanding
PICO Class A Common Shares shall be deemed for all corporate purposes to
evidence the right to receive cash Citation Common Shares accordance with this
terms of the Section 5.2.
5.3 The stock transfer books of PICO with respect to PICO Class A Common
Shares shall be closed at the Effective Date of the Merger and PICO's
shareholders of record as of that time shall be the shareholders entitled to
receive shares of Citation Common Stock in exchange for PICO Class A Common
Shares in accordance with the terms of Section 5.2 hereof.
In the event of a transfer of ownership of PICO Common Shares which is not
registered in the transfer records of PICO, an appropriate number of Citation
Common Shares may be paid and delivered to a transferee of the certificate
representing such PICO Class A Common Shares as presented to the Agent,
accompanied by all documents required to evidence and effect such transfer and
by any applicable stock transfer taxes.
5.4 Except as hereinafter provided, immediately prior to the Effective Date
of the Merger and without any action on the part of the holder thereof, each
unexercised option outstanding at such time to purchase PICO Class A Common
Shares (an "Option") pursuant to The PICO 1995 Non-Qualified Stock Option Plan,
(the "Stock Option Plans"), whether or not then exercisable, shall be converted
into an option to purchase that number of Citation Common Shares equal to
multiplied by the number of PICO Class A Common Shares subject to
such option, with an exercise price per share equal to the exercise price per
share of the option divided by .
5.5 At the Effective Date of the Merger, the effect of the Merger shall be
as provided herein and by the applicable provisions of the laws of the State of
Ohio. Without limiting the generality of the foregoing and subject thereto, at
the Effective Date of the Merger: the separate existence of Holdings shall
thereupon cease, the Surviving Corporation shall possess all assets and property
of every description, and every interest therein, wherever located and the
rights, privileges, immunities, powers, franchises, and authority, of a public
as well as of a private nature, of each of the Constituent Corporations; all
obligations belonging to or due to each of the Constituent Corporations shall be
vested in the Surviving Corporation without further act or deed; title to any
real estate or any interest therein vested in any Constituent Corporation shall
not revert or in any way be impaired by reason of the Merger; the Surviving
Corporation shall be liable for all obligations of each Constituent corporation,
including liability to Dissenting Shareholders; all of the rights of creditors
of each of the Constituent Corporations shall be preserved unimpaired; and all
liens upon the property of each of the Constituent Corporations shall be
preserved unimpaired, on only the property affected by such liens immediately
prior to the Effective Date.
ARTICLE VI
6.1 The Merger shall become effective at the time of the filing of the
Certificate of Merger with the Secretary of State for the State of Ohio (the
"Effective Date").
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<PAGE> 240
6.2 The Constituent Corporations may terminate this Merger Agreement at any
time prior to the Effective Date of the Merger by a mutual agreement in writing
to that effect, authorized by their respective Boards of Directors. This Merger
Agreement shall terminate without further action by the Constituent Corporations
either before or after the action of the shareholders of the Constituent
Corporations on this Merger Agreement (but prior to the Effective Date of the
Merger) upon the termination of the Reorganization Agreement.
ARTICLE VII
Any of the provisions of this Merger Agreement may be waived at any time
prior to the Effective Date by the party which is or the shareholders of which
are entitled to the benefit thereof, and this Merger Agreement may be amended at
any time prior to the Effective Date (by action taken by the respective Boards
of Directors of the Constituent Corporations or duly authorized representatives
thereof), provided that no such waiver or amendment shall affect materially and
adversely the benefits to PICO or its shareholders intended under this Merger
Agreement without the further approval of such shareholders.
ARTICLE VIII
Nothing expressed or implied in this Merger Agreement is intended, or shall
be construed, to confer upon or give any person, firm or corporation other than
Holdings and PICO and their respective shareholders and the holders of Options
any rights or remedies under or by reason of this Merger Agreement. This Merger
Agreement may be executed in two or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have each caused this Merger Agreement to
be duly executed on its behalf effective as of the day and year first above
written.
PHYSICIANS INSURANCE COMPANY OF OHIO
By:
--------------------------------------
President
And:
--------------------------------------
Secretary
CITATION HOLDINGS, INC.
By:
--------------------------------------
President
And:
--------------------------------------
Secretary
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<PAGE> 241
APPENDIX B
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
CITATION INSURANCE GROUP
DONALD HENDERSON AND DOUGLAS GOULD certify that:
1. They are the duly elected and acting President and Secretary,
respectively, of Citation Insurance Group.
2. The Articles of Incorporation of this corporation are hereby amended and
restated to read as follows:
ARTICLE I
The name of this corporation is PICO Holdings, Inc.
ARTICLE II
The purpose of the corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
This corporation is authorized to issue two (2) classes of shares,
designated respectively "Common Stock" and "Preferred Stock."
A. The number of shares of Common Stock is One Hundred Million
(100,000,000). The par value of each share is one tenth of one cent ($0.001).
B. The number of shares of Preferred Stock is Two Million (2,000,000). The
par value of each share of Preferred Stock is one cent ($.01). The Preferred
Stock herein authorized may be issued from time to time in one or more series,
the number of shares, the designation and the rights, preferences, privileges
and restrictions, within any limits and restrictions herein stated, shall be
fixed and determined, for any wholly unissued series of stock authorized herein,
by the Board of Directors. The Board of Directors, within the limits and
restrictions stated herein and in any resolution or resolutions of the Board
originally fixing the number of shares constituting any series, may increase or
decrease (but not below the number of shares of such series then outstanding)
the number of shares of any such series subsequent to the issue of shares of
that series. In case the number of shares of any series shall be so decreased,
the shares constituted the decrease shall resume the status they had prior to
the adoption of the resolution originally fixing the number of shares of that
series.
C. One Million (1,000,000) shares of Preferred Stock are designated as
Series A Junior Participating Cumulative Preferred Stock.
(1) Dividends and Distributions.
(a) The holders of shares of Series A Preferred Stock, in
preference to the holders of Common Stock of the Corporation and of any
other junior stock of the Corporation that may be outstanding, shall be
entitled to receive, when, as and if declared by the Board of Directors out
of funds legally available for the purpose, quarterly dividends payable in
cash on the tenth day of January, April, July and October in each year
(each such date being referred to herein as a "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment Date after the
first issuance of a share or fraction of a share of Series A Preferred
Stock, in an amount per share (rounded to the nearest cent) equal to the
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greater of (i) $.25 per share ($1.00 per annum), or (ii) subject to the
provision for adjustment hereinafter set forth, 100 times the aggregate per
share amount of all cash dividends, and 100 times the aggregate per share
amount (payable in kind) of all non-cash dividends or other distributions,
other than a dividend payable in shares of Common Stock, or a subdivision
of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock since the immediately preceding
Quarterly Dividend Payment Date, or, with respect to the first Quarterly
Dividend Payment Date, since the first issuance of any share or fraction of
a share of Series A Preferred Stock. In the event that the Corporation
shall at any time declare or pay any dividend on common Stock payable in
shares of Common Stock, or effect a subdivision or combination or
consolidation of the outstanding stares of Common Stock (by
reclassification or otherwise) into a greater or lesser number of shares of
Common Stock, then and in each such event, the amount to which the holder
of each share of Series A Preferred Stock was entitled immediately prior to
such event under clause (ii) of the preceding sentence shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event, and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) The Corporation shall declare a dividend or distribution on
the Series A Preferred Stock as provided in paragraph (1) of this Section 2
contemporaneously with any declaration of a dividend or distribution on the
Common Stock (other than a dividend payable in shares of Common Stock);
provided, however, that in the event no dividend or distribution shall have
been declared on the Common Stock during the period between any Quarterly
Dividend Payment Date and the next subsequent Quarterly Dividend Payment
Date, a dividend of $.25 per share ($1.00 per annum) on the Series A
Preferred Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(c) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares of Series A
Preferred Stock, unless the date of issue of such shares is prior to the
record date for the first Quarterly Dividend Payment Date, in which cash
dividends on such shares shall begin to accrue from the date of issue of
such shares, or unless the date of issue is a Quarterly Dividend Payment
Date or is a date after the record date for the determination of holders of
shares of Series A Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly dividend Payment Date, in either of which cases
such dividends shall begin to accrue and be cumulative from such Quarterly
Dividend Payment Date. Accrued but unpaid dividends shall cumulate but
shall not bear interest. Dividends paid on the shares of Series A Preferred
Stock in an amount less than the total amount of such dividends at the time
accrued and payable on such shares shall be allocated pro rata on a
share-by-share basis among all such shares at the time outstanding. The
Board of Directors may fix a record date for the determination of holders
of shares of Series A Preferred Stock entitled to receive payment of a
dividend or distribution declared thereon, which record date shall be not
more than 60 days prior to the date fixed for the payment thereof.
(2) Voting Rights. The holders of shares of Series A Preferred Stock
shall have the following voting rights:
(a) Each share of Series A Preferred Stock shall entitle the holder
thereof to 100 votes (and each one one-hundredth of a share of Series A
Preferred Stock shall entitled the holder thereof to one vote) on all
matters submitted to a vote of the stockholders of the Corporation. In
the event that the Corporation shall at any time declare or pay any
dividend on Common Stock payable in shares of Common Stock or effect a
subdivision or combination or consolidation of the outstanding shares of
Common Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or lesser number of
shares of Common Stock, then and in each such event, the number of votes
per share to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event shall be adjusted by
multiplying such number by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such
event, and the denominator of which is the number of shares of common
Stock that were outstanding immediately prior to such event.
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(b) Except as otherwise provided in the Amended and Restated
Articles of Incorporation of the Corporation or herein or by law, the
holders of shares of Series A Preferred Stock and the holders of shares
of Common Stock shall vote together as one class on all matters
submitted to a vote of the stockholders of the Corporation.
(c) In addition, the holders of shares of Series A Preferred Stock
shall have the following special voting rights:
(i) In the event that at any time dividends on a Series A Preferred
Stock, whenever accrued and whether or not consecutive, shall not have
been paid or declared and a sum sufficient for the payment thereof set
aside, in an amount equivalent to six quarterly dividends on all shares
of Series A Preferred Stock at the time outstanding, then and in each
such event, the holders of shares of Series A Preferred Stock and each
other series of preferred stock now or hereafter issued that shall be
accorded such class voting right by the Board of Directors and that
shall have the right to elect two directors as the result of a prior or
subsequent default in payment of dividends on such series (each such
other series being hereinafter called "Other Series of Preferred
Stock"), voting separately as a class without regard to series, shall be
entitled to elect two directors at the next annual meeting or a special
meeting called for such purpose. The remainder of the board shall be
elected by the holders of all shares (including the Series A Preferred
Stock and each Other Series of Preferred Stock) of the Corporation
entitled to vote for the election of directors; provided, however, that
the Series A Preferred Stock and each Other Series of Preferred Stock
voting as a class, shall not have the right to elect more than one-third
of the directors. Such special voting right of the holders of shares of
Series A Preferred Stock may be exercised until all dividends in a
default on the Series A Preferred Stock shall have been paid in full or
declared and funds sufficient therefor set aside, and when so paid or
provided for, such special voting right of the holders of shares of
Series A Preferred Stock shall cease, but subject always to the same
provisions for the vesting of such special voting rights in the event of
any such future dividend default or defaults.
(ii) At any time after such special voting rights shall have so
vested in the holders of shares of Series A Preferred Stock, the
Secretary of the Corporation may, and upon the written request of the
holders of record of 10% or more in number of the shares of Series A
Preferred Stock and each Other Series of Preferred Stock then
outstanding addressed to the Secretary at the principal executive office
of the Corporation shall, call a special meeting of the holders of all
shares of the Corporation entitled to vote, for the election of
directors to be elected as herein provided, to be held within 60 days
after such call and at the place and upon the notice provided by law and
in the Bylaws for the holding of meetings of stockholders; provided,
however, that the Secretary shall not be required to call such special
meeting in the case of any such request received less than 90 days
before the date fixed for any annual meeting of stockholders, and if in
such case such special meeting is not called or held, the holders of
shares of Preferred Stock so entitled to vote shall be entitled to
exercise the special voting rights provided in this paragraph at such
annual meeting. No such special meeting and no adjournment thereof shall
be held on a date later than 60 days before the annual meeting of
stockholders. If, at any meeting so called or at any annual meeting held
which the holders of shares of Series A Preferred Stock have the special
voting rights provided for in this paragraph, the holders of not less
than 40% of the aggregate voting power of Series A Preferred Stock and
each Other Series of Preferred Stock then outstanding are present in
person or by proxy, such percentage shall be sufficient to constitute a
quorum for the election of the two directors as herein provided.
(iii) Upon the election at such meeting by the holders of shares of
Series A Preferred Stock and each Other Series of Preferred Stock,
voting as a class, of the directors they are entitled so to elect, the
persons so elected, together with such persons as may be directors or as
may have been elected as directors by the holders of all shares
(including Series A Preferred Stock and each other Series of Preferred
Stock) otherwise entitled to vote for directors, shall constitute the
duly elected directors of the Corporation. The directors so elected by
holders of shares of Series A Preferred Stock and each Other Series of
Preferred Stock, voting as a class, shall serve until the next annual
meeting or until their respective successors shall be elected and
qualified, or if any such director is a
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member of a class of directors under provisions dividing the directors
into classes, each such director shall serve until the annual meeting at
which the term of office of such director's class shall expire or until
such director's successor shall be elected and shall qualify, and at
each subsequent meeting of stockholders at which the directorship of any
director elected by the vote of holders of shares of Series A Preferred
Stock and each Other Series of Preferred Stock under the special voting
rights set forth in this paragraph is up for election, said special
class voting rights shall apply in the reelection of such director or in
the election of such director's successor; provided, however, that
whenever the holders of shares of Series A Preferred Stock and each
Other Series of Preferred Stock shall be divested of the special rights
to elect two directors as above provided, the terms of office of all
persons elected as directors by the holders of shares of Series A
Preferred Stock and each Other Series of Preferred Stock, voting as a
class, shall forthwith terminate, and two directors shall be elected by
the holders of all shares (including the Series A Preferred Stock and
each other series of Preferred Stock) to fill their positions.
(iv) If, at any time after a special meeting of stockholders or an
annual meeting of stockholders at which the holders of shares of Series
A Preferred Stock and each Other Series of Preferred Stock, voting as a
class, have elected directors as provided above, and while the holders
of shares of Series A Preferred Stock and each Other Series of Preferred
Stock shall be entitled so to elect two directors, the number of
directors who have been elected by the holders of shares of Series A
Preferred Stock and each Other Series of Preferred Stock (or who by
reason of one or more resignations, deaths or removals have succeeded
any directors so elected) shall by reason of resignation, death or
removal by less than two but at least one, the vacancy in the directors
so elected by the holders of shares of the Series A Preferred Stock and
each Other Series of Preferred Stock may be filled by the remaining
director elected by such holders. In the event that such election shall
not occur within 30 days after such vacancy arises, or in the event that
there shall not be incumbent one director so elected by such holders,
the Secretary of the Corporation may, and upon the written request of
the holders of record of 10% or more in number of the shares of Series A
Preferred Stock and each Other Series of Preferred Stock then
outstanding addressed to the Secretary at the principal office of the
Corporation shall, call a special meeting of the holders of shares of
Series A Preferred Stock and each Other Series of Preferred Stock so
entitled to vote, for an election to fill such vacancy or vacancies, to
be held within 60 days after such call and at the place and upon the
notice provided by law and in the Bylaws for the holding of meetings of
stockholders; provided, however, that the Secretary shall not be
required to call such special meeting in the case of any such request
received less than 90 days before the date fixed for any annual meeting
of stockholders, and if in such case such special meeting is not called,
the holders of shares of Preferred Stock so entitled to vote shall be
entitled to fill such vacancy or vacancies at such annual meeting. If
any such special meeting required to be called as above provided shall
not be called by the Secretary within 30 days after receipt of any such
request, then the holders of record of 10% or more in number of the
shares of Series A Preferred Stock and each Other Series of Preferred
Stock then outstanding may designate in writing one of their number to
call such meeting, and the person so designated may, at the expense of
the Corporation, call such meeting to be held at the place and upon the
notice above provided, and for that purpose shall have access to the
stock books of the Corporation; no such special meeting and no
adjournment thereof shall be held on a date later than 60 days before
the annual meeting of stockholders.
(d) Nothing herein shall prevent the directors or stockholders
from taking any action to increase the number of authorized shares of
Series A Preferred Stock, or increasing the number of authorized shares of
Preferred Stock of the same class as the Series A Preferred Stock or the
number of authorized shares of Common Stock, or changing the par value of
the Common Stock or Preferred Stock, or issuing options, warrants or rights
to any class of stock of the Corporation as authorized by the Amended and
Restated Articles of Incorporation of the Corporation, as it may hereafter
be amended.
(e) Except as set forth herein, holders of shares of Series A
Preferred Stock shall have no special voting rights and their consent shall
not be required (except to the extent they are entitled to vote
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as set forth in the Amended and Restated Articles of Incorporation of the
Corporation or herein or by law) for taking any corporate action.
(3) Certain Restrictions.
(a) Whenever any dividends or other distributions payable on the
Series A Preferred Stock as provided in Section 2 hereof are in arrears,
thereafter and until all accrued and unpaid dividends and distributions,
whether or not declared, on shares of Series A Preferred Stock
outstanding shall have been paid in full, the Corporation shall not,
directly or indirectly:
(i) declare or pay dividends on, or made any other distributions
with respect to, any shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the
Series A Preferred Stock;
(ii) declare or pay dividends on, or make any other
distributions with respect to, any shares of stock ranking on a
parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series A Preferred Stock, except dividends paid
ratably on shares of the Series A Preferred Stock and all such parity
stock on which dividends are payable or in arrears in proportion to
the total amounts to which the holders of all such shares are then
entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred
Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such junior stock in exchange for
shares of any stock of the Corporation ranking junior (either as to
dividends or upon dissolution, liquidation or winding up) to the
Series A Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares
of Series A Preferred Stock, or any shares of stock ranking on a
parity with the Series A Preferred Stock, except in accordance with a
purchase offer made in writing or by publication (as determined by
the Board of Directors) to all holders of such shares upon such terms
as the Board of Directors, after consideration of the respective
annual dividend rates and other relative rights and preferences of
the respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series or
classes.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration, directly
or indirectly, any shares of stock of the Corporation unless the
Corporation could, under paragraph (a) of this Section 4, purchase or
otherwise acquire such shares at such time and in such manner.
(4) Reacquired Shares. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All
such shares shall upon their cancellation become authorized but unissued
shares of preferred stock, without designation as to series, and may be
reissued as part of any series of preferred stock created by resolution or
resolutions of the Board of Directors (including Series A Preferred Stock),
subject to the conditions and restrictions on issuance set forth herein.
(5) Liquidation, Dissolution or Winding Up. Upon any liquidation,
dissolution or winding up of the Corporation, no distribution shall be made
to:
(a) the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received the greater of (i) $1.00 per share
($.01 per one one-hundredth of a share), plus an amount equal to accrued
and unpaid dividends and distributions thereon, whether or not declared, to
the date of such payment, or (ii) an aggregate amount per share, subject to
the provision for adjustment hereinafter set forth, equal to 100 times the
aggregate amount to be distributed per share to holders of shares of Common
Stock; or
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(b) the holders of shares of stock ranking on a parity (either as
to dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Stock, except distributions made ratably on the Series A
Preferred Stock and all other such parity stock in proportion to the total
amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up.
In the event that the corporation shall at any time declare or pay any dividend
on Common Stock payable in shares of Common Stock, or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise) into a greater or lesser number of shares of
Common Stock, then and in each such event, the aggregate amount to which the
holder of each share of Series A Preferred Stock was entitled immediately prior
to such event under the proviso in clause (a) of the preceding sentence shall be
adjusted by multiplying such amount by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately after such event, and
the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(6) Consolidation, Merger, etc. In the event that the Corporation
shall enter into any consolidation, merger, combination or other
transaction in which the shares of Common Stock are exchanged for or
changed into other stock or securities, cash and/or any other property, or
otherwise changed, then and in each such event, the shares of Series A
Preferred Stock shall at the same time be similarly exchanged or changed in
an amount per share (subject to the provision for adjustment hereinafter
set forth) equal to 100 times the aggregate amount of stock, securities,
cash and/or any other property (payable in kind), as the case may be, into
which or for which each share of Common Stock is changed or exchanged. In
the event that the Corporation shall at any time declare or pay any
dividend on Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding shares of
Common Stock (by reclassification or otherwise) into a greater or lesser
number of shares of Common Stock, then and in each such event, the amount
set forth in the preceding sentence with respect to the exchange or change
of shares of Series A Preferred Stock shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event, and the denominator
of which is the number of shares of Common Stock that were outstanding
immediately prior to such event.
(7) No Redemption. The shares of Series A Preferred Stock shall not
be redeemable. Notwithstanding the foregoing, the Corporation may acquire
shares of Series A Preferred Stock in any other manner permitted by law,
the Amended and Restated Articles of Incorporation of the Corporation or
herein.
(8) Rank. Unless otherwise provided in the amended and Restated
Articles of Incorporation of the Corporation or a Certificate of
Determination relating to a subsequent series of preferred stock of the
Corporation, the Series A Preferred Stock shall rank junior to all other
series of the Corporation's preferred stock as to the payment of dividends
and the distribution of assets on liquidation, dissolution or winding up,
and senior to the Common Stock of the Corporation.
(9) Amendment. The Amended and Articles of Incorporation of the
Corporation shall not be amended in any manner that would materially and
adversely alter or change the powers, preferences or special rights of the
Series A Preferred Stock without the affirmative vote of the holders of at
least two-thirds of the outstanding shares of Series A Preferred Stock,
voting together as a single series.
(10) Fractional Shares. Series A Preferred Stock may be issued in
fractions of a share (in one one-hundredths (1/100) of a share and integral
multiples thereof) that shall entitle the holder thereof, in proportion to
such holder's fractional shares, to exercise voting rights, receive
dividends, participate in distributions and have the benefit of all other
rights of holders of shares of Series A Preferred Stock.
ARTICLE IV
The corporation reserves the right to amend, alter, or repeal any provision
contained in these Articles of Incorporation, in the manner now or hereafter
prescribed by law, and all rights and powers conferred by these Articles of
Incorporation on shareholders, directors and officers are granted subject to
this reservation.
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ARTICLE V
A. The liability of the directors of the corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
B. The corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the Corporations Code) through by-law provisions,
agreements with agents, vote of shareholders, or otherwise, in excess of the
indemnification otherwise permitted by Section 317 of the California
Corporations Code, subject only to the limits set forth in Section 204 of the
Corporations Code with respect to actions for breach of duty to the corporation
and its shareholders.
ARTICLE VI
A. The authorized number of Directors of the Corporation shall not be less
than five (5) nor more than nine (9) and the exact number of directors initially
authorized shall be nine (9). The exact number of Directors may be fixed within
the limits specified in this Article VI.A by a resolution adopted by the Board
of Directors or by a vote of the holders of a majority of the voting power of
the outstanding shares of capital stock entitled to vote. The minimum or maximum
number of directors provided in this Article VI.A may be changed only by
amendment to these Articles of Incorporation duly adopted by the affirmative
vote of the holders of a majority of the voting power of outstanding shares of
capital stock entitled to vote and by a resolution duly adopted by the Board of
Directors. Subject to the rights of any outstanding series of Preferred Stock,
all directors shall be elected by the holders of all outstanding shares of
capital stock, voting together as a single class.
B. So long as the Corporation remains a "Listed Corporation" within the
meaning of Section 301.5 of the California Corporations Code, the composition of
the Board of Directors of the Corporation shall be determined as set forth in
this subsection. The Directors shall be divided into three classes, as nearly
equal in number as reasonably possible, with the term of office of the first
class to expire at the annual meeting of shareholders in 1997, the term of
office of the second class to expire at the third annual meeting of shareholders
in 1998 and the term of office of the third class to expire at the annual
meeting of shareholders in 1999. At each annual meeting of shareholders
hereafter, directors shall be elected for a term of office to expire at the
third succeeding annual meeting of shareholders after their election. All
directors shall hold office until the expiration of the term for which elected,
and until their respective successors are elected, except in the case of the
death, resignation, or removal of any director.
3. The foregoing amendment and restatement of the Articles of Incorporation
has been duly approved by the Board of Directors.
4. The foregoing amendment and restatement of the Articles of Incorporation
has been duly approved by the required vote of the shareholders in accordance
with Section 902 of the California Corporations Code. The total number of
outstanding shares of the corporation is . The number of shares
voting in favor of the amendment equalled or exceeded the vote required. The
percentage vote required was more than 50%.
We further declare under penalty of perjury under the laws of the State of
California that the matters set forth in this Certificate are true and correct
of our own knowledge.
Dated: , 1996
--------------------------------------
DONALD HENDERSON
President
--------------------------------------
DOUGLAS GOULD
Secretary
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APPENDIX C
AMENDED AND RESTATED BY-LAWS
OF
PICO HOLDINGS, INC
(PREVIOUSLY KNOWN AS CITATION INSURANCE GROUP)
ARTICLE I
OFFICES
1.1 Principal Offices. The Board of Directors shall fix the location of
the principal executive office of the corporation at any place within the State
of California.
1.2 Other Offices. The Board of Directors may at any time establish other
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1 Place of Meetings. Meetings of shareholders shall be held at any place
within or outside the State of California designated by the Board of Directors.
In the absence of any such designation, shareholders' meetings shall be held at
the principal executive office of the corporation.
2.2 Annual Meeting. The annual meeting of shareholders shall be held on
such day and at such hour as may be fixed by the Board of Directors. At this
meeting, Directors shall be elected, and any other proper business may be
transacted.
2.3 Special Meeting.
(a) A special meeting of the shareholders may be called at any time by
the Board of Directors, or by the Chairman of the Board or President, or by one
or more shareholders entitled to cast in the aggregate not less than 10% of the
votes at that meeting.
(b) If a special meeting is called by any person or persons other than
the Board of Directors, the request shall be in writing, shall specify the time
of such meeting and the general nature of the business proposed to be
transacted, and shall be delivered personally or sent by registered mail or by
telegraphic or other facsimile transmission to the Chairman of the Board, the
President, any Vice President, or the Secretary of the corporation. The officer
receiving the request shall promptly cause notice to be given to the
shareholders then entitled to vote, in accordance with the provisions of
Sections 2.4 and 2.5 of this Article II, that a meeting will be held at the time
requested by the person or persons calling the meeting, such time to be not less
than thirty-five (35) nor more than sixty (60) days after the receipt of the
request. If the notice is not given within twenty (20) days after receipt of the
request, the person or persons entitled to call the meeting may give the notice.
Nothing contained in this paragraph (b) of this Section 2.3 shall be construed
as limiting, fixing or affecting the time when a meeting of shareholders called
by action of the Board of Directors may be held.
2.4 Notice of Shareholders' Meetings. All notices of meetings of
shareholders shall be sent or otherwise given, in the manner prescribed by
Section 2.5 of this Article II, not less than ten (10) nor more than sixty (60)
days before the date of the meeting. The notice shall specify the place, date
and hour of the meeting and (i) in the case of a special meeting, the general
nature of the business to be transacted, or (ii) in the case of the annual
meeting, those matters which the Board of Directors, at the time of giving the
notice, intends to present for action by the shareholders. The notice of any
meeting at which Directors are to be elected shall include the name of any
nominee or nominees whom, at the time of the notice, management intends to
present for election.
If action is proposed to be taken at any meeting pursuant to (i) Section
310 of the Corporations Code of California (contract or transaction in which a
Director has a direct or indirect financial interest), Section 902
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of the Code (amendment of the Articles of Incorporation), (iii) Section 1201 of
that Code (reorganization of the corporation), (iv) Section 1900 of that Code
(voluntary dissolution of the corporation), or (v) Section 2007 of that Code
(distribution in dissolution other than in accordance with the rights of
outstanding preferred shares), the notice shall also state the general nature of
that proposal; provided, however, that unanimous approval by those entitled to
vote on such proposal shall be valid notwithstanding the omission from the
notice of a statement concerning the general nature of the proposal.
2.5 Manner of Giving Notice; Affidavit of Notice. Notice of any meeting of
shareholders shall be given either personally or by first-class mail or
telegraphic or other written communication, charges prepaid, addressed to the
shareholder at the address of that shareholder appearing on the books of the
corporation or given by the shareholder to the corporation for the purpose of
notice. If no such address appears on the corporation's books or is given,
notice shall be deemed to have been given if sent to that shareholder by first-
class mail or telegraphic or other written communication to the corporation's
principal executive office, or if published at least once in a newspaper of
general circulation in the county where that office is located. Notice shall be
deemed to have been given at the time when delivered personally or deposited in
the mail or sent by telegram or other means of written communication.
If any notice addressed to a shareholder at the address of that shareholder
appearing on the books of the corporation is returned to the corporation by the
United States Postal Service marked to indicate that the United States Postal
Service is unable to deliver the notice to the shareholder at that address, all
future notices or reports shall be deemed to have been duly given without
further mailing if these shall be available to the shareholder on written demand
of the shareholder at the principal executive office of the corporation for a
period of one year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting shall be executed by the Secretary, Assistant Secretary,
or any transfer agent of the corporation giving the notice, and shall be filed
and maintained in the minute book of the corporation.
2.6 Quorum. The presence in person or by proxy of the holders of a
majority of the shares entitled to vote at any meeting of shareholders shall
constitute a quorum for the transaction of business. The shareholders present at
a duly called or held meeting at which a quorum is present may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum.
2.7 Adjourned Meeting; Notice. Any shareholders' meeting, annual or
special, whether or not a quorum is present, may be adjourned from time to time
by the vote of the majority of the shares represented at that meeting, either in
person or by proxy, but in the absence of a quorum, no other business may be
transacted at that meeting, except as provided in Section 2.6 of this Article
II.
When any meeting of shareholders, either annual or special, as adjourned to
another time or place, notice need not be given of the adjourned meeting if the
time and place are announced at a meeting at which the adjournment is taken,
unless a new record date for the adjourned meeting is fixed, or unless the
adjournment is for more than forty-five (45) days from the date set for the
original meeting, in which case the Board of Directors shall set a new record
date and shall give notice of such adjourned meeting to each shareholder of
record entitled to vote at the adjourned meeting in accordance with the
provisions of Sections 2.4 and 2.5 of this Article II. At any adjourned meeting
for which no new record date and notice are required hereunder, the corporation
may transact any business which might have been transacted at the original
meeting.
2.8 Voting. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of Section
2.11 of this Article II, subject to the provisions of Section 702 to 704,
inclusive, of the Corporations Code of California (relating to voting shares
held by a fiduciary, in the name of a corporation, or in joint ownership). The
shareholders' vote may be by voice vote or by ballot; provided, however, that
any election for Directors must be by ballot if demanded by any shareholder
before the voting has begun. On any matter other than elections of directors,
any shareholder may vote part of the shares in favor of the proposal and refrain
from voting the remaining shares or vote them against the proposal, but, if
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the shareholder fails to specify the number of shares which the shareholder is
voting affirmatively, it will be conclusively presumed that the shareholder's
approving vote is with respect to all shares that the shareholder is entitled to
vote. If a quorum is present, the affirmative vote of the majority of the shares
represented at the meeting and entitled to vote on any matter (other than the
election of Directors) shall be the act of the shareholders, unless the vote of
a greater number or voting by classes is required by the Corporations Code of
California or by the Articles of Incorporation.
At a shareholders' meeting at which Directors are to be elected, no
shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a
number of votes greater than the number of the shareholder's shares) unless the
candidates' names have been placed in nomination prior to commencement of the
voting (in accordance with the provisions of Section 2.14 of this Article II)
and a shareholder has given notice at the meeting prior to commencement of the
voting of the shareholder's intention to cumulate votes. If any shareholder has
given such a notice, then every shareholder entitled to vote may cumulate votes
for candidates in nomination and give one candidate a number of votes equal to
the number of Directors to be elected multiplied by the number of votes to which
that shareholder's shares are entitled, or distribute the shareholder's votes on
the same principle among any or all of the candidates, as the shareholder thinks
fit. The candidates receiving the highest number of votes, up to the number of
Directors to be elected, shall be elected.
2.9 Waiver of Notice or Consent by Absent Shareholders. The transactions
of any meeting of shareholders, either annual or special, however called and
noticed, and wherever held, shall be as valid as though had at a meeting duly
held after regular call and notice, if a quorum be present either in person or
by proxy, and if, either before or after the meeting, each person entitled to
vote, who was not present in person or by proxy, signs a written waiver of
notice or a consent to a holding of the meeting, or an approval of the minutes.
The waiver of notice or consent or approval of minutes need not specify either
the business or the purpose of any annual or special meeting of shareholders,
except that if action is taken or proposed to be taken for approval of any of
those matters specified in the second paragraph of Section 2.4 of this Article
II, the waiver of notice or consent shall state the general nature of the
proposal. All such waivers, consents or approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of and presence at that meeting, except when the person objects, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened, and except that attendance at a meeting is
not a waiver of any right to object to the consideration of matters required to
be but not included in the notice of the meeting if that objection is expressly
made at the meeting.
2.10 Shareholder Action by Written Consent Without A Meeting. Any action
which may be taken at any annual or special meeting of shareholders may be taken
without a meeting and without prior notice, if a consent in writing, setting
forth the action so taken, is signed by the holders of outstanding shares having
not less than the minimum number of votes that would be necessary to authorize
or take that action at a meeting at which all shares entitled to vote on that
action were present and voted. In the case of election of Directors, such a
consent shall be effective only if signed by the holders of all outstanding
shares entitled to vote for the election of Directors; provided, however, that a
Director may be elected at any time, by the written consent of the holders of a
majority of the outstanding shares entitled to vote for the election of
Directors, to fill a vacancy (unless such vacancy is created by removal) on the
Board of Directors unless previously filled by action of the Board. All such
consents shall be filed with the Secretary of the corporation and shall be
maintained in the corporate records. Any shareholder giving a written consent,
or the shareholder's proxy holders, or a transferee of the shares or a personal
representative of the shareholder or their respective proxy holders, may revoke
the consent by a writing received by the Secretary of the corporation before
written consents of the number of shares (including those whose consent is
sought to be revoked) required to authorize the proposed action have been filed
with the Secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing, and if the unanimous written consent of all such
shareholders shall not have been received, the Secretary shall give prompt
notice of the corporate action approved by the shareholders without a meeting.
This notice shall be given in the manner specified in Section 2.5 of this
Article II. In the case of approval of any action for which, under Section 2.4
of
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this Article II, a statement of the general nature of the proposal must be
included in any notice of shareholders' meeting, the notice of such corporate
action shall be given at least ten (10) days before the consummation of any
action authorized by that approval.
2.11 Record Date for Shareholder Notice, Voting, and Giving Consents. For
purposes of determining the shareholders entitled to notice of any meeting or to
vote or entitled to give consent to corporate action without a meeting, the
Board of Directors may fix, in advance, a record date, which shall not be more
than sixty (60) days nor less than ten (10) days before the date of any such
meeting nor more than sixty (60) days before any such action without a meeting.
Only shareholders of record on the date so fixed are entitled to notice and to
vote or to give consents, as the case may be, notwithstanding any transfer of
any shares on the books of the corporation after the record date, except as
otherwise provided in the Corporations Code of California.
If the Board of Directors does not so fix a record date:
(a) The record date for determining shareholders entitled to notice of
or to vote at a meeting of shareholders shall be at the close of business on the
business day next preceding the day on which notice is given or, if notice is
waived, at the close of business on the business day next preceding the day on
which the meeting is held.
(b) The record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the Board has been taken, shall be the day on which the first written
consent is given; or (ii) when prior action of Board has been taken or for any
other purpose, shall be at the close of business on the day on which the Board
adopted the resolution relating to that action, or the sixtieth (60th) day
before the date of such other action by the Board, whichever is later.
2.12 Proxies. Every person entitled to vote for Directors or on any other
matter shall have the right to do so either in person or by one or more agents
authorized by a written proxy signed by the person and filed with the Secretary
of the corporation. A proxy shall be deemed signed if the shareholder's name is
placed on the proxy (whether by manual signature, typewriting, telegraphic
transmission, or otherwise) by the shareholder or by shareholder's attorney in
fact. A validly executed proxy which does not state that it is irrevocable shall
continue in full force and effect unless (i) revoked by the person executing it,
before the vote pursuant to that proxy, by a writing delivered to the
corporation stating that the proxy is revoked, or by a subsequent proxy
presented to the meeting and executed by, or attendance at the meeting and
voting in person by, the person executing the proxy; or (ii) written notice of
the death or incapacity of the maker of that proxy is received by the
corporation before the vote pursuant to that proxy is counted; provided,
however, that no proxy shall be valid after the expiration of eleven (11) months
from the date of the proxy, unless otherwise provided in the proxy. The
revocability of a proxy that states on its face that it is irrevocable shall be
governed by the provisions of Sections 705(e) and 705(f) of the Corporations
Code of California.
2.13 Inspectors of Election. Before any meeting of shareholders, the Board
of Directors may appoint any persons other than nominees for office to act as
inspectors of election at the meeting or its adjournment. If no inspectors of
election are so appointed, the Chairman of the meeting may, and on the request
of any shareholder or proxy holder shall, appoint inspectors of election at the
meeting. The number of inspectors shall be either one (1) or three (3). If
inspectors are appointed at a meeting pursuant to such request, the holders of a
majority of shares or their proxies present at the meeting shall determine
whether one (1) or three (3) inspectors are to be appointed. If any person
appointed as inspector fails to appear or fails or refuses to act, the Chairman
of the meeting may, and upon the request of any shareholder or proxy holder
shall, appoint a person to fill that vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the voting power of
each, the shares represented at the meeting, the existence of a quorum, and the
authenticity, validity, and effect of proxies;
(b) Receive votes, ballots, or consents;
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(c) Hear and determine all challenges and questions in any way arising
in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the election or vote
with fairness to all shareholders.
2.14 Nominations for Directors. Only persons who are nominated in
accordance with the procedures set forth in this Section 2.14 shall be eligible
for election as Directors. Subject to the rights of holders of any class or
series of stock having a preference over the common stock as to dividends or
upon liquidation, nominations for the election of Directors may be made by the
Board of Directors or a nomination committee appointed by the Board of Directors
or by any shareholder entitled to vote in the election of Directors generally.
However, any shareholder entitled to vote in the election of Directors generally
may nominate one or more persons for election as Directors at a meeting only if
written notice of such shareholder's intent to make such nomination or
nominations has been given, either by personal delivery or by United States
mail, postage prepaid, to the Secretary of the corporation not later than (i)
with respect to an election to be held at an annual meeting of shareholders,
sixty (60) days in advance of such meeting, and (ii) with respect to an election
to be held at a special meeting of shareholders for the election of Directors,
the close of business on the seventh (7th) day following the date on which
notice of such meeting is first sent to shareholders. Each such notice shall set
forth: (a) the name and address of the shareholder who intends to make the
nomination; (b) the name, age, business address, residence address and principal
occupation or employment of the person or persons to be nominated; (c) the class
and number of shares of the corporation which are beneficially owned by the
person or person to be nominated; (d) a description of all arrangements or
understandings between the shareholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the shareholder; (e) any other information
relating to such person that is required to be disclosed in solicitations of
proxies for election of Directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended; (f) the consent of each nominee to serve as a Director of the
corporation if so elected; (g) the class and number of shares of the corporation
which are beneficially owned by the shareholder who intends to make the
nomination; and (h) a representation that the shareholder is a holder of record
of stock of the corporation entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice. The chairman of the meeting shall, if the facts
warrant, determine and declare at the meeting that a nomination was not made in
accordance with the procedures prescribed by these By-Laws, and if he should so
determine, he shall so declare at the meeting and the defective nomination shall
be disregarded.
ARTICLE III
DIRECTORS
3.1 Powers. Subject to the provisions of the Corporations Code of
California and any limitations in the Articles of Incorporation and these
By-Laws relating to action required to be approved by the shareholders or by the
outstanding shares, the business and affairs of the corporation shall be
managed, and all corporate powers shall be exercised by or under the direction
of, the Board of Directors.
Without prejudice to these general powers, and subject to the same
limitations, the directors shall have the power to:
(a) Select and remove all officers, agents, and employees of the
corporation; prescribe any powers and duties for them that are consistent with
law, with the Articles of Incorporation, and with these By-Laws; fix their
compensation; and require from them security for faithful service.
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(b) Establish or change the principal executive office or the principal
business office in the State of California from one location to another; cause
the corporation to be qualified to do business in any other state, territory,
dependency, or country and conduct business within or without the State of
California; and designate any place within or without the State of California
for the holding of any shareholders' meeting, or meetings, including annual
meetings.
(c) Adopt, make, and use a corporate seal; prescribe and alter the forms
of certificates of stock.
(d) Authorize the issuance of shares of stock of the corporation on any
lawful terms, in consideration of money paid, labor done, services actually
rendered to the corporation or for its benefit or in its formation or
reorganization, debts or securities cancelled, or tangible or intangible
property actually received either by the issuing corporation or by a wholly
owned subsidiary.
(e) Borrow money and incur indebtedness on behalf of the corporation,
and cause to be executed and delivered for the corporation's purposes, in the
corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages,
pledges, hypothecations, and other evidences of debt and securities.
3.2 Number and Qualification of Directors. The authorized number of
Directors on the Board of Directors shall not be less than five (5) nor more
than nine (9) until changed by a By-Law duly adopted in accordance with Article
IX, or by an amendment of the Articles of Incorporation to permit the authorized
number of directors to be set other than in the By-Laws. The exact number of
Directors shall be set by the Board of Directors within the specified limits.
3.3 Election and Term of Office of Directors. Directors shall be elected
at each annual meeting of the shareholders to hold office until the next annual
meeting or until his successor is duly elected and qualified. Each Director,
including a Director elected to fill a vacancy, shall hold office until the
expiration of the term for which elected and until a successor has been elected
and qualified.
3.4 Vacancies. Vacancies in the Board of Directors, including vacancies
created by the removal of a director or an increase in the authorized number of
directors, may be filled by a majority of the remaining Directors, provided that
if the number of remaining Directors then in office is less than a quorum, such
vacancy may be filled only by (a) the unanimous written consent of the Directors
then in office, (b) the affirmative vote of a majority of the Directors then in
office at a duly held meeting, or (c) a sole remaining Director. Each Director
so elected shall hold office for a term expiring at the next annual meeting of
shareholders at which the term of the class of Directors to which such Director
has been elected expires and until his or her successor is duly elected and
qualified.
A vacancy in the Board of Directors shall be deemed to exist in the event
of the death, resignation, or removal of any Director, or if the Board of
Directors by resolution declares vacant the office of a Director who has been
declared of unsound mind by an order of court or convicted of a felony, or if
the authorized number of Directors is increased, or if the shareholders fail, at
any meeting of shareholders at which any Director or Directors are elected, to
elect the number of Directors to be voted for at that meeting.
The shareholders may elect a Director at any time to fill any vacancy not
filled by the Directors. Any such election by written consent shall require the
consent of a majority of the outstanding shares entitled to vote; provided
however, that in the case of a vacancy created by removal, election to fill such
vacancy by written consent requires the consent of all the outstanding shares
entitled to vote.
Any Director may resign effective upon giving written notice to the
Chairman of the Board, the President, the Secretary, or the Board of Directors,
unless the notice specifies a later time for the effectiveness of such
resignation. If the resignation of a Director is effective at a future time, a
successor may be elected to take office when the resignation becomes effective.
Any reduction of the authorized number of Directors does not remove any
Director prior to the expiration of such Director's term of office.
3.5 Place of Meetings and Meetings by Telephone. Regular meetings of the
Board of Directors may be held at any place within or outside the State of
California that has been designated from time to time by
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resolution of the Board. In the absence of such a designation, regular meetings
shall be held at the principal executive office of the corporation. Special
meetings of the Board shall be held at any place within or outside the State of
California that has been designated in the notice of the meeting or, if not
stated in the notice or there is no notice, at the principal executive office of
the corporation. Any meeting, regular or special, may be held by conference
telephone or similar communication equipment, so long as all Directors
participating in the meeting can hear one another, and all such Directors shall
be deemed to be present in person at the meeting.
3.6 Annual Meeting. Immediately following each annual meeting of
shareholders, the Board of Directors shall hold a regular meeting for the
purpose of organization, any desired election of officers, and the transaction
of other business. Notice of this meeting shall not be required.
3.7 Other Regular Meetings. Other regular meetings of the Board of
Directors shall be held without call at such time as shall from time to time be
fixed by the Board of Directors. Such regular meetings may be held without
notice.
3.8 Special Meetings. Special meetings of the Board of Directors for any
purpose or purposes may be called at any time by the Chairman of the Board or
the President or any Vice President or the Secretary or any two Directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each Director or sent by first-class mail or
telegram, charges prepaid, addressed to each Director at that Director's address
as it is shown on the records of the corporation. In case the notice is mailed,
it shall be deposited in the United States mail at least four (4) days before
the time of the holding of the meeting. In case the notice is delivered
personally or by telephone or telegram, it shall be so delivered at least
forty-eight (48) hours before the time of the holding of the meeting. Any oral
notice may be communicated either to the Director personally or to any person at
his office who the person giving the notice has reason to believe will promptly
communicate it to the Director. The notice need not specify the purpose of the
meeting nor the place if the meeting is to be held at the principal executive
office of the corporation.
3.9 Quorum. A majority of the authorized number of Directors shall
constitute a quorum for the transaction of business, except to adjourn as
provided in Section 3.11 of this Article III. Every act or decision done or made
by a majority of the Directors present at a meeting duly held at which a quorum
is present shall be regarded as the act of the Board of Directors, subject to
the provisions of Section 310 of the Corporations Code of California (as to
approval of contracts or transactions in which a Director has a direct or
indirect material financial interest), Section 311 of that code (as to
appointment of committees), and Section 317(e) of that Code (as to
indemnification of Directors). A meeting at which a quorum is initially present
may continue to transact business notwithstanding the withdrawal of Directors,
if any action taken is approved by at least a majority of the required quorum
for that meeting.
3.10 Waiver of Notice. The transactions of any meeting of the Board of
Directors, however called and noticed or wherever held, shall be as valid as
though had at a meeting duly held after regular call and notice if a quorum is
present and if, either before or after the meeting, each of the Directors not
present signs a written waiver of notice, a consent to holding the meeting or an
approval of the minutes. The waiver of notice or consent need not specify the
purpose of the meeting. All such waivers, consents, and approvals shall be filed
with the corporate records or made a part of the minutes of the meeting. Notice
of a meeting shall also be deemed given to any Director who attends the meeting
without protesting before or at its commencement the lack of notice to such
Director.
3.11 Adjournment. A majority of the Directors present, whether or not
constituting a quorum, may adjourn any meeting to another time and place.
3.12 Notice of Adjournment. Notice of the time and place of holding an
adjourned meeting need not be given, unless the meeting is adjourned for more
than twenty-four (24) hours, in which case notice of the time and place shall be
given before the time of the adjourned meeting, in the manner specified in
Section 3.8 of this Article III, to the Directors who were not present at the
time of the adjournment.
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3.13 Action Without Meeting. Any action required or permitted to be taken
by the Board of Directors may be taken without a meeting, if all members of the
Board shall individually or collectively consent in writing to that action. Such
action by written consent shall have the same force and effect as a unanimous
vote of the Board of Directors. Such written consent or consents shall be filed
with the minutes of the proceedings of the Board.
3.14 Fees and Compensation of Directors. Directors and members of
committees may receive such compensation, if any, for their services, and such
reimbursement of expenses, as may be fixed or determined by resolution of the
Board of Directors. This Section 3.14 shall not be construed to preclude any
Director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise, and receiving compensation for those services.
ARTICLE IV
COMMITTEES
4.1 Committees of Directors. The Board of Directors may, by resolution
adopted by a majority of the authorized number of Directors, designate one or
more committees, each consisting of two or more Directors, to serve at the
pleasure of the Board. The Board may designate, by a vote of a majority of the
authorized number of Directors, one or more Directors as alternate members of
any committee, who may replace any absent member at any meeting of the
committee. Any committee, to the extent provided in the resolution of the Board,
shall have all the authority of the Board, except with respect to:
(a) the approval of any action which, under the Corporations Code of
California, also requires shareholders' approval or approval of the outstanding
shares;
(b) the filling of vacancies on the Board of Directors or in any
committee;
(c) the fixing of compensation of the Directors for serving on the Board
or on any committee;
(d) the amendment or repeal of By-Laws or the adoption of new By-Laws;
(e) the amendment or repeal of any resolution of the Board of directors
which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation, except at a
rate or in a periodic amount or within a price range determined by the Board of
Directors; or
(g) the appointment of any other committees of the Board of Directors or
the members of these committees.
4.2 Meetings and Action of Committees. The Board of Directors may adopt
rules for the government of any committee not inconsistent with the provisions
of these By-Laws. In the absence of rules adopted by the Board, these By-Laws
shall govern the meetings and actions of committees, with such changes in
application of these By-Laws as are necessary or appropriate for any committee.
ARTICLE V
OFFICERS
5.1 Officers. The officers of the corporation shall be a President, a
Secretary, and a Chief Financial Officer. The corporation may also have, at the
discretion of the Board of Directors, a Chairman of the Board, one or more Vice
Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers,
and such other officers as may be appointed in accordance with the provisions of
5.3 of this Article V. Any number of offices may be held by the same person.
5.2 Election of Officers. The officers of the corporation, except such
officers as may be appointed in accordance with the provisions of Sections 5.3
or 5.5 of this Article V, shall be chosen by the Board of
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Directors, and each shall serve at the pleasure of the Board, subject to the
rights, if any, of an officer under any contract of employment.
5.3 Subordinate Officers. The Board of Directors may appoint, and may
empower the President to appoint, such other officers as the business of the
corporation may require, each of whom shall hold office for such period, have
such authority and perform such duties as are provided in the By-Laws or as the
Board of Directors may from time to time determine.
5.4 Removal and Resignation of Officers. Subject to the rights, if any, of
an officer under any contract of employment, any officer may be removed, either
with or without cause, by the Board of Directors, at any regular or special
meeting of the Board, or, except in case of an officer chosen by the Board of
Directors, by any officer upon whom such power of removal may be conferred by
the Board of Directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 Vacancies in Offices. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these By-Laws for regular appointments to that office.
5.6 Chairman of the Board. The Chairman of the Board, if such an officer
be elected, shall, if present, preside at meetings of the Board of Directors and
exercise and perform such other powers and duties as may be from time to time
assigned by him by the Board of directors or prescribed by the By-Laws. If there
is no President, the Chairman of the Board shall in addition be the Chief
Executive Officer of the corporation and shall have the powers and duties
prescribed in Section 5.7 of this Article V.
5.7 President. Subject to such supervisory powers, if any, as may be given
by the Board of Directors to the Chairman of the Board, if there be such an
officer, the President shall be the Chief Executive Officer of the corporation
and shall, subject to the control of the Board of Directors, have general
supervision, direction and control of the business and the officers of the
corporation. He shall preside at all meetings of the shareholders and, in the
absence of the Chairman of the Board, or if there be none, at all meetings of
the Board of Directors. He shall have such other powers and duties as may be
prescribed by the Board of Directors or the By-Laws.
5.8 Vice Presidents. In the absence or disability of the President, the
Vice Presidents, if any, in order of their rank as fixed by the Board of
Directors or, if not ranked, a Vice President designated by the Board of
Directors, shall perform all the duties of the President, and when so acting
shall have all the powers of, and be subject to all the restrictions upon, the
President. The Vice Presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them respectively by the
Board of Directors or the By-Laws.
5.9 Secretary. The Secretary shall keep or cause to be kept, at the
principal executive office or such other place as the Board of Directors may
direct, a book of minutes of all meetings and actions of Directors, committees
of Directors, and shareholders, showing (a) the time and place of meetings and
whether regular or special; (b) in the case of special meetings, how authorized
and the notice given; (c) the names of those present at Directors' meetings or
committee meetings; (d) the number of shares present or represented at
shareholders' meetings, and the proceedings.
The Secretary shall keep, or cause to be kept, at the principal executive
office or at the office of the corporation's transfer agent or registrar, as
determined by resolution of the Board of Directors, a share register, or a
duplicate share register, showing (a) the names of all shareholders and their
addresses; (b) the number and classes of shares held by each; (c) the number and
date of certificates issued for the same; and (d) the number and date of
cancellation of every certificate surrendered for cancellation.
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The Secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the Board of Directors required by the By-Laws or by law
to be given, and he shall keep the seal of the corporation if one be adopted, in
safe custody, and shall have such other powers and perform such other duties as
may be prescribed by the Board of Directors or by the By-Laws.
5.10 Chief Financial Officer. The Chief Financial Officer shall keep and
maintain, or cause to be kept and maintained, adequate and correct books and
records of accounts of the properties and business transactions of the
corporation, including accounts of its assets, liabilities, receipts,
disbursements, gains, losses, capital, retained earnings, and shares. The books
of account shall at all reasonable times be open to inspection by any Director.
The Chief Financial Officer shall deposit all moneys and other valuables in
the name and to the credit of the corporation with such depositories as may be
designated by the Board of Directors. He shall cause to be disbursed the funds
of the corporation as may be ordered by the Board of directors. He shall render
to the President and Directors, whenever they request it, an account of all of
the corporation's transactions and of the financial condition of the
corporation. He shall have other powers and perform such other duties as may be
prescribed by the Board of Directors or the By-Laws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS,
OFFICERS, EMPLOYEES AND OTHER AGENTS
The corporation may provide indemnification of agents (as that term is
defined in Section 317 of the California Corporations Code), through agreements
with the agents, a vote of shareholders or otherwise, in excess of the
indemnification otherwise permitted by Section 317 of the California Corporate
Code, but not for acts, omissions or transactions for which a director may not
be relieved of liability as set forth in the exceptions to paragraph (a)(10) of
Section 204 of the California Corporations Code or as to circumstances in which
indemnity is expressly prohibited by Section 317 of the California Corporations
Code. In any event, the corporation shall have the right to purchase and
maintain insurance against any liability asserted against or incurred by any
such agents whether or not the corporation would have the power to indemnify
such agents against the liability insured against.
ARTICLE VII
RECORDS AND REPORTS
7.1 Inspection of Share Register. A shareholder or shareholders of the
corporation holding at least five percent (5%) in the aggregate of the
outstanding voting shares of the corporation may (i) inspect and copy the
records of shareholders' names and addresses and shareholdings during usual
business hours on five (5) days prior written demand on the corporation, and/or
(ii) obtain from the transfer agent of the corporation, if any, on written
demand and on the tender of such transfer agent's usual charges for such list, a
list of the shareholder's names and addresses, who are entitled to vote for the
election of Directors, and their shareholdings, as of the most recent record
date for which that list has been compiled or as of a date specified by the
shareholder after the date of demand. This list shall be made available to any
such shareholder by the transfer agent on or before the later of five (5) days
after the demand is received or the date specified in the demand as the date as
of which the list is to be compiled.
The record of shareholders shall also be open to inspection on the written
demand of any shareholder or holder of a voting trust certificate, at any time
during usual business hours, for a purpose reasonably related to the holder's
interests as a shareholder or as the holder of a voting trust certificate. Any
inspection and copying under this Section 7.1 may be made in person or by an
agent or attorney of the shareholder or holder of a voting trust certificate
making the demand.
7.2 Maintenance and Inspection of By-Laws. The corporation shall keep at
its principal executive office, or if its principal executive office is not in
the State of California, at its principal business office in this
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state, the original or a copy of the By-Laws as amended to date, which shall be
open to inspection by the shareholders at all reasonable times during office
hours. If the principal executive office of the corporation is outside the State
of California and the corporation has no principal business office in this
state, the Secretary shall, upon the written request of any shareholder, furnish
to that shareholder a copy of the By-Laws as amended to date.
7.3 Maintenance and Inspection of Other Corporate Records. The accounting
books and records and minutes of proceedings of the shareholders and the Board
of Directors and any committee or committees of the Board of Directors shall be
kept at such place or places designated by the Board of Directors, or, in the
absence of such designation, at the principal executive office of the
corporation. The minutes shall be kept in written form; and the accounting books
and records shall be kept either in written form or in any other form capable of
being converted into written form. The foregoing documents shall be open to
inspection upon the written demand of any shareholder or holder of a voting
trust certificate, at any reasonable time during usual business hours, for a
purpose reasonably related to the holder's interests as a shareholder or as the
holder of a voting trust certificate. The inspection may be made in person or by
an agent or attorney, and shall include the right to copy and make extracts.
These rights of inspection shall extend to the records of each subsidiary
corporation of the corporation.
7.4 Inspection by Directors. Every Director shall have the absolute right
at any reasonable time to inspect all books, records, and documents of every
kind and the physical properties of the corporation and each of its subsidiary
corporations. Such inspection by a Director may be made in person or by an agent
or attorney and the right of inspection includes the right to copy and make
extracts of documents.
7.5 Annual Report to Shareholders. The annual report to shareholders
referred to in Section 1501 of the Corporations Code of California is expressly
dispensed with, but nothing herein shall be interpreted as prohibiting the Board
of Directors from issuing annual or other periodic reports to the shareholders
of the corporation as they consider appropriate.
7.6 Financial Statements. A copy of any annual financial statement and any
income statement of the corporation for each quarterly period of each fiscal
year, and any accompanying balance sheet of the corporation as of the end of
each such period, that has been prepared by the corporation shall be kept on
file in the principal executive office of the corporation for twelve (12) months
and each such statement shall be exhibited at all reasonable times to any
shareholder demanding an examination of any such statement or a copy shall be
mailed to any such shareholder.
If a shareholder or shareholders holding at least five percent (5%) of the
outstanding shares of any class of stock of the corporation makes a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the then current fiscal year
ended more than thirty (30) days before the date of the request, and a balance
sheet of the corporation as of the end of that period, the Chief Financial
Officer shall cause that statement to be prepared, if not already prepared, and
shall deliver personally or mail that statement or statements to the person
making the request within thirty (30) days after the receipt of the request. If
the corporation has not sent to the shareholders its annual report for the last
fiscal year, this report shall likewise be delivered or mailed to the
shareholder or shareholders within thirty (30) days after the request.
The corporation shall also, on the written request of any shareholder, mail
to the shareholder a copy of the last annual, semi-annual, or quarterly income
statement which it has prepared, and a balance sheet as of the end of that
period.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
7.7 Annual Statement of General Information. The corporation shall, during
the period commencing on the first day of the fifth preceding month and ending
on the end of month of incorporation in each year, file with the Secretary of
State of the State of California, on the prescribed form, a statement setting
forth the
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authorized number of Directors, the names and complete business or residence
addresses of all incumbent Directors, the names and complete business or
residence addresses of the Chief Executive Officer, Secretary and Chief
Financial Officer, the street address of its principal executive office or
principal business office in this state, and the general type of business
constituting the principal business activity of the corporation, together with a
designation of the agent of the corporation for the purpose of service of
process, all in compliance with Section 1502 of the Corporations Code of
California.
ARTICLE VIII
GENERAL CORPORATE MATTERS
8.1 Record Date for Purposes Other Than Notice and Voting. For purposes of
determining the shareholders entitled to receive payment of any dividend or
other distribution or allotment of any rights or entitled to exercise any rights
in respect of any other lawful action (other than action by shareholders by
written consent without a meeting), the Board of Directors may fix, in advance,
a record date, which shall not be more than sixty (60) days before any such
action, and in that case only shareholders of record on the date so fixed are
entitled to receive the dividend, distribution, or allotment of rights or to
exercise the rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided in the Corporations Code of California.
If the Board of Directors does not so fix a record date, the record date
for determining shareholders for any such purpose shall be at the close of
business on the day on which the Board adopts the applicable resolution or the
sixtieth (60th) day before the date of that action, whichever is later.
8.2 Checks, Drafts, Evidences of Indebtedness. All checks, drafts, or
other orders for payment of money, notes, or other evidences of indebtedness,
issued in the name of or payable to the corporation, shall be signed or endorsed
by such person or persons and in such manner as, from time to time, shall be
determined by resolution of the Board of Directors.
8.3 Corporate Contracts and Instruments; How Executed. The Board of
Directors, except as otherwise provided in these By-Laws, may authorize any
officer or officers, agent or agents, to enter into any contract or execute any
instrument in the name of and on behalf of the corporation, and this authority
may be general or confined to specific instances; and unless so authorized or
ratified by the Board of Directors or within the agency power of an officer, no
officer, agent, or employee shall have any power or authority to bind the
corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or for any amount.
8.4 Certificate for Shares. A certificate or certificates for shares of
the capital stock of the corporation shall be issued to each shareholder when
any of these shares are fully paid, and the Board of Directors may authorize the
issuance of certificates or shares as partly paid provided that these
certificates shall state the amount of the consideration to be paid for them and
the amount paid. All certificates shall be signed in the name of the corporation
by the Chairman of the Board or Vice Chairman of the Board or the President or
Vice President and by the Chief Financial Officer or an Assistant Treasurer or
the Secretary or any Assistant Secretary, certifying the number of shares and
the class or series of shares owned by the shareholder. Any or all of the
signatures on the certificate may be facsimile. In case any officer, transfer
agent, or registrar who has signed or whose facsimile signature has been placed
on a certificate shall have ceased to be that officer, transfer agent, or
registrar before that certificate is issued, it may be issued by the corporation
with the same effect as if that person were an officer, transfer agent, or
registrar at the date of issue.
8.5 Lost Certificates. Except as provided in this Section 8.5, no new
certificates for shares shall be issued to replace an old certificate unless the
latter is surrendered to the corporation and cancelled at the same time. The
Board of Directors may, in case any share certificate or certificate for any
other security is lost, stolen, or destroyed, authorize the issuance of a
replacement certificate on such terms and conditions as the board may require,
including provision for indemnification of the corporation secured by a bond or
other adequate security sufficient to protect the corporation against any claim
that may be made against it, including
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any expense or liability, on account of the alleged loss, theft, or destruction
of the certificate or the issuance of the replacement certificate.
8.6 Representation of Shares of Other Corporations. The Chairman of the
Board, the President, or any Vice President, or any other person authorized by
resolution of the Board of Directors or by any of the foregoing designated
officers, is authorized to vote on behalf of the corporation any and all shares
of any other corporation or corporations, foreign or domestic, standing in the
name of the corporation. The authority granted to these officers to vote or
represent on behalf of the corporation any and all shares held by the
corporation in any other corporation or corporations may be exercised by any of
these officers in person or by any person authorized to do so by a proxy duly
executed by these officers.
8.7 Construction and Definitions. Unless the context requires otherwise,
the general provisions, rules of construction, and definitions in the
Corporations Code of California shall govern the construction of these By-Laws.
Without limiting the generality of this provision, the singular number includes
the plural, the plural number includes the singular, and the term "person"
includes both a corporation and a natural person.
ARTICLE IX
AMENDMENTS
9.1 Amendment by Shareholders. Subject to any provisions in the Articles
of Incorporation of the corporation which require a greater vote of the
shareholders to amend or repeal, or to adopt provisions inconsistent with, these
By-Laws or any provisions hereof, new By-Laws may be adopted or these By-Laws
may be amended or repealed by the vote or written consent of holders of a
majority of the outstanding shares entitled to vote; provided, however, that if
the Articles of Incorporation of the corporation set forth the authorized number
of directors of the corporation, the authorized number of Directors may be
changed only by an amendment of the Articles of Incorporation.
9.2 Amendment by Directors. Subject to the rights of the shareholders as
provided in Section 9.1 of this Article IX, By-Laws may be adopted, amended or
repealed by the Board of Directors.
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APPENDIX D
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13. DISSENTERS' RIGHTS
SEC. 1300. REORGANIZATION OR SHORT FORM MERGER; DISSENTING SHARES;
CORPORATE PURCHASE AT FAIR MARKET VALUE; DEFINITIONS
(a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter, require
the corporation in which the shareholder holds shares to purchase for cash at
their fair market value the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be determined
as of the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock split, reverse
stock split, or share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by the
Commissioner of Corporations under subdivision (o) of Section 25100 or (B)
listed on the list of OTC margin stocks issued by the Board of Governors of the
Federal Reserve System, and the notice of meeting of shareholders to act upon
the reorganization summarizes this section and Sections 1301, 1302, 1303 and
1304; provided, however, that this provision does not apply to any shares with
respect to which there exists any restriction on transfer imposed by the
corporation or by any law or regulation; and provided, further, that this
provision does not apply to any class of shares described in subparagraph (A) or
(B) if demands for payment are filed with respect to 5 percent or more of the
outstanding shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted in
favor of the reorganization or, (B) if described in subparagraph (A) or (B) of
paragraph (1) (without regard to the provisos in that paragraph), were voted
against the reorganization, or which were held of record on the effective date
of a short-form merger; provided, however, that subparagraph (A) rather than
subparagraph (B) of this paragraph applies in any case where the approval
required by Section 1201 is sought by written consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the
recordholder of dissenting shares and includes a transferee of record.
SEC. 1301. NOTICE TO HOLDERS OF DISSENTING SHARES IN REORGANIZATIONS;
DEMAND FOR PURCHASE; TIME; CONTENTS
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any
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dissenting shares as defined in subdivision (b) of Section 1300, unless they
lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of
record by the shareholder which the shareholder demands that the corporation
purchase and shall contain a statement of what such shareholder claims to be the
fair market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
SEC. 1302. SUBMISSION OF SHARE CERTIFICATES FOR ENDORSEMENT; UNCERTIFICATED
SECURITIES
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
SEC. 1303. PAYMENT OF AGREED PRICE WITH INTEREST; AGREEMENT FIXING FAIR
MARKET VALUE; FILING; TIME OF PAYMENT
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
SEC. 1304. ACTION TO DETERMINE WHETHER SHARES ARE DISSENTING SHARES OR FAIR
MARKET VALUE; LIMITATION; JOINDER; CONSOLIDATION; DETERMINATION OF ISSUES;
APPOINTMENT OF APPRAISERS
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
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(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If
the status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SEC. 1305. REPORT OF APPRAISERS; CONFIRMATION; DETERMINATION BY COURT;
JUDGMENT; PAYMENT; APPEAL; COATS
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a
report within 10 days from the date of their appointment or within such further
time as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
SEC. 1306. PREVENTION OF IMMEDIATE PAYMENT; STATUS AS CREDITORS; INTEREST
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SEC. 1307. DIVIDENDS ON DISSENTING SHARES
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
SEC. 1308. RIGHTS OF DISSENTING SHAREHOLDERS PENDING VALUATION; WITHDRAWAL
OF DEMAND FOR PAYMENT
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
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SEC. 1309. TERMINATION OF DISSENTING SHARE AND SHAREHOLDER STATUS
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation purchase their shares upon the happening of any of the
following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SEC. 1310. SUSPENSION OF RIGHT TO COMPENSATION OR VALUATION PROCEEDINGS;
LITIGATION OF SHAREHOLDERS' APPROVAL
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
SEC. 1311. EXEMPT SHARES
This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
SEC. 1312. RIGHT OF DISSENTING SHAREHOLDER TO ATTACK, SET ASIDE OR RESCIND
MERGER OR REORGANIZATION; RESTRAINING ORDER OR INJUNCTION; CONDITIONS
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof, but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
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(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
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OHIO REVISED CODES
SECTION 1701.85. DISSENTERS' RIGHTS
SEC. 1701.85. DISSENTING SHAREHOLDER'S DEMAND FOR FAIR CASH VALUE OF
SHARES.
(A) (1) A shareholder of a domestic corporation is entitled to relief as a
dissenting shareholder in respect of the proposals described in sections
1701.74, 1701.76, and 1701.84 of the Revised Code, only in compliance with this
section.
(2) If the proposal must be submitted to the shareholders of the
corporation involved, the dissenting shareholder shall be a record holder of the
shares of the corporation as to which he seeks relief as of the date fixed for
the determination of shareholders entitled to notice of a meeting of the
shareholders at which the proposal is to be submitted, and such shares shall not
have been voted in favor of the proposal. Not later than ten days after the date
on which the vote on the proposal was taken at the meeting of the shareholders,
the dissenting shareholder shall deliver to the corporation a written demand for
payment to him of the fair cash value of the shares as to which he seeks relief,
which demand shall state his address, the number and class of such shares, and
the amount claimed by him as the fair cash value of the shares.
(3) The dissenting shareholder entitled to relief under division (C) of
section 1701.84 of the Revised Code in the case of a merger pursuant to section
1701.80 of the Revised Code and a dissenting shareholder entitled to relief
under division (E) of section 1701.84 of the Revised Code in the case of a
merger pursuant to section 1701.801 [1701.80.1] of the Revised Code shall be a
record holder of the shares of the corporation as to which he seeks relief as of
the date on which the agreement of merger was adopted by the directors of that
corporation. Within twenty days after he has been sent the notice provided in
section 1701.80 or 1701.801 [1701.80.1 of the Revised Code, the dissenting
shareholder shall deliver to the corporation a written demand for payment with
the same information as that provided for in division A)(2) of this section.
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or the new
entity, whether the demand is served before, on, or after the effective date of
the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at the
address specified in his demand, a request for the certificates representing the
shares as to which he seeks relief, the dissenting shareholder, within fifteen
days from the date of the sending of such request, shall deliver to the
corporation the certificates requested so that the corporation may forthwith
endorse on them a legend to the effect that demand for the fair cash value of
such shares has been made. The corporation promptly shall return such endorsed
certificates to the dissenting shareholder. A dissenting shareholder's failure
to deliver such certificates terminates his rights as a dissenting shareholder,
at the option of the corporation, exercised by written notice sent to the
dissenting shareholder within twenty days after the lapse of the fifteen-day
period, unless a court for good cause shown otherwise directs. If shares
represented by a certificate on which such a legend has been endorsed are
transferred, each new certificate issued for them shall bear a similar legend,
together with the name of the original dissenting holder of such shares. Upon
receiving a demand for payment from a dissenting shareholder who is the record
holder of uncertificated securities, the corporation shall make an appropriate
notation of the demand for payment in its shareholder records. If uncertificated
shares for which payment has been demanded are to be transferred, any new
certificate issued for the shares shall bear the legend required for
certificated securities as provided in this paragraph. A transferee of the
shares so endorsed, or of uncertificated securities where such notation has been
made, acquires only such rights in the corporation as the original dissenting
holder of such shares had immediately after the service of a demand for payment
of the fair cash value of the shares. A request under this paragraph by the
corporation is not an admission by the corporation that the shareholder is
entitled to relief under this section.
(B) Unless the corporation and the dissenting shareholder have come to an
agreement on the fair cash value per share of the shares as to which the
dissenting shareholder seeks relief, the dissenting shareholder or the
corporation, which in case of a merger or consolidation may be the surviving or
new entity, within three months after the service of the demand by the
dissenting shareholder, may file a complaint in the court of common peas of the
county in which the principal office of the corporation that issued the shares
is located or
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was located when the proposal was adopted by the shareholders of the
corporation, or, if the proposal was not required to be submitted to the
shareholders, was approved by the directors. Other dissenting shareholders
within that three-month period, may join as plaintiffs or may be joined as
defendants in any such proceeding, and any two or more such proceedings may be
consolidated. The complaint shall contain a brief statement of the facts,
including the vote and the facts entitling the dissenting shareholder to the
relief demanded. No answer to such a complaint is required. Upon the filing of
such a complaint, the court, on motion of the petitioner, shall enter an order
fixing a date for a hearing on the complaint and requiring that a copy of the
complaint and a notice of the filing and of the date for hearing be given to the
respondent or defendant in the manner in which summons is required to be served
or substituted service is required to be made in other cases. On the day fixed
for the hearing on the complaint or any adjournment of it, the court shall
determine from the complaint and from such evidence as is submitted by either
party whether the dissenting shareholder is entitled to be paid the fair cash
value of any shares and, if so, the number and class of such shares. If the
court finds that the dissenting shareholder is so entitled, the court may
appoint one or more persons as appraisers to receive evidence and to recommend a
decision on the amount of the fair cash value. The appraisers have such power
and authority as is specified in the order of their appointment. The court
thereupon shall make a finding as to the fair cash value of a share and shall
render judgment against the corporation for the payment of it, with interest at
such rate and from such date as the court considers equitable. The costs of the
proceeding, including reasonable compensation to the appraisers to be fixed by
the court, shall be assessed or apportioned as the court considers equitable.
The proceeding is a special proceeding and final orders in it may be vacated,
modified, or reversed on appeal pursuant to the Rules of Appellate Procedure
and, to the extent not in conflict with those rules, Chapter 2505 of the Revised
Code. If, during the pendency of any proceeding instituted under the section, a
suit or proceeding is or has been instituted to enjoin or otherwise to prevent
the carrying out of the action as to which the shareholder has dissented, the
proceeding instituted under this section shall be stayed until the final
determination of the other suit or proceeding. Unless any provision in division
(D) of this section is applicable, the fair cash value of the shares that is
agreed upon by the parties or fixed under this section shall be paid within
thirty days after the date of final determination of such value under this
division, the effective date of the amendment to the articles, or the
consummation of the other action involved, whichever occurs last. Upon the
occurrence of the last such event payment shall be made immediately to a holder
of uncertificated securities entitled to such payment. In the case of holders of
shares represented by certificates, payment shall be made only upon and
simultaneously with the surrender to the corporation of the certificates
representing the shares for which the payment is made.
(C) If the proposal was required to be submitted to the shareholders of the
corporation, fair cash value as to those shareholders shall be determined as of
the day prior to the day on which the vote by the shareholders was taken and, in
the case of a merger pursuant to section 1701.80 or 1701.801 [1701.80.1] of the
Revised Code, fair cash value as to shareholders of a constituent subsidiary
corporation shall be determined as of the day before the adoption of the
agreement of merger by the directors of the particular subsidiary corporation.
The fair cash value of a share for the purposes of this section is the amount
that a willing seller who is under no compulsion to sell would be willing to
accept and that a willing buyer who is under no compulsion to purchase would be
willing to pay, but in no event shall the fair cash value of a share exceed the
amount specified in the demand of the particular shareholder. In computing such
fair cash value, any appreciation or depreciation in market value resulting from
the proposal submitted to the directors or to the shareholders shall be
excluded.
(D) (1) The right and obligation of a dissenting shareholder to receive
such fair cash value and to sell such shares as to which he seeks relief, and
the right and obligation of the corporation to purchase such shares and to pay
the fair cash value of them terminates if any of the following applies:
(a) The dissenting shareholder has not complied with this section,
unless the corporation by its directors waives such failure;
(b) The corporation abandons the action involved or is finally
enjoined or prevented from carrying it out, or the shareholders rescind their
adoption of the action involved;
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(c) The dissenting shareholder withdraws his demand with the consent
of the corporation by its directors;
(d) The corporation and the dissenting shareholder have to come to an
agreement as to the fair cash value per share, and neither the shareholder nor
the corporation has filed or joined in a complaint under division (B) of this
section within the period provided in that division.
(2) For purposes of division (D)(1) of this section, if the merger or
consolidation has become effective and the surviving or new entity is not a
corporation, action required to be taken by the directors of the corporation
shall be taken by the general partners of a surviving or new partnership or the
comparable representatives of any other surviving or new entity.
(E) From the time of the dissenting shareholder's giving of the demand
until either the termination of the rights and obligations arising from it or
the purchase of the shares by the corporation, all other rights accruing from
such shares, including voting and dividend or distribution rights, are
suspended. If during the suspension, any dividend or distribution is paid in
money upon shares during the suspension, any dividend or distribution is paid in
money upon shares of such class or any dividend, distribution, or interest is
paid in money upon any securities issued in extinguishment of or in substitution
for such shares, an amount equal to the dividend distribution, or interest
which, except for the suspension, would have been payable upon such shares or
securities, shall be paid to the holder of record as a credit upon the fair cash
value of the shares. If the right to receive fair cash value is terminated other
than by the purchase of the shares by the corporation, all rights of the holder
shall be restored and all distributions which, except for the suspension, would
have been made shall be made to the holder of record of the shares at the time
of termination.
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APPENDIX E
April 25, 1996
Board of Directors
Citation Insurance Group
One Almaden Boulevard
Suite 300
San Jose, CA 95113
Gentlemen:
You have advised us that Citation Insurance Group ("Citation"), a California
corporation, Newco, a wholly-owned subsidiary of Citation ("Newco"), an Ohio
corporation, and Physicians Insurance Company of Ohio ("PICO"), an Ohio
corporation, propose to enter into an Agreement and Plan of Reorganization (the
"Agreement") providing for the merger of Newco with and into PICO, with PICO
continuing as the surviving corporation and wholly-owned subsidiary of Citation
(the "Merger"). Pursuant to the Agreement, and as more fully described therein,
at the "Effective Time" (as defined in the Agreement) each outstanding share of
PICO common stock, par value $1.00 per share, ("PICO Stock") shall be converted
into the right to receive that number of shares of Citation's common stock, par
value $0.10 per share ("Citation Stock"), equal to the quotient of the average
market price of one share of PICO Stock during the determination period (as
defined in the Agreement) and $5.03 (the "Exchange Ratio"), provided that the
Exchange Ratio will be no less than 5.010 nor more than 6.123 shares of Citation
Stock per share of PICO Stock. In the event that the "PICO Share Value" (as
defined in the agreement) is less than $22.50 or more than $33.50 (the "Exchange
Range"), Citation or PICO, respectively, would have the right to terminate the
Agreement.
Prudential Securities Incorporated ("Prudential Securities") has been requested
by Citation's Board of Directors to render an opinion (the "Opinion") with
respect to the fairness, from a financial point of view, to the stockholders of
Citation, of the Exchange Ratio within the Exchange Range.
In conducting our analysis and arriving at the Opinion expressed herein, we have
reviewed such materials and considered such financial and other factors as we
deemed relevant under the circumstances, including, among other, the following:
(1) Reviewed Citation's Annual Reports for the four fiscal years prior to
and including December 31, 1994, and Citation's Reports on Form 10-K and
related financial information for the five fiscal years prior to and
including December 31, 1995.
(2) Reviewed PICO's Annual Reports and related financial information for
the four fiscal years prior to and including December 31, 1994 and PICO's
audited financial statements and related financial information for the
fiscal year ended December 31, 1995;
(3) Reviewed Citation's, PICO's, and each "PICO Insurance Subsidiary's" (as
defined in the Agreement) annual Statutory Financial Statements and related
financial information for the year ended December 31, 1994 and Citation's
annual Statutory Financial Statements and related financial information for
the year ended December 31, 1995;
(4) Reviewed Milliman & Robertson, Inc.'s ("M&R") actuarial report on
Citation Insurance Company's loss and loss adjustment expense reserves as
of March 31, 1995 and M&R's actuarial report on Citation Insurance
Company's and Citation National Insurance Company's loss and loss
adjustment expense reserves as of December 31, 1995;
(5) Reviewed PICO's Review of Loss and Loss Adjustment Reserves as of
December 31, 1994 prepared by Tillinghast, a Towers Perrin company;
(6) Reviewed the Agreement for the Purchase and Sale of Certain Assets,
dated as of July 14, 1995 between PICO and Mutual Assurance, Inc., and the
reinsurance agreement between PICO and Mutual Assurance, Inc. incorporated
as an exhibit therein;
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(7) Reviewed the management and reinsurance agreements between Sydney
Reinsurance Corporation and Sequoia Insurance Company;
(8) Reviewed certain internal financial forecasts relating to the business
of Citation, furnished to us by Citation's management;
(9) Conducted discussions with members of senior management of Citation and
PICO concerning their respective businesses and prospects;
(10) Reviewed the stock market performance of Citation Stock from
Citation's initial public offering on March 21, 1991 to present;
(11) Reviewed the stock market performance of PICO Stock from January 1,
1990 to present;
(12) Compared the results of operations and stock price trading histories
of Citation with those of certain companies which we deemed to be
reasonably similar to Citation;
(13) Compared the results of operations and stock price trading histories
of PICO with those of certain companies which we deemed to be reasonably
similar to PICO;
(14) Compared the proposed financial terms of the Merger with the financial
terms of other transactions we deemed relevant;
(15) Reviewed a draft of the Agreement dated April 23, 1996; and
(16) Reviewed such other financial studies and analyses and performed such
other investigations and considered such other matters as we deemed
relevant.
We were retained by Citation pursuant to a letter agreement dated April 17, 1995
to provide Citation with strategic financial advice. We received a retainer fee
for our services and will receive a fee upon consummation of the Merger as set
forth in the letter agreement referred to above. In addition, in the ordinary
course of business, we may actively trade Citation Stock or PICO Stock for our
own account or for the accounts of customers and, accordingly, may at any time
hold a long or short position in either Citation Stock or PICO Stock.
In preparing our Opinion, we have, with your consent, assumed and relied upon
the accuracy and completeness of all financial information, including all
actuarial information, supplied or otherwise made available to us from public
sources or by Citation and PICO and have not independently verified such
information. We have neither made nor obtained any independent appraisals of the
assets of Citation or PICO, nor have we conducted any independent actuarial
analyses of the businesses of either Citation or PICO.
With respect to the financial forecasts furnished to us by Citation, we have
assumed that the revised financial forecasts delivered by Citation's management
to the Board of Directors on April 11, 1996 have been reasonably prepared and we
have been advised by Citation that the revised forecasts reflect the best
currently available estimates and judgment of Citation's management as to the
expected future financial performance of Citation and have not undertaken any
independent analysis to verify the reasonableness of the assumptions underlying
such forecasts.
Our Opinion does not address the relative merits of the Merger as compared to
any alternative business strategies that might exist for Citation or the effect
of any other transaction in which Citation might engage. Our Opinion is
necessarily based upon information available to us, and on economic, financial,
stock market and other conditions as they exist and can be evaluated as of the
date hereof. In addition, and without limitation, we are expressing no opinion
as to the prices at which Citation Stock or PICO Stock will trade at any time
after the date of this Opinion.
Our advisory services and the Opinion expressed herein are provided for the use
of the Board of Directors of Citation in its evaluation of the proposed merger,
and our Opinion is not intended to be and does not constitute a recommendation
to any stockholder as to how such stockholder should vote on the Merger. This
Opinion may be reproduced in full in any proxy or information statement mailed
to stockholders of Citation but may not otherwise be disclosed publicly,
referred to or communicated by you in any manner without our prior
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written approval and this Opinion must be treated as confidential. Any summary
of the Opinion included in such proxy statement must be in a form acceptable to
Prudential Securities.
Based upon and subject to the foregoing, we are of the opinion that, as of the
date hereof, the Exchange Ratio within the Exchange Rate, is fair, from a
financial point of view, to the stockholders of Citation.
Very truly yours,
Prudential Securities Incorporated
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APPENDIX F
June 19, 1996
The Board of Directors
Physicians Insurance Company of Ohio
13515 Yarmouth Drive N.W.
Pickerington, Ohio 43147-9257
Gentlemen:
You have requested our opinion as to the fairness from a financial point of
view to Physicians Insurance Company of Ohio ("PICO") and its shareholders of
the consideration to be received in the form of Citation Insurance Group
("Citation") common shares pursuant to the terms of the Agreement and Plan of
Reorganization ("Agreement") between Citation, Citation Holdings, Inc.
("Newco"), and Physicians Insurance Company of Ohio.
Pursuant to the Agreement, each of PICO's outstanding shares will be
converted into Citation common stock based upon a floating exchange rate. The
exchange rate is calculated by dividing the PICO share value by $5.03 per share
of Citation stock. The PICO share value is the average closing price of PICO's
common stock for the twenty trading days prior to the determination date, within
a range of $25.20 to $30.80 per share, inclusive. The determination date will be
set by the occurrence of approvals by regulators and shareholders of both
companies. If the average closing price is less than $25.20, the PICO share
value will be $25.20, but the agreement is subject to termination by Citation if
the PICO average closing price is below $22.50. If the average closing price is
greater than $30.80, the PICO share value will be $30.80, but the agreement is
subject to termination by PICO if the average closing price is above $33.50.
Under the terms of the Agreement, all outstanding unexercised PICO options will
be assumed by Citation. Also, as a result of the transactions contemplated in
the Agreement, the shareholders of PICO will acquire a majority of the Citation
common shares.
In arriving at our opinion, we have reviewed the Agreement as well as
financial and other information that was publicly available or furnished to us
by PICO and Citation, including information provided during discussions with
their respective managements. Financial projections for Citation for the fiscal
years ended December 31, 1996 and 1997 were developed by us based upon
discussions with and information provided by the management of Citation and were
reviewed and accepted as reasonable by the management of PICO. In addition,
certain financial projections of PICO for fiscal years 1996 and 1997 were
developed by us based upon public information and were reviewed and accepted as
reasonable by the management of PICO. In addition, we have compared certain
financial data of PICO and Citation with various other comparable companies
whose securities are traded in public markets, reviewed the historical stock
prices and trading volumes of the common stock of Citation and PICO, reviewed
prices and premiums paid in other business combinations and conducted such other
financial studies, analyses and investigations as we deemed appropriate for the
purposes of this opinion.
In rendering our opinion, we have relied upon and assumed, without
independent verification, the accuracy, completeness and fairness of all of the
financial and other information that was available to us from public sources,
that was provided to us by PICO and Citation or their respective
representatives, or that was otherwise reviewed by us. With respect to the
financial projections developed by us and reviewed by the management of PICO, we
have assumed that the information provided by the management of PICO, in
connection therewith, reflects the best currently available estimates and
judgments of the management of PICO as to the future operating and financial
performance of PICO. We did not make any independent evaluation of PICO's or
Citation's assets or liabilities nor did we verify any of the information
reviewed by us.
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Our opinion is necessarily based on general economic, market, financial and
other conditions as they exist and on the information made available to us as of
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. Our opinion as expressed herein is limited to
the fairness, from a financial point of view, of the consideration to be
received by PICO's shareholders and does not address PICO's underlying business
decision to proceed with the merger. We are expressing no opinion herein as to
the prices at which Citation's common stock will actually trade at any time.
This opinion is not intended to be and does not constitute a recommendation to
any shareholder as to how such shareholder should vote with respect to the
Agreement.
Montag & Joselson is a New York Stock Exchange member firm recognized for
its expertise in the valuation of insurance businesses and securities in
connection with mergers, acquisitions, underwritings, sales and distributions of
listed and unlisted securities, private placements and valuations for estate,
corporate and other purposes. Montag & Joselson has substantial experience in
insurance company merger and acquisition transactions and is familiar with PICO
and Citation. In the ordinary course of its business, Montag & Joselson may
trade securities of PICO or Citation for its own account or for the account of
its customers and, accordingly, may at any time hold a long or short position in
such securities.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that as of June 1996 the consideration to be received by the PICO
shareholder pursuant to the Agreement is fair from a financial point of view.
Very truly yours,
MONTAG & JOSELSON
By:
John D. Gwynn, C.F.A.
Managing Director
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APPENDIX G
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- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 0-18786
CITATION INSURANCE GROUP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 94-2723335
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
ONE ALMADEN BOULEVARD, SUITE 300
SAN JOSE, CALIFORNIA 95113-2213
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(408) 292-0222
(REGISTRANT'S TELEPHONE NUMBER)
Securities registered pursuant to Section 12(b) of the Act:
None
(Title of class)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of voting stock held by non-affiliates of the
registrant was $24,300,000 as of March 29, 1996. As of such date 6,407,803
shares of Common Stock were outstanding, including 313,600 shares held by a
subsidiary of registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders on May 15, 1996 are incorporated by reference in Part III herein.
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CITATION INSURANCE GROUP
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
ITEMS NUMBER
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<S> <C> <C>
PART 1
Item 1 Business
G-3
Company Overview........................................................
G-5
Proposed Merger with PICO...............................................
G-5
Workers' Compensation...................................................
G-8
Commercial Property and Casualty........................................
G-11
Billing and Premium Collections.........................................
G-12
Loss and Loss Adjustment Expense Reserves...............................
G-17
Reinsurance.............................................................
G-19
Investments.............................................................
G-21
Information Services....................................................
G-21
Competition.............................................................
G-22
Regulation..............................................................
G-25
Employees...............................................................
Item 2 Properties.............................................................. G-25
Item 3 Legal Proceedings....................................................... G-26
Item 4 Submission of Matters to a Vote of Security Holders..................... G-26
G-26
Executive Officers of the Registrant....................................
PART II
Item 5 Market for the Registrant's Common Stock and
G-28
Related Security Holder Matters.........................................
Item 6 Selected Financial Data................................................. G-28
Item 7 Management's Discussion and Analysis of Financial
G-30
Condition and Results of Operations.....................................
Item 8 Consolidated Financial Statements and Supplementary Data
G-45
Consolidated Balance Sheets.............................................
G-47
Consolidated Statements of Operations...................................
G-48
Consolidated Statements of Cash Flows...................................
G-49
Consolidated Statements of Stockholders' Equity.........................
G-50
Notes to Consolidated Financial Statements..............................
G-63
Independent Auditors' Report............................................
Statement of Management's Financial
G-64
Reporting Responsibility................................................
G-65
Selected Quarterly Financial Data.......................................
Item 9 Changes in and Disagreements with Accountants on Accounting
G-65
and Financial Disclosure................................................
PART III
Item 10 Directors and Executive Officers of the Registrant...................... G-65
Item 11 Executive Compensation.................................................. G-65
Item 12 Security Ownership of Certain Beneficial Owners and Management.......... G-65
Item 13 Certain Relationships and Related Transactions.......................... G-66
PART IV
Item 14 Exhibits, Financial Statements, Schedules and Reports on Form 8-K....... G-66
</TABLE>
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PART I.
ITEM 1. BUSINESS
COMPANY OVERVIEW
Citation Insurance Group ("CIG") is a holding company principally engaged
in writing workers' compensation and commercial property and casualty insurance
through its wholly-owned subsidiaries, Citation Insurance Company ("CIC") and
Citation National Insurance Company ("CNIC"). As used in Item 1, the "Company"
refers to CIG and its subsidiaries, excluding Citation General Insurance Company
(CGIC). CGIC, a wholly-owned subsidiary of CIG, was placed into conservation in
July 1995 by the State of California and as used in Item 1, the "Company" does
not refer to CGIC. The Company had effectively written off its investment in
CGIC in November, 1994.
In its workers' compensation business, CIC historically specialized in
providing coverage for California businesses but has expanded to provide such
coverage in Arizona, Colorado and Utah. CIC focuses on insuring smaller accounts
in those classifications it believes to be historically profitable. CIC believes
that by maintaining its focus on a limited number of employment classifications
it can provide claim management and loss control services to the smaller
accounts at a level appropriate to the size and type of business of the
policyholder. Historically, CIC competed with other workers' compensation
insurers principally on the basis of its loss control expertise, claim
management services and policyholder dividends. Beginning January 1, 1995,
California's long standing rate law (known as the minimum rate law) was replaced
with a competitive rate law which CIC believes resulted in the lowest premium
price becoming the most prominent competitive factor.
In October 1989, CIG entered the commercial property and casualty business
to capitalize on what management believed was an attractive opportunity to
operate in a relatively narrow segment of the commercial property and casualty
market. Since that time, CIC has underwritten general liability and property
insurance for small and medium-sized businesses with uniform risk
characteristics and coverage needs. CIC typically provides general liability,
theft, inland marine, property, glass and incidental products liability
coverage. Commercial auto and umbrella liability are written for accounts where
the Company writes other lines of business.
In October 1993, CIG completed the acquisition of Madison Capital, Inc. and
its subsidiaries ("Madison") for which CIG issued 2,158,545 shares of common
stock and paid $3,650,000 to the former shareholders of Madison in exchange for
all of the issued and outstanding stock of Madison. Madison was merged with and
into CIG and its former wholly-owned subsidiaries, The Canadian Insurance
Company of California, California Consumers Insurance Company and Madison
Acceptance Corporation, became wholly-owned subsidiaries of CIG. In February
1994, the names of The Canadian Insurance Company of California and California
Consumers Insurance Company were changed to Citation General Insurance Company,
(CGIC), and Citation National Insurance Company (CNIC), respectively.
CGIC and CNIC specialized in insuring accounts in commercial
property-oriented business classifications, including investment properties,
retail operations, restaurants, wholesale distribution operations and other
service-related businesses. Until October 1994 they also provided coverage for
artisan contractors. They competed principally on the basis of price,
comprehensive coverage, service and premium payment plans. Historically, CGIC
and CNIC could invoice the policyholder directly or, if the policyholder
preferred, through a producer. In both instances, CGIC and CNIC provided
installment payment options. Since January 1994, all three insurance
subsidiaries offered installment payment plans directly to the policyholder. All
producer invoicing requires 100% of policy premiums to be paid upon issuance of
the policy.
Madison Acceptance Corporation ("MAC") is licensed by the California
Department of Corporations as an industrial loan company empowered to transact
premium financing in California. MAC does not presently conduct premium
financing operations.
During 1994, the Company increased CGIC's loss reserves and, in the third
quarter of 1994, the increase in CGIC's loss reserves aggregated approximately
$6.2 million. These increases were due primarily to re-evaluation of potential
losses related to construction defect claims emanating from CGIC's artisan
contractor
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policies written in years prior to the merger. Subsequent to the third quarter
loss reserve increases, the Company notified the California Department of
Insurance (the "Department") that the cumulative effect of these increases
brought CGIC below the minimum surplus required by the State. The Company began
working with the Department to formulate a plan for resolving the situation.
Based upon discussions with the Department regarding the possible conservation
of CGIC, the Company concluded that its control over CGIC had become temporary
and, as a result, has accounted for the results of CGIC on the equity method
since November 1994, resulting in a write off of its remaining investment in
CGIC of $4.2 million at that date. At that time, CGIC and CNIC stopped writing
any new business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
In February 1995, the Company reached an agreement in principle with the
Department regarding CGIC. Under the terms of the agreement an inter-company
pooling reinsurance agreement between CGIC and CNIC was commuted effective
September 30, 1994. In addition, CNIC transferred approximately $1.1 million of
securities into a contingency fund for potential further development of CGIC's
loss reserves associated with accident years 1990 to 1994 during which time the
inter-company pooling agreement was in effect. Further, CIG agreed to pay
$600,000 in cash to CGIC and transfer its 25% ownership of the Company's Costa
Mesa property to CGIC. As a result of this agreement the Company recorded a
liability for the cost of the disposition of CGIC, which includes the above
described payments and transfers which, when combined with its write off of its
investment in CGIC, resulted in a $6.7 million charge to operating results in
1994. Further, CIC agreed to acquire the in-force book of business of CGIC for
approximately $1.7 million, which amount was accrued as a liability and recorded
as an other asset at December 31, 1994.
During July 1995, CGIC was placed into conservation by the State of
California, effectively transferring control of CGIC's assets to the California
Department of Insurance. In August 1995, CGIC was placed into liquidation by the
State of California.
On November 30, 1995, CIG contributed all of the capital stock of CNIC to
CIC. This transaction increased the paid in and contributed surplus of CIC by
$5,303,731.
CIC is currently rated B- (Adequate) by A.M. Best Company. CNIC is
currently rated C (Marginal) by A.M. Best Company. Best's ratings are based upon
factors relevant to policyholders rather than the protection of investors, and
are subject to review and change over time. A "B-" rating is A.M. Best's eighth
highest rating classification out of 15 ratings and is assigned to insurers
which in A.M. Best's opinion "have demonstrated adequate overall performance
when compared to the standards established by A.M. Best". A "C" rating is A.M.
Best's eleventh highest rating classification and is assigned to insurers which
in A.M. Best's opinion "have demonstrated marginal overall performance when
compared to the standards established by A.M. Best". CIG believes CIC's rating
allows it to pursue business opportunities which are unavailable to unrated or
lower rated companies whereas CNIC's current rating is a significant impediment
in the marketplace. CNIC has been essentially inactive since mid-December 1994.
In February 1994, the Company entered the personal automobile insurance
business in California by offering low limit policies marketed through a
Managing General Agent. Primarily as a result of poor operating results in this
line, the Company decided in early 1995 to withdraw from this business and focus
on its primary business segments i.e., workers' compensation and commercial
property and casualty.
For the year ended December 31, 1995 approximately 45% of the Company's
consolidated net premiums earned were attributable to workers' compensation, 41%
were attributable to its commercial property and casualty lines of business and
14% were attributable to personal automobile insurance. For the year ended
December 31, 1994, approximately 49% of the Company's consolidated net premiums
earned were attributable to workers' compensation, 43% were attributable to its
commercial property and casualty lines of business and 8% were attributable to
personal auto insurance.
CIC is currently licensed to write business in Arizona, California,
Colorado, Hawaii, Nevada, New Mexico and Utah and is currently writing business
in Arizona, California, Colorado, Nevada and Utah. CNIC is licensed in
California.
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The profitability and financial position of the Company are affected by
many factors including competition, the severity and frequency of claims, state
regulation of premium rates and policy benefits, overall economic conditions and
general business conditions. The net effect of these factors on the future
operations of the Company cannot currently be predicted.
PROPOSED MERGER WITH PICO
On March 4, 1996, the Company and Physicians Insurance Company of Ohio
("PICO"), announced that they had signed a letter of intent for a
stock-for-stock merger, pursuant to which PICO will become a wholly-owned
subsidiary of Citation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation".
WORKERS' COMPENSATION
Overview
Workers' compensation is a no-fault statutory system, which requires an
employer to provide its employees with medical care, disability payments and
other specified benefits for work-related injuries or illnesses. Employers
typically purchase workers' compensation insurance to provide these benefits,
which are statutorily established.
In July 1993, the California legislature enacted a series of seven bills to
significantly change the California workers' compensation system (collectively,
"the 1993 Reforms"). The 1993 Reforms addressed various aspects of the current
system, including limitation of employees' post-termination claims and claims
for psychiatric injuries, managed care alternatives, restrictions on vocational
rehabilitation benefits, additional penalties for fraud and abuse of the system,
scheduled increases in disability benefits beginning July 1, 1994, a 7% decrease
in minimum rates effective immediately, and replacement of California's minimum
rate law with a competitive rate law effective January 1, 1995. A further 12.7%
reduction in minimum rates became effective January 1, 1994 and an even further
16% reduction in minimum rates became effective October 1, 1994.
Under the new competitive rating system effective January 1, 1995,
individual insurance companies must file rates and rules not less than 30 days
prior to their effective date, and such rates can only be disapproved by the
Department after a hearing and on the basis of solvency, market share, or
improper filing. The Workers' Compensation Insurance Rating Bureau (WCIRB) is
the designated rating organization responsible for filing advisory pure premium
loss costs, which include allocated loss adjustment expense, for approval by the
Department. An insurance company may either adopt these pure premium loss costs
as a basis for their filings, develop their own loss costs or file for a
deviation from the WCIRB's pure premium loss costs. Additionally, each insurance
company then applies a loss cost multiplier to whatever basis of pure premium
loss costs it utilizes, which reflects its individual expense load. Each
insurance company files its own system of rating plans including premium
discount, schedule or merit rating and loss and/or expense constant.
Policyholder dividend plans are still permitted under the new rating system.
Future operating results of CIC's workers' compensation business will
continue to be affected by the level of claim activity and, beginning in January
1995, when the new competitive rate law went into effect, the rate level of CIC
as compared to its competitors. Based on experience since January 1, 1995, CIC
believes its rate level is generally higher than many of its competitors in the
market segments on which it focuses. The Company filed for modifications to its
rating plans, effective April, 1995, and January 1, 1996, which management
believes should enable CIC to compete more effectively. However, the Company is
unable to predict if such adjusted rates will be competitive in the marketplace.
California law permits workers' compensation insurers to issue
participating policies, which allow the insurer to declare and pay dividends to
a policyholder after the expiration of the policy. Prior to January 1, 1995,
workers' compensation insurers typically charged the minimum premium rates and
did not compete on premium pricing. Insurers could, however, use policyholder
dividends as a means of competitive pricing. Although insurers are prohibited by
law from promising policyholders that future dividends will be paid to
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them or stating the amount or rate of dividends to be paid, insurers may compete
by informing policyholders of the amount of dividends they have historically
paid. Historically, a substantial portion of CIC's workers' compensation
premiums had been attributable to participating policies, however, in the new
competitive rate environment, CIC stopped issuing participating policies in
July, 1995 in California. CIC currently offers participating policies only in
Arizona. See "Workers' Compensation -- Policyholder Dividends".
CIC began to offer workers' compensation insurance in Arizona in January
1994 and in Colorado and Utah in May 1994 based on its belief that the
regulatory environment and economic conditions in these states provided an
opportunity to offer this product at an adequate price. Further, CIC believed
that the California workers' compensation market could become unstable and
volatile in 1995 when the competitive rate law became effective and that
pursuing business in these other states would serve to insulate CIC to some
extent from a decline in its California workers' compensation business revenues.
Underwriting
CIC markets workers' compensation products targeted at accounts with annual
premiums below $75,000. CIC has developed pre-determined underwriting rules,
acceptable risk characteristics, pricing guidelines and qualifying employment
classifications, all of which are contained in a program guide. This program
guide assists both CIC and its producers with risk selection and pricing
uniformity. The producer must submit a complete application for coverage to
CIC's underwriting department which confirms the accuracy of the information
presented and the proper application of underwriting rules and pricing
guidelines before CIC will bind coverage and issue a policy. See "Workers'
Compensation -- Marketing".
CIC currently conducts its underwriting activities through branch offices.
CIC's branch offices currently may write accounts with estimated annual premiums
of less than $100,000 without prior approval outside of the branch office
whereas accounts with estimated annual premiums above that amount or with
certain risk characteristics must be approved by CIC's principal underwriting
officer. CIC focuses its marketing efforts on a limited number of employment
classifications. The remaining classifications are generally avoided by CIC
because of the higher risk exposure represented by such classifications.
Classifications which require the approval of CIC's principal underwriting
officer include those which represent potential exclusions from CIC's
reinsurance treaties, unusual hazards or catastrophic exposures. CIC's workers'
compensation business is diverse in terms of employment classifications, with
the largest single classification accounting for 12.1% of CIC's workers'
compensation premiums in force as of December 31, 1995.
Prior to insuring an account, CIC's underwriting department reviews the
employer's prior loss experience and safety record, premium payment and credit
history, operations, geographic location and employment classifications. CIC
verifies employment classifications principally through information provided by
the WCIRB and, in some instances, through its own on-site surveys of the
employer's place of business.
Marketing
CIC's workers' compensation insurance policies are sold only through
independent brokers, none of which market CIC's policies exclusively. As of
December 31, 1995, CIC's Southern California office, located in Orange, had an
average estimated annual premium of $10,118 for its approximately 570 workers'
compensation accounts in force; the San Jose office, serving the greater San
Francisco Bay Area, had an average of $4,795 for its approximately 1,409
workers' compensation accounts in force; the Central Valley offices, located in
Sacramento, had an average of $8,656 for their approximately 398 workers'
compensation accounts in force and the Denver and Phoenix offices combined had
an average of $11,754 for their approximately 225 workers' compensation accounts
in force.
During 1995, the percentages of total workers' compensation direct premiums
written attributable to the Southern California, San Jose, Central Valley and
out-of-state offices were approximately 35%, 33%, 18% and 14%, respectively.
During 1994, the percentages of total workers' compensation direct premiums
written attributable to the Southern California, San Jose, Central Valley and
out-of-state offices were 36%, 26%, 35% and 3%, respectively.
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The branch office managers and the underwriting, loss control and regional
claim staffs work closely with producers. CIC conducts its marketing by
territory to enable its branch office staffs to better address the needs of the
local producer community as well as to better address the specific types of
accounts on which they focus in each region. Commissions for the size of account
CIC has targeted over the past two years are generally about 10% of premiums.
CIC's average commission rate was 11.5% in 1995 compared to 11.4% in 1994.
Generally, CIC's producers are not permitted to bind CIC with respect to any
account. All new and renewal policyholder applications must be submitted to CIC
for approval. CIC is not committed to accept a fixed portion of any producer's
business.
Prior to 1995, many of CIC's California workers' compensation policies were
written on participating policyholder dividend plans; however, management
believes that the importance of policyholder dividends to marketing efforts has
declined industry-wide, particularly as a result of the replacement of
California's minimum rate law with a competitive rate law which occurred on
January 1, 1995. Effective in July 1995, CIC no longer offers participating
policyholder dividend plans in California.
Loss Control
CIC's loss control department often assists CIC's workers' compensation
policyholders in developing and maintaining safety programs and procedures to
minimize on-the-job injuries and health hazards where indicated. After analyzing
the policyholder's loss profile, CIC's loss control consultants will help
develop a loss control program and establish accident reporting and claim
follow-up activities for the policyholder. CIC's loss control personnel may also
consult with policyholder management about safety and health issues, as well as
about the effectiveness of the policyholder's loss prevention procedures.
Claim Management
CIC's policy is to resolve claims and work closely with policyholders to
return injured workers to the job quickly, while avoiding litigation if
possible. CIC's workers' compensation claim personnel communicate frequently
with policyholders, injured employees and medical providers. In addition, CIC
controls the number of cases assigned to its claim personnel. Management
believes in actively directing claims, whether or not they are litigated, toward
planned resolutions.
Claim technicians are required to develop a written case management action
plan outlining strategies to achieve timely resolution for all indemnity claims.
To emphasize the importance of resolving claims quickly, CIC requires the
technician to establish priorities and project completion dates for the
implementation of the plan as well as to determine specific responsibility for
each item. These plans are reviewed by a claim supervisor at least every 90
days.
The workers' compensation claim function is supported by CIC's on-line
automated claim system, which has been internally developed and refined over the
past several years. Claim technicians have on-line, direct access to all claim
files through their own computer terminals. See "Information Services."
CIC's approach to vocational rehabilitation places emphasis on developing
modified work programs using direct job placement services and utilizing
on-the-job training programs designed to return qualified injured workers to
gainful employment in a timely manner.
Medical cost containment continues to be a significant area of emphasis. In
addition to utilizing traditional mechanisms, such as bill review services,
hospital audits, preferred provider organizations and utilization reviews, CIC
seeks out innovative working arrangements with medical providers committed to
principles of managed medical care.
CIC monitors medical care bills to determine if they are reasonable,
encourages the use of preferred provider organizations, audits hospital bills,
reviews hospital utilization and, where practical, is involved in the selection
of treatment facilities. Although CIC cannot quantify all aspects of savings, it
believes that its medical cost containment programs historically have helped to
reduce medical expenses. Additionally, CIC's pharmaceutical cost containment
program allows it to obtain drugs and pharmaceutical appliances at a reduced
cost through a third party which ships products directly to injured workers.
Rounding out its medical
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cost containment program, CIC enlists the services of a medical bill review
service. Using highly sophisticated computer tracking, the medical bill review
company screens medical treatment billings for conformity with the Workers'
Compensation Medical Fee Schedule and identifies possible duplicates and
overlapping treatment dates.
Responding to suspected fraudulent activities by unscrupulous claimants,
doctors, and attorneys who encourage employees or recently unemployed
individuals to file questionable or potentially fraudulent workers' compensation
claims, CIC established a Special Investigation Unit ("SIU"). The focus of the
SIU is to identify, investigate and prepare cases of suspected fraud for
prosecution. The senior level examiners involved in this effort work closely
with legal and investigative specialists, as well as law enforcement officials,
to resist cases involving fraud.
The Company employs state certified claim administrators to handle out of
state claims. These claims are managed however, by a Company claim technician
specializing in out of state claims. Out of state
administrators are required by contract to subscribe to the practices,
procedures and claim philosophy of the Company.
Policyholder Dividends
Since the California minimum rate law, which was in effect until January 1,
1995, was designed to preclude premium price competition, policyholder dividends
historically have been the only way an insurance carrier could compete with
respect to price. Under California law, an insurance carrier discloses its
historical policyholder dividend payment practices and procedures to a
prospective participating policyholder by means of a policyholder dividend
disclosure statement (a "disclosure statement").
Historically, many of the workers' compensation policies written by CIC
were participating policies. CIC stopped offering participating policies in
California as of July, 1995 because CIC believed that the importance of
policyholder dividends has declined industry-wide with the implementation of
competitive rating on January 1, 1995.
Workers' compensation carriers are prohibited by law from guaranteeing the
amount, the factors to be used in the calculation, or the timing of payment of
future policyholder dividends. The disclosure statement must state that there is
no guarantee to the potential policyholder that any of the factors shown in the
disclosure statement will actually be used in determining policyholder dividends
for a specified policy period. In fact, when an insurance company calculates the
dividend a number of months after the expiration of the policy, conditions may
have changed from the time of the original proposal and the company may decide
not to pay any or all of the indicated dividend. Any payment of dividends to
policyholders is determined by the board of directors of an insurance company
subject to the legal requirements in California that such dividends may not
exceed the earned surplus on such company's California workers' compensation
policies, may not be unfairly discriminatory and may not be declared or paid
until after the expiration of the policy period. The Board of Directors of CIC
considers a number of factors in connection with the declaration of policyholder
dividends, including loss ratio, class of business, geographical location and
premium payment history of the policyholder, risk and expense factors and the
overall loss ratio and financial condition of CIC. On June 1, 1995, the Board of
Directors of CIC suspended indefinitely the payment of any and all California
workers' compensation policyholder dividends.
COMMERCIAL PROPERTY AND CASUALTY
Overview
CIC underwrites general liability and property insurance for small and
medium-sized businesses, including restaurants, hotels and motels, retail
stores, owners of small commercial centers, and until October 1994, artisan
contractors, with uniform risk characteristics and coverage needs. CIC targets
specific types of accounts within predetermined business classifications
containing certain characteristics including low potential for loss severity, no
long delay between loss occurrence and loss reporting, and a relatively short
and
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uncomplicated claim settlement process. CIC typically provides general
liability, theft, inland marine, property, glass, commercial automobile,
incidental products liability coverage and umbrella liability.
In October 1993, Citation completed its acquisition of Madison in
furtherance of its strategic plan to position itself as a regional, multi-line
specialty carrier. CGIC and CNIC, former Madison subsidiaries, specialized in
insuring accounts in the commercial property-oriented business classification,
including investment properties, retail operations, restaurants, wholesale and
distribution operations and other service-related businesses. Until October
1994, CGIC also provided coverage for artisan contractors. CGIC and CNIC had
typically provided general liability and property coverages through a policy
referred to as a commercial package, as well as commercial automobile liability
and physical damage coverages, commercial umbrella liability coverages (although
such coverage was only offered to policyholders who obtained their primary
insurance coverage through CIC, CGIC or CNIC) and a special homeowners program
for tenants of extended care facilities.
CGIC and CNIC developed and filed with the Department extensive
underwriting rules and procedures for the selection and pricing of insurance
risks. The pricing of insurance risks involves the development of premium rates
for each type of coverage, based on the application of each company's filed
rating plans, which are then modified by credit or debit factors associated with
the specific characteristics of the applicant. CGIC and CNIC's rating plans
either directly incorporate loss statistics compiled by an industry affiliated
rating bureau, the Insurance Services Office (the "ISO"), or are derived from
ISO statistics. In all cases, expected loss costs are developed for the
coverages involved and are then adjusted to reflect each company's expense
levels. All rating plans currently in use have been filed with and have received
interim or final approval of the Department. Since CGIC and CNIC had written
property and casualty business prior to 1988 which was subject to the rollback
provisions of Proposition 103, they had filed a request for determination with,
and had received confirmation from, the Department that they are in compliance
with such rollback provisions and that neither company had any financial
obligations with regard to premium refunds pursuant to the provisions of that
initiative. (See "Regulation".)
During 1994 the Company increased CGIC's loss reserves. In the third
quarter of 1994 the increase in CGIC's loss reserves was substantial. These
increases were due primarily to a re-evaluation of potential losses related to
construction defect claims emanating from CGIC's artisan contractor policies
written in years prior to the merger. Subsequent to the third quarter loss
reserve increases the Company notified the Department that the cumulative effect
of these increases brought CGIC below the minimum surplus required by the State.
The Company began working with the Department to formulate a plan for resolving
the situation. Based upon discussions with the Department regarding the possible
conservation of CGIC, the Company concluded that its control over CGIC had
become temporary and, as a result, has accounted for the results of CGIC on the
equity method since November 1994, resulting in a write off of its remaining
investment in CGIC at that date. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
Effective February 1995, all of the policies in force in CGIC and CNIC were
cancelled and rewritten in CIC. During July 1995, CGIC was placed into
conservation by the State of California, effectively transferring control of
CGIC's assets to the California Department of Insurance. In August 1995, CGIC
was placed in liquidation by the State of California.
Underwriting
CIC and CNIC (collectively "The Insurance Group"), originally concentrated
on carefully targeted segments of the commercial insurance market in California.
CIC opened its first office outside California in December 1992 in Phoenix,
Arizona and began writing commercial property and casualty business in Arizona
in January 1993 and in Nevada in May 1993. CIC opened its Denver office in July
1993 and began writing commercial property and casualty business in Colorado in
October 1993 and in Utah in March 1994. Direct property and casualty premiums
written in states other than California accounted for approximately 3% of total
property and casualty premiums during 1994 and 6% in 1995. CIC plans to continue
increasing the percentage of its commercial property and casualty business
outside of California during 1996. CIC will target the same types of businesses
with the same types of risk characteristics in these states as it has in
California.
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CIC is the Company's only insurance subsidiary currently writing new and
renewal insurance policies. CIC's underwriting strategy involves four phases.
First, it identifies the business classifications for which it intends to
provide coverage. Second, it defines the parameters within such classifications
it intends to specifically target and tailors coverages, depending on
underwriting goals and pricing structures. Third, it prepares instruction
materials for its underwriters and producers to define the specific risk
characteristics acceptable to it. Fourth, its underwriters offer to accept
policies from producers, subject to ongoing supervision of its underwriting
management staff.
The underwriting staff is solely responsible for the ultimate acceptance,
underwriting and pricing of applications for commercial insurance. A producer
cannot bind coverage, but must submit a complete application and supplementary
questionnaire to CIC. CIC's underwriting staff confirms the appropriate
application of the underwriting rules before quoting a premium, binding coverage
and issuing a policy. CIC's premium pricing levels are based on a variety of
factors, including industry historical loss costs, anticipated loss costs,
acceptable profit margins and anticipated operating expenses.
Within a month after policy inception, an independent firm is retained to
conduct on-site inspections of most new and many renewing insured operations.
The written reports of inspection are an important source of underwriting
information. In addition, the specific recommendations set forth in the report
are communicated directly to the insured with a copy to the producer. Compliance
with recommendations within a stated time period may be a condition imposed by
CIC's underwriters to continue coverage. A policy may be cancelled if compliance
with recommendations is not confirmed within the stated time frames.
As part of the underwriting process, all applications are tracked utilizing
an automated quotation system and computer-based rating software is used to
provide consistent application of rates and rules based on each submission's
characteristics. These systems also are intended to ensure that applicants and
producers receive accurate quotations, quick response and competitive pricing.
CIC's product portfolio includes standard industry policy forms, modified
by endorsements required by CIC or requested by the insured. By primarily using
standard policy forms, CIC believes that it can incorporate industry loss
experience in the development of rate structures, avoid the additional cost of
product development and reduce the risk of coverage litigation.
The objective of CIC's pricing structures in all product lines is to
provide sufficient funds to pay all costs of policy issuance and administration,
premium taxes and losses and related claims handling expenses and provide a
profit margin as well. Because pricing structures are based on estimates of
future loss patterns developed from historical information and because losses
and expenses may differ substantially from estimates, product pricing may
ultimately prove inadequate. Factors causing inadequate rates may include
catastrophic losses or a lack of correlation between the loss forecast for the
market and that applicable to the customers which actually purchase the
policies. In addition, if underlying statistical information understates the
value of known claims, forecasts may understate prospective claims patterns.
Although there can be no guarantee that CIC's price structure will provide
sufficient funds to cover policy and claims expenses, CIC attempts to monitor
underlying loss patterns and respond quickly to observed trends or other factors
which might indicate that its pricing structures may be inappropriate. In
addition, underwriting management tracks the final policy pricing using
automated systems. Percentage discounts or surcharges can be calculated by
policy, product line, underwriter or producer. This information may be used in
performance measurement, training and new program pricing development.
Marketing
CIC sells policies only through independent producers located in its
operating territories which are serviced by its branch office network.
Currently, CIC has a producer force of approximately 400, the majority of which
are located in California and transact both workers' compensation and property
and casualty insurance business with CIC. None of these producers market CIC's
policies exclusively.
CIC's Southern California office, located in Orange, had an average
estimated annual premium of $5,012 for its approximately 4,032 property and
casualty policies in force as of December 31, 1995; the San Jose
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office, serving the greater San Francisco Bay Area, had an average of $4,871 for
its approximately 1,530 property and casualty policies in force; the Central
Valley office, located in Sacramento, had an average of $4,461 for their
approximately 1,079 property and casualty policies in force; the Phoenix office
had an average of $4,689 for their approximately 355 property and casualty
policies in force and the Denver office had an average of $3,693 for their
approximately 263 property and casualty policies in force.
CIC's underwriting management reviews the performance of its producer force
on an ongoing basis. Producers are evaluated based on the effectiveness and
efficiency of premium production, cancellation rates, premium payment patterns
and loss experience.
Claim Management
The Insurance Group's policy is to settle valid claims promptly and
equitably. The Insurance Group employs claim technicians, located in its San
Jose and Orange offices, to administer the claim settlement process. It is the
Insurance Group's policy to limit the number of claims assigned to each
technician, based in part on the complexity of the individual claims. It is also
the Insurance Group's policy that the most experienced technicians handle the
most complex claims. In general, claims in litigation are the most complex and
require the most experienced personnel.
Runoff claims from the personal automobile program are being handled by an
auto claim unit in San Jose. This unit has access to the internally developed
computerized claim system and operates in the same manner and subscribes to the
same claim philosophy as the other company claim operations.
Similar to the procedures utilized in workers' compensation, upon receiving
notice of a claim, claim technicians review the facts of the claim, policy
coverage of the insured and ultimate exposure of the Insurance Group prior to
establishing case reserves, which are recorded individually on a claim-by-claim
basis. The Insurance Group's claim technicians adjust reserves for each case as
more information is received. See "Loss and Loss Adjustment Expense Reserves".
The Insurance Group's claim staff, working closely with claim department
supervisors, may retain independent adjusters, appraisers and defense counsel,
based on the nature of the claim. In addition, the Insurance Group has
implemented procedures and programs to detect and investigate claim fraud and
believes that, to date, these programs have resulted in substantial savings
relative to the claimed amounts involved.
CIC's claim function has been supported by its on-line automated claim
system, which has been internally developed and refined over several years.
CNIC's claims functions have been integrated into CIC's automated system and are
being supported by this system. Utilizing this system, claim technicians have
on-line, direct access to all claim files through their own computer terminal.
See "Information Services".
BILLING AND PREMIUM COLLECTIONS
CIC collects premiums either by direct billing or producer billing. The
prior direct billing program utilized by the Insurance Group for its property
and casualty business was introduced in 1991 by Madison prior to its acquisition
by CIG and was supported by an outside service vendor. The Company has recently
developed its own direct billing system and began utilizing this system for all
new and renewal policies in June 1995 thereby eliminating its reliance on the
outside service vendor. The workers' compensation direct billing program is
supported by CIG's in-house automated system.
At December 31, 1995, approximately 68.7% of the Insurance Group's property
and casualty premium accounts receivable were related to direct billed policies.
Historically, the property and casualty direct billing program offered several
installment payment options in addition to full premium payment. Beginning in
January 1995, the property and casualty direct billing program was modified to a
standardized program that offers two installment payment options as well as a
full premium payment option. A flat $5.00 fee is charged for each installment
payment, excluding the initial deposit.
The producer billing method involves the accumulation of billing
transactions relating to individual producers during the monthly accounting
period. An accounting statement is generated for each producer after
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the month is closed which reflects each transaction. The producer is expected to
pay the total amount reflected on the statement within 45 days of the end of the
statement month.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Several years or more may elapse between the occurrence of an insured
workers' compensation or casualty loss, the reporting of the loss and the final
payment of the loss. Loss reserves are estimates of what an insurer expects to
pay claimants, legal and investigative costs and claims administrative costs.
The Insurance Group is required to maintain reserves for payment of estimated
losses and loss adjustment expense for both reported claims and claims which
have occurred but have not yet been reported ("IBNR"). The Insurance Group's
ultimate actual liability may be materially more or less than current reserve
estimates.
Reserves for reported claims are established on a case-by-case basis. The
case-by-case reserve amounts are determined by claim technicians handling the
claims, based on the technician's judgment and experience and on the Insurance
Group's reserving practices, which may take into account the type of risk, the
circumstances surrounding the claim or policy provisions relating to type of
loss and historical paid loss and loss adjustment expense data for similar
claims. The Insurance Group's claim department regularly monitors the adequacy
of reserves for losses which have occurred and been reported to it and adjusts
such reserves as necessary.
Loss and loss adjustment expense reserves for IBNR are estimated based on
many variables including historical and statistical information, inflation,
legal developments, the regulatory environment, benefit levels, economic
conditions, judicial administration of claims, general trends in claim severity
and frequency, medical costs and other factors which could affect the adequacy
of loss reserves. The senior claim and financial officers of the Company review
and adjust IBNR reserves regularly.
The process of estimating loss reserves of CGIC had been complicated by
many variables and uncertainties surrounding the policies written by CGIC's
predecessor, the U.S. Branch of The Canadian Indemnity Company of Toronto,
Canada ("U.S. Branch"), which had been in existence since the 1930's. During its
existence, the U.S. Branch provided insurance to a wide variety of customers,
including personal insurance (homeowners and personal automobile), surety,
workers' compensation and most classes of commercial risks. Although pre-1986
claims generally have not reflected manufacturing-oriented classifications with
associated products liability exposure, claims related to general contractors
and municipalities had been received. Reserves carried by CGIC prior to the
Company's acquisition of Madison were highly volatile, resulting in substantial
additions to reserves since 1986. This volatility resulted from many factors
including significant changes in product mix, particularly in the pre-1986
period as compared to the post-1985 period when Madison acquired CGIC; a lack of
complete knowledge regarding the types of policies written by CGIC prior to
1986; and the variety of differing reinsurance programs in place during the
pre-1986 period. CGIC's provisions for reserves for losses occurring during the
post-1985 period reflected adjustments made from time to time by Madison's
management to generally reflect the independent actuary's evaluation of the loss
development experience for claims arising prior to and since 1986. The
adjustments were due in part to Madison's management's belief that the trend in
the loss development patterns of CGIC in the post-1985 period would not follow
the unfavorable patterns and trends of CGIC's losses occurring prior to 1986,
because CGIC did not write policies for many of the business classifications
after 1985 that had been written prior to 1986. Since 1986, CGIC's reserves had
generally been established consistent with the statutory reserve reports
prepared by an independent actuarial firm.
During 1994, the Company identified a significant and continuing increase
in the number of certain types of construction defect claims causing it to
increase CGIC's IBNR reserves substantially. Most of these claims emanated from
policies written by CGIC during the late 1980's and early 1990's covering
insureds located in southern California. Management more closely monitored
emerging construction defect claim patterns since this increase became apparent.
During the third quarter of 1994, the Company requested its independent
actuaries to project the potential loss development from these types of claims.
As a result of the actuarial studies, the Company substantially increased CGIC's
loss and loss adjustment expense reserves during the third quarter of 1994. The
cumulative effect of the loss reserve increases during 1994 brought CGIC's
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statutory surplus at September 30, 1994 below the minimum required by the State.
The Company notified the Department and began working in close cooperation with
the Department to formulate a plan for resolving the situation. Based upon
discussions with the Department regarding the possible conservation of CGIC, the
Company concluded that its control over CGIC had become temporary and, as a
result, has accounted for the results of CGIC on the equity method since
November 1994, resulting in a write off of its remaining investment in CGIC of
$4.2 million at that date. Accordingly, the Reconciliation of Liability for Loss
and Loss Adjustment Expense on page 13 does not include CGIC's activity. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
The Insurance Group utilizes the services of an independent actuarial firm
to assist in the evaluation of the sufficiency of loss and loss adjustment
reserves for purposes of meeting state insurance regulatory requirements. The
Insurance Group considers the estimates of the independent actuarial firm as
corroborative evidence as to the reasonableness of the reserves established by
it. The Insurance Group considers the estimates it receives, along with all
other statistical data compiled and evaluated by management, for purposes of
establishing its reserves. To the extent the Insurance Group's reserves differ
from those estimated by the independent actuary, management analyzes such
differences and determines if modifications are necessary to its initial reserve
estimates. No assurance can be given that the ultimate liability will not vary
materially from such estimates.
As to its workers' compensation business, the Company believes, based on
its own experience since 1990 as well as information received from the
California Workers' Compensation Institute, that the 1989 Reform Act resulted in
a relative increase in the proportion of disability claims submitted. Subsequent
changes included in the 1993 Reforms appear to have had the effect of reducing
the number of disability claims alleging mental stress to more historically
normal levels (see "Regulation"). No assurance can be given that the 1989 Reform
Act or the 1993 Reforms will not ultimately affect CIC's reserving practices and
the conclusions of the independent actuary with respect to the sufficiency of
CIC's workers' compensation reserves in future periods.
Adjustments in aggregate reserves, if any, are reflected in the operating
results of the period during which such adjustments are made. Although claims
for which reserves are established may not be paid for several years or more,
the reserves for losses and loss adjustment expense are not discounted, except
as required by the Internal Revenue Code to calculate taxable income.
The following table provides a reconciliation of the consolidated beginning
and ending loss and loss adjustment expense reserve balances for each of the
years in the three-year period ended December 31, 1995 as computed in accordance
with generally accepted accounting principles (GAAP). These reserves differ from
such reserves calculated in accordance with statutory accounting practices
primarily due to the effects of CIC's Stop Loss Reinsurance Agreement, which was
commuted in November 1994, but had been accounted for as a reinsurance agreement
for purposes of statutory accounting practices and as a financing agreement for
purposes of GAAP. See Notes 4 and 5 of Notes to Consolidated Financial
Statements included in this Form 10-K. This table excludes loss activity related
to CGIC, which has been accounted for on the equity method since November 1994.
See Note 7 of Notes to Consolidated Financial Statements for a similar table
including loss activity related to CGIC.
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RECONCILIATION OF LIABILITY FOR LOSS AND LOSS ADJUSTMENT EXPENSE
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balances for wholly-owned subsidiaries as of December 31,
1995
Beginning reserves, net of reinsurance................... $ 93,016 $106,873 $107,724
Net reserves of CGIC at date of acquisition.............. 3,859 -- --
Provisions for:
Insured events incurred in current year............... 55,987 58,164 50,893
Insured events incurred in prior years:
First prior year including CGIC from date of
acquisition in 1993.............................. (217) (4,006) (1,946)
All other prior years............................... 5,312 (18) (2,224)
All periods of CGIC prior to date of acquisition.... 42 1,206 --
-------- -------- --------
Total............................................... 61,124 55,346 46,723
-------- -------- --------
Payments for losses and loss adjustment expense:
Attributable to insured events incurred in current
year............................................. 12,478 15,274 15,184
Attributable to insured events incurred in prior
years including CGIC from date of acquisition in
1993............................................. 38,455 35,865 44,296
Attributable to acquired subsidiary prior to date of
acquisition...................................... 193 3,356 --
-------- -------- --------
Total............................................... 51,126 54,495 59,480
-------- -------- --------
Ending reserves, net of reinsurance........................ 106,873 107,724 94,967
CGIC ending reserves, net of reinsurance................... 17,808 -- --
Reclassification of reinsurance recoverable on unpaid
losses................................................... 41,804 10,380 11,002
-------- -------- --------
Ending reserves, gross of reinsurance...................... $166,485 $118,104 $105,969
======== ======== ========
</TABLE>
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The following table discloses the development of net loss and loss
adjustment expense reserves of the Insurance Group from December 31, 1985
through December 31, 1995. This table includes information with respect to CNIC
from October 4, 1993, the date of acquisition by CIG, to December 31, 1995. CGIC
has not been included in this schedule since it was accounted for on the equity
method.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
------- ------- ------- ------- ------- ------- ------- ------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for
unpaid loss and
loss adjustment
expense......... $11,288.. $18,116 $31,362 $46,646 $57,052 $63,490 $80,558 $93,016 $106,873 $107,724 $94,967
Liability
re-estimated as
of:
One year
later......... 14,252 24,423 36,569 47,424 55,857 66,988 82,709 98,111 104,055 103,554
Two years
later......... 18,926 26,831 37,087 45,356 54,949 68,534 88,021 98,093 101,833
Three years
later......... 19,230 26,967 36,414 44,876 55,522 70,397 88,663 95,499
Four years
later......... 19,653 27,024 35,914 44,671 56,246 70,617 87,139
Five years
later......... 19,388 26,857 36,186 44,602 56,552 69,882
Six years
later......... 19,263 27,170 36,406 44,850 56,225
Seven years
later......... 19,496 27,189 36,452 44,755
Eight years
later......... 19,423 27,254 36,426
Nine years
later......... 19,441 27,351
Ten years
later......... 19,478
Cumulative
redundancy
(deficiency).... $(8,190) $(9,235) $(5,064) $ 1,891 $ 827 $(6,392) $(6,581) $(2,483) $ 5,040 $ 4,170
Cumulative amount
of liability
paid through:
One year
later......... $ 7,537 $10,447 $13,575 $16,265 $22,231 $28,891 $34,241 $38,455 $ 39,222 $ 44,296
Two years
later......... 12,850 17,369 23,006 28,918 37,739 46,675 56,771 60,852 65,401
Three years
later......... 15,728 21,632 29,030 36,811 45,766 56,267 68,603 74,455
Four years
later......... 17,387 24,003 32,502 40,174 50,286 61,201 75,727
Five years
later......... 18,196 25,389 34,113 42,023 52,599 64,275
Six years
later......... 18,709 26,174 35,135 42,991 53,762
Seven years
later......... 19,031 26,651 35,556 43,501
Eight years
later......... 19,165 26,859 35,664
Nine years
later......... 19,247 26,918
Ten years
later......... 19,248
</TABLE>
The first line of the preceding table depicts the estimated liability for
unpaid losses and loss adjustment expense recorded at the balance sheet date for
each of the indicated periods. This liability represents the estimated amount of
loss and loss adjustment expense for claims arising in all prior years that are
unpaid as of the balance sheet date, including IBNR. The preceding table also
shows the reestimated amount of the previously recorded liability based on
experience as of the end of each succeeding year, including cumulative payments
made for such claims since the end of the respective year. The lower portion of
the table shows the cumulative amounts paid as of successive years for such
claims. The estimates change as more information becomes known about the
frequency and severity of claims for each year. A redundancy (deficiency) exists
when the initial liability estimate is greater (less) than the reestimated
liability at each December 31.
CIC significantly increased its reserves in 1987 and 1988 based on a
review, beginning in 1987, of outstanding claims. Such review was commenced
primarily because CIC was experiencing higher than anticipated costs for claims,
including increases in vocational rehabilitation, medical expenses and loss
adjustment expense. As a result, CIC increased reserves for prior years' losses
(primarily the 1984 and 1985 accident years) by $6.3 million in 1987 and $5.2
million in 1988. In addition, in 1987 and 1988 CIC
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established initial reserves for the 1987 and 1988 accident years above the
level of initial reserves established for prior years.
At December 31, 1993, the liability for unpaid loss and loss adjustment
expense was $121,376,000 gross of reinsurance and excluding CGIC reserves. The
liability gross of reinsurance, re-estimated one year later and two years later,
was $113,109,000 and $108,185,000 respectively. The cumulative redundancy was
$13,191,000 as of December 31, 1995. The cumulative amount of liability paid,
gross of reinsurance, through one year later and two years later, was
$40,723,000 and $68,463,000 respectively.
At December 31, 1994, the liability for unpaid loss and loss adjustment
expense was $118,104,000 gross of reinsurance. The liability gross of
reinsurance re-estimated one year later was $112,179,000. The cumulative
redundancy was $5,925,000. The cumulative amount of liability paid gross of
reinsurance through one year later was $47,177,000.
At December 31, 1995, the liability for unpaid loss and loss adjustment
expense was $105,969,000 gross of reinsurance.
During 1991, and to a lesser extent in 1992, CIC increased its reserves for
the 1990 accident year. This resulted from workers' compensation disability
claims reported in early 1991, which CIC believes were primarily
recession-related and which were filed soon after unemployment benefits expired
following late 1990 recession-related layoffs. As a result of the claim
reporting patterns experienced by CIC during 1991 and the continued weakness in
the California economy, CIC established initial reserves for 1991 and 1992 at a
higher level than those initially established for 1990, resulting in a 1991
accident year loss ratio of 83% at December 31, 1991 as compared to a 1990
accident year loss ratio of 73% at December 31, 1990. The accident year loss
ratios at December 31, 1992 were 85.2%, 84.5% and 83.8% for 1990, 1991 and 1992,
respectively.
During 1993, CIC increased its reserves by $5.1 million, of which $1.8
relates to workers' compensation and $3.3 million relates to CIC's property and
casualty business. The $1.8 million increase in workers' compensation reserves
was a result of increases in allocated loss adjustment expenses due to increases
in legal fees incurred in the settlement of claims. These increases affected
primarily the 1990 and 1991 accident years. The $3.3 million increase in CIC's
property and casualty reserves resulted in part from the identification during
the fourth quarter of a significant and continuing increase in the number of
certain types of construction defect claims. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in this Form
10-K. This increase affected all accident years from 1989 to 1992.
During 1994, the Insurance Group decreased its reserves by $2.8 million.
This was the net result of a decrease in workers' compensation reserves by $10.3
million, an increase in CIC's property and casualty reserves by $6.2 million and
an increase in CNIC's property and casualty reserves by $1.3 million. The
workers' compensation reserve decrease was entirely attributable to the 1992 and
1993 accident years and resulted from changes included in the 1993 Reforms which
appear to have had the effect of reducing the number of disability claims
alleging mental stress from the levels experienced during 1991. The increase in
CIC's property and casualty reserves affected all accident years since 1989,
with $5.0 million attributable to the 1992 and 1993 accident years. This
increase in CIC's reserves was due primarily to a continuation of a higher level
of construction defect claims during 1994 than had been anticipated. Of the
increase in CNIC's property and casualty reserves, all but $66,000 was
attributable to insured events occurring prior to the date of acquisition. These
increases were also a result of a high level of construction defect claims
received by CGIC during 1994 associated with accident years 1990 to 1993 during
which time CNIC had reinsured a portion of CGIC's business through an
intercompany pooling reinsurance agreement. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in this Form
10-K.
During 1995, the Insurance Group decreased its reserves by $4.2 million.
This was a net result of a decrease in CIC's workers' compensation reserves by
$5.4 million, an increase in CIC's personal auto reserves by $1.5 million, a
decrease of $0.7 million in property and casualty reserves of CIC and an
increase in CNIC's property and casualty reserves of $0.4 million. The decrease
in CIC's workers' compensation reserves was attributable to $2.6 million for the
1994 accident year and the remaining decrease was throughout accident years 1988
through 1993. The decrease in general resulted from redundancy in both case
reserves and incurred
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but not reported (IBNR) reserves as settlements and reserve development
demonstrated favorable trends which appear to have resulted from the 1993
Reforms (See "Regulation").
Conditions and trends that have historically affected CIC's claims may not
necessarily be indicative of conditions and trends that will affect future
claims. Accordingly, it would not be appropriate to extrapolate future
redundancies or deficiencies based on the results set forth above.
REINSURANCE
The Insurance Group follows the industry practice of reinsuring a portion
of its risks. Reinsurance is ceded primarily to reduce liability on individual
risks and to protect against catastrophic losses.
WORKERS' COMPENSATION
CIC maintains excess of loss workers' compensation reinsurance treaties
with General Reinsurance Corporation ("Gen Re") and other reinsurers. Under the
reinsurance treaties relating to losses occurring on or after January 1, 1990,
reinsurers assume liability on that portion of loss which exceeds $250,000 per
occurrence, up to a maximum of $50.0 million per occurrence through December 31,
1990, $60.0 million per occurrence in 1991, $70.0 million per occurrence through
1993 and $50.0 million per occurrence thereafter. For losses that occurred from
January 1, 1988 through December 31, 1988, CIC has aggregate coverage of $40.0
million with a $200,000 retention, and for losses that occurred from January 1,
1989 through December 31, 1989, CIC has aggregate coverage of $50.0 million with
a $200,000 retention. CIC is liable for losses in excess of the maximum amounts
reinsured. Reinsurance does not discharge an insurer from direct responsibility
for payment of the full amount of any covered loss, but a reinsurer is liable to
the insurer for the portion it has assumed.
Effective January 1989, CIC entered into a Stop Loss Reinsurance Agreement
with Gen Re under which Gen Re assumed liability for net retained workers'
compensation loss and loss adjustment expense incurred above specified aggregate
retention amounts for each of the accident years from 1986 through 1989. The
premium paid by CIC for this coverage was $10.85 million. The Stop Loss
Reinsurance Agreement provided coverage for up to $2.0 million of loss and loss
adjustment expense above a $17.5 million retention for the 1986 accident year,
$4.5 million above a $23.0 million retention for the 1987 accident year, $1.0
million above a $30.3 million retention for the 1988 accident year and $5.7
million above a $25.0 million retention for the 1989 accident year. Any unused
coverage for a particular year may be reallocated to increase the total coverage
available for a subsequent accident year. The Stop Loss Reinsurance Agreement
provided for automatic commutation as of December 31, 1996 and contained a
profit-sharing provision pursuant to which Gen Re may have paid CIC a
profit-sharing commission in 1996 based upon the ultimate amount of losses ceded
under the Stop Loss Reinsurance Agreement, the timing of payment of such losses
and the amount of premiums ceded. The Stop Loss Reinsurance Agreement was
commuted in November 1994. Upon commutation Gen Re paid to CIC $3,563,000 of
which $2,512,000 represented the full undiscounted carried value of the
reinsured reserves (including IBNR) outstanding as of September 30, 1994 and
$1,051,000 represented the profit sharing payment, CIC reassumed liability for
all known and unknown losses as of that date and Gen Re was discharged from any
further obligations under the Stop Loss Reinsurance Agreement. The Stop Loss
Reinsurance Agreement was accounted for as a financing agreement for GAAP
purposes and, accordingly, the commutation did not have a material impact on
results of operations in 1994. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for the effects of the Stop Loss
Reinsurance Agreement on the Company's financial condition and operating
results.
COMMERCIAL PROPERTY AND CASUALTY
CIC has excess of loss reinsurance treaties for its property and casualty
insurance business with Gen Re for policies written on or after October 1, 1991
through December 31, 1993, and primarily with North Star Reinsurance
Corporation, a subsidiary of Gen Re, and Western Atlantic Management
Corporation, a subsidiary of North American Reinsurance Corporation, for
policies written prior to October 1, 1991. For losses that occurred from October
1, 1989 to September 30, 1990 on policies written prior to October 1, 1990,
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the reinsurers assume liability on that portion of loss which exceeds $75,000
per occurrence, up to a maximum of $3.0 million per occurrence for property
losses and up to a maximum of $1.0 million per occurrence for casualty losses.
For losses that occur after September 30, 1990, on policies written prior to
October 1, 1991, the maximum coverage for property losses is $2.0 million. For
losses occurring after October 1, 1991 on policies written between October 1,
1991 and December 31, 1993, the reinsurer assumes liability on that portion of
loss which exceeds $75,000 per occurrence, up to a maximum of $3.0 million per
occurrence for property losses and that portion of loss which exceeds $125,000
per occurrence, up to a maximum of $3.0 million per occurrence for casualty
losses occurring prior to December 31, 1993. CIC obtains facultative reinsurance
for those policies it issues with policy limits above its excess of loss
reinsurance treaties. Currently, the number of such policies is insignificant.
CGIC and CNIC's casualty excess of loss reinsurance treaty through December
31, 1993 provided $850,000 of coverage in excess of a retention of $150,000 per
auto liability or general liability loss and was placed with National (75%) and
Prudential (25%). Another treaty, placed primarily with Prudential, provided
$3.0 million in additional limits. The $150,000 retention has been in place
since January 1, 1992. Between February 1, 1986, and December 31, 1991, the
retention was $100,000. CIG believes that, before February 1, 1986, the CGIC
reinsurance program had retentions ranging up to $250,000 per occurrence.
CGIC and CNIC's property reinsurance program, which covered all policies
incepting before January 1, 1994, is structured as follows:
- A surplus share treaty providing $6.0 million in available limits is
maintained with Prudential (55%) and Munich (45%).
- A property excess of loss treaty provides $450,000 in limits in excess of
a $50,000 per occurrence retention. This treaty is maintained with National
(75%) and Prudential (25%).
- A property catastrophe program, supported by several reinsurers, provided
95% of $8.5 million in excess of a $1.5 million per occurrence retention.
- Several facultative reinsurance agreements provide direct access to as
much as $6.0 million in additional reinsurance coverage as needed.
CGIC's and CNIC's commercial umbrella liability treaty was placed with
Prudential for all policies incepting before January 1, 1994. Prudential
reinsures 95% of the first $1.0 million of umbrella coverage and 100% of any
limits purchased above $1.0 million. The maximum limit reinsured under this
treaty is $5.0 million. For higher umbrella limits, facultative reinsurance is
obtained.
CGIC entered into a Stop Loss reinsurance treaty with Scandinavian
Reinsurance Company, Ltd. ("Scandinavian") in 1991. Since CGIC and CNIC had
entered into an intercompany pooling reinsurance agreement, CNIC shared in the
results of this treaty. This treaty, effective November 1, 1991, involved the
transfer of $8.5 million of portfolio investments to Scandinavian in exchange
for $13,175,000 of coverage, including $6.5 million of existing loss and loss
adjustment expense reserves and $6,675,000 of coverage for potential future
adverse development of loss and loss adjustment expense reserves associated with
accident years 1991 and prior. All $6,675,000 was ceded as of December 31, 1991.
Additional limits were purchased during 1992, providing $5.1 million of coverage
for the accident years 1991 and prior. This involved the payment of $3.5 million
in April 1992 representing $3.5 million in existing loss and loss adjustment
expense reserves. All $5.1 million was ceded as of year end 1992. Other
provisions of the treaty permit CGIC and CNIC to purchase additional limits to
protect accident years 1992 through 1995. As of December 31, 1994, CGIC and CNIC
had purchased approximately $2,126,000 of limits for the 1992 accident year, all
of which has been ceded, had purchased approximately $2,182,000 of limits for
the 1993 accident year, all of which has been ceded, and had purchased
approximately $1,950,000 of limits for the 1994 accident year, $1,844,000 of
which has been ceded. The coverage provided by the Stop Loss treaty cannot be
canceled or commuted by the reinsurer. As of December 31, 1995, CNIC has
received payment for all losses ceded to this treaty for accident year 1992.
CNIC has a letter of credit from the reinsurer for unpaid losses ceded to this
treaty for accident years 1993 and 1994.
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Effective January 1, 1994, the Insurance Group has in place reinsurance
agreements for its property and casualty business which apply to all members of
the Insurance Group. The Insurance Group has an excess of loss reinsurance
treaty with Gen Re for casualty losses occurring from January 1, 1995 through
December 31, 1995. This treaty provides $5,850,000 of coverage in excess of
$150,000 per occurrence. The Insurance Group also has an excess and commercial
umbrella liability treaty with American Reinsurance Company which reinsures 95%
of the first $1.0 million of umbrella coverage and 100% of any limits purchased
above $1.0 million, up to $10.0 million. For property losses, a surplus share
treaty providing up to $4.5 million of proportional coverage is placed with
Munich. A property excess of loss treaty with National Re provides up to
$1,350,000 of coverage in excess of $150,000. Facultative reinsurance agreements
with American Re and Munich Re provide coverage of up to an additional $6.0
million. Property catastrophe reinsurance is provided by several reinsurers and
provides 95% of $8.5 million of coverage in excess of a $1.5 million per
occurrence retention.
Effective March 31, 1995, CIC entered into a reinsurance agreement with
National Re to provide coverage for property and casualty losses incurred in
excess of $50,000 per occurrence up to $150,000, at which level CIC's other
reinsurance agreements provide coverage. This reinsurance agreement provides
reinsurance commission income to CIC on the premiums ceded pursuant to the
agreement.
Effective January 1, 1996, CIC cancelled the property and casualty excess
of loss agreement described above with National Re. In addition, the Insurance
Group cancelled on a run off basis the surplus share treaty with Munich Re and
the pro rata automatic facultative agreements with American Re and Munich Re.
There were no cancellation penalties associated with the cancellation of these
reinsurance contracts. The Insurance Group has an excess of loss treaty with
National Re for property and casualty loss occurring on or after January 1,
1996. This treaty provides $4,750,000 of coverage in excess of $250,000 per
occurrence. An automatic facultative agreement with Munich Re provides coverage
up to $6.0 million in excess of $5.0 million per occurrence. Property
catastrophe reinsurance, which is provided by several reinsurers, was increased
to provide 95% of $18.5 million of coverage in excess of a $1.5 million per
occurrence retention. The commercial umbrella agreement with American Re
continues to provide coverage as described above.
Reinsurance recoverable aggregated $12.6 million at December 31, 1995. The
following table contains information regarding concentration of reinsurance
recoverable by reinsurance company. Included in the amounts below are amounts
recoverable on paid losses, ceded outstanding reserves and ceded IBNR balances.
Where the reinsurers are "not admitted" for regulatory purposes, the Insurance
Group presently maintains sufficient collateral with approved financial
institutions to secure cessions of paid losses and outstanding reserves.
REINSURANCE RECOVERABLE CONCENTRATION
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------
AMOUNT PERCENT
------- -------
(IN THOUSANDS)
<S> <C> <C>
General Reinsurance Corporation........................... $ 5,425 43.2%
Munich American Reinsurance Company....................... 734 5.8
National Reinsurance Corporation.......................... 5,573 44.4
All others as a group..................................... 832 6.6
------- -----
Total........................................... $12,564 100.0%
======= =====
</TABLE>
Prepaid reinsurance premiums aggregated $2.9 million at December 31, 1995.
Of this amount, $1.4 million was prepaid to National Reinsurance Corporation,
$1.1 million was prepaid to Munich American Reinsurance Company and $0.4 million
was prepaid to American Reinsurance Company.
INVESTMENTS
The amount and types of investments that may be made by the Company are
regulated under the California Insurance Code and rules and regulations
promulgated by the Department. The investments of the
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Company are managed internally. The Company's consolidated portfolio consisted
primarily of fixed income securities as of December 31, 1995. The bond portfolio
is heavily weighted toward intermediate term, investment grade securities rated
A or better, with approximately 43% rated AA or better. The Company does not
invest in non-investment grade debt securities, so-called "junk bonds."
The table below contains information concerning the composition of the
investment portfolio at December 31, 1995:
<TABLE>
<CAPTION>
TYPE OF INVESTMENT
- ------------------------------------------------------------------------- CARRYING AMOUNT(1)
------------------
(IN THOUSANDS)
<S> <C>
Bonds(2)
U.S. government and agencies........................................... $ 22,903
AAA/Aaa rated.......................................................... 6,989
AA/Aa rated............................................................ 28,503
A rated................................................................ 67,651
BBB/Baa rated.......................................................... 9,224
--------
Total Bonds.................................................... 135,270
Cash..................................................................... 1,338
--------
Total.......................................................... $136,608
========
</TABLE>
- ---------------
(1) Carrying amount is market value.
(2) Standard & Poor's Corporation defines "AAA" rated securities as "highest
rating, extremely strong security," "AA" rated securities as "very strong
security," "A" as "strong security", and "BBB" as "adequate security".
Moody's Investor Services, Inc. defines "Aaa" rated securities as "best
quality," "Aa" as "high quality," "A" as "strong security", and "Baa" as
"adequate security".
The table below reflects cash and investments and interest earned thereon
and average annual yield on investments for each year in the five-year period
ended December 31, 1995.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT FOR PERCENTAGES)
<S> <C> <C> <C> <C> <C>
Total cash and investments at end of
period at carried value........... $107,182 $123,804 $178,036 $138,316 $136,608
Net investment income before taxes,
excluding capital gains and
losses............................ 7,315 8,579 9,252 10,375 9,514
Average annual yield on investment
portfolio (before taxes)(1)....... 7.8% 7.5% 6.8% 6.5% 6.9%
</TABLE>
- ---------------
(1) Based on the monthly average cash in interest bearing accounts and
investments at carried value for each period and excluding capital gains and
losses and investment expense.
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THE TABLE BELOW SETS FORTH THE MATURITY PROFILE OF THE COMPANY'S BOND PORTFOLIO
AS OF DECEMBER 31, 1995.
<TABLE>
<CAPTION>
BONDS RATED(1) (IN THOUSANDS)
--------------------------------------------------------
AAA/AAA AA/AA A BBB/BAA TOTAL
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
1 year or less.......................... $10,860 $ -- $ 2,999 $ -- $ 13,859
More than 1 year, through 3 years....... 5,128 2,295 24,520 799 32,742
More than 3 years, through 5 years...... -- 10,355 18,585 2,068 31,008
More than 5 years, through 10 years..... 13,904 15,603 21,547 6,357 57,411
More than 10 years, through 15 years.... -- 250 -- -- 250
------- ------- ------- ------ --------
Total................................. $29,892 $28,503 $67,651 $9,224 $135,270
======= ======= ======= ====== ========
</TABLE>
- ---------------
(1) Ratings as assigned by Standard & Poor's Corporation and Moody's Investor
Services, Inc., except that securities issued by the U.S. government and
agencies are included in the "AAA/Aaa" rating category.
INFORMATION SERVICES
From its inception, the Company has emphasized the development and
maintenance of information and processing systems for use in all areas of its
business. Management believes that its information and processing systems enable
the Company to compete effectively through enhanced policyholder services,
efficient underwriting, claim support systems, reduced processing costs and
timely management information. In addition, the Company's systems are not
dependent on specific hardware vendors, thereby providing it with greater
control over hardware costs and flexibility in terms of operating hardware. An
internally integrated software system has been designed for the processing of
CIC's workers' compensation and commercial property and casualty business,
including automated policy issuance and claim processing.
During 1994, the Company completed the conversion of all necessary data
from Madison's mainframe onto its information and processing systems. All of
CNIC's policy and claim processing activities are currently being processed
through the Company's systems. The Company's reliance on computing services
provided by an outside vendor for purposes of monitoring and processing direct
bill policies will end by the second quarter of 1996. The Company developed its
own direct billing system and began utilizing this system for all new and
renewal policies in June 1995. The outside vendor is being used only for the
run-off of direct bill policies issued prior to June 1995.
The Company has developed several safeguards for its information and
processing systems. Disaster recovery programs and back-up procedures include
storing on separate disk at 15 minute intervals a copy of all transactions and
changes to the system's database. At the end of each business day, the Company
transfers this information to tapes that are stored offsite. The Company is
implementing a redundant data server in its Southern California office to use if
it's main facilities are unavailable. Computer access is restricted by use of
codes and passwords.
COMPETITION
California is the largest workers' compensation and property and casualty
insurance market in the United States. According to A.M. Best, in 1994 the total
direct workers' compensation written premiums in the State of California were
approximately $7.6 billion, of which CIC wrote approximately $37.2 million, or
less than 1%. Approximately 300 companies reported to the WCIRB that they wrote
workers' compensation insurance in California during 1994. Also according to
A.M. Best, in 1994 the total direct property and casualty written premiums in
California (excluding workers' compensation) was $25.6 billion. On a
consolidated basis, the Insurance Group wrote less than 1% of this business.
The workers' compensation insurance industry in California and the property
and casualty insurance industry in general are extremely competitive. Many of
the Insurance Group's competitors have been in business longer, have a larger
volume of business, offer more diversified types of insurance coverage, have
greater financial resources and have greater distribution capabilities than the
Insurance Group. Beginning
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January 1, 1995, California's minimum rate law was replaced with a competitive
rate law which CIC believes resulted in premium price levels becoming the most
prominent competitive factor for the foreseeable future.
The California property and casualty business segment in which The
Insurance Group operates is also highly competitive, with no single company or
group of companies dominating the market. Competition in this business segment
is characterized by the presence of national agency insurers, direct writers and
regional and local insurers competing on the basis of price, product and
service. Many of the competitors in the market segment have higher ratings from
financial rating services and offer a broader array of coverages than does CIC.
Commercial insurance markets are commodity-oriented, highly fragmented and
reflective of intense price competition. Nevertheless, because each commercial
risk is somewhat unique in terms of insurance exposure, different insurers can
develop widely divergent estimates of prospective losses. Most insurers attempt
to segment classes within commercial markets so that they target the more
profitable sub-classes with lower, although adequate rates, given the estimated
profitability of the segment. In some cases, no statistics are available for the
sub-classes involved, and the insurer implements discounted rate structures
based solely on theoretical judgment. Finally, different insurers have
widely-divergent internal expense positions, due to method of distribution,
scale economies and efficiency of operations. Therefore, although insurance is a
commodity, the price of insurance does not necessarily reflect commodity
pricing.
CIC's ability to attract and retain customers results from price structures
which have been tailored to attract certain sub-segments of the commercial
insurance market. In addition, several of the Insurance Group's competitors have
either restricted writings in California or have withdrawn from the state due to
a variety of competitive pressures and adverse litigation and regulatory
climates.
REGULATION
CIG and its subsidiaries are subject to extensive governmental regulation
and supervision. Regulations relate to such matters as prior approval of rates
for property and casualty insurance as well as workers' compensation insurance
beginning January 1, 1995, adequacy of reserves, types and quality of
investments, minimum capital and surplus requirements, deposit of securities for
the protection of policyholders and restrictions on stockholder dividends. CIG
and its insurance subsidiaries are also subject to periodic examination by the
California Department of Insurance and must file annual and other reports on
their financial condition and other financial matters. In addition, assessments
are made against the insurance subsidiaries to cover liabilities to
policyholders of insolvent insurance companies and various state regulated
involuntary or assigned risk pools have been created to provide insurance
coverage for insureds which are unable to obtain insurance from private
companies. The regulation and supervision of insurance companies by state
agencies is designed principally for the benefit of their policyholders, not
their stockholders. In addition, MAC is subject to regulation by the California
Department of Corporations, which includes various requirements relating to the
financial condition of MAC as well as all aspects of the marketing of premium
financing. CIG believes that it and its consolidated subsidiaries are in
compliance with state regulatory requirements which are relevant to their
respective business.
The Department completed its latest market conduct examination of CGIC and
CNIC in 1992 and of CIC in 1993. The Department has also completed a financial
examination of CGIC and CNIC in 1993 covering the three years ended December 31,
1991, but also included an extension of the review to December 31, 1992 with
regard to the adequacy of CGIC's and CNIC's loss and loss adjustment expense
reserves as of that date. The Department's final examination report did not
require either company to take any action.
The Department has recently completed a financial examination of CIC
covering the four-year period ended December 31, 1992, but also included an
extension of the review to June 30, 1993 with regard to the adequacy of CIC's
loss and loss adjustment expense reserves as of that date. The Department's
final examination report did not require CIC to take any actions which would
have an impact on its financial statements.
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The California Insurance Code requires the Insurance Commissioner to
approve any proposed change of control of the Company. For such purposes,
"control" is presumed to exist if any person, directly or indirectly, owns,
controls, holds with the power to vote, or holds proxies representing more than
10% of the voting securities of the Company.
The California Insurance Code limits the amount of dividends or
distributions an insurance subsidiary may pay in any 12-month period without 30
days prior written notice to the Commissioner to the greater of (a) net income
for the preceding year as determined under statutory accounting principles or
(b) 10% of statutory policyholders' surplus as of the preceding December 31.
Insurers may pay dividends only from earned surplus. Payments of dividends in
excess of these amounts may only be made if the Commissioner has not disapproved
such payment, or specifically approves such payment, within the 30 day-period.
In July 1993, the California legislature enacted a series of seven bills to
significantly change the California workers' compensation system (the "1993
Reforms"). The 1993 Reforms are intended to provide substantial cost savings as
a result of: (i) a higher compensability standard for psychiatric injuries
through a requirement that work causation be the predominant cause (more than
50%) in contrast to the previously existing 10% cause standard; (ii) a provision
that psychiatric injuries are not compensable if they arise from lawful
personnel actions; (iii) restrictions on post-termination claims unless, among
other things, notice of an injury prior to termination is given; (iv) extension
of the employers' control of medical treatment for up to one year; (v)
imposition of a cap on vocational rehabilitation costs of $16,000, which
previously were not subject to maximum dollar limitations; (vi) restrictions on
the number and timing of medical-legal evaluations; (vii) a prohibition on
referrals by physicians and other providers to facilities in which they have a
financial interest; (viii) a requirement that a schedule of medical-legal fees
be developed; and (ix) a strengthening of provisions which are intended to
combat fraudulent claims and abuse of the system by providing for felony
penalties, restitution and civil liability. In each case, these provisions
contain various qualifications and conditions.
The 1993 Reforms also increase costs as a result of benefit increases
commencing July 1, 1994 and continuing through July 1, 1996. In addition, the
1993 Reforms reduced revenues through an immediate reduction in minimum rates of
7%. The legislation permitted the Insurance Commissioner to approve rates even
lower. Effective January 1, 1994, the Insurance Commissioner ordered a further
12.7% reduction in minimum rates and a 16% reduction in minimum rates effective
October 1, 1994. Effective January 1995, California's minimum rate law was
replaced by a competitive rating system. The 1993 Reforms also permit certain
large entities or groups in the construction business to establish alternative
workers' compensation programs. The 1993 Reforms contain numerous other
provisions, including limitations on grounds for cancellation of policies.
The Company cannot predict the ultimate effect of the 1993 Reforms on its
workers' compensation business. The reductions in minimum rates had an immediate
effect on workers' compensation premiums. The specified benefit increases are
scheduled to occur gradually over a three-year period. The potential cost
savings from the other reforms may not be realized for some period of time, and
there can be no assurance that the intended benefits of the cost savings
provisions will materialize. The Company cannot predict whether it will be
impacted by the provisions of the legislation permitting alternative programs in
the construction business, although it does not currently write workers'
compensation policies for the large entities or groups which can provide
alternative programs.
Under the new competitive rating system effective January 1, 1995,
individual insurance companies must file rates and rules not less than 30 days
prior to their effective date, and such rates can only be disapproved by the
Department after a hearing and on the basis of solvency, market share, or
improper filing. The Workers' Compensation Rating Bureau (WCIRB) is the
designated rating organization responsible for filing advisory pure premium loss
costs, which include allocated loss adjustment expense, for approval by the
Department. An insurance company may either adopt these pure premiums as a basis
for their filings, develop their own loss costs or file for a deviation from the
WCIRB's pure premium loss costs. Additionally, each insurance company then
applies a loss cost multiplier to whatever basis of pure premium loss costs it
utilizes, which reflects its individual expense load. The WCIRB also files an
advisory retrospective rating plan and advisory
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large loss deductible plan. If an insurance company chooses to adopt these, it
must file its own expense provisions. Each insurance company files its own
system of rating plans including premium discounts, schedule or merit rating
factors and loss and/or expense constants. Policyholder dividend plans are still
permitted under the new rating system. Based on experience since January 1,
1995, CIC believes its rate level is generally higher than many of its
competitors in the market segment on which it focuses and has filed for certain
modifications to its rating plan, effective April 1, 1995 and January 1, 1996,
which management believes should enable CIC to compete more effectively.
However, the Company is unable to predict if such adjusted rates will be
sufficiently competitive in the marketplace.
Proposed federal legislation has been introduced from time to time in
recent years that would provide the federal government with substantial power to
regulate property and casualty insurers including state workers' compensation
systems, primarily through the establishment of uniform solvency standards.
Proposals also have been discussed to modify or repeal the antitrust exemption
for insurance companies provided by the McCarran-Ferguson Act. The adoption of
such proposals could have a material adverse impact upon the operations of the
Company.
Proposition 103, a ballot initiative passed by California voters on
November 8, 1988, requires rate rollbacks and prior approval of rates and
imposes other requirements on property and casualty insurers. Proposition 103,
by its terms, does not apply to workers' compensation insurance, but does apply
to the types of property and casualty insurance that CIG's insurance
subsidiaries write. The rate rollback provisions of Proposition 103 do not apply
to CIC nor CNIC since neither company commenced writing property and casualty
insurance prior to the effective date of Proposition 103 and, as to CIC, because
such provisions do not apply to the workers' compensation business. The rate
rollback provisions did apply to CGIC, however, CGIC has received formal written
notification from the Department that its rates are in conformity with such
rollback provisions. Beginning on November 8, 1989, insurance rates may be
increased only after application to and approval by the Insurance Commissioner
and, under certain circumstances, after a public hearing. In 1990, CIC filed
rate applications with the Department with respect to its property and casualty
lines of business, and the Department issued Interim Notices of Approval of such
rates in July 1990. Receipt of such interim approval authorizes CIC to issue
policies at the rates specified in CIC's applications until the Department
issues its ultimate approval of such rates. If the rates which the Department
ultimately approves are lower than those approved pursuant to the Interim
Notices of Approval, CIC may have to refund to policyholders the difference
between the interim rates and the rates ultimately approved, plus interest. In
June 1993, CIC received final approval from the Department for its inland marine
and other liability rate filings.
Since 1990, numerous rates and underwriting rules have been filed by CIC
and approved by the Department including certain rate increases. No assurance
can be given as to what actions, if any, the Department will take with respect
to the ultimate approval of CIC's remaining interim rate filings or future rate
filings.
The Insurance Commissioner issued emergency regulations that, if and when
adopted, would repeal the prior approval procedures and regulations in effect
when CIC's Interim Notices of Approval were received in 1990. These emergency
regulations focus on rate rollbacks and procedures and substantive standards
regarding approvals of future rates (including determining rates by reference to
rates of return). Administrative proceedings and court challenges relating to
these regulations have been continuous. Most recently, the California Supreme
court reversed an earlier California Superior Court ruling that held Proposition
103 did not authorize the Insurance Commissioner to adopt substantive
regulations for the determination of the liability of insurers for rate
rollbacks and that each insurer is entitled to a separate hearing to demonstrate
to the Insurance Commissioner that the 10% cap on insurers' returns (as set
forth in the emergency regulations) should not apply to it. The United States
Supreme Court has since refused to hear an appeal of the California Supreme
Court's decision. The Company cannot predict what the ultimate outcome of these
issues will be or what procedures and substantive standards ultimately may be
adopted by the Insurance Commissioner. CIG and its insurance subsidiaries may be
materially adversely affected by such adopted regulations.
Proposition 103 also subjects the insurance industry to California
antitrust and unfair business practices laws (although the relevant provision of
Proposition 103 may only apply to automobile and certain other
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insurers), prohibits cancellation or nonrenewal of insurance policies except for
specified reasons and provides that the Insurance Commissioner shall be an
elected official.
Beginning in 1994, the Insurance Group became subject to the provisions of
the Risk-Based Capital for Insurers Model Act (the "Model Act") which has been
adopted by the NAIC for the purpose of helping regulators identify property and
casualty insurers that may be in financial difficulty. The Model Act contains a
formula which takes into account asset risk, credit risk, underwriting risk and
all other relevant risks. Under this formula, each insurer is required to report
to regulators using formulas which measure the quality of its capital and the
relationship of its modified capital base to the level of risk assumed in
specific aspects of its operations. The formula does not address all of the
risks associated with the operations of an insurer. The formula is intended to
provide a minimum threshold measure of capital adequacy by individual insurance
company and does not purport to compute a target level of capital. Companies
which fall below the threshold will be placed into one of four categories:
Company Action Level, where the insurer must submit a plan of corrective action;
Regulatory Action Level, where the insurer must submit such a plan and the
regulator will issue a corrective order; Authorized Control Level, which
includes the above actions and may include rehabilitation or liquidation; and
Mandatory Control Level, where the regulator must rehabilitate or liquidate the
insurer.
The Model Act is not expected to cause any material change in CIC's or
CNIC's future operations. CIC's and CNIC's risk-based capital results as of
December 31, 1995 exceed their minimum thresholds.
The NAIC's Insurance Regulatory Information System ("IRIS") was developed
by a committee of state insurance regulators and is primarily intended to assist
state insurance departments in executing their statutory mandates to oversee the
financial condition of insurance companies operating in their respective states.
IRIS identifies 11 industry ratios and specifies "usual values" for each ratio.
Departure from the usual values on four or more of the ratios generally leads to
inquiries from individual state insurance commissioners. Based on its 1995 and
1994 statutory financial statements, CIC was outside the usual range each year
on one IRIS test: the Two-Year Overall Operating Ratio (a measure of operating
profitability excluding investment gains). CIC has not received and does not
expect to receive any inquiries from regulators regarding such results for 1994
and 1995; however, management has written the California Department of Insurance
to keep them informed of the changes made by management in 1995 and of the
corporate business plan for 1996.
Based on its 1994 statutory annual financial statements, the Company
believes CNIC was outside the normal range on four IRIS tests: the Two-Year
Overall Operating Ratio, the Change in Surplus Ratio, the Change in Writings
Ratio and the Two-Year Reserve Development to Surplus Ratio. Based on its 1994
statutory annual financial statements, CNIC was outside the usual range on five
of the IRIS tests: the Two-Year Overall Operating Ratio, the Change in Surplus
Ratio, the One-Year Reserve Development to Surplus Ratio, the Two-Year Reserve
Development to Surplus Ratio and the Estimated Current Reserve Deficiency to
Surplus Ratio. CNIC has not received any inquiries from regulators to date but
expects it may receive such inquiries based on 1995's results. CNIC does not
expect that such inquiries will result in any significant adverse regulatory
actions.
CGIC had nine IRIS tests which resulted in values outside the usual range
in 1994. These results occurred from the significant loss reserve increases
recorded by CGIC in 1993, prior to the date of the merger and continuing in
1994. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations".
EMPLOYEES
The Company currently has approximately 176 employees, none of whom are
covered by a collective bargaining agreement.
ITEM 2. PROPERTIES
The Company's principal executive offices, the San Jose branch office and
the northern California regional claim operation share approximately 28,000
square feet of space in San Jose, California pursuant to a
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<PAGE> 299
lease expiring in March 2001. The Company also leases space for branch offices
located in Rancho Cordova, Denver, Colorado and Phoenix, Arizona. The Rancho
Cordova and Phoenix leases expire in 1997 and the Denver lease expires in 1998.
The Company owned a 38,000 square foot facility on three acres of land in
Costa Mesa, California, which housed its southern California branch office and
its southern California regional claim operations. Title to this property was
held, on an undivided interest basis, 75% by CGIC and 25% by CIG. The Company
entered into an agreement which was approved by the California Department of
Insurance on March 21, 1995 whereby CIG contributed its 25% interest in this
property to CGIC. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations". The Company relocated its southern
California operations in January 1996 into new facilities and believes that the
relocation will result in a decrease in operating costs.
ITEM 3. LEGAL PROCEEDINGS
Members of the Insurance Group are frequently a party in claims proceedings
and actions regarding insurance coverage, all of which the Company considers
routine and incidental to its business. Neither CIG nor its subsidiaries are
parties to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the shareholders during the last
quarter of the year ended December 31, 1995.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information about the Company's executive officers and executive officers
of subsidiaries who have significant policy making authority is set forth below.
All positions are with CIG except as otherwise noted.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------- --- -----------------------------------------------------
<S> <C> <C>
Donald Henderson.......... 60 Director, President and Chief Executive Officer
Robert M. Erickson........ 45 Vice President, Chief Financial Officer and Treasurer
Douglas S. Gould.......... 59 Vice President and Secretary
Richard S. Jeweler........ 46 Vice President and General Counsel
Jess R. Gutierrez......... 39 Vice President and Assistant Treasurer
Dennis A. Sweeney......... 47 Vice President
Kathleen A. Sabatini...... 42 Vice President of CIC and CNIC
Charles D. McInnis........ 62 Vice President of CIC and CNIC
Willard C. Heffelman...... 61 Vice President of CIC and CNIC
</TABLE>
Donald Henderson has been a director since January, 1995 and has been
President and Chief Executive Officer since April, 1995. From 1993 through 1994,
Mr. Henderson was a consultant for various insurance companies. Mr. Henderson
was formerly President and Chief Executive Officer of the California Insurance
Group from 1986 to 1992 and held various positions over 31 years with the
Hartford Insurance Group.
Robert M. Erickson has been Vice President, Chief Financial Officer and
Treasurer since June, 1995. Immediately prior to joining the Company, Mr.
Erickson was Vice President of the California Insurance Group since 1988 and
Secretary and Treasurer of the California Insurance Group since 1986.
Douglas S. Gould has been Vice President and Secretary of CIG and CIC since
1991, and of CGIC and CNIC since 1993. Prior thereto he has been Secretary since
1989 of CIG and CIC. He holds the professional insurance designation of
Chartered Property and Casualty Underwriter.
Richard S. Jeweler has been Vice President and General Counsel since
October 1993. Immediately prior thereto he had been Vice President, Secretary
and General Counsel of Madison Capital, Inc. since its formation in 1986. Mr.
Jeweler has been a practicing attorney since 1974.
G-26
<PAGE> 300
Jess R. Gutierrez has been Vice President and Assistant Treasurer of CIG,
CIC and CNIC, with primary responsibility for the investment function, since
1993. From 1989 to 1993, Mr. Gutierrez served as Assistant Vice President and
Assistant Treasurer of CIG and CIC.
Dennis A. Sweeney has been Vice President of Information Services since
December 1994. From 1992 to 1994, Mr. Sweeney was Vice President, Corporate
Systems and Planning. From 1988 to 1992, Mr. Sweeney was Assistant Vice
President of Underwriting.
Kathleen A. Sabatini has been Vice President of Workers' Compensation
Underwriting for CIC and CNIC since October, 1995. Ms. Sabatini was previously
Manager of Workers' Compensation Underwriting for CIC since August, 1994.
Immediately prior to joining Citation, Ms. Sabatini was the home office Product
Quality Manager of TIG Insurance (formerly known as Transamerica Workers'
Compensation) from 1993 to 1994. From 1991 to 1992, Ms. Sabatini was the
California Marketing Manager for TIG Insurance. Previous to joining TIG
Insurance, Ms. Sabatini had over 18 years of workers' compensation experience in
underwriting and management positions within the insurance industry.
Charles D. McInnis has been Vice President of Claims for CIC and CNIC since
August, 1995. Immediately prior to joining the Company, Mr. McInnis was Vice
President of Claims for California Insurance Group. He held this position from
July 1988 until August 1995. Previously, Mr. McInnis was with the Hartford
Insurance Group for 27 years.
Willard C. Heffelman has been Vice President of Property and Casualty
Underwriting for CIC and CNIC since October, 1995. Immediately prior to joining
the Company, Mr. Heffelman was the East Bay Branch Manager for the California
Insurance Group since 1991. Mr. Heffelman has over 30 years of experience in the
insurance industry and holds the professional insurance designation of Chartered
Property and Casualty Underwriter.
G-27
<PAGE> 301
PART II.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND
RELATED SECURITY HOLDER MATTERS
The Common Stock of the Company is traded on the NASDAQ Stock Market under
the symbol CITN. The following table sets forth for each period indicated, the
high, low, and closing sale prices as reported on the NASDAQ National Market
System. These reported prices reflect interdealer prices without adjustments for
retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
1995 1994
------------------------- -------------------------
HIGH LOW CLOSE HIGH LOW CLOSE
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
1st Quarter.......................... $3.25 $2.38 $2.88 $9.50 $5.25 $6.38
2nd Quarter.......................... 3.38 2.75 3.25 6.50 5.00 6.25
3rd Quarter.......................... 4.88 2.88 4.88 6.25 5.25 6.00
4th Quarter.......................... 4.88 3.50 3.50 6.00 2.75 2.75
</TABLE>
As of March 29, 1996, there were 191 holders of record of the Company's
Common Stock and 899 beneficial shareholders.
ITEM 6. SELECTED FINANCIAL DATA
OPERATIONS FOR THE YEAR
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues
Net Premiums Written
Workers' Compensation............... $61,916 $60,885 $53,049 $36,879 $22,935
Property and Casualty............... 8,088 14,573 23,875 36,991 18,623
Personal Automobile................. -- -- -- 9,467 5,633
Net Earned Premiums
Workers' Compensation............... 59,249 61,326 52,662 38,704 24,385
Property and Casualty............... 6,152 10,665 20,921 34,461 22,705
Personal Automobile................. -- -- -- 6,604 7,646
Net Investment Income (excluding
capital gains and losses)........... 7,315 8,579 9,252 10,375 9,514
Net Capital Gains...................... 414 1,472 1,029 521 2,133
Other Revenues......................... 320 438 787 326 562
------- ------- ------- ------- -------
TOTAL REVENUES.......... $73,450 $82,480 $84,651 $90,991 $66,945
======= ======= ======= ======= =======
</TABLE>
G-28
<PAGE> 302
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995
------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Components of Net Income (Loss)
Workers' Compensation Underwriting
Profit (Loss).................... $(9,899) $(6,970) $(5,114) $ 7,591 $ 4,492
Property and Casualty Underwriting
Profit (Loss).................... 693 850 (4,935) (24,613) (6,602)
Personal Automobile Underwriting
Loss............................. -- -- -- (2,105) (7,671)
Loss on Disposition of Subsidiary... -- -- -- (6,708) --
Investment Income and Net Capital
Gains............................ 7,729 10,051 10,281 10,896 11,647
Other Income (Expenses), Net........ (498) 40 (455) (631) (927)
------- ------- ------- -------- -------
(1,975) 3,971 (223) (15,570) 939
Federal Income Taxes (Benefit)...... -- 749 (756) (3,881) --
------- ------- ------- -------- -------
(1,975) 3,222 533 (11,689) 939
Extraordinary Item - Reduction of
Income Taxes..................... -- 674 -- -- --
Cumulative Effect of Change in
Accounting for Income Taxes...... -- -- 3,500 -- --
------- ------- ------- -------- -------
NET INCOME (LOSS)........... $(1,975) $ 3,896 $ 4,033 $(11,689) $ 939
======= ======= ======= ======== =======
Per Share:
Income (Loss) Before Items Below.... $ (0.53) $ 0.78 $ 0.12 $ (1.92) $ 0.15
Extraordinary Item.................. -- 0.16 -- -- --
Cumulative Effect of Change in
Accounting for Income Taxes...... -- -- 0.76 -- --
------- ------- ------- -------- -------
NET INCOME (LOSS) PER
SHARE..................... $ (0.53) $ 0.94 $ 0.88 $ (1.92) $ 0.15
======= ======= ======= ======== =======
Ratios (GAAP BASIS)
Workers' Compensation
Loss and Loss Adjustment Expense
Ratio.......................... 91.2% 87.8% 84.5% 49.8% 58.4%
Underwriting Expense Ratio....... 21.2 20.9 24.0 27.4 23.5
Policyholders' Dividend Ratio.... 4.3 2.7 1.2 3.2 (0.3)
------- ------- ------- -------- -------
COMBINED RATIO.............. 116.7% 111.4% 109.7% 80.4% 81.6%
======= ======= ======= ======== =======
Property and Casualty
Loss and Loss Adjustment Expense
Ratio.......................... 62.8% 64.7% 91.4% 135.2% 91.9%
Underwriting Expense Ratio....... 25.9 27.3 32.2 36.2 37.2
------- ------- ------- -------- -------
COMBINED RATIO................... 88.7% 92.0% 123.6% 171.4% 129.1%
======= ======= ======= ======== =======
Personal Automobile
Loss and Loss Adjustment Expense
Ratio.......................... -- -- -- 107.0% 151.9%
Underwriting Expense Ratio....... -- -- -- 24.8 48.4
------- ------- ------- -------- -------
COMBINED RATIO.............. -- -- -- 131.8% 200.3%
======= ======= ======= ======== =======
</TABLE>
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<PAGE> 303
<TABLE>
<CAPTION>
FINANCIAL POSITION AT YEAR-END 1991 1992 1993 1994 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total Cash and Investments
--Carrying Value................ $ 107,182 $ 123,803 $ 178,037 $ 138,316 $ 136,608
--Market Value.................. 112,163 128,357 178,366 138,316 136,608
Total Assets....................... 128,411 146,097 269,403 190,095 184,353
Long-Term Debt..................... 86 -- -- -- --
Loss and Loss Adjustment Expense
Reserves........................ 80,558 93,016 166,485 118,104 105,969
Total Liabilities.................. 96,563 111,820 209,624 151,547 138,250
Stockholders' Equity............... 31,848 34,277 59,779 38,548 46,103
Book Value Per Share............... $7.62 $8.63 $9.79 $6.35 $7.60
Outstanding Shares................. 4,177,442 3,971,342 6,108,115 6,069,203 6,069,203
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPANY SUMMARY AND RECENT DEVELOPMENTS
Background
Citation Insurance Group ("CIG") was incorporated in 1981 and began
insurance operations in 1982. Through its wholly-owned subsidiary, Citation
Insurance Company ("CIC"), the Company exclusively wrote workers' compensation
in the State of California until 1989.
In October 1989, CIG acquired certain assets of an underwriting management
company in order to capitalize on what management believed to be an attractive
opportunity to operate in a relatively narrow segment of the commercial property
and casualty market. Since that time, CIC has underwritten property and casualty
insurance for small-to-medium-size businesses which have generally uniform risk
characteristics and coverage needs.
In October 1993, CIG completed its acquisition of Madison Capital, Inc. and
subsidiaries (Madison) for which CIG issued 2,158,545 shares of common stock and
paid $3,650,000 to the former shareholders of Madison in exchange for all of the
issued and outstanding stock of Madison. Madison was merged with and into CIG
and its former wholly-owned subsidiaries became wholly-owned subsidiaries of
CIG. This acquisition has been accounted for utilizing the purchase method of
accounting. The results of operations of Madison and its subsidiaries are
included in the financial statements from the date of acquisition. During 1994,
the Company increased CGIC's loss reserves and in the third quarter of 1994, the
increase in CGIC's loss reserves aggregated approximately $6.2 million. These
increases were due primarily to re-evaluation of potential losses related to
construction defect claims emanating from CGIC's artisan contractor policies
written in years prior to the merger. Subsequent to the third quarter loss
reserve increases, the Company notified the Department of Insurance that the
cumulative effect of these increases brought CGIC below the minimum surplus
required by the State. The Company began working with the Department to
formulate a plan for resolving the situation. Based upon discussions with the
Department regarding the possible conservation of CGIC, the Company concluded
that its control over CGIC had become temporary and, as a result, has accounted
for the results of CGIC on the equity method since November 1994, resulting in a
write off of its remaining investment in CGIC of $4.2 million at that date.
During July 1995, CGIC was placed into conservation by the State of California,
effectively transferring control of CGIC's assets to the California Department
of Insurance. In August 1995, CGIC was placed into liquidation by the State of
California.
On November 30, 1995, CIG contributed all of the capital stock of CNIC to
CIC. This transaction increased the paid in and contributed surplus of CIC by
$5,300,000.
The consolidated profitability and financial position of the Company are
affected by many factors, including competition, the severity and frequency of
claims, state regulation of premium rates and workers' compensation benefits,
overall economic conditions and general business conditions. The net effect of
these factors on CIC cannot presently be predicted.
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<PAGE> 304
POSSIBLE MERGER WITH PICO
On March 4, 1996, The Company and Physicians Insurance Company of Ohio
("PICO") announced that they have signed a letter of intent for a
stock-for-stock merger, pursuant to which PICO will become a wholly-owned
subsidiary of Citation.
Under the terms of the letter of intent, each of PICO's outstanding shares
will be converted into Citation common stock based upon a floating exchange
rate. The numerator will be the average closing price of PICO's common stock for
the twenty trading days ending two business days before the merger is
consummated, within a range of $25.20 to $30.80 per share, and the denominator
will be the agreed value of Citation stock of $5.03 per share.
As a result of the transaction, which is anticipated to be a tax-free
merger, the shareholders of PICO will own between 80 percent and 83 percent of
the combined company, and the existing Citation shareholders will own between 17
percent and 20 percent.
In addition to negotiation of a definitive agreement, the transaction is
subject to receipt of fairness opinions, regulatory approvals, approval of the
transaction by the shareholders of the Company and PICO, satisfactory
completions of due diligence and other conditions customary in transactions of
this nature.
OPERATING ENVIRONMENT
The 1993 Reforms addressed various aspects of the California workers'
compensation insurance system including limitations of employees'
post-termination claims and claims for psychiatric injuries, a variety of
managed care alternatives, restrictions on vocational rehabilitation benefits,
additional penalties for fraud and abuse of the system, scheduled increases in
disability benefits beginning July 1, 1994, a 7% decrease in minimum rates
effective July 1993, and replacement of California's minimum rate law with a
competitive rating law effective January 1, 1995. A further 12.7% reduction in
minimum rates was ordered by the Department in late 1993 and became effective
January 1, 1994 and a further 16% reduction in minimum rates became effective on
October 1, 1994. CIC believes that minimum rates for this line of business over
the last several years have generally been inadequate to provide an underwriting
profit.
Future operating results of CIC's workers' compensation business will
continue to be affected by the level of claim activity and beginning in January
1995, when the new competitive rate law went into effect, the level of CIC's
rate adequacy and its pricing as compared to its competitors. CIC believes that
the rates it has filed and is using are adequate, but is unable to predict if
such rates will be sufficiently competitive in the marketplace on a long-term
basis. It appears that several competitors have filed rates which are designed
to capture market share. The intense price competition coupled with CIC's B-
rating from A.M. Best resulted in a reduction in CIC's workers' compensation
business in 1995 and will continue to affect production in the near future.
CIC has experienced a gradual reduction in the proportion of disability
claims involving allegations of post termination stress and psychiatric injury
since the latter part of 1992, which it believes is due largely to the
anti-fraud law passed in 1992, its more vigorous defense in cases of suspected
fraud, its decision not to renew several large accounts in the Los Angeles area
in 1991 and 1992 and the impact of the 1993 Reforms which appear to have had the
effect of reducing the number of disability claims alleging mental stress to
more historically normal levels.
Over the last several years, the Company has changed its marketing strategy
by focusing on increasing its property and casualty business which led to the
acquisition of Madison, while shifting the focus of its workers' compensation
business away from larger premium accounts to more geographically diverse and
smaller premium accounts. This change in strategy has resulted in a decrease in
net premiums earned from the Company's workers' compensation business as a
percentage of net premiums earned from all lines of business. Given the current
economic and regulatory atmosphere of the California workers' compensation
industry, the Company expects this trend to continue for the foreseeable future.
In accordance with this strategic plan, the number of workers' compensation
policies in force increased to 2,600 at December 31, 1995, from 2,400 at
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<PAGE> 305
December 31, 1994, but down from 2,700 at December 31, 1993. At the same time,
the average premium decreased to $7,000 at December 31, 1995 from $13,000 at the
end of 1994 and $19,000 at the end of 1993.
Net premiums earned from CIG's property and casualty business decreased to
$18.6 million during 1995, down from $34.5 million in 1994 and $20.9 million in
1993. CIG plans to continue to follow its strategy of writing workers'
compensation policies with smaller premiums and being selective both in its
underwriting process and in the business classifications for which it writes
policies. At December 31, 1995, approximately 66% of CIG's premium in force was
attributable to its property and casualty business.
RESULTS OF OPERATIONS
Years Ended December 31, 1995 and 1994
As previously reported, the Company concluded that its control over CGIC,
one of the companies acquired when the Company acquired Madison Capital, Inc.
and subsidiaries in October 1993, had become temporary in late 1994. As a
result, the Company has accounted for the results of CGIC on the equity method
since November 1994 which resulted in a write off of its remaining investment in
CGIC at that date. Consequently, the consolidated results of operations for the
year ended December 31, 1995 do not include the operations of CGIC. During July
1995, CGIC was placed into conservation by the State of California, effectively
transferring control of CGIC's assets to the California Department of Insurance.
In August 1995, CGIC was placed into liquidation by the State of California.
The 1994 results of operations include the operations of Madison and its
subsidiaries on a consolidated basis for the entire year, except that CGIC's
results have been accounted for on the equity method since November 1994.
Direct and assumed premiums written decreased by $23.7 million, or 23.4% in
1995 compared to 1994. This decrease was the net result of a reduction of
approximately $14.4 million in aggregate workers' compensation premiums, a
decrease of approximately $5.4 million in aggregate property and casualty
premiums and a decrease of approximately $3.9 million in personal automobile
premiums.
The 38% decrease in workers' compensation premiums from $38.0 million in
1993 to $23.6 million in 1995 was primarily a result of (a) reductions in
minimum rates of 12.7% effective January 1, 1994 and a further 16% reduction
effective October 1, 1994 and (b) a 46% decline in the average policy premium
from $13,000 at December 31, 1994 to $7,000 at December 31, 1995 which was
primarily a result of the above rate reductions and the intense competition
during the year in the California workers' compensation market caused by the new
competitive rate law which went into effect January 1, 1995. This was partially
offset by an increase in the number of policies issued from 2,400 in 1994 to
2,600 in 1995.
The 10% decrease in property and casualty premiums written from $53.8
million in 1994 to $48.4 million in 1995 was the net result of a reduction of
approximately $14.6 million in premium related to new and renewal policies
offset by approximately $9.2 million of non-recurring premium related to the
transfer of in-force policies of CGIC to CIC. The reduction in premium related
to new and renewal policies was primarily due to (a) the decision to discontinue
offering coverage for any type of artisan contractor in late 1994, (b) the
adverse impact of the decrease in Citation Insurance Company's AM Best rating
from B+ to B in late 1994 (CIC's rating was further reduced to B- late in the
second quarter of 1995) and (c) the adverse impact of the poor operating results
of CGIC and the resulting placement of CGIC into conservation and liquidation by
the California Department of Insurance.
The 41% decrease in direct personal automobile premiums written, from $9.5
million in 1994 to $5.6 million in 1995, resulted from the Company's decision to
withdraw from the personal automobile line further described below. Due to
unsatisfactory results, the Company terminated its agreement in October 1994
with the managing general agency ("MGA") which had been producing personal
automobile business since the Company entered this line of business, and decided
to withdraw from this business in early 1995. The MGA obtained a court order
allowing it to continue renewing business and collecting commissions for two
years from the termination date of the agreement. Since that time, the MGA has
resisted the Company's efforts to exercise control over its activities and
method of doing business. The Company prevailed in court to
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<PAGE> 306
appoint a referee to oversee the conduct of the MGA as it relates to the
Company's business. Further, the California Department of Insurance approved a
rate change filing effective in November 1995, which enables the Company on
policy renewal to charge a higher premium that more appropriately reflects the
risks associated with the policies. Although the Company is attempting to
withdraw from the personal automobile business as quickly as possible, it may be
required to offer existing policyholders the opportunity to renew their
policies. While management believes the volume in this business will decline
rapidly over the next several quarters, the policy renewal offer requirements
may result in some level of premium revenue being reported during the next two
years.
Net premiums earned decreased by $25.0 million, or 31% in 1995 compared to
1994. The decrease was the net result of a reduction of approximately $14.3
million, or 37%, attributable to workers' compensation, a decrease of $11.8
million, or 34%, attributable to property and casualty premiums and an increase
of $1.0 million, or 16%, attributable to personal automobile premiums. These
changes in net earned premiums for workers' compensation generally reflect the
changes in the volume of business described above. The increase in net earned
premiums for personal auto was primarily due to earning the December 31, 1994
unearned premiums of $2.9 million during 1995, partially offset by the decrease
in personal automobile premiums written. The decline in net property and
casualty premiums written was due to changes in direct premiums written and due
to an increase in premiums ceded to reinsurers in 1995 under two reinsurance
agreements aggregating $17.4 million. Of this increase, $14.6 million was a
result of the Company entering into a new excess of loss reinsurance agreement
effective March 31, 1995. This agreement applies to the Company's property and
casualty business and generally provides coverage for losses incurred in excess
of $50,000 per occurrence up to $150,000 at which level the Company's previous
reinsurance agreements provide coverage. The remaining $2.8 million increase in
premiums ceded resulted from the Company amending the existing property excess
of loss reinsurance agreement whereby the reinsurance premium calculation would
be based upon written premiums rather than earned premiums. Both agreements now
provide for ceding commissions which result in immediate increases in the
Company's statutory surplus. There have been significant changes to the
reinsurance program effective January 1, 1996. See "Business -- Reinsurance" for
a description of these changes.
For the year ended December 31, 1995 approximately 45% of the Company's
consolidated net premiums earned were attributable to workers' compensation, 41%
were attributable to its commercial property and casualty lines of business and
14% were attributable to personal automobile insurance. For the year ended
December 31, 1994, the Company's consolidated net premiums attributable to
workers' compensation premiums, property and casualty premiums and personal
automobile premiums were approximately 49%, 43% and 8%, respectively.
Net investment income decreased by $900,000, or 8.3%, in 1995 compared to
1994. Of this decrease, $570,000 was attributable to the inclusion of CGIC's
results for ten months of 1994, and CGIC's exclusion in 1995. While the average
investment portfolio in 1995 was lower, the average annual pre-tax yield on the
consolidated investment portfolio increased to 6.9% in 1995 compared to 6.5% in
1994. This increase in the average yield was primarily due to sale of tax-exempt
securities during 1995 with reinvestment in taxable securities. The investment
portfolio, including cash, at December 31, 1995 aggregated $136.6 million as
compared to $138.3 million at December 31, 1994. This decline is attributable to
a decline in cash flow from operations offset by an increase in the market value
of the investment portfolio. Realized gains were $2.1 million in 1995 compared
to $.5 million in 1994.
The Company earned fee income of $562,000 in 1995 and $326,000 in 1994.
Substantially all of the fee income earned in 1995 and 1994 represented service
charges to policyholders under the Company's premium installment payment plans.
Four ratios are traditionally used to measure underwriting performance: the
loss and loss adjustment expense ratio, the underwriting expense ratio and the
policyholder dividend ratio, which when added together, constitute the combined
ratio. A combined ratio of greater than 100% reflects an underwriting loss,
while a combined ratio of less than 100% indicates an underwriting profit. The
following table sets forth CIG's
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<PAGE> 307
underwriting experience as measured by its combined ratio and the component
ratios (computed on a GAAP basis) for the years ended December 31, 1994 and
1995.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1994 1995
----- -----
<S> <C> <C>
Loss and Loss adjustment expense ratio..................................... 91.4% 85.4%
Underwriting expense ratio................................................. 31.0 32.6
Policyholder dividend ratio................................................ 1.6 (0.1)
------ ------
Combined ratio............................................................. 124.0% 117.9%
====== ======
</TABLE>
Loss and loss adjustment expense decreased by $26.2 million, or 35.9%, in
1995 compared to 1994 partially due to a decrease in net premiums earned in 1995
compared to 1994 combined with a decrease in the overall loss ratio from 91.4%
in 1994 to 85.4% in 1995. These decreases were the net effect of the changes in
the Company's loss and loss adjustment expenses described in the following
paragraphs.
Loss and loss adjustment expenses and the loss ratio for the Company's
workers' compensation business for the years ended December 31, 1994 and 1995
were as follows:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Loss and loss adjustment expense (in thousands).......................... $19,277 $14,235
Loss and loss adjustment expense ratio................................... 49.8% 58.4%
</TABLE>
The 26% decline in loss and loss adjustment expense was partially due to
the 37% decline in net premiums earned and partially offset by an increase in
the loss ratio. Favorable loss development from prior years' reserves in 1995
resulted in a decrease in loss and loss adjustment expense of $5.3 million
compared to a decrease of $10.3 million of prior years' reserves in 1994. The
1994 decrease was entirely attributable to the 1992 and 1993 accident years and
primarily resulted from changes included in the 1993 Reforms which appear to
have had the effect of reducing the number of disability claims involving
allegations of post termination stress and psychiatric injury from the levels
experienced during 1991. This decrease in prior years' reserves resulted in a
26.6% reduction in the 1994 workers' compensation loss ratio. The $5.3 million
decrease in prior years' reserves in 1995 was partially attributed to the 1994
accident year primarily for the above described reasons. This decrease in prior
years' reserves resulted in a 21.7% reduction in the 1995 workers' compensation
loss ratio.
Loss and loss adjustment expenses and the loss ratio for the Company's
property and casualty business for the years ended December 31, 1994 and 1995
were as follows:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Loss and loss adjustment expense (in thousands).......................... $46,584 $20,872
Loss and loss adjustment expense ratio................................... 135.2% 91.9%
</TABLE>
The 55% decrease in loss and loss adjustment expense was partially due to
the 34% decrease in net premiums earned, which was discussed earlier. The loss
development from prior years' reserves in 1995 for property and casualty
business was $0.3 million.
Loss development from prior years' reserves in 1994 associated with CIC and
CNIC resulted in an increase in loss and loss adjustment expense of $6.2 million
and $1.3 million, respectively. In addition, loss development from prior years'
reserves in 1994 associated with CGIC through October 1994 resulted in an
increase in loss and loss adjustment expense of $8.7 million. The $6.2 million
increase in CIC's property and casualty reserves was attributable to all
accident years since 1989 with $5.0 million attributable to the 1992 and 1993
accident years. This increase was due primarily to a continuation of a higher
level of construction defect claims during 1994 than had been anticipated.
Substantially all of the $1.3 million increase in CNIC's property and casualty
reserves was attributable to losses occurring prior to the date of Madison's
merger with and into CIG. This increase was a result of increases in CGIC's loss
reserves associated with accident years 1990 through 1993 during which time CNIC
and CGIC had in effect an inter-company pooling reinsurance
G-34
<PAGE> 308
agreement whereby CNIC assumed liability for 20% of all business written by CGIC
and CNIC combined. Substantially all of the $8.7 million increase in CGIC's
property and casualty reserves was attributable to losses occurring prior to the
date of Madison's merger with and into CIG. These increases were a result of a
significant increase in the number of construction defect claims being reported
for losses occurring during the late 1980's and early 1990's. These increases in
prior years' reserves during 1994 resulted in a 47.0% increase in the 1994
property and casualty loss ratio.
The Company identified a significant and continuing increase in certain
types of construction defect claims in the fourth quarter of 1993, causing it to
significantly increase its IBNR reserves (claims incurred but not yet reported
to the Company) on its property and casualty business at that time. Management
has more closely monitored emerging construction defect claim patterns since
that time. During the third quarter of 1994, management commenced an even more
detailed analysis of property and casualty claim development patterns for all
three insurance subsidiaries. The result of this analysis was an $11.6 million
increase in the Company's consolidated loss reserves for 1993 and prior accident
years' property and casualty reserves in the third quarter of 1994 as well as an
increase in the current year loss ratio resulting from management's evaluation
of the current results being experienced in this line.
While the Company had stopped insuring subcontractors in the heavier
specialties such as framing, sheet metal, plumbing and concrete work beginning
in 1992, it had continued to provide insurance to other artisan contractors
based on management's belief that this sub-segment was less exposed to
construction defect claims. Most such claims typically arise when a condominium
association or homeowners group sues the developer and general contractor
alleging faulty construction. The general contractor eventually files a cross-
complaint against all of the subcontractors who worked on the project, no matter
how remotely they may be connected to the alleged damage. Typically, there is a
lag of several years between the alleged activity which caused the damage and
the initial lawsuit and sometimes even more of a lag in the filing of the cross-
complaints. Although currently, the majority of newly reported claims arise from
subcontractors in heavier specialities insured in the past, management
anticipates that the Company will continue to receive future claims against the
lighter artisan contractors.
Although management decided to discontinue offering coverage for any type
of artisan contractor, since most insurance policies are written on an annual
basis and cover occurrences during the policy period, the Company will have
exposure to claims from this business until these policies expire throughout
1995 even though such claims may not be reported to the Company for many years.
Accordingly, the Company has established initial property and casualty reserves
for accident year 1994 at a higher level than those initially established for
1993 resulting in a 1994 accident year loss ratio for all property and casualty
business of 94.9% at December 31, 1994 as compared to a 1993 accident year loss
ratio of 75.2% at December 31, 1993. While some of these claims appear to be
frivolous, the Company frequently has an obligation to provide a defense for its
insureds.
A significant portion of the third quarter reserve increases in 1994
described above were associated with CGIC. Subsequent to this third quarter loss
reserve increase the Company notified the Department that the cumulative effect
of these increases brought CGIC below the minimum surplus required by the State.
The Company began working with the Department to formulate a plan for resolving
the situation. Based upon discussions with the Department regarding the possible
conservation of CGIC, the Company concluded that its control over CGIC had
become temporary and as a result, has accounted for the results of CGIC on the
equity method since November 1994.
Loss and loss adjustment expenses and the loss ratio for the Company's
personal auto business for the years ended December 31, 1994 and 1995 were as
follows:
<TABLE>
<CAPTION>
1994 1995
------ -------
<S> <C> <C>
Loss and loss adjustment expense (in thousands)..................... $7,068 $11,616
Loss Ratio.......................................................... 107.0% 151.9%
</TABLE>
The 64% increase in loss and loss adjustment expense was partially due to
$1.5 million in loss development from the 1994 reserves in 1995 and from the
losses and loss adjustment expenses corresponding
G-35
<PAGE> 309
to the increase in net earned premiums during 1995. Primarily due to the poorer
than expected operating results, the Company decided in January, 1995, to
withdraw from this line of business and focus on its primary business segments.
Policy acquisition and other underwriting expenses decreased by $6.9
million, or 27.7% in 1995 compared to 1994. As a percentage of net premiums
earned, these expenses were 32.6% in 1995 and 31.0% in 1994. The decrease in
expenses was primarily due to a reduction in net earned premiums of 31% and the
increase in ceded earned commission of $5.4 million related to the reinsurance
changes made effective March 31, 1995. (See "Business -- Reinsurance"). These
decreases in expenses are partially offset by non-recurring expenses for
severance of $625,000 paid in the second quarter of 1995, the write-off of
personal automobile policy acquisition costs in the first quarter of $485,000
resulting from the increased loss ratio in this line of business, the
establishment of an allowance for doubtful accounts of $958,000 in the fourth
quarter for accounts receivable from the managing general agent writing the
personal automobile line of business and additional underwriting expenses
incurred in managing the run off of the unprofitable personal auto line of
business.
Deferred policy acquisition costs, which vary with and are primarily
related to the production of premiums, consisting of commissions, premium taxes
and other costs, are deferred and amortized as the related premiums are earned.
The amounts capitalized in the future may be affected by changes in the mix of
business, the amount of premiums written, loss and loss adjustment expense
ratios and levels of investment income.
Dividends to policyholders decreased from $1,249,000 in 1994 to a credit of
$68,000 in 1995. The ratio of dividends to total net premiums earned was 1.6% in
1994 and (0.1%) in 1995. This decrease reflects management's expectation that
the Company's future policyholder dividend obligations will be minimal.
Combined statutory ratios for CIG's insurance subsidiaries for these
periods are similar to the GAAP ratios for the same periods, with only minor
differences generally due to accruals permitted under GAAP but not permitted
under statutory accounting principles.
During 1994 the Company reported a loss of $6.7 million related to its
disposition of CGIC. As previously discussed, in the third quarter of 1994 the
Company increased CGIC's loss reserves substantially, due primarily to
construction defect claims emanating from CGIC's artisan contractor policies
written in years prior to the merger of Madison with and into CIG. The Company
subsequently notified the Department that the loss reserve increases brought
CGIC below the minimum surplus required by the State. The Company immediately
began working with the Department to formulate a plan for resolving the
situation. Based upon discussions with the Department regarding the possible
conservation of CGIC, the Company concluded that its control over CGIC had
become temporary and, as a result, has accounted for the results of CGIC on the
equity method since November 1994, resulting in a write off of its remaining
investment in CGIC of $4.2 million at that date. In February 1995, the Company
reached an agreement in principle with the Department regarding CGIC. Under the
terms of the agreement the intercompany pooling reinsurance agreement between
CGIC and CNIC was commuted effective September 30, 1994. In addition, CNIC
transferred approximately $1.1 million of securities into a contingency fund for
potential further development of CGIC's loss reserves associated with accident
years 1990 to 1994 during which time the intercompany pooling agreement was in
effect. Further, CIC paid an additional $600,000 in cash to CGIC and CIG
transferred its 25% ownership of the Company's Costa Mesa property to CGIC. As a
result of this agreement the Company recorded a liability for the cost of the
disposition of CGIC, which includes the above described payments and transfers,
which, when combined with its write off of its investment in CGIC of $4.2
million resulted in a $6.7 million charge to operating results in 1994. Further,
CIC agreed to acquire the in-force book of business of CGIC for approximately
$1.7 million, which occurred effective February, 1995.
G-36
<PAGE> 310
The net result of these items discussed in the preceding paragraphs on the
loss before income taxes in 1994 is summarized as follows:
<TABLE>
<CAPTION>
PROPERTY AND
CASUALTY
WORKERS' -------------------- PERSONAL
COMPENSATION CIC & CNIC CGIC AUTO TOTAL
------------ ---------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Underwriting loss before prior years' loss
reserve development..................... $ (2,759) $ (7,206) $(1,140) $ (2,105) $(13,210)
Prior years' loss reserve development..... 10,350 (7,527) (8,740) -- (5,917)
------- -------- ------- ------- --------
Underwriting income (loss)................ $ 7,591 $(14,733) $(9,880) $ (2,105) (19,127)
======= ======== ======= =======
Net investment income, including capital
gains................................... 10,896
Loss on disposition of CGIC............... (6,708)
Other expense, net........................ (631)
--------
Loss before income taxes.................. $(15,570)
========
</TABLE>
The Company reported no net income tax expense in 1995 as compared to a net
income tax benefit of $3.9 million in 1994. The effective tax benefit rate was
24.9% in 1994. The effective tax benefit rate in 1994 was lower than statutory
rates primarily due to the tax effect of the disposition of CGIC, which lowered
the tax benefit rate, offset partially by the effect of tax exempt income which
increased the tax benefit rate. The 1995 effective tax rate was lower than
statutory rates primarily due to a reduction of $310,000 in the valuation
allowance against deferred tax assets.
As of December 31, 1995, the Company had net deferred tax assets of
$10,974,000, including $6,940,000 attributable to net operating loss
carryforwards.
The loss carryforwards, tax effected at 34%, expire as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR
---------------------------------------------------------------------------
<S> <C>
2000....................................................................... $ 80
2001....................................................................... 373
2002....................................................................... 519
2003....................................................................... 211
2004....................................................................... 35
2006....................................................................... 1,218
2007....................................................................... 302
2008....................................................................... 1,388
2009....................................................................... 4,532
2010....................................................................... 972
-------
9,630
Valuation allowance........................................................ (2,690)
-------
$ 6,940
=======
</TABLE>
G-37
<PAGE> 311
A reconciliation of the Company's income (loss) before taxes for financial
statement purposes to taxable income for the three years ended December 31, 1995
is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1993 1994 1995
------- -------- -------
<S> <C> <C> <C>
Financial statement pre-tax income (loss)........................ $ (223) $(15,570) $ 939
Change in deferred policy acquisition costs...................... (1,085) (2,039) 3,445
Statutory basis reserve adjustment in connection with
acquisition.................................................... (6,165) -- --
Change in earned but unbilled premiums........................... 597 -- (1,057)
Change in accrued policyholder dividends......................... (1,500) (898) (775)
Change in unearned premium reserve............................... 673 870 (1,575)
Difference in accounting for stop loss agreement commuted in
1994........................................................... (404) 1,051 --
Special tax deposit for effect of loss reserve discount.......... -- 1,371 --
Change in loss reserve discount.................................. 3,481 935 (3,329)
Tax exempt investment income..................................... (2,441) (1,556) (176)
Change in allowance for uncollectible accounts................... 38 140 1,140
Other, net....................................................... (250) (181) (1,470)
Taxable loss..................................................... $(7,279) $(15,877) $(2,858)
======= ======== =======
</TABLE>
Realization of the recorded deferred tax asset is dependent on the
Company's ability to generate sufficient pre-tax and taxable income to offset
the available losses during the reversal period. Based on the expiration of
existing net operating losses, the Company will have to generate an average of
approximately $1.35 million of taxable income in each year from 1996 forward to
fully utilize the available losses, after giving effect to the valuation
allowance.
The Company believes that, after giving effect to the valuation allowance,
pre-tax and taxable income in the carryforward period will be sufficient to
utilize the recorded net deferred tax assets, including the available loss
carryforwards. A change in the reinsurance structure of the insurance company
subsidiaries will result in a higher percentage of retained loss reserves which
will increase tax basis loss discounts in future tax years. The change in
reinsurance will also increase the net unearned premium reserves which will
increase taxable income in future tax years. In addition, the Company has
changed the mix of its investment portfolio to maximize the taxable portion of
investment income and forgo the election to utilize special tax deposits to pay
its loss reserve discount liabilities. The Company believes that the realization
of the recorded net deferred tax asset is more likely than not. However, no
assurance can be given that the Company's pre-tax and taxable income will be
sufficient to utilize the deferred tax benefit in whole or in part. The
Company's belief is based upon certain assumptions regarding future events which
may or may not occur. If the Company is unable to achieve pre-tax income in
1996, required levels of pre-tax income thereafter, and the required levels of
taxable income from 1996 forward, the Company may have to increase, perhaps
materially, the valuation allowance. The Company's Federal income tax returns
have not been audited by the Internal Revenue Service and all tax years remain
open to possible audit.
A large portion of the tax losses incurred in 1993 and 1994, related to
CGIC. As previously discussed, CGIC was placed in conservation in July, 1995,
and has been accounted for on the equity method since November 1994, and is not
expected to have any negative impact on future operations. If the above
mentioned change to the Company's investment portfolio had been in effect for
the previous three years and the effect of CGIC and other non-recurring expenses
are eliminated from consolidated operating results, the Company estimates that
cumulative financial statement pre-tax income would have been approximately $3.9
million as opposed to the pre-tax losses noted previously, aggregating $14.9
million.
RESULTS OF OPERATIONS
Years Ended December 31, 1994 and 1993
The 1994 results of operations include the operations of Madison and its
subsidiaries on a consolidated basis for the entire year, except that CGIC's
results have been accounted for on the equity method since
G-38
<PAGE> 312
November 1994. The 1993 results of operations include the operations of Madison
and its subsidiaries on a consolidated basis since October 1993.
Direct and assumed premiums written increased by $15.6 million, or 18.2% in
1994 compared to 1993. This increase was the net result of a reduction of
approximately $16.7 million in aggregate workers' compensation premiums, an
increase of approximately $22.8 million in aggregate property and casualty
premiums and an increase of approximately $9.5 million in personal automobile
premiums.
The 31% decrease in workers' compensation premiums from $54.7 in 1993 to
$38.0 million in 1994 was primarily a result of (a) reductions in minimum rates
of 12.7% effective January 1, 1994 and a further 16% reduction effective October
1, 1994 (b) CIC's continuing shift in emphasis toward smaller premium business
which began in mid-1992 and (c) California's continuing economic difficulties.
The 74% increase in property and casualty premiums from $31.0 million in
1993 to $53.8 million in 1994 was primarily due to (a) an increase of $17.9
million attributable to the inclusion of CGIC's results for ten months of 1994
and only three months in 1993, (b) an increase of $2.8 million attributable to
the inclusion of CNIC's results for all of 1994 and only three months in 1993
and c) an increase of $2.1 million attributable to CIC. The Company continues to
emphasize increasing this business segment as a percent of total premium
revenue, particularly given the marketplace turmoil created by the new
competitive rate environment for California workers' compensation which became
effective January 1, 1995.
The $9.5 million increase in personal automobile premiums resulted from the
Company's entry into this line of business in February 1994. Management entered
this business based on its belief that there existed an opportunity to offer low
limit policies at a price adequate to provide reasonable profit potential. As a
result of poorer than expected operating results in this line of business the
Company recently decided to withdraw from this line of business and focus on its
primary business segments.
Net premiums earned increased by $6.2 million, or 8.4% in 1994 compared to
1993. The increase was the net result of a reduction of approximately $14.0
million, or 26.5% attributable to workers' compensation, an increase of $13.5
million, or 64.7% attributable to property and casualty premiums and an increase
of $6.6 million attributable to personal automobile premiums. These changes in
net earned premiums generally reflect the changes in the volume of business
described above.
For the year ended December 31, 1994 approximately 49% of the Company's
consolidated net premiums earned were attributable to workers' compensation, 43%
were attributable to its commercial property and casualty lines of business and
8% were attributable to personal automobile insurance. For the year ended
December 31, 1993, approximately 72% of the Company's consolidated net premiums
earned were attributable to workers' compensation and the remaining premiums
were attributable to its commercial property and casualty lines of business.
Net investment income increased by $1.1 million, or 12.1% in 1994 compared
to 1993. Of this increase, $570,000 was attributable to the inclusion of CGIC's
results for ten months of 1994 compared to three months in 1993 and $524,000 was
attributable to the inclusion of CNIC's results for all of 1994 compared to
three months in 1993. While the average investment portfolio in 1994 was higher
due to the $26.9 million of investments of Madison at the date of the
acquisition, the average annual pre-tax yield on the consolidated investment
portfolio declined to 6.5% in 1994 compared to 6.8% in 1993. This decrease in
the average yield was primarily due to generally declining prevailing interest
rates throughout this period. The investment portfolio, including cash, at
December 31, 1994 aggregated $138.3 million as compared to $178.0 million at
December 31, 1993. This decline is attributable to a decline in the market value
of the investment portfolio and the elimination from the consolidated investment
portfolio of CGIC's investments since CGIC has been accounted for by the equity
method since November 1994. Realized gains were $521,000 in 1994 compared to
$1.0 million in 1993.
The Company earned fee income of $326,000 in 1994 and $787,000 in 1993.
Substantially all of the $326,000 of fee income earned in 1994 represented
service charges to policyholders under the Company's premium installment payment
plans. In 1993 only $57,000 of the $787,000 was attributable to premium
installment payment plans. The remainder of the 1993 fees was from an
unaffiliated insurance carrier for
G-39
<PAGE> 313
claims services provided to this carrier by the Company and fees charged to
policyholders by CIC which ceased during 1993.
Four ratios are traditionally used to measure underwriting performance: the
loss and loss adjustment expense ratio, the underwriting expense ratio and the
policyholder dividend ratio, which when added together, constitute the combined
ratio. A combined ratio of greater than 100% reflects an underwriting loss,
while a combined ratio of less than 100% indicates an underwriting profit. The
following table sets forth CIG's underwriting experience as measured by its
combined ratio and the component ratios (computed on a GAAP basis) for the years
ended December 31, 1993 and 1994.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------
1993 1994
----- -----
<S> <C> <C>
Loss and loss adjustment expense ratio............................... 86.4% 91.4%
Underwriting expense ratio........................................... 26.4 31.0
Policyholder dividend ratio.......................................... .9 1.6
----- -----
Combined ratio....................................................... 113.7% 124.0%
===== =====
</TABLE>
Loss and loss adjustment expense increased by $9.3 million, or 14.7%, in
1994 compared to 1993 partially due to an increase in net premiums earned in
1994 compared to 1993 combined with an increase in the overall loss and loss
adjustment expense ratio from 86.4% in 1993 to 91.4% in 1994. These increases
were the net effect of the changes in the Company's loss and loss adjustment
expenses described in the following paragraphs.
Loss and loss adjustment expenses and the loss and loss adjustment expense
ratio for the Company's workers' compensation business for the years ended
December 31, 1993 and 1994 were as follows:
<TABLE>
<CAPTION>
1993 1994
------- -------
<S> <C> <C>
Loss and loss adjustment expense................................. $44,481 $19,277
Loss and loss adjustment expense ratio........................... 84.5% 49.8%
</TABLE>
The 57% decline in loss and loss adjustment expense was partially due to
the 26.5% decline in net premiums earned and partially due to the decline in the
loss and loss adjustment expense ratio. Favorable loss development from prior
years' reserves in 1994 resulted in a decrease in loss and loss adjustment
expense of $10.3 million compared to an increase of $1.8 million of prior years'
reserves in 1993. The 1994 decrease was entirely attributable to the 1992 and
1993 accident years and primarily resulted from changes included in the 1993
Reforms which appear to have had the effect of reducing the number of disability
claims involving allegations of post termination stress and psychiatric injury
from the levels experienced during 1991. This decrease in prior years' reserves
resulted in a 26.6% reduction in the 1994 workers' compensation loss ratio. The
$1.8 million increase in prior years' reserves in 1993 was a result of increases
in allocated loss adjustment expenses due to increases in legal fees incurred in
the settlement of claims and increased the 1993 workers' compensation loss ratio
by 3.4%.
Loss and loss adjustment expenses and the loss and loss adjustment expense
ratio for the Company's property and casualty business for the years ended
December 31, 1993 and 1994 were as follows:
<TABLE>
<CAPTION>
1993 1994
------- -------
<S> <C> <C>
Loss and loss adjustment expense................................. $19,127 $46,584
Loss and loss adjustment expense ratio........................... 91.4% 135.2%
</TABLE>
The 144% increase in loss and loss adjustment expense was partially due to
the 65% increase in net premiums earned, the majority of which resulted from the
merger with Madison in October 1993, and partially due to the significant
increase in the loss and loss adjustment expense ratio.
Loss development from prior years' reserves in 1994 associated with CIC and
CNIC resulted in an increase in loss and loss adjustment expense of $6.2 million
and $1.3 million, respectively. In addition, loss
G-40
<PAGE> 314
development from prior years' reserves in 1994 associated with CGIC through
October 1994 resulted in an increase in loss and loss adjustment expense of $8.7
million. The $6.2 million increase in CIC's property and casualty reserves was
attributable to all accident years since 1989 with $5.0 million attributable to
the 1992 and 1993 accident years. This increase was due primarily to a
continuation of a higher level of construction defect claims during 1994 than
had been anticipated. Substantially all of the $1.3 million increase in CNIC's
property and casualty reserves was attributable to losses occurring prior to the
date of Madison's merger with and into CIG. This increase was a result of
increases in CGIC's loss reserves associated with accident years 1990 through
1993 during which time CNIC and CGIC had in effect an inter-company pooling
reinsurance agreement whereby CNIC assumed liability for 20% of all business
written by CGIC and CNIC combined. Substantially all of the $8.7 million
increase in CGIC's property and casualty reserves was attributable to losses
occurring prior to the date of Madison's merger with and into CIG. These
increases were a result of a significant increase in the number of construction
defect claims being reported for losses occurring during the late 1980's and
early 1990's. These increases in prior years' reserves during 1994 resulted in a
47.0% increase in the 1994 property and casualty loss and loss adjustment
expense ratio.
Loss development from prior years' reserves in 1993 resulted in an increase
in loss and loss adjustment expense of $3.3 million and an increase in the 1993
property and casualty loss ratio of 17.2% over 1992. This increase was also a
result of an increase in the number of construction defect claims being
reported.
The Company identified a significant and continuing increase in certain
types of construction defect claims in the fourth quarter of 1993, causing it to
significantly increase its IBNR reserves (claims incurred but not yet reported
to the Company) on its property and casualty business at that time. Management
has more closely monitored emerging construction defect claim patterns since
that time. During the third quarter of 1994, management commenced an even more
detailed analysis of property and casualty claim development patterns for all
three insurance subsidiaries. The result of this analysis was an $11.6 million
increase in the Company's consolidated loss reserves for 1993 and prior accident
years' property and casualty reserves in the third quarter of 1994 as well as an
increase in the current year loss ratio resulting from management's evaluation
of the current results being experienced in this line.
While the Company had stopped insuring subcontractors in the heavier
specialties such as framing, sheet metal, plumbing and concrete work beginning
in 1992, it had continued to provide insurance to other artisan contractors
based on management's belief that this sub-segment was less exposed to
construction defect claims. Most such claims typically arise when a condominium
association or homeowners group sues the developer and general contractor
alleging faulty construction. The general contractor eventually files a cross-
complaint against all of the subcontractors who worked on the project, no matter
how remotely they may be connected to the alleged damage. Typically, there is a
lag of several years between the alleged activity which caused the damage and
the initial lawsuit and sometimes even more of a lag in the filing of the cross-
complaints. Although currently, the majority of newly reported claims arise from
subcontractors in heavier specialities insured in the past, management now
anticipates that the Company will continue to receive future claims against the
lighter artisan contractors.
Although management has decided to discontinue offering coverage for any
type of artisan contractor, since most insurance policies are written on an
annual basis and cover occurrences during the policy period, the Company will
have exposure to claims from this business until these policies expire
throughout 1995 even though such claims may not be reported to the Company for
many years. Accordingly, the Company has established initial property and
casualty reserves for accident year 1994 at a higher level than those initially
established for 1993 resulting in a 1994 accident year loss ratio for all
property and casualty business of 94.9% at December 31, 1994 as compared to a
1993 accident year loss ratio of 75.2% at December 31, 1993. While some of these
claims appear to be frivolous, the Company frequently has an obligation to
provide a defense for its insureds.
A significant portion of the third quarter reserve increases described
above were associated with CGIC. Subsequent to this third quarter loss reserve
increase the Company notified the Department that the cumulative effect of these
increases brought CGIC below the minimum surplus required by the State. The
Company began working with the Department to formulate a plan for resolving the
situation. Based upon
G-41
<PAGE> 315
discussions with the Department regarding the possible conservation of CGIC, the
Company concluded that its control over CGIG had become temporary and as a
result, has accounted for the results of CGIC on the equity method since
November 1994.
Losses and loss adjustment expenses for the Company's personal automobile
business in 1994 aggregated $7.1 million and the loss ratio was 107.0%. The
Company entered this line in February 1994. Primarily due to the poorer than
expected operating results in this line of business the Company recently decided
to withdraw from this line of business and focus on its primary business
segments.
Policy acquisition and other underwriting expenses increased by $5.3
million, or 27.6% in 1994 compared to 1993. As a percentage of net premiums
earned, these expenses were 31.0% in 1994 and 26.3% in 1993. The increase in the
underwriting expense ratio was due to a number of factors including a highly
competitive commission environment in workers' compensation, the relatively
higher rates of commission which accompany the smaller size workers'
compensation policies and commercial property and casualty business in general
and certain merger related costs incurred in 1994 associated with restructuring
and consolidating certain functions and operations following the merger of
Madison with and into CIG in October 1993. Deferred policy acquisition costs,
which vary with and are primarily related to the production of premiums,
consisting of commissions, premium taxes and other costs, are deferred and
amortized as the related premiums are earned. The amounts capitalized in the
future may be affected by changes in the mix of business, the amount of premiums
written, loss and loss adjustment expense ratios and levels of investment
income.
Dividends to policyholders increased by $597,000, or 91.6%, in 1994
compared to 1993. The ratio of dividends to net premiums earned was 1.6% in 1994
and .9% in 1993. This increase reflects the significant improvement in the
workers' compensation loss ratio offset partially by the Company's continuing
shift in emphasis to smaller premium size workers' compensation policies which
generally result in lower policyholder dividend obligations.
LIQUIDITY AND CAPITAL RESOURCES
Since January 1, 1993, the Company has generated $1 million of cash flow
from operations. The Company's principal source of liquidity is from its
investments, which have staggered maturities. (See "Investments"). Capital
expenditures during this period were approximately $1.2 million and were
primarily for computer equipment. During 1995, the Company sold all of its
investments in common stock. In 1994, $542,000 of cash was used in the
disposition of CGIC.
CIG's insurance subsidiaries' major sources of funds from operations are
premiums collected and investment income received. The major uses of operating
funds include claim payments, underwriting and administrative expenses,
policyholder dividends, interest expense and income taxes. The insurance
subsidiaries maintain adequate liquidity by investing in high-grade securities
with staggered maturities and do not invest in so-called "junk bonds". The
Company's current investment strategy is to structure the portfolio of each
insurance subsidiary to match anticipated claim obligations as well as other
operating needs. In this regard, the Company regularly monitors emerging claim
reporting and payment patterns. To the extent emerging patterns indicate that
previously anticipated payment patterns have changed, the Company generally
begins to modify its portfolio maturities accordingly; first through the
investment of current operating cash flows and the reinvestment of proceeds
received from maturing investments, and second, through the reinvestment of
proceeds received from the sale of investments, if necessary.
During 1994, CGIC experienced significant losses which ultimately resulted
in CIG writing off its investment in CGIC. The operating losses of CGIC combined
with CIG's write off of its investment in CGIC generated substantial net
operating losses for federal income tax purposes. Due to this unforeseen change
in circumstances, the Company began to liquidate its portfolio of tax advantaged
investments including, in the fourth quarter of 1994, redeemable preferred
stocks which were classified as held-to-maturity at December 31, 1993. Sales of
tax exempt bonds and redeemable preferred stocks during 1994 aggregated
approximately $20.4 million. The remaining portfolio of redeemable preferred
stocks has been transferred to securities
G-42
<PAGE> 316
available-for-sale at December 31, 1994 in order to appropriately reflect the
status of these investments at that date.
Also, during 1994 the Company sold approximately $4.8 million of securities
held by CGIC and CNIC at the date of the Company's acquisition of these
companies primarily because the quality ratings of these securities were lower
than those contained in the Company's statement of investment policy. The
majority of the remaining sales of securities in 1994 resulted primarily from
the Company's strategy to structure its investment portfolio to match
anticipated claim obligations.
The amount of net premiums that each insurer may write and its attendant
ability to expand its business generally are limited by the amount of each
company's policyholders' surplus. The Department views the ratio of net premiums
written to policyholders' surplus as an indication of an insurance company's
financial condition; however, to CIG's knowledge, no specific maximum ratio has
been promulgated by the Department. CIG believes that, in general, based in part
on guidelines established by the NAIC, profitable multi-line property and
casualty insurance companies maintain a ratio of net premiums written to
policyholders' surplus of not more than 3 to 1. CIC's ratios of net premiums
written to policyholders' surplus at December 31, 1993, 1994 and 1995 were 2.8
to 1, 2.8 to 1 and 1.6 to 1 respectively. CNIC's ratios of net premiums written
to policyholders' surplus at December 31, 1993, 1994 and 1995 were .5 to 1, .7
to 1 and (.4) to 1 respectively.
California workers' compensation insurers are also required to deliver
securities for deposit with the State of California for the benefit of
policyholders for the full amount of their unpaid losses and loss adjustment
expense. CIC has made the required deposits, which were approximately $79.1
million at December 31, 1995.
On a separate company basis, CIG's principle sources of liquidity since
January 1, 1993 have been intercompany charges for services and interest on
contribution certificates from CIC. CIG also received a dividend from CIC of
$250,000 in 1993. The California Insurance Code permits the payment of dividends
by an insurer from the earned surplus at the preceding year end in any 12-month
period, without the prior consent of the Insurance Commissioner, generally based
on the greater of (a) net income for the preceding year as determined under
statutory accounting principles or (b) 10% of statutory policyholders' surplus
as of the preceding December 31. Under these provisions, based on financial data
as of December 31, 1995, CNIC could pay approximately $400,000 in dividends to
CIC during 1996, without prior approval; however, CIC cannot pay any dividends
to CIG during 1996 without prior approval.
CIG received interest on contribution certificates and intercompany service
charges from its subsidiaries amounting to $5.4 million, $8.3 million and $7.5
million in 1993, 1994 and 1995, respectively. The contribution certificates were
forgiven in 1993.
Management believes that the Company's current capital structure, together
with internally generated funds, will be sufficient to support its operations
for the foreseeable future. The Company has no material commitments for capital
expenditures.
EFFECTS OF INFLATION
Inflation can be expected to affect the operating performance and financial
condition of the Company in several respects. Inflation can reduce the market
value of the investment portfolio, which consists to a significant extent of
fixed income securities. The portfolio may also benefit from inflation because
yields on new investments will generally be higher. Inflation adversely affects
the portion of loss reserves that relate to hospital and medical expenses, as
these expenses normally increase at a greater rate than prevailing inflation.
Benefits for lost wages are not directly affected by inflation, because these
amounts are regulated by the Department and are fixed at pre-established
amounts. In addition, inflation normally results in increases in wages paid to
employees, which increase workers' compensation premiums, but also increase
underwriting expenses at about the same rate. To the extent that loss reserves
and payments increase as a result of inflation, rates historically have
increased through operation of the rate setting process. However, no assurance
can be given that future rate changes will match inflation.
G-43
<PAGE> 317
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PAGE
----
<S> <C>
Consolidated Balance Sheets at December 31, 1994 and 1995............................ G-45
Consolidated Statements of Operations for the Years Ended
December 31, 1993, 1994 and 1995................................................... G-47
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1993, 1994 and 1995................................................... G-48
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1993, 1994 and 1995................................................... G-49
Notes to Consolidated Financial Statements........................................... G-50
Independent Auditors' Report......................................................... G-63
Statement of Management's Financial Reporting Responsibility......................... G-64
Supplementary Information (unaudited) -- Selected Quarterly Financial Data
for the Years Ended December 31, 1994 and 1995..................................... G-65
</TABLE>
G-44
<PAGE> 318
CITATION INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
-------- --------
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C>
ASSETS
Investments:
Securities available-for-sale:
Fixed maturity securities, at market:
Redeemable preferred stocks (cost approximates
market).............................................. $ 3,017 $ --
Tax-exempt bonds (cost $9,720 and $549)................ 9,219 575
Taxable bonds (cost $123,368 and $123,817)............. 118,367 128,849
Short-term investments (cost approximates market)......... 939 5,846
Common stocks at market (cost $4,954 ).................... 5,885 --
-------- --------
Total investments................................................ 137,427 135,270
Cash in interest-bearing accounts................................ 889 1,338
Investment income receivable..................................... 2,589 2,572
Premiums receivable, net of allowance for uncollectible
amounts of $790 and $1,930..................................... 10,126 12,808
Earned but unbilled premiums..................................... -- 936
Reinsurance recoverable, net of allowance for uncollectible
amounts of $22 and $46......................................... 13,096 12,564
Prepaid reinsurance premiums..................................... 766 2,907
Deferred policy acquisition costs................................ 5,791 2,346
Property and equipment, net of accumulated depreciation
of $3,516 and $3,798........................................... 2,192 1,035
Intangible assets................................................ 113 --
Deferred income taxes............................................ 13,987 10,974
Other assets..................................................... 3,119 1,603
-------- --------
Total Assets..................................................... $190,095 $184,353
======== ========
</TABLE>
See notes to consolidated financial statements.
G-45
<PAGE> 319
CITATION INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1994 1995
-------- --------
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Loss and loss adjustment expense................................. $118,104 $105,969
Unearned premiums................................................ 22,767 17,032
Dividends payable to policyholders............................... 878 121
Reinsurance balances............................................. 2,113 9,896
Other liabilities................................................ 7,685 5,232
-------- --------
Total liabilities................................................ 151,547 138,250
Commitments and contingencies (Notes 5 and 12)................... -- --
Stockholders' Equity:
Preferred stock, $1.00 par value; authorized 1,000,000 shares;
none issued.................................................... -- --
Common stock, $.10 par value; authorized 15,000,000 shares;
6,382,803 shares issued in 1994 and 1995....................... 620 620
Additional paid-in capital....................................... 45,207 45,207
Treasury stock, 313,600 shares in 1994 and 1995.................. (2,000) (2,000)
Accumulated deficit.............................................. (2,001) (1,062)
Unrealized appreciation (depreciation) on securities
available-for-sale, net of deferred taxes...................... (3,278) 3,338
-------- --------
Total Stockholders' Equity....................................... 38,548 46,103
-------- --------
Total Liabilities and Stockholders' Equity....................... $190,095 $184,353
======== ========
</TABLE>
See notes to consolidated financial statements.
G-46
<PAGE> 320
CITATION INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenues:
Direct and assumed premiums written.......................... $85,735 $101,321 $77,632
------- -------- -------
Net premiums earned.......................................... $73,583 $ 79,769 $54,736
Net investment income........................................ 9,252 10,375 9,514
Gain on sale of investments.................................. 1,029 521 2,133
Commission and fee income.................................... 787 326 562
------- -------- -------
84,651 90,991 66,945
Expenses:
Loss and loss adjustment expense............................. 63,608 72,930 46,723
Policy acquisition and other underwriting expenses........... 19,372 24,717 17,862
Dividends to policyholders................................... 652 1,249 (68)
Loss on disposition of subsidiary............................ -- 6,708 --
Restructuring costs.......................................... 500 -- --
Other operating costs and expenses........................... 742 957 1,489
------- -------- -------
84,874 106,561 66,006
------- -------- -------
Income (loss) before income taxes and cumulative effect of a
change in accounting principle............................. (223) (15,570) 939
Income tax benefit........................................... (756) (3,881) --
------- -------- -------
Income (loss) before cumulative effect of a change in
accounting principle....................................... 533 (11,689) 939
Cumulative effect on years prior to 1993 of a change in
accounting for income taxes................................ 3,500 -- --
------- -------- -------
Net income (loss)............................................ $ 4,033 $(11,689) $ 939
======= ======== =======
Net income (loss) per share:
Income (loss) before cumulative effect of a change in
accounting for income taxes................................ $ 0.12 $ (1.92) $ 0.15
Cumulative effect of a change in accounting for income
taxes...................................................... 0.76 -- --
------- -------- -------
Net income (loss) per share.................................. $ 0.88 $ (1.92) $ 0.15
======= ======== =======
</TABLE>
See notes to consolidated financial statements.
G-47
<PAGE> 321
CITATION INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities:
Direct premiums and fees collected......................... $ 88,830 $ 97,746 $ 73,179
Investment income collected, net of investment expense
paid..................................................... 9,503 10,933 11,863
Direct claims and adjustment expense paid.................. (66,273) (75,581) (65,671)
Underwriting, policy acquisition costs and other operating
expenses paid............................................ (20,829) (28,808) (14,328)
Policyholders dividends paid............................... (2,152) (2,139) (689)
Net collections from (payments to) reinsurers.............. 7,134 (5,370) (15,314)
Income taxes paid.......................................... (942) (104) --
-------- -------- --------
Net cash provided by (used in) operating activities........ 15,271 (3,323) (10,960)
-------- -------- --------
Investing activities:
Fixed maturity securities:
Purchased............................................. (40,418) (63,229) (44,023)
Matured............................................... -- 77 4,975
Sold.................................................. 37,998 39,640 50,576
Common stocks:
Purchased............................................. (4,630) (5,112) (646)
Sold.................................................. 9,396 7,826 5,612
Funds received from reinsurer.............................. 4,042 4,912 --
Purchase of property and equipment......................... (351) (719) (178)
Net change in short-term investments....................... (4,964) 4,025 (4,907)
Acquisition of subsidiaries, net of cash acquired.......... (3,607) -- --
Cash effect of deconsolidation of subsidiary............... -- (542) --
-------- -------- --------
Net cash provided by (used in) investing activities........ (2,534) (13,122) 11,409
-------- -------- --------
Financing activities:
Purchase of common stock held in treasury.................. (232) (368) --
Issuance of common stock................................... 57 27 --
-------- -------- --------
Net cash used in financing activities...................... (175) (341) --
-------- -------- --------
Net increase (decrease) in cash............................ 12,562 (16,786) 449
Cash, beginning of year.................................... 5,113 17,675 889
Cash, end of year.......................................... $ 17,675 $ 889 $ 1,338
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
G-48
<PAGE> 322
CITATION INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION)
COMMON STOCK ADDITIONAL TREASURY STOCK RETAINED ON SECURITIES
------------------ PAID-IN ----------------- EARNINGS AVAILABLE-
SHARES AMOUNT CAPITAL SHARES AMOUNT (DEFICIT) FOR-SALE TOTAL
--------- ------ ---------- ------- ------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1993......... 4,207,442 $402 $ 28,611 236,100 $(1,400) $ 5,655 $ 1,009 $ 34,277
Common stock issued in acquisition
of subsidiaries................. 2,158,545 216 16,513 16,729
Repurchase of common stock held in
treasury........................ 33,500 (232 ) (232)
Stock issued under stock
option plans.................... 11,728 1 57 58
Change in unrealized appreciation
(depreciation) on common stock
investments, net of deferred tax
effect.......................... (146) (146)
Cumulative effect of a change in
accounting principle -- change
in unrealized appreciation on
bond investments, net of
deferred tax effect............. 5,060 5,060
Net income........................ 4,033 4,033
--------- ------ ---------- ------- ------- -------- ------- --------
Balances, December 31, 1993....... 6,377,715 619 45,181 269,600 (1,632 ) 9,688 5,923 59,779
Repurchase of common stock held in
treasury........................ 44,000 (368 ) (368)
Stock issued under stock
option plans.................... 5,088 1 26 27
Change in unrealized appreciation
(depreciation) on securities
available-for-sale net of
deferred tax effect............. (9,201) (9,201)
Net loss.......................... (11,689 ) (11,689)
--------- ------ ---------- ------- ------- -------- ------- --------
Balances, December 31, 1994....... 6,382,803 620 45,207 313,600 (2,000 ) (2,001 ) (3,278) 38,548
Change in unrealized appreciation
(depreciation) on securities
available-for-sale, net of
deferred tax effect............. 6,616 6,616
Net income........................ 939 939
--------- ------ ---------- ------- ------- -------- ------- --------
Balances, December 31 ,1995....... 6,382,803 $620 $ 45,207 313,600 $(2,000) $(1,062 ) $ 3,338 $ 46,103
======== ======= ========= ======= ======= ======== ============= ========
</TABLE>
See notes to consolidated financial statements.
G-49
<PAGE> 323
CITATION INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Years Ended December 31, 1995
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Principles of Consolidation -- Citation Insurance Group (the
Company) is engaged in writing workers' compensation, commercial property and
casualty, and beginning in 1994, personal auto insurance principally in
California through its subsidiaries, Citation Insurance Company (CIC) and
Citation National Insurance Company (CNIC).
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries; CIC, CNIC, Madison Acceptance Corporation and
Citation Insurance Services, Inc. As further explained in Note 2, the Company
increased loss reserves for its wholly-owned subsidiary Citation General
Insurance Company (CGIC) throughout 1994, and in the third quarter of 1994 the
increase in CGIC's loss reserves was substantial. The Company notified the
California Department of Insurance (the "Department") that the cumulative effect
of these increases brought CGIC below the minimum surplus required by the State.
Based on ensuing discussions with the Department regarding the possible
conservation of CGIC, the Company concluded that its control over CGIC had
become temporary and, as a result, has accounted for the results of CGIC on the
equity method since November 1994. All material intercompany transactions and
balances have been eliminated.
Investments -- Prior to December 31, 1993, fixed maturity securities
including redeemable preferred stocks and bonds were considered securities
available-for-sale and were carried at the lower of cost or market with the
difference between cost and carrying amount, if any, reflected as a separate
component of stockholders' equity.
In May 1993, the Financial Accounting Standards Board (FASB) issued
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." This Statement requires that investments in debt and equity
securities be classified as "held-to-maturity," "trading securities" or
"available-for-sale." It requires that investments classified as
held-to-maturity be reported at amortized cost, that investments classified as
trading securities be reported at fair value with unrealized gains and losses
included in earnings and that investments classified as available-for-sale be
reported at fair value with unrealized gains and losses, net of related tax, if
any, reported as a separate component of stockholders' equity. The Company
classified all its debt and equity securities excluding redeemable preferred
stocks as available-for-sale at December 31, 1993. The cumulative effect of
adopting the statement on the Company's financial statements was to increase
stockholders' equity by $5,060,000 as of December 31, 1993.
Securities which have a stated maturity of one year or less at the date of
acquisition are classified as short-term securities available-for-sale.
Redeemable preferred stocks were classified as held-to-maturity and carried
at amortized cost at December 31, 1993 since the Company had both the ability
and intention to hold those securities to maturity at that time. During 1994 one
of the Company's insurance subsidiaries experienced significant losses (see Note
2) and, as a result, generated substantial net operating losses for federal
income tax purposes. The Company began, in the fourth quarter of 1994, to
liquidate its portfolio of tax advantaged investments, including redeemable
preferred stocks, in order to maximize the utilization of the available net
operating losses. The remaining portfolio of redeemable preferred stocks was
transferred to securities available-for-sale at December 31, 1994 in order to
appropriately reflect management's intentions not to hold such securities to
maturity.
Realized gains and losses on securities sold are based on the amortized
cost of specific securities sold. As of December 31, 1995, 1994 and 1993, there
were no investments which were delinquent as to the payment of principal or
interest.
G-50
<PAGE> 324
CITATION INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Years Ended December 31, 1995
Revenue Recognition -- Premiums are earned on a pro rata basis over the
terms of the policies. Premiums earned reflect an estimate for earned but
unbilled premiums. Unearned premiums represent the difference between premiums
written and premiums earned.
Deferred Policy Acquisition Costs -- Policy acquisition costs, which vary
with and are primarily related to the production of premiums, consisting of
commissions, premium taxes and other costs, are deferred and amortized as the
related premiums are earned. Amortization of deferred policy acquisition costs
was $16,559,000, $17,850,000 and $13,400,000 for the years ended December 31,
1993, 1994 and 1995, respectively. Deferred policy acquisition costs are
reviewed to determine that they are recoverable, after allowing for anticipated
investment income.
Property and Equipment -- Property and equipment consists primarily of a
building, land, furniture and equipment and is stated at cost. Depreciation is
computed on the straight-line basis over estimated useful lives of two to twenty
years.
Intangible Assets -- Intangible assets consist of the excess of cost over
net tangible assets, covenants not to compete and agency lists of a business
acquired in 1989, and are being amortized on a straight-line basis over a range
of two to seven years. Amortization of intangibles in 1993, 1994 and 1995 was
$112,000, $64,000 and $113,000 respectively.
Loss and Loss Adjustment Expense -- Liabilities for loss and loss
adjustment expense are related to insured events that occurred before the
balance sheet date. Such estimates are based on many variables including
individual cases for reported losses, estimates of unreported losses using
historical and statistical information and other factors. Such estimates are
necessarily subject to the impact of future changes in economic and social
conditions. Given the inherent variability in such estimates, the actual
liabilities could differ significantly from the amounts provided. However,
management believes the liabilities established are adequate. The estimates are
regularly reviewed and any adjustments are reflected in operations in the period
in which they become known.
Dividends Payable to Policyholders -- Estimated dividends to policyholders
on participating policies are accrued as the related premiums are earned. These
participating policies represent approximately 37%, 33% and 9% of direct and
assumed premiums earned in 1993, 1994 and 1995, respectively. Dividends do not
become a contractual liability until they are declared by the Board of
Directors.
Income Taxes -- Deferred income taxes are provided for temporary
differences between the carrying amount of assets and liabilities for financial
reporting and for income tax purposes.
Income (Loss) Per Share -- Income (loss) per share is based on the weighted
average number of shares of common stock outstanding and, when dilutive, common
stock equivalents. The weighted average number of common and common equivalent
shares used in the computation was 4,590,403, 6,075,067 and 6,082,825 for the
years ended 1993, 1994 and 1995, respectively.
Statement of Cash Flows -- For purposes of reporting cash flows, cash
includes demand deposits in interest-bearing accounts.
Reclassifications -- Certain reclassifications have been made to the 1993
and 1994 presentation in order to conform with the 1995 presentation. Such
reclassifications had no impact on the Company's financial position or results
of operations.
Financial Statement Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results could differ from these
estimates.
G-51
<PAGE> 325
CITATION INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Years Ended December 31, 1995
Recently Issued Accounting Pronouncements -- The Financial Accounting
Standards Board issued Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" which must be
adopted by the Company effective January, 1996. The statement establishes
standards to measure the impairment of long-lived assets, certain identifiable
intangibles, and goodwill. The Company has determined the effect of the adoption
of this standard will not be material.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-based Compensation," is effective for fiscal years beginning after
December 15, 1995. The Company will adopt this statement on January 1, 1996 and
will elect to continue applying APB Opinion No. 25 to account for its
stock-based employee compensation arrangements. Based on the Company's current
use of equity instruments, adoption of the new standard will not affect reported
earnings, financial position or cash flows.
2. ACQUISITION AND DISPOSITION OF SUBSIDIARIES
Acquisition of Subsidiaries
In October 1993, the Company completed its acquisition of Madison Capital,
Inc. and subsidiaries (Madison), a Company engaged primarily in writing
commercial property and casualty insurance. The Madison acquisition has been
accounted for utilizing the purchase method and accordingly, the operations of
Madison have been consolidated with the Company's since October 4, 1993. No
goodwill was recorded in connection with the transaction. The total
consideration paid to Madison's former shareholders was as follows:
<TABLE>
<CAPTION>
(IN
THOUSANDS)
-------------
<S> <C>
2,158,545 shares of Citation common stock valued at $7.75 per share
at the date of acquisition.................................................. $16,729
Cash consideration paid, net of cash acquired................................. 3,607
-------------
$20,336
============
</TABLE>
In connection with the acquisition, the Company combined its Southern
California operations into one facility. As a result of this restructuring, the
Company accrued $430,000 for remaining lease commitments and $70,000 for
employee severance packages which are included in the accompanying statement of
operations for 1993, under the caption "restructuring costs."
The following unaudited pro forma results of operations for the year ended
December 31, 1993 give effect to the acquisition of Madison as though the
transaction had occurred on January 1, 1993. Pro forma results do not give
effect to any potential benefits that might have been realized through the
combination of operations and are not necessarily indicative of the results that
actually would have occurred since January 1, 1993, or that will be achieved in
the future.
<TABLE>
<CAPTION>
1993
--------
(IN THOUSANDS EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenues....................................................... $102,971
Net income..................................................... $ 1,295
Net income per share........................................... $ 0.21
</TABLE>
Disposition of Subsidiary
During 1994 the Company increased CGIC's loss reserves, primarily in the
third quarter. Subsequent to the third quarter loss reserve increases the
Company notified the Department that the cumulative effect of these loss reserve
increases brought CGIC below the minimum surplus required by the State. The
Company immediately began working with the Department to formulate a plan for
resolving the situation. Based upon
G-52
<PAGE> 326
CITATION INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Years Ended December 31, 1995
discussions with the Department regarding the possible conservation of CGIC, the
Company concluded that its control over CGIC had become temporary and, as a
result, has accounted for the results of CGIC on the equity method since
November 1994, resulting in a write off of its remaining investment in CGIC of
$4,181,000 at that date.
In February 1995, the Company reached an agreement in principle with the
Department regarding CGIC. Under the terms of the agreement an intercompany
reinsurance agreement between CGIC and CNIC was commuted effective September 30,
1994 which had no material impact on consolidated results of operations. In
addition, the Company agreed to transfer approximately $1.1 million of
securities into a contingency fund for potential future development of CGIC's
loss reserves, pay an additional $600,000 in cash to CGIC and transfer its 25%
ownership of the Company's Costa Mesa property with a carrying value of
approximately $847,000 to CGIC. As a result of this agreement, the Company
recorded a liability for the cost of disposition of CGIC, which includes the
above described payments and transfers which, when combined with its write off
of its investment in CGIC, resulted in a $6,708,000 charge to operating results
in 1994.
During July 1995, CGIC was placed into conservation by the State of
California, effectively transferring control of CGIC's assets to the California
Department of Insurance. In August 1995, CGIC was placed into liquidation by the
State of California.
The following table reflects the results of CGIC on a separate basis (for
the ten months ended October 31, 1994, including the loss on disposition of
subsidiary) and of the Company exclusive of CGIC for the year ended December 31,
1994.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
---------------------------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA) CGIC
CGIC OMITTED CONSOLIDATED
--------- --------- ---------
<S> <C> <C> <C>
Total revenues.............................................. $ 13,117 $77,874 $ 90,991
Loss before income taxes.................................... (15,296 ) (274) (15,570 )
Net income (loss)........................................... (12,007 ) 318 (11,689 )
Net income (loss) per share................................. (1.97 ) .05 (1.92 )
</TABLE>
3. INVESTMENTS
Net investment income is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax-exempt bonds............................................ $ 1,937 $ 1,557 $ 174
Taxable bonds............................................... 6,229 8,116 8,724
Redeemable preferred stocks................................. 540 314 19
Common stocks............................................... 234 209 41
Short-term investments...................................... 196 342 784
Deposit with reinsurer...................................... 416 174 --
Other....................................................... 21 -- --
--------- --------- ---------
9,573 10,712 9,742
Investment expense.......................................... 321 337 228
--------- --------- ---------
$ 9,252 $10,375 $ 9,514
========= ========= =========
</TABLE>
G-53
<PAGE> 327
CITATION INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Years Ended December 31, 1995
Realized investment gains and losses are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross realized gains:
Fixed maturities....................................... $ 700 $ 1,206 $ 780
Common stocks.......................................... 759 638 1,908
--------- --------- ---------
1,459 1,844 2,688
--------- --------- ---------
Gross realized losses:
Fixed maturities....................................... 139 719 396
Common stocks.......................................... 291 604 159
--------- --------- ---------
430 1,323 555
--------- --------- ---------
Net realized investment gains..................... $ 1,029 $ 521 $ 2,133
========= ========= =========
</TABLE>
Net unrealized gains (losses) on securities included in stockholders' equity are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Common stocks............................................... $ 1,307 $ 931 $ --
Fixed maturity securities................................... 7,667 (5,502) 5,058
Deferred taxes.............................................. (3,051) 1,293 (1,720)
--------- --------- ---------
Net unrealized gain (loss).................................. $ 5,923 $(3,278) $ 3,338
========= ========= =========
</TABLE>
The amortized cost and estimated market value of securities available-for-sale
are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1995
U.S. Government and agency bonds...... $ 22,382 $ 526 $ (5) $ 22,903
State and political subdivision
bonds.............................. 549 26 -- 575
Corporate debt securities............. 107,281 4,563 (52) 111,792
----------- ----------- ----------- -----------
$ 130,212 $ 5,115 $ (57) $ 135,270
=========== =========== =========== ===========
December 31, 1994
Common stocks......................... $ 4,954 $ 1,081 $ (150) $ 5,885
U.S. Government and agency bonds...... 28,114 96 (628) 27,582
State and political subdivision
bonds.............................. 9,720 207 (708) 9,219
Corporate debt securities............. 96,193 253 (4,722) 91,724
Redeemable preferred stock............ 3,017 -- -- 3,017
----------- ----------- ----------- -----------
$ 141,998 $ 1,637 $(6,208) $ 137,427
=========== =========== =========== ===========
</TABLE>
G-54
<PAGE> 328
CITATION INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Years Ended December 31, 1995
As discussed in Note 1, during November 1994 the Company sold or
transferred its portfolio of redeemable preferred stocks from held-to-maturity
to available-for-sale. The amortized cost, realized gains on sale and unrealized
loss at the date of transfer relating to these securities are as follows:
<TABLE>
<CAPTION>
UNREALIZED
LOSS AT
AMORTIZED REALIZED DATE OF
COST GAINS TRANSFER
----------- ----------- -----------
<S> <C> <C> <C>
Sold................................................. $ 813 $28 $ --
Transferred.......................................... $ 3,017 $-- $(113)
</TABLE>
The amortized cost and estimated market value of securities at December 31,
1995, by contractual maturity, are shown below. Actual maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
-------------------------
ESTIMATED
AMORTIZED MARKET
COST VALUE
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
One year or less.................................................. $ 13,857 $ 13,859
After 1 year through 5 years...................................... 61,780 63,750
After 5 years through 10 years.................................... 54,331 57,411
After 10 years.................................................... 244 250
----------- -----------
Total............................................................. $ 130,212 $ 135,270
=========== ===========
</TABLE>
At December 31, 1993, 1994 and 1995, securities with a carrying amount of
$83,447,000, $85,318,000 and $79,100,000 were pledged under a workers'
compensation agreement for the purpose of fulfilling the Company's security
obligation under the California Insurance Code.
4. STATUTORY BASIS INFORMATION
The Company is primarily an insurance holding company and does not have any
significant revenue producing operations of its own. Its primary sources of cash
are dividends, intercompany charges for services and interest on contribution
certificates (which were retired during 1993) from its insurance subsidiaries.
The subsidiaries are subject to comprehensive regulation under the California
Insurance Holding Company Act which limits dividend payments and regulates other
intercompany transactions. Based on financial data as of December 31, 1995, the
insurance company subsidiaries could pay during 1996 no dividends to the Company
without prior approval. The insurance company subsidiaries paid no dividends in
1994 and 1995 to the Company. During 1993, CIC paid $250,000 in dividends to the
Company. Selected statutory financial data of the Company's consolidated
insurance subsidiaries, CIC and CNIC (from October 4, 1993, the date of
acquisition), is set forth below:
<TABLE>
<CAPTION>
CONSOLIDATED SUBSIDIARIES
---------------------------------
1993 1994 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Loss and loss adjustment expense
reserves at December 31,.................................. $104,772 $107,723 $94,755
Statutory capital and surplus
at December 31,........................................... $ 32,310 $ 29,675 $29,626
Statutory net income (loss) for
the year ended December 31................................ $ (2,525 ) $ (399 ) $ 3,079
</TABLE>
G-55
<PAGE> 329
CITATION INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Years Ended December 31, 1995
The statutory net loss of CGIC for the ten month period ended October 31,
1994 was $10,058,000.
The Company's insurance subsidiaries prepare their statutory financial
statements in accordance with accounting practices prescribed or permitted by
the California Department of Insurance. Prescribed statutory accounting
practices include a variety of publications of the National Association of
Insurance Commissioners ("NAIC"), as well as state laws, regulations and general
administrative rules. Permitted statutory accounting practices encompass all
accounting practices not so prescribed.
The Company's insurance subsidiaries do not apply any statutory accounting
practices, which differ from prescribed statutory accounting practices, which
individually or in the aggregate materially affect statutory surplus or
risk-based capital.
5. REINSURANCE AND SUBROGATION
In the ordinary course of business, the Company's insurance subsidiaries
have entered into excess of loss, pro-rata, and catastrophic reinsurance
agreements which provide protection against losses over stipulated amounts
arising from any one occurrence or event. Coverage provided under these
agreements is generally summarized as follows:
<TABLE>
<CAPTION>
COMPANY RETENTION REINSURANCE LIMITS
-------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Workers' Compensation............................... $ 250,000 $ 50,000,000
Commercial Property -- Excess of loss and
Pro-Rata.......................................... $ 50,000 -- $ 125,000 $ 3,000,000 -- $ 12,000,000
Commercial Property -- Catastrophe.................. $ 1,500,000 $ 10,000,000
General Liability................................... $ 50,000 -- $ 150,000 $ 3,000,000 -- $ 6,000,000
</TABLE>
Effective January 1, 1989, CIC entered into an aggregate stop loss
reinsurance agreement under which the reinsurer assumed liability for workers'
compensation losses and loss adjustment expenses incurred above specified
aggregate retention amounts, not to exceed in the aggregate $13,200,000 for the
1986 through 1989 accident years, in exchange for $10,850,000 in premium. The
agreement was accounted for as a financing agreement and, accordingly, the
amount paid to the reinsurer, less a $300,000 non-refundable risk fee, was
recorded as an investment deposit. Investment earnings thereon, as adjusted for
amortization of the risk fee over the life of the agreement, have been accrued
in accordance with the terms of the agreement. The agreement was commuted in
November 1994 resulting in a payment to CIC by the reinsurer aggregating
$3,563,000. Since this agreement was accounted for as a financing agreement, the
commutation did not have a material impact on results of operations in 1994.
Reinsurance payments received on paid losses in 1993, 1994 and 1995 were
$14,723,000, $12,247,000 and $7,345,000 respectively. Ceded incurred loss and
loss adjustment expenses in 1993, 1994 and 1995 were $19,221,000, $11,883,000
and $6,813,000, respectively. These payments received and ceded incurred loss
and loss adjustment expenses are exclusive of amounts recorded under the
aggregate stop loss reinsurance agreement described in the preceeding paragraph.
Reinsurance agreements do not discharge the primary liability of the
Company as the direct insurer of the risks reinsured.
G-56
<PAGE> 330
CITATION INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Years Ended December 31, 1995
The statement of operations presents premiums written and premiums earned
net of reinsurance. Direct and assumed, ceded and net amounts for these items
are as follows:
<TABLE>
<CAPTION>
PREMIUMS PREMIUMS
YEAR ENDED DECEMBER 31, WRITTEN EARNED
- ----------------------------------------------------------------------- -------- --------
(IN THOUSANDS)
<S> <C> <C>
1993
Direct and assumed................................................... $ 85,735 $ 81,933
Ceded................................................................ (8,811) (8,350)
-------- --------
Net.................................................................. $ 76,924 $ 73,583
======== ========
1994
Direct and assumed................................................... $101,321 $ 97,192
Ceded................................................................ (17,984) (17,423)
-------- --------
Net.................................................................. $ 83,337 $ 79,769
======== ========
1995
Direct and assumed................................................... $ 77,632 $ 76,224
Ceded................................................................ (30,442) (21,488)
-------- --------
Net.................................................................. $ 47,190 $ 54,736
======== ========
</TABLE>
Estimated amounts receivable under third party subrogation were $1,790,000,
$1,390,000 and $900,000 at December 31, 1993, 1994 and 1995, respectively.
6. INCOME TAXES
The provision for federal income taxes for the years ended December 31,
1993, 1994 and 1995 consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
----- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current......................................................... $ -- $ -- $ --
Deferred........................................................ (756) (3,881) --
----- ------- -------
$(756) $(3,881) $ --
===== ======= =======
</TABLE>
The Company adopted FASB Statement No. 109, "Accounting for Income Taxes",
effective January 1, 1993. This Statement requires that deferred income taxes be
computed using the liability method rather than the deferred method previously
in effect. The cumulative effect of adopting the Statement on the Company's
financial statements was to increase income by $3,500,000 or $.76 per share, for
the year ended December 31, 1993.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax
G-57
<PAGE> 331
CITATION INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Years Ended December 31, 1995
purposes, and (b) operating loss and tax credit carryforwards. Significant
components of the Company's net deferred tax asset are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward............................................ $ 8,658 $ 9,630
Discount of unpaid loss and loss adjustment expenses....................... 4,511 3,379
Special tax deposit paid on discounted losses.............................. 1,651 1,651
Unearned premiums.......................................................... 1,496 960
Unrealized loss on investments available-for-sale.......................... 1,293 --
Alternative minimum tax credit carryforward................................ 743 743
Accrued policyholder dividends............................................. 305 41
Allowance for uncollectible accounts....................................... 293 656
Other...................................................................... 899 662
------- -------
19,849 17,722
======= =======
Deferred tax liabilities:
Deferred policy acquisition costs.......................................... 1,969 798
State income tax........................................................... 613 613
Tax over book depreciation................................................. 67 75
Unrealized gains on investments available-for-sale......................... -- 1,720
Earned but unbilled premiums............................................... -- 360
Other...................................................................... 213 492
------- -------
2,862 4,058
------- -------
16,987 13,664
Valuation allowance........................................................ (3,000) (2,690)
------- -------
Net deferred tax asset..................................................... $13,987 $10,974
======= =======
</TABLE>
In 1994, the Company established a $3,000,000 valuation allowance against
deferred tax assets relating to the realization of net operating loss
carryforwards. The valuation allowance was reduced to $2,690,000 in 1995.
The provision for federal income tax and the amount computed by applying
the statutory federal income tax rate to income before taxes differ as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------------------------
1993 1994 1995
--------------- --------------- --------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
------ ------ ------- ----- ------ -----
(IN THOUSANDS, EXCEPT PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Expected income tax provision (benefit) at
statutory rates......................... $ (78 ) (35.0) $(5,450) (35.0)% $ 329 35.0%
Tax exempt investment income.............. (706 ) (316.4) (529) (3.4) (61 ) (6.5)
Non-deductible loss on disposition of
subsidiary.............................. -- -- 1,913 12.3 -- --
Decrease in valuation allowance........... -- -- -- -- (310 ) (33.0)
Other, net................................ 27 12.5 185 1.2 42 4.5
----- ------ ------- ----- ----- -----
$(756 ) (338.9)% $(3,881) (24.9)% $ -- --
===== ====== ======= ===== ===== =====
</TABLE>
G-58
<PAGE> 332
CITATION INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Years Ended December 31, 1995
The Company and its subsidiaries file a consolidated federal income tax
return. For California franchise tax purposes, the Company files a separate
return. As California insurance companies, CIC, CNIC and CGIC pay a premium tax
to the State of California on gross premiums written in lieu of state income and
franchise taxes.
At December 31, 1995, the Company had net operating loss carryforwards of
$28,323,000 available to offset future taxable income, expiring from the year
2000 through 2010, and alternative minimum tax credit carryforwards of $743,000
available to offset future regular income taxes.
7. LIABILITY FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSE
The following table provides a reconciliation of the beginning and ending
loss and loss adjustment expense reserve balances for each of the years in the
three-year period ended December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning reserves, gross of reinsurance................... $ 93,016 $166,485 $118,104
Less reinsurance recoverable on unpaid losses.............. -- 41,804 10,380
-------- -------- --------
Beginning reserves, net of reinsurance..................... 93,016 124,681 107,724
Net reserves of acquired subsidiaries at date of
acquisition.............................................. 22,206 -- --
Provisions for:
Insured events incurred in current year............... 58,088 67,008 50,893
Insured events incurred in prior years................ 5,520 5,922 (4,170)
-------- -------- --------
Total............................................ 63,608 72,930 46,723
-------- -------- --------
Payments for losses and loss adjustment expense:
Attributable to insured events incurred in current
year................................................ 13,756 17,517 15,184
Attributable to insured events incurred in prior
years............................................... 40,393 45,612 44,296
-------- -------- --------
Total............................................ 54,149 63,129 59,480
-------- -------- --------
Net reserves of CGIC at date of disposition................ -- (26,758) --
-------- -------- --------
Ending reserves, net of reinsurance........................ 124,681 107,724 94,967
Reclassification of reinsurance recoverables on unpaid
losses................................................... 41,804 10,380 11,002
-------- -------- --------
Ending reserves, gross of reinsurance...................... $166,485 $118,104 $105,969
======== ======== ========
</TABLE>
The $5.5 million provision for prior years' losses in 1993 was a result of
1) $1.8 million related to workers' compensation due primarily to increases in
allocated loss adjustment expenses; 2) $3.3 million related to property and
casualty business due in part to an increase in the number of construction
defect claims being received and 3) $.4 million related to property and casualty
business written by CGIC and CNIC prior to the date of acquisition by the
Company. The $5.9 million provision for prior years' losses in 1994 was the net
result of 1) a decrease of $10.4 million related to workers' compensation due to
a lower than expected number of stress claims being received; 2) an increase of
$16.3 million related to property and casualty business, of which $7.5 million
was attributable to CIC and CNIC and $8.8 million was attributable to CGIC, due
in part to a continuation of the increase in the number of construction defect
claims being received. The $4.2 million favorable development for prior years'
losses in 1995 was the net result of a decrease in workers' compensation
reserves of $5.4 million, an increase in personal auto reserves by $1.5 million,
a decrease of $0.7 million in CIC's property and casualty reserves and an
increase in CNIC's property and casualty reserves of $0.4 million. The decrease
in CIC's workers' compensation reserves was attributable to $2.6 million for the
1994 accident
G-59
<PAGE> 333
CITATION INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Years Ended December 31, 1995
year and the remaining decrease was throughout accident years 1988 through 1993.
The decrease in general resulted from redundancy in reserves as settlements and
reserve development demonstrated favorable trends which appear to have resulted
from the 1993 Reforms.
8. RELATED PARTY TRANSACTIONS
A stockholder and director of the Company is a partner in a general
partnership which owns a 50% interest in a building in which the Company leases
facilities. The lease commenced in 1992 and extends through 2001. Future minimum
rentals under this lease are included in the table in Note 12. The Company
believes that the terms of the lease are no less favorable to the Company than
could be obtained in arm's length negotiations with unaffiliated parties.
9. STOCK OPTIONS
Options are granted at the discretion of the Board of Directors at the fair
market value of the Company's common stock on the date of grant. The options are
exercisable over a period of ten years from the date of the grant and vest
ratably over three or four years. At December 31, 1995, options to purchase
133,206 shares were exercisable.
Option activity is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------------------
SHARES NUMBER
AVAILABLE OF SHARES PRICE PER SHARE
--------- --------- --------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993........................... 182,824 343,193 $4.50 to $10.00
Options granted.................................. (42,500) 42,500 8.75 to 11.00
Options exercised................................ -- (11,728) 4.50 to 6.00
-------- --------
Balance, December 31, 1993......................... 140,324 373,965 4.50 to 11.00
Options granted.................................. (45,000) 45,000 2.88 to 10.25
Options exercised................................ -- (5,088) 4.50 to 6.00
Options cancelled................................ 30,000 (45,258) 4.50 to 10.25
-------- --------
Balance, December 31, 1994......................... 125,324 368,619 2.88 to 11.00
Options granted.................................. (160,000) 160,000 2.88 to 4.75
Options cancelled................................ 75,000 (234,413) 2.88 to 11.00
-------- --------
Balance, December 31, 1995......................... 40,324 294,206 $2.88 to $10.25
======== ========
</TABLE>
10. STOCKHOLDERS' RIGHTS PLAN
On July 11, 1991, the Board of Directors adopted a Stockholders' Rights
Plan and pursuant to the plan declared a dividend on its common stock of one
right (a Right) for each share of common stock then outstanding. Upon the
occurrence of certain events, each Right becomes exercisable to purchase 1/100
of a share of Series A Junior Participating Cumulative Preferred Stock at an
initial price of $35.00. The Rights expire on July 22, 2001 and prior to the
occurrence of certain events, may be redeemed at a price of $.01 per Right. Of
the Company's 1,000,000 authorized shares of preferred stock, 100,000 shares
have been designated as Series A Junior Participating cumulative Preferred
Stock.
G-60
<PAGE> 334
CITATION INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Years Ended December 31, 1995
11. EMPLOYEE STOCK OWNERSHIP PLAN
The Citation Insurance Group Employee Stock Ownership Plan covers
substantially all of the employees of the Company and its subsidiaries.
Contributions are made to the plan at the discretion of the Board of Directors.
No contributions to the plan were made in 1993, 1994 or 1995.
12. FACILITIES LEASES
The Company leases its offices under noncancellable operating leases which
expire through February 2001. Total rental expense for the years ended December
31, 1993, 1994 and 1995 was $927,000, $800,000 and $677,000 respectively. Future
minimum rental payments required under the leases are as follows:
<TABLE>
<CAPTION>
Years Ending December 31, (in thousands)
<S> <C>
1996................................................................ $ 852
1997................................................................ 941
1998................................................................ 878
1999................................................................ 907
2000................................................................ 922
2001................................................................ 131
------
$4,631
======
</TABLE>
13. CASH FLOW FROM OPERATIONS
A reconciliation of net income (loss) and net cash provided by (used in)
operating activities is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income (loss)............................................... $ 4,033 $(11,689) $ 939
Loss on disposition of subsidiary............................... -- 6,708 --
Provisions for uncollectible accounts, net of accounts written
off........................................................... 38 213 1,067
Depreciation and amortization................................... 733 1,038 580
Deferred income taxes........................................... (4,256) (3,881) --
Increase in funds deposited with reinsurer...................... (463) (218) (2,141)
Increase (decrease) in investment income receivable............. (474) (203) 17
Decrease (increase) in premiums receivable...................... 2,226 (3,196) (2,682)
Decrease (increase) in earned but unbilled premiums............. 598 149 (936)
Decrease (increase) in reinsurance recoverable.................. 2,537 (437) 532
Decrease (Increase) in deferred policy acquisition costs........ (1,647) (4,542) 3,445
Decrease in other assets........................................ (2,950) 697 1,516
Increase (decrease) in loss and loss adjustment expense
reserves...................................................... 9,521 8,277 (12,135)
Increase (decrease) in unearned premiums........................ 3,451 4,767 (5,735)
Decrease in dividends payable to policyholders.................. (1,500) (890) (757)
Increase (decrease) in reinsurance balances..................... 1,117 (1,169) 7,783
Increase (decrease) in other liabilities........................ 2,307 1,053 (2,453)
------- -------- --------
Net cash provided (used) by operating activities................ $15,271 $ (3,323) $(10,960)
======= ======== ========
</TABLE>
G-61
<PAGE> 335
CITATION INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Years Ended December 31, 1995
Supplemental information regarding noncash investing and financing
activities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1993
-------------
(IN
THOUSANDS)
<S> <C>
Acquisition of subsidiaries:
Fair value of assets acquired................................................ $ 92,492
Liabilities assumed.......................................................... (72,156)
--------
Net assets acquired............................................................ 20,336
Less cash consideration paid, net of cash acquired............................. (3,607)
--------
Common stock issued............................................................ $ 16,729
========
Implementation of Financial Accounting Standard No. 115:
Increase in securities available-for-sale.................................... $ 7,667
Deferred tax effect.......................................................... (2,607)
--------
Increase in unrealized gain on securities available-for-sale................. $ 5,060
========
Implementation of Financial Accounting Standard No. 113
Increase in reinsurance recoverable and loss and loss adjustment expense
reserves.................................................................. $ 10,752
========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1993
-------------
(IN
THOUSANDS)
<S> <C>
Disposition of subsidiary:
Non-cash assets deconsolidated................................................. $ 49,992
Liabilities deconsolidated..................................................... (42,742)
Loss on disposition of subsidiary.............................................. (6,708)
--------
Reduction in cash resulting from disposition of subsidiary..................... $ 542
========
</TABLE>
G-62
<PAGE> 336
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Citation Insurance Group
San Jose, California
We have audited the accompanying consolidated balance sheets of Citation
Insurance Group and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Citation Insurance Group and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
As discussed in Note 6 to the consolidated financial statements, the
Company changed its method of accounting for income taxes effective January 1,
1993 to conform with Statement of Financial Accounting Standards (SFAS) No. 109.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for investments in debt and equity securities
effective December 31, 1993 to conform with SFAS No. 115.
DELOITTE & TOUCHE LLP
SAN JOSE, CALIFORNIA
MARCH 15, 1996
G-63
<PAGE> 337
STATEMENT OF MANAGEMENT'S FINANCIAL REPORTING RESPONSIBILITY
The Company's consolidated financial statements included in this annual
report have been prepared by management in conformity with generally accepted
accounting principles. Such statements include informed estimates and
knowledgeable judgments of management for those areas and amounts where such
determinations are necessary. Management is responsible for the integrity of
these financial statements as well as all other financial information included
in this annual report and for ascertaining that such information presents fairly
the financial position and operating results of the Company.
The accounting systems and internal accounting controls for the Company are
designed to provide reasonable assurance that assets are safeguarded against
losses from unauthorized use or disposition, that transactions are executed in
accordance with management's authorization and that the financial records are
reliable for preparing financial statements and maintaining accountability for
assets. Qualified personnel throughout the organization maintain and monitor
these internal accounting controls on an ongoing basis.
The Company engages Deloitte & Touche LLP as independent auditors to audit
its financial statements and express their opinion thereon. They have full
access to each member of management in conducting their audits. Such audits are
conducted in accordance with generally accepted auditing standards. Those
standards require that they plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. They include examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. They also include assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
The Company's accounting policies and internal controls are under the
general oversight of the Board of Directors acting through its Audit Committee.
This Committee is composed entirely of Directors who are not officers or
employees of the Company. The Committee meets regularly with management and the
independent auditors to review the accounting principles and practices employed
by the Company and to discuss auditing, internal control and financial reporting
matters. The independent auditors have, at all times, unrestricted access to the
Audit Committee, without members of management present, to discuss the results
of their audits, their evaluations of the adequacy of the Company's internal
accounting controls and the quality of the Company's financial reporting, and
any other matters that they believe should be brought to the attention of the
Committee.
<TABLE>
<S> <C>
/s/ DONALD HENDERSON /s/ ROBERT M. ERICKSON
---------------------------------------------
---------------------------------------
Donald Henderson Robert M. Erickson
President and Chief Treasurer and Chief
Executive Officer Financial Officer
</TABLE>
G-64
<PAGE> 338
SELECTED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data (in thousands, except share
and per share amounts) for 1995 and 1994 are shown below. In management's
opinion, the interim financial data contains all adjustments, consisting of only
normal recurring accruals except as described below, necessary for a fair
presentation of results for such interim periods.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
--------------------- --------------------- --------------------- ---------------------
1994 1995 1994 1995 1994 1995 1994 1995
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net premiums written.............. $20,864 $ 9,897 $20,003 $12,758 $24,820 $10,936 $17,649 $13,601
Net premiums earned............... 20,957 15,952 20,342 13,206 20,607 11,494 17,863 14,086
Net investment income............. 2,859 2,442 2,675 4,047 2,937 2,532 2,424 2,626
Total revenues.................... 23,913 18,670 23,071 17,399 23,752 14,133 20,255 16,744
Net income (loss)............. $ 39 $ (955) $ 1,437 $ 980 $(6,070) $ 61 $(7,095) $ 854
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) per share... $ .01 $ (.16) $ .23 $ .16 $ (1.00) $ .01 $ (1.17) $ .14
------ ------ ------ ------ ------ ------ ------ ------
Weighted average common and
equivalent shares outstanding... 6,210,751 6,069,203 6,089,052 6,069,203 6,068,880 6,097,109 6,069,203 6,104,070
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
In the third quarter of 1994, the Company increased its property and
casualty loss and loss adjustment expense reserves related to prior accident
years by $11.6 million primarily due to a higher level of construction defect
claims being received than had been anticipated. At the same time, the Company
reduced its workers' compensation loss and loss adjustment expense reserves
related to prior accident years by $3.3 million primarily due to a decline in
the number of disability claims alleging mental stress. The net effect of these
actions was to increase loss and loss adjustment expense by $8.3 million in the
third quarter of 1994.
In the fourth quarter of 1994, the Company wrote off its investment in CGIC
and recorded a liability for the cost of disposition of CGIC resulting in a $6.7
million charge to operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's Directors and Executive Officers is
incorporated by reference from the Company's definitive proxy statement for the
Annual Meeting of Shareholders on May 15, 1996.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the Company's Executive Compensation is incorporated
by reference from the Company's definitive proxy statement for the Annual
Meeting of Shareholders on May 15, 1996 except for the report of the Executive
Compensation and Stock Option Committee and the Stock Performance Graph.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding Security Ownership of Certain Beneficial Owners and
Management is incorporated by reference from the Company's definitive proxy
statement for the Annual Meeting of Shareholders on May 15, 1996.
G-65
<PAGE> 339
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information Regarding Certain Relationship and Related Transactions is
incorporated by reference from the Company's definitive proxy statement for the
Annual Meeting of Shareholders on May 15, 1996.
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS AND
2. FINANCIAL STATEMENT SCHEDULES
The financial statements listed in the Index to Consolidated Financial
Statements and Supplementary Data on page 41 of this annual report and the
Financial Statement schedules listed in the accompanying Index to Financial
Statement Schedules on page 67 of this annual report are filed as part of
this report.
3. EXHIBITS
The exhibits listed in the accompanying Index to Exhibits are filed as part
of this report.
(B) REPORTS ON FORM 8-K
None
G-66
<PAGE> 340
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CITATION INSURANCE GROUP
(Registrant)
April 10, 1996
By /s/ DONALD HENDERSON
------------------------------------
Donald Henderson
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ----------------------------------- ---------------
<C> <S> <C>
/s/ JAMES R. BANCROFT Director April 10, 1996
- ------------------------------------------
James R. Bancroft
/s/ PAUL M. BANCROFT Director April 10, 1996
- ------------------------------------------
Paul M. Bancroft
/s/ THEODORE J. BIAGINI Director April 10, 1996
- ------------------------------------------
Theodore J. Biagini
/s/ MARSHALL J. BURAK Director April 10, 1996
- ------------------------------------------
Marshall J. Burak
/s/ J. PHILIP DINAPOLI Director April 10, 1996
- ------------------------------------------
J. Philip DiNapoli
/s/ EUGENE A. O'ROURKE Director April 10, 1996
- ------------------------------------------
Eugene A. O'Rourke
/s/ DONALD F. IMWALLE Director April 10, 1996
- ------------------------------------------
Donald F. Imwalle
/s/ LOUIS J. MARIANI, SR. Director April 10, 1996
- ------------------------------------------
Louis J. Mariani, Sr.
/s/ LARRY D. RUSSEL Director April 10, 1996
- ------------------------------------------
Larry D. Russel
</TABLE>
G-67
<PAGE> 341
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ----------------------------------- ---------------
<C> <S> <C>
/s/ E. ALEXANDER GLOVER Director April 10, 1996
- ------------------------------------------
E. Alexander Glover
/s/ DONALD HENDERSON Director, President and Chief April 10, 1996
- ------------------------------------------ Executive Officer (Principal
Donald Henderson Executive Officer)
/s/ ROBERT M. ERICKSON Chief Financial Officer and April 10, 1996
- ------------------------------------------ Treasurer (Principal Financial
Robert M. Erickson Officer and Principal Accounting
Officer)
</TABLE>
G-68
<PAGE> 342
APPENDIX H
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER: 0-18786
---------------------------
CITATION INSURANCE GROUP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
CALIFORNIA 94-2723335
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
ONE ALMADEN BOULEVARD, SUITE 300
SAN JOSE, CALIFORNIA 95113-2213
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(408) 292-0222
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 6,407,803 shares of common
stock were outstanding as of April 30, 1996, including 313,600 shares held by a
subsidiary of registrant.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
H-1
<PAGE> 343
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CITATION INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
(IN THOUSANDS) 1996 1995
----------- ------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Investments......................................................... $ 127,887 $135,270
Cash................................................................ 2,478 1,338
Investment income receivable........................................ 2,417 2,572
Premiums receivable................................................. 10,685 12,687
Earned but unbilled premiums........................................ 715 936
Reinsurance recoverable............................................. 12,958 12,564
Prepaid reinsurance premiums........................................ 707 2,907
Deferred policy acquisition costs................................... 4,208 2,346
Property and equipment, net......................................... 964 1,035
Deferred income taxes............................................... 11,851 10,974
Other assets........................................................ 1,764 1,603
-------- --------
TOTAL ASSETS................................................... $ 176,634 $184,232
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Loss and loss adjustment expense.................................... $ 104,019 $105,969
Unearned premiums................................................... 17,570 17,032
Reinsurance balances................................................ 6,643 9,896
Other liabilities................................................... 3,509 5,232
-------- --------
TOTAL LIABILITIES.............................................. 131,741 138,129
STOCKHOLDERS' EQUITY
Common stock........................................................ 622 620
Additional paid-in capital.......................................... 45,280 45,207
Treasury stock...................................................... (2,000) (2,000)
Accumulated deficit................................................. (626) (1,062)
Unrealized appreciation on investments, net......................... 1,617 3,338
-------- --------
TOTAL STOCKHOLDERS' EQUITY..................................... 44,893 46,103
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................... $ 176,634 $184,232
======== ========
</TABLE>
See notes to condensed consolidated financial statements
H-2
<PAGE> 344
CITATION INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
------------------------
1996 1995
---------- ---------
<S> <C> <C>
REVENUES
Direct and assumed premiums written.................................. $ 12,969 $ 20,266
---------- ----------
Net premiums written................................................. 15,627 9,897
Change in unearned premiums.......................................... (2,727) 6,055
---------- ----------
NET PREMIUMS EARNED............................................. 12,900 15,952
Net investment income................................................ 2,212 2,442
Commission and fee income............................................ 40 276
---------- ----------
15,152 18,670
---------- ----------
EXPENSES
Loss and loss adjustment expense..................................... 10,343 14,279
Policy acquisition and other underwriting expense.................... 4,239 4,905
Dividends to policyholders........................................... 15 135
Other operating costs and expenses................................... 119 306
---------- ----------
14,716 19,625
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES.................................... 436 (955)
INCOME TAXES......................................................... --
---------- ----------
NET INCOME (LOSS)............................................... $ 436 $ (955)
========== ==========
NET INCOME (LOSS) PER SHARE..................................... $ .07 $ (.16)
========== ==========
WEIGHTED AVERAGE SHARES AND COMMON EQUIVALENT SHARES
OUTSTANDING.................................................... 6,107,292 6,069,203
========== ==========
</TABLE>
See notes to condensed consolidated financial statements
H-3
<PAGE> 345
CITATION INSURANCE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
(IN THOUSANDS) 1996 1995
------- -------
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES.................................... $(3,689) $(4,492)
INVESTING ACTIVITIES:
Investments purchased.................................................... (5,264) (5,031)
Investments sold......................................................... 5,049 14,480
Investments matured...................................................... 5,000 --
Purchases of property and equipment...................................... (31) (119)
------- -------
NET CASH PROVIDED BY INVESTING ACTIVITIES........................... 4,754 9,330
FINANCING ACTIVITIES:
Issuance of common stock................................................. 75 --
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES................................ 75 --
------- -------
INCREASE IN CASH......................................................... 1,140 4,838
CASH, BEGINNING OF PERIOD................................................ 1,338 889
------- -------
CASH, END OF PERIOD...................................................... $ 2,478 $ 5,727
======= =======
</TABLE>
See notes to condensed consolidated financial statements
H-4
<PAGE> 346
CITATION INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
The accompanying condensed consolidated financial statements as of March
31, 1996 and for the three month periods ended March 31, 1996 and 1995 have been
prepared in accordance with the instructions to Form 10-Q and are unaudited;
however, in management's opinion, they include all adjustments (consisting of
only normal recurring accruals) necessary for a fair presentation of results for
such interim periods. These statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in connection with the financial
statements and notes thereto included in the Company's 1995 Annual Report to
Shareholders. Interim results are not necessarily indicative of results for the
full year.
As previously reported, the Company concluded that its control over
Citation General Insurance Company ("CGIC"), one of the companies acquired when
the Registrant acquired Madison Capital, Inc. and subsidiaries in October 1993,
had become temporary in late 1994. As a result, the Company has accounted for
the results of CGIC on the equity method since November 1994 which resulted in a
write off of its remaining investment in CGIC at that date. Consequently, the
consolidated results of operations for the quarters ending March 31, 1995 and
1996 do not include the operations of CGIC. During July 1995, CGIC was placed
into conservation by the State of California, effectively transferring control
of CGIC's assets to the California Department of Insurance. In August 1995, CGIC
was placed into liquidation by the State of California.
On March 4, 1996, the Company and Physicians Insurance of Ohio ("PICO")
announced that they had signed a letter of intent for a stock-for-stock merger,
pursuant to which PICO will become a wholly-owned subsidiary of Citation. The
definitive agreement to merge the two companies was signed on May 3, 1996. As a
result of the transaction, the shareholders of PICO will own over 80 percent of
the combined company.
Under the terms of the agreement, each of PICO's outstanding shares will be
converted into Citation common stock based upon a floating exchange rate. The
exchange rate is calculated by dividing the PICO share value by $5.03 per share
of Citation stock. The PICO share value is the average closing price of PICO's
common stock for the 20 trading days prior to the determination date, within a
range of $25.20 to $30.80 per share, inclusive. The determination date will be
set by the occurrence of approvals by regulators and shareholders of both
companies. If the average closing price is less than $25.20, the PICO share
value will be $25.20, but the agreement is subject to termination by Citation if
the PICO average closing price is below $22.50. If the average closing price is
greater than $30.80, the PICO share value will be $30.80, but the agreement is
subject to termination by PICO if the average closing price is above $33.50
The transaction is subject to regulatory approvals, approval of the
transaction by shareholders of the Company and PICO and satisfactory completion
of other conditions customary in transactions of this nature.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
As previously reported, the Company concluded that its control over
Citation General Insurance Company ("CGIC"), one of the companies acquired when
the Registrant acquired Madison Capital, Inc. and subsidiaries in October 1993,
had become temporary in late 1994. As a result, the Company has accounted for
the results of CGIC on the equity method since November 1994 which resulted in a
write off of its remaining investment in CGIC at that date. Consequently, the
consolidated results of operations for the quarters ending March 31, 1995 and
1996 do not include the operations of CGIC.
Direct and assumed premiums written decreased by $7.3 million, or 36.0%, in
the three months ended March 31, 1996 compared to the same period in 1995. This
decrease was the net result of a reduction of approximately $1.3 million in
aggregate workers' compensation premiums, a reduction of approximately
H-5
<PAGE> 347
CITATION INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
$4.5 million in aggregate property and casualty premiums and a decrease of
approximately $1.5 million in aggregate personal automobile premiums.
The 21% decrease in workers' compensation premiums written from $6.4
million in the first quarter of 1995 to $5.1 million in the first quarter of
1996, was primarily a result of (a) reductions in minimum rates of 16% effective
October 1, 1994, partially offset by a rate increase by the Company of 9.3%
effective January 1, 1996 and (b) a decrease in the average premium per policy
to $7,132 at March 31, 1996 from $12,100 at March 31, 1995 which was primarily a
result of rate reductions and the intense competition in the California workers'
compensation market caused by the competitive rate law which went into effect
January 1, 1995.
The 37% decrease in property and casualty premiums written from $12.1
million in the first quarter of 1995 to $7.6 million in the first quarter of
1996 was primarily the result of approximately $4.3 million of non-recurring
premium in the first quarter of 1995 related to the transfer of in force
policies of Citation General Insurance Company (CGIC) to Citation Insurance
Company. The $4.3 million of premium related to the transfer of in force
policies of CGIC during the first quarter of 1995 was a result of the previously
reported agreement with the California Department of Insurance regarding CGIC.
At March 31, 1995, CGIC had approximately $3.7 million of remaining unexpired
premium on in force policies which was transferred to Citation Insurance Company
during the second quarter of 1995.
The 85% decrease in personal automobile premiums written from $1.8 million
in the first quarter of 1995 to $0.3 million in the first quarter of 1996
resulted from the Company's decision to withdraw from the personal auto line of
business as further described below. Due to unsatisfactory results, the Company
terminated its agreement in October 1994 with the managing general agency
("MGA"), which had been producing this business since the Company entered this
line of business, and decided to withdraw from this business as described in
previous filings. Although the Company is attempting to withdraw from the
personal automobile business as quickly as possible, it may be required to offer
existing policyholders the opportunity to renew their policies. While management
believes the volume in this business will continue to decline rapidly over the
next several quarters, the policy renewal offer requirements may result in some
level of premium revenue being reported during the next two calendar years.
Net premiums written increased $5.7 million, or 58%, in the three months
ended March 31, 1996 compared to the same period in 1995. This increase was the
net result of a reduction of approximately $1.3 million attributable to workers'
compensation premiums, an increase of approximately $8.5 million attributable to
property and casualty premiums and a decrease of approximately $1.5 million
attributable to personal automobile premiums.
The decrease in net workers' compensation premiums written and net personal
automobile premiums written are generally consistent with the changes in direct
and assumed premium volume for these lines of business. The significant change
in net property and casualty premiums written was primarily due to increased
premiums ceded to reinsurers in 1995 under two reinsurance agreements
aggregating $7.4 million and the cancellation of these two treaties on January
1, 1996 which resulted in a reduction of ceded written premiums of $7.6 million
during the first quarter of 1996. This was partially offset by $2.8 million of
premiums ceded to a new reinsurance contract effective January 1, 1996. Of the
increase in ceded premiums during the first quarter of 1995, $5.9 million was a
result of the Company entering into a new excess of loss reinsurance agreement
effective March 31, 1995. This agreement applied to the Company's property and
casualty business and generally provided coverage for losses incurred in excess
of $50,000 per occurrence up to $150,000 at which level the Company's previous
reinsurance agreements provided coverage. The remaining $1.5 million increase in
ceded premiums in 1995 resulted from the Company amending the existing property
excess of loss reinsurance agreement whereby the reinsurance premium calculation
would be based upon written premiums rather than earned premiums. Since both the
new reinsurance agreement and the amendment to the existing reinsurance
agreement required initial cessions of unearned premiums in amounts equal to
ceded written premiums, these agreements had no effect on net earned premiums
during the first quarter of 1995; however,
H-6
<PAGE> 348
CITATION INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
these agreements resulted in a decrease in unearned premiums and deferred policy
acquisition costs of approximately $7.4 million and $3.0 million, respectively,
and an increase in reinsurance balances payable of approximately $4.4 million as
of March 31, 1995. Both agreements provided for ceding commissions which
resulted in immediate increases in the Company's statutory surplus.
The new property and casualty reinsurance agreement effective January 1,
1996 generally provides coverage for losses incurred in excess of $250,000 per
occurence and required an initial cession of unearned premiums of $2.8 million.
This was more than offset by the cancellation of the above described reinsurance
agreements on January 1, 1996 in which the ceded unearned premiums were returned
to the Company in the amount of $7.6 million, effectively reversing the March
31, 1995 transactions described above.
The net effect of the changes described above which were effective January
1, 1996 was to decrease ceded written premiums and increase unearned premiums by
approximately $4.8 million, increase deferred acquisition costs by $2.3 million
and decrease reinsurance balances by $2.5 million.
Net premiums earned decreased by $3.0 million, or 19%, in the three months
ended March 31, 1996 compared to the same period in 1995. This decrease was
primarily the net result of a reduction of approximately $1.7 million
attributable to workers' compensation premiums, an increase of approximately
$0.7 million attributable to property and casualty premiums and a decrease of
$2.0 million attributable to personal automobile premiums. For the three months
ended March 31, 1996, 40%, 54% and 6% of net premiums earned related to workers'
compensation premiums, property and casualty premiums and personal automobile
premiums, respectively, compared to 43%, 39% and 18% in the same period in 1995.
Net investment income decreased by $230,000 or 9.4%, in the three months
ended March 31, 1996 compared to the first quarter of 1995. The principal reason
for the decrease was a reduction in the average investment portfolio in the 1996
period. The Company realized no net capital gains during the first quarter of
1996 compared to $38,000 of net capital gains realized during the first quarter
of 1995.
Total revenues for the first quarter of 1996 were $15.2 million, a 19%
decrease from the first quarter of 1995.
The Company's underwriting results for the three months ended March 31,
1996 and 1995 (computed on a GAAP basis), are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
---------------
1996 1995
----- -----
<S> <C> <C>
Loss and Loss Adjustment Expense Ratio....................................... 80.2% 89.5%
Underwriting Expense Ratio................................................... 32.9 30.7
Policyholder Dividend Ratio.................................................. 0.1 0.8
----- -----
Combined Ratio.......................................................... 113.2% 121.0%
===== =====
</TABLE>
Loss and loss adjustment expenses decreased $3.9 million or 28% in the
first quarter of 1996 from the first quarter of 1995. This decrease was
primarily due to the decrease in net earned premium of 19% and a decrease in the
loss ratio described below. The loss and loss adjustment expense ratio decreased
to 80.2% in the first quarter of 1996 from 89.5% in the first quarter of 1995.
The decrease in loss and loss adjustment expense ratio from the prior year
quarter is attributable to a decrease in both the commercial property and
casualty loss and loss adjustment expense ratio from 90.1% to 85.8% and the
personal automobile loss and loss adjustment expense ratio from 152.8% to 89.6%
partially offset by an increase in the workers' compensation loss and loss
adjustment expense ratio from 63.3% to 71.2% in 1996.
H-7
<PAGE> 349
CITATION INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
The commercial property and casualty loss and loss adjustment expense ratio
decreased from 90.1% in the first quarter of 1995 to 85.8% in the first quarter
of 1996. Management believes that the decrease is a reflection of the ongoing
re-underwriting of the book of business which began in the third quarter of 1995
and the decision to discontinue writing the artisan contractor line of business
in late 1994. As the artisan contractor policies were written on an annual basis
and covered occurrences during the policy period, the Company had exposure to
claims emanating from this line of business throughout 1995 even though such
claims may not be reported to the Company for many years.
The personal automobile loss and loss adjustment expense ratio decreased
from 152.8% in the first quarter of 1995 to 89.6% in 1996. The first quarter of
1995 results included an increase in loss reserves of $964,000 for the 1994
accident year which increased the loss ratio during the quarter from 118.8% to
152.8%. The decrease in the 1996 loss and loss adjustment expense ratio was
primarily due to the rate increase of approximately 70% which was effective in
November 1995. Primarily due to the poorer than expected operating results, the
Company decided in January 1995 to withdraw from this line of business and focus
on its primary business segments.
The increase in the loss and loss expense ratio from 63.3% in the first
quarter of 1995 to 71.2% in the first quarter of 1996 was primarily a result of
the reduction in the favorable loss development from prior year reserves during
1996 compared to the first quarter of 1995. The favorable loss development from
prior years' reserves in the first quarter of 1995 and 1996 resulted in a
decrease in loss and loss adjustment expense of $1.9 million and $1.4 million,
respectively. Notwithstanding the increase in the loss ratio, the workers'
compensation loss and loss adjustment expense ratios in the first quarter of
1995 and 1996 were affected by a continued favorable trend in loss development
for prior accident years. This favorable trend is a result of fewer than
expected newly reported claims particularly for the 1993, 1994 and 1995 accident
years and claim settlements for amounts lower than originally provided. These
positive factors were partially offset by reductions in policy premium rates as
a result of the open rating environment effective in California since January 1,
1995.
Policy acquisition costs and other underwriting expenses declined $0.7
million or 14% from the first quarter of 1995. This decrease was primarily due
to the decline in net earned premium during the same comparative periods of 19%.
As a percentage of net earned premium the underwriting expense ratio increased
to 32.9% from 30.7% in the first quarter of 1995. This increase was the net
result of an increase in the commercial property and casualty underwriting
expense ratio from 36.0% to 37.0%, a decrease in the personal automobile
underwriting expense ratio from 41.4% to 15.1%, and an increase in the workers'
compensation underwriting expense ratio from 21.7% to 30.1%. The increase in the
underwriting expense ratio was generally a result of fixed overhead expenses
being incurred against a smaller premium base. The significant decrease in the
personal automobile underwriting expense ratio resulted primarily from the
Company writing off the deferred policy acquisition costs associated with this
business aggregating $485,000 at March 31, 1995.
Dividends to policyholders were $15,000 in the first quarter of 1996
compared with $135,000 in the first quarter of 1995.
The Company reported no net income tax expense for the first quarter of
1995 and 1996. The 1996 effective tax rate was lower than statutory rates
primarily due to a reduction of $138,000 in the valuation allowance against
deferred taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's major sources of funds from operations are premiums collected
and investment income. The major uses of operating funds include the payment of
claims and underwriting and administrative expenses. The Company's current
investment strategy is to structure the portfolio to match anticipated claims
obligations as well as other operating needs. The Company used $3.7 million of
funds in operations in the first
H-8
<PAGE> 350
CITATION INSURANCE GROUP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(CONTINUED)
three months of 1996 and used $4.5 million during the first three months of
1995. Funds used in the first quarter of 1996 were primarily provided from The
Company's investment portfolio.
The Company believes that its current capital structure together with
internally generated funds, will be sufficient to support its operations for the
foreseeable future. The Company currently has no material commitments for
capital expenditures.
H-9
<PAGE> 351
CITATION INSURANCE GROUP
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As described in previous filings, the Company terminated its agreement in
October 1994 with the managing general agency ("MGA"), which had been producing
the personal auto line of business since the Company entered this line of
business, and decided to withdraw from this business. The MGA obtained an
injunction which effectively allowed it to continue renewing business and
collecting commissions for two years from the termination date of the agreement.
The Company was successful in obtaining a dissolution of the injunction in March
1996, followed by a settlement with the MGA in April 1996. The terms of the
settlement included dismissal of pending litigation with the MGA and
relinquishing of security rights and records by the MGA to the Company. There
are no other legal proceedings except in the ordinary course of business in
connection with the insurance subsidiaries' operations.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Financial Data Schedule included in electronic filing
b. No reports on Form 8-K were filed in the quarter ended March 31, 1996.
H-10
<PAGE> 352
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CITATION INSURANCE GROUP
(Registrant)
Date: May 16, 1996
/s/ DONALD HENDERSON
--------------------------------------
President & Chief Executive Officer
(Principal Executive Officer)
Date: May 16, 1996
/s/ ROBERT M. ERICKSON
--------------------------------------
Chief Financial Officer
(Principal Financial and Accounting
Officer)
H-11
<PAGE> 353
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to provisions of the California General Corporation Law,
Registrant's Articles of Incorporation include a provision which eliminates the
personal liability of its directors to Registrant and its shareholders for
monetary damages to the fullest extent permissible under California law. This
limitation has no effect on a director's liability (i) for acts or omissions
that involve intentional misconduct or a knowing and culpable violation of law,
(ii) for acts or omissions that a director believes to be contrary to the best
interest of Registrant or its shareholders or that involve the absence of good
faith on the part of the director, (iii) for any transaction from which a
director derived an improper benefit, (iv) for acts or omissions that show a
reckless disregard for the director's duty to Registrant or its shareholders in
circumstances in which the director was aware, or should have been aware, in the
ordinary course of performing a director's duties, of a risk of serious injury
to Registrant or its shareholders, (v) for acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the director's
duty to Registrant or its shareholders, (vi) under Section 310 of the California
General Corporation Law (concerning contracts or transactions between the
corporation and a director) or (vii) under Section 316 of the California General
Corporation Law (concerning a director's liability for improper distributions,
loans and guarantees). The provision does not eliminate liability of a director
for any acts or omissions which occurred prior to November 18, 1988, the
effective date of Registrant's amended Articles of Incorporation including such
provision, and it does not eliminate or limit the liability of an officer for
any act or omission as an officer, notwithstanding that the officer is also a
director or that his or her actions, if negligent or improper, have been
ratified by the Board of Directors. Further, the provision has no effect on
claims arising under federal or state securities laws and does not affect the
availability of injunctions and other equitable remedies available to
Registrant's shareholders for any violation of a director's fiduciary duty to
Registrant or its shareholders. Although the validity and scope of the
legislation underlying the provision have not yet been interpreted to any
significant extent by the California courts, the provision may relieve directors
of monetary liability to Registrant for grossly negligent conduct, including
conduct in situations involving attempted takeovers of Registrant.
Registrant's Articles of Incorporation also include a section authorizing
Registrant to indemnify its officers, directors and other agents through bylaw
provisions, agreements with such agents, vote of shareholders or otherwise in
excess of the indemnification permitted by Section 317 of the California General
Corporation Law, subject only to the limits set forth in Section 204 of the
California General Corporation Law with respect to actions for breach of duty to
the corporation and its shareholders. The By-Laws expressly provide that
Registrant shall have the right to purchase and maintain insurance against any
liability asserted against or incurred by officers, directors and other agents,
whether or not Registrant would have the power to indemnify such person against
the liability insured against.
The Registrant has obtained directors and officers liability and company
reimbursement insurance pursuant to two policies currently in effect (the "D & O
Policies") with underwriters at Lloyd's, London ("Lloyd's"). Pursuant to the D &
O Policies, Lloyd's will pay on behalf of directors and officers of the
Registrant, certain losses (a "Loss") incurred as a result of a wrongful act (a
"Wrongful Act") by such persons, for which they are not being indemnified by the
Registrant. In addition, Lloyd's will reimburse the Registrant for Losses over
$1,000,000 incurred as a result of Registrant's indemnification of an officer or
director in connection with a Wrongful Act. However, the D & O Policies provide
that Lloyd's aggregate liability to the Registrant with respect to a single
policy year shall not exceed $2,000,000. The D & O Policies are subject to
customary exclusions.
The Registrant has entered into agreements with its executive officers and
directors to provide indemnity to such persons to the maximum extent permitted
under applicable law.
Section 317 of the California General Corporation law makes provisions for
the indemnification of officers, directors and other corporate agents in terms
sufficiently broad to indemnify such persons, under
II-1
<PAGE> 354
certain circumstances, against such liabilities (including reimbursement of
expenses incurred) arising under the Securities Act.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------------- -------------------------------------------------------------------------
<C> <S> <C>
++ 2.1 Agreement and Plan of Reorganization dated as of June 11, 1993 between
Citation and Madison Capital, Inc. including form of Escrow Agreement,
Escrow Representation Agreement, and Shareholders Voting and Transfer
Restriction Agreement.
++++ 2.2 Agreement and Plan of Reorganization, dated as of May 1, 1996, among
Registrant, Citation Holdings, Inc. and Physicians Insurance Company of
Ohio and related Merger Agreement.
* 3.1 Articles of Incorporation of Citation.
* 3.1.1 Certificate of Determination of Series A Junior Participating Cumulative
Preferred Stock.
++ 3.1.2 Certificate of Amendment to Articles of Incorporation of Citation.
+++ 3.1.3 Agreement of Merger of Madison Capital, Inc into Citation, dated October
4, 1993.
++++ 3.1.4 Amended and Restated Articles of Incorporation of Citation (proposed).
**** 3.2.1 Amended and Restated By-Laws of Citation (current).
++++ 3.2.2 Amended and Restated Bylaws of Citation (proposed).
** 4.1 Form of Rights Agreement dated as of July 22, 1991 between Citation and
Security Pacific National Bank.
5.1 Opinion of Gibson, Dunn & Crutcher LLP, regarding legality of shares.
8.1 Draft form of opinion of Gray Cary Ware & Freidenrich, A Professional
Corporation regarding tax matters.
8.2 Draft form of opinion of Gibson, Dunn & Crutcher LLP regarding tax
matters.
* 10.1 Agreement of Reinsurance No. 7431 between General Reinsurance Corporation
and Citation Insurance Company ("CIC") dated May 16, 1989 and Endorsement
No. 1 thereto.
**** 10.1.1 Endorsement No. 2 to Agreement of Reinsurance No. 7431 dated November 15,
1994.
*+ 10.2 Agreement of Reinsurance No. 7085 between General Reinsurance Corporation
and CIC dated March 31, 1986 (the "General Reinsurance Agreement") and
Endorsement Nos. 1 through 4 thereto.
+* 10.2.1 Endorsement Nos. 5 and 6 to Agreement of Reinsurance No. 7085.
**** 10.2.2 Endorsements Nos. 7, 8 and 9 to Agreement of Reinsurance No. 7085
effective January 1, 1992, January 1, 1993 and January 1, 1992,
respectively.
* 10.3 Indemnity Agreement, pursuant to the General Reinsurance Agreement dated
April 1, 1987.
* 10.4 Workers' Compensation Excess of Loss Reinsurance Agreement between CIC,
Northwestern National. Title Insurance Company, American Accident
Reinsurance Group and Pinehurst Accident Reinsurance Group dated August
12, 1988, and effective January 1, 1988 (including endorsements thereto),
and Addendum Nos. 1 and 2 thereto.
*** 10.4.1 Endorsement No. 3 to Excess of Loss Reinsurance Agreement dated August
12, 1988.
* 10.5 Casualty Quota Share Reinsurance Treaty between Old Republic Insurance
Company and CIC dated August 6, 1985.
* 10.6 Industrial Aid Aviation and Farm Labor/Land Travel Hard Workers'
Compensation Excess of Loss Reinsurance Agreement between CIC and America
Accident Reinsurance Group dated January 17, 1989, effective March 1,
1988.
-* 10.7 Key Officer Performance Recognition Plan.
* 10.8 Flexible Benefit Plan
</TABLE>
II-2
<PAGE> 355
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------------- -------------------------------------------------------------------------
<C> <S> <C>
-* 10.9 Amended and Restated 1983 Employee Stock Option Plan.
** 10.10 Salary Reduction Profit Sharing Plan and amendments thereto.
****- 10.10.1 Salary Reduction Profit Sharing Plan as amended and restated effective
January 1, 1994 and Amendments Nos. 1 and 2 thereto dated March 13, 1995
and March 15, 1995, respectively.
-* 10.11 Employee Stock Ownership Plan and Trust Agreement.
-*** 10.11.1 Amended Employee Stock Ownership Plan and Trust Agreement.
-++ 10.11.2 Amendment to Employee Stock Ownership Plan dated October 1, 1992.
****- 10.11.3 Amendment to Employee Stock Ownership Plan dated March 15, 1995.
* 10.13 Directors and Officers Liability and Company Reimbursement Insurance
Policy between Citation and Gulf Insurance Company currently in effect,
and Endorsement Nos. 1 through 10 thereto and Renewal Agreement.
**** 10.13.1 Directors and Officers and Company Reimbursement Indemnity Insurance
Policy between Citation and Underwriters at Lloyd's, and Endorsement Nos.
1 through 13 thereto.
**** 10.13.2 Excess Directors and Officers and Company Reimbursement Indemnity Policy
between Citation and certain insurance companies and Endorsement Nos. 1
through 9 thereto.
**** 10.13.3 Endorsement No. 11 to Directors and Officers Liability and Company
Reimbursement Insurance Policy between Citation and Gulf Insurance
Company.
* 10.16 Office Lease between CIC and North Block Partnership dated July, 1990.
*** 10.16.1 Amendments Nos. 1 and 2 to Office Lease between CIC and North Block
Partnership dated January 6, 1992 and February 25, 1992, respectively.
**** 10.16.2 Amendments Nos. 3 and 4 to Office Lease between CIC and North Block
Partnership dated December 6, 1993 and October 4, 1994, respectively.
-* 10.22 1991 Employee Stock Option Plan
-++ 10.23 Citation Insurance Group Severance Plan for Certain Executive Officers,
Senior Management and Key Employees of the Company and its Subsidiaries,
including form of agreement.
-****** 10.24.1 Employment Agreement with Paul M. Bancroft, as amended.
++ 10.25 Aggregate Excess Reinsurance Agreement between Scandinavian Reinsurance
Company and CGIC effective November 1, 1991 and Endorsement Nos. 1 and 2
thereto.
++ 10.26 Casualty Excess of Loss Reinsurance Agreement between National
Reinsurance Corporation and CCIG dated May 5, 1988 and Endorsements Nos.
1 through 5 thereto. Casualty Excess of Loss Reinsurance Agreement
between National Reinsurance Corporation and CCIG effective January 1,
1991 and Endorsement No. 1. Casualty Excess of Loss Reinsurance Agreement
between National Reinsurance Corporation and CCIG effective January 1,
1992 and Endorsements Nos. 1 through 3 and Addendum Nos. l and 2.
++ 10.27 Property First Surplus Reinsurance Agreement between Prudential
Reinsurance Company and CCIG dated May 5, 1988 and Endorsements Nos. 1
through 5 thereto. Casualty Excess of Loss Reinsurance Agreement between
Prudential Reinsurance Company and CCIG effective January 1, 1991,
Casualty Excess of Loss Reinsurance Agreement between Prudential
Reinsurance Company and CCIG effective January 1, 1992 and Endorsements
Nos. 1 through 3 and Addendum Nos. 1 and 2.
-++ 10.28 Citation Unfunded Executive Deferred Compensation Plan.
++ 10.29 Workers' Compensation Excess of Loss Reinsurance Agreement No. 290
between Citation and Northwestern National Life Insurance Company,
Lincoln National Life Insurance Company and Pinehurst Accident
Reinsurance Group dated January 1, 1993.
**** 10.29.1 Termination Endorsement to Workers' Compensation Excess of Loss
Reinsurance Agreement No. 290.
</TABLE>
II-3
<PAGE> 356
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------------- -------------------------------------------------------------------------
<C> <S> <C>
++ 10.30 Agreement of Reinsurance No. 7727 between General Reinsurance Corporation
and CIC dated June 11, 1993 and effective January 1, 1993.
**** 10.30.1 Endorsements Nos. 1, 2 and 3 to Agreement of Reinsurance No. 7727
effective January 1, 1994, January 1, 1993 and January 1, 1995,
respectively.
****** 10.30.2 Endorsement No. 4 to Agreement of Reinsurance No. 7727 effective January
1, 1996.
* 10.31 Form of Indemnity Agreement.
**** 10.32 Commutation Agreement between CNIC and CGIC dated January 19, 1995 and
Amendment No. 1 to Commutation Agreement dated March 15, 1995.
**** 10.33 Purchase Agreement among Citation, ClC and CGIC effective as of March 1,
1995.
**** 10.34 Agreement of Reinsurance No. 7631 between General Reinsurance Corporation
and CIC effective October 1, 1991 and Endorsement Nos. 1 through 3
thereto.
**** 10.35 Workers' Compensation Excess of Loss Reinsurance agreement No. 316
between CIC and Federal Insurance Company effective January 1, 1994.
**** 10.36 Property Facultative Automatic Binding Agreement between the Insurance
Group and Munich American Reinsurance Company and Addendum Nos. 1 through
4 thereto.
**** 10.37 Property Facultative Binding Agreement between the Insurance Group and
American Reinsurance Company and Endorsement Nos. 1 through 5 thereto.
**** 10.38 Indemnity Agreement among Munich American Reinsurance Company, National
Reinsurance Corporation and the Insurance Group effective January 1,
1994.
**** 10.39 Property Surplus Reinsurance Agreement between Munich American
Reinsurance Company and the Insurance Group effective January 1, 1994 and
Addendum No. 1 thereto.
****** 10.39.1 Addendum No. 2 and Termination Addendum to the Property Surplus
Reinsurance Agreement No. 10-2699-0 between the Insurance Group and
Munich American Reinsurance Company effective January 1, 1995 and
December 31, 1995 respectively.
**** 10.40 Property Per Risk Excess of Loss Reinsurance Agreement No. 2462-01
between the Insurance Group and National Reinsurance Corporation
effective January 1, 1994 and Endorsement No. 1 thereto.
****** 10.40.1 Endorsement Nos. 2 and 3 to Property Per Risk Excess of Loss Reinsurance
Agreement No. 2462-01 between the Insurance Group and National
Reinsurance Corporation effective March 31, 1995 and September 31, 1995,
respectively.
**** 10.41 Second Property Per Risk Excess of Loss Reinsurance Agreement No. 2462-02
between the Insurance Group and National Reinsurance Corporation
effective January 1, 1994 and Endorsement No. 1 thereto.
****** 10.41.1 Endorsements Nos. 2 and 3 to the Second Property Per Risk Excess of Loss
Reinsurance Agreement No. 2462-02 between the Insurance Group and
National Reinsurance Corporation effective March 31, 1995 and September
31, 1995 respectively.
**** 10.42 Multiple Line Excess of Loss Reinsurance Agreement No. 2462-04A/04B
between CGIC and National Reinsurance Corporation effective June 24,
1994.
****** 10.42.1 Endorsement Nos. 1 and 2 effective December 15, 1994 and April 1, 1995
respectively to the Multiple Line Excess of Loss Reinsurance Agreement
No. 2462-04A/04B between CGIC, CIC and National Reinsurance Corporation.
**** 10.43 First Property Catastrophe Excess of Loss Reinsurance Agreement No.
2462-03 between the Insurance Group and National Reinsurance Corporation
effective January 1, 1994 and Endorsement No. 1 thereto.
**** 10.44 Excess of Loss Catastrophe Reinsurance Agreement No. 189541 between the
Insurance Group and American Re-Insurance Company effective January 1,
1994 and Endorsement No. 1 thereto.
****** 10.44.1 Endorsement Nos. 2 and 3 to the Excess of Loss Catastrophe Reinsurance
Agreement No. 1895-001 between the Insurance Group and American
Re-insurance Company effective January 1, 1995 and January 1, 1996
respectively.
</TABLE>
II-4
<PAGE> 357
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------------- -------------------------------------------------------------------------
<C> <S> <C>
****** 10.45 Property Catastrophe Excess of Loss Reinsurance Agreement between the
Insurance Group and various reinsurers effective January 1, 1994 and
Endorsement No. 1 thereto.
*****- 10.46 Retirement agreement and mutual release between Citation Insurance Group
and Donald D. Young.
*****- 10.47 Employment agreement between Citation Insurance Group and Donald
Henderson.
****** 10.48 Underlying Multiple Line Excess of Loss Reinsurance Agreement No. 2462-03
between CIC and National Reinsurance Corporation effective March 31, 1995
and Endorsement No. 1 effective September 1, 1995.
****** 10.49 First Property Catastrophe Excess of Loss Reinsurance Agreement No.
2462-03 and Endorsement No. 1 between the Insurance Group and National
Reinsurance Corporation effective January 1, 1995 and September 1, 1995
respectively.
****** 10.50 Property Catastrophe Excess of Loss Reinsurance Agreement between the
Insurance Group and various reinsurers effective January 1, 1995 and
Endorsement No. 1 thereto.
****** 10.51 Agreement of Reinsurance No. 7893 between General Reinsurance Company and
the Insurance Group effective January 1, 1994 and Endorsement Nos. 1, 2
and 3 thereto.
****** 10.52 Excess Casualty and Commercial Umbrella Liability Reinsurance Agreement
No. 1895-0002 between the Insurance Group and American Re-Insurance
Company effective December 31, 1993.
****** 10.53 Directors and Officers and Company Reimbursement Indemnity Insurance
Policy between Citation ad Underwriters at Lloyd's, London and
Endorsement Nos. 1 through 11 thereto.
****** 10.54 Excess Directors and Officers and Company Liability policy between
Citation and certain insurance companies effective October 15,1995 and
Endorsement Nos. 1 through 10 thereto.
*+* 10.55 Consulting Agreements, each dated September 11, 1995, regarding retention
of Ronald Langley and John R. Hart as consultants by PICO
*+ 10.56 Agreement for Purchase and Sale of Stock, dated November 23, 1993 between
GPG, Quaker Holdings Limited and PICO
*+ 10.57 PICO 1995 Stock Option Plan
10.58 Key Employee Severance Agreement and Amendment No. 1 thereto, each made
as of November 1, 1992, between PICO and Richard H. Sharpe; and Schedule
A identifying other substantially identical Key Employee Severance
Agreements between PICO and certain of the executive officers of PICO
10.59 Agreement for Purchase and Sale of Shares, dated May 9, 1996, among PICO,
GPG and TOC.
*+ 10.60 Agreement for the purchase and sale of Certain Assets, dated July 14,
1995 between PICO, PRO and Mutual Assurance, Inc.
*+ 10.61 Stock Purchase Agreement dated March 7, 1995 between Sydney Reinsurance
Corporation and PICO.
*+ 10.62 Letter Agreement, dated September 5, 1995, between PICO, Christopher
Ondaatje and the South East Asia Plantation Corporation Limited.
11.1 Statement Regarding Computation of Per Share Earnings.
++++ 13.1 Citation's Annual Report on Form 10-K for the Year Ended December 31,
1995.
++++ 13.2 Citation's Quarterly Report on Form 10-Q for the Quarter Ended March 31,
1996.
****** 21. Subsidiaries of Citation
23.1 Consent of Deloitte & Touche LLP, independent auditors.
23.2 Consent of Gibson, Dunn & Crutcher LLP (contained in Exhibit 5.1).
23.3 Consent of Coopers and Lybrand, L.L.P.
23.4 Consent of KPMG Peat Marwick Thorne, Chartered Accountants.
23.5 Consent of Gray Cary Ware & Freidenrich regarding Exhibit 8.1 (to be
filed by amendment).
</TABLE>
II-5
<PAGE> 358
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ----------------- -------------------------------------------------------------------------
<C> <S> <C>
23.6 Consent of Gibson Dunn & Crutcher LLP regarding Exhibit 8.2 (to be filed
by amendment).
****** 28. Information from reports furnished to state insurance regulatory
authorities.
99.1 Form of proxy for Citation Meeting.
99.2 Form of proxy for PICO Meeting.
99.3 Director Consents pursuant to Rule 438.
</TABLE>
- ------------------------
<TABLE>
<C> <S>
* Incorporated by reference to exhibit of same number filed with Registration
Statement on Form S-1 (File No. 33-36383), except Exhibit 10.31 which was filed as
Exhibit 28 to such Registration Statement.
** Incorporated by reference to exhibit of same number filed with Form 8-A on July 22,
1961.
*** Incorporated by reference to exhibit of same number filed with 1992 Form 10-K.
**** Incorporated by reference to exhibit of same number filed with 1994 Form 10-K.
***** Incorporated by reference to exhibit of same number filed with June 30, 1995 Form
10-Q.
****** Incorporated by reference to exhibit of same number filed with 1995 Form 10-K.
+ Confidential treatment has been accorded certain information contained in this
exhibit.
++ Incorporated by reference to exhibit bearing the same number filed with Registration
Statement on Form S-4 (File No. 33-64328).
+++ Incorporated by reference to Exhibit 2.1 to Form 8-K dated October 8, 1993.
++++ Filed as Appendix to the prospectus in Part I of this Registration Statement.
*+ Incorporated by reference to exhibit filed with PICO's Registration Statement No.
33-99352 on Form S-1 filed with the SEC on November 14, 1995.
*+* Incorporated by reference to exhibit filed with PICO's Amendment No. 1 to
Registration Statement No. 33-99352 on Form S-1 filed with SEC on January 30, 1996.
- Executive Compensation Plans and Agreements
</TABLE>
II-6
<PAGE> 359
(b) Financial Statement Schedules
The following schedules of Citation and PICO are included in this
Registration Statement on Form S-4 or incorporated by reference. All other
Schedules have been omitted because they are not applicable, or because the
required information is shown in each corporation's respective consolidated
financial statements of notes thereto.
<TABLE>
<C> <S> <C>
CITATION (INCORPORATED BY REFERENCE)
Independent Auditors' Report on Supplemental Schedules as of December 31, 1995
and for the Three Years Ended December 31, 1995
I -- Summary of Investments -- Other than Investments in Related Parties --
December 31, 1995
II -- Condensed Financial Information of Registrant at December 31, 1994 and
1995
and for the Years Ended December 31, 1993, 1994 and 1995
III -- Consolidated Supplementary Insurance Information
IV -- Reinsurance for the Years Ended December 31, 1993, 1994 and 1995
V -- Valuation and Qualifying Accounts and Reserves for the Years Ended
December 31, 1993, 1994 and 1995
VI -- Supplemental Property and Casualty Insurance Information for the Years
Ended December 31, 1993, 1994 and 1995
PICO
I -- Summary of Investments -- Other than Investments in Related Parties
III -- Consolidated Supplementary Insurance Information
V -- Valuation and Qualifying Accounts
</TABLE>
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to offerings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(b) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (a) immediately preceding or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(d) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-7
<PAGE> 360
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Citation has
duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Jose, State of
California, on the 21st day of June, 1996.
By: /s/ DONALD HENDERSON
------------------------------------
Donald Henderson
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Donald Henderson and Robert Erickson, and each of
them, his true and lawful attorney-in-fact and agent, each with full power of
substitution and resubstitution, for him in any and all capacities, to sign any
and all amendments to this Registration Statement and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
either of said attorneys-in-fact and agent, or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereto.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------------- --------------
<C> <S> <C>
/s/ DONALD HENDERSON Director, President and Chief June 21, 1996
- ---------------------------------------- Executive Officer (Principal
Donald Henderson Executive Officer)
/s/ J. PHILIP DINAPOLI Director June 21, 1996
- ----------------------------------------
J. Philip DiNapoli
/s/ THEODORE J. BIAGINI Director June 21, 1996
- ----------------------------------------
Theodore J. Biagini
/s/ MARSHALL J. BURAK Director June 21, 1996
- ----------------------------------------
Marshall J. Burak
/s/ DONALD F. IMWALLE Director June 21, 1996
- ----------------------------------------
Donald F. Imwalle
/s/ LOUIS J. MARIANI, SR. Director June 21, 1996
- ----------------------------------------
Louis J. Mariani, Sr.
/s/ EUGENE A. O'ROURKE Director June 21, 1996
- ----------------------------------------
Eugene A. O'Rourke
</TABLE>
II-8
<PAGE> 361
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------------- --------------
<C> <S> <C>
/s/ LARRY D. RUSSEL Director June 21, 1996
- ----------------------------------------
Larry D. Russel
/s/ JAMES R. BANCROFT Director June 21, 1996
- ----------------------------------------
James R. Bancroft
/s/ PAUL M. BANCROFT Director June 21, 1996
- ----------------------------------------
Paul M. Bancroft
/s/ E. ALEXANDER GLOVER Director June 21, 1996
- ----------------------------------------
E. Alexander Glover
/s/ ROBERT ERICKSON Vice President and Chief Financial June 21, 1996
- ---------------------------------------- Officer (Principal Financial Officer
Robert Erickson and Principal Accounting Officer)
</TABLE>
II-9
<PAGE> 362
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PHYSICIANS INSURANCE COMPANY OF OHIO
Independent Auditors' Report on Supplemental Schedules as of December 31, 1995
and 1994 and for the Three Years Ended December 31, 1995...................... S-2
I -- Summary of Investments -- Other than Investments in Related Parties...... S-3
III -- Consolidated Supplementary Insurance Information......................... S-4
V -- Valuation and Qualifying Accounts........................................ S-7
</TABLE>
S-1
<PAGE> 363
Board of Directors and Shareholders
Physicians Insurance Company of Ohio
Pickerington, Ohio
In connection with our audits of the consolidated financial statements of
Physicians Insurance Company of Ohio and Subsidiaries as of December 31, 1995
and 1994, and for each of the three years in the period ended December 31, 1995,
which financial statements are included in the Prospectus, we have also audited
the financial statement schedules listed in Item 17. herein.
In our opinion, these financial statement schedules, when considered in
relation to the basic financial statements taken as a whole, present fairly, in
all material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
Columbus, Ohio
April 15, 1996
S-2
<PAGE> 364
SCHEDULE I
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
OTHER THAN INVESTMENT IN RELATED PARTIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
AMOUNT AT WHICH
SHOWN IN
TYPE OF INVESTMENT COST(1) VALUE BALANCE SHEET
- ---------------------------------------------------- ------------ ------------ ---------------
<S> <C> <C> <C>
Available-for-Sale Fixed maturities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies.............. $ 32,171,232 $ 32,183,335 $ 32,183,335
Corporate securities................................ 29,729,110 29,987,063 29,987,063
Mortgage-backed securities.......................... 18,196,640 18,173,673 18,173,673
------------ ------------ ------------
Total fixed maturities......................... 80,096,982 80,344,071 80,344,071
Equity securities:
Banks, trusts, and insurance companies............ 10,310,456 10,943,355 10,943,355
Industrial, miscellaneous, and other.............. 55,930,913 90,117,940 90,117,940
------------ ------------ ------------
Total equity securities............................. 66,241,369 101,061,295 101,061,295
Short term investments.............................. 9,162,925 9,162,925 9,162,925
Real estate......................................... 3,038,750 3,038,750 3,038,750
------------ ------------ ------------
Totals......................................... $158,540,026 $193,607,041 $ 193,607,041
============ ============ ============
</TABLE>
- ---------------
(1) Original cost of equity securities, short-term investments and real estate
adjusted for any permanent write downs, and, as to fixed maturities,
original cost reduced by repayments, write downs and adjusted for
amortization of premiums or accrual of discounts.
S-3
<PAGE> 365
SCHEDULE III
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
DECEMBER 31, 1993
<TABLE>
<CAPTION>
OTHER AMORTIZATION
DEFERRED FUTURE POLICY POLICY BENEFITS OF DEFERRED
POLICY BENEFITS CLAIMS & NET LOSSES AND POLICY
ACQUISITION LOSSES, CLAIMS UNEARNED BENEFITS PREMIUM INVESTMENT LOSS ACQUISITION
SEGMENT COSTS LOSS EXPENSES PREMIUMS PAYABLE REVENUE INCOME EXPENSES COSTS
- --------------------- ----------- -------------- -------- -------- ------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Medical professional
liability.......... $ 1,275 $191,735 $19,473 $0 $50,491(1) $ 9,513(1) $ 60,980(1) $3,058(1)
Life and health...... 2,152 47,154 219 0 8,804 3,598 5,388 406
--
------ -------- ------- ------- ------- ------- ------
Total medical
professional
liability and life
and health......... 3,427 238,889 19,692 0 59,295 13,111 66,368 3,464
Other operations..... 2,183 2,725
Discontinued
operations......... (107 ) (78) 1,045
--
------ -------- ------- ------- ------- ------- ------
Total................ $ 3,427 $238,889 $19,692 $0 $61,371 $ 15,758 $ 67,413 $3,464
====== ======== ======= == ======= ======= ======= ======
<CAPTION>
OTHER
OPERATING PREMIUMS
SEGMENT EXPENSES WRITTEN
- --------------------- --------- --------
<S> <C<C> <C>
Medical professional
liability.......... $ 4,197(1) $41,837
Life and health...... 2,927
-------
Total medical
professional
liability and life
and health......... 7,124
Other operations..... 4,086
Discontinued
operations......... (135)
-------
Total................ $11,075
=======
</TABLE>
(1) Included with results of discontinued operations
S-4
<PAGE> 366
SCHEDULE III
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
DECEMBER 31, 1994
<TABLE>
<CAPTION>
OTHER AMORTIZATION
DEFERRED FUTURE POLICY POLICY BENEFITS OF DEFERRED
POLICY BENEFITS CLAIMS & NET LOSSES AND POLICY
ACQUISITION LOSSES, CLAIMS UNEARNED BENEFITS PREMIUM INVESTMENT LOSS ACQUISITION
SEGMENT COSTS LOSS EXPENSES PREMIUMS PAYABLE REVENUE INCOME EXPENSES COSTS
- --------------------- ----------- -------------- -------- -------- ------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Medical professional
liability.......... $ 305 $180,691 $15,919 $0 $20,026(1) $ 10,413(1) $ 11,639(1) $ 817(1)
Life and health...... 2,508 45,874 194 0 3,922 3,691 79 318
--
------ -------- ------- ------- ------- ------- ------
Total medical
professional
liability and life
and health......... 2,813 226,565 16,113 0 23,948 14,104 11,718 1,135
Other operations..... 1,537 1,272
--
------ -------- ------- ------- ------- ------- ------
Total................ $ 2,813 $226,565 $16,113 $0 $25,485 $ 15,376 $ 11,718 $1,135
====== ======== ======= == ======= ======= ======= ======
<CAPTION>
OTHER
OPERATING PREMIUMS
SEGMENT EXPENSES WRITTEN
- --------------------- --------- --------
<S> <C<C> <C>
Medical professional
liability.......... $ 1,721(1) $12,092
Life and health...... 2,569
------
Total medical
professional
liability and life
and health......... 4,290
Other operations..... 3,634
------
Total................ $ 7,924
======
</TABLE>
(1) Included with results of discontinued operations
S-5
<PAGE> 367
SCHEDULE III
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
CONSOLIDATED SUPPLEMENTARY INSURANCE INFORMATION
(IN THOUSANDS)
DECEMBER 31, 1995
<TABLE>
<CAPTION>
OTHER AMORTIZATION
DEFERRED FUTURE POLICY POLICY BENEFITS OF DEFERRED
POLICY BENEFITS CLAIMS & NET LOSSES AND POLICY
ACQUISITION LOSSES, CLAIMS UNEARNED BENEFITS PREMIUM INVESTMENT LOSS ACQUISITION
SEGMENT COSTS LOSS EXPENSES PREMIUMS PAYABLE REVENUE INCOME EXPENSES COSTS
- --------------------- ----------- -------------- -------- -------- ------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Medical professional
liability.......... $ 272 $168,485 $12,985 $0 $17,120(1) $ 5,928(1) $ 21,247(1) $ 723(1)
Life and health...... 2,113 47,553 171 1,870 4,007 701 368
Other Property and
Casualty........... 510 61,312 17,702 2,421 170 1,925
--
------ -------- ------- ------- ------- ------- ------
Total medical
professional
liability, life and
health, and other
property
casualty........... 2,895 277,350 30,858 0 21,411 10,105 23,873 1,091
Other operations..... 5,979 5,110
--
------ -------- ------- ------- ------- ------- ------
Total................ $ 2,895 $277,350 $30,858 $0 $27,390 $ 15,215 $ 23,873 $1,091
====== ======== ======= == ======= ======= ======= ======
<CAPTION>
OTHER
OPERATING PREMIUMS
SEGMENT EXPENSES WRITTEN
- --------------------- --------- --------
<S> <C<C> <C>
Medical professional
liability.......... $ 1,053(1) $13,079
Life and health...... 2,390
Other Property and
Casualty........... 4,282 10,755
-------
Total medical
professional
liability, life and
health, and other
property
casualty........... 7,725
Other operations..... 9,916
-------
Total................ $17,641 $23,834
======= =======
</TABLE>
(1) Included with results of discontinued operations
S-6
<PAGE> 368
SCHEDULE V
PHYSICIANS INSURANCE COMPANY OF OHIO AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
-------------------------
(1) (2)
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
- ---------------------------------- ----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Three months ended March 31, 1996
Allowance for Doubtful Accounts,
net.......................... $ 78,000 $ 4,737 $ 0 $(29,737) $ 53,000
Year-ended December 31, 1995
Allowance for Doubtful Accounts,
net.......................... $ 196,000 $ 11,385 $ 0 $106,615 $ 78,000
Valuation Allowance for Deferred
Federal Income Taxes......... 10,772,320 (8,922,371) (1,849,949) 0 0
Year-ended December 31, 1994
Allowance for Doubtful Accounts,
net.......................... 285,000 (45,796) 0 43,204 196,000
Valuation Allowance for Deferred
Federal Income Taxes......... 13,834,298 (5,317,367) 2,255,389 0 10,772,320
</TABLE>
S-7
<PAGE> 369
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------------- --------------------------------------------------------------
<C> <S> <C> <C>
++ 2.1 Agreement and Plan of Reorganization dated as of June 11, 1993
between Citation and Madison Capital, Inc. including form of
Escrow Agreement, Escrow Representation Agreement, and
Shareholders Voting and Transfer Restriction Agreement.
+++++ 2.2 Agreement and Plan of Reorganization, dated as of May 1, 1996,
among Registrant, Citation Holdings, Inc. and Physicians
Insurance Company of Ohio and related Merger Agreement.
* 3.1 Articles of Incorporation of Citation.
* 3.1.1 Certificate of Determination of Series A Junior Participating
Cumulative Preferred Stock.
++ 3.1.2 Certificate of Amendment to Articles of Incorporation of
Citation.
+++ 3.1.3 Agreement of Merger of Madison Capital, Inc into Citation,
dated October 4, 1993.
+++++ 3.1.4 Amended and Restated Articles of Incorporation of Citation
(proposed).
**** 3.2.1 Amended and Restated By-Laws of Citation (current).
+++++ 3.2.2 Amended and Restated Bylaws of Citation (proposed).
** 4.1 Form of Rights Agreement dated as of July 22, 1991 between
Citation and Security Pacific National Bank.
5.1 Opinion of Gibson, Dunn & Crutcher LLP, regarding legality of
shares (to be provided by amendment).
8.1 Draft form of opinion of Gray Cary Ware & Freidenrich, A
Professional Corporation regarding tax matters.
8.2 Draft form of opinion of Gibson, Dunn & Crutcher LLP regarding
tax matters.
* 10.1 Agreement of Reinsurance No. 7431 between General Reinsurance
Corporation and Citation Insurance Company ("CIC") dated May
16, 1989 and Endorsement No. 1 thereto.
**** 10.1.1 Endorsement No. 2 to Agreement of Reinsurance No. 7431 dated
November 15, 1994.
*+ 10.2 Agreement of Reinsurance No. 7085 between General Reinsurance
Corporation and CIC dated March 31, 1986 (the "General
Reinsurance Agreement") and Endorsement Nos. 1 through 4
thereto.
+* 10.2.1 Endorsement Nos. 5 and 6 to Agreement of Reinsurance No. 7085.
**** 10.2.2 Endorsements Nos. 7, 8 and 9 to Agreement of Reinsurance No.
7085 effective January 1, 1992, January 1, 1993 and January 1,
1992, respectively.
* 10.3 Indemnity Agreement, pursuant to the General Reinsurance
Agreement dated April 1, 1987.
* 10.4 Workers' Compensation Excess of Loss Reinsurance Agreement
between CIC, Northwestern National. Title Insurance Company,
American Accident Reinsurance Group and Pinehurst Accident
Reinsurance Group dated August 12, 1988, and effective January
1, 1988 (including endorsements thereto), and Addendum Nos. 1
and 2 thereto.
*** 10.4.1 Endorsement No. 3 to Excess of Loss Reinsurance Agreement
dated August 12, 1988.
</TABLE>
<PAGE> 370
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------------- --------------------------------------------------------------
<C> <S> <C> <C>
* 10.5 Casualty Quota Share Reinsurance Treaty between Old Republic
Insurance Company and CIC dated August 6, 1985.
* 10.6 Industrial Aid Aviation and Farm Labor/Land Travel Hard
Workers' Compensation Excess of Loss Reinsurance Agreement
between CIC and America Accident Reinsurance Group dated
January 17, 1989, effective March 1, 1988.
-* 10.7 Key Officer Performance Recognition Plan.
* 10.8 Flexible Benefit Plan
-* 10.9 Amended and Restated 1983 Employee Stock Option Plan.
** 10.10 Salary Reduction Profit Sharing Plan and amendments thereto.
****- 10.10.1 Salary Reduction Profit Sharing Plan as amended and restated
effective January 1, 1994 and Amendments Nos. 1 and 2 thereto
dated March 13, 1995 and March 15, 1995, respectively.
-* 10.11 Employee Stock Ownership Plan and Trust Agreement.
-*** 10.11.1 Amended Employee Stock Ownership Plan and Trust Agreement.
-++ 10.11.2 Amendment to Employee Stock Ownership Plan dated October 1,
1992.
****- 10.11.3 Amendment to Employee Stock Ownership Plan dated March 15,
1995.
* 10.13 Directors and Officers Liability and Company Reimbursement
Insurance Policy between Citation and Gulf Insurance Company
currently in effect, and Endorsement Nos. 1 through 10 thereto
and Renewal Agreement.
**** 10.13.1 Directors and Officers and Company Reimbursement Indemnity
Insurance Policy between Citation and Underwriters at Lloyd's,
and Endorsement Nos. 1 through 13 thereto.
**** 10.13.2 Excess Directors and Officers and Company Reimbursement
Indemnity Policy between Citation and certain insurance
companies and Endorsement Nos. 1 through 9 thereto.
**** 10.13.3 Endorsement No. 11 to Directors and Officers Liability and
Company Reimbursement Insurance Policy between Citation and
Gulf Insurance Company.
* 10.16 Office Lease between CIC and North Block Partnership dated
July, 1990.
*** 10.16.1 Amendments Nos. 1 and 2 to Office Lease between CIC and North
Block Partnership dated January 6, 1992 and February 25, 1992,
respectively.
**** 10.16.2 Amendments Nos. 3 and 4 to Office Lease between CIC and North
Block Partnership dated December 6, 1993 and October 4, 1994,
respectively.
-* 10.22 1991 Employee Stock Option Plan
-++ 10.23 Citation Insurance Group Severance Plan for Certain Executive
Officers, Senior Management and Key Employees of the Company
and its Subsidiaries, including form of agreement.
-****** 10.24.1 Employment Agreement with Paul M. Bancroft, as amended.
++ 10.25 Aggregate Excess Reinsurance Agreement between Scandinavian
Reinsurance Company and CGIC effective November 1, 1991 and
Endorsement Nos. 1 and 2 thereto.
</TABLE>
<PAGE> 371
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------------- --------------------------------------------------------------
<C> <S> <C> <C>
++ 10.26 Casualty Excess of Loss Reinsurance Agreement between National
Reinsurance Corporation and CCIG dated May 5, 1988 and
Endorsements Nos. 1 through 5 thereto. Casualty Excess of Loss
Reinsurance Agreement between National Reinsurance Corporation
and CCIG effective January 1, 1991 and Endorsement No. 1.
Casualty Excess of Loss Reinsurance Agreement between National
Reinsurance Corporation and CCIG effective January 1, 1992 and
Endorsements Nos. 1 through 3 and Addendum Nos. l and 2.
++ 10.27 Property First Surplus Reinsurance Agreement between
Prudential Reinsurance Company and CCIG dated May 5, 1988 and
Endorsements Nos. 1 through 5 thereto. Casualty Excess of Loss
Reinsurance Agreement between Prudential Reinsurance Company
and CCIG effective January 1, 1991, Casualty Excess of Loss
Reinsurance Agreement between Prudential Reinsurance Company
and CCIG effective January 1, 1992 and Endorsements Nos. 1
through 3 and Addendum Nos. 1 and 2.
-++ 10.28 Citation Unfunded Executive Deferred Compensation Plan.
++ 10.29 Workers' Compensation Excess of Loss Reinsurance Agreement No.
290 between Citation and Northwestern National Life Insurance
Company, Lincoln National Life Insurance Company and Pinehurst
Accident Reinsurance Group dated January 1, 1993.
**** 10.29.1 Termination Endorsement to Workers' Compensation Excess of
Loss Reinsurance Agreement No. 290.
++ 10.30 Agreement of Reinsurance No. 7727 between General Reinsurance
Corporation and CIC dated June 11, 1993 and effective January
1, 1993.
**** 10.30.1 Endorsements Nos. 1, 2 and 3 to Agreement of Reinsurance No.
7727 effective January 1, 1994, January 1, 1993 and January 1,
1995, respectively.
****** 10.30.2 Endorsement No. 4 to Agreement of Reinsurance No. 7727
effective January 1, 1996.
* 10.31 Form of Indemnity Agreement.
**** 10.32 Commutation Agreement between CNIC and CGIC dated January 19,
1995 and Amendment No. 1 to Commutation Agreement dated March
15, 1995.
**** 10.33 Purchase Agreement among Citation, ClC and CGIC effective as
of March 1, 1995.
**** 10.34 Agreement of Reinsurance No. 7631 between General Reinsurance
Corporation and CIC effective October 1, 1991 and Endorsement
Nos. 1 through 3 thereto.
**** 10.35 Workers' Compensation Excess of Loss Reinsurance agreement No.
316 between CIC and Federal Insurance Company effective
January 1, 1994.
**** 10.36 Property Facultative Automatic Binding Agreement between the
Insurance Group and Munich American Reinsurance Company and
Addendum Nos. 1 through 4 thereto.
**** 10.37 Property Facultative Binding Agreement between the Insurance
Group and American Reinsurance Company and Endorsement Nos. 1
through 5 thereto.
</TABLE>
<PAGE> 372
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------------- --------------------------------------------------------------
<C> <S> <C> <C>
**** 10.38 Indemnity Agreement among Munich American Reinsurance Company,
National Reinsurance Corporation and the Insurance Group
effective January 1, 1994.
**** 10.39 Property Surplus Reinsurance Agreement between Munich American
Reinsurance Company and the Insurance Group effective January
1, 1994 and Addendum No. 1 thereto.
****** 10.39.1 Addendum No. 2 and Termination Addendum to the Property
Surplus Reinsurance Agreement No. 10-2699-0 between the
Insurance Group and Munich American Reinsurance Company
effective January 1, 1995 and December 31, 1995 respectively.
**** 10.40 Property Per Risk Excess of Loss Reinsurance Agreement No.
2462-01 between the Insurance Group and National Reinsurance
Corporation effective January 1, 1994 and Endorsement No. 1
thereto.
****** 10.40.1 Endorsement Nos. 2 and 3 to Property Per Risk Excess of Loss
Reinsurance Agreement No. 2462-01 between the Insurance Group
and National Reinsurance Corporation effective March 31, 1995
and September 31, 1995, respectively.
**** 10.41 Second Property Per Risk Excess of Loss Reinsurance Agreement
No. 2462-02 between the Insurance Group and National
Reinsurance Corporation effective January 1, 1994 and
Endorsement No. 1 thereto.
****** 10.41.1 Endorsements Nos. 2 and 3 to the Second Property Per Risk
Excess of Loss Reinsurance Agreement No. 2462-02 between the
Insurance Group and National Reinsurance Corporation effective
March 31, 1995 and September 31, 1995 respectively.
**** 10.42 Multiple Line Excess of Loss Reinsurance Agreement No.
2462-04A/04B between CGIC and National Reinsurance Corporation
effective June 24, 1994.
****** 10.42.1 Endorsement Nos. 1 and 2 effective December 15, 1994 and April
1, 1995 respectively to the Multiple Line Excess of Loss
Reinsurance Agreement No. 2462-04A/04B between CGIC, CIC and
National Reinsurance Corporation.
**** 10.43 First Property Catastrophe Excess of Loss Reinsurance
Agreement No. 2462-03 between the Insurance Group and National
Reinsurance Corporation effective January 1, 1994 and
Endorsement No. 1 thereto.
**** 10.44 Excess of Loss Catastrophe Reinsurance Agreement No. 189541
between the Insurance Group and American Re-Insurance Company
effective January 1, 1994 and Endorsement No. 1 thereto.
****** 10.44.1 Endorsement Nos. 2 and 3 to the Excess of Loss Catastrophe
Reinsurance Agreement No. 1895-001 between the Insurance Group
and American Re-insurance Company effective January 1, 1995
and January 1, 1996 respectively.
****** 10.45 Property Catastrophe Excess of Loss Reinsurance Agreement
between the Insurance Group and various reinsurers effective
January 1, 1994 and Endorsement No. 1 thereto.
*****- 10.46 Retirement agreement and mutual release between Citation
Insurance Group and Donald D. Young.
*****- 10.47 Employment agreement between Citation Insurance Group and
Donald Henderson.
</TABLE>
<PAGE> 373
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------------- --------------------------------------------------------------
<C> <S> <C> <C>
****** 10.48 Underlying Multiple Line Excess of Loss Reinsurance Agreement
No. 2462-03 between CIC and National Reinsurance Corporation
effective March 31, 1995 and Endorsement No. 1 effective
September 1, 1995.
****** 10.49 First Property Catastrophe Excess of Loss Reinsurance
Agreement No. 2462-03 and Endorsement No. 1 between the
Insurance Group and National Reinsurance Corporation effective
January 1, 1995 and September 1, 1995 respectively.
****** 10.50 Property Catastrophe Excess of Loss Reinsurance Agreement
between the Insurance Group and various reinsurers effective
January 1, 1995 and Endorsement No. 1 thereto.
****** 10.51 Agreement of Reinsurance No. 7893 between General Reinsurance
Company and the Insurance Group effective January 1, 1994 and
Endorsement Nos. 1, 2 and 3 thereto.
****** 10.52 Excess Casualty and Commercial Umbrella Liability Reinsurance
Agreement No. 1895-0002 between the Insurance Group and
American Re-Insurance Company effective December 31, 1993.
****** 10.53 Directors and Officers and Company Reimbursement Indemnity
Insurance Policy between Citation ad Underwriters at Lloyd's,
London and Endorsement Nos. 1 through 11 thereto.
****** 10.54 Excess Directors and Officers and Company Liability policy
between Citation and certain insurance companies effective
October 15, 1995 and Endorsement Nos. 1 through 10 thereto.
*+* 10.55 Consulting Agreements, each dated September 11, 1995,
regarding retention of Ronald Langley and John R. Hart as
consultants by PICO
*+ 10.56 Agreement for Purchase and Sale of Stock, dated November 23,
1993 between GPG, Quaker Holdings, Inc. and PICO
*+ 10.57 PICO 1995 Stock Option Plan
10.58 Key Employee Severance Agreement and Amendment No. 1 thereto,
each made as of November 1, 1992, between PICO and Richard H.
Sharpe; and Schedule A identifying other substantially
identical Key Employee Severance Agreements between PICO and
certain of the executive officers of PICO
10.59 Agreement for Purchase and Sale of Shares, dated May 9, 1996,
among PICO, GPG and TOC.
*+ 10.60 Agreement for the purchase and sale of Certain Assets, dated
July 14, 1995 between PICO, PRO and Mutual Assurance, Inc.
*+ 10.61 Stock Purchase Agreement dated March 7, 1995 between Sydney
Reinsurance Corporation and PICO.
*+ 10.62 Letter Agreement, dated September 5, 1995, between PICO,
Christopher Ondaatje and the South East Asia Plantation
Corporation Limited.
11.1 Statement Regarding Computation of Per Share Earnings.
+++++ 13.1 Citation's Annual Report on Form 10-K for the Year Ended
December 31, 1995.
+++++ 13.2 Citation's Quarterly Report on Form 10-Q for the Quarter Ended
March 31, 1996.
****** 21. Subsidiaries of Citation
23.1 Consent of Deloitte & Touche LLP, independent auditors.
23.2 Consent of Gibson, Dunn & Crutcher LLP (contained in Exhibit
5.1).
</TABLE>
<PAGE> 374
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------------- --------------------------------------------------------------
<C> <S> <C> <C>
23.3 Consent of Coopers and Lybrand, L.L.P.
23.4 Consent of KPMG Peat Marwick Thorne, Chartered Accountants.
23.5 Consent of Gray Cary Ware & Freidenrich regarding Exhibit 8.1
(to be filed by amendment).
23.6 Consent of Gibson, Dunn & Crutcher LLP regarding Exhibit 8.2
(to be filed by amendment).
****** 28. Information from reports furnished to state insurance
regulatory authorities.
99.1 Form of proxy for Citation Meeting.
99.2 Form of proxy for PICO Meeting.
99.3 Director Consents pursuant to Rule 438.
</TABLE>
- ------------------------
<TABLE>
<C> <S>
* Incorporated by reference to exhibit of same number filed with Registration
Statement on Form S-1 (File No. 33-36383), except Exhibit 10.31 which was filed as
Exhibit 28 to such Registration Statement.
** Incorporated by reference to exhibit of same number filed with Form 8-A on July 22,
1961.
*** Incorporated by reference to exhibit of same number filed with 1992 Form 10-K.
**** Incorporated by reference to exhibit of same number filed with 1994 Form 10-K.
***** Incorporated by reference to exhibit of same number filed with June 30, 1995 Form
10-Q.
****** Incorporated by reference to exhibit of same number filed with 1995 Form 10-K.
+ Confidential treatment has been accorded certain information contained in this
exhibit.
++ Incorporated by reference to exhibit bearing the same number filed with Registration
Statement on Form S-4 (File No. 33-64328).
+++ Incorporated by reference to Exhibit 2.1 to Form 8-K dated October 8, 1993.
++++ Filed as Appendix to the prospectus in Part I of this Registration Statement.
*+ Incorporated by reference to exhibit filed with PICO's Registration Statement No.
33-99352 on Form S-1 filed with the SEC on November 14, 1995.
*+* Incorporated by reference to exhibit filed with PICO's Amendment No. 1 to
Registration Statement No. 33-99352 on Form S-1 filed with SEC on January 30, 1996.
- Executive Compensation Plans and Agreements
</TABLE>
<PAGE> 1
EXHIBIT 5.1
[GIBSON, DUNN & CRUTCHER LLP Letterhead]
June 24, 1996
Citation Insurance Group
One Almaden Boulevard, Suite 300
San Jose, California 95113-2213
Re: Registration Statement on Form S-4
of Citation Insurance Group
Ladies and Gentlemen:
We have acted as counsel for Citation Insurance Group, a California
corporation (the "Company"), in connection with the preparation of the
Registration Statement on Form S-4 (the "Registration Statement"), which
registers under the Securities Act of 1933, as amended (the "Act"), up to
35,018,370 shares of the Company's Common Stock (the "Shares"), to be issued to
the shareholders of Physicians Insurance Company of Ohio, an Ohio corporation
("PICO"), in connection with the proposed merger (the "Merger") of Citation
Holdings, Inc., an Ohio corporation and wholly owned subsidiary of the Company,
with and into PICO.
For purposes of rendering this opinion, we have made such legal and
factual examinations as we have deemed necessary under the circumstances and,
as part of such examination, we have examined, among other things, originals
and copies, certified or otherwise, identified to our satisfaction, of such
documents, corporate records and other instruments as we have deemed necessary
or appropriate. For the purposes of such examination, we have assumed the
genuineness of all signatures on original documents and the conformity to
original documents of all copies submitted to us.
On the basis of and in reliance upon the foregoing examinations and
assumptions, we are of the opinion that, assuming the Registration Statement
has become effective pursuant to the provisions of the Securities Act of 1933,
as amended, the shares of Common Stock being issued and sold by the Company,
when issued in accordance with the Registration Statement, will be validly
issued, fully paid and nonassessable.
<PAGE> 2
GIBSON, DUNN & CRUTCHER LLP
June 24, 1996
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, and we further consent to the use of our name under the
caption "Legal Matters" in the Registration Statement and the Joint Proxy
Statement/Prospectus which is a part thereof.
Very truly yours,
GIBSON, DUNN & CRUTCHER LLP
LC/GTD
<PAGE> 1
EXHIBIT 8.1
[Gray Cary Ware & Freidenrich Letterhead]
June , 1996
Physicians Insurance Company of Ohio
P.O. Box 1449
Columbus, OH 43216
Ladies and Gentlemen:
We have acted as special counsel to Physicians Insurance Company of Ohio,
an Ohio corporation ("PICO"), in connection with (i) the Merger, as defined and
described in the Agreement and Plan of Reorganization by and among PICO,
Citation Insurance Group, a California corporation ("Citation"), and Citation
Holdings, Inc., an Ohio corporation and wholly owned subsidiary of Citation
("Holdings"), dated as of May 1, 1996 (the "Merger Agreement"), and (ii) the
preparation and filing with the Securities and Exchange Commission of a Joint
Proxy Statement/Prospectus under the Securities Act of 1933, as amended (the
"Proxy Statement/Prospectus"). Unless otherwise indicated, each capitalized term
has the meaning ascribed to it in the Merger Agreement.
If the Merger is consummated on the terms and subject to the conditions set
forth in the Merger Agreement, then (i) PICO will become a wholly owned
subsidiary of Citation, and (ii) holders of shares of PICO Class A Common Stock
("Pico Stock"), who together hold all of the issued and outstanding shares of
PICO, will be entitled to receive for each share of PICO Stock held by them,
other than cash in lieu of a fractional share or shares as to which dissenters'
rights have been perfected under applicable law, that number of shares of Stock
of Citation determined pursuant to the Exchange Ratio. The Exchange Ratio is
determined pursuant to Section 1.5(b) of the Merger Agreement.
In connection with this opinion, we have examined and are familiar with
originals and copies, certified or otherwise identified to our satisfaction, of
(i) the Proxy Statement/Prospectus, and (ii) such other documents as we have
deemed necessary or appropriate in order to enable us to render the opinion
below. In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies, and the
authenticity of the originals of such latter documents.
Based upon and subject to (i) the Merger being consummated in the manner
described in the Merger Agreement, (ii) the accuracy of the Proxy
Statement/Prospectus and facts concerning the Merger that have come to our
attention during our engagement, (iii) certain representations made by PICO,
Citation, Holdings and PICO shareholders pursuant to the Merger Agreement or in
connection with the issuance of our opinion, and (iv) the Continuity of Interest
Certificate executed by Guinness Peat Group PLC on May , 1996, the description
in the Proxy Statement/Prospectus under the heading "Certain Federal Income Tax
Consequences," although general in nature, fairly and accurately sets forth
certain of the federal income tax consequences to PICO and their shareholders
resulting from the Merger. We express no opinion as to whether such description
addresses all of the United States federal income tax consequences of the Merger
that may be applicable to PICO, Citation, Holdings, or to any particular PICO
shareholder. In addition, we express no opinion as to the United States federal,
state, or local, or foreign or other tax consequences, other than as set forth
in the Proxy Statement/Prospectus under the heading "Certain Federal Income Tax
Consequences."
<PAGE> 2
Physicians Insurance Company of Ohio
June , 1996
Page 2
This letter is furnished to you solely for use in connection with the
Merger, as described in the Merger Agreement, and is not to be used, circulated,
quoted, or otherwise referred to for any other purposes without our express
written permission. We expressly disclaim any obligation to update this opinion
after the date hereof for any reason, including but not limited to any new or
changed facts or law which come to our attention after the date hereof.
We hereby consent to the use of this opinion as an exhibit to the Proxy
Statement/Prospectus and to the reference to our firm under the heading "Certain
Federal Income Tax Consequences" in the Proxy Statement/Prospectus. In giving
such consent, we do not thereby admit that we are in the category of persons
whose consent is required under Section 7 of the Securities Act of 1933.
Very truly yours,
--------------------------------------
GRAY CARY WARE & FREIDENRICH
A Professional Corporation
<PAGE> 1
[GIBSON, DUNN & CRUTCHER LLP LETTERHEAD]
EXHIBIT 8.2
DRAFT
, 1996
CITATION INSURANCE GROUP
ONE ALMADEN BOULEVARD, SUITE 300
SAN JOSE, CALIFORNIA 95113
LADIES AND GENTLEMEN:
We have acted as special counsel to Citation Insurance Group, a California
corporation ("Citation"), in connection with (i) the Merger, as defined and
described in the Agreement and Plan of Reorganization by and among Physicians
Insurance Company of Ohio, an Ohio corporation ("PICO"), Citation and Citation
Holdings, Inc., an Ohio corporation and wholly owned subsidiary of Citation
("Holdings"), dated as of May 1, 1996 (the "Merger Agreement"), and (ii) the
preparation and filing with the Securities and Exchange Commission of a Joint
Proxy Statement/Prospectus under the Securities Act of 1933, as amended (the
"Proxy Statement/Prospectus"). Unless otherwise indicated, each capitalized term
used herein has the meaning ascribed to it in the Merger Agreement.
If the Merger is consummated on the terms and subject to the conditions set
forth in the Merger Agreement, then (i) PICO will become a wholly owned
subsidiary of Citation, and (ii) holders of shares of PICO Class A Common Stock
("PICO Stock"), who together hold all of the issued and outstanding shares of
PICO, will be entitled to receive for each share of PICO Stock held by them,
other than cash in lieu of a fractional share or shares as to which dissenters'
rights have been perfected under applicable law, that number of shares of Common
Stock of Citation determined pursuant to the Exchange Ratio. The Exchange Ratio
is calculated as provided in Section 1.5(b) of the Merger Agreement.
In connection with this opinion, we have examined and are familiar with
originals and copies, certified or otherwise identified to our satisfaction, of
(i) the Proxy Statement/Prospectus, and (ii) such other documents as we have
deemed necessary or appropriate in order to enable us to render the opinion
below. In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies, and the
authenticity of the originals of such latter documents.
Based upon and subject to (i) the Merger being consummated in the manner
described in the Merger Agreement, (ii) the accuracy of the Proxy
Statement/Prospectus and facts concerning the Merger that have come to our
attention during our engagement, (iii) certain representations made by PICO,
Citation, Holdings and PICO shareholders pursuant to the Merger Agreement or in
connection with the issuance of our opinion, and (iv) the Continuity of Interest
Certificate executed by Guinness Peat Group PLC on May , 1996, the description
in the Proxy Statement/Prospectus under the heading "Certain Federal Income Tax
Consequences," although general in nature, fairly and accurately sets forth
certain of the federal income tax consequences to Holdings, Citation and
Citation shareholders from the Merger. We express no opinion as to whether such
description addresses all of the United States federal income tax consequences
of the Merger that may be applicable to Citation or Holdings. In addition, we
express no opinion as to the United States federal, state, or local, or foreign
or other tax consequences, other than as set forth in the Proxy
Statement/Prospectus under the heading "Certain Federal Income Tax
Consequences."
<PAGE> 2
Citation Insurance Group
, 1996
Page 2
This letter is furnished to you solely for use in connection with the
Merger, as described in the Merger Agreement, and is not to be used, circulated,
quoted, or otherwise referred to for any other purposes without our express
written permission. We expressly disclaim any obligation to update this opinion
after the date hereof for any reason, including but not limited to any new or
changed facts or law which come to our attention after the date hereof.
We hereby consent to the use of this opinion as an exhibit to the Proxy
Statement/Prospectus and to the reference to our firm under the heading "Certain
Federal Income Tax Consequences" in the Proxy Statement/Prospectus.
Very truly yours,
--------------------------------------
Gibson, Dunn & Crutcher LLP
<PAGE> 1
EXHIBIT 10.58
KEY EMPLOYEE SEVERANCE AGREEMENT
THIS AGREEMENT made as of the 1st day of November, 1992, by and between
PHYSICIANS INSURANCE COMPANY OF OHIO, an Ohio corporation (the "Company"), and
Rich Sharpe (the "Employee").
W I T N E S S E T H :
WHEREAS, the Company has been advised that its majority shareholder, the
Ohio State Medical Association ("OSMA"), has entered into a letter of intent to
sell its controlling block of Class B Common Shares to The PIE Mutual Insurance
Company ("PIE"); and
WHEREAS, the Board of Directors of the Company has appointed a Special
Committee to evaluate the proposed sale by OSMA to PIE and to take such action
as may be necessary to preserve the business of PICO and the continuity of its
management during the pendency of the proposed sale; and
WHEREAS, the Special Committee believes it is imperative that the Company
and the Board of Directors be able to rely upon Employee to continue in
Employee's position, and that the Company be able to rely upon Employee's
objective advice, if requested by the Company, as to the best interests of the
Company and its shareholders without concern that Employee might be distracted
by the personal economic uncertainties and risks created by such proposal; and
WHEREAS, in connection with the evaluation of the proposed sale by OSMA to
PIE or any alternative transactions which may hereafter be presented, in
addition to Employee's regular duties, Employee may be called upon to assist in
the assessment of such proposals, to advise management, the Special Committee
and the Board of Directors as to whether such proposal would be in the best
interests of the Company and its shareholders, and to perform such other duties
as the Board may determine appropriate; and
WHEREAS, the Special Committee has approved the Company entering into
severance agreements with certain key employees of the Company, including
Employee;
NOW, THEREFORE, to assure the Company that it will have the continued
dedication of Employee and the availability of Employee's advice and counsel
notwithstanding the possibility, threat or occurrence of a bid or proposal to
take over control of the Company, and to induce Employee to remain in the employ
of the Company throughout the pendency of such proposal, and for other good and
valuable considerations, the Company and Employee agree as follows:
1. Services During Certain Events. Employee agrees not to leave the employ
of the Company voluntarily, without the prior consent of the Company, other than
by reason of retirement at or after Employee's normal retirement date, and to
render the services contemplated in the recitals to this Agreement, until
(a) The proposed sale by OSMA to PIE is abandoned or terminated; or
(b) In the event a third person, corporation or group begins a tender
or exchange offer, circulates a proxy to shareholders, or takes other steps
to effect a Change of Control (as hereafter defined), such efforts to
effect a Change of Control are abandoned or terminated; or
(c) A Change of Control has occurred.
2.Termination After Change of Control.
(a) In the event Employee's employment with the Company shall be
terminated at any time during the twenty-four (24) month period following a
Change of Control, either by the Company for any reason other than for
serious Cause (as herein defined) or by Employee for Good Reason (as herein
defined), then Employee shall receive (i) payment for services rendered
prior to the date of termination based on
<PAGE> 2
Employee's then current base compensation rate and (ii) Employee's
compensation will continue at the same rate for the longer of (A) the
period remaining between the termination date and the second anniversary of
the Change of Control or (B) a period of six (6) months. To the extent
Employee shall receive compensation from other employment for services
rendered during the period specified in (A) or (B) above, whichever is
applicable, the amount payable pursuant to (ii) above shall be
correspondingly reduced. The preceding sentence shall not be construed as
requiring Employee to seek other employment prior to the end of the period
specified in (A) or (B).
(b) For purposes hereof, a termination by the Company for "Serious Cause"
shall mean and be limited to termination by the Company by reason of the
Employee's:
(i) Grave misconduct, such as misappropriation of funds or property
of the Company, theft or fraudulent misconduct; or
(ii) Conflict of interest by attempting to obtain personal profit
from any transaction in which Employee has an interest which is adverse
to that of the Company unless Employee has first obtained the consent of
the Company;
and shall not include termination by reason of:
(A) negligence or bad judgment of Employee; or
(B) any act or omission of Employee without intent of personal
profit or believed by Employee to be in or not adverse to the best
interests of the Company.
(c) For purposes hereof, a termination by Employee for "Good Reason"
shall mean and be limited to voluntary termination by Employee following:
(i) A reduction in Employee's compensation (including bonus
practices) or a change in benefits, or decrease in duties or
responsibilities in connection with the Employee's employment by the
Company which, in either case, is materially less favorable than was
that which was in effect immediately prior to the Change of Control; or
(ii) Employee's transfer outside the Central Ohio area.
(d) For purposes hereof, a "Change of Control" shall be deemed to have
occurred if, after the date first written above:
(i) OSMA votes its shares in an election of Directors or on a
proposal to remove Directors with the result that the persons who are
Class A Directors of the Company immediately prior to such action cease
to constitute a majority of the Class A Directors of the Company; or
(ii) Any Person (as such term is used in Sections 3(a)(9) and
14(d)(2) of the Securities Exchange Act of 1934, as amended) other than
OSMA at any time in any manner acquires ownership of any of the Class B
Common Shares of the Company or of shares of any class of the Company
possessing in the aggregate more than 50% of the voting rights of the
Company; or
(iii) The Company sells all or substantially all of its assets,
whether in one or a related series of transactions.
3. Severability. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
only to the extent of such prohibition or unenforceability without invalidating
or affecting the remaining provisions hereof. Any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
4. Controlling Law. This Agreement shall in all respects be governed by,
and construed in accordance with, the laws of the State of Ohio.
2
<PAGE> 3
5. Termination.
(a) This Agreement shall terminate if the Board of Directors
determines that Employee is no longer a key employee and so notifies
Employee; provided that such determination shall not be made, and if made
shall have no effect:
(i) During the period from the date first above written until, in
the opinion of the Board or the Special Committee, the proposed sale of
OSMA to PIE has been abandoned or terminated; or
(ii) During any period when the Company has knowledge that any
third person has taken steps reasonably calculated to effect a Change of
Control until, in the opinion of the Board or the Special Committee, the
third person has abandoned or terminated its efforts to effect such
Change of Control; or
(iii) After a Change of Control.
Any decision by the Board of Directors or the Special Committee that the
proposed sale by OSMA to PIE has been abandoned or terminated or that any
third person has abandoned or terminated its efforts to effect a Change of
Control shall be conclusive and binding on Employee.
(b) This Agreement shall not be terminated by any consolidation or
merger in which the Company is not the surviving corporation, by a transfer
of all or substantially all of the assets of the Company, or by a Change of
Control of the Company. In the event of any consolidation, merger, transfer
of assets, or Change of Control, the Company shall require that the new or
surviving corporation, transferee of the Company's assets or controlling
shareholder be bound by and benefit from the provisions of this Agreement
as a condition for entering into the transaction; and the Company shall
take all actions reasonably necessary to accomplish this result.
6. Miscellaneous. Except as otherwise specified herein, neither this
Agreement nor its operation shall in any way affect the right of the Company to
dismiss or discharge Employee at any time with or without cause.
This Agreement shall not affect any other agreement to which Employee is a
party relating to Employee's employment by the Company (including but not
limited to any agreement not to compete with the Company and/or to keep
confidential information regarding the Company), nor shall this Agreement reduce
any benefits or affect any rights Employee now has or may hereafter acquire
pursuant to the provisions of any employee benefit plan of the Company.
The obligations hereunder of the Company shall be wholly unsecured. The
Company shall be under no obligation to reserve, segregate or earmark any cash
or other property for the payment of any amounts under this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
PHYSICIANS INSURANCE COMPANY
OF OHIO
By:
------------------------------------
Its
------------------------------------
--------------------------------------
Rich Sharpe (Employee)
3
<PAGE> 4
AMENDMENT NO. 1 TO
KEY EMPLOYEE SEVERANCE AGREEMENT
This Amendment No. 1 to the Key Employee Severance Agreement made as of the
1st day of November, 1992 (the "Severance Agreement"), by and between PHYSICIANS
INSURANCE COMPANY OF OHIO, an Ohio corporation (the "Company") and the employee
signing below (the "Employee").
For good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged, the Company and Employee hereby agree that subparagraph
2(d) of the Severance Agreement is hereby amended to read as follows:
"(d) For purposes hereof, a "Change of Control" shall be deemed to have
occurred if, after the date first written above:
(i) OSMA votes its shares on a proposal to remove Directors with the
result that more than two of the persons who are Class A Directors (as
defined in the Regulations) of the Company immediately prior to such action
cease to be Class A Directors of the Company; or
(ii) OSMA votes its shares in an election of Class A Directors for any
person other than the nominees selected by a committee of the Board of
Directors of the Company a majority of the members of which are neither
employees of the Company or OSMA nor current or former officers of OSMA; or
(iii) Any Person (as such term is used in Sections 3(a)(9) and
14(d)(2) of the Securities Exchange Act of 1934, as amended) other than
OSMA or the Company at any time in any manner acquires ownership of any of
the Class B Common Shares of the Company or of shares of any class of the
Company possessing in the aggregate more than 50% of the voting rights of
the Company; or
(iv) The Company sells all or substantially all of its assets, whether
in one or a related series of transactions."
IN WITNESS WHEREOF, the parties have executed this Amendment No. 1 to be
effective as of the 1st day of November, 1992.
PHYSICIANS INSURANCE COMPANY
OF OHIO
By:
--------------------------------------
Its
--------------------------------------
--------------------------------------
Rich Sharpe (Employee)
4
<PAGE> 5
SCHEDULE A TO EXHIBIT 10.58
On November 1, 1992, each of Martha G. Althauser, Vice President of Claims
of Physicians Insurance Company of Ohio ("PICO"), Gary W. Burchfield, Chief
Financial Officer and Treasurer of PICO, and James F. Mosier, General Counsel
and Secretary of PICO, entered into a Key Employee Severance Agreement (the
"Severance Agreements") with PICO. The Severance Agreements between PICO and Mr.
Mosier and Mr. Burchfield contain the same terms as the Key Employee Severance
Agreement between PICO and Rich Sharpe (the "Sharpe Agreement") filed as Exhibit
10. herewith. The Severance Agreement between PICO and Ms. Althauser contains
the same terms as the Sharpe Agreement except that if Ms. Althauser terminates
her employment with PICO during the 24-month period following a "change of
control" of PICO for "good reason" or if PICO terminates her employment during
such period for any reason other than for "serious cause," PICO will be
obligated to continue her compensation at the base rate then in effect for the
longer of (a) the period remaining between the termination date of employment
and the first anniversary of the change of control and (b) a period of six
months.
5
<PAGE> 1
EXHIBIT 10.59
AGREEMENT FOR PURCHASE AND SALE OF SHARES
This Agreement is entered into effective as of May 9, 1996 among Physicians
Insurance Group of Ohio ("PICO"), Guinness Peat Group Plc ("GPG") and The
Ondaatje Corporation ("TOC").
RECITALS
A. PICO and GPG are parties to the Agreement for Purchase and Sale of Stock
dated November 23, 1993 as modified by an Assignment and Assumption Agreement
dated December 30, 1993 (collectively, the "Prior Agreement") pursuant to which
GPG acquired shares of PICO and PICO granted certain rights to GPG.
B. GPG desires to sell 850,000 shares of PICO stock held by it to TOC (the
"Shares").
C. PICO has negotiated a definitive agreement (the "Merger Agreement") in
connection with the proposed merger of PICO with a wholly owned subsidiary of
Citation Insurance Group ("Citation") which will result in the issuance of
shares of Citation Common Stock to the holders of PICO Class A Common Stock in
exchange for their PICO shares (the "Merger").
D. It is a condition to the Merger that GPG makes certain representations
and warranties to PICO pursuant to the Continuity of Interest Certificate (the
"Certificate") and that it agrees to certain of the terms provided herein.
Pursuant to the Certificate, GPG acknowledges that GPG has no current plan or
intention to sell any additional PICO shares. The consummation of the
transactions provided in this Agreement are a condition to GPG agreeing to make
such representations and warranties.
AGREEMENT
The parties agree as follows:
1. Purchase and Sale of Shares.
1.1 Share Transfer.
(a) GPG agrees to sell and transfer 665,000 of the Shares (the
"First Shares") to TOC at the First Closing (as defined below).
(b) Subject to the terms and conditions of this Agreement, GPG
agrees to sell and transfer 185,000 of the Shares (the "Conditional
Shares") to TOC at the Conditional Closing (as defined below).
1.2 Purchase Prices.
(a) TOC agrees to purchase the First Shares and to pay to GPG in
consideration therefor $20.78 per share which, in the aggregate, totals
$13,798,750.
(b) Subject to the terms and conditions of this Agreement, TOC
agrees to purchase the Conditional Shares and to pay to GPG in
consideration therefor $8.1149 per share which, in the aggregate, totals
$1,501,250.
1.3 Closings.
(a) The closing of the purchase and sale of the First Shares (the
"First Closing") shall be held at the offices of Gray Cary Ware &
Freidenrich located at 4365 Executive Drive, Suite 1600, San Diego,
California on May 9, 1996.
(b) The closing of the purchase and sale of the Conditional Shares
(the "Conditional Closing") shall be subject to and conditioned upon,
and shall be held at the location set forth in
<PAGE> 2
paragraph (a) above five (5) days after the notice period with respect
to the sale of the Conditional Shares under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 (the "HSR Act") shall have expired
(the "Condition").
(c) Each of the other events, rights or obligations which by the
terms of this Agreement are to occur or arise upon the Conditional
Closing shall be subject to and conditioned upon the completion of the
Condition and the Conditional Closing.
1.4 Delivery.
(a) At the First Closing, TOC shall deliver a check for the
purchase price of the First Shares to GPG and GPG shall deliver a stock
certificate representing the First Shares duly endorsed for transfer to
TOC.
(b) At the First Closing, TOC shall deliver to Gray Cary Ware &
Freidenrich, as escrow agent (the "Escrow Agent"), a check payable to
GPG for the purchase price of the Conditional Shares (the "Second
Check), and GPG shall deliver to the Escrow Agent a stock certificate
representing the Conditional Shares duly endorsed for transfer to TOC.
(c) Five (5) days after completion of the Condition, the Escrow
Agent shall deliver the Second Check to GPG and the stock certificate
representing the Conditional Shares duly endorsed for transfer to TOC.
(d) If both TOC and GPG agree that the Condition will not be
satisfied by reason of disapproval of the sale of the Conditional Shares
by the United States Federal Trade Commission or the Anti-Trust Division
of the United States Justice Department, upon notice from both such
parties to that effect the Escrow Agent shall return to TOC the Second
Check and shall return to GPG the stock certificate representing the
Conditional Shares and any stock power containing the endorsement.
(e) Each of the parties hereto agrees that the Escrow Agent shall
not be liable for any act, error or omission in carrying out its duties
under this Agreement except for the Escrow Agent's gross negligence or
willful misconduct.
2. Representations and Warranties of TOC. In connection with the purchase
of the Shares, TOC represents to PICO the following:
2.1 TOC understands the Shares represent a speculative investment. TOC
is aware of PICO's business affairs and financial condition and have
acquired sufficient information about PICO to reach an informed and
knowledgeable decision to acquire the Shares. TOC is purchasing the Shares
for investment for its own account only and not with a view to, or for
resale in connection with, any "distribution" thereof within the meaning of
the Shares Act of 1933 ("Securities Act").
2.2 TOC understands that the Shares have not been registered under the
Securities Act by reason of a specific exemption therefrom, which exemption
depends upon, among other things, the bona fide nature of its investment
intent as expressed herein.
2.3 TOC further acknowledges and understands that the Shares must be
held indefinitely unless they are subsequently registered under the
Securities Act or an exemption from such registration is available. TOC
further acknowledges and understands that, except as provided in this
Agreement, PICO is under no obligation to register the Shares. TOC
understands that the instrument evidencing the Shares will be imprinted
with a legend which prohibits the transfer of the Shares unless they are
registered or such registration is not required in the opinion of counsel
satisfactory to PICO.
2.4 TOC is aware of the adoption of Rule 144 by the Securities and
Exchange Commission, promulgated under the Securities Act, which permits
limited public resale of securities acquired in a non-public offering
subject to the satisfaction of certain conditions, including, among other
things: the availability of certain public information about PICO, the
resale occurring not less than two years after the Shares to be sold were
originally issued and paid for (and the giving of a promissory note does
not, for
<PAGE> 3
this purpose, constitute payment), the sale being through a broker in an
unsolicited "brokers transaction" and the amount of Securities being sold
during any three-month period not exceeding specified limitations
(generally, 1% of the total amount outstanding).
2.5 TOC further acknowledges and understands that if PICO (or its
successors) is not satisfying the current public information requirement of
Rule 144 at the time TOC wishes to sell the Shares, TOC would be precluded
from selling the Shares under Rule 144 even if the two-year minimum holding
period had been satisfied.
2.6 TOC understands that stop transfer instructions will be in effect
with respect to the transfer of the Shares consistent with the above.
2.7 In addition, TOC represents and warrants that:
(a) TOC is capable of bearing the economic risk and burden of the
investment and the possibility of complete loss of all of the
investment, and the lack of a public market such that it may not be
possible to readily liquidate the investment whenever desired.
(b) That at no time was TOC presented with or solicited by any
leaflet, public promotional meeting, circular, newspaper or magazine
article, radio or television advertisement, or any other form of general
advertising.
(c) TOC has had substantial experience in business or investments
in securities, such as stocks and bonds, and therefore TOC is familiar
with business and financial dealings and problems, and TOC can "fend for
itself" in a venture of this nature.
(d) TOC understands that, in selling the Shares, GPG has relied
upon the exemption from registration under the Act contained in Section
4(1) and that, in an attempt to effect compliance with all the
conditions thereof, GPG and PICO are relying in good faith upon all of
the foregoing representations and warranties on the part of the
undersigned.
3. Assignment of Rights and Obligations; Consent. PICO, GPG and TOC agree
that effective as of the First Closing, or, as noted, the Conditional Closing,
certain ongoing rights and obligations of GPG pursuant to the Prior Agreement
shall be assigned and transferred to TOC as follows:
3.1 Registration Rights. PICO grants to TOC upon the First Closing
the rights as a "Purchaser" set forth in Sections 6.02 through 6.06 of the
Prior Agreement with respect to the First Shares and upon the Conditional
Closing the same such rights as a "Purchaser" with respect to the
Conditional Shares, and TOC agrees to be bound by the obligations of such
Sections. This Section 3.1 does not in any way limit GPG's rights or
obligations under Sections 6.02 through 6.07 of the Prior Agreement and GPG
shall retain such rights and obligations with respect to the shares of PICO
stock it retains. GPG's and TOC's rights under this section shall terminate
in accordance with Section 6.12 of the Prior Agreement. GPG and TOC agree
not to exercise their rights under this Section 3.1 and under Sections 6.02
through 6.06 of the Prior Agreement for a period of six (6) months
following the closing of the Merger.
3.2 Right to Purchase Shares Issued by PICO. So long as TOC continues
to own the Shares, or any of them, TOC, upon the First Closing, shall have
the right to acquire shares of PICO with an aggregate purchase price of
$1,613,605, and upon the Conditional Closing TOC shall have the right to
acquire shares of PICO with the full aggregate purchase price of $5,000,000
pursuant to Section 7.02 of the Prior Agreement, subject to the limitations
of Section 7.04 of the Prior Agreement and shall be deemed to be the
"Purchaser" as defined in the Prior Agreement to the extent of such rights
for purposes of Section 7.02. GPG shall retain the right to acquire
$3,386,395 in aggregate amount of such shares unless and until the
Conditional Closing occurs, in which event all of GPG's rights under such
Section 7.02 shall terminate. TOC agrees not to exercise its rights under
this Section 3.2 and under Section 7.02 of the Prior Agreement until six
months after the Effective Time as defined in the Merger Agreement.
3.3 PICO Right to Purchase PICO Shares Owned by TOC. PICO shall have
the first right to purchase PICO shares owned by TOC in accordance with the
terms of Sections 6.07, 6.08, and 6.09 of
<PAGE> 4
the Prior Agreement. The rights provided in this Section 3.3 shall not
alter or amend PICO's rights to acquire GPG's shares pursuant to such
Sections of the Prior Agreement, subject to the limitations of Section 6.10
of the Prior Agreement.
3.4 TOC Option to Acquire PICO Shares. GPG hereby transfers to TOC
upon the Conditional Closing the right to acquire PICO shares valued at
$825,182.63 in accordance with the terms of Section 7.01 of the Prior
Agreement. Each of GPG and TOC shall retain its option under such Section
7.01 and this Section 3.4 so long as it owns not less than 7.5% of PICO.
3.5 Director Nominees.
(a) So long as GPG holds 11% or more of the outstanding shares of
PICO or any successor corporation, it shall have the right to nominate
one director to the PICO board of Directors, subject to the terms of
Section 6.01 of the Prior Agreement.
(b) PICO will use its best efforts to elect such TOC and GPG
nominated directors to the PICO Board of Directors in accordance with
and subject to the limitations of Section 6.01 of the Prior Agreement.
4. GPG Consent. Pursuant to Section 6.13 of the Prior Agreement, GPG
hereby consents to the terms of the Merger in accordance with the Merger
Agreement in substantially the form thereof provided to GPG as of May 3, 1996;
provided, however, that (i) such consent shall remain effective only so long as
there are, as determined by GPG in its reasonable discretion, no material
changes to such agreement or the terms of the Merger which adversely affect
GPG's rights and obligations under or in connection with such agreement
including but not limited to the PICO Share Value (as defined in such agreement)
not being greater than $33.50 per share and (ii) GPG's consent shall terminate
unless the First Closing shall have occurred on or before the Merger occurs, as
contemplated by the Merger Agreement. Upon consummation of the Merger, the
provisions of Section 6.13 and 6.14 of the Prior Agreement shall terminate and
be of no further force and effect.
5. Obligations of TOC.
5.1 Best Efforts. Promptly after the date of this Agreement, TOC
shall use its best efforts to obtain all approvals and consents necessary
for the consummation of the transactions contemplated under this Agreement.
5.2 TOC Filing Obligations. TOC shall promptly after the date of this
agreement take all actions necessary to make all regulatory filings
required to be made by TOC with respect to the purchase and sale of the
Conditional Shares contemplated by this Agreement, including but not
limited to filings under the HSR Act. TOC shall cooperate with PICO and GPG
in providing information necessary for any regulatory filings required to
be made by them in order to consummate the transactions contemplated by
this Agreement.
6. GPG Covenant. If within two (2) years after the Merger an unforeseen
material change in the investment prospects for Citation cause GPG to reconsider
its plans with respect to its Citation shares, GPG will seek confirmation from
U.S. legal counsel that a sale of any such shares in such circumstances would
not affect the validity of the Certificate nor any tax free status of the Merger
before proceeding with any such sale. In such two-year period, GPG shall
promptly provide to PICO copies of all correspondence or documents from such
counsel.
7. Obligation of PICO. PICO shall maintain the registration of the Class A
common stock of PICO under Section 12(g) of the Exchange Act for a period of not
less than four years following the Merger, and shall continue to comply with the
reporting and other requirements of the Exchange Act for the same four-year
period.
8. General Terms.
8.1 Governing Law. This Agreement shall be interpreted, construed,
governed and enforced according to the laws of the State of Ohio.
<PAGE> 5
8.2 Attorneys' Fees. In the event of any dispute or breach arising
with respect to this Agreement, the party prevailing in any negotiations or
proceedings for the resolution or enforcement thereof shall be entitled to
recover from the losing party reasonable expenses, attorneys' fees and
costs incurred therein.
8.3 Amendments. No amendment or modification of the terms or
conditions of this Agreement shall be valid unless in writing and signed by
both parties hereto. There shall be no implied-in-fact contracts modifying
the terms of this Agreement.
8.4 Entire Agreement. This Agreement and the Prior Agreement as
amended by this Agreement constitute the entire agreement between the
parties with respect to the transactions contemplated hereby and thereby.
This Agreement and the Prior Agreement as amended by this Agreement
supersede all prior agreements, understandings, negotiation and
representation with respect to such transactions.
8.5 Successors and Assigns. The rights and obligations of PICO under
this Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of PICO. Specifically, but not by way of limitation,
upon consummation of the Merger, PICO's rights and obligations under this
Agreement and the Prior Agreement as amended by this Agreement shall be
assigned to and assumed by Citation, pursuant to the Assignment and
Assumption Agreement in the form attached to this Agreement as Exhibit A,
and in accordance with Section 7.04 of the Prior Agreement. Neither GPG nor
TOC shall be entitled to assign any of their respective rights or
obligations under this Agreement without the prior written consent of PICO.
Notwithstanding this Section 7.5, GPG shall be permitted to assign any or
all of its respective rights or obligations under this Agreement to a
direct or indirect wholly-owned subsidiary of GPG in accordance with
Section 10.5 of the Prior Agreement, without the prior written consent of
PICO.
8.6 Waiver. Any party's failure to enforce any provision of this
Agreement shall not in any way be construed as a waiver of any such
provision, or prevent that party thereafter from enforcing each and every
other provision of this Agreement.
8.7 Severable Provisions. The provisions of this Agreement are
severable, and if any one or more provisions may be determined to be
judicially unenforceable, in whole or in part, the remaining provisions
shall nevertheless be binding and enforceable.
8.8 Counterparts. This Agreement may be executed in more than one
counterpart, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
set forth above.
PHYSICIANS INSURANCE COMPANY OF OHIO
By:
------------------------------------------
Title:
------------------------------------------
GUINNESS PEAT GROUP PLC
By:
------------------------------------------
Title:
------------------------------------------
THE ONDAATJE CORPORATION
By:
------------------------------------------
Title:
------------------------------------------
<PAGE> 6
EXHIBIT A
ASSIGNMENT AND ASSUMPTION AGREEMENT
This Assignment and Assumption Agreement, made this day of
1996, by and between Physicians Insurance Company of Ohio ("PICO) and Citation
Insurance Group ("Citation").
WHEREAS, pursuant to an Agreement and Plan of Reorganization dated May ,
1996 (the "Merger Agreement") PICO will be merged with a wholly owned subsidiary
of Citation which will result in the issuance of shares of Citation Common Stock
to the holders of PICO Class A Common Stock in exchange for their PICO shares
(the "Merger").
WHEREAS, it is a condition to Guinness Peat Group's ("GPG's") and The
Ondaatje Corporation's ("TOC's") consent to the Merger that Citation assume
PICO's obligations under the Agreement (as defined below) upon consummation of
the Merger.
NOW, THEREFORE, the parties hereto agree as follows:
1. Effective as of the Effective Time of the Merger (as defined in the
Merger Agreement), PICO assigns, transfers and conveys to Citation all of its
rights and obligations under the Agreement for Purchase and Sale of Stock dated
November 23, 1993 as such rights have been assigned and modified pursuant to the
Assignment and Assumption Agreement dated December 30, 1993 and the Agreement
for Purchase and Sale of Shares dated May , 1996.
2. Effective as of the Effective Time of the Merger, Citation expressly
assumes all of PICO's rights and obligations under the Agreement. As a matter of
clarification, the obligations so assumed which by the terms of the Agreement
relate to shares of common stock of PICO shall, as of the Effective Time, be
deemed to relate to shares of Citation common stock.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment and
Assumption Agreement as of the day and year first written above.
CITATION INSURANCE GROUP
By:
------------------------------------------
Title:
------------------------------------------
PHYSICIANS INSURANCE COMPANY OF OHIO
By:
------------------------------------------
Title:
------------------------------------------
<PAGE> 1
EXHIBIT 11.1
PHYSICIANS INSURANCE COMPANY OF OHIO
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------------
1995 1994 1993
MARCH 31, ----------- ----------- ----------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Primary Earnings Per Share
Earnings:
Net Income.................................. $ 1,971,720 $15,672,976 $14,720,988 $ 108,281
Common shares outstanding:
Weighted average common shares
outstanding.............................. 5,203,897 5,150,472 4,792,433 3,147,113
Add: Adjustment for outstanding stock
options..................................... 241,592 37,682 30,035 2,724
---------- ----------- ----------- ----------
Total weighted average common share
outstanding................................. 5,445,489 5,188,154 4,822,468 3,149,837
Net Income (loss) per common share:
Continuing operations....................... $(0.01) $0.32 $0.51 $1.94
Discontinued operations before change in
discount rate............................ 0.37 2.70 3.39 (1.91)
Cumulative effect of change in discount
rate..................................... (0.85)
---------- ----------- ----------- ----------
Net income (loss) per common share.......... $0.36 $3.02 $3.05 $0.03
----- ----- ----- -----
----- ----- ----- -----
Proforma amounts assuming new discount rate is
applied retroactively:
Net income (loss)............................. $18,830,929 $1,851,065
Net income (loss) per share................... $3.90 $0.59
</TABLE>
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Citation Insurance
Group on Form S-4 of our reports dated March 15, 1996, incorporated by reference
from the Annual Report on Form 10-K of Citation Insurance Group for the year
ended December 31, 1995, and to the use of our report dated March 15, 1996,
appearing in the Prospectus, which is part of this Registration Statement. We
also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
San Jose, California
June 19, 1996
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTS
We consent to the inclusion in this registration statement on Form S-4
(Registration No. 333- ) of our reports dated April 15, 1996, on our
audits of the consolidated financial statements and financial statement
schedules of Physicians Insurance Company of Ohio and its subsidiaries and our
report dated November 3, 1995, on our audits of the financial statements of
Sequoia Insurance Company. We also consent to the reference to our firm under
the caption "Experts".
/s/ COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Columbus, Ohio
June 21, 1996
<PAGE> 1
EXHIBIT 23.4
CONSENT OF KPMG PEAT MARWICK THORNE, CHARTERED ACCOUNTANTS
The Board of Directors
The Ondaatje Corporation
We consent to the use of our report dated March 16, 1995 on the
consolidated financial statements of The Ondaatje Corporation included herein
and to the reference to our firm under the heading "Experts" in the registration
statement on Form S-4 of Citation Insurance Group.
/s/ KPMG Peat Marwick Thorne
Toronto, Canada
June 21, 1996
<PAGE> 1
EXHIBIT 99.1
PROXY
CITATION INSURANCE GROUP
ONE ALMADEN BOULEVARD, SUITE 300
SAN JOSE, CALIFORNIA 95113
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Robert M. Erickson and Douglas S. Gould, or
either of them acting alone, as proxies, each with the power to appoint his
substitute, and hereby authorizes them to represent, and to vote as designated
below, all of the shares of Common Stock of Citation Insurance Group (the
"Company") held of record by the undersigned on [[record date]] , 1996,
at the special meeting of shareholders to be held at [[meeting location]]
, San Jose, California [[zip code]] on [[day and date of
meeting]] , 1996 at [[time]] , Pacific Time, and at any adjournment
thereof.
1. PROPOSAL TO APPROVE THE PRINCIPAL TERMS OF THE MERGER DESCRIBED IN THE
JOINT PROXY STATEMENT/PROSPECTUS WHICH ACCOMPANIED THIS PROXY. THIS PROPOSAL
INVOLVES MERGING CITATION HOLDINGS, INC., A WHOLLY OWNED SUBSIDIARY OF THE
COMPANY, WITH AND INTO PHYSICIANS INSURANCE COMPANY OF OHIO ("PICO"). UPON
CONSUMMATION OF THE MERGER, EACH OUTSTANDING SHARE OF THE CLASS A COMMON STOCK
OF PICO (OTHER THAN SHARES AS TO WHICH DISSENTERS' RIGHTS ARE PERFECTED) WILL BE
CONVERTED INTO THE RIGHT TO RECEIVE A NUMBER OF SHARES OF THE COMPANY'S COMMON
STOCK EQUAL TO THE EXCHANGE RATIO (AS DESCRIBED IN THE JOINT PROXY
STATEMENT/PROSPECTUS):
/ / FOR / / AGAINST / / ABSTAIN
2. PROPOSAL TO AMEND THE ARTICLES OF INCORPORATION OF THE COMPANY IN
CONNECTION WITH THE MERGER, INCLUDING AN INCREASE IN THE AUTHORIZED
CAPITALIZATION OF THE COMPANY:
/ / FOR / / AGAINST / / ABSTAIN
3. PROPOSAL TO AMEND THE BYLAWS OF THE COMPANY IN CONNECTION WITH THE MERGER:
/ / FOR / / AGAINST / / ABSTAIN
4. In their discretion, the above named Proxies are authorized to vote upon
each other item of business as may properly come before the meeting or any
adjournment thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR EACH OF THE PROPOSALS
LISTED ABOVE.
(Continued and to be signed on reverse side)
<PAGE> 2
(Continued from other side)
Please sign exactly as your name appears on your stock certificate. If such
stock is held by joint tenants, both persons should sign. When signing as
attorney, executor, administrator, trustee or guardian, please note your title
as such. If the stock is registered in the name of a corporation, please sign in
the corporation's name by the president or any other authorized officer. If the
stock is registered in the name of a partnership, please sign in the
partnership's name by an authorized person.
------------------------------
(Signature)
------------------------------
(Signature if held jointly)
I PLAN TO ATTEND THE
SPECIAL MEETING:
/ / YES / / NO
Dated: ________________, 1996
PLEASE MARK, SIGN AND DATE THIS PROXY CARD AND
RETURN IT IN THE ENCLOSED ENVELOPE.
<PAGE> 1
EXHIBIT 99.2
PROXY
PHYSICIANS INSURANCE COMPANY OF OHIO
13515 YARMOUTH DRIVE, N.W.
PICKERINGTON, OHIO 43147
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Gary W. Burchfield and James F. Mosier, or
either of them acting alone, as proxies, each with the power to appoint his
substitute, and hereby authorizes them to represent, and to vote as designated
below, all of the shares of Class A Common Stock of Physicians Insurance Company
of Ohio (the "Company") held of record by the undersigned on [[record date]]
, 1996, at the special meeting of shareholders to be held at 13515
Yarmouth Drive, N.W., Pickerington, Ohio 43147 on [[day and date of meeting]]
, 1996 at [[time]] , Eastern Time, and at any adjournment
thereof.
1. PROPOSAL TO APPROVE THE PRINCIPAL TERMS OF THE MERGER DESCRIBED IN THE
JOINT PROXY STATEMENT/PROSPECTUS WHICH ACCOMPANIED THIS PROXY. THIS PROPOSAL
INVOLVES MERGING CITATION HOLDINGS, INC., A WHOLLY OWNED SUBSIDIARY OF CITATION
INSURANCE GROUP, WITH AND INTO THE COMPANY. UPON CONSUMMATION OF THE MERGER,
EACH OUTSTANDING SHARE OF THE CLASS A COMMON STOCK OF THE COMPANY (OTHER THAN
SHARES AS TO WHICH DISSENTERS' RIGHTS ARE PERFECTED) WILL BE CONVERTED INTO THE
RIGHT TO RECEIVE A NUMBER OF SHARES OF CITATION INSURANCE GROUP'S COMMON STOCK
EQUAL TO THE EXCHANGE RATIO (AS DESCRIBED IN THE JOINT PROXY
STATEMENT/PROSPECTUS):
/ / FOR / / AGAINST / / ABSTAIN
2. In their discretion, the above named Proxies are authorized to vote upon
each other item of business as may properly come before the meeting or any
adjournment thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR EACH OF THE PROPOSALS
LISTED ABOVE.
(Continued and to be signed on reverse side)
<PAGE> 2
(Continued from other side)
Please sign exactly as your name appears on your stock certificate. If such
stock is held by joint tenants, both persons should sign. When signing as
attorney, executor, administrator, trustee or guardian, please note your title
as such. If the stock is registered in the name of a corporation, please sign in
the corporation's name by the president or any other authorized officer. If the
stock is registered in the name of a partnership, please sign in the
partnership's name by an authorized person.
------------------------------
(Signature)
------------------------------
(Signature if held jointly)
I PLAN TO ATTEND THE
SPECIAL MEETING:
/ / YES / / NO
Dated: ________________, 1996
PLEASE MARK, SIGN AND DATE THIS PROXY CARD AND
RETURN IT IN THE ENCLOSED ENVELOPE.
<PAGE> 1
EXHIBIT 99.3
CONSENT OF DIRECTOR PURSUANT TO RULE 438
OF THE SECURITIES ACT OF 1933
I hereby consent to serve as a Director of Citation Insurance Group, a
California Corporation, upon consummation of the merger between Physicians
Insurance Company of Ohio and Citation Holdings, Inc., a wholly owned
subsidiary of Citation Insurance Group.
Dated: June 12, 1996
/s/ Gary H. Weiss
--------------------------------
Dr. Gary H. Weiss
<PAGE> 2
CONSENT OF DIRECTOR PURSUANT TO RULE 438
OF THE SECURITIES ACT OF 1933
I hereby consent to serve as a Director of Citation Insurance Group, a
California Corporation, upon consummation of the merger between Physicians
Insurance Company of Ohio and Citation Holdings, Inc., a wholly owned
subsidiary of Citation Insurance Group.
Dated: June 10, 1996
/s/ S. Walter Foulkrod, III
--------------------------------
S. Walter Foulkrod, III
<PAGE> 3
CONSENT OF DIRECTOR PURSUANT TO RULE 438
OF THE SECURITIES ACT OF 1933
I hereby consent to serve as a Director of Citation Insurance Group, a
California Corporation, upon consummation of the merger between Physicians
Insurance Company of Ohio and Citation Holdings, Inc., a wholly owned
subsidiary of Citation Insurance Group.
Dated: June 9, 1996
/s/ Richard D. Ruppert, M.D.
--------------------------------
Richard D. Ruppert, M.D.
<PAGE> 4
CONSENT OF DIRECTOR PURSUANT TO RULE 438
OF THE SECURITIES ACT OF 1933
I hereby consent to serve as a Director of Citation Insurance Group, a
California Corporation, upon consummation of the merger between Physicians
Insurance Company of Ohio and Citation Holdings, Inc., a wholly owned
subsidiary of Citation Insurance Group.
Dated: June 8, 1996
/s/ John D. Weil
--------------------------------
John D. Weil
<PAGE> 5
CONSENT OF DIRECTOR PURSUANT TO RULE 438
OF THE SECURITIES ACT OF 1933
I hereby consent to serve as a Director of Citation Insurance Group, a
California Corporation, upon consummation of the merger between Physicians
Insurance Company of Ohio and Citation Holdings, Inc., a wholly owned
subsidiary of Citation Insurance Group.
Dated: June 10, 1996
/s/ John R. Hart
--------------------------------
John R. Hart
<PAGE> 6
CONSENT OF DIRECTOR PURSUANT TO RULE 438
OF THE SECURITIES ACT OF 1933
I hereby consent to serve as a Director of Citation Insurance Group, a
California Corporation, upon consummation of the merger between Physicians
Insurance Company of Ohio and Citation Holdings, Inc., a wholly owned
subsidiary of Citation Insurance Group.
Dated: June 10, 1996
/s/ Ronald Langley
--------------------------------
Ronald Langley
<PAGE> 7
CONSENT OF DIRECTOR PURSUANT TO RULE 438
OF THE SECURITIES ACT OF 1933
I hereby consent to serve as a Director of Citation Insurance Group, a
California Corporation, upon consummation of the merger between Physicians
Insurance Company of Ohio and Citation Holdings, Inc., a wholly owned
subsidiary of Citation Insurance Group.
Dated: June 14, 1996
/s/ Robert R. Broadbent
--------------------------------
Robert R. Broadbent
